IKONICS Corporation

2017 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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16 etched composites, ceramics, glass and silicon wafers, to be located in Duluth, Minnesota. The Loan requires monthly payments of approximately $18,000, including interest. The Loan bears interest at a rate of 2.14% per year, subject to change based upon changes to the maximum federal corporate tax rate, payable monthly, and matures on April 1, 2041. The Loan is subject to mandatory purchase provisions, under which any owners of the Bonds (the "Owners") may tender the Bonds to the Issuer on April 1, 2021, which would result in the Company repaying the outstanding loan principal and any outstanding accrued and unpaid interest to the Issuer at that time. If in the event the Bonds are not repurchased on April 1, 2021, the Bonds shall be subject to the interest rate and redemption provisions set forth in the associated covenant agreement. Including debt costs of approximately $139,000, the Loan's effective annual interest rate was 2.77% at December 31, 2017. As a result of the Tax Reform Act described above, the Company estimates the future effective interest rate will be approximately 3.23% beginning in March 2018, resulting in an approximate $15,000 increase in interest payments annually. The Company is subject to certain customary covenants set forth in the associated covenant agreement, including a requirement that the Company maintain a debt service coverage ratio as of the end of each calendar quarter of not less than 1.25 to 1.00 on a rolling four-quarter basis. The Company was in compliance with the required debt service coverage ratio as of December 31, 2017 and 2016. A bank line of credit exists providing for borrowings of up to $2,050,000 and expires on June 30, 2019. 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 2017 or 2016, and there were no borrowings outstanding as of December 31, 2017 and 2016. 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 secured through debt financing, and short term investments, along with the Company's capacity for additional debt and/or equity financing will be sufficient to fund current and anticipated business operations. The Company also believes that it is unlikely that a decrease in demand for the Company's products would impair the Company's ability to fund operations given its excess cash and available line of credit. Capital Expenditures In 2017, the Company incurred $230,000 of capital expenditures which were mainly for improvements to production and process capabilities and two vehicles. In 2016, the Company incurred $1.7 million of capital expenditures. A majority of the expenditures were related to the AMS building expansion. The remaining capital expenditures were for upgrades to improve AMS production and process capabilities, as well as for a new ERP system. The Company expects capital expenditures in 2018 of approximately $658,000. The planned expenditures primarily will be to upgrade the heating, cooling and ventilation system at the Company's main facility and manufacturing equipment to improve processes and capabilities. These commitments are expected to be funded with cash generated from operating activities. 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 2017 foreign sales of $5.4 million were approximately 30.5% of total sales, compared to the 2016 foreign sales of $4.9 million, which were 28.0% of total sales. The Company realized an increase in foreign sales due to the sale of two DTX printers into Europe and improved consumable sales to Asia. 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. Furthermore, the impact of foreign exchange on the Company's balance sheet and operating results was not material in either 2017 or 2016. Future Outlook IKONICS has spent an average of approximately 4.0% of annual sales in research and development and has made capital expenditures related to new products and programs. The Company plans to maintain its efforts in these

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