IKONICS Corporation

2015 IKONICS Annual Report

Through processes based in photochemistry, abrasive etching, chemical etching and other technologies, IKONICS participates in a diverse spectrum of markets. From traditional and high-tech screen printing, to decorative and industrial etching.

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15 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.

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