##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended September 30, 2010
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Transition Period From

to .
 Commission file number 000-25727
 IKONICS CORPORATION
 
  Minnesota
    
    41-0730027(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. employer
identification no.)4832 Grand AvenueDuluth, Minnesota
    
    55807(Address of principal executive offices)
    
    (Zip code)
 Issuers telephone number
  
  þ o
  o o
  o þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)




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##### 



IKONICS Corporation
  PAGE NO.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Balance Sheets as of September 30, 2010 (unaudited)
and December 31, 2009
    
    
    3Condensed Statements of Operations for the Three Months and
Nine Months Ended September 30, 2010 and 2009 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 2010 and 2009 (unaudited)
    
    
    5Notes to Condensed Financial Statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II. OTHER INFORMATION
    
    
    21SIGNATURES
    
    
    23EX-31.1EX-31.2EX-32




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##### Table of Contents



FINANCIAL INFORMATION
 
 ITEM 1.
    
    Condensed Financial Statements
 IKONICS CORPORATION
 
 CONDENSED BALANCE SHEETS
 September 30
    
    
    December 312010
    
    
    2009(unaudited)ASSETSCURRENT ASSETS:Cash
    
    $
    459,162
    
    
    $
    1,304,586Short-term investments
    
    
    2,211,213
    
    
    
    802,165Trade receivables, less allowance of $66,000 in 2010 and
$78,000 in 2009
    
    
    2,187,305
    
    
    
    2,015,798Inventories
    
    
    2,336,807
    
    
    
    2,070,602Deposits, prepaid expenses and other assets
    
    
    94,653
    
    
    
    61,337Deferred income taxes
    
    
    163,000
    
    
    
    163,000Total current assets
    
    
    7,452,140
    
    
    
    6,417,488PROPERTY, PLANT, AND EQUIPMENT, at cost:Land and building
    
    
    5,888,445
    
    
    
    5,883,794Machinery and equipment
    
    
    2,527,285
    
    
    
    2,456,218Office equipment
    
    
    748,810
    
    
    
    741,895Vehicles
    
    
    234,650
    
    
    
    241,0069,399,190
    
    
    
    9,322,913Less accumulated depreciation
    
    
    4,322,046
    
    
    
    4,088,6695,077,144
    
    
    
    5,234,244INTANGIBLE ASSETS, less accumulated amortization of $364,790 in
2010 and $325,576 in 2009
    
    
    311,829
    
    
    
    345,540$
    12,841,113
    
    
    $
    11,997,272LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    389,826
    
    
    $
    286,610Accrued compensation
    
    
    307,484
    
    
    
    337,365Other accrued expenses
    
    
    128,085
    
    
    
    104,408Income taxes payable
    
    
    5,988
    
    
    
    80,803Total current liabilities
    
    
    831,383
    
    
    
    809,186DEFERRED INCOME TAXES
    
    
    162,000
    
    
    
    162,000Total liabilities
    
    
    993,383
    
    
    
    971,186STOCKHOLDERS EQUITY:Preferred stock, par value $.10 per share; authorized 250,000 shares; issued noneCommon stock, par value $.10 per share; authorized 4,750,000 shares;
issued and outstanding 1,972,857 shares in 2010 and 1,967,057 in 2009
    
    
    197,286
    
    
    
    196,706Additional paid-in capital
    
    
    2,252,973
    
    
    
    2,198,289Retained earnings
    
    
    9,397,471
    
    
    
    8,631,091Total stockholders equity
    
    
    11,847,730
    
    
    
    11,026,086$
    12,841,113
    
    
    $
    11,997,272
  3




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IKONICS CORPORATION
 
 CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)
 Three Months
    
    
    Nine MonthsEnded September 30
    
    
    Ended September 302010
    
    
    2009
    
    
    2010
    
    
    2009NET SALES
    
    $
    4,141,092
    
    
    $
    3,920,663
    
    
    $
    12,073,724
    
    
    $
    11,270,376COST OF GOODS SOLD
    
    
    2,474,188
    
    
    
    2,337,757
    
    
    
    7,093,266
    
    
    
    6,825,654GROSS PROFIT
    
    
    1,666,904
    
    
    
    1,582,906
    
    
    
    4,980,458
    
    
    
    4,444,722SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
    
    
    1,086,577
    
    
    
    1,101,610
    
    
    
    3,409,441
    
    
    
    3,419,030RESEARCH AND DEVELOPMENT
EXPENSES
    
    
    163,420
    
    
    
    164,666
    
    
    
    528,622
    
    
    
    487,942INCOME FROM OPERATIONS
    
    
    416,907
    
    
    
    316,630
    
    
    
    1,042,395
    
    
    
    537,750GAIN ON SALE OF NON-MARKETABLE
EQUITY SECURITIES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,762LOSS ON INVESTMENT IN NON-
MARKETABLE EQUITY SECURITIES
    
    
    
    
    
    
    (918,951
    )
    
    
    
    
    
    
    (918,951
    )INTEREST INCOME
    
    
    6,267
    
    
    
    3,070
    
    
    
    13,672
    
    
    
    5,190INCOME (LOSS) BEFORE INCOME TAXES
    
    
    423,174
    
    
    
    (599,251
    )
    
    
    1,056,067
    
    
    
    (346,249
    )INCOME TAX EXPENSE
    
    
    135,831
    
    
    
    110,134
    
    
    
    277,111
    
    
    
    163,253NET INCOME (LOSS)
    
    $
    287,343
    
    
    $
    (709,385
    )
    
    $
    778,956
    
    
    $
    (509,502
    )EARNINGS (LOSS) PER COMMON SHARE:Basic
    
    $
    0.15
    
    
    $
    (0.36
    )
    
    $
    0.40
    
    
    $
    (0.26
    )Diluted
    
    $
    0.15
    
    
    $
    (0.36
    )
    
    $
    0.39
    
    
    $
    (0.26
    )WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING :Basic
    
    
    1,974,162
    
    
    
    1,967,057
    
    
    
    1,971,248
    
    
    
    1,975,991Diluted
    
    
    1,975,882
    
    
    
    1,967,057
    
    
    
    1,972,351
    
    
    
    1,975,991
  4




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IKONICS CORPORATION
 
 CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)
 Nine MonthsEnded September 302010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    778,956
    
    
    $
    (509,502
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation
    
    
    304,347
    
    
    
    321,759Amortization
    
    
    39,214
    
    
    
    41,438Stock based compensation
    
    
    21,952
    
    
    
    17,024(Gain) loss on sale of equipment and vehicles
    
    
    (10,766
    )
    
    
    13,582Loss on intangible asset abandonment
    
    
    29,918
    
    
    
    12,700Gain on sale of non-marketable equity securities
    
    
    
    
    
    
    (29,762
    )Loss on investment in non-marketable equity securities
    
    
    
    
    
    
    918,951Deferred income taxes
    
    
    
    
    
    
    35,000Changes in working capital components:Trade receivables
    
    
    (171,507
    )
    
    
    (22,954
    )Inventory
    
    
    (266,205
    )
    
    
    84,372Deposits, prepaid expenses and other assets
    
    
    (33,316
    )
    
    
    98,884Income tax refund receivable
    
    
    
    
    
    
    157,873Accounts payable
    
    
    103,216
    
    
    
    (190,090
    )Accrued expenses
    
    
    (6,204
    )
    
    
    (92,017
    )Income taxes payable
    
    
    (74,189
    )
    
    
    Net cash provided by operating activities
    
    
    715,416
    
    
    
    857,258CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment
    
    
    (155,681
    )
    
    
    (96,579
    )Proceeds from sale of equipment and vehicles
    
    
    19,200
    
    
    
    18,000Purchases of intangibles
    
    
    (35,421
    )
    
    
    (8,472
    )Purchases of short-term investments
    
    
    (2,216,089
    )
    
    
    (600,000
    )Proceeds on sale of short-term investments
    
    
    807,041
    
    
    
    Proceeds from sale of non-marketable equity securities
    
    
    
    
    
    
    29,762Net cash used in investing activities
    
    
    (1,580,950
    )
    
    
    (657,289
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repurchase of common stock
    
    
    (15,130
    )
    
    
    (123,844
    )Proceeds from exercise of stock options
    
    
    35,240
    
    
    
    Net cash provided by (used in) financing activities
    
    
    20,110
    
    
    
    (123,844
    )NET INCREASE (DECREASE) IN CASH
    
    
    (845,424
    )
    
    
    76,125CASH AT BEGINNING OF PERIOD
    
    
    1,304,586
    
    
    
    901,738CASH AT END OF PERIOD
    
    $
    459,162
    
    
    $
    977,863SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for income taxes, net of refunds received of $81,422 and
$119,423, respectively
    
    $
    386,299
    
    
    $
    (6,620
    )
  5




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IKONICS CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 1.
    
    Basis of Presentation
 The balance sheet of IKONICS Corporation (the Company) as of September 30, 2010, and the
related statements of operations for the three and nine months ended September 30, 2010 and
2009, and cash flows for the nine months ended September 30, 2010 and 2009, have been
prepared without being audited.In the opinion of management, these statements reflect all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial position of IKONICS
Corporation as of September 30, 2010, and the results of operations and cash flows for all
periods presented.Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America, have been condensed or omitted. Therefore, these statements should be read in
conjunction with the financial statements and notes thereto included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2009.The results of operations for interim periods are not necessarily indicative of results that
will be realized for the full fiscal year.
 2.
    
    Short Term Investments
 The Companys $2,211,000 of short-term investment is comprised of fully insured certificates
of deposit with maturities ranging from six to twelve months and interest rates ranging from
0.2% to 1.9%.
 3.
    
    Investments and Fair Value Measurements
 The carrying value of financial instruments, such as cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities approximate their
fair value because of their short term nature. We do not hold or issue financial instruments
for trading purposes.The companys 2009 investment in non-marketable equity securities was comprised of shares in
imaging Technology international (iTi) and was carried at cost. Non-marketable equity
securities are not adjusted to fair value on a recurring basis; however, they are assessed
for an other than temporary decline in fair value. A decline in the fair value of these
securities that is determined to be other than temporary will result in a revaluation of its
carrying amount to fair value in accordance with FASB ASC 325-20-35 paragraphs 1A and 2. An
impairment analysis was conducted in accordance with the provisions within FASB ASC
320-10-35 paragraphs 17 through 35. For the three months ended September 30, 2009, the
Company recorded an impairment charge of $918,951 reducing the investment in iTi to $0.Managements assessment of fair value was primarily based on iTis recent financial results
and iTis inability to secure adequate financing or to negotiate the sale of the company to
a third party. Consequently, iTi has ceased operations and has been liquidated. In order
to increase consistency and comparability in fair value measurements, the FASB Codification
establishes a fair value hierarchy that prioritizes observable and unobservable inputs used
to measure fair value into three broad levels. These levels, in order of highest priority to
lowest priority, are described below:
   6




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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  Based on the definition of the levels above and the nature of the inputs as described above,
management categorized the methodology used in the valuation of its iTi asset as Level 3.
 4.
    
    Inventory
 The major components of inventory are as follows:
 Sep 30, 2010
    
    
    Dec 31, 2009Raw materials
    
    $
    1,414,762
    
    
    $
    1,333,549Work-in-progress
    
    
    317,043
    
    
    
    277,876Finished goods
    
    
    1,557,077
    
    
    
    1,351,736Reduction to LIFO cost
    
    
    (952,075
    )
    
    
    (892,559
    )Total Inventory
    
    $
    2,336,807
    
    
    $
    2,070,602
 5.
    
    Earnings Per Common Share (EPS)
 Basic EPS is calculated using net income divided by the weighted average of common shares
outstanding. Diluted EPS is similar to Basic EPS except that the weighted average number of
common shares outstanding is increased to include the number of additional common shares
that would have been outstanding if the potential dilutive common shares, such as those
shares subject to options, had been issued.Shares used in the calculation of diluted EPS are summarized below:
 Three Months EndedSep 30, 2010
    
    
    Sep 30, 2009Weighted average common shares outstanding
    
    
    1,974,162
    
    
    
    1,967,057Dilutive effect of stock options
    
    
    1,720
    
    
    
    Weighted average common and common equivalent shares outstanding
    
    
    1,975,882
    
    
    
    1,967,057
 Nine Months EndedSep 30, 2010
    
    
    Sep 30, 2009Weighted average common shares outstanding
    
    
    1,971,248
    
    
    
    1,975,991Dilutive effect of stock options
    
    
    1,103
    
    
    
    Weighted average common and common equivalent shares outstanding
    
    
    1,972,351
    
    
    
    1,975,991
 7




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##### Table of Contents



IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 6.
    
    Stock-based Compensation
 The Company maintains a stock incentive plan which authorizes the issuance of up to 442,750
shares of common stock. Of those shares, 41,000 were subject to outstanding options and
125,573 were reserved for future grants at September 30, 2010. The plan provides for
granting eligible participants stock options or other stock awards, as described by the
plan, at option prices ranging from 85% to 110% of fair market value at the date of grant.
Options granted expire up to seven years after the date of grant. Such options generally
become exercisable over a one to three year period. The plan also includes a clause whereby
if any individual shareholders ownership percentage increases beyond 20%, all outstanding,
unvested awards would become immediately vested.The Company charged compensation cost of $7,500 against income for the three months
ended September 30, 2010 compared to $6,600 for the three months ended September 30, 2009.
For the first nine months of 2010, the Company charged compensation cost of approximately
$22,000 against income compared to approximately $17,000 for the same period in 2009. As of
September 30, 2010 there was approximately $44,000 of unrecognized compensation cost related
to unvested share-based compensation awards granted. That cost is expected to be recognized
over the next three years.The Company receives a tax deduction for certain stock option exercises during the period in
which the options are exercised, generally for the excess of the market price at the time
the stock options are exercised over the exercise price of the options, which increased the
APIC pool, which is the amount that represents the pool of excess tax benefits available to
absorb tax shortages. There were no excess tax benefits recognized during the three or nine
month period ending September 30, 2010 and 2009, respectively. The Companys APIC pool
totaled approximately $111,000 at September 30, 2010 and December 31, 2009, respectively.Proceeds from the exercise of stock options were $35,000 for the nine months ended September 30,
2010. There were no options exercised during the nine months ended September 30, 2009.The fair value of options granted during the nine months ended September 30, 2010 and 2009
were estimated using the Black-Scholes option pricing model with the following assumptions:
 2010
    
    2009Dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    45.2
    %
    
    
    47.2
    %Expected life of option
    
    Five Years
    
    Five YearsRisk-free interest rate
    
    
    2.5
    %
    
    
    2.0
    %Fair value of each option on grant date
    
    $
    3.08
    
    
    $
    2.10
 There were 4,000 options and 21,750 options granted during the nine months ended September
30, 2010 and 2009, respectively.Stock option activity during the nine months ended September 30, 2010 was as follows:
 8




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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 WeightedAverageExerciseShares
    
    PriceOutstanding at beginning of period
    
    
    45,500
    
    
    $
    5.91Granted
    
    
    4,000
    
    
    
    7.39Exercised
    
    
    (8,000
    )
    
    
    4.41Expired and forfeited
    
    
    (500
    )
    
    
    5.00Outstanding at September 30, 2010
    
    
    41,000
    
    
    
    6.36Exercisable at September 30, 2010
    
    
    20,083
    
    
    
    6.90
 The aggregate intrinsic value of all options outstanding and for those exercisable at
September 30, 2010 was approximately $35,000 and $11,000, respectively.
 7.
    
    Segment Information
 The Companys reportable segments are strategic business units that offer different products
and have varied customer bases. There are three reportable segments: Domestic, Export,
and IKONICS Imaging. Domestic sells screen printing film, emulsions, and inkjet receptive film to distributors
located in the United States and Canada. IKONICS Imaging sells photo resistant film, art
supplies, glass, metal medium and related abrasive etching equipment to end user customers
located in the United States and Canada. It is also entering the market for etched
ceramics, glass and silicon wafers, and is developing and selling proprietary inkjet
technology. Export sells primarily the same products as Domestic and IKONICS Imaging to
foreign customers. The accounting policies applied to determine the segment information are
the same as those described in the summary of significant accounting policies included in
the Companys Annual Report on Form 10-K for the year ended December 31, 2009.Management evaluates the performance of each segment based on the components of divisional
income, and with the exception of trade receivables, does not allocate assets and
liabilities to segments. Financial information with respect to the reportable segments
follows:For the three months ended September 30, 2010:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet sales
    
    $
    1,671,062
    
    
    $
    1,413,108
    
    
    $
    1,056,922
    
    
    $
    
    
    
    $
    4,141,092Cost of goods sold
    
    
    888,023
    
    
    
    1,021,437
    
    
    
    564,728
    
    
    
    
    
    
    
    2,474,188Gross profit
    
    
    783,039
    
    
    
    391,671
    
    
    
    492,194
    
    
    
    
    
    
    
    1,666,904Selling, general and
administrative*
    
    
    231,668
    
    
    
    119,113
    
    
    
    280,277
    
    
    
    455,519
    
    
    
    1,086,577Research and development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163,420
    
    
    
    163,420Income from operations
    
    $
    551,371
    
    
    $
    272,558
    
    
    $
    211,917
    
    
    $
    (618,939
    )
    
    $
    416,907
 9




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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 For the three months ended September 30, 2009:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet sales
    
    $
    1,702,631
    
    
    $
    1,329,464
    
    
    $
    888,568
    
    
    $
    
    
    
    $
    3,920,663Cost of goods sold
    
    
    880,967
    
    
    
    955,366
    
    
    
    501,424
    
    
    
    
    
    
    
    2,337,757Gross profit
    
    
    821,664
    
    
    
    374,098
    
    
    
    387,144
    
    
    
    
    
    
    
    1,582,906Selling, general and
administrative*
    
    
    211,180
    
    
    
    131,183
    
    
    
    245,930
    
    
    
    513,317
    
    
    
    1,101,610Research and development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    164,666
    
    
    
    164,666Income from operations
    
    $
    610,484
    
    
    $
    242,915
    
    
    $
    141,214
    
    
    $
    (677,983
    )
    
    $
    316,630
 For the nine months ended September 30, 2010:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet sales
    
    $
    4,962,625
    
    
    $
    4,042,887
    
    
    $
    3,068,212
    
    
    $
    
    
    
    $
    12,073,724Cost of goods sold
    
    
    2,589,379
    
    
    
    2,827,152
    
    
    
    1,676,735
    
    
    
    
    
    
    
    7,093,266Gross profit
    
    
    2,373,246
    
    
    
    1,215,735
    
    
    
    1,391,477
    
    
    
    
    
    
    
    4,980,458Selling, general and
administrative*
    
    
    718,275
    
    
    
    444,767
    
    
    
    848,344
    
    
    
    1,398,055
    
    
    
    3,409,441Research and development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    528,622
    
    
    
    528,622Income from operations
    
    $
    1,654,971
    
    
    $
    770,968
    
    
    $
    543,133
    
    
    $
    (1,926,677
    )
    
    $
    1,042,395
 For the nine months ended September 30, 2009:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet sales
    
    $
    5,055,963
    
    
    $
    3,452,937
    
    
    $
    2,761,476
    
    
    $
    
    
    
    $
    11,270,376Cost of goods sold
    
    
    2,676,991
    
    
    
    2,598,502
    
    
    
    1,550,161
    
    
    
    
    
    
    
    6,825,654Gross profit
    
    
    2,378,972
    
    
    
    854,435
    
    
    
    1,211,315
    
    
    
    
    
    
    
    4,444,722Selling, general and
administrative*
    
    
    716,708
    
    
    
    386,805
    
    
    
    830,457
    
    
    
    1,485,060
    
    
    
    3,419,030Research and development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    487,942
    
    
    
    487,942Income from operations
    
    $
    1,662,264
    
    
    $
    467,630
    
    
    $
    380,858
    
    
    $
    (1,973,002
    )
    
    $
    537,750
 
 *
    
    The Company does not allocate all general and administrative expenses or any research and
development expenses to its operating segments for internal reporting.  Sep 30, 2010
    
    
    Dec 31, 2009Domestic
    
    $
    913,311
    
    
    $
    976,967Export
    
    
    901,009
    
    
    
    740,547IKONICS Imaging
    
    
    403,016
    
    
    
    331,117Other, net of allowances
    
    
    (30,031
    )
    
    
    (32,833
    )Total
    
    $
    2,187,305
    
    
    $
    2,015,798
 10




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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 8.
    
    Sale of Non-Marketable Equity Securities
 The Company received and realized a gain of $29,762 during the first nine months of 2009
related to the 2007 sale of its equity investment in Apprise Technologies, Inc.
 9.
    
    Income Taxes
 The Company reports a liability for unrecognized tax benefit taken or expected to be taken
when they are uncertain. During the first nine months of 2010 and 2009, the statute of
limitations for the relevant taxing authority to examine and challenge the tax position for
an open year expired, resulting in decreases in income tax expense of $27,000 for the first
nine months of 2010 and $21,000 for the first nine months of 2009. As of September 30,
2010, there was no liability for unrecognized tax benefits compared to a liability of
$27,000 as of September 30, 2009. The liability for unrecognized tax benefits was
previously included in other accrued expenses.The Company is subject to taxation in the United States and various states. The material
jurisdictions that are subject to examination by tax authorities primarily include Minnesota
and the United States, for tax years 2007, 2008, and 2009.It has been the Companys policy to recognize interest and penalties related to uncertain
tax positions in income tax expense. The Company had accrued approximately $8,000 of
interest related to uncertain tax positions at December 31, 2009, all of which was reversed
and included in income tax benefit on the Statement of Operations for the first nine months
of 2010. The unrecognized tax benefits at September 30, 2009 related to taxation of foreign
export sales.
 11




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The information presented below in Managements Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements within the meaning of the safe harbor
provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are
subject to risks and uncertainties, including those discussed under Factors that May Affect Future
Results below, that could cause actual results to differ materially from those projected. Because
actual results may differ, readers are cautioned not to place undue reliance on these
forward-looking statements. Certain forward-looking statements are indicated by italics.
 
 ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
  Factors that May Affect Future Results
 
    
    The Companys expectation that its effective tax rate will return to 35% to 36% of
pretax income for the remainder of 2010 compared to the tax expense recorded in the
first nine months of 2010The effective tax rate for the final three months of 2010
may be affected by changes in federal and state tax law, unanticipated changes in the
Companys financial position or the Companys operating activities and/or management
decisions could increase or decrease its effective tax rate.
    
    The Companys belief that the quality of its receivables is high and that strong
internal controls are in place to maintain proper collectionsThis belief may be
impacted by domestic economic conditions, by economic, political, regulatory or social
conditions in foreign markets, or by the failure of the Company to properly implement
or maintain internal controls.
    
    The belief that the Companys current financial resources, cash generated from
operations and the Companys capacity for debt and/or equity financing will be
sufficient to fund current and anticipated business operations and capital
expenditures. The belief that the Companys low debt levels and available line of
credit make it unlikely that a decrease in product demand would impair the Companys
ability to fund operationsChanges in anticipated operating results, credit
availability, equity market conditions or the Companys debt levels may further enhance
or inhibit the Companys ability to maintain or raise appropriate levels of cash.
    
    The Companys expectations as to the level and use of planned capital expenditures
and that capital expenditures will be funded with cash on hand and cash generated from
operating activitiesThis expectation may be affected by changes in the Companys
anticipated capital expenditure requirements resulting from unforeseen required
maintenance, repairs, or capital asset additions. The funding of planned or unforeseen
expenditures may also be affected by changes in anticipated operating results resulting
from decreased sales, lack of acceptance of new products or increased operating
expenses or by other unexpected events affecting the Companys financial position.
    
    The Companys belief that its vulnerability to foreign currency fluctuations and
general economic conditions in foreign countries is not significantThis belief may be
impacted by economic, political and social conditions in foreign markets, changes in
regulatory and competitive conditions, a change in the amount or geographic focus of
the Companys international sales, or changes in purchase or sales terms.
 12




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##### Table of Contents




    
    The Companys plans to continue to invest in research and development efforts,
expedite internal product development and invest in technological alliances, as well as
the expected focus and results of such investmentsThese plans and expectations may be
impacted by general market conditions, unanticipated changes in expenses or sales,
delays in the development of new products, technological advances, the ability to find
suitable and willing technology partners or other changes in competitive or market
conditions.
    
    The Companys efforts to grow its international businessThese efforts may be
impacted by economic, political and social conditions in current and anticipated
foreign markets, regulatory conditions in such markets, unanticipated changes in
expenses or sales, changes in competitive conditions or other barriers to entry or
expansion.
    
    The Companys belief as to future activities that may be undertaken to expand the
Companys businessActual activities undertaken may be impacted by general market
conditions, competitive conditions in the Companys industry, unanticipated changes in
the Companys financial position, lack of acceptance of new products or the inability
to identify attractive acquisition targets or other business opportunities.
 Critical Accounting Estimates
  Accounts Receivable.
 Inventories.
 Income Taxes.
 13




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##### Table of Contents



Investments and Fair Value Measurements
   Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement
date for assets or liabilities.Level 2: Observable prices that are based on inputs not quoted on active markets, but
corroborated by market data.Level 3: Unobservable inputs are used when little or no market data is available.
  Revenue Recognition.
 (a)
    
    persuasive evidence of an arrangement (principally in the form
of customer sales orders and the Companys sales invoices)(b)
    
    delivery and performance (evidenced by proof of delivery, e.g.
the shipment of film and substrates with bill of lading used for proof of
delivery for FOB shipping point terms, and the carrier booking confirmation
report used for FOB destination terms). Once the finished product is shipped
and physically delivered under the terms of the invoice and sales order, the
Company has no additional performance or service obligations to complete(c)
    
    a fixed and determinable sales price (the Companys pricing is
established and is not based on variable terms, as evidenced in either the
Companys invoices or the limited number of distribution agreements; the
Company rarely grants extended payment terms and has no history of concessions)(d)
    
    a reasonable likelihood of payment (the Companys terms are
standard, and the Company does not have a substantial history of customer
defaults or non-payment)
 14




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##### Table of Contents



Results of Operations
 Quarter Ended September 30, 2010 Compared to Quarter Ended September 30, 2009
 Sales.
 Gross Profit
 Selling, General and Administrative Expenses
 Research and Development Expenses
 Loss on Investment in Non-marketable Equity Securities.
 Interest Income.
 Income Taxes.
 15




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##### Table of Contents



Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009
 Sales.
 Gross Profit
 Selling, General and Administrative Expenses
 Research and Development Expenses
 Gain on Sale of Non-Marketable Equity Securities.
 Loss on Investment in Non-Marketable Equity Securities .
 Interest Income.
 Income Taxes
 16




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Liquidity and Capital Resources
        17




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Capital Expenditures
  International Activity
   18




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Future Outlook
    Recent Accounting Pronouncements
  Off Balance Sheet Arrangements
  19




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ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4.
    
    Controls and Procedures
   20




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OTHER INFORMATION
 ITEM 1.
    
    Legal Proceedings
  ITEM 1A.
    
    Risk Factors
  ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities(1)
 (c) Total Number ofShares Purchased as
    
    (d) Maximum Number of(a) Total Number
    
    
    
    
    
    Part of Publicly
    
    Shares that Mayof
    
    (b) Average Price
    
    Announced Plans
    
    Yet Be Purchased UnderShares Purchased
    
    Paid per Share
    
    or Programs
    
    The Plans or ProgramsJuly 1, 2010 through July 31, 2010
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    35,231August 1, 2010 through August 31, 2010
    
    
    2,200
    
    
    $
    6.88
    
    
    
    2,200
    
    
    
    33,031September 1, 2010 through September 30, 2010
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    33,031
 
 (1)
    
    In prior years, the Companys board of directors had authorized the repurchase of
150,000 shares of common stock. In August 2008, the Companys Board of Directors approved
the repurchase of an additional 100,000 shares of common stock bringing the total shares
eligible for repurchase to 250,000. A total of 206,370 shares have been repurchased under
this program including 2,200 shares repurchased during the third quarter of 2010. The plan
allows for an additional 33,031 shares to be repurchased. ITEM 3.
    
    Defaults upon Senior Securities
  ITEM 4.
    
    [Removed and Reserved]
 ITEM 5.
    
    Other Information
  ITEM 6.
    
    Exhibits
  Exhibit
    
    Description3.1
    
    Restated Articles of Incorporation of Company, as amended.13.2
    
    By-Laws of the Company, as amended.231.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of CEO31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of CFO32
    
    Section 1350 Certifications
 
 1
    
    Incorporated by reference to the like numbered
Exhibit to the Companys Registration Statement on Form 10-SB (File No.
000-25727).2
    
    Incorporated by reference to the like numbered Exhibit to the
Companys Current Report on Form 8-K filed with the Commission on February 22,
2007 (File No. 000-25727). 21




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22




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SIGNATURES
  IKONICS CORPORATIONDATE: November 12, 2010
    
    By:
    
    /s/ Jon Gerlach

Jon Gerlach,Chief Financial Officer, andVice President of Finance
 23




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INDEX TO EXHIBITS
 Exhibit
    
    Description
    
    Page3.1
    
    Restated Articles of Incorporation of Company, as amended
    
    Incorporated by reference3.2
    
    By-Laws of the Company, as amended.
    
    Incorporated by reference31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of CEO.
    
    Filed Electronically31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of CFO.
    
    Filed Electronically32
    
    Section 1350 Certifications.
    
    Filed Electronically