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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5 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

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