IKONICS Corporation

2016 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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Letter to Shareholders This has been a year of contrasts for IKONICS. Sales of Advanced Material Solutions (AMS), our aerospace business, grew 66% over 2015. Most of these sales were to one customer, and we expect that this business will continue for future years. AMS has achieved industry recognition for service and quality. We are anticipating additional business from three potential new customers in 2017 and 2018. IKONICS Imaging also had a good year, with sales up 8% over 2015, driven primarily by a new customer, which is continuing to increase its orders. We expect to introduce a new, patent-applied-for product to this market this year, which we believe will be an important contributor to sales and profits. DTX, our automotive-based product line, experienced a 15% decline in sales, mirroring the segment of the automotive market the company serves. But based on firm orders in house, we expect that decline to reverse in the first half of 2017 and generate good sales and profits. Our traditional domestic screen print supply business was down 3%, reflecting the mature nature of this market. To counteract this, we are making a major effort in the growing printed electronics sector where we are developing a unique product that allows the printing of very fine circuits for touch pads, wearable electronics, antennas and other applications. This is a large market that could bring us significant profits. Our international business was down 8%, reflecting the strong dollar. We are looking for the printed electronics market described above and the new product being developed for IKONICS Imaging to improve our export business. For the year, overall sales were flat with 2015, with AMS and IKONICS Imaging countering the decline in International and DTX. Unfortunately, we were hit with a large unforeseen increase in health care expenses in the fourth quarter of 2016. For the year, our employee health care costs were $721,000 compared to $408,000 in 2015. This resulted in a loss of $0.03 per diluted share for the year compared to 2015 earnings of $0.07 per diluted share. Without the $313,000 increase in healthcare costs, pre-tax earnings on a non-GAAP basis would have increased by 8% over 2015. For a reconciliation to the comparable GAAP measure, see the table below. William C. Ulland Chairman, President & CEO March 24, 2017 Reconciliation of GAAP to Non-GAAP Pre-Tax Earnings We report our financial results in accordance with U.S. generally accepted accounting principles ("GAAP"). We have provided non- GAAP pre-tax earnings to assist investors in comparing earnings on a year-over-year basis and because management believes it is a useful metric in evaluating ongoing performance of our company. Reconciliation to the comparable GAAP measure is below. TWELVE MONTHS ENDED 12/31/16 12/31/15 GAAP pre-tax earnings (loss) $ (69,061) $ 225,007 Percentage decrease from prior fiscal year (131%) -- Add: Increase in health care costs 313,000 -- Non-GAAP pre-tax earnings $ 243,939 $ 225,007 Percentage increase from prior fiscal year 8% --

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