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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 March 31, 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 Avenue 
Duluth, Minnesota
    
    55807(Address of principal executive offices)
    
    (Zip code)
 
 
  þ o
  o o
  o þ
   Large accelerated filer oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ




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IKONICS Corporation
  PAGE NO.PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009
    
    
    3Condensed Statements of Operations for the Three Months Ended March 31, 2010 and 2009 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (unaudited)
    
    
    5Notes to Condensed Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4.
    
    Controls and Procedures
    
    
    15PART II.
    
    OTHER INFORMATION
    
    
    16SIGNATURES
    
    
    17EX-31.1EX-31.2EX-32




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FINANCIAL INFORMATION
 
 ITEM 1. Condensed Financial Statements
 
 IKONICS CORPORATION  CONDENSED BALANCE SHEETS
 March 31
    
    
    December 312010
    
    
    2009(unaudited)ASSETSCURRENT ASSETS:Cash
    
    $
    1,415,772
    
    
    $
    1,304,586Short-term investments
    
    
    805,567
    
    
    
    802,165Trade receivables, less allowance of $66,000 in 2010 and
$78,000 in 2009
    
    
    2,048,553
    
    
    
    2,015,798Inventories
    
    
    1,996,502
    
    
    
    2,070,602Deposits, prepaid expenses and other assets
    
    
    115,913
    
    
    
    61,337Deferred income taxes
    
    
    163,000
    
    
    
    163,000Total current assets
    
    
    6,545,307
    
    
    
    6,417,488PROPERTY, PLANT, AND EQUIPMENT, at cost:Land and building
    
    
    5,888,445
    
    
    
    5,883,794Machinery and equipment
    
    
    2,468,928
    
    
    
    2,456,218Office equipment
    
    
    745,195
    
    
    
    741,895Vehicles
    
    
    236,117
    
    
    
    241,0069,338,685
    
    
    
    9,322,913Less accumulated depreciation
    
    
    4,145,614
    
    
    
    4,088,6695,193,071
    
    
    
    5,234,244INTANGIBLE ASSETS, less accumulated amortization of $339,389 in
2010 and $325,576 in 2009
    
    
    341,607
    
    
    
    345,540$
    12,079,985
    
    
    $
    11,997,272LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    379,746
    
    
    $
    286,610Accrued compensation
    
    
    217,762
    
    
    
    337,365Other accrued expenses
    
    
    101,936
    
    
    
    104,408Income taxes payable
    
    
    37,268
    
    
    
    80,803Total current liabilities
    
    
    736,712
    
    
    
    809,186DEFERRED INCOME TAXES
    
    
    162,000
    
    
    
    162,000Total liabilities
    
    
    898,712
    
    
    
    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 1,967,057 shares in 2010 and 2009
    
    
    196,706
    
    
    
    196,706Additional paid-in capital
    
    
    2,205,135
    
    
    
    2,198,289Retained earnings
    
    
    8,779,432
    
    
    
    8,631,091Total stockholders equity
    
    
    11,181,273
    
    
    
    11,026,086$
    12,079,985
    
    
    $
    11,997,272
  3




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IKONICS CORPORATION  CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
 Three MonthsEnded March 312010
    
    
    2009NET SALES
    
    $
    3,684,577
    
    
    $
    3,563,212COST OF GOODS SOLD
    
    
    2,200,782
    
    
    
    2,157,898GROSS PROFIT
    
    
    1,483,795
    
    
    
    1,405,314SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    1,200,389
    
    
    
    1,221,581RESEARCH AND DEVELOPMENT EXPENSES
    
    
    160,704
    
    
    
    167,283INCOME FROM OPERATIONS
    
    
    122,702
    
    
    
    16,450GAIN ON SALE OF NON-MARKETABLE
EQUITY SECURITIES
    
    
    
    
    
    
    20,131INTEREST INCOME
    
    
    3,519
    
    
    
    70INCOME BEFORE INCOME TAXES
    
    
    126,221
    
    
    
    36,651INCOME TAX BENEFIT
    
    
    (22,120
    )
    
    
    (16,484
    )NET INCOME
    
    $
    148,341
    
    
    $
    53,135EARNINGS PER COMMON SHARE:Basic
    
    $
    0.08
    
    
    $
    0.03Diluted
    
    $
    0.08
    
    
    $
    0.03WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:Basic
    
    
    1,967,057
    
    
    
    1,989,222Diluted
    
    
    1,969,433
    
    
    
    1,989,866
  4




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IKONICS CORPORATION  CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
 Three MonthsEnded March 312010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    148,341
    
    
    $
    53,135Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    101,147
    
    
    
    106,669Amortization
    
    
    13,813
    
    
    
    13,812Stock based compensation
    
    
    6,846
    
    
    
    3,769Loss on intangible asset abandonment
    
    
    
    
    
    
    12,701Gain on sale of non-marketable equity securities
    
    
    
    
    
    
    (20,131
    )Deferred income taxes
    
    
    
    
    
    
    35,000Changes in working capital components:Trade receivables
    
    
    (32,755
    )
    
    
    216,541Inventories
    
    
    74,100
    
    
    
    251,862Prepaid expenses and other assets
    
    
    (54,576
    )
    
    
    (36,032
    )Income taxes receivable
    
    
    
    
    
    
    (10,276
    )Accounts payable
    
    
    93,136
    
    
    
    (47,204
    )Accrued liabilities
    
    
    (122,075
    )
    
    
    (148,836
    )Income taxes payable
    
    
    (43,535
    )
    
    
    Net cash provided by operating activities
    
    
    184,442
    
    
    
    431,010CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, equipment and construction in progress
    
    
    (68,408
    )
    
    
    (47,990
    )Proceeds from sale of vehicles
    
    
    8,434
    
    
    
    Purchase of intangibles
    
    
    (9,880
    )
    
    
    (1,789
    )Proceeds from sale of non-marketable equity securities
    
    
    
    
    
    
    20,131Purchase of short-term investments
    
    
    (203,402
    )
    
    
    Proceeds from maturity of short-term investments
    
    
    200,000
    
    
    
    Net cash used in investing activities
    
    
    (73,256
    )
    
    
    (29,648
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repurchase of common stock
    
    
    
    
    
    
    (69,213
    )Net cash used in financing activities
    
    
    
    
    
    
    (69,213
    )NET INCREASE IN CASH
    
    
    111,186
    
    
    
    332,149CASH AT BEGINNING OF PERIOD
    
    
    1,304,586
    
    
    
    901,738CASH AT END OF PERIOD
    
    $
    1,415,772
    
    
    $
    1,233,887SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for income taxes, net of refunds received of $74,156
    
    $
    56,415
    
    
    $
    5,640
  5




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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  1.
    
    Basis of Presentation
     2.
    
    Short Term Investments
  3.
    
    Inventory
  Mar 31, 2010
    
    
    Dec 31, 2009Raw materials
    
    $
    1,321,807
    
    
    $
    1,333,549Work-in-progress
    
    
    311,569
    
    
    
    277,876Finished goods
    
    
    1,261,423
    
    
    
    1,351,736Reduction to LIFO cost
    
    
    (898,297
    )
    
    
    (892,559
    )Total Inventory
    
    $
    1,996,502
    
    
    $
    2,070,602
 4.
    
    Earnings Per Common Share (EPS)
  6




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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
   Three Months EndedMar 31, 2010
    
    Mar 31, 2009Weighted average common shares outstanding
    
    
    1,967,057
    
    
    
    1,989,222Dilutive effect of stock options
    
    
    2,376
    
    
    
    644Weighted average common and common equivalent shares outstanding
    
    
    1,969,433
    
    
    
    1,989,866
  5.
    
    Stock-based Compensation
     7




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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  6.
    
    Segment Information
   For the three months ended March 31, 2010:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    1,500,171
    
    
    $
    1,156,790
    
    
    $
    1,027,616
    
    
    $
    
    
    
    $
    3,684,577Cost of goods sold
    
    
    798,205
    
    
    
    801,008
    
    
    
    601,569
    
    
    
    
    
    
    
    2,200,782Gross profit
    
    
    701,966
    
    
    
    355,782
    
    
    
    426,047
    
    
    
    
    
    
    
    1,483,795Selling, general and administrative*
    
    
    230,855
    
    
    
    158,659
    
    
    
    284,661
    
    
    
    526,214
    
    
    
    1,200,389Research and development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    160,704
    
    
    
    160,704Income from operations
    
    $
    471,111
    
    
    $
    197,123
    
    
    $
    141,386
    
    
    $
    (686,918
    )
    
    $
    122,702
 For the three months ended March 31, 2009:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    1,647,870
    
    
    $
    953,604
    
    
    $
    961,738
    
    
    $
    
    
    
    $
    3,563,212Cost of goods sold
    
    
    883,527
    
    
    
    714,689
    
    
    
    559,682
    
    
    
    
    
    
    
    2,157,898Gross profit
    
    
    764,343
    
    
    
    238,915
    
    
    
    402,056
    
    
    
    
    
    
    
    1,405,315Selling, general and administrative*
    
    
    272,187
    
    
    
    139,313
    
    
    
    291,908
    
    
    
    518,173
    
    
    
    1,221,581Research and development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    167,283
    
    
    
    167,283Income from operations
    
    $
    492,156
    
    
    $
    99,602
    
    
    $
    110,148
    
    
    $
    (685,456
    )
    
    $
    16,450
 
 *
    
    The Company does not allocate all general and administrative expenses or any research and
development expenses to its operating segments for internal reporting. 8




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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
   Mar 31, 2010
    
    
    Dec 31, 2009Domestic
    
    $
    913,185
    
    
    $
    976,967Export
    
    
    789,494
    
    
    
    740,547IKONICS Imaging
    
    
    373,016
    
    
    
    331,117Other
    
    
    (27,142
    )
    
    
    (32,833
    )Total
    
    $
    2,048,553
    
    
    $
    2,015,798
 7.
    
    Sale of Non-Marketable Equity Securities
  8.
    
    Income Taxes
    9




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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 benefit recorded in the
first three month of 2010The effective tax rate for the final nine 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 Companys expectation that it will obtain a new line of credit similar to its
current line of credit when the current line of credit expiresThis expectation may be
impacted by factors such as changes in credit markets, the interest rate environment,
general economic conditions, the Companys financial results and condition, and the
Companys anticipated need for capital to fund business operations and capital
expenditures.
    
    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
 10




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the amount or geographic focus of the Companys international
sales, or changes in purchase or sales terms.
 
    
    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.
 11




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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)
  Results of Operations
 Quarter Ended March 31, 2010 Compared to Quarter Ended March 31, 2009
 Sales. .
 Gross Profit
 Selling, General and Administrative Expenses
 12




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Research and Development Expenses
 Gain on Sale of Non-Marketable Equity Securities.
 Interest Income.
 Income Taxes.
 Liquidity and Capital Resources
    13




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Capital Expenditures
  International Activity
   14




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Future Outlook
     Recent Accounting Pronouncements
  Off Balance Sheet Arrangements
  
 ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4.
    
    Controls and Procedures
   15




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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
  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). 16




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SIGNATURES
  IKONICS CORPORATIONDATE: May 13, 2010
    By:
    /s/ Jon GerlachJon Gerlach,Chief Financial Officer, and
Vice President of Finance 17




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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