2007 Annual Report
Letter to Shareholders
The year 2007 was our seventh consecutive year of record sales and our third consecutive year of record earnings. For the year, sales were $15,825,000, a 6% increase over 2006. Net income rose by 4% over 2006 to $1,170,000 or $0.57 per share. Sales were positively affected by our image mate® acquisition in December 2006. Earnings growth was dampened by our investment in new technologies and Sarbanes-Oxley compliance expenses.
During the year we made exciting progress on two new technology initiatives: Photo-Machining T M and Digital Texturing T M . Both, however, have remaining hurdles to overcome before contributing to profits.
Photo-Machining brings our core strengths of photoresist design and manufacturing together with our broad experience in abrasive etching to a new market, namely, the etching of electronic wafers, industrial ceramics and other advanced materials. We are providing this as a service to large aerospace, electronic, and industrial materials companies. Although we are gradually building a base of repeat customers, we are still learning how we fit into this large and complex market place. We believe the market for our service is significant; but we do not yet know its full scope.
Digital Texturing is a different type of project. The product is a digitally imaged acid resist transfer film that will be used to etch steel molds for the plastic injection molding industry. We are currently focusing on companies that service the automotive industry. Digital Texturing is the combination of three new technologies to satisfy an existing demand from a market that we believe we understand fairly well. We are developing a jetable fluid and a patent-applied-for substrate to be used with a digital printer being manufactured by our strategic partner, iTi (Imaging Technology International). Linking three new technologies usually makes a task exponentially more difficult; but we have made great progress, as has been confirmed by our beta sites. Although the technical challenges and financial risks are much larger than with Photo-Machining, I believe there is less market risk and greater opportunity with Digital Texturing.
We are currently manufacturing commercial Digital Texturing product on prototype equipment and anticipate high volume production equipment to be installed in the second quarter of 2008. Presently, we are operating as a service bureau to this industry; and we plan to sell the imaging equipment together with the consumable fluids and substrates in late 2008 or early 2009.
Both of these efforts require investment and entail risk; but, in my view, this type of investment is necessary so that IKONICS can grow beyond its traditionalcore businesses of manufacturing photo stencils for the screen printing industry and photoresists for abrasive etching. Although these markets are mature, particularly domestically, they are profitable and have further growth and profit potential as evidenced by our image mate acquisition. I would caution, however, that these core businesses are subject to the world economy. For instance, the weak dollar helps our exports sales (currently 30% of our business), while an American recession would adversely affect the remaining 70% of the business. The slump in the domestic automotive industry may slow our penetration into this market; but this is a worldwide industry and we are pursuing a global strategy.
I believe IKONICS is in the process of re-inventing itself into a company that brings innovative high-value proprietary products to industrial markets. I am hopeful that in 2008 we will see the start of the economic payoff from this transformation.
For the Board of Directors, William C. Ulland Chairman,
The preceding letter contains statements regarding future financial results, new products, the success of acquisitions and other matters that involve risks and uncertainties. The Company’s actual results could differ materially as a result of domestic and global economic conditions, competitive market conditions, acceptance of new products, the ability to identify, complete and successfully integrate suitable acquisitions, as well as the other factors described elsewhere in this Annual Report and in the Company’s most recent Form 10-KSB and most recent Form 10-QSB on file with the SEC.