IKONICS Corporation
Annual Report 2015

Plain-text annual report

Letter to Shareholders This has been an important year for IKONICS Corporation: our Digital Texturing (DTX) business achieved profitability, and IKONICS Advanced Material Solutions (AMS) aerospace business unit experienced accelerating growth, with revenues up 92% for the year and 159% for the fourth quarter of 2015, with quarterly sales of $234,000. For the year, the Company posted net income of $135,000, or $0.07 per diluted share, compared to $0.32 per diluted share for 2014; our quarterly earnings improved each quarter of 2015. Overall sales for the year declined by 5% to $17,562,000, primarily due to a large IKONICS Imaging one-time stocking order in 2014, as well as a change of its glass supplier. The strong U.S. dollar also adversely affected export sales in 2015. However, fourth quarter sales set a record, led by AMS, as noted above, and IKONICS Imaging, which posted a 13% gain over the same quarter of 2014. Our long-term strategy of developing new businesses and new markets based on our core technologies is beginning to pay off through increased diversification and new sources of revenue. As our traditional businesses mature and sometimes meet headwinds, our new businesses, DTX and AMS, are stepping up. DTX was profitable in 2015 and AMS, although yet to be profitable, is growing rapidly. I am confident that the AMS growth trend will continue because the production schedule of the aircraft using our technology is well publicized and many of these planes are pre-sold. We know how many planes are likely to use our technology and we are adding new customers. To meet anticipated demand, a 27,000-square-foot expansion of the AMS facility is underway with completion scheduled for April of this year. I am also confident that our traditional businesses will thrive and continue to deliver profits to IKONICS. William C. Ulland Chairman, President & CEO March 25, 2016 The Global Reach of IKONICS The core strength of IKONICS is bringing ‘unique imaging solutions’ to the world. IKONICS’ success begins with our ability to work across the company’s business units to meet the needs of our customers. Through Chromaline Screen Print Products, IKONICS Advanced Material Solutions, IKONICS Imaging, IKONICS DTX technology and IKONICS Export, the industries served include aerospace, screen-printing, awards and giftware, automotive, printed electronics, prototyping and more. Chromaline Screen Print Products, sold through our Domestic and Export business units, manufactures films and emulsions for the graphics and textile screen printing industries. In the electronics industry, Chromaline developed a method for the ultra-fine printing of electric circuits used for antennas, touch panels and wearable electronics, while IKONICS Advanced Material Solutions is machining electronic wafers for microelectromechanical systems (MEMS) sensors. Serving the aerospace business, IKONICS Advanced Material Solutions is shown here machining a four-foot diameter intake cowl for sound-deadening on a jet engine. Serving the automotive industry, IKONICS DTX technology creates texture for vehicle interiors while IKONICS Imaging products are used to customize the exterior on glass, rims and muffler tips. IKONICS Imaging and Export provide clients with the sandcarving materials for the awards and giftware markets around the world. Prototyping of textures with Digital Texturing allows for the direct transfer of an image onto a part or work piece to create a proto- type of a textured item. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One)  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2015 or For the Transition Period From to . Commission file number 000-25727 IKONICS CORPORATION (Exact name of registrant as specified in its charter) Minnesota (State or other jurisdiction of incorporation or organization) 4832 Grand Avenue Duluth, Minnesota (Address of principal executive offices) 41-0730027 (I.R.S. employer identification no.) 55807 (Zip code) Securities registered under Section 12(b) of the Act: Registrant’s telephone number, including area code: (218) 628-2217 Title of Each Class Name of Each Exchange On Which Registered Common Stock, par value $.10 per share Nasdaq Capital Market Securities registered under Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No  Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes  No  Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes  No  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K.  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer  Accelerated filer  Non-accelerated filer  (do not check if smaller reporting company) Smaller reporting company  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No  The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2015 was $13,642,659 based on the most recent closing price for the issuer’s Common Stock on such date as reported on the Nasdaq Capital Market. For purposes of determining this number, all officers and directors of the issuer are considered to be affiliates of the issuer, as well as individual stockholders holding more than 10% of the issuer’s outstanding Common Stock. This number is provided only for the purpose of this report on Form 10-K and does not represent an admission by either the issuer or any such person as to the status of such person. State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date: Common Stock, $.10 par value — 2,018,253 issued and outstanding as of February 26, 2016. This Annual Report on Form 10-K 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 Annual Report on Form 10-K. 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 captions “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as those discussed elsewhere in this Annual Report on Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company’s definitive proxy statement for its 2016 Annual Meeting of Shareholders are incorporated by reference in Part III. 2 Item 1. Business General PART I IKONICS Corporation (“IKONICS” or the “Company”) was incorporated in Minnesota as Chroma-Glo, Inc. in 1952 and changed its name to The Chromaline Corporation in 1982. In December 2002, the Company changed its name to IKONICS Corporation. The Company’s three traditional businesses, Domestic, IKONICS Imaging and Export, have been the development, manufacture and selling of photosensitive liquids (“emulsions”) and films for the screen printing and awards and recognition industries. 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. These products are sold worldwide primarily through distributors. 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 which uses the Company’s proprietary processes 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, large format prints, and abrasion resistance. Products The Company has four primary technology platforms: Ultraviolet (UV) chemistry, film coating and construction, technical abrasive etching, and industrial inkjet printing. The Company’s traditional products and new initiatives are based on these platforms and their combinations. The Company’s Chromaline branded products for the screen printing industry and IKONICS Imaging products for the awards and recognition market are based on UV chemistry and film coating and construction capabilities; the AMS offering is a combination of UV chemistry, film coating and construction and technical abrasive etching capabilities; DTX is a combination of UV chemistry, film coating and construction, and industrial inkjet printing. There is overlap and synergy in the market between the Domestic, Ikonics Imaging, AMS and DTX product offerings, and the Company offers ancillary products, including equipment to provide customers with a total solution. The Company considers this combination of core technologies and product offerings to be unique. Distribution and Customers The Company currently has approximately 200 domestic and international distributors for its Chromaline and ImageMate screen printing emulsions and films. The Company’s abrasive etching products are mainly sold directly to end users in the awards and recognition market under the Ikonics Imaging brand. AMS products are sold either directly to users or the Company offers AMS as a service. DTX includes the sales of consumable inks and films to customers that have purchased specialized industrial inkjet printers from the Company’s strategic partner. DTX sales are both direct to users and through distributors. The Company markets and sells its products through magazine advertising, trade shows and the internet. The Company has a diverse customer base both domestically and abroad, with international sales accounting for 27.9% of total sales in 2015, and does not depend on one or a few customers for a material portion of its revenues. In 2015 and 2014, no one customer accounted for more than 10% of net sales. Quality Control in Manufacturing In March 1994, IKONICS became the first firm in northern Minnesota to receive ISO 9001 certification. ISO 9000 is a worldwide standard issued by the International Organization for Standardization that provides a framework for quality assurance. The Company has been recertified every three years beginning in 3 1997. IKONICS’ quality function goal is to train all employees properly in both their work and in the importance of their work. Internal records of quality, including related graphs and tables, are reviewed regularly and discussions are held among management and employees regarding how improvements might be realized. The Company has rigorous materials selection procedures and also uses testing procedures to assure its products meet quality standards. Research and Development and Intellectual Property The Company spent 3.8% of sales, or $660,000, on research and development in 2015, and 3.6% of sales, or $665,000, in 2014. In its research program, IKONICS has developed ultraviolet light-sensitive chemistries used in the manufacture of screen print stencils, photoresists for abrasive etching and acid resist and prototyping ink jet fluids and ink jet receptive films. The Company has a number of patents and patent applications on these chemistries and applications. There can be no assurance that any patent granted to the Company will provide adequate protection to the Company’s intellectual property. Within the Company, steps are taken to protect the Company’s trade secrets, including physical security, confidentiality and non-competition agreements with employees, non-disclosure agreements where applicable, and confidentiality agreements with vendors. Over the past few years, the Company has directed a larger portion of it research and development resources towards industrial inkjettable fluids and ink jet receptive substrates. The Company has also invested significant resources for personnel and equipment to develop proprietary products and techniques for the etching of composite materials, industrial ceramics and electronic wafers. In addition to its patents, the Company has various trademarks including the “IKONICS,” “Chromaline,” “IKONICS Imaging,” “Precision Abrasive Machining,” “SmartFlex,” “PhotoBrasive,” “AccuArt,” “Nichols,” “image mate,” “Alpha FlexTrace,” “Alpha MicroCap,” and “DTX” trademarks. Raw Materials The primary raw materials used by IKONICS in its production are photopolymers, polyester films, polyvinylacetates, polyvinylalcohols and water. The Company’s purchasing staff leads in the identification of both domestic and foreign sources for raw materials and negotiates price and terms for all domestic and foreign markets. IKONICS’ involvement in foreign markets has given it the opportunity to become a global buyer of raw materials at lower overall cost. The Company has a number of suppliers for its operations. Some suppliers provide a significant amount of key raw materials to the Company, but the Company believes alternative sources are available for most materials. For those raw materials where an alternative source is not readily available, the Company has contingency raw material replacement plans. To date, there have been no significant shortages of raw materials. The Company believes it has good supplier relations. Competition The Company competes in its markets based on product development capability, quality, reliability, availability, technical support and price. Though the screen printing market is much larger than the awards and recognition market, IKONICS commands significantly more market share in the latter. IKONICS has two primary domestic competitors in its screen printing film business. They are larger than IKONICS and possess greater resources than the Company in many areas. The Company has numerous competitors in the market for screen print emulsions, many of whom are larger than IKONICS and possess greater resources. The market for the Company’s abrasive etching products in the awards and recognition market has one significant competitor. IKONICS considers itself to be the leader in this market. There are significant competitors, using different technologies in the new markets being entered by the Company. The primary competition for AMS is from other machining methods, most of which are well established. The primary competition for DTX comes from old, well-established technologies based on wax and screen printing and new competition from laser technologies. Government Regulation The Company is subject to a variety of federal, state and local industrial laws and regulations, including those relating to the discharge of material into the environment and protection of the environment. The governmental authorities primarily responsible for regulating the Company’s environmental compliance are the Environmental Protection Agency, the Minnesota Pollution Control Agency and the Western Lake Superior Sanitary District. Failure to comply with the laws promulgated by these authorities may result in monetary sanctions, liability for environmental 4 clean-up and other equitable remedies. To maintain compliance, the Company may make occasional changes in its waste generation and disposal procedures. These laws and regulations have not had a material effect upon the capital expenditures or competitive position of the Company. The Company believes that it complies in all material respects with the various federal, state and local regulations that apply to its current operations. Failure to comply with these regulations could have a negative impact on the Company’s operations and capital expenditures and such negative impact could be significant. The Company also is subject to regulations from foreign governments covering the importation of certain chemicals. The Company believes that it complies in all material respects with these regulations that apply to its current products. Failure to comply with these regulations could have a negative impact on the Company’s operations and capital expenditures and such negative impact could be significant. Employees As of February 26, 2016, the Company had approximately 82 full-time employees, 77 of whom are located at the Company’s two facilities in Duluth, Minnesota and five of whom are outside technical sales representatives in various locations in the United States. None of the Company’s employees are subject to a collective bargaining agreement and the Company believes that its employee relations are good. Item 1A. 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 technologies that might never achieve market acceptance. During 2015 and 2014, the Company generated operating losses in its AMS segment and in 2014 its DTX segment realized an operating loss. 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 AMS 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 3.8% of sales, or $660,000, on research and development in 2015 and 3.6% of sales, or $665,000, in 2014. 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 5 execution of these initiatives is important for its ability to grow its revenues and profits. However, if the Company fails to generate its projected revenues in these business units, the Company’s investments in these areas would not generate the profits the Company expects and its results of operations, financial condition and prospects would be materially and adversely affected. Adverse changes to global economic conditions generally, and to the aerospace and automotive industries in particular, may harm the Company’s business. The prospects for economic growth in the United States and other countries remain uncertain and major economies where the Company conducts business could continue or return to recessionary conditions. Economic concerns and issues such as reduced access to capital for businesses may cause the Company’s customers to delay or reduce purchases of the Company’s products. Given the continued uncertainty concerning the global economy, the Company also faces risks that may arise from financial difficulties experienced by suppliers and customers, such as an inability to collect receivables or the continued operation of suppliers. The Company’s 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 prior 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 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. 6 The Company’s failure to comply with environmental laws and regulations could harm its business and results of operations. The manufacturing of the Company’s products requires the use of hazardous materials that are subject to a broad array of environmental laws and regulations. The Company’s failure to comply with these laws or regulations could result in: • • • • regulatory penalties, fines and legal liabilities; suspension of production; alteration of manufacturing processes; and restrictions on the Company’s operations or sales. The Company’s failure to manage the use, transportation, emissions, discharge, storage, recycling or disposal of hazardous materials could lead to increased costs or future liabilities. Environmental laws and regulations also could require the Company to acquire pollution abatement or remediation equipment, modify product designs or incur other expenses. Third parties may claim the Company infringes their intellectual property rights, which could harm the Company’s business. The Company may face claims that it infringes other parties’ intellectual rights. Regardless of a claim’s merit, claims that the Company’s products or processes infringe the intellectual property rights of others could cause the Company to incur large costs to respond to, defend, and resolve the claims, and they may divert the efforts and attention of management and technical personnel. As a result of any intellectual property rights infringement claims, the Company could be required to: • • • • pay infringement claims; stop manufacturing, using, or selling products or technology subject to infringement claims; develop other products or technology not subject to infringement claims, which could be time-consuming, costly or impossible; or license technology from the party claiming infringement, which license may not be available on commercially reasonable terms or at all. These actions could harm the Company’s competitive position, result in additional expenses, or require the Company to impair its assets. If the Company alters or stops production of affected items, its revenue could be harmed. The Company may be unable to enforce or protect its intellectual property rights, which may harm its ability to compete and may harm its business. The Company’s ability to enforce its patents, trademarks and other intellectual property rights is subject to general litigation risks, as well as uncertainty as to the enforceability of the Company’s intellectual property rights in various countries. If the Company seeks to enforce its rights, it could become subject to claims that its intellectual property rights are invalid, not enforceable, or licensed to the opposing party. The Company’s assertion of intellectual property rights also could result in the other party seeking to assert claims against the Company, which could harm the Company’s business. The Company’s inability to enforce its intellectual property rights for any reason could harm its competitive position and business. 7 If the Company is unable to protect the confidentiality of its proprietary information and know-how, the value of its technology could be adversely affected. In addition to patented technology, the Company relies on unpatented proprietary technology, trade secrets, processes and know-how. The Company generally seeks to protect this information by confidentiality agreements with employees, consultants, advisors and third parties. These agreements may be breached, and the Company may not have adequate remedies for any such breach. In addition, the Company’s trade secrets may otherwise become known or be independently developed by competitors. To the extent that the Company’s employees, consultants or contractors use intellectual property owned by others in their work for the Company, disputes may arise as to the rights in related or resulting know-how and inventions. The Company operates a global business that exposes it to additional risks. The Company operates throughout the world, including in the United States, Europe and China. These international operations create a variety of risks and uncertainties, including: • • • • • • • rapid changes in government, economic and political policies and conditions, political or civil unrest or instability, terrorism or epidemics, fluctuations in foreign currency exchange rates; compliance with and changes in foreign laws and regulations, as well as U.S. laws affecting the activities of U.S. companies abroad, including the Foreign Corrupt Practices Act of 1977 (the “FCPA”), as amended; different, complex and changing laws governing intellectual property rights, sometimes affording companies lesser protection in certain areas; longer accounts receivable payment cycles and difficulties in collecting accounts receivable; protectionist laws and business practices that favor local producers; and potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings. The occurrence of any one of these risks could negatively affect the Company’s international business and, consequently, its results of operations generally. The Company faces risks related to sales through distributors and other third parties. During 2015, approximately 70% 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 sell products that compete with the Company’s products, and the loss of a distributor could reduce the Company’s revenue. Distributors may face financial difficulties, including bankruptcy, which could harm the Company’s collection of accounts receivable and financial results. Violations of the FCPA or similar laws by distributors or other third-party intermediaries could have a material impact on the Company’s business. Failing to manage risks related to the Company’s use of distributors may reduce sales, increase expenses, and weaken its competitive position. Increases in prices and declines in the availability of raw materials could negatively impact the Company’s financial results. 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 8 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 inability to attract and retain qualified personnel could adversely impact the Company’s business. Sustaining and growing the Company’s business depends on the recruitment, development and retention of qualified employees, including management and research and development personnel. The inability to recruit and retain key personnel or the unexpected loss of key personnel may adversely affect the Company’s operations. An active trading market for the Company’s shares of common stock may not develop. The Company’s common stock has been listed for trading on the Nasdaq Capital Market since 1999 and persistently has experienced limited trading volume. There can be no assurance that an active public market for the Company’s shares will develop or be sustained. The lack of an active trading market could adversely affect the price and liquidity of the Company’s common stock. The Company’s directors and officers own a large percentage of the Company’s common stock, which may allow them to collectively exert significant influence over substantially all matters requiring shareholder approval. As of December 31, 2015, the Company’s directors and officers collectively beneficially owned approximately 33.8% 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. 9 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. 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. 10 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. Item 1B. Unresolved Staff Comments None Item 2. Property The Company primarily conducts its operations in Duluth, Minnesota. The administrative, sales, research and development, quality and most of the manufacturing activities are housed in a 60,000 square-foot, four-story building, including a basement level. The building is approximately seventy years old and has been maintained in good condition. The Company also utilizes a 5,625 square-foot warehouse adjacent to the existing plant building that was constructed in 1997. These facilities are owned by the Company with no existing liens or leases. The Company also owns an approximately 11-acre property with a 35,000 square-foot manufacturing and warehouse facility. In addition to warehousing and shipping functions, the facility accommodates the Company’s AMS business along with some manufacturing activities. The Company also leases 3,000 square feet of warehouse space at one location in Duluth. The lease term on this facility ends on March 31, 2016. In 2015, the Company began construction of a 27,300 square-foot expansion to its 35,000 square-foot warehousing and manufacturing facility. The expansion will accommodate the Company’s growing AMS business. The expansion project is expected to be completed in the second quarter of 2016. Item 3. Legal Proceedings None. Item 4. Mine Safety Disclosures Not applicable. 11 PART II Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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. Fiscal Year Ended December 31, 2015: First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year Ended December 31, 2014: First Quarter Second Quarter Third Quarter Fourth Quarter High Low $ 20.43 $ 14.25 13.75 11.00 9.76 16.00 15.62 12.00 $ 31.02 $ 13.50 19.90 17.06 14.03 29.00 27.20 17.82 As of February 24, 2016, the Company had 683 shareholders. The Company has not declared cash dividends in the past two years and does not currently have plans to pay any cash dividends in the future. Any future declaration and payment of dividends is within the sole discretion of the Company’s board of directors. Item 6. Selected Financial Data Not applicable Item 7. 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 2015 and 2014 and should be read in connection with the Company’s audited financial statements and notes thereto for the years ended December 31, 2015 and 2014, 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. The Company also maintains a 12 provision based 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) 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, 2015 Compared to Year Ended December 31, 2014 Sales. The Company’s net sales decreased 5.0% in 2015 to $17.6 million compared to the record net sales of $18.5 million in 2014. Compared to 2014, IKONICS Imaging sales in 2015 decreased $691,000, or 14.9%, to $4.0 million. IKONICS Imaging sales in 2014 benefitted from a large non-recurring initial stocking order from its new 13 distributor, JDS Industries. Lower IKONICS Imaging glass sales related to a change in glass suppliers also contributed to the sales decrease. IKONICS Imaging’s previous glass supplier discontinued selling through distributors. Export sales in 2015 decreased $353,000, or 6.7%, compared to 2014 as sales were negatively impacted by the weaker European economy and stronger U.S. dollar. European and Asian sales were most affected by the strong U.S. dollar. Lower film and emulsion sales in 2015 resulted in a $239,000, or 3.0%, decrease in Domestic sales versus the same period in 2014. Partially offsetting these sales decreases was a $301,000, or 92% increase in AMS sales as the Company has begun to receive repeatable production orders which the Company expects to continue through 2016. DTX sales also increased $54,000 or 12.7% in 2015 versus 2014 as a result of higher film sales. Gross Profit. Gross profit in 2015 was $6.1 million, or 35.0% of sales, compared to $6.7 million, or 36.3% of sales in 2014. The 2014 gross margin percentage benefited from the initial stocking order from JDS Industries. That initial stocking order was mainly comprised of film products, which have higher gross margins. Export’s 2015 gross margin was down due to a decrease in higher margin sales to Europe. An improved sales mix offset lower Domestic volumes resulting in a higher 2015 gross margin compared to 2014. The DTX gross margin improved to 46.5% in 2015 from 13.4% in 2014. The 2015 DTX gross margin improvement is related to higher volumes and lower personnel and depreciation expenses. The AMS 2015 gross margin percentage improved versus 2014 due to an increase in volume. In 2016, the Company expects AMS production costs to increase and gross profit in the aggregate to decrease in the short term due to the completion of the building expansion to improve AMS production capacity and capabilities as the Company plans for additional repeat production orders. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $5.3 million, or 30.0% of sales, in 2015 compared to $5.1 million, or 27.7% of sales, in 2014. The increase in selling, general and administrative expenses reflects higher travel and trade show expenses for domestic markets in addition to consulting expenses related the Company’s ERP system selection process and employee training. Selling, general, and administrative expenses in 2014 benefitted from a $46,000 net gain on a sale of assets including a $49,000 gain recorded on a land sale. Research and Development Expenses. Research and development expenses in 2015 were $660,000, or 3.8% of sales, versus $665,000, or 3.6% of sales, in 2014. The 2015 decrease is related to lower production trial and chemical costs partially offset by a $46,000 expense from the abandonment of patent applications. The Company records patent application costs as an asset and amortizes those costs upon successful completion of the application process or expenses those costs when an application is abandoned. Income Taxes. During 2015, the Company realized income tax expense of $90,000, or an effective rate of 40.0%, compared to income tax expense of $270,000, or an effective rate of 29.4%, for the same period in 2014. The decrease in income tax expense from 2014 is primarily due to lower profitability in 2015. The increase in the effective tax rate is mainly driven by a decrease in the domestic manufacturing deduction from lower profitability in 2015. Additionally, the one-time valuation allowance release of $17,000 incurred in 2014, which did not recur in 2015, and higher rate impact of non-deductible items resulting from significantly lower pre-tax book income in 2015 also contributed the 2015 effective tax rate increase. The income tax provision for the 2015 and 2014 periods differs from the expected tax rate due to the benefits of the domestic manufacturing deduction, credits for research and development, and other non-deductible items. Liquidity and Capital Resources The Company has financed its operations principally with funds generated from operations. These funds have been sufficient to cover the Company’s normal operating expenditures, annual capital requirements, and research and development expenditures. Cash and cash equivalents were $2.2 million and $1.9 million at December 31, 2015 and 2014, respectively. In addition to its cash, the Company also held $1.8 million of short-term investments as of December 31, 2014. The Company held no short-term investments as of December 31, 2015. The Company generated $1,466,000 in cash from operating activities during 2015, compared to generating $917,000 of cash from operating activities in 2014. 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. 14 During 2015, inventories decreased by $511,000. The lower inventory balance reflects efforts to tighten inventory levels on hand along with the timing of raw material purchases. Trade receivables increased $69,000 related to increased fourth quarter sales. Accounts payable increased $49,000 due to the timing of payments to and purchases from vendors while accrued liabilities increased $8,000. Income taxes receivables decreased $61,000 due to the timing of estimated 2015 tax payments compared to the calculated 2015 tax liability. 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 2015, cash used by investing activities was $1.2 million. Fifteen certificates of deposits totaling $2.4 million matured during 2015. The Company purchased three certificates of deposits totaling $650,000 during the same period. The Company’s purchases of property and equipment were $3.2 million. Total building expansion expenditures were $2.3 million, but $315,000 of the expenditures were included as part of construction payable and not as cash used in investing activities. Similarly, expenditures on the new ERP system in 2015 were $208,000 of which $18,000 was included as part of construction payable and not as cash used in investing activities. The remaining capital expenditures were mainly for upgrades to improve AMS production and process capabilities and costs associated with mandatory elevator upgrades. Also during 2015, the Company incurred $53,000 in patent application costs that the Company records as an asset and amortizes upon successful completion of the application process. 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. 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. There were no exercises of stock options in 2015, resulting in no cash from or used for financing activities. A bank line of credit exists provides for borrowings of up to $2,050,000 and expires on May 31, 2017. The line of credit is collateralized by the Company’s assets and bears interest at 1.8 percentage points over the 30-day LIBOR rate. The Company did not utilize this line of credit during 2015 or 2014 and there were no borrowings outstanding as of December 31, 2015 and 2014. 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 since it currently carries no long-term debt and has an available line of credit, it is unlikely that a decrease in demand for the Company’s products would impair the Company’s ability to fund operations. Capital Expenditures In 2015, the Company incurred $3.2 million of capital expenditures, of which, $2.3 million was related to the building expansion, including the $315,000 in construction accounts payable. The remaining capital expenditures were mainly for upgrades to improve production and process capabilities for both AMS and the Company’s traditional businesses, a new ERP system which will be completed in 2016, data center equipment, and costs associated with mandatory elevator upgrades, including $18,000 in construction accounts payable. 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. 15 The Company expects capital expenditures in 2016 of approximately $2.0 million. The total cost of the Company’s building expansion to accommodate the growth of its AMS operations is estimated to be approximately $3.5 million including the $2.3 million already incurred, although the expansion cost could vary based on unexpected factors that arise during construction. The Company anticipates the remaining amounts for the building expansion will be spent over the first half of 2016. The Company will also incur additional costs related to the installation of its new ERP system, which will be completed in 2016, along with capital expenditures to improve AMS capacity and capabilities. Other expenditures will be incurred to enhance emulsion and film production along with research and development. Currently, the Company expects to fund its capital expenditures with existing cash, cash generated from operating activities and utilization of the Company’s line of credit. The Company is also pursuing $3.5 million in permanent financing as a source of funds for the expansion. 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 2015 foreign sales of $4.9 million were approximately 27.9% of total sales, compared to the 2014 foreign sales of $5.3 million, which were 28.4% of total sales. The Company experienced a decrease in foreign sales across all geographic regions in 2015 due to poor general economic conditions in Europe and a strong U.S. dollar. The Company’s foreign transactions are primarily negotiated, invoiced and paid in U.S. dollars, though 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, 2015. Furthermore, the impact of foreign exchange on the Company’s balance sheet and operating results was not material in either 2015 or 2014. Future Outlook IKONICS has spent on average approximately 4% of annual sales 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 AMS business initiative. The Company has entered into agreements with major aerospace companies along with working on smaller development programs to determine the feasibility of using its unique technologies in the production of military and commercial aircraft. Progress is being made on a number of these 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 pursue DTX related business initiatives. In addition to making efforts towards growing the 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 on production improvements to enhance its customer offerings. 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 and 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. However, the strong U.S. dollar made this challenging during 2015, and the Company anticipates continued strength of the U.S. dollar in the near term. In addition to the $3.5 million building expansion to accommodate the AMS division and the implementation of a new ERP system, other future activities undertaken to expand the Company’s business may include acquisitions, building improvements, equipment additions, new product development and marketing opportunities. 16 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 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. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which defers the adoption of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its condensed statements of operations, cash flows and financial position. In 2014, the 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. In 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330) Related to Simplifying the Measurement of Inventory which applies to all inventory except inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. Inventory measured using first-in, first-out (FIFO) or average cost is covered by the new amendments. Inventory within the scope of the new guidance should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments will take effect for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The new guidance should be applied prospectively, and earlier application is permitted as of the beginning of an interim or annual reporting period. The Company does not anticipate the adoption of the standard to have a material impact on the financial statements. In 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, requiring that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet. The amendment takes effect for public entities for fiscal years beginning after December 15, 2016, with early adoption available. The Company plans to adopt ASU No. 2015-17 in the first quarter of 2016. The Company does not anticipate the adoption of the standard to have a material impact on the financial statements. . Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable Item 8. Financial Statements 17 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, 2015 and 2014, 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, 2015 and 2014, 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/ RSM US LLP Duluth, Minnesota March 2, 2016 18 IKONICS CORPORATION BALANCE SHEETS DECEMBER 31, 2015 AND 2014 ASSETS (Note 8) CURRENT ASSETS: 2015 2014 Cash and cash equivalents (Note 7) Short-term investments Trade receivables, less allowance of $122,000 in 2015 and $49,000 in 2014 (Notes 5 and 7) Inventories Prepaid expenses and other assets Income taxes receivable Deferred income taxes (Note 2) Total current assets $ 2,248,466 $ 1,936,214 1,766,000 — 2,165,194 2,119,805 85,648 102,778 195,000 6,916,891 2,096,328 2,630,650 86,400 163,651 178,000 8,857,243 PROPERTY, PLANT, AND EQUIPMENT, at cost: Land and building Machinery and equipment Office equipment Vehicles Construction in progress Less accumulated depreciation INTANGIBLE ASSETS, less accumulated amortization of $123,957 in 2015 and $198,918 in 2014 (Note 3) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable Trade Construction Accrued compensation Other accrued liabilities Total current liabilities DEFERRED INCOME TAXES (Note 2) Total liabilities COMMITMENTS AND CONTINGENCIES (Note 8) 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 2015 and 2014 Additional paid-in-capital Retained earnings Total stockholders’ equity See notes to financial statements. 19 6,391,555 4,275,910 933,596 272,141 2,491,432 14,364,634 (6,407,304) 7,957,330 6,247,781 3,956,561 754,220 247,356 — 11,205,918 (5,789,070) 5,416,848 336,096 353,871 $ 15,210,317 $ 14,627,962 $ 420,245 $ 333,339 350,518 31,000 1,135,102 371,181 — 294,706 78,610 744,497 580,000 545,000 1,715,102 1,289,497 — — 201,825 2,703,050 10,590,340 13,495,215 201,825 2,681,307 10,455,333 13,338,465 $ 15,210,317 $ 14,627,962 IKONICS CORPORATION STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2015 AND 2014 NET SALES COST OF GOODS SOLD GROSS PROFIT 2015 2014 $ 17,562,066 $ 18,489,837 11,417,474 11,786,608 6,144,592 6,703,229 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,263,372 5,124,764 RESEARCH AND DEVELOPMENT EXPENSES INCOME FROM OPERATIONS OTHER INCOME BEFORE INCOME TAXES FEDERAL AND STATE INCOME TAXES (Note 2) 660,402 664,999 220,818 913,466 4,189 5,304 225,007 918,770 90,000 270,000 NET INCOME $ 135,007 $ 648,770 EARNINGS PER COMMON SHARE: Basic Diluted WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic Diluted See notes to financial statements. $ $ 0.07 $ 0.07 $ 0.32 0.32 2,018,253 2,018,591 2,017,144 2,018,334 20 IKONICS CORPORATION STATEMENTS OF STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2015 AND 2014 Common Stock Shares Amount Paid-in Capital Retained Earnings Additional Total Stock- holders’ Equity BALANCE AT DECEMBER 31, 2013 2,012,170 $ 201,217 $ 2,592,038 $ 9,806,563 $ 12,599,818 Net income Exercise of stock options Tax benefit resulting from stock option exercises Stock based compensation and related tax benefit — 6,083 — 608 — 45,379 648,770 — 648,770 45,987 — — — 25,475 — 18,415 — — 25,475 18,415 BALANCE AT DECEMBER 31, 2014 2,018,253 201,825 2,681,307 10,455,333 13,338,465 Net income Stock based compensation and related tax benefit — — — — 135,007 135,007 — 21,743 — 21,743 BALANCE AT DECEMBER 31, 2015 2,018,253 $ 201,825 $ 2,703,050 $ 10,590,340 $ 13,495,215 See notes to financial statements. 21 IKONICS CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2015 AND 2014 CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: $ 135,007 $ 648,770 Year Ended December 31, 2015 2014 Depreciation Amortization Stock based compensation Gain on sale and disposal of property, plant and equipment Deferred income taxes Loss on intangible asset abandonment Changes in working capital components: Trade receivables Inventories Prepaid expenses and other assets Income tax receivable Accounts payable Accrued expenses Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant, equipment and construction in progress Proceeds from sales of equipment and vehicles Purchases of intangibles Purchases of short-term investments Proceeds on sale of short-term investments Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 659,528 25,040 21,743 — 18,000 45,873 (68,866) 510,845 752 60,873 49,064 8,202 1,466,061 635,607 25,775 18,415 (45,659) (10,000) — (45,475) (75,708) 17,287 (121,776) (161,113) 30,625 916,748 (2,866,671) — (53,138) (650,000) 2,416,000 (1,153,809) (434,463) 61,763 (56,998) (2,716,000) 2,414,877 (730,821) — 45,987 NET INCREASE IN CASH AND CASH EQUIVALENTS 312,252 231,914 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,936,214 1,704,300 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,248,466 $ 1,936,214 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Construction in progress included in construction payable $ 333,339 $ — Cash paid for income taxes $ 11,127 $ 401,776 See notes to financial statements. 22 IKONICS CORPORATION NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2015 AND 2014 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business and Foreign Export Sales - IKONICS Corporation’s (the Company or IKONICS) 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 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. 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 a suite of products including 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 27.9% of net sales in 2015 and 28.4% of net sales in 2014. The Company’s trade receivables at December 31, 2015 and 2014 due from foreign customers were 21.4% and 30.6% 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 2015 or in 2014. 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, 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. There were no short-term investments as of December 31, 2015. 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. 23 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 Sheets or the Statements of Income, Stockholders’ Equity and Cash Flows for 2015 and 2014. 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 $1,232,000 and $1,315,000 higher than reported at December 31, 2015 and 2014, respectively. The inventory reserve for obsolescence was $7,000 and $11,000 at December 31, 2015 and 2014, respectively. The major components of inventories are as follows: Raw materials Work-in-progress Finished goods Reduction to LIFO cost Total Inventory 2015 2014 $ 1,640,098 $ 375,229 1,336,707 (1,232,229) 2,020,151 407,964 1,517,151 (1,314,616) $ 2,119,805 $ 2,630,650 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. 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, 2015, the remaining estimated weighted average useful lives of intangible assets are as follows: Patents Licenses Non-compete agreements Years 11.4 2.3 — 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. The Company recognized a loss an abandonment of patents applied for of $46,000 in 2015. To date, the Company has determined that no other loss of long-lived assets exists. 24 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: (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. 25 Shares used in the calculation of diluted EPS are summarized below: Weighted average common shares outstanding Dilutive effect of stock options Weighted average common and common equivalent shares outstanding 2015 2014 2,018,253 2,017,144 1,190 2,018,591 2,018,334 338 At December 31, 2015, options to purchase 8,500 shares of common stock with a weighted average exercise price of $17.16 were outstanding, but were excluded from the computation of common share equivalents because they were anti-dilutive. 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. 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 Financial Accounting Standards Board (“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. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which defers the adoption of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its condensed statements of operations, cash flows and financial position. In 2014, the 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. In 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330) Related to Simplifying the Measurement of Inventory which applies to all inventory except inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. Inventory measured using first-in, first-out (FIFO) or average cost is covered by the new amendments. Inventory within the scope of the new guidance should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments will take effect for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The new guidance should be applied prospectively, and earlier application is permitted as of the beginning of an interim or annual reporting period. The Company does not anticipate the adoption of the standard to have a material impact on the financial statements. In 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, requiring that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet. The amendment takes effect for public entities for fiscal years beginning after December 15, 2016, with early adoption available. The Company plans to adopt ASU No. 2015-17 in the first quarter of 2016. The Company does not anticipate the adoption of the standard to have a material impact on the financial statements. 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 26 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, and the valuation allowance for deferred tax assets. 2. INCOME TAXES Income tax expense for the years ended December 31, 2015 and 2014 consists of the following: Current: Federal State Deferred 2015 2014 $ 62,000 $ 332,000 15,000 347,000 (77,000) $ 90,000 $ 270,000 10,000 72,000 18,000 The expected provision for income taxes, computed by applying the U.S. federal income tax rate of 34% in 2015 and 2014 to income before taxes, is reconciled to income tax expense as follows: Expected provision for federal income taxes State income taxes, net of federal benefit Domestic manufacturers deduction Non-deductible meals, entertainment, and life insurance Research and development credit Valuation allowance released on capital loss utilized Other 2015 2014 $ 77,000 $ 312,000 15,000 (33,000) 21,000 (31,000) (17,000) 3,000 $ 90,000 $ 270,000 7,000 (6,000) 29,000 (15,000) — (2,000) Net deferred tax liabilities consist of the following as of December 31, 2015 and 2014: Deferred tax assets: Accrued vacation Inventories reserve Allowance for doubtful accounts Allowance for sales returns Research and development credit carryforward Accrued self-insured medical Less valuation allowance Deferred tax liabilities Property and equipment Intangible assets Net deferred tax liabilities 2015 2014 $ 26,000 $ 23,000 129,000 4,000 13,000 30,000 9,000 (30,000) 178,000 126,000 5,000 37,000 45,000 1,000 (45,000) 195,000 (494,000) (86,000) (462,000) (83,000) $ (385,000) $ (367,000) 27 The deferred tax amounts described above have been included in the accompanying balance sheet as of December 31, 2015 and 2014 as follows: Current assets Noncurrent liabilities 2015 2014 $ 195,000 $ 178,000 (545,000) (580,000) $ (385,000) $ (367,000) The valuation allowance balance of $45,000 and $30,000 at December 31, 2015 and 2014, respectively relates entirely to Minnesota research and development credit carryforwards that the Company does not expect to utilize and begin to expire in 2028. The change in the valuation allowance was $15,000 and $296,000 in 2015 and 2014, respectively. 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, 2015 and 2014, 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 2012, 2013, 2014, and 2015. 3. INTANGIBLE ASSETS Intangible assets consist of patents, patent applications, licenses and covenants not to compete. Capitalized patent application costs are included with patents. Intangible assets are amortized on a straight-line basis over their estimated useful lives or terms of their agreement, whichever is shorter. The Company wrote off costs related to abandoned patent applications of $46,000 in 2015. There were no impairment adjustments to intangible assets during the year ended December 31, 2014. Intangible assets at December 31, 2015 and 2014 consist of the following: December 31, 2015 December 31, 2014 Gross Carrying Accumulated Gross Carrying Accumulated Amortization Amortization Amount Amount Amortized intangible assets: Patents License Non-compete agreements Aggregate amortization expense: For the years ended December 31 $ 410,053 $ (81,248) $ 50,000 — (42,709) — $ 460,053 $ (123,957) $ 402,789 $ (62,676) (39,584) 50,000 100,000 (96,658) 552,789 $ (198,918) 2015 2014 $ 25,040 $ 25,775 $ 24,000 24,000 22,000 20,000 20,000 Estimated amortization expense for the years ending December 31: 2016 2017 2018 2019 2020 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 $15,000 of expense under these agreements during 2015, and $16,000 during 2014 which are included in selling, general and administrative expenses in the Statements of Income. 28 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, 2015 and 2014 was approximately $202,000 and $213,000, 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, 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, 2015: IKONICS Net sales Cost of goods sold Gross profit (loss) Selling, general, and administrative* Research and development* Income (loss) from operations DTX Export Imaging Domestic $ 7,607,832 $ 4,896,736 $ 3,952,929 $ 476,286 $ 628,283 $ 1,854,519 2,098,410 988,823 — 1,138,147 (509,864) 347,298 — 46,898 $ (857,162) $ (2,495,886) $ — $ 17,562,066 11,417,474 — 6,144,592 — 5,263,372 1,835,484 660,402 660,402 220,818 4,402,356 3,205,476 1,337,069 — 3,767,589 1,129,147 580,173 — 254,863 221,423 174,525 — $ 1,868,407 $ 548,974 $ 1,109,587 $ Unalloc. Total AMS For the year ended December 31, 2014: IKONICS Net sales Cost of goods sold Gross profit (loss) Selling, general, and administrative* Research and development* Income (loss) from operations Imaging Domestic Export $ 7,846,457 $ 5,249,843 $ 4,644,082 $ 3,840,948 1,408,895 549,254 — 4,571,505 3,274,952 1,353,509 — 2,167,870 2,476,212 918,337 — 365,828 56,818 166,724 — 859,641 $ 1,557,875 $ (109,906) $ (938,735) $ (2,376,852) $ 840,457 (513,648) 425,087 — — $ 18,489,837 11,786,608 — 6,703,229 — 5,124,764 1,711,853 664,999 664,999 913,466 DTX 422,646 $ 326,809 $ Unalloc. Total $ 1,921,443 $ AMS * The Company does not allocate all general and administrative expenses or any research and development expenses to its operating segments for internal reporting. 29 Trade receivables by segment as of December 31, 2015 and December 31, 2014 were as follows: Domestic Export IKONICS Imaging DTX AMS Unallocated Total 6. STOCK OPTIONS Dec 31 2015 Dec 31 2014 $ 1,206,077 $ 528,372 341,980 26,314 164,639 (102,188) 1,068,170 640,464 254,483 86,507 85,170 (38,466) $ 2,165,194 $ 2,096,328 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 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 108,739 shares of common stock are reserved for additional grants of options under the plan as of December 31, 2015. Under the plan, the Company charged compensation cost of $21,743 and $18,415 against income in 2015 and 2014, respectively. As of December 31, 2015, there was approximately $40,000 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. There was no exercise of stock options in 2015. The fair value of options granted during 2015 and 2014 was estimated using the Black-Scholes option pricing model with the following assumptions: Dividend yield Expected volatility Expected life of option Risk-free interest rate Fair value of each option on grant date 2015 0% 42.3% - 42.4% Five Years 1.4% - 1.5% $5.43 - $6.14 2014 0% 44.3% Five Years 1.7% $ 11.49 There were 7,250 options and 1,250 options granted during 2015 and 2014, 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%. 30 A summary of the status of the Company’s stock option plan as of December 31, 2015 and changes during the year then ended is presented below: Outstanding at January 1, 2015 Granted Exercised Expired and forfeited Outstanding at December 31, 2015 Exercisable at December 31, 2015 Shares Weighted Average Exercise Price 15.78 15.25 — — 15.47 13.53 4,918 $ 7,250 — — 12,168 $ 2,833 $ The weighted-average grant date fair value of options granted was $5.92 and $11.49 for the years ended December 31, 2015 and 2014, respectively. The total intrinsic value of stock options exercised was $107,639 for the year ended December 31, 2014. No stock options were exercised in 2015. 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 issued or outstanding during the year ended December 31, 2015. Restricted stock activity during 2014 was as follows: Outstanding at January 1, 2014 Granted Forfeited Outstanding at December 31, 2014 7. CONCENTRATION OF CREDIT RISK Weighted Average Price — 28.25 28.25 — $ $ Shares — 3,000 3,000 — The Company maintains its cash balances primarily in two financial institutions. As of December 31, 2015, 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. COMMITMENTS Building: During 2015, the Company committed to proceed with a 27,300 square-foot building expansion project. The new structure will contain a 20,500 square-foot production floor in addition to offices and ancillary facilities and is expected to cost $3.5 million. The expansion will be in addition to the current 35,000 square-foot IKONICS building on its Morgan Park site in western Duluth, which houses AMS production, warehousing, shipping and film conversion for all IKONICS business units. All AMS activities will relocate to the new facility, with an expected project completion date during the second quarter of 2016. Through December 31, 2015, the Company had incurred costs of $2.3 million of which $315,000 was included in construction accounts payable. Costs incurred to date are reflected in construction in progress on the Balance Sheet. 31 ERP System: During 2015, the Company committed to the purchase and implementation of a new Enterprise Resource Planning (ERP) system. The new ERP system will better support and accommodate IKONICS’ operations and replace the Company’s existing ERP system. The total ERP system project is expected to cost approximately $400,000, and is expected to be completed by the second quarter of 2016. Through December 31, 2015, the Company had incurred costs of $208,000, of which $18,000 was included in construction accounts payable. Costs incurred to date are reflected in construction in progress on the Balance Sheet. Line of Credit: The Company has a bank line of credit providing for borrowings of up to $2,050,000 and expiring on May 31, 2017. The line of credit is collateralized by the Company’s assets and bears interest at 1.8 percentage points over the 30-day LIBOR rate. The Company did not utilize this line of credit during 2015 or 2014 and there were no borrowings outstanding as of December 31, 2015 and 2014. There are no financial covenants related to the line of credit. 32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Item 9A. Controls and Procedures Disclosure Controls and Procedures. As of December 31, 2015, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms. 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, 2015. In making this assessment, management used the 2013 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, 2015, 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. Changes in Internal Control Over Financial Reporting. There was no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) of the Exchange Act that occurred during the period covered by this report and that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B. Other Information None. 33 Item 10. Directors and Executive Officers of the Registrant PART III The information to be included in the Company’s definitive proxy statement for the 2015 Annual Meeting of Shareholders under the captions “Election of Directors,” “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated by reference. The following information completes the Company’s response to this Item 10. The Company has adopted a code of ethics that applies to the Company’s Chief Executive Officer, Chief Financial Officer, Controller and other employees performing similar functions. This code of ethics is filed as Exhibit 14 to this report. The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, this code of ethics by posting such information on its web site which is located at www.ikonics.com. Item 11. Executive Compensation The information to be included in the Company’s definitive proxy statement for the 2016 Annual Meeting of Shareholders under the captions “Election of Directors—Director Compensation,” “Summary Compensation Table,” “Outstanding Equity Awards at Fiscal Year-End” and “Employment Contracts; Termination of Employment and Change-In-Control Arrangements” is incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information to be included in the Company’s definitive proxy statement for the 2016 Annual Meeting of Shareholders under the captions “Security Ownership of Principal Shareholders and Management” and “Equity Compensation Plan Information” is incorporated by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence The information to be included in the Company’s definitive proxy statement for the 2016 Annual Meeting of Shareholders under the caption “Election of Directors” is incorporated by reference. The Company has not engaged in any transaction since the beginning of its last fiscal year and does not currently propose to engage in any transaction required to be disclosed pursuant to Item 404 of Regulation S-K. Item 14. Principal Accountant Fees and Services The information to be included in the Company’s definitive proxy statement for the 2016 Annual Meeting of Shareholders under the caption “Principal Accounting Firm Fees” is incorporated by reference. Item 15. Exhibits and Financial Statement Schedules (a)(1) The following financial statements of the Company are filed as part of this Annual Report on Form 10-K; (i) Report of RSM US LLP, independent registered public accounting firm (ii) Balance Sheets as of December 31, 2015 and 2014 (iii) Statements of Income for the years ended December 31, 2015 and 2014 (iv) Statements of Stockholders’ Equity for the years ended December 31, 2015 and 2014 (v) Statements of Cash Flows for the years ended December 31, 2015 and 2014 (vi) Notes to the Financial Statements 34 (b) The following exhibits are filed as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2015: Exhibit 3.1 3.2 4 10.1* 10.2 14 23 24 31.1 31.2 32 101 Description Restated Articles of Incorporation of Company, as amended. (Incorporated by reference to the like numbered Exhibit to the Company’s Registration Statement on Form 10-SB filed with the Commission on April 7, 1999 (Registration No. 000-25727)). By-Laws of the Company, as amended. (Incorporated by reference to the like numbered Exhibit to the Company’s Current Report on Form 8-K filed with the Commission on February 22, 2007 (File No. 000-25727)). Specimen of Common Stock Certificate. (Incorporated by reference to the like numbered Exhibit to Amendment No. 1 to the Company’s Registration Statement on Form 10-SB filed with the Commission on May 26, 1999 (Registration No. 000-25727)). IKONICS Corporation 1995 Stock Incentive Plan, as amended. (Incorporated by reference to the like numbered Exhibit to the Company’s Annual Report on Form 10-K filed with the Commission on March 3, 2011 (File No. 000- 25727)). Confidentiality Agreement, dated March 11, 2013, between the Company and Joseph R. Nerges. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 13, 2013 (File No. 000-25727)). Code of Ethics. (Incorporated by reference to the like numbered Exhibit to the Company’s Annual Report on Form 10- KSB for the year ended December 31, 2003 (File No. 000-25727)). Consent of Independent Registered Public Accounting Firm. Powers of Attorney. Rule 13a-14(a)/15d-14(a) Certifications of CEO. Rule 13a-14(a)/15d-14(a) Certifications of CFO. Section 1350 Certifications. Interactive data files pursuant to Rule 405 of Regulation S-T.** * Management contract or compensatory plan, contract or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K. ** In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K is deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections. 35 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 2, 2016. SIGNATURES IKONICS CORPORATION By /s/ William C. Ulland William C. Ulland, Chairman, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 2, 2016. /s/ William C. Ulland William C. Ulland, Chairman, Chief Executive Officer and President (Principal Executive Officer) /s/ Jon Gerlach Jon Gerlach, Chief Financial Officer and Vice President of Finance (Principal Financial and Accounting Officer) Rondi Erickson* H. Leigh Severance* Gerald W. Simonson* Lockwood Carlson* David O. Harris* Ernest M. Harper Jr.* Darrell B. Lee* Director Director Director Director Director Director Director *William C. Ulland, by signing his name hereto, does hereby sign this document on behalf of each of the above named Directors of the registrant pursuant to powers of attorney duly executed by such persons. William C. Ulland, Attorney-in-Fact /s/ William C. Ulland 36 INDEX TO EXHIBITS Description Restated Articles of Incorporation of Company, as amended By-Laws of the Company, as amended. Specimen of Common Stock Certificate IKONICS Corporation 1995 Stock Incentive Plan, as amended Confidentiality Agreement, dated March 11, 2013, between the Company and Joseph R. Nerges Code of Ethics Consent of Independent Registered Public Accounting Firm Powers of Attorney Rule 13a-14(a)/15d-14(a) Certifications of CEO Rule 13a-14(a)/15d-14(a) Certifications of CFO Section 1350 Certifications Interactive data files pursuant to Rule 405 of Regulation S-T Exhibit 3.1 3.2 4 10.1 10.2 14 23 24 31.1 31.2 32 101 Page Incorporated by Reference Incorporated by Reference Incorporated by Reference Incorporated by Reference Incorporated by Reference Incorporated by Reference Filed Electronically Filed Electronically Filed Electronically Filed Electronically Filed Electronically Filed Electronically 37 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statements No. 333-92893, No. 333-129220, and No. 333- 161351 on Forms S-8 of IKONICS Corporation of our report dated March 2, 2016, relating to our audits of the financial statements, which appear in this Annual Report on Form 10-K of IKONICS Corporation for the year ended December 31, 2015. EXHIBIT 23 /s/ RSM US LLP Duluth, Minnesota March 2, 2016 38 IKONICS CORPORATION Powers of Attorney EXHIBIT 24 The undersigned directors of IKONICS Corporation, a Minnesota corporation, do hereby make, constitute and appoint William C. Ulland and Jon R. Gerlach, and either of them, the undersigned’s true and lawful attorneys-in-fact, with power of substitution, for the undersigned and in the undersigned’s name, place and stead, to sign and affix the undersigned’s name as such director of said Corporation to an Annual Report on Form 10-K or other applicable form, and all amendments thereto, to be filed by said Corporation with the Securities and Exchange Commission, Washington, D.C., under the Securities Act of 1934, as amended, with all exhibits thereto and other supporting documents, with said Commission, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, each of the undersigned have hereunto set their hands as of March 2, 2016. /s/ William C. Ulland William C. Ulland /s/ Gerald W. Simonson Gerald W. Simonson /s/ Ernest M. Harper Jr. Ernest M. Harper Jr. /s/ Darrell B. Lee Darrell B. Lee /s/ David O. Harris David O. Harris /s/ Rondi Erickson Rondi Erickson /s/ Lockwood Carlson Lockwood Carlson /s/ Leigh Severance Leigh Severance 39 EXHIBIT 31.1 RULE 13a-14(a)/15d-14(a) CERTIFICATIONS OF CEO I, William C. Ulland, certify that: 1. I have reviewed this annual report on Form 10-K of IKONICS Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 2, 2016 /s/ William C. Ulland William C. Ulland Chairman, Chief Executive Officer and President 40 EXHIBIT 31.2 RULE 13a-14(a)/15d-14(a)/CERTIFICATIONS OF CFO I, Jon Gerlach, certify that: 1. I have reviewed this annual report on Form 10-K of IKONICS Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 2, 2016 /s/ Jon Gerlach Jon Gerlach Chief Financial Officer and Vice President of Finance 41 SECTION 1350 CERTIFICATIONS EXHIBIT 32 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned certifies that this periodic report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this periodic report fairly presents, in all material respects, the financial condition and results of operations of IKONICS Corporation. Date: March 2, 2016 Date: March 2, 2016 /s/ William C. Ulland William C. Ulland Chairman, Chief Executive Officer and President /s/ Jon Gerlach Jon Gerlach Chief Financial Officer and Vice President of Finance 42 ( This page has been left blank intentionally.) ( This page has been left blank intentionally.) 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 Jon Gerlach Vice President, Finance, CFO, Ernest M. Harper Jr. Chief Tax Officer (retired 2010) Treasurer, and Secretary General Mills, Inc. Minneapolis, MN Director Since 2012 David O. Harris President Robert D. Banks Vice President, International Ken Hegman Vice President, Sales: North America David O. Harris, Inc. Minneapolis, MN Director Since 1965 Common Stock IKONICS Corporation common stock is traded on the Nasdaq Capital Market under the symbol IKNX. For investment and stock information contact: Darrell B. Lee Vice President, Chief Financial Officer, Treasurer, Secretary (retired 2014) 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 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 RSM US LLP 227 West First Street, Suite 700 Duluth, MN 55802 (218) 727-8253 William C. Ulland Chairman, President & CEO Counsel IKONICS Corporation Duluth, MN Director Since 1972 HANFT FRIDE 1000 U.S. Bank Place 130 W. Superior Street Duluth, MN 55802 (218) 722-4766 Marlanne Bohren Executive Director Western Lake Superior Sanitary District Duluth, MN Director Since 2016 Additional Financial Information 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: Jeffrey D. Engbrecht President & CEO Clearwater Composites Duluth, MN Director Since 2016 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 28, 2016 1:00 p.m. Kitchi Gammi Club 831 E. Superior Street Duluth, MN 55802 (800) 328-4261 www.ikonics.com ISO 9001 Certifi ed | NASDAQ Listed: IKNX 031516 

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