PART I - FINANCIAL INFORMATION

ITEM 1.  Condensed Financial Statements

IKONICS CORPORATION 

CONDENSED BALANCE SHEETS 

 See notes to condensed financial statements.

IKONICS CORPORATION 

CONDENSED STATEMENTS OF OPERATIONS (Unaudited) 

See notes to condensed financial statements.

IKONICS CORPORATION 

STATEMENTS OF STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2021 and 2020 and 2019 (unaudited)

For the three months ended March 31, 2021:

For the three months ended March 31, 2020: 

For the three months ended March 31, 2019:

See notes to condensed financial statements.

IKONICS CORPORATION 

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) 

See notes to condensed financial statements.

IKONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS 

(Unaudited)

IKONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS 

(Unaudited)

If the Company was in a net income position for the first three months of 2021, 15,000 options with a weighted average exercise price of $6.43 would have been included as part of  the computation of common share equivalents as the options would have been dilutive, while 11,750 options with a weighted average exercise price of $11.39 would have remained excluded because these options were anti-dilutive.

If the Company was in a net income position for the first three months of 2021, 55,800 restricted stock units would have been included as part of the computation of common share equivalents as the restricted stock units would have been dilutive.

If the Company was in a net income position for the first three months of 2020,  the computation of diluted income per share would exclude 23,750 options with a weighted average exercise price of $8.01 because the inclusion of these options would be anti-dilutive.

If the Company was in a net income position for the first three months of 2019, the computation of diluted income per share would exclude 18,000 options with a weighted average exercise price of $13.22 because the inclusion of these options would be anti-dilutive. 

Stock option activity during the three months ended March 31, 20202021 was as follows:

The aggregate intrinsic value of all options outstanding and for those exercisable at March 31, 20202021 was $0.approximately $59,600 and $21,700, respectively.

There were 1,500 RSUs granted during the three months ended March 31, 2021.  The shares underlying the awards were assigned a weighted average value of $9.85 per share, which was the closing price of the Company's common stock on the date of grants.  These awards are scheduled to vest over three years.  No RSUs were granted during the three months ended March 31, 2020.

RSU activity during the three months ended March 31, 2021 is summarized as follows:

IKONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS 

(Unaudited)

For the three months ended March 31, 2019:2020: 

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

IKONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS 

(Unaudited)

Trade receivables by segment as of March 31, 20202021 and December 31, 20192020 were as follows:

IKONICS CORPORATION

  Cautionary Note Regarding Forward-Looking Statements

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 but are not limited to statements relating to our future plans, objectives and results and the impact of the COVID-19 pandemic on our financial results and the effectiveness of the Company’s responses to the pandemic.  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, 2019,2020, 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 quarterthree months of 20202021 and 2019.2020.  It should be read in connection with the Company’s condensed unaudited financial statements and notes thereto included in this Form 10-Q.

Potential Impact of the COVID-19 Pandemic

The Company is closely monitoring the novel strain of coronavirus (COVID-19) pandemic and its potential impact on its business. The outbreak and continuing spread of COVID-19 has resulted in a substantial curtailment of business activities worldwide and is causing weakened economic conditions, both nationally and globally. As part of intensifying efforts to contain the spread of COVID-19, a growing number of state, local and foreign governments have imposed various restrictions on the conduct of business and travel. Government restrictions, such as stay-at-home orders and quarantines and company remote work policies have led to a significant number of business closures and slowdowns. These business closures and slowdowns have already adversely impacted and will likely continue to adversely impact the Company directly, as well as cause its customers and suppliers to slow or stop production, which will likely significantly disrupt the Company's sales, production and supply chain.  For example, as a result of the COVID-19 pandemic, the Company began to experience decreased demand for its products and services during the three monthsyear ended March 31, 2020.  The Company anticipates a significantsustained decrease in global demand from pre-COVID-19 levels  for certain of its products and services during second quarter of 2020 and beyond.2021.  This significant decrease in demand will likely have a material adverse impact on the Company's business, operating results and financial condition beginning with the second quarter of 2020.condition.  The Company has been deemed an essential operation.  As a result, the Company’s facilities continue to operate and are doing so safely, having implemented social distancing and enhanced health, safety and sanitization measures. The Company's leadership continues to address the rapidly evolving situation and is adjusting as necessary. The Company has also implemented necessary procedures to enable a significant portion of its employee base to work remotely.  As the situation evolvescontinues to evolve into a more prolonged pandemic, the Company expects the COVID-19 pandemic to have a significant adverse effect on economies and financial markets globally, potentially leading to a significant worldwide economic downturn, which could have a significant adverse effect on the Company's business, operating results and financial condition. However, the duration of these trends and the magnitude of such impacts cannot be precisely estimated at this time, as they are affected by a number of factors (some of which are outside management’s control), including those presented in Part II, Item 1A. “Risk Factors” below.  To partially mitigate the negative impact of the COVID-19 pandemic,  in 2020 the Company implemented cost reduction efforts including a reduction of its workforce, a decrease in the Company’s contribution to its 401(k) retirement plan and the elimination of all non-essential expenditures.

Critical Accounting Estimates 

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 the Company 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 especially given the unpredictability of any effects related to the COVID-19 pandemic.  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 FASB ASC 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 FASB ASC 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.  The Company is not under a warranty obligation except as described below.

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 FASB 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 31%27% of total sales during the first three months of 20202021 and 26%31% during the first three months of 2019.2020.

Results of Operations 

Quarter Ended March 31, 20202021 Compared to Quarter Ended March 31, 20192020 

Sales.  The Company’s 2021 first quarter sales of $3.1 million were $424,000, or 12.1%, lower than the 2020 first quarter sales of $3.5 million were $31,000, or 0.9%, lower than the 2019million.  Chromaline's 2021 first quarter sales of $3.5 million.  IKONICS Imaging 2020 first quarter sales of $970,000$1.7 million decreased by 10.9%13.5% from first quarter 20192020 sales of $1.1 million.  The IKONICS Imaging 2020$2.0 million while AMS sales decreased from $450,000 in the first quarter of 2020 to $212,000 in the first quarter of 2021, a 53.0% decrease.  DTX sales decrease is duealso decreased by 32.2% in the first quarter of 2021 to a COVID-19 related slowdown$76,000 compared to $113,000 in domestic sales towards the end of the first quarter of 2020.  Chromaline, AMS and DTX sales forcontinue to be negatively impacted by the slowdown in economic activity related to the COVID-19 pandemic.  Partially offsetting these decreases, IKONICS Imaging sales increased from $970,000 in the first quarter of 2020 also decreased versus the first quarter due to COVID-19 related issues as 2020 Chromaline first quarter sales of $2.0$1.1 million were $65,000 lower than 2019 first quarter sales.  Partially offsetting these sales decreases, 2020 first quarter AMS sales increased from $318,000 in the first quarter of 20192021, a 12.0% increase.  The IKONICS Imaging sales increase is related to $450,000, a $132,000 increase, due to higher sales to AMS' largest customers.  The Company was notified by AMS' largest customer that it will reduce order volume beginning in the second quarter of 2020 due to the COVID-19 pandemic.  DTX sales also increased in the first quarter from $93,000 in 2019 to $113,000 in 2020.improving IKONART® sales.  IKONICS anticipates that the COVID-19 outbreak will continue to adversely impact sales in the second quarterall of 2020 and beyondits divisions for most of 2021 due to decreasingdecreased demand for certain of its products and services.

Gross Profit.  Gross profit was $996,000 or 32.4% of sales, in the first three months of 2021 compared to $1.2 million, or 33.0%, of sales for the first three month of 2020.  Lower sales and production volume, resulted in the Chromaline gross margin decreasing from 27.8% in the first quarter of 2020 compared to $1.0 million, or 28.6%27.3% in the first quarter of 2021.  A decrease in sales volumes also resulted in the AMS gross margin decreasing to a negative 18.0% in first three months of 2021 from 12.0% in the first three months of 2020.  A large portion of the AMS cost structure is fixed, causing sales volumes to have a significant impact on its gross margin.  The IKONICS Imaging 2021 first quarter gross margin decreased from 50.8% in 2020 to 49.4% in 2021 due to a less favorable sales mix while the DTX gross margin decreased from 54.0.% in first three months of 2020 to 43.9% for the same period in 2019.2021.  The ChromalineDTX gross margin increased from 23.4%decrease in the first quarter of 2019 to 27.8% for the first quarter of 2020 while the IKONICS Imaging gross margin increased from 46.2% in the first quarter of 2019 to 50.8% in the first quarter of 2020.  Both the Chromaline and IKONICS Imaging gross margins in 2019 were unfavorably impacted by production issues caused by raw material shortages related to cold weather shipping issues.  Additionally, the Chromaline 2019 gross margin2021 was negatively impacted by a $60,000 credit related to cold weather product damage and a less favorable sales mix.  An increase in sales volumes resulted in the AMS 2020 first quarter gross margin increasing to 12.0% from a negative 9.0% in 2019.  The 2020 and 2019 DTX gross margins were 54.0% and 63.3%, respectively as the 2020 DTX gross margin decreased due to increase in material wastelower sales of high margin film sales and increased production costs.  IKONICS anticipates that the COVID-19 outbreak will continue to adversely impact gross margins in the second quarterfor most of 2020 and beyond as2021 due to lower sales volumes decrease.and production output.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $1.8$1.2 million or 50.9%38.5% of sales, in the first quarter of 20202021 compared to $1.4$1.8 million, or 39.2%50.9% of sales, for the same period in 2019.2020.  Selling, general and administrative expenses for the first quarter of 2020 increased2021 decreased primarily due to a reduction in personnel, travel, trade show, promotional and consulting expenses.  Selling, general and administration expenses in the first quarter of 2020 were also unfavorably impacted by $365,000 of one-time costs related to the Chief Executive Officer transition which occurred in the first quarter of 2020.transition.  These costs include severance payments, a signing bonus, relocation expenses and executive search consulting expenses.  

Research and Development Expenses.  Research and development expenses during the first quarter of 20202021 were $135,000, or 4.4% of sales, versus $184,000, or 5.2% of sales, versus $179,000, or 5.1%, of sales for the same period in 2019.  The 20202020.  Research and development expenses in the first quarter increase is due to additional research and development costs related to DTX product development projects.of 2021 were favorably impacted by a reduction in staffing levels.

Interest Expense.  Interest expense for the first quarter of 2021 and 2020 was $20,000 and 2019 was $21,000, and $22,000, respectively.

Income Taxes.  For the first quarter of 2020, the Company realized an income tax benefit of $239,000, or anthree months ended March 31, 2021 the effective tax rate was a benefit of 28.9%5.9% , compared to a benefit of $103,000, or an effective tax rate of 18.4%28.9% for the three months ended March 31, 2019.2020. The primary driver of the change in the Company’s effective tax rate is attributable to a taxadditional benefit in the current period to recognizefor a net operating loss carryback claim as a result fromrecorded in the recently passed CARES Act.prior year.  The Company recorded an income tax provisionbenefit $20,000 and $239,000 for 2019 differs from the expected tax benefit due to unfavorable non-deductible itemsthree months ended March 31, 2021 and generation of research and development tax credits.    2020, respectively.

Liquidity and Capital Resources 

Outside of the building expansion, for which $3.4 million in financing was obtained during 2016 and the $1.2 million Paycheck Protection loan the Company received and was forgiven in 2020, the Company has financed its operations principally with funds generated from operations.  These funds have historically been sufficient to cover the Company’s normal operating expenditures, annual capital requirements, and research and development expenditures.  

Cash and cash equivalents were $1.6was $4.4 million and $960,000$3.7 million at March 31, 20202021 and December 31, 2019,2020, respectively.  Operating activities used $427,000provided $771,000 in cash during the first three months of 20202021 compared to using $618,000a use of cash of $427,000 during the same period in 2019.2020.  Cash provided by or 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 2021, trade receivables decreased by $574,000.  This decrease was due primarily to a slowdown in sales of products and services during the first quarter of 2021.  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 $317,000 due to higher finished goods levels.  Prepaid expenses and other assets increased by $85,000 reflecting the prepayment of insurance premiums.  Accrued expenses increased $100,000 due to the timing of payroll.  Accounts payable increased by $413,000 as the Company has increased inventory levels during the first quarter.  Income taxes receivable decreased by $201,000 as the Company received payment during the first quarter of 2021 on previously recorded income tax refund.

During the first three months of 2020, trade receivables decreased $675,000.  This decrease was due primarily to a slowdown in sales of products and services during the latter part of the 2020 first quarter, as a result of the aforementioned COVID-19 pandemic.  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 $408,000 due to higher finished goods levels as the Company experienced lower than expected sales towards the end of the first quarter of 2020.  Prepaid expenses and other assets decreased by $578,000 reflecting a decrease in a receivable related to the reimbursement of 2019 medical insurance costs that the Company received from its stop-loss insurance carrier.  Accrued expenses decreased $621,000, reflecting a decrease in the accrual for health insurance costs.  Accounts payable increased by $2,000 due to the timing of vendor payments.  Income taxes receivable increased by $244,000 as the Company recognized an income tax benefit attributable to a net operating loss carryback claim.

During the first three months of 2019, trade receivables decreased $394,000 from lower sales.  The Company believes that2021, cash used in investing activities was $7,000 as during the qualitythree months 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 as2021, the Company was ramping up inventory levels to meet demand for the remainder of 2019incurred $7,000 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 insurancepatent application 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 $111,000 due to the recognitionrecords as an asset and amortizes upon successful completion of the 2019 first quarter tax benefit.application process.

During the first three months of 2020, cash provided by investing activities was $1.1 million.  Five certificates of deposits totaling $1.2 million matured during the first three months of 2020.  The Company’s purchases of equipment of $135,000 were mainly for improvements to production and process capabilities and to replace a vehicle.  The Company received $18,000 in proceeds from the sale of a vehicle.  Also, during the first three months of 2020, 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 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.

On April 1, 2016, the Company entered into a financing agreement (the “Financing Agreement”) under which the Duluth Economic Development Authority (the “Issuer”) agreed to sell $3,415,000 of its Tax Exempt Industrial Revenue Bonds, Series 2016 (IKONICS Project) (the “Bonds”) to Wells Fargo Bank, National Association (the “Bank”), and the Bank agreed to lend to the Company the proceeds received from the sale of the Bonds (the “Loan”). Related to the Company’s Loan, the Company made principal payments of $37,000 during the first three months of 2021 and $36,000 during the first three months of 2020 and $35,000 during the first three months of 2019.2020.  

The Company iswas subject to certain customary covenants set forth in the Loan, including a requirement that the Company maintain a debt service coverage ratio as of the end of each calendar quarter of not less than 1.25 to 1.00 on a rolling four-quarter basis.1.00.  As of December 31, 2019,2020, the Company was not in compliance with the debt service coverage ratio covenant, but obtained a waiver forloan covenant.  During the non-compliance.  There is no certainty that a waiver can be obtained in the future if similar violations occur.  The Company amended the covenant terms in Februaryfirst quarter of 2020 to change the debt service coverage ratio calculation from a rolling quarterly calculation to an annual calculation beginning December 31, 2020.  If2021, the Company has future violationswas notified by the bank that per the loan agreement the bank will recall the loan on April 1, 2021.  On April 1, 2021, the Company repaid the entire loan including principal amount of its covenants,$2.7 million and is unable to obtain appropriate waivers, it could have a significant adverse effectinterest of $6,100 with existing cash on the Company's liquidity.hand.  

A bank line of credit providing for borrowings of up to $2,050,000 expires August 30, 2021.  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 20202021 or 2019,2020, and there were no borrowings outstanding as of March 31, 20202021 or December 31, 2019.2020.  There are no financial covenants related to the line of credit.   

The Company anticipates a significant decrease in global demand forbelieves that current financial resources, its productsline of credit, and services during second quarter of 2020 and beyond due to the COVID-19 pandemic. This significant decrease in demand will likely have a material adverse impact oncash generated from operations, along with the Company’s capacity for additional debt and/or equity financing will be sufficient to fund current and anticipated business operating results and financial condition beginning with second quarter of 2020.  It is currently not possible to predictoperations. However, the future potential impact, or thefull extent of any impact,the effect of the COVID-19 pandemic on the Company’s customers, supply chain and business cannot be reasonably assessed at this time and the Company expects its full year 2021 results of operations to be adversely affected. The Company has developed a plan to mitigate the impact of COVID-19 which includes permanent reductions to the Company's workforce, temporary reductions in board and officer compensation, temporary suspension of the Company’s contribution to its 401(k) retirement plan and the elimination of all non-essential expenditures.  The impact of COVID-19 on the global economy as a whole. It is also currently not possibleCompany’s operating results will depend on future developments, which are highly uncertain and cannot be predicted, including governmental and business reactions to predict how long the COVID-19 pandemic will last or the time that it will take for economic activity to return to prior levels.

The Company believes that its strong working capital position (including cash, cash equivalents, and short-term investments of $2.6 million) along with the Company's $2.0 million available line of credit as of March 31, 2020 and the recently secured $1.2 million loan through the Small Business Administration (SBA) can help mitigate the negative impact of the COVID-19 pandemic.  However, the Company cannot reasonably estimate the future financial impact on its operations or working capital position given the recent downturn in business due to the COVID-19 pandemic.

Capital Expenditures 

Through the first three months of 2020,2021, the Company incurred $135,000 ofhad no capital expenditures mainly for improvements to production and process capabilities and to replace a vehicle.expenditures.

The Company wasis planning additional capital expenditures in 20202021 of approximately $204,000$220,000 including improvements to the Company's production capabilities, process improvements, and information technology upgrades and two replacement vehicles.  With the recent downturn in business related to the COVID-19 pandemic, the Company anticipates that additional capital expenditures in 2020 will be significantly less than $204,000.upgrades.  Currently, the Company expects to fund its capital expenditures with existing cash and cash generated from operating activities. 

International Activity 

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 31%27% of total sales during the first three months of 20202021 and 26%31% during the first three months of 2019.  International sales during the first quarter of 2020 increased in certain Asian markets and in Europe.2020.   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.  Furthermore, the impact of foreign exchange on the Company’s balance sheet and operating results was not material in either 20202021 or 2019.2020.

Future Outlook

See the discussion under the heading “Potential Impact“Impact of the COVID-19 Pandemic” above for the Company’s discussion of the COVID-19 pandemic.

IKONICS has spent an average of approximately 5.0%5% 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.

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. 

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.  However, based on customer communications, the Company was notified by AMS' largest customer that it will reduceanticipates reduced order volume beginning in the second quarter of 2020for 2021 due to the COVID-19 pandemic.  

Both the Chromaline and IKONICS Imaging units remain profitableoperate 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.  Early in 2019, the Company introduced its new IKONART® product to positive reviews and is generating sales.  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 international growth challenging.

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

Recent Accounting Pronouncements 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which revises guidance for the accounting for credit losses on financial instruments within its scope, and in November 2018, issued ASU No. 2018-19 and in April 2019, issued ASU No. 2019-04 and in May 2019, issued ASU No. 2019-05, and in November 2019, issued ASU No. 2019-11, which amended the standard. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is still evaluating the impact of this ASU.

Off Balance Sheet Arrangements 

The Company has no off-balance sheet arrangements.  

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

Not applicable

ITEM 4.  Controls and Procedures

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 three months of 20202021 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 

PART II. OTHER INFORMATION

None

You should carefully review and consider the information regarding certain factors which could materially affect ourthe Company's business, financial condition or future results set forth under the heading “Risk Factors” in our the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019.2020.  There have been no material changes or additions to ourthe Company's risk factors discussed in such report, which could materially affect the Company’s business, financial condition, or future results, with the exception of the following new risk factor: results.

A public health crisis or global outbreak

The pandemic caused by COVID-19 was first reported in Wuhan, China, in December 2019 and has since spread to all geographic regions where the Company’s products are produced and sold. The global, regional and local spread of COVID-19 has resulted in significant global mitigation measures, including government-directed quarantines, social distancing and shelter-in-place mandates, travel restrictions and/or bans, and restricted access to certain corporate facilities and manufacturing sites. Uncertainty with respect to the severity and duration of the pandemic, coupled with a significant drop in oil prices that began in early March 2020 driven by a collapse in demand due to the global spread of COVID-19 combined with increased supply from oil producers, has contributed to the volatility of financial markets. While the severity and duration of the COVID-19 pandemic cannot be reasonably estimated at this time, impacts to the Company may include, but are not limited to: fluctuations in the Company’s stock price due to market volatility; a decrease in demand for the Company’s products; reduced profitability; supply chain disruptions impeding the Company’s ability to ship and/or receive product; potential interruptions or limitations to manufacturing operations imposed by local, state or federal governments; shortages of key raw materials; workforce absenteeism and distraction; labor shortages; customer credit concerns; cyber security and data accessibility disruptions due to remote working arrangements; reduced sources of liquidity; increased borrowing costs; and potential asset impairment charges. Business disruptions and market volatility resulting from the COVID-19 pandemic could have a material adverse impact on the Company’s results of operations, financial condition and cash flows.

Not applicable

Not applicable

Not applicable

None

The following exhibits are filed as part of this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020:2021:

IKONICS CORPORATION

SIGNATURES 

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.