ikon20210930

ikon20210930_10q.htm

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 September 30, 2021

☐

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

(Registrant’s telephone number, including area code)

Not Applicable

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

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 LLC

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 of 1934 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 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 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 ☒

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 - 1,981,527 shares outstanding as of November 10, 2021.

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IKONICS CORPORATION

QUARTERLY REPORT ON FORM 10-Q

			PAGE NO.
PART I.	FINANCIAL INFORMATION

Item 1.		Condensed Financial Statements	3

		Condensed Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020	3

		Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)	4

		Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)	5

		Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (unaudited)	6

		Notes to Condensed Financial Statements (unaudited)	7

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.		Quantitative and Qualitative Disclosures about Market Risk	19

Item 4.		Controls and Procedures	19

PART II.	OTHER INFORMATION		20

Item 1.		Legal Proceedings	20

Item 1A.		Risk Factors	20

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3.		Defaults upon Senior Securities	23

Item 4.		Mine Safety Disclosures	23

Item 5.		Other Information	23

Item 6.		Exhibits	23

	SIGNATURES		24

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PART I - FINANCIAL INFORMATION

ITEM 1. Condensed Financial Statements

IKONICS CORPORATION

CONDENSED BALANCE SHEETS

	*September 30,*			*December 31,*
	*2021*			*2020*
ASSETS	(unaudited)

CURRENT ASSETS:
Cash	$	1,500,847		$	3,693,845
Trade receivables, less allowance of $54,000 in 2021 and $55,000 in 2020		1,875,177			2,119,213
Inventories		1,649,517			1,644,975
Prepaid expenses and other assets		183,516			125,969
Income taxes receivable		5,331			219,451
Total current assets		5,214,388			7,803,453

PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land and building		9,556,586			9,556,586
Machinery and equipment		5,273,968			5,263,586
Office equipment		1,420,494			1,417,219
Vehicles		222,120			245,674
		16,473,168			16,483,065
Less accumulated depreciation		(9,540,029	)		(9,094,702	)
Total property, plant and equipment at cost, net		6,933,139			7,388,363

INTANGIBLE ASSETS, less accumulated amortization of $212,913 in 2021 and $207,399 in 2020		232,679			243,583
Total assets	$	12,380,206		$	15,435,399

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Current portion of long-term debt	$	—		$	2,688,396
Accounts payable		1,615,868			459,836
Accrued compensation		419,574			279,755
Other accrued liabilities		162,861			168,066
Total current liabilities		2,198,303			3,596,053

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 1,981,527 shares in 2021 and 1,976,354 in 2020		198,153			197,635
Additional paid-in-capital		2,981,620			2,743,930
Retained earnings		7,002,130			8,897,781
Total stockholders' equity		10,181,903			11,839,346
Total liabilities and stockholders' equity	$	12,380,206		$	15,435,399

See notes to condensed financial statements.

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IKONICS CORPORATION

CONDENSED STATEMENTS OF OPERATIONS (Unaudited)

	*Three Months Ended*						*Nine Months Ended*
	*September 30,*						*September 30,*
	*2021*			*2020*			*2021*			*2020*

NET SALES	$	4,743,452		$	3,134,984		$	12,068,208		$	9,204,615

COST OF GOODS SOLD		3,161,362			2,261,205			8,060,482			6,792,709

GROSS PROFIT		1,582,090			873,779			4,007,726			2,411,906

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		2,274,054			979,773			5,402,147			3,963,100

RESEARCH AND DEVELOPMENT EXPENSES		134,608			136,520			398,425			521,334

LOSS FROM OPERATIONS		(826,572	)		(242,514	)		(1,792,846	)		(2,072,528	)

INTEREST EXPENSE		(103	)		(24,592	)		(102,443	)		(70,699	)

OTHER INCOME		20			39			5,195			8,722

LOSS BEFORE INCOME TAXES		(826,655	)		(267,067	)		(1,890,094	)		(2,134,505	)

INCOME TAX EXPENSE (BENEFIT)		25,081			6,929			5,557			(232,000	)

NET LOSS	$	(851,736	)	$	(273,996	)	$	(1,895,651	)	$	(1,902,505	)

LOSS PER COMMON SHARE
Basic	$	(0.43	)	$	(0.14	)	$	(0.96	)	$	(0.96	)
Diluted	$	(0.43	)	$	(0.14	)	$	(0.96	)	$	(0.96	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		1,981,138			1,976,354			1,978,638			1,976,354
Diluted		1,981,138			1,976,354			1,978,638			1,976,354

See notes to condensed financial statements.

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IKONICS CORPORATION

STATEMENTS OF STOCKHOLDERS’ EQUITY

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 and 2020 (unaudited)

For the three months ended September 30, 2021:

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

BALANCE AT JUNE 30, 2021		1,980,694	$	198,069	$	2,902,790	$	7,853,866		$	10,954,725

Net loss		—		—		—		(851,736	)		(851,736	)
Exercise of stock options		833		84		5,873		—			5,957
Stock based compensation		—		—		72,957		—			72,957

BALANCE AT SEPTEMBER 30, 2021		1,981,527	$	198,153	$	2,981,620	$	7,002,130		$	10,181,903

For the three months ended September 30, 2020:

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

BALANCE AT JUNE 30, 2020		1,976,354	$	197,635	$	2,729,338	$	7,708,592		$	10,635,565

Net loss		—		—		—		(273,996	)		(273,996	)
Stock based compensation		—		—		2,762		—			2,762

BALANCE AT SEPTEMBER 30, 2020		1,976,354	$	197,635	$	2,732,100	$	7,434,596		$	10,364,331

For the nine months ended September 30, 2021:

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

BALANCE AT DECEMBER 31, 2020		1,976,354	$	197,635	$	2,743,930		$	8,897,781		$	11,839,346

Net loss		—		—		—			(1,895,651	)		(1,895,651	)
Exercise of stock options		3,833		384		33,263			—			33,647
Restricted stock vested		1,340		134		(134	)		—			—
Stock based compensation		—		—		204,561			—			204,561

BALANCE AT SEPTEMBER 30, 2021		1,981,527	$	198,153	$	2,981,620		$	7,002,130		$	10,181,903

For the nine months ended September 30, 2020:

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

BALANCE AT DECEMBER 31, 2019		1,976,354	$	197,635	$	2,721,962	$	9,337,101		$	12,256,698

Net loss		—		—		—		(1,902,505	)		(1,902,505	)
Stock based compensation		—		—		10,138		—			10,138

BALANCE AT SEPTEMBER 30, 2020		1,976,354	$	197,635	$	2,732,100	$	7,434,596		$	10,364,331

See notes to condensed financial statements.

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IKONICS CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

	*Nine Months Ended*
	*September 30,*
	*2021*			*2020*
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,895,651	)	$	(1,902,505	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		468,881			499,899
Amortization		105,764			27,445
Stock based compensation		204,561			10,138
Net gain on sale and disposal of equipment		(4,800	)		(2,325	)
Loss on intangible asset abandonment		—			16,906
Changes in working capital components:
Trade receivables		244,037			1,017,501
Inventories		(4,542	)		24,723
Prepaid expenses and other assets		(57,548	)		746,216
Income tax receivable		214,120			(240,082	)
Accounts payable		1,156,032			(302,512	)
Accrued expenses		134,614			(525,521	)
Net cash provided by (used in) operating activities		565,468			(630,117	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property equipment		(13,657	)		(149,916	)
Proceeds from sales of equipment		4,800			18,297
Purchases of intangible assets		(10,021	)		(12,976	)
Proceeds on sale of short-term investments		—			2,205,000
Net cash (used in) provided by investing activities		(18,878	)		2,060,405

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from paycheck protection program loan		—			1,214,500
Payment on long-term debt		(2,773,235	)		(107,554	)
Proceeds from exercise of stock options		33,647			—
Net cash (used in) provided by financing activities		(2,739,588	)		1,106,946

NET (DECREASE) INCREASE IN CASH		(2,192,998	)		2,537,234

CASH AT BEGINNING OF PERIOD		3,693,845			963,649

CASH AT END OF PERIOD	$	1,500,847		$	3,500,883

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	24,089		$	56,834
Net cash received (paid for) income taxes, net	$	208,562		$	(8,082	)

See notes to condensed financial statements.

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IKONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.	Basis of Presentation

The condensed balance sheet of IKONICS Corporation (the “Company”) as of September 30, 2021, and the related condensed statements of operations for the three and nine months ended September 30, 2021 and 2020, the condensed statements of stockholders' equity for the three and nine months ended September 30, 2021 and 2020, and condensed cash flows for the nine months ended September 30, 2021 and 2020, have been prepared without being audited.

In the opinion of management, these statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of IKONICS Corporation as of September 30, 2021, 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, 2020.

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

The Company relies on cash flow generated from operations and available cash balances to fund its working capital and other operating and investing needs. Additionally, the Company has access to its bank line of credit. The Company’s ability to borrow under the bank line of credit is based on its ability to continue to renew the maturity date of the bank line of credit.

The global, regional and local spread of COVID-19 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. Even though many of these government mandated restrictions have been lifted, uncertainty with respect to the severity and duration of the pandemic has contributed to periods of volatility and disruption of financial markets. While the severity and duration of the COVID-19 pandemic remain uncertain, 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 continue to have a material adverse impact on the Company’s results of operations, financial condition and cash flows.

Based on the Company’s current cash position, and expected future cash flows, the Company believes it will have sufficient cash to fund its operations beyond twelve months from the date of the issuance of the accompanying unaudited condensed financial statements.

Definitive Transaction Agreement with TeraWulf, Inc.

On June 25, 2021, the Company announced that its board of directors, along with the board of directors of TeraWulf Inc. (“TeraWulf”), unanimously approved a definitive agreement (as amended, the "Agreement”) under which the Company will combine with TeraWulf under a new holding company in a strategic business combination (the “Transaction”).

Upon consummation of the Transaction, each outstanding share of the Company’s common stock will receive $5.00 in cash, one contingent value right (“CVR”), and one share of the combined company's common stock. Through the CVRs, which will not be publicly traded, the Company’s shareholders will be entitled to receive 95% of the net proceeds from any sale of the IKONICS legacy business completed during the 18 months following the closing of the business combination, and will expire at the end of such 18 month period with respect to any portion of the IKONICS legacy business which has not been sold. The shares of the combined company's common stock to be received by the Company’s shareholders will collectively represent approximately 2% of the combined company's pro forma common equity ownership.

Following consummation of the Transaction, the legacy business of IKONICS will be operated consistent with past practices but will be positioned for sale on terms that are acceptable to the board of directors of the combined company.

The Transaction is expected to close in the fourth quarter of 2021, subject to the receipt of regulatory approvals, the approval of IKONICS and TeraWulf shareholders, and other customary closing conditions.

The Agreement contains certain termination rights for both IKONICS and TeraWulf, including if the Transaction is not completed on or before December 31, 2021.

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The Agreement provides that the Company will be obligated to pay TeraWulf a termination fee of $1.2 million, and TeraWulf will be obligated to pay the Company a termination fee of $10.0 million, if the Agreement is terminated under certain circumstances. The Agreement does not contain any post-Closing indemnification obligations with respect to the Parties.

The Company has incurred significant pre-tax expenses for professional fees and stock compensation expense in connection with the Transaction. In the third quarter of 2021 and during the first nine months of 2021, these expenses totaled approximately $1.1 million and $1.9 million, respectively. These expenses are primarily recorded in selling, general and administrative expenses in the condensed consolidated statement of operations.

Legal Proceedings

From time to time, the Company is involved in legal proceedings and regulatory proceedings arising from the Company’s operations. The Company establishes reserves for specific liabilities in connection with legal actions that are deemed to be probable and estimable. Except as set forth below, the Company is not currently a party to any proceeding, the adverse outcome of which would have a material adverse effect on its financial position or results of operations.

Six complaints have been filed by purported shareholders of IKONICS related to the mergers. On August 3, 2021, a complaint was filed in the United States District Court for the Southern District of New York, captioned Stein v. Ikonics Corporation, et al., No. 1:21-cv-06550. On August 11, 2021, a second complaint was filed in the United States District Court for the Eastern District of New York, captioned Bendimez v. Ikonics Corporation, et al., No. 1:21-cv-04514. On August 19, 2021, a third complaint was filed in the United States District Court for the Southern District of New York, captioned Whitfield v. Ikonics Corporation, et al., No. 1:21-cv-0710. On October 1, 2021, a fourth complaint was filed in the United States District Court for the Southern District of New York, captioned Jacobs v. Ikonics Corporation, et al., No. 1:21-cv-08148. On October 6, 2021, a fifth complaint was filed in the United States District Court for the Eastern District of Pennsylvania, captioned Ciccotelli v. Ikonics Corporation, et al., No. 2:21-cv-04391. On November 3, 2021, a sixth complaint was filed in the United States District Court for the Southern District of New York, captioned Noorman v. Ikonics Corporation, et al., No. 1:21-cv-09047. The Stein, Bendimez, Jacobs, Ciccotelli, and Noorman complaints name IKONICS and the members of its board of directors as defendants. The Whitfield complaint names as defendants IKONICS, its board of directors, and four other entities associated either with Telluride or TeraWulf and that are involved in the transactions discussed herein. Each of the six complaints alleges violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and certain SEC rules and regulations promulgated thereunder. Generally, the complaints allege, among other things, that disclosures made in the July 30, 2021 registration statement filed on Form S-4 with the SEC, or various amendments to that registration statement, misrepresented and/or omitted material information. The complaints seek, among other remedies, injunctive relief, including enjoining defendants from proceeding with or consummating the mergers, rescissory damages, and an award of costs and expenses, including attorneys’ and experts’ fees and expenses. IKONICS and the members of its board of directors have not yet answered or moved to dismiss any of the complaints, and believe they are without merit. However, there can be no assurance that IKONICS or its directors will prevail in any lawsuit. Additionally, similar lawsuits may be filed between the date of this filing and the date of the special meeting.

2.	Inventories

The major components of inventories as of September 30, 2021 and December 31, 2020 were as follows:

	*Sep 30, 2021*			*Dec 31, 2020*

Raw materials	$	1,487,128		$	1,323,655
Work-in-progress		356,365			428,753
Finished goods		1,104,345			1,065,458
Reduction to LIFO cost		(1,298,321	)		(1,172,891	)

Total Inventories	$	1,649,517		$	1,644,975

3.	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 and restricted stock units disclosed in Note 4 have been excluded from the computation because of their antidilutive effect.

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

	*Three Months Ended*
	*Sep 30, 2021*		*Sep 30, 2020*

Weighted average common shares outstanding		1,981,138		1,976,354
Dilutive effect of stock options and restricted stock units		—		—
Weighted average common and common equivalent shares outstanding		1,981,138		1,976,354

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IKONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

	*Nine Months Ended*
	*Sep 30, 2021*		*Sep 30, 2020*

Weighted average common shares outstanding		1,978,638		1,976,354
Dilutive effect of stock options and restricted stock units		—		—
Weighted average common and common equivalent shares outstanding		1,978,638		1,976,354

If the Company was in a net income position for the three and nine months ended September 30, 2021, 22,667 options with a weighted average exercise price of $8.49 would have been included as part of the computation of common share equivalents as the options would have been dilutive.

If the Company was in a net income position for the three and nine months ended September 30, 2021, 86,810 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 three and nine months ended September 30, 2020, 17,500 options outstanding with a weighted average exercise price of $6.97 would have remained excluded from the computation of common share equivalents as the options were anti-dilutive.

4.	Stock-Based Compensation

The Company maintains the 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan replaced the 1995 Incentive Stock Option Plan (the "1995 Plan) upon its ratification by shareholders in April 2019. The 1995 plan authorized the issuance of up to 442,750 shares of common stock through grants of restricted stock units and options. Of those shares, 1,000 were subject to outstanding options as of September 30, 2021. Awards granted under the 1995 Plan will remain in effect until they are exercised or expire according to their terms. At the time the 2019 Plan was approved, there were 102,157 shares reserved for future grants under the 1995 Plan which will no longer be available for future grants.

Under the terms of the 2019 Plan, the number of shares of common stock that may be the subject of awards and issued under the 2019 Plan was initially set at 102,157. Subsequent to the approval of the 2019 Plan, 12,750 outstanding options granted under the 1995 Plan were forfeited. Under the terms of the 2019 Plan, those forfeited options are added back to the 2019 Plan reserve pool. As of September 30, 2021, 90,850 restricted stock units (RSUs) and 23,250 options have been granted under the 2019 Plan, of which 1,000 stock options and 2,700 RSUs have been forfeited, bringing the number of shares of common stock available for future awards under the 2019 Plan to 4,257.

The Company charged compensation cost of approximately $204,600 against the loss for the nine months ended September 30, 2021 and approximately $10,100 for the nine months ended September 30, 2020. As of September 30, 2021, there was approximately $597,000 of unrecognized compensation cost related to unvested share-based compensation awards. That cost is expected to be recognized over the next four years.

The Company receives a tax deduction for certain stock option exercises during the period in which the options are exercised, generally for the excess of the market price at the time the stock options are exercised over the exercise price of the options, which increases additional paid in capital and reduces income taxes payable.

Proceeds from the exercise of 3,833 stock options with an intrinsic value of approximately $39,800 were approximately $33,600 for the nine months ended September 30, 2021. No stock options were exercised during the nine months ended September 30, 2020.

There were 10,000 options granted during the nine months ended September 30, 2021 and 2020. The fair value of options granted during the nine months ended September 30, 2021 and 2020 were estimated using the Black Scholes option pricing model with the following assumptions:

	*2021*		*2020*
Dividend yield		—		—
Expected volatility		51.6%		40.3%
Expected life of option (years)		10		10
Risk-free interest rate		0.5%		1.4%
Fair value of each option on grant date		$7.05		$2.90

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Stock option activity during the nine months ended September 30, 2021 was as follows:

				*Weighted*
				*Average*
				*Exercise*
	*Shares*			*Price*
Outstanding at January 1, 2021		17,500		$	6.97
Granted		10,000			11.50
Exercised		(3,833	)		8.78
Expired and forfeited		(1,000	)		10.75
Outstanding at September 30, 2021		22,667		$	8.50
Exercisable at September 30, 2021		5,166		$	6.54

The aggregate intrinsic value of all options outstanding and for those exercisable at September 30, 2021 was approximately $152,800 and $44,900, respectively.

There were 36,550 RSUs granted during the nine months ended September 30, 2021. The shares underlying the awards were assigned a weighted average value of $11.01 per share, based on the closing price of the Company's common stock on the date of grants. The scheduled vesting period for these awards ranges from vesting at the time of the grant up to four years. No RSUs were granted during the nine months ended September 30, 2020.

RSU activity during the nine months ended September 30, 2021 is summarized as follows:

				*Weighted*
				*Average*
	*Number of*			*Grant Date*
	*Shares*			*Fair Value*
Unvested shares at January 1, 2021		54,300		$	6.11
Granted		36,550			11.01
Vested		(1,340	)		11.30
Forfeited or surrendered		(2,700	)		6.69
Unvested shares at September 30, 2021		86,810		$	8.07

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IKONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

5.	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, 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. 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, 2020.

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. Financial information with respect to the reportable segments follows:

For the three months ended September 30, 2021:

	*IKONICS*
			*IKONICS*
	*Chromaline*		*Imaging*		*DTX*		*AMS*			*Unalloc.*			*Total*
Net sales	$	2,954,569	$	1,445,926	$	81,925	$	261,032		$	—		$	4,743,452
Cost of goods sold		2,076,840		759,955		36,762		287,805			—			3,161,362
Gross profit (loss)		877,729		685,971		45,163		(26,773	)		—			1,582,090
Selling general and administrative*		331,134		316,535		31,811		37,153			1,557,421			2,274,054
Research and development*		—		—		—		—			134,608			134,608
Income (loss) from operations	$	546,595	$	369,436	$	13,352	$	(63,926	)	$	(1,692,029	)	$	(826,572	)

For the three months ended September 30, 2020:

	*IKONICS*
			*IKONICS*
	*Chromaline*		*Imaging*		*DTX*		*AMS*			*Unalloc.*			*Total*
Net sales	$	2,051,047	$	893,064	$	62,024	$	128,849		$	—		$	3,134,984
Cost of goods sold		1,474,881		499,750		33,143		253,431			—			2,261,205
Gross profit (loss)		576,166		393,314		28,881		(124,582	)		—			873,779
Selling general and administrative*		234,884		180,285		27,567		51,644			485,393			979,773
Research and development*		—		—		—		—			136,520			136,520
Income (loss) from operations	$	341,282	$	213,029	$	1,314	$	(176,226	)	$	(621,913	)	$	(242,514	)

For the nine months ended September 30, 2021:

	*IKONICS*
			*IKONICS*
	*Chromaline*		*Imaging*		*DTX*		*AMS*			*Unalloc.*			*Total*
Net sales	$	7,306,983	$	3,797,382	$	243,680	$	720,163		$	—		$	12,068,208
Cost of goods sold		5,217,363		1,953,681		113,814		775,624			—			8,060,482
Gross profit (loss)		2,089,620		1,843,701		129,866		(55,461	)		—			4,007,726
Selling general and administrative*		879,064		792,290		93,851		154,643			3,482,299			5,402,147
Research and development*		—		—		—		—			398,425			398,425
Income (loss) from operations	$	1,210,556	$	1,051,411	$	36,015	$	(210,104	)	$	(3,880,724	)	$	(1,792,846	)

For the nine months ended September 30, 2020:

	*IKONICS*
			*IKONICS*
	*Chromaline*		*Imaging*		*DTX*		*AMS*			*Unalloc.*			*Total*
Net sales	$	5,635,373	$	2,488,963	$	223,606	$	856,673		$	—		$	9,204,615
Cost of goods sold		4,300,512		1,397,458		109,235		985,504			—			6,792,709
Gross profit (loss)		1,334,861		1,091,505		114,371		(128,831	)		—			2,411,906
Selling general and administrative*		1,027,239		683,720		91,999		211,788			1,948,354			3,963,100
Research and development*		—		—		—		—			521,334			521,334
Income (loss) from operations	$	307,622	$	407,785	$	22,372	$	(340,619	)	$	(2,469,688	)	$	(2,072,528	)

*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 September 30, 2021 and December 31, 2020 were as follows:

	*Sep 30, 2021*			*Dec 31, 2020*

Chromaline	$	1,266,482		$	1,676,592
IKONICS Imaging		482,691			396,116
DTX		19,908			35,983
AMS		155,643			57,676
Unallocated		(49,547	)		(47,154	)

Total	$	1,875,177		$	2,119,213

6.	Income Taxes

The Company records its interim provision for income taxes by applying its estimated annual effective tax rate to the year-to-date pre-tax income 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 included current federal and state income tax expense, as well as deferred federal and state income tax expense.

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended September 30, 2021. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.

On the basis of this evaluation, as of September 30, 2021, a full valuation allowance has been recorded to reserve for deferred tax assets entirely, which are not expected to be realized. The valuation allowance will be reevaluated on a quarterly basis and may change if estimates of future taxable income during the carryforward period is increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth

The effective tax rate for the three months ended September 30, 2021 was an expense of 3.0%, compared to a benefit of 0.5% for the three months ended September 30, 2020. The Company recorded an income tax expense of $26,000 and an expense of $7,000 for the three months ended September 30, 2021 and 2020, respectively.

The effective tax rate for the nine months ended September 30, 2021 was an expense of 0.3%, compared to a benefit of 10.9% for the nine months ended September 30, 2020. The primary driver of the change in the Company’s effective tax rate is attributable to additional benefit from a net operating loss carryback claim recorded in the prior year. The Company recorded an income tax expense of $6,000 and a benefit of $232,000 for the nine months ended September 30, 2021 and 2020, respectively.

SEC Form 10-Q filed by Ikonics Corporation