ikon20190321

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2019

☐

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

(Exact name of registrant as specified in its charter)

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)

(218) 628-2217

Issuer’s telephone number

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☐		Smaller reporting company ☒
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.10 per share	IKNX	Nasdaq Capital Market

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $.10 par value - 1,983,553 shares outstanding as of May 1, 2019.

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	March 31,			December 31,
	2019			2018
ASSETS	(unaudited)

CURRENT ASSETS:
Cash and cash equivalents	$	617,246		$	1,623,137
Short-term investments		2,940,000			2,695,000
Trade receivables, less allowance of $112,000 in 2019 and $53,000 in 2018		1,821,114			2,215,215
Inventories		2,840,176			2,046,588
Prepaid expenses and other assets		259,839			375,362
Income taxes receivable		113,321			2,768
Total current assets		8,591,696			8,958,070

PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land and building		9,500,429			9,500,429
Machinery and equipment		5,022,691			4,964,816
Office equipment		1,564,978			1,559,728
Vehicles		245,674			245,679
		16,333,772			16,270,652
Less accumulated depreciation		(8,298,897	)		(8,185,910	)
Total property, plant and equipment at cost, net		8,034,875			8,084,742

INTANGIBLE ASSETS, less accumulated amortization of $155,908 in 2019 and $149,740 in 2018		372,693			376,406
Total assets	$	16,999,264		$	17,419,218

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Current portion of long-term debt	$	129,582		$	129,282
Accounts payable		860,106			647,528
Accrued compensation		236,935			366,900
Other accrued liabilities		143,019			159,821
Total current liabilities		1,369,642			1,303,531

LONG-TERM LIABILTIES
Long-term debt, less current portion		2,788,703			2,821,657
Deferred income taxes		183,000			183,000
Total long-term liabilities		2,971,703			3,004,657
Total liabilities		4,341,345			4,308,188
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY

Preferred stock, par value $.10 per share; authorized 250,000 shares; issued none		—			—

Common stock, par value $.10 per share; authorized 4,750,000 shares; issued and outstanding 1,983,553 shares in 2019 and 2018.		198,355			198,355
Additional paid-in-capital		2,724,944			2,723,024
Retained earnings		9,734,620			10,189,651
Total stockholders' equity		12,657,919			13,111,030
Total liabilities and stockholders' equity	$	16,999,264		$	17,419,218

	Three Months Ended
	March 31,
	2019			2018

NET SALES	$	3,528,691		$	4,071,478

COST OF GOODS SOLD		2,519,572			2,709,059

GROSS PROFIT		1,009,119			1,362,419

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		1,381,965			1,348,983

RESEARCH AND DEVELOPMENT EXPENSES		178,842			154,076

LOSS FROM OPERATIONS		(551,688	)		(140,640	)

INTEREST EXPENSE		(22,275	)		(19,935	)

OTHER		16,194			9,421

LOSS BEFORE INCOME TAXES		(557,769	)		(151,154	)

INCOME TAX BENEFIT		(102,738	)		(20,416	)

NET LOSS	$	(455,031	)	$	(130,738	)

LOSS PER COMMON SHARE
Basic	$	(0.23	)	$	(0.07	)
Diluted	$	(0.23	)	$	(0.07	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		1,983,553			1,983,553
Diluted		1,983,553			1,983,553

	Three Months Ended
	March 31,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(455,031	)	$	(130,738	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation		162,033			199,906
Amortization		8,932			9,442
Stock based compensation		1,920			2,893
Net gain on sale and disposal of property, plant and equipment		(7,487	)		—
Deferred income taxes		—			12,839
Loss on intangible asset abandonment		343			—
Changes in working capital components:
Trade receivables		394,101			158,353
Inventories		(793,588	)		(282,766	)
Prepaid expenses and other assets		115,523			(25,586	)
Income tax receivable		(110,553	)		(40,622	)
Accounts payable		212,578			286,829
Accrued expenses		(146,767	)		(77,854	)
Net cash (used in) provided by operating activities		(617,996	)		112,696

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(117,075	)		(49,004	)
Proceeds from sales of property and equipment		12,396			—
Purchases of intangibles assets		(2,797	)		(15,572	)
Purchases of short-term investments		(1,715,000	)		(1,205,000	)
Proceeds on sale of short-term investments		1,470,000			1,425,000
Net cash (used in) provided by investing activities		(352,476	)		155,424

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on long-term debt		(35,419	)		(35,632	)
Net cash used in financing activities		(35,419	)		(35,632	)

NET (DECREASE) INCREADE IN CASH AND CASH EQUIVALENTS		(1,005,891	)		232,488

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		1,623,137			929,700

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	617,246		$	1,162,188

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	19,367		$	17,038
Cash paid for income taxes, net	$	7,815		$	7,367

1.	Basis of Presentation

The condensed balance sheet of IKONICS Corporation (the “Company”) as of March 31, 2019, and the related condensed statements of operations for the three months ended March 31, 2019 and 2018, the statements of stockholders' equity for the three months ended March 31, 2019 and 2018, and cash flows for the three months ended March 31, 2019 and 2018, 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 March 31, 2019, 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, 2018.

The results of operations for interim periods are not necessarily indicative of results that will be realized for the full fiscal year.

4.	Earnings Per Common Share (EPS)

Basic EPS is calculated using net loss divided by the weighted average of common shares outstanding. Diluted EPS is calculated similarly 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. The options disclosed in Note 6 have been excluded from the computation because of their antidilutive effect.

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IKONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Shares used in the calculation of diluted EPS are summarized below:

	Three Months Ended
	Mar 31, 2019		Mar 31, 2018

Weighted average common shares outstanding		1,983,553		1,983,553
Dilutive effect of stock options		—		—
Weighted average common and common equivalent shares outstanding		1,983,553		1,983,553

If the Company was in a net income position for the first three months of 2019, no options would have been included as part of the common and common equivalent shares outstanding, and 18,000 options with a weighted average exercise price of $13.22 would have remained excluded as the options were anti-dilutive.

If the Company was in a net income position for the first three months of 2018, no options would have been included as part of the common and common equivalent shares outstanding, and 18,168 options with a weighted average exercise price of $13.81 would have remained excluded as the options were anti-dilutive.

5.	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, 18,000 were subject to outstanding options and 102,157 were reserved for future grants at March 31, 2019. The plan provides for grants of stock options or other stock awards to eligible participants, 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 Company charged compensation cost of approximately $2,000 and $3,000 against the loss for the three months ended March 31, 2019 and 2018, respectively.

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 increases additional paid in capital and reduces income taxes payable.

No stock options were exercised during the three months ended March 31, 2019 or 2018, and there were no options granted during the three months ended March 31, 2019 or 2018.

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IKONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Stock option activity during the three months ended March 31, 2019 was as follows:

			Weighted
			Average
			Exercise
	Shares		Price
Outstanding at January 1, 2019		18,000	$	13.22
Granted		—		—
Exercised		—		—
Expired and forfeited		—		—
Outstanding at March 31, 2019		18,000	$	13.22
Exercisable at March 31, 2019		12,247	$	15.09

The aggregate intrinsic value of all options outstanding and exercisable at March 31, 2019 was $0.

6.	Segment Information

The Company’s reportable segments are strategic business units that offer different products and have varied customer bases. There are four reportable segments: Chromaline, IKONICS Imaging, Digital Texturing (DTX) and Advanced Material Solutions (AMS). Chromaline sells screen printing film, emulsions, and inkjet receptive film primarily to distributors and some end users. IKONICS Imaging sells photo resistant film, art supplies, glass, metal medium and related abrasive etching equipment to both end users and distributors. AMS provides sound deadening and weight reduction technology to the aerospace industry along with products and services for etched composites, ceramics, glass and silicon wafers. DTX includes products and customers related to patented and proprietary inkjet technology used for mold texturing and prototyping. Prior to 2019, the Company had one additional business segment called Export. Export was primarily responsible for both Chromaline and IKONICS Imaging sales outside of the United States and Canada. Chromaline products sold within the United States and Canada prior to 2019 were included in a segment called Domestic. To better reflect how the Company manages these businesses, beginning in 2019, the Export segment was eliminated. Sales previously recorded in the Export segment are now included in either the Chromaline or IKONICS Imaging segments, respectively. Both the 2019 and 2018 financial information reflect the new reportable segments. The accounting policies applied to determine the segment information are the same as those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Management evaluates the performance of each segment based on the components of divisional income (loss). Assets and liabilities are not allocated to segments, except for trade receivables which are allocated based on the previous segmentation. Financial information with respect to the reportable segments follows:

For the three months ended March 31, 2019:

	IKONICS
			IKONICS
	Chromaline		Imaging		DTX		AMS			Unalloc.			Total
Net sales	$	2,029,341	$	1,088,806	$	92,760	$	317,784		$	—		$	3,528,691
Cost of goods sold		1,553,610		585,504		34,046		346,412			—			2,519,572
Gross profit (loss)		475,731		503,302		58,714		(28,628	)		—			1,009,119
Selling general and administrative*		445,003		322,453		34,605		88,148			491,756			1,381,965
Research and development*		—		—		—		—			178,842			178,842
Income (loss) from operations	$	30,728	$	180,849	$	24,109	$	(116,776	)	$	(670,598	)	$	(551,688	)

For the three months ended March 31, 2018:

	IKONICS
			IKONICS
	Chromaline		Imaging		DTX		AMS			Unalloc.			Total
Net sales	$	2,340,810	$	1,219,348	$	88,666	$	422,654		$	—		$	4,071,478
Cost of goods sold		1,664,878		623,611		25,392		395,178			—			2,709,059
Gross profit		675,932		595,737		63,274		27,476			—			1,362,419
Selling general and administrative*		425,329		285,025		34,852		84,783			518,994			1,348,983
Research and development*		—		—		—		—			154,076			154,076
Income (loss) from operations	$	250,603	$	310,712	$	28,422	$	(57,307	)	$	(673,070	)	$	(140,640	)

*The Company does not allocate all selling, general and administrative expenses or any research and development expenses to its operating segments for internal reporting.

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IKONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Trade receivables by segment as of March 31, 2019 and December 31, 2018 were as follows:

	Mar 31, 2019			Dec 31, 2018

Chromaline	$	1,200,281		$	1,550,411
IKONICS Imaging		416,230			360,551
DTX		40,775			15,692
AMS		238,700			331,708
Unallocated		(74,872	)		(43,147	)

Total	$	1,821,114		$	2,215,215

7.	Income Taxes

The Company recorded its interim provision for income taxes by applying the estimated annual effective tax rate to the year-to-date pre-tax loss and adjusting for discrete tax items recorded in the period. Deferred income taxes result from temporary differences between the reporting of amounts for financial statement purposes and income tax purposes. These differences relate primarily to different methods used for income tax reporting purposes, including for depreciation and amortization, warranty and vacation accruals, and deductions related to allowances for doubtful accounts receivable and inventory reserves. The provision for income taxes (benefits) included current federal and state income tax expense (benefit), as well as deferred federal and state income tax expense.

The effective tax rate for the three months ended March 31, 2019 was a benefit of 18.4%, compared to a benefit of 13.5% for the three months ended March 31, 2018. The primary driver of the change in the Company’s effective tax rate is attributable to an increase in the tax benefit related to tax credits proportionate to pre-tax book loss as compared to the prior year's reporting period. The Company recorded an income tax benefit of $103,000 and $20,000 for the three months ended March 31, 2019 and 2018, respectively.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority is more-likely-than-not to sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the condensed consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. As of March 31, 2019 the Company has no unrecognized tax benefits.

The Company is not currently under examination in any jurisdiction. In the event of any future tax assessments, the Company has elected to record the income taxes and any related interest and penalties as income tax expense on the statement of operations. The federal Tax Cut and Jobs Act of 2017 (the “Tax Reform Act”) was enacted December 22, 2017. Effective January 1, 2018, the Tax Reform Act reduced statutory corporate income tax rates from 35% to 21% in addition to other tax changes.

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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. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These forward-looking statements include statements relating to our future plans and objectives and results. Such statements are subject to risks and uncertainties, including those discussed elsewhere in this report and under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, as updated in our subsequent reports filed with the SEC, which 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.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management’s discussion and analysis focuses on those factors that had a material effect on the Company’s financial results of operations during the first quarter of 2019 and for the same period of 2018. It should be read in connection with the Company’s condensed unaudited financial statements and notes thereto included in this Form 10-Q.

The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America. Therefore, the Company is required to make certain estimates, judgments and assumptions that the Company believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The accounting estimates, which IKONICS believes are the most critical to aid in fully understanding and evaluating its reported financial results, include the following:

Trade Receivables. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by review of the current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same collection history that has occurred in the past. The general payment terms are net 30-45 days for domestic customers and net 30-90 days for foreign customers. A small percentage of the trade receivables balance is denominated in a foreign currency with no concentration in any given country. At the end of each reporting period, the Company analyzes the receivable balance for customers paying in a foreign currency. These balances are adjusted to each quarter or year-end spot rate in accordance with FASB ASC 830, Foreign Currency Matters. The Company also maintains a provision for any customer related returns based upon historical experience of actual returns and any specifically identified product issues, refunds or credits.

Inventories. Inventories are valued at the lower of cost or net realizable value using the last in, first out (LIFO) method. The Company monitors its inventory for obsolescence and records reductions from cost when required.

Income Taxes. Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred tax assets and liabilities are presented as long-term on a net basis. The Company follows the accounting standard on accounting for uncertainty in income taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also addresses derecognition, classification, interest and penalties on income taxes, and accounting in interim periods.

Revenue recognition. Revenue is measured based on consideration specified in the contract with a customer, adjusted for any applicable estimates of variable consideration and other factors affecting the transaction price, including noncash consideration, consideration paid or payable to customers and significant financing components. While most of the Company’s revenue is contracted with customers through one-time purchase orders and short-term contracts, the Company does have long-term arrangements with certain customers. Revenue from all customers is recognized when a performance obligation is satisfied by transferring control of a distinct good or service to a customer.

Individually promised goods and services in a contract are considered a distinct performance obligation and accounted for separately if the customer can benefit from the individual good or service on its own or with other resources that are readily available to the customer and the good or service is separately identifiable from other promises in the arrangement. When an arrangement includes multiple performance obligations, the consideration is allocated between the performance obligations in proportion to their estimated standalone selling price. Costs related to products delivered are recognized in the period incurred, unless criteria for capitalization of costs are met. Costs of revenues consist primarily of direct labor, manufacturing overhead, materials and components. The Company does not incur significant upfront costs to obtain a contract. If costs to obtain a contract were to become material, the costs would be recorded as an asset and amortized to expense in a manner consistent with the related recognition of revenue.

The Company excludes governmental assessed and imposed taxes on revenue transactions that are invoiced to customers from revenue. The Company includes freight billed to customers in revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.

The timing of revenue recognition, billings and cash collections results in accounts receivable on the balance sheet.

Performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation in proportion to its standalone selling price and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s various performance obligations and the timing or method of revenue recognition are discussed below:

The Company sells its products to both distributors and end-users. Each unit of product delivered under a customer order represents a distinct and separate performance obligation as the customer can benefit from each unit on its own or with other resources that are readily available to the customer and each unit of product is separately identifiable from other products in the arrangement.

The transaction price for the Company’s products is the invoiced amount. The Company does not have variable consideration in the form of refunds, credits, rebates, price concessions, pricing incentives or other items impacting transaction price. The purchase order pricing in arrangements with customers is deemed to approximate standalone selling price; therefore, the Company does not need to allocate proceeds on a relative standalone selling price allocation between performance obligations. The Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less. There are no material obligations that extend beyond one year.

Revenue is recognized when transfer of control occurs as defined by the terms in the customer agreement. The Company immediately recognizes incidental items that are immaterial in the context of the contract. The Company has also applied the practical expedient in paragraph 606-10-32-18 regarding the adjustment of the promised amount of consideration for the effects of a significant financing component when the customer pays for that good or service within one year or less, as the Company does not have any significant financing components in its customer arrangements as payment is received at or shortly after the point of sale, generally thirty to ninety days.

The Company estimates returns based on an analysis of historical experience if the right to return products is granted to its customers. The Company does not record a return asset as non-conforming products are generally not returned. The Company’s return policy does not vary by geography. The customer has no rotation or price protection rights, and the Company is not under a warranty obligation.

Trade receivables. Trade receivables include amounts invoiced and currently due from customers. The amounts due are stated at their net estimated realizable value. The Company records an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based on a review of all outstanding amounts on an on-going basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considers a customer’s financial condition, credit history, and current economic conditions. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. Accounts are considered past due if payment is not received according to agreed-upon terms.

Sales commissions. Sales commissions paid to sales representatives are eligible for capitalization as they are incremental costs that would not have been incurred without entering into a specific sales arrangement and are recoverable through the expected margin on the transaction. The Company has elected to apply the practical expedient provided by ASC 340-40-25-4 and recognize the incremental costs of obtaining contracts as an expense when incurred, as the amortization period of the assets that would have otherwise been recognized is one year or less. The Company records these costs in selling, general, and administrative expense.

Product warranty. The Company offers warranties on various products and services. These warranties are assurance type warranties that are not sold on a standalone basis; therefore, they are not considered distinct performance obligations. The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time the revenue is recognized for the product sale.

International revenue. The Company markets its products to numerous countries in North America, Europe, Latin America, Asia and other parts of the world. Foreign sales were approximately 23% of total sales during the first three months of 2019 compared to 29% for the first three months of 2018.

Sales. The Company’s 2019 first quarter sales of $3.5 million were 13.3% lower than the 2018 first quarter sales of $4.1 million. Chromaline 2019 first quarter sales decreased by $311,000, or 13.3%, compared to the same period last year. Chromaline 2019 first quarter sales were adversely affected by cold weather shipping constraints since its emulsion products are not freeze-thaw stable. AMS sales for the first three months of 2019 decreased from $423,000 during the same period in 2018 to $318,000, a 24.8% decrease resulting from a temporary decrease in sales to its two largest customers. The Company expects AMS sales for the remaining nine months of 2019 to improve over the first quarter trend relatively to 2018. 2019 first quarter IKONICS Imaging sales of $1.1 million were $131,000, or 10.7%, lower than the sales for the first three months of 2018 mainly due to lower equipment sales. Equipment sales in 2018 were positively impacted by the timing of first quarter trade shows while the 2019 sales benefit from these trade shows will not occur until the second quarter. Partially offsetting these sales decreases, DTX sales increased from $89,000 in the first quarter of 2018 to $93,000 in the first quarter of 2019, a 4.6% increase.

Gross Profit. Gross profit was $1.0 million, or 28.6% of sales, in the first quarter of 2019 compared to $1.4 million, or 33.5% of sales, for the same period in 2018. Lower sales volumes negatively impacted the 2019 first quarter AMS gross margin which decreased from 6.5% in first quarter of 2018 to negative 9.0% this quarter. A large portion of the AMS cost structure is fixed, causing sales volumes to have a significant impact on its gross margin. Lower sales volumes also unfavorably impacted both the Chromaline and IKONICS Imaging 2019 gross margin compared to the same period in 2018. The DTX gross margin for the first three months of 2019 was 63.3% compared to 71.4% for the first quarter of 2018.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $1.4 million, or 39.2% of sales, in the first quarter of 2019 compared to $1.4 million, or 33.1% of sales, for the same period in 2018. Selling, general and administrative expenses for the first quarter of 2019 were similar to first quarter of 2018, however, the percentage of expense as it relates to sales increased in 2019 due to lower sales.

Research and Development Expenses. Research and development expenses during the first quarter of 2019 were $179,000, or 5.1% of sales, versus $154,000, or 3.8%, of sales for the same period in 2018. The 2019 first quarter increase is related to additional staffing and production trial expenses.

Interest Expense. Interest expense for the first three months of 2019 was $22,000 compared to interest expense of $20,000 during the first three months of 2018. The interest expense is related to a $3.4 million financing agreement the Company entered to finance the construction of a 27,300-square foot building as well as related equipment for use in the Company’s manufacture of sound deadening technology used in the aerospace industry and products consisting of etched composites, ceramics, glass and silicon wafers.

Income Taxes. For the first three months of 2019, the Company realized an income tax benefit of $103,000, or an effective rate of 18.4%, compared to a benefit of $20,000, or an effective tax of 13.5% for the three months ended March 31, 2018. The primary driver of the change in the Company’s effective tax rate is attributable to an increase in the tax benefit related to tax credits proportionate to pre-tax book loss as compared to the prior year's reporting period. The income tax provision for the 2019 and 2018 periods differ from the expected tax benefit due to unfavorable non-deductible items and generation of research and development tax credits.

Outside of the building expansion, for which $3.4 million in financing was obtained during 2016, the Company has financed its operations principally with funds generated from operations. These funds have been sufficient to cover the Company’s normal operating expenditures, annual capital requirements, and research and development expenditures.

Cash and cash equivalents were $617,000 and $1.6 million at March 31, 2019 and December 31, 2018, respectively. Operating activities used $618,000 in cash during the first three months of 2019 compared to providing $113,000 of cash used in operating activities during the same period in 2018. Cash provided by (used in) operating activities is primarily the result of net losses adjusted for non-cash depreciation, amortization, and certain changes in working capital components discussed in the following paragraph.

During the first three months of 2019, trade receivables decreased $394,000 from lower sales. The Company believes that the quality of its receivables is high and that strong internal controls are in place to maintain proper collections. Inventories increased by $794,000 due to higher finished goods and raw material levels as the Company is ramping up inventory levels to meet demand for the remainder of 2019 in addition to lower than expected first quarter sales. Prepaid expenses and other assets decreased by $116,000, reflecting a decrease in a receivable related to the reimbursement of 2018 medical insurance costs that the Company received from its stop-loss insurance carrier. Accounts payable increased by $213,000 due to the timing of vendor payments. Accrued expenses decreased by $147,000, reflecting the timing of compensation payments while income taxes receivable increased by $110,000 due to the recognition of the 2019 first quarter tax benefit.

During the first three months of 2018, trade receivables decreased $158,000 from improved collections. The Company believes that the quality of its receivables is high and that strong internal controls are in place to maintain proper collections. Inventories increased by $283,000 due to higher finished goods and raw material levels. Prepaid expenses and other assets increased by $26,000, reflecting insurance premiums paid in advance. Accounts payable increased by $287,000 due to the timing of vendor payments. Accrued expenses decreased by $78,000, reflecting the timing of compensation payments while income taxes receivable increased by $41,000 due to the timing of estimated tax payments compared to the calculated 2018 tax liability.

During the first three months of 2019, cash used in investing activities was $352,000. Six certificates of deposits totaling $1.5 million matured during the first three months of 2019. The Company purchased seven certificates of deposits totaling $1.7 million. The Company’s purchases of property and equipment of $117,000 were mainly for improvements to production and process capabilities and to replace two vehicles. The Company received $12,000 in proceeds from the sale of two vehicles. Also, during the first three months of 2019, the Company incurred $3,000 in patent application costs that the Company records as an asset and amortizes upon successful completion of the application process.

During the first three months of 2018, cash provided by investing activities was $155,000. Six certificates of deposits totaling $1.4 million matured during the first three months of 2018. The Company purchased five certificates of deposits totaling $1.2 million. The Company’s purchases of property and equipment of $49,000 were mainly for improvements to production and process capabilities. Also, during the first three months of 2018, the Company incurred $16,000 in patent application costs that the Company records as an asset and amortizes upon successful completion of the application process.

Related to the Company’s loan, the Company made principal payments of $35,000 and $36,000 during the first three months of 2019 and 2018, respectively.

A bank line of credit exists providing for borrowings of up to $2,050,000 and expires on June 30, 2019 if not renewed. The line of credit is collateralized by the Company’s assets and bears interest at 1.8 percentage points over the 30-day LIBOR rate. The Company did not utilize this line of credit during the first three months of 2019 or 2018, and there were no borrowings outstanding as of March 31, 2019 and December 31, 2018. There are no financial covenants related to the line of credit.

The Company believes that current financial resources, its line of credit, cash generated from operations and secured through debt financing, and short-term investments, along with the Company’s capacity for additional debt and/or equity financing will be sufficient to fund current and anticipated business operations. The Company also believes that it is unlikely that a decrease in demand for the Company’s products would impair the Company’s ability to fund operations given its excess cash and available line of credit which it expects to renew once the existing line of credit expires.

Through the first three months of 2019, the Company incurred $117,000 of capital expenditures mainly for improvements to production and process capabilities and to replace two vehicles.

The Company expects additional capital expenditures in 2019 of approximately $460,000 including improvements to the Company's coating capabilities, process improvements and information technology upgrades. Currently, the Company expects to fund its capital expenditures with existing cash and cash generated from operating activities.

The Company markets its products to numerous countries in North America, Europe, Latin America, Asia and other parts of the world. Foreign sales were approximately 23% sales during the first three months of 2019 compared to 29% of total sales during the first three months of 2018. The fluctuations of certain foreign currencies have not significantly impacted the Company’s operations, as the Company’s foreign sales are not concentrated in any one region of the world, although a strong U.S. dollar does make the Company’s products less competitive internationally. The Company believes its vulnerability due to uncertainties in foreign currency fluctuations and general economic conditions in foreign countries is not significant.

The Company’s foreign transactions are primarily negotiated, invoiced and paid in U.S. dollars, while a portion is transacted in Euros. The Company has not implemented an economic hedging strategy to reduce the risk of foreign currency translation or transaction exposures, as management does not believe this to be a significant risk based on the scope and geographic diversity of the Company’s foreign operations as of March 31, 2019. Furthermore, the impact of foreign exchange on the Company’s balance sheet and operating results was not material in either 2019 or 2018.

IKONICS has spent an average of approximately 4.0% of annual sales in research and development and has made capital expenditures related to new products and programs. The Company plans to maintain its efforts in these areas to expedite internal product development as well as to form technological alliances with outside entities to commercialize new product opportunities.

Despite lower first quarter sales in 2019, the Company continues to make progress on its AMS business. The Company has three long-term sales agreements in place for its technology with major aerospace companies. In anticipation of this growing business, the Company increased its AMS capacity with a 27,300 square foot expansion at its Morgan Park site in 2016.

The Company is also continuing to pursue DTX-related business initiatives. In addition to making efforts towards growing the inkjet technology business, the Company offers a range of products for creating texture surfaces and has introduced a fluid for use in prototyping. The Company is currently working on production improvements as part of its joint development agreement with AKK, a German manufacturer of high quality printers, to enhance its customer offerings. The Company has been awarded European, Japanese, and United States patents on its DTX technologies. The Company has also modified its DTX technology to facilitate entry into the market for prototyping.

Both the Chromaline and IKONICS Imaging units remain profitable in mature markets. Although these business units require aggressive strategies to grow market share, both are developing new products and business relationships that the Company believes will contribute to growth. In October 2017, the Company introduced SubTHAT!™, a patent-pending product for the dye-sublimation market. Early in 2019 the Company introduced its new IKONART™ product to positive reviews. IKONART™ provides a new way to make custom reusable stencils for the creative arts markets. In addition to its traditional emphasis on domestic markets, the Company will continue efforts to grow its business internationally by attempting to develop new markets and expanding market share where it has already established a presence. However, the strong U.S. dollar has made this challenging.

Other future activities undertaken to expand the Company’s business may include acquisitions, building improvements, equipment additions, new product development and marketing opportunities.

During February 2016, the FASB issued ASU No. 2016-02, Leases. ASU No. 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company adopted ASU No. 2016-02 as of January 1, 2019. The adoption of this standard did not have a material impact on its financial statements.

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure control and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes to the Company's internal control over financial reporting that occurred during the first quarter of 2019 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

The following exhibits are filed as part of this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019:

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

			PAGE NO.
PART I.	FINANCIAL INFORMATION

Item 1.		Condensed Financial Statements:	3

		Condensed Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018	3

		Condensed Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (unaudited)	4

		Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018 (unaudited)	5

		Condensed Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (unaudited)	6

		Notes to Condensed Financial Statements (unaudited)	7

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.		Quantitative and Qualitative Disclosures about Market Risk	16

Item 4.		Controls and Procedures	16

PART II.	OTHER INFORMATION		17

	SIGNATURES		18

	Mar 31, 2019			Dec 31, 2018

Raw materials	$	2,127,147		$	1,767,458
Work-in-progress		393,802			370,075
Finished goods		1,632,673			1,196,516
Reduction to LIFO cost		(1,313,446	)		(1,287,461	)

Total Inventories	$	2,840,176		$	2,046,588

Exhibit		Description
	3.1	Restated Articles of Incorporation of Company, as amended. (Incorporated by reference to the like numbered Exhibit to the Company’s Registration Statement on Form 10-SB filed with the Commission on April 7, 1999 (File No. 000-25727).)
	3.2	Amended and Restated By-Laws of the Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 30, 2018 (File No. 000-25757).)
	31.1	Rule 13a-14(a)/15d-14(a) Certifications of CEO
	31.2	Rule 13a-14(a)/15d-14(a) Certifications of CFO
	32	Section 1350 Certifications
	101	Interactive Data Files Pursuant to Rule 405 of Regulation S-T

	IKONICS CORPORATION


DATE: May 13, 2019	By:	/s/ Jon Gerlach
		Jon Gerlach,
		Chief Financial Officer, and
		Vice President of Finance

										Total
					Additional					Stock-
	Common Stock				Paid-in		Retained			holders’
	Shares		Amount		Capital		Earnings			Equity

BALANCE AT DECEMBER 31, 2018		1,983,553	$	198,355	$	2,723,024	$	10,189,651		$	13,111,030

Net loss		—		—		—		(455,031	)		(455,031	)
Stock based compensation		—		—		1,920		—			1,920

BALANCE AT MARCH 31, 2019		1,983,553	$	198,355	$	2,724,944	$	9,734,620		$	12,657,919