##### 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, 2009
 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)
  
 
 þ o
 o o
 o þ
   Large accelerated filer o
Accelerated filer o
Non-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 September 30, 2009 (unaudited) and December 31, 2008
    
    
    3Condensed Statements of Operations for the Three Months and Nine Months Ended September 30, 2009 and 2008 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 (unaudited)
    
    
    5Notes to Condensed Financial Statements (unaudited)
    
    
    6Item 2.
    

Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    21PART II.
    
    OTHER INFORMATION
    
    
    22SIGNATURES
    
    
    23EX-31.1EX-31.2EX-32




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FINANCIAL INFORMATION
 
 ITEM 1. Condensed Financial Statements
 
 IKONICS CORPORATION  CONDENSED BALANCE SHEETS
 September 30
    
    
    December 312009
    
    
    2008(unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    977,863
    
    
    $
    901,738Short term investments
    
    
    600,000
    
    
    
    Trade receivables, less allowance of $86,000 in 2009 and $56,000 in 2008
    
    
    2,100,112
    
    
    
    2,077,158Inventory
    
    
    2,024,792
    
    
    
    2,109,164Deposits, prepaid expenses and other assets
    
    
    93,317
    
    
    
    192,201Income tax refund receivable
    
    
    27,996
    
    
    
    185,869Deferred income taxes
    
    
    96,000
    
    
    
    96,000Total current assets
    
    
    5,920,080
    
    
    
    5,562,130PROPERTY, PLANT, AND EQUIPMENT, at cost:Land and building
    
    
    5,924,847
    
    
    
    5,928,275Machinery and equipment
    
    
    2,487,092
    
    
    
    2,430,857Office equipment
    
    
    765,916
    
    
    
    763,595Vehicles
    
    
    241,905
    
    
    
    241,9059,419,760
    
    
    
    9,364,632Less accumulated depreciation
    
    
    (4,074,459
    )
    
    
    (3,762,569
    )5,345,301
    
    
    
    5,602,063INTANGIBLE ASSETS, less accumulated amortization of $311,763 in
2009 and $270,325 in 2008
    
    
    357,619
    
    
    
    403,285INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES
    
    
    
    
    
    
    918,951$
    11,623,000
    
    
    $
    12,486,429LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payableTrade
    
    $
    274,693
    
    
    $
    344,783Construction
    
    
    
    
    
    
    120,000Accrued compensation
    
    
    234,996
    
    
    
    335,126Other accrued liabilities
    
    
    117,993
    
    
    
    109,880Total current liabilities
    
    
    627,682
    
    
    
    909,789DEFERRED INCOME TAXES
    
    
    178,000
    
    
    
    143,000Total liabilities
    
    
    805,682
    
    
    
    1,052,789STOCKHOLDERS 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 2009 and 1,993,983 in 2008
    
    
    196,706
    
    
    
    199,398Additional paid-in capital
    
    
    2,191,663
    
    
    
    2,202,888Retained earnings
    
    
    8,428,949
    
    
    
    9,031,354Total stockholders equity
    
    
    10,817,318
    
    
    
    11,433,640$
    11,623,000
    
    
    $
    12,486,429
  3




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IKONICS CORPORATION  CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months
    
    
    Nine MonthsEnded September 30
    
    
    Ended September 302009
    
    
    2008
    
    
    2009
    
    
    2008NET SALES
    
    $
    3,920,663
    
    
    $
    3,832,783
    
    
    $
    11,270,376
    
    
    $
    11,943,690COST OF GOODS SOLD
    
    
    2,337,757
    
    
    
    2,178,597
    
    
    
    6,825,654
    
    
    
    6,798,858GROSS PROFIT
    
    
    1,582,906
    
    
    
    1,654,186
    
    
    
    4,444,722
    
    
    
    5,144,832SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
    
    
    1,101,610
    
    
    
    1,187,912
    
    
    
    3,419,030
    
    
    
    3,709,842RESEARCH AND DEVELOPMENT
EXPENSES
    
    
    164,666
    
    
    
    219,071
    
    
    
    487,942
    
    
    
    601,781INCOME FROM OPERATIONS
    
    
    316,630
    
    
    
    247,203
    
    
    
    537,750
    
    
    
    833,209GAIN ON SALE OF NON-MARKETABLE
EQUITY SECURITIES
    
    
    
    
    
    
    24,550
    
    
    
    29,762
    
    
    
    24,550LOSS ON INVESTMENT IN NON-
MARKETABLE EQUITY SECURITIES
    
    
    (918,951
    )
    
    
    
    
    
    
    (918,951
    )
    
    
    INTEREST INCOME
    
    
    3,070
    
    
    
    19,890
    
    
    
    5,190
    
    
    
    87,262INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (599,251
    )
    
    
    291,643
    
    
    
    (346,249
    )
    
    
    945,021INCOME TAX EXPENSE
    
    
    110,134
    
    
    
    53,810
    
    
    
    163,253
    
    
    
    243,113NET INCOME (LOSS)
    
    $
    (709,385
    )
    
    $
    237,833
    
    
    $
    (509,502
    )
    
    $
    701,908EARNINGS (LOSS) PER COMMON SHARE:Basic
    
    $
    (0.36
    )
    
    $
    0.11
    
    
    $
    (0.26
    )
    
    $
    0.34Diluted
    
    $
    (0.36
    )
    
    $
    0.11
    
    
    $
    (0.26
    )
    
    $
    0.34WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:Basic
    
    
    1,967,057
    
    
    
    2,070,705
    
    
    
    1,975,991
    
    
    
    2,066,395Diluted
    
    
    1,967,057
    
    
    
    2,073,925
    
    
    
    1,975,991
    
    
    
    2,070,134
  4




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IKONICS CORPORATION  CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
 Nine MonthsEnded September 302009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (509,502
    )
    
    $
    701,908Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation
    
    
    321,759
    
    
    
    219,271Amortization
    
    
    41,438
    
    
    
    43,451Excess tax benefit from share-based payment arrangement
    
    
    
    
    
    
    (39,319
    )Stock based compensation
    
    
    17,024
    
    
    
    13,939Loss (gain) on sale of equipment and vehicles
    
    
    13,582
    
    
    
    (1,725
    )Loss on intangible asset abandonment
    
    
    12,700
    
    
    
    66,746Gain on sale of non-marketable equity securities
    
    
    (29,762
    )
    
    
    (24,550
    )Loss on investment in non-marketable equity securities
    
    
    918,951
    
    
    
    Deferred income taxes
    
    
    35,000
    
    
    
    Changes in working capital components:Trade receivables
    
    
    (22,954
    )
    
    
    (39,103
    )Inventory
    
    
    84,372
    
    
    
    251,674Prepaid expenses and other assets
    
    
    98,884
    
    
    
    (106,149
    )Income tax refund receivable
    
    
    157,873
    
    
    
    (37,756
    )Accounts payable
    
    
    (190,090
    )
    
    
    45,839Accrued liabilities
    
    
    (92,017
    )
    
    
    (123,280
    )Income taxes payable
    
    
    
    
    
    
    38,417Net cash provided by operating activities
    
    
    857,258
    
    
    
    1,009,363CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (96,579
    )
    
    
    (2,926,395
    )Proceeds from sale of equipment and vehicles
    
    
    18,000
    
    
    
    8,500Purchase of intangibles
    
    
    (8,472
    )
    
    
    (34,729
    )Purchase of short-term investments
    
    
    (600,000
    )
    
    
    Proceeds on sale of short-term investments
    
    
    
    
    
    
    3,550,000Proceeds from sale of non-marketable equity securities
    
    
    29,762
    
    
    
    24,550Net cash provided by (used in) investing activities
    
    
    (657,289
    )
    
    
    621,926CASH FLOWS FROM FINANCING ACTIVITIES:Excess tax benefit from share-based payment arrangement
    
    
    
    
    
    
    39,319Repurchase of common stock
    
    
    (123,844
    )
    
    
    (526,212
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    106,712Net cash used in financing activities
    
    
    (123,844
    )
    
    
    (380,181
    )NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    76,125
    
    
    
    1,251,108CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    901,738
    
    
    
    1,230,020CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    977,863
    
    
    $
    2,481,128SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for income taxes, net of refunds received
    
    $
    (6,620
    )
    
    $
    284,348SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIESConstruction payables incurred for building expansion
    
    $
    
    
    
    $
    711,827
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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  1.
    
    Basis of Presentation and Accounting PoliciesThe balance sheet of IKONICS Corporation (the Company) as of September 30, 2009, and the
related statements of operations for the three and nine months ended September 30, 2009 and
2008, and cash flows for the nine months ended September 30, 2009 and 2008, 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, 2009, 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, 2008.Recent Accounting PronouncementsEffective July 1, 2009, the Company adopted the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 105-10, Generally Accepted Accounting
Principles  Overall (ASC 105-10). ASC 105-10 establishes the FASB Accounting Standards
Codification (the Codification) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the
SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. All guidance contained in the Codification carries an equal level of
authority. The Codification superseded all existing non-SEC accounting and reporting
standards. All other non-grandfathered, non-SEC accounting literature not included in the
Codification is non-authoritative. The FASB will not issue new standards in the form of
Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will
issue Accounting Standards Updates (ASUs). The FASB will not consider ASUs as
authoritative in their own right. ASUs will serve only to update the Codification, provide
background information about the guidance and provide the bases for conclusions on the
change(s) in the Codification. References made to FASB guidance throughout this document
have been updated for the Codification.Effective January 1, 2008, the Company adopted FASB ASC 820-10, Fair Value Measurements
and Disclosures  Overall(ASC 820-10) with respect to its financial assets and
liabilities. In February 2008, the FASB issued updated guidance related to fair value
measurements, which is included in the Codification in ASC 820-10-55, Fair Value
Measurements and Disclosures  Overall  Implementation Guidance and Illustrations. The
updated guidance provided a one year deferral of the effective date of ASC 820-10 for
non-financial assets and non-financial liabilities, except those that are recognized or
disclosed in the financial statements at fair value at least annually. Therefore, the
Company adopted the provisions of ASC 820-10 for non-financial assets and non-financial
liabilities effective January 1, 2009, and such adoption did not have a material impact on
the Companys consolidated results of operations or financial condition. The Companys only
financial instruments measured at fair value on a nonrecurring basis were its auction rate
securities, which were sold during the second quarter of 2008 at cost. The Companys
nonfinancial assets include property, plant and equipment and intangible assets comprised of
patents and non-competes. ASC 820-10 affects how the fair value of these assets is
determined when determining if the assets are impaired. None of the Companys non-financial assets were considered to be impaired as of
September 30, 2009. Accordingly, the adoption of ASC 820-10 in 2009 for financial and
nonfinancial assets had no impact on the Companys financial condition or results of
operations.
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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  Effective January 1, 2009, the Company adopted FASB ASC Topic 805, Business
Combinations(ASC 805). ASC 805 establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree.
ASC 805 also provides guidance for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the business
combination. ASC 805 also provides guidance for recognizing changes in an acquirers
existing income tax valuation allowances and tax uncertainty accruals that result from a
business combination transaction as adjustments to income tax expense. The adoption of ASC
805 by the Company had no impact on the Companys current financial condition or results of
operations, as the Company did not enter into any business combinations.
 In April 2009, the FASB issued updated guidance related to business combinations, which
is included in the Codification in ASC 805-20, Business Combinations  Identifiable Assets,
Liabilities and Any Noncontrolling Interest(ASC 805-20). ASC 805-20 amends and clarifies
ASC 805 to address application issues regarding initial recognition and measurement,
subsequent measurement and accounting and disclosure of assets and liabilities arising from
contingencies in a business combination. In circumstances where the acquisition-date fair
value for a contingency cannot be determined during the measurement period and it is
concluded that it is probable that an asset or liability exists as of the acquisition date
and the amount can be reasonably estimated, a contingency is recognized as of the
acquisition date based on the estimated amount. ASC 805-20 is effective for assets or
liabilities arising from contingencies in business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The adoption of ASC 805-20 had no impact on the Companys financial
condition or results of operations.
 Effective January 1, 2009, the Consolidation Topic, ASC 810-10-45-16, revised the
accounting treatment for noncontrolling minority interests of partially-owned subsidiaries.
Noncontrolling minority interests represent the portion of earnings that is not within the
parent companys control. These amounts are now required to be reported as equity instead of
as a liability on the balance sheet. The adoption of ASC 810-10-45-16 had no impact on the
Companys financial condition or results of operations.
 Effective April 1, 2009, the Company adopted FASB ASC 825-10-65, Financial Instruments
 Overall  Transition and Open Effective Date Information(ASC 825-10-65). ASC
825-10-65 amends ASC 825-10 to require disclosures about fair value of financial instruments
in interim financial statements as well as in annual financial statements and also amends
ASC 270-10 to require those disclosures in all interim financial statements. The adoption of
ASC 825-10-65 did not have a material impact on the Companys results of operations or
financial condition.
 Effective April 1, 2009, the Company adopted FASB ASC 855-10, Subsequent Events  Overall
(ASC 855-10). ASC 855-10 establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements are issued or
are available to be issued. It requires the disclosure of the date through which an entity
has evaluated subsequent events and the basis for that date  that is, whether that date
represents the date the financial statements were issued or were available to be issued.
This disclosure should alert all users of financial statements that an entity has not
evaluated subsequent events after that date in the set of financial statements being
presented. The adoption of ASC 855-10 resulted in the following disclosure: The Company has
evaluated subsequent events through November 13, 2009, the date these financial statements
were issued.
 The results of operations for interim periods are not necessarily indicative of results that
will be realized for the full fiscal year.
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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  2.
    
    Short Term Investments
 The Companys $600,000 of short-term investment is comprised of fully insured certificates
of deposit with maturities ranging from seven to twelve months and interest rates ranging
from 1.9% to 2.3%.
 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 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 a other then temporary decline in fair value. A decline in the market 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 has been 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 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 is currently evaluating its
options including liquidation. 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:
    Based on the definition of the levels above and the nature of the inputs as described above,
management has 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, 2009
    
    
    Dec 31, 2008Raw materials
    
    $
    1,380,385
    
    
    $
    1,447,063Work-in-progress
    
    
    280,590
    
    
    
    324,361Finished goods
    
    
    1,239,963
    
    
    
    1,194,148Reduction to LIFO cost
    
    
    (876,146
    )
    
    
    (856,408
    )Total Inventory
    
    $
    2,024,792
    
    
    $
    2,109,164
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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  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,
when dilutive, 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, 2009
    
    Sep 30, 2008Weighted average common shares outstanding
    
    
    1,967,057
    
    
    
    2,070,705Dilutive effect of stock options
    
    
    
    
    
    
    3,220Weighted average common and common equivalent shares outstanding
    
    
    1,967,057
    
    
    
    2,073,925
 Nine Months EndedSep 30, 2009
    
    Sep 30, 2008Weighted average common shares outstanding
    
    
    1,975,991
    
    
    
    2,066,395Dilutive effect of stock options
    
    
    
    
    
    
    3,739Weighted average common and common equivalent shares outstanding
    
    
    1,975,991
    
    
    
    2,070,134
 6.
    
    Stock-based Compensation
 The Company has a stock incentive plan for the issuance of up to 442,750 shares of common
stock including the 100,000 additional shares approved by the shareholders at the April 24,
2009 annual meeting. 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 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. A
total of 129,073 shares of common stock are reserved for additional grants of options under
the plan at September 30, 2009.
 The Company charged compensation cost of $6,600 against income for the three months ended
September 30, 2009 compared to $5,900 for the three months ended September 30, 2008. For
the first nine months of 2009, the Company charged compensation cost of approximately
$17,000 against income compared to approximately $14,000 for the same period in 2008. As of
September 30, 2009 there was approximately $60,500 of unrecognized compensation cost related
to unvested share-based compensation awards granted. That cost is expected to be recognized
over the next three years.
 There were no excess tax benefits recognized during the three or nine month period ended
September 30, 2009. For the nine months ended September 30, 2008, $39,319 of excess tax
benefits were reported as financing cash flows. The Companys APIC pool totaled $111,029 at
September 30, 2009 and December 31, 2008.
 Proceeds from the exercise of stock options were $106,712 for the nine months ended
September 30, 2008. 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, 2009 and 2008
were estimated using the Black-Scholes option pricing model with the following assumptions:
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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  2009
    
    2008Dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    47.2
    %
    
    
    55.0%-56.3
    %Expected life of option
    
    Five Years
    
    Five YearsRisk-free interest rate
    
    
    2.0
    %
    
    
    3.00%-3.25
    %Fair value of each option on grant date
    
    $
    2.10
    
    
    
    $3.44-$4.05
 There were 21,750 options and 10,250 options granted during the nine months ended September
30, 2009 and 2008, respectively.
 Stock option activity during the nine months ended September 30, 2009 was as follows:
 WeightedAverageExerciseShares
    
    PriceOutstanding at beginning of period
    
    
    26,250
    
    
    $
    6.69Granted
    
    
    21,750
    
    
    
    5.00Exercised
    
    
    Expired and forfeited
    
    
    (2,500
    )
    
    
    6.14Outstanding at September 30, 2009
    
    
    45,500
    
    
    
    5.91Exercisable at September 30, 2009
    
    
    17,666
    
    
    
    6.43
 The aggregate intrinsic value of all options outstanding and options exercisable at
September 30, 2009 was $17,200 and $7,900, respectively.
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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  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, 2008.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, 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 three months ended September 30, 2008:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet sales
    
    $
    1,770,792
    
    
    $
    1,070,894
    
    
    $
    991,097
    
    
    $
    
    
    
    $
    3,832,783Cost of goods sold
    
    
    907,877
    
    
    
    749,647
    
    
    
    521,073
    
    
    
    
    
    
    
    2,178,597Gross profit
    
    
    862,915
    
    
    
    321,247
    
    
    
    470,024
    
    
    
    
    
    
    
    1,654,186Selling, general and
administrative*
    
    
    316,160
    
    
    
    116,687
    
    
    
    297,583
    
    
    
    457,482
    
    
    
    1,187,912Research and
development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    219,071
    
    
    
    219,071Income from operations
    
    $
    546,755
    
    
    $
    204,560
    
    
    $
    172,441
    
    
    $
    (676,553
    )
    
    $
    247,203
 11




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##### Table of Contents



IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  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
 For the nine months ended September 30, 2008:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet sales
    
    $
    4,962,181
    
    
    $
    3,650,622
    
    
    $
    3,330,887
    
    
    $
    
    
    
    $
    11,943,690Cost of goods sold
    
    
    2,655,735
    
    
    
    2,464,993
    
    
    
    1,678,130
    
    
    
    
    
    
    
    6,798,858Gross profit
    
    
    2,306,446
    
    
    
    1,185,629
    
    
    
    1,652,757
    
    
    
    
    
    
    
    5,144,832Selling, general and
administrative*
    
    
    902,912
    
    
    
    318,190
    
    
    
    973,622
    
    
    
    1,515,118
    
    
    
    3,709,842Research and
development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    601,781
    
    
    
    601,781Income from operations
    
    $
    1,403,534
    
    
    $
    867,439
    
    
    $
    679,135
    
    
    $
    (2,116,899
    )
    
    $
    833,209
 
 *
    
    The Company does not allocate all general and administrative expenses or any research and
development expenses to its operating segments for internal reporting. Trade receivables by segment as of September 30, 2009 and December 31, 2008 were as follows:
 Sep 30, 2009
    
    
    Dec 31, 2008Domestic
    
    $
    936,195
    
    
    $
    957,617Export
    
    
    883,878
    
    
    
    874,068IKONICS Imaging
    
    
    317,789
    
    
    
    276,718Other, net of allowances
    
    
    (37,750
    )
    
    
    (31,245
    )Total
    
    $
    2,100,112
    
    
    $
    2,077,158
 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 (Apprise).
The Company realized a gain of approximately $55,000 on the $253,000 cash payment received
in 2007. During 2008 the Company received an additional $25,000 related to the Apprise
sale.
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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  9.
    
    Income Taxes
 The Company accounts for its uncertain tax positions under the provisions of FASB ASC
740-10-55, Income Taxes  Overall  Implementation. During the first quarter of 2009 and
2008, the statute of limitations for the relevant taxing authority to examine and challenge
the tax position for open years expired, resulting in decreases in income tax expense of
$21,000 for the first nine months of 2009 and $44,000 for the first nine months of 2008. As
of September 30, 2009, the liability for unrecognized tax benefits totaled $27,000 compared
to a liability of $48,000 as of September 30, 2008. The liability for unrecognized tax
benefits is included in other accrued liabilities.
 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 2006, 2007, and 2008.
 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 $7,000 of
interest related to uncertain tax positions at September 30, 2009. The unrecognized tax
benefits at September 30, 2009 relate to taxation of foreign export sales.
 A reconciliation of the beginning and ending amounts of unrecognized tax benefit for the
first nine months of 2009 is as follows:
 Balance at December 31, 2008
    
    $
    48,000Expiration of the statute of limitations for the
assessment of taxes
    
    
    (21,000
    )Balance at September 30, 2009
    
    $
    27,000
 The balance of unrecognized tax benefits at September 30, 2009, if reversed, would decrease
the provision for income taxes and increase net income by the same amount and reduce the
Companys effective tax rate. The Company expects its unrecognized tax benefit to be reduced
by approximately $27,000 during the next twelve months as a result of the expiration of the
statutes of limitations for the assessment of taxes.
 The Company does not receive a tax benefit from the $919,000 loss on investment in
non-marketable equity securities since the Company has recorded a full valuation allowance
against the deferred tax asset resulting from the loss on the capital asset impairment
charge, as it is currently more likely that the deferred tax asset will not be realized.
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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 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.
    
    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.
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##### Table of Contents




    
    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 and the timing of the Companys market entry for new
initiativesActual activities undertaken and the timing for market entry 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, the ability to obtain necessary equipment or other materials or the
inability to identify attractive acquisition targets or other business opportunities.
 Critical Accounting Estimates
  Trade Receivables.
 Inventory.
 Income Taxes.
 Investments and Fair Value Measurements
  15




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Revenue Recognition.
 Results of Operations
 Quarter Ended September 30, 2009 Compared to Quarter Ended September 30, 2008
 Sales.
 Gross Profit
 Selling, General and Administrative Expenses
 Research and Development Expenses
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Gain on Sale of Non-Marketable Equity Securities.
 Loss on Investment in Non-marketable Equity Securities.
 Interest Income.
 Income Taxes.
 Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008
 Sales.
 Gross Profit
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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
 18




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Liquidity and Capital Resources
        19




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Capital Expenditures
  International Activity
   Future Outlook
    20




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Recent Accounting Pronouncements
  Off-Balance Sheet Arrangements
  
 ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4.
    
    Controls and Procedures
   21




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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.
    
    Submission of Matters to a Vote of Security Holders
  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). 22




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SIGNATURES
  IKONICS CORPORATIONDATE: November 13, 2009
    By:
    /s/ Jon GerlachJon Gerlach,Chief Financial Officer, and
Vice 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