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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Page 18 of 46

17 areas to expedite internal product development as well as to form technological alliances with outside entities to commercialize new product opportunities. The Company continues to make progress on its AMS business initiative. Although AMS experienced a short- term drop in sales during 2017 due to temporary inventory overstocking by a major customer, these sales have returned to expected levels, and the Company anticipates continued growth over the long term. The Company has two long-term sales agreements in place for its technology with major aerospace companies and is negotiating a third. In anticipation of this growing business, the Company increased its AMS capacity with a 27,300 square foot expansion at its Morgan Park site in 2016. The Company is also continuing to pursue DTX-related business initiatives and expects increased consumable sales as a result of the sale of two DTX printers in 2017. 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 also modified its DTX technology to facilitate entry into the market for prototyping. Both the Domestic and IKONICS Imaging units remain profitable in mature markets. Although these business units require aggressive strategies to grow market share, both are developing new products and business relationships that we believe will contribute to growth. In October 2017, the Company introduced SubTHAT!™, a patent-pending product for the dye-sublimation market. Response to SubTHAT!™ has been very encouraging, with the Company realizing SubTHAT!™ sales of $258,000 in the fourth quarter of 2017. 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 has made this challenging. Other future activities undertaken to expand the Company's business may include acquisitions, building improvements, equipment additions, new product development and marketing opportunities. Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements. Recent Accounting Pronouncements In May 2014, the FASB issued 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. The standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The standard also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The Company will adopt the provisions of ASU 2014-09 on January 1, 2018 using the modified retrospective method. While most of the Company's revenue is contracted with customers through one-time purchase orders and short-term contracts, the Company does have long-term contracts with certain customers. The Company is nearly complete with its evaluation of the effect of adoption on its financial statements, and will expand its financial statement disclosures in future periods in order to comply with the new standard. For the revenue streams assessed, the Company does not anticipate any adjustments regarding the timing of recognizing revenue as a result of the adoption. The

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