IKONICS Corporation Annual Report 2020

FY2020 Annual Report · IKONICS Corporation

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2020

ANNUAL REPORT

Unique. Imaging.
Solutions.

LETTER TO THE SHAREHOLDERS

2020 was easily the most challenging period in IKONICS’ recent history. The
challenges faced created an environment where the IKONICS team worked
closer, more creatively, and effectively than ever. Their professionalism,
dedication and sense of urgency drove extraordinary outcomes for
IKONICS. I am pleased to report that IKONICS delivered markedly improved
2020 performance.

During the year we implemented several key initiatives to maintain safe
sustainable operations. The safety protocols introduced at the outset
of the COVID-19 pandemic, limited the impact of COVID-19 on both
our employees and operations. Additionally, the cost control and cash
management measures undertaken in 2020 have had a direct and
consequential impact on our productivity and overall financial results.

In the fourth quarter of 2020, IKONICS posted its most profitable quarter in more than two years,
irrespective of the one-time PPP loan forgiveness. For the year, IKONICS had decidedly improved bottom
line performance despite challenged sales - posting revenue of $13,432,000, down 23.8% from the prior
year. The Company realized a net loss in 2020 of $439,000 or $0.22 per diluted share compared to a
2019 net loss of $814,000 or $0.41 per diluted share.

We are optimistic as we look forward to 2021 opportunities. Our versatile Ikonart® consumer screen
printing system enjoyed robust sales for the year and is on a trajectory to significantly outperform in
2021. IKONICS patented Integrated Inkjet Systems Dual-Print™ mold texturing mask making system,
which can significantly reduce skilled labor costs for mold-makers, made great technical strides in 2020
and is expected to be commercialized later this year. Moreover, the global economic recovery is driving
improved sales in our legacy screen-printing materials and imaging businesses.

Conversely, the AMS division will continue to be negatively impacted in 2021 by the slow aerospace and
aviation industry recovery, and as previously reported, the Company was notified that its $2.7 million
outstanding loan will be payable on April 1, 2021. Fortunately, due to our prudent financial management
efforts in 2020, the Company was able to build cash through the year. I believe that any adverse effect of
the loan recall is mitigated by our strong working capital position.

Overall, 2020 was a catalyst for transformation at IKONICS. The Company comes into 2021 stronger,
better prepared and well positioned for the reopening of the global economy expected mid-2021. Our
search will continue for strategic additions to our businesses and other prospects that leverage our core
strengths, improve our trajectory and further enhance shareholder value. I am confident that 2021 will be
a year of business improvement and new opportunities for IKONICS.

Glenn Sandgren
Chief Executive Officer

March 23, 2021

This letter contains forward-looking statements regarding sales, gross profits, net earnings, balance sheet position, new products, new business initiatives,
customer behavior and market trends that involve risks and uncertainties. The Company’s actual results could differ materially as a result of domestic and
global economic conditions, downturns in the aerospace or automotive industries, unexpected production delays by customers using the Company’s products,
competitive market conditions, changes in consumer preferences, inability to commercialize technologies the Company is developing on the anticipated
timeline or at all, acceptance of new products the Company offers, introduction of new products or technologies by competitors, unexpected capital expenditure
requirements, delays in completing planned expansions, the ability to control operating costs without impacting growth as well as the factors described in the
Company’s Forms 10-K, and 10-Q, and other reports on file with the SEC.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

☒☒

☐☐

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

For the fiscal year ended December 31, 2020

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
(State or other jurisdiction of
incorporation or organization)

4832 Grand Avenue
Duluth, Minnesota
(Address of principal executive offices)

41-0730027
(I.R.S. Employer
Identification No.)

55807
(Zip code)

Registrant’s telephone number, including area code: (218) 628-2217

Securities registered under Section 12(b) of the Act:

Title of Each Class
Common Stock, par value $.10 per share

Trading Symbol
IKNX

Securities registered under Section 12(g) of the Act: None

Name of Each Exchange
On Which Registered
Nasdaq Capital Market LLC

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant (1) has 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 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 ☐
Non-accelerated filer ☒

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2020 was $4,598,074 based on the most recent
closing price for the issuer’s Common Stock on such date as reported on the Nasdaq Capital Market. For purposes of determining this number, all officers and
directors of the issuer are considered to be affiliates of the issuer, as well as individual stockholders holding more than 10% of the issuer’s outstanding Common
Stock. This number is provided only for the purpose of this report on Form 10-K and does not represent an admission by either the issuer or any such person
as to the status of such person.

State the number of shares outstanding of each of the Registrant’s classes of common equity, as of the latest practical date: Common Stock, $.10 par

value — 1,977,104 issued and outstanding as of February 26, 2021.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the safe harbor
provisions of Section 21E of the Securities Exchange Act of 1934, as amended, relating to future events or the future financial
performance of the Company. In some cases, you can identify forward-looking statements by the following words:
“anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “project,”
“should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking
statements contain these words. Forward-looking statements are only predictions or statements of intention subject to risks
and uncertainties and actual events or results could differ materially from those projected. Forward-looking statements are
based on information available at the time the statements are made and involve known and unknown risks, uncertainties and
other factors that may cause our results, levels of activity, performance or achievements to be materially different from the
information expressed or implied by the forward-looking statements in this Annual Report on Form 10-K. Factors that could
cause actual results to differ include the risks, uncertainties and other matters set forth below under the caption “Risk
Factors” and the matters set forth under the captions “Business” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” as well as those discussed elsewhere in this Annual Report on Form 10-K.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive proxy statement for its 2021 Annual Meeting of Shareholders are incorporated

by reference in Part III.

Item 1. Business

General

PART I

IKONICS Corporation (“IKONICS” or the “Company”) was incorporated in Minnesota as Chroma-Glo, Inc. in
1952 and changed its name to The Chromaline Corporation in 1982. In December 2002, the Company changed its name to
IKONICS Corporation. The Company’s two traditional businesses, Chromaline and IKONICS Imaging, have been the
development, manufacture and selling of photosensitive liquids (“emulsions”) and films for the screen printing, awards and
recognition industries and consumer products markets. These sales have been augmented with inkjet receptive films,
ancillary chemicals and related equipment to provide a full line of products and services to its customers. These products are
sold worldwide primarily through distributors. The Company further diversified itself by expanding its business to industrial
markets. These efforts now include the Company’s Advanced Material Solutions (“AMS”) business unit which uses the
Company’s proprietary processes and photoresist film for the abrasive etching of composite materials, industrial ceramics,
silicon wafers, and glass wafers. The customer base for AMS is primarily the aerospace and electronics industries. Based
on its expertise in ultraviolet curable fluids and inkjet receptive substrates, the Company has also developed a patented digital
texturing technology (“DTX”) for putting patterns and textures into steel molds for the plastic injection molding industry.
The original equipment manufacturer (“OEM”) for the Company’s DTX technology is primarily the automotive industry.
The Company offers a suite of products to the mold making industry. Industrial inkjet printers, which are integral to the DTX
system, are manufactured by a third party and sold by IKONICS. The Company’s business plan is to sell consumable fluids
and transfer films. For most markets, these sales are direct to the mold maker. The DTX technology is also utilized in
prototyping where the Company’s technology offers a unique combination of high definition, large format prints, and
abrasion resistance.

Products

The Company has four primary technology platforms: ultraviolet (UV) chemistry, film coating and construction,
technical abrasive etching, and industrial inkjet printing. The Company’s traditional products and new initiatives are based
on these platforms and their combinations. The Company’s Chromaline and ImageMate branded products for the screen
printing industry and IKONICS Imaging products for the both the awards and recognition and consumer product markets are
based on UV chemistry and film coating and construction capabilities; the AMS offering is a combination of UV chemistry,
film coating and construction and technical abrasive etching capabilities; DTX is a combination of UV chemistry, film coating
and construction, and
the
Chromaline, IKONICS Imaging, AMS and DTX product offerings, and the Company offers ancillary products, including
equipment to provide customers with a total solution. The Company considers this combination of core technologies and
product offerings to be unique.

is overlap and synergy

inkjet printing. There

the market between

industrial

Distribution and Customers

The Company currently has approximately 200 domestic and international distributors for its Chromaline and
ImageMate screen printing emulsions and films. The Company’s abrasive etching products are mainly sold directly to end
users in the awards and recognition market under the IKONICS Imaging brand. AMS products are sold either directly to
users or the Company offers AMS as a service. DTX includes the sales of consumable inks and films to customers that have
purchased specialized industrial inkjet printers from the Company’s strategic partner. DTX sales are primarily direct to end
users. The Company markets and sells its products through magazine advertising, trade shows and the internet.

The Company has a diverse customer base both domestically and abroad, with international sales accounting for
29.7% of total sales in 2020 and 29.4% of sales in 2019, and does not depend on one or a few customers for a material portion
of its revenues. In 2020 and 2019, no one customer accounted for more than 10% of net sales.

Quality Control in Manufacturing

In March 1994, IKONICS became

to receive ISO 9001
the first company
certification. ISO 9000 is a worldwide standard issued by the International Organization for Standardization that provides a
framework for quality assurance. The Company has been recertified every three years beginning in 1997. IKONICS’ quality
function goal is to train all employees properly in both their work and in the importance of their work. Internal records of
quality, including related graphs and tables, are reviewed regularly and discussions are held among management and

in northern Minnesota

employees regarding how improvements might be realized. The Company has rigorous materials selection procedures and
also uses testing procedures to assure its products meet quality standards.

Research and Development and Intellectual Property

The Company incurred costs totaling 5.0% of sales, or $671,000, on research and development in 2020, and 4.9%
of sales, or $870,000, in 2019. In its research program, IKONICS has developed ultraviolet light-sensitive chemistries used
in the manufacturing of screen print stencils, photoresists for abrasive etching and acid resists, stencils for consumer products,
and prototyping ink jet fluids, and ink jet receptive films. The Company has a number of patents and patent applications on
these chemistries and applications. There can be no assurance that any patent granted to the Company will provide adequate
protection to the Company’s intellectual property. Within the Company, steps are taken to protect the Company’s trade
secrets, including physical security, confidentiality and non-competition agreements with employees, non-disclosure
agreements where applicable, and confidentiality agreements with vendors. Over the past few years, the Company has
directed a larger portion of it research and development resources towards industrial inkjettable fluids and ink jet receptive
substrates along with films for the consumer products market. The Company has also invested significant resources for
personnel and equipment to develop proprietary products and techniques for the etching of composite materials, industrial
ceramics and electronic wafers.

In addition to its patents, the Company has various trademarks including the “IKONICS®,” “Chromaline®,”
“IKONICS Imaging®,” “Precision Abrasive Machining®,” “PhotoBrasive®,” “AccuArt®,” “image mate®,” “Alpha
FlexTrace®,” “Alpha MicroCap®," “DTX®,” “SubTHAT!®,” and “IKONART®” trademarks.

Raw Materials

The primary raw materials used by IKONICS in its production are photopolymers, polyester films,
polyvinylacetates, polyvinylalcohols and water. The Company’s purchasing staff leads in the identification of both domestic
and foreign sources for raw materials and negotiates price and terms for all domestic and foreign markets. IKONICS’
involvement in foreign markets has given it the opportunity to become a global buyer of raw materials at lower overall
cost. The Company has a number of suppliers for its operations. Some suppliers provide a significant amount of key raw
materials to the Company, but the Company believes alternative sources are available for most materials. For those raw
materials where an alternative source is not readily available, the Company has contingency raw material replacement
plans. To date, there have been no significant shortages of raw materials. The Company believes it has good supplier
relations.

Competition

The Company competes in its markets based on product development capability, quality, reliability, availability,
technical support and price. Though the screen printing market is much larger than the awards and recognition
market, IKONICS commands significantly more market share in the latter. IKONICS has two primary domestic competitors
in its screen printing film business. They are larger than IKONICS and possess greater resources than the Company in many
areas. The Company has numerous competitors in the market for screen print emulsions, many of whom are larger than
IKONICS and possess greater resources. The market for the Company’s abrasive etching products in the awards and
recognition market has one significant competitor. IKONICS considers itself to be the leader in this market. There are
significant competitors, using different technologies in the new markets being entered by the Company. The primary
competition for AMS is from other machining methods, most of which are well established. The primary competition for
DTX comes from old, well-established technologies based on wax and screen printing and new competition from laser
technologies.

Government Regulation

The Company is subject to a variety of federal, state and local industrial laws and regulations, including those
relating to the discharge of material into the environment and protection of the environment. The governmental
authorities primarily responsible for regulating the Company’s environmental compliance are the Environmental
Protection Agency, the Minnesota Pollution Control Agency and the Western Lake Superior Sanitary District. Failure to
comply with the laws promulgated by these authorities may result in monetary sanctions, liability for environmental
clean-up and other equitable remedies. To maintain compliance, the Company may make occasional changes in its waste
generation and disposal procedures.

These laws and regulations have not had a material effect upon the capital expenditures or competitive position
of the Company. The Company believes that it complies in all material respects with the various federal, state and local
regulations that apply to its current operations. Failure to comply with these regulations could have a negative impact on the
Company’s operations and capital expenditures and such negative impact could be significant.

The Company also is subject to regulations from foreign governments covering the importation of certain
chemicals. The Company believes that it complies in all material respects with these regulations that apply to its current
products. Failure to comply with these regulations could have a negative impact on the Company’s operations and capital
expenditures and such negative impact could be significant.

Employees

As of February 28, 2021, the Company had 58 total and full-time employees, 54 of whom are located at the
Company’s two facilities in Duluth, Minnesota and four of whom are outside technical sales representatives in various
locations in the United States. None of the Company’s employees are subject to a collective bargaining agreement and the
Company believes that its employee relations are good.

Item 1A. Risk Factors

Covid-19 Related Risks

A public health crisis or global outbreak of disease, including the pandemic caused by coronavirus disease 2019 (“COVID-
19”) has had, and we believe will continue to have, a negative effect on the Company's operations, supply chain and
workforce, creating business disruptions that could have a material adverse impact on the Company’s financial condition,
results of operations and cash flows

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 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.

The Company received funding and subsequently had its entire loan forgiven under the Coronavirus Aid, Relief and
Economic Security (CARES) Act. There is no guarantee that the Company will not become subject to future penalties or
that the decision to forgive the loan in whole or part will be rescinded.

On April 18, 2020, the Company executed a promissory note in favor of BMO Harris Bank evidencing an
unsecured loan in the aggregate principal amount of $1,214,500, which was made pursuant to the Paycheck Protection
Program, or the PPP. The PPP was established under the CARES Act, which was enacted on March 27, 2020, and is
administered by the U.S. Small Business Administration, or the SBA. All the funds under the loan were disbursed to the
Company on April 22, 2020. The Company used all proceeds from the loan to retain employees, maintain payroll and make
rental and utility payments.

Under the terms of the CARES Act, loan recipients can apply for and be granted forgiveness for all or a portion
of the loans granted under the PPP. In 2020, the Company submitted an application for 100% forgiveness of the PPP Loan
and upon approval by the SBA and the lender, the Company received forgiveness for 100% of the $1,214,500 loan. The
Company is not aware of or anticipating any further review of its loan forgiveness, but the loan itself and the forgiveness of
the loan could be subject for further examination by the SBA or the lender. If the decision to forgive the loan is reversed in
part of whole, the Company will be required to repay the outstanding principal, along with accrued interest.

Strategic and Competitive Related Risks

The Company’s DTX and AMS initiatives involve new technologies that might not be executed successfully and might not
achieve market acceptance.

The Company’s DTX and AMS initiatives involve technologies that might never achieve market
acceptance. During 2020 and 2019, the Company generated operating losses in its AMS segment while the DTX segment
has realized operating income since 2015. The Company’s ability for generating profits from these initiatives will depend
on its products gaining market acceptance among customers, which cannot be guaranteed. The degree of market acceptance
of any new products the Company develops will depend on a number of factors, including:

•

the Company’s ability to successfully develop its technologies and products to include the capabilities the Company
intends;

•

the Company’s ability to accurately assess the functions and features customers desire;

•

the perceived effectiveness and price of the Company’s products compared to alternative products and technologies;

•

the development of new products and technologies by current competitors or new competitors that might enter the
Company’s markets; and

•

the strength of the Company’s marketing and distribution functions.

If new products that the Company develops do not have the capabilities the Company expects or fail to achieve an
adequate level of acceptance by customers for any reason, then the Company’s AMS and DTX business units could fail to
generate the revenues the Company expects and may not become profitable or sustain profitability.

If the Company’s new products and technologies do not achieve market acceptance, the Company will not realize a return
on its investments in its new business initiatives.

The Company has invested, and plans to continue to invest, significant resources in its research and development
efforts to develop technology for its business units. The Company spent 5.0% of sales, or $671,000, on research and
development in 2019 and 4.9% of sales, or $870,000, in 2019. A substantial portion of these investments was for new
products and initiatives. The Company plans to continue to invest significant resources in research and development of new
products and initiatives for the foreseeable future. The Company believes successful execution of these initiatives and new
products is important for its ability to grow its revenues and profits. However, if the Company fails to generate its projected
revenues from these products and initiatives, the Company’s investments in these areas would not generate the profits the
Company expects and its results of operations, financial condition and prospects would be materially and adversely affected.

The Company faces significant competition and expects to face increasing competition in many aspects of its businesses,
which could cause operating results to suffer.

The Company operates in highly competitive industries that experience rapid technological and market
developments, changes in customer needs, and frequent product introductions and improvements, particularly with respect
to the AMS and DTX businesses. If the Company is unable to anticipate and respond to these developments, its products or
technologies could become uncompetitive or obsolete. Most of the Company’s competitors in the AMS and DTX fields are
larger and better capitalized than the Company with longer operating histories. These advantages could allow the Company’s
competitors to invest more resources in research and development and sales and marketing than the Company, which could
make the competitive products more attractive or better known to consumers than the Company’s products. In addition,
because there is potential for rapid technological change in fields in which the Company operates, the Company could face
competition from new sources in the future that customers find more attractive.

The Company also could face increased competition in its traditional Chromaline and IKONICS Imaging
units. Capital costs for machinery necessary to operate in these industries have decreased in recent years, increasing the
possibility that the Company will face new competitors. An increase in the amount of competition the Company faces, or a
loss of competitiveness in any of the Company’s business units for any reason, could adversely affect its revenues and gross
margins.

Regulatory and Legal Risks

The Company’s failure to comply with environmental laws and regulations could harm its business and results of
operations.

The manufacturing of the Company’s products requires the use of hazardous materials that are subject to a broad
array of environmental laws and regulations. The Company’s failure to comply with these laws or regulations could result
in:

•

regulatory penalties, fines and legal liabilities;

suspension of production;

alteration of manufacturing processes; and

restrictions on the Company’s operations or sales.

The Company’s failure to manage the use, transportation, emissions, discharge, storage, recycling or disposal of
hazardous materials could lead to increased costs or future liabilities. Environmental laws and regulations also could require
the Company to acquire pollution abatement or remediation equipment, modify product designs or incur other expenses.

Third parties may claim the Company infringes their intellectual property rights, which could harm the Company’s
business.

The Company may face claims that it infringes other parties’ intellectual rights. Regardless of a claim’s merit,
claims that the Company’s products or processes infringe the intellectual property rights of others could cause the Company
to incur large costs to respond to, defend, and resolve the claims, and they may divert the efforts and attention of management
and technical personnel. As a result of any intellectual property rights infringement claims, the Company could be required
to:

•

pay infringement claims;

stop manufacturing, using, or selling products or technology subject to infringement claims;

develop other products or technology not subject to infringement claims, which could be time-consuming, costly or
impossible; or

license technology from the party claiming infringement, which license may not be available on commercially
reasonable terms, if at all.

These actions could harm the Company’s competitive position, result in additional expenses, or require the Company
to impair its assets. If the Company alters or stops production of affected items, its ability to generate revenue could be
harmed.

The Company may be unable to enforce or protect its intellectual property rights, which may harm its ability to compete
and may harm its business.

The Company’s ability to enforce its patents, trademarks and other intellectual property rights is subject to general
litigation risks, as well as uncertainty as to the enforceability of the Company’s intellectual property rights in various
countries. If the Company seeks to enforce its rights, it could become subject to claims that its intellectual property rights
are invalid, not enforceable, or licensed to the opposing party. The Company’s assertion of intellectual property rights also
could result in the other party seeking to assert claims against the Company, which could harm the Company’s business. The
Company’s inability to enforce its intellectual property rights for any reason could harm its competitive position and business.

If the Company is unable to protect the confidentiality of its proprietary information and know-how, the value of its
technology could be adversely affected.

In addition to patented technology, the Company relies on unpatented proprietary technology, trade secrets,
processes and know-how. The Company generally seeks to protect this information by confidentiality agreements with
employees, consultants, advisors and third parties. These agreements may be breached, and the Company may not have
adequate remedies for any such breach. In addition, the Company’s trade secrets may otherwise become known or be
independently developed by competitors. To the extent that the Company’s employees, consultants or contractors use
intellectual property owned by others in their work for the Company, disputes may arise as to the rights in related or resulting
know-how and inventions.

General Economic and Operational Risks

Adverse changes to global economic conditions generally, and to the aerospace and automotive industries in particular,
may harm the Company’s business.

The prospects for economic growth in the United States and other countries remain uncertain and major economies
where the Company conducts business could continue or return to recessionary conditions. Economic concerns and issues
such as reduced access to capital for businesses or tariffs may cause the Company’s customers to delay or reduce purchases
of the Company’s products. Given the continued uncertainty concerning the global economy, the Company also faces risks
that may arise from financial difficulties experienced by suppliers and customers, such as an inability to collect receivables or
the continued operation of suppliers. Global or local events, such as terrorist attacks, political insurgencies, electrical grid
disruptions and outages, and pandemics including further spread of the coronavirus could also disrupt our operations, the
operations of our suppliers and customers, or result in economic instability.

The Company’s AMS segment focuses primarily on customers in the aerospace industry, and its DTX segment
focuses primarily on customers in the automotive industry. The aerospace and automotive industries have experienced
volatility in prior years in a manner similar to or greater than the global economy generally. If either or both these industries
experiences difficulties that reduce demand for their products generally, the Company’s results of operations, financial
condition and prospects would suffer.

The Company conducts a global business that exposes it to additional risks.

The Company conducts business throughout the world, including in the United States, Europe, India and

China. These international operations create a variety of risks and uncertainties, including:

•

rapid changes in government, economic and political policies and conditions, political or civil unrest or instability,
terrorism or epidemics including the coronavirus;

fluctuations in foreign currency exchange rates;

compliance with and changes in foreign laws and regulations, as well as U.S. laws affecting the activities of U.S.
companies abroad, including the Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”);

different, complex and changing laws governing intellectual property rights, sometimes affording companies lesser
protection in certain areas;

longer accounts receivable payment cycles and difficulties in collecting accounts receivable; and

protectionist laws, tariffs and business practices that favor local producers.

The occurrence of any one of these risks could negatively affect the Company’s international business and,

consequently, its results of operations generally.

The Company faces risks related to sales through distributors and other third parties.

A significant portion of the Company’s sales, including nearly all sales of its Chromaline products, were conducted
through third parties. Using third parties for distribution exposes the Company to many risks, including competitive pressure,
concentration, credit risk and compliance risks. Distributors may sell products that compete with the Company’s products,
and the loss of a distributor could reduce the Company’s revenue. Distributors may face financial difficulties, including
bankruptcy, which could harm the Company’s collection of accounts receivable and financial results. Violations of the FCPA
or similar laws by distributors or other third-party intermediaries could have a material impact on the Company’s
business. Failing to manage risks related to the Company’s use of distributors may reduce sales, increase expenses, and
weaken its competitive position.

Increases in prices and declines in the availability of raw materials could negatively impact the Company’s financial
results.

Certain raw materials needed to manufacture products are obtained from a limited number of suppliers and many of
the raw materials are petroleum-based. Under normal market conditions, these raw materials are generally available on the
open market from a variety of producers. While alternate supplies of most key raw materials are available, supplier
production outages may lead to strained supply-demand situations for certain raw materials. The substitution of key raw
materials could require the Company to identify new supply sources, or reformulate and retest products or processes. From
time to time, the prices and availability of these raw materials may fluctuate, which could impair the Company’s ability to
procure necessary materials, or increase the cost of manufacturing products. If the prices of raw materials increase in a short
period of time, the Company may be unable to pass these increases on to its customers in a timely manner or at all, which
could reduce its gross margins. Like most companies in the Company’s industries, the Company does not have long-term
supply contracts for most of its key raw materials, which exacerbates the foregoing risks to the Company.

If any of the Company’s current single or limited source suppliers become unavailable or inadequate, its customer
relationships, results of operations and financial condition may be adversely affected.

The Company acquires certain of its materials that are critical to its operations from a limited number of third
parties. Should any of the Company’s current single or limited source suppliers become unavailable or inadequate, or impose
terms unacceptable to the Company such as increased pricing terms, the Company could be required to spend a significant
amount of time and expense to develop alternate sources of supply, and may not be successful in doing so on acceptable
terms or at all. If the Company is unable to find a suitable supplier for a particular material, it could be required to modify
its existing business processes or offerings to accommodate the situation. As a result, the loss of a single or limited source
supplier could adversely affect the Company’s relationship with its customers and its results of operations and financial
condition.

The Company depends on one manufacturer to make and sell DTX printers. If the manufacturer ceased to make or sell
DTX printers, or failed to meet quality standards, the Company’s financial results and prospects would be adversely
affected.

The Company relies on one company to manufacture and sell DTX printers. If the manufacturer ceased to produce
or devote resources to selling DTX printers, due to a change in company strategy, to focus on alternative initiatives, or for
any other reason, the Company would need to find an alternative manufacturer and seller of DTX printers. Finding an
alternative manufacturer and seller of DTX printers could result in additional costs and delays in growing the Company’s
DTX business unit, which would adversely affect the Company’s financial results and prospects.

In addition, if these manufacturers failed to produce DTX printers that satisfy the Company’s quality standards, the
Company’s reputation with end users could be harmed and the Company could be forced to find a new manufacturer. Either
of these results also would harm the Company’s business and prospects.

The inability to attract and retain qualified personnel could adversely impact the Company’s business.

Sustaining and growing the Company’s business depends on the recruitment, development and retention of qualified
employees, including management and research and development personnel. The inability to recruit and retain key personnel
or the unexpected loss of key personnel may adversely affect the Company’s operations.

We heavily rely on our information technology systems and are vulnerable to damage and interruption.

The Company relies on our information technology systems and infrastructure to process transactions and manage
its business, including maintaining employee, client and supplier information. The Company has also engaged third
parties, including cloud providers, to store, transfer and process data. The information technology systems, as well as the
systems of our customers, suppliers and other partners, are vulnerable to outages and an increasing risk of deliberate
intrusions to gain access to and exploit company sensitive information. Similarly, data security breaches by employees
and others with or without permitted access to the Company's systems pose a risk that sensitive data may be exposed to
unauthorized persons or to the public. The Company may be unable to prevent outages or security breaches in its systems
that could adversely affect results of operations and cause reputational harm.

The Company’s operating results and financial condition may fluctuate on a quarterly and annual basis.

The Company’s operating results and financial condition may fluctuate from quarter to quarter and year to year,
and could vary due to a number of factors, some of which are outside of the Company’s control. In addition, the
Company’s actual or projected operating results may fail to match its past performance. The Company’s operating results
and financial condition may fluctuate due to a number of factors, including those listed below and those identified
throughout this “Risk Factors” section:

•

the failure of the Company’s new products to meet expectations;

changes to the costs of raw materials, especially petroleum-based materials;

the entry of new competitors into the Company’s markets whether by established companies or by new companies;

the geographic distribution of the Company’s sales;

changes in customer preferences or needs;

changes in the amount that the Company invests to develop or acquire new technologies;

delays between the Company’s expenditures to develop new technologies and products and the generation of sales
related thereto;

protectionist laws and tariffs implemented by foreign governments to favor local producers;

a prolonged United States Federal or State government shutdown;

changes in the Company’s pricing policies or those of its competitors;

changes in accounting rules and tax and other laws; and

general economic and industry conditions that affect customer demand and product development trends.

Due to all of the foregoing factors and the other risks discussed in this “Risk Factors” section, you should not rely
on quarter-to-quarter or year-to-year comparisons of the Company’s operating results as an indicator of future performance.

Risks Related to Our Common Stock

An active trading market for the Company’s shares of common stock may not develop.

The Company’s common stock has been listed for trading on the Nasdaq Capital Market since 1999 and persistently
has experienced limited trading volume. There can be no assurance that an active public market for the Company’s shares
will develop or be sustained. The lack of an active trading market could adversely affect the price and liquidity of the
Company’s common stock.

The Company’s directors and officers own a large percentage of the Company’s common stock, which may allow them to
collectively exert significant influence over substantially all matters requiring shareholder approval.

As of December 31, 2020, the Company’s directors and officers collectively beneficially owned approximately
14.2% of its common stock outstanding as of that date. As a result, the Company’s directors and officers could exert
significant influence over all matters requiring a shareholder vote, including the election of directors, amendments to the
Company’s articles of incorporation, and extraordinary transactions such as mergers or going private transactions. These
ownership positions may have the effect of delaying, deterring or preventing a change in control or a change in the
composition of the Company’s board of directors. In addition, substantial sales of shares beneficially owned by our directors
or officers could be viewed negatively by third parties and have a negative impact on the Company’s stock price.

The price of the Company’s common stock may fluctuate significantly.

The price of the Company’s common stock has, and could continue to, fluctuate substantially in a short period of

time. The price of the Company’s common stock could vary for many reasons, including the following:

•

future announcements concerning the Company or its competitors;

introduction of new products by the Company or its competitors, or the failure of the Company’s new products to
meet expectations;

the commencement of, or developments to, litigation involving the Company;

quarterly variations in operating results, which the Company has experienced in the past and expects to experience
in the future;

business acquisitions or divestitures; or

changes to the global economy in general, and the aerospace and automotive markets in particular.

In addition, stock markets in general have experienced price and volume fluctuations in recent years, fluctuations
that sometimes have been unrelated to the operating performance of the affected companies. These broad market fluctuations
may adversely affect the market price of the Company’s common stock. The market price of the Company’s common stock
could decline below its current price and the market price of the Company’s shares may fluctuate significantly in the
future. These fluctuations may be unrelated to the Company’s performance.

Item 1B. Unresolved Staff Comments

None

Item 2. Property

The Company primarily conducts its operations in Duluth, Minnesota. The administrative, sales, research and
development, quality and most of the manufacturing activities are housed in a 60,000 square-foot, four-story building,
including a basement level. The building is approximately eighty years old and the Company believes it has been maintained
in good condition. The Company also utilizes a 5,625 square-foot warehouse adjacent to the existing plant building that was
constructed in 1997. These facilities are owned by the Company with no existing liens or leases. The Company also owns
an approximately 11-acre property with a 62,300 square-foot manufacturing and warehouse facility. The 62,300 square-foot
facility is comprised of a 35,000 square-foot warehousing and manufacturing facility constructed in 2008 and a 27,300 square-
foot expansion completed in 2016 to accommodate the Company’s AMS business. The entire facility on the 11-acre property
is collateral on the Company’s $3.4 million loan.

Item 3. Legal Proceedings

None.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s Common Stock is traded on the Nasdaq Capital Market under the symbol "IKNX."

As of February 26, 2021, the Company had 54 holders of record. The Company has not declared cash dividends in
the past two years and does not currently have plans to pay any cash dividends in the future. Any future declaration and
payment of dividends is within the sole discretion of the Company’s board of directors.

Recent Sales of Unregistered Equity Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Item 6. Selected Financial Data

Not applicable

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management discussion and analysis focuses on those factors that had a material effect on the
Company’s financial results of operations and financial condition during 2020 and 2019 and should be read in conjunction
with the Company’s audited financial statements and notes thereto for the years ended December 31, 2020 and 2019, included
herein.

Impact of the COVID --19 Pandemic

The Company is closely monitoring the novel strain of coronavirus (COVID-19) pandemic and the 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 efforts to contain the
spread of COVID-19, federal, 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 twelve months ended December 31, 2020. The Company anticipates a decrease in global
demand for its products and services will continue in 2021 and beyond. This significant decrease in demand will likely have
a material adverse impact on the Company's business, operating results and financial condition. 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 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
continues 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” above. To partially mitigate the negative impact of the COVID-19 pandemic, the Company
implemented cost reduction efforts including reducing the Company's workforce by approximately 30%, 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.

Critical Accounting Policies and Estimates

The Company prepares its financial statements in conformity with generally accepted accounting principles 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 policies and estimates which IKONICS believes are the most critical
to aid in fully understanding and evaluating its reported financial results include the following:

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 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 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.

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 warranties. 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 29.7% of total sales in 2020 and 29.4% of total
sales in 2019.

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 basis. 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.

Results of Operations

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Sales. Sales decreased 23.8% in 2020 to $13.4 million from $17.6 million in 2019 due to the slowdown in economic
activity related to the COVID-19 pandemic. Chromaline 2020 sales of $8.5 million decreased by 26.1% from the 2019 sales
of $11.5 million. IKONICS Imaging 2020 sales of $3.7 million were $482,000, or 11.5%, lower than 2019 sales. AMS sales
decreased from $1.6 million in 2019 to $952,000 in 2020, a 39.0% decrease. DTX sales also decreased in 2020 from
$394,000 in 2019 to $295,000 in 2020. IKONICS anticipates that the COVID-19 outbreak will continue to adversely
impact sales in all of its divisions for most of 2021 due to decreasing demand for its products and services.

Gross Profit. Gross profit was $3.9 million, or 29.1% of sales, in 2020 compared to $5.4 million, or 30.6%, of
sales in 2019. Lower sales and production volume, resulted in the Chromaline gross margin decreasing from 26.9% in
2019 to 26.6% in 2020. A decrease in sales volumes also resulted in the AMS gross margin decreasing to a negative 25.1%
in 2020 from 10.3% in 2019. 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 2020 gross margin improved from 45.8% in 2019 to 46.8% in 2020 as a
more favorable sales mix offset the negative impact of lower sales and production volumes while the DTX gross margin
decreased from 60.0% in 2019 to 52.2% in 2020. IKONICS anticipates that the COVID-19 outbreak will continue
to adversely impact gross margins for most of 2021 due to lower sales volumes and production output.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $5.0 million, or
37.4% of sales, in 2020 compared to $5.5 million, or 31.1% of sales, in 2019. Selling, general and administrative expenses
in 2020 decreased primarily from the Company's cost reduction initiative resulting in fewer personnel, travel, trade show,
and promotional expenses. These cost savings were partially offset by the one-time expense incurred in 2020 of
$365,000 related to the Chief Executive Officer transition. The transition costs include severance payments to the former
CEO, a signing bonus, relocation expenses and executive search consulting expenses.

Research and Development Expenses. Research and development expenses for 2020 were $671,000, or 5.0% of
sales, versus $870,000, or 4.9%, of sales in 2019. Research and development expenses in 2019 were unfavorably impacted
by a $93,000 write off of patent application costs that were previously recorded as an asset as the Company determined that
it would no longer continue to pursue those patent applications. Research and Development expenses in 2020 were also
lower due to staffing reductions or other cost reduction efforts

Interest Expense. Interest expense for 2020 and 2019 was $87,000 and $90,000, respectively.

Other Income. Other Income for 2020 was $1.2 million due to forgiveness of its Paycheck Protection, or PPP, loan
under the CARES Act compared to $61,000 in 2019. On April 18, 2020, the Company executed a promissory note in favor
of BMO Harris Bank evidencing an unsecured loan in the aggregate principal amount of $1,214,500, which was made
pursuant to the PPP. The PPP was established under the CARES Act, which was enacted on March 27, 2020, and is
administered by the U.S. Small Business Administration, or the SBA. All the funds under the loan were disbursed to the
Company on April 22, 2020. The Company used all proceeds from the loan to retain employees, maintain payroll and make
utility payments. Under the initial terms of the CARES Act, loan recipients could apply for and be granted forgiveness for
all or a portion of the loans granted under the PPP. During the fourth quarter of 2020, the Company submitted an application
for 100% forgiveness of the PPP Loan and upon approval by the SBA and the Lender, the Company received forgiveness for
100% of the $1,214,500 loan.

Income Taxes. For 2020, the effective tax rate was a benefit of 32.3%, compared to a benefit of 17.5% for 2019. The
primary driver of the change in the Company’s effective tax rate is attributable to a tax benefit in the current period to
recognize a net operating loss carryback claim. The Company recorded an income tax benefit of $210,000 and $172,000 for
2020 and 2019, respectively.

Liquidity and Capital Resources

Outside of the 2016 building expansion, for which $3.4 million in financing was obtained, and the PPP loan, 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 $3.7 million and $964,000 as of December 31, 2020 and 2019, respectively. In
addition to its cash, the Company held $2.2 million of short-term investments as of December 31, 2019. There were no short-
term investments as of December 31, 2020. The Company used $399,000 in cash from operating activities during 2020,
compared to using $477,000 of cash from operating activities in 2019. Cash provided by operating activities is primarily the
result of the net loss adjusted for non-cash depreciation and amortization, deferred taxes, loan forgiveness and certain changes
in working capital components discussed in the following paragraph.

During 2020, trade receivables decreased by $316,000. This decrease was due primarily to a slowdown in sales of
products and services in 2020 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 decreased
by $536,000 as the Company tightened inventory levels in response to the decrease in demand for its products. Prepaid
expenses and other assets decreased by $781,000 reflecting a decrease in a receivable related to the reimbursement of 2019
medical insurance costs the Company received from its stop-loss insurance carrier. Accrued expenses decreased by $592,000,
reflecting a decrease in the accrual for health insurance costs. Accounts payable decreased by $302,000 due to the Company's
costs reduction efforts and a reduction in raw material purchases in anticipation of lower sales volume. Income taxes
receivable increased by $218,000 as the Company recognized an income tax benefit attributable to a net operating loss
carryback claim.

increased

$134,000 mainly

During 2019, an increase in sales during the fourth quarter of 2019 resulted in a $220,000 trade receivables
Imaging
increase. Inventories
equipment inventory compared to 2018. Accounts payable increased from 2018 to 2019 by $114,000 due to the timing of
payments to and purchases from vendors. Prepaid expenses and other assets increased $532,000 from 2018 to 2019. The
increase is mainly due to a receivable related to the reimbursement of 2019 medical insurance costs that the Company will
receive from its stop-loss insurance carrier. Compared to 2018, accrued expenses increased $513,000 reflecting an increase
in accrued medical insurance costs. Income taxes receivables decreased $1,000 due to the timing of estimated 2019 tax
payments compared to the calculated 2019 tax liability.

IKONICS

higher

levels

due

During 2020, cash provided by investing activities was $2.1 million. Nine certificates of deposits totaling $2.2
million matured during the year. The Company's purchases of equipment of $150,000 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
vehicle. Also, during 2020, the Company incurred $15,000 in patent application costs that the Company records as an asset
and amortizes upon successful completion of the application process.

During 2019, cash provided by investing activities was $8,000. The Company purchased seventeen certificates of
deposits totaling $5.6 million. Twenty two certificates of deposits totaling $6.1 million matured during 2019. The
Company’s purchases of property and equipment of $478,000 in 2019 were mainly for improvements to production and
process capabilities and to replace two vehicles. The Company received $16,000 in proceeds from the sale of two vehicles
and equipment. Also, during 2019, the Company incurred $20,000 in patent application costs that the Company records as
an asset and amortizes upon successful completion of the application process.

For 2020, net cash provided by investing activities was $1.1 million compared to $190,000 of cash used in financing
activities during 2019. The $1.2 million proceeds from debt in 2020 reflects the receipt of the PPP loan discussed
below. Related to the Company's financing agreement, the Company made principal payments of $144,000 and $140,000
during 2020 and 2019, respectively. During 2019, the Company purchased 7,199 shares of its own stock for $50,000.

On April 18, 2020, the Company entered into a loan pursuant to the Paycheck Protection Program under the CARES
Act, as administered by the U.S. Small Business Administration (the “SBA”). The loan, in the principal amount of
$1,214,500 (the “PPP Loan”), was disbursed by BMO Harris Bank National Association (“Lender”) on April 22, 2020,
pursuant to a Paycheck Protection Program Promissory Note and Agreement (the “Note and Agreement”).

Under the initial terms of the PPP Loan, the loan would have matured on the two-year anniversary of the funding
date, with interest at a fixed rate of 1.00% per annum. Monthly principal and interest payments, less the amount of any
potential forgiveness (discussed below), would commence after the six-month anniversary of the funding date. The
Company did not provide any collateral or guarantees in connection with the PPP Loan, nor did the Company pay any
facility charge to obtain the PPP Loan. The Note and Agreement provided for customary events of default, including those
relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company
could have prepaid the principal of the PPP Loan at any time without incurring any prepayment charges. All or a portion
of the PPP Loan was eligible to be forgiven by the SBA and the Lender upon application by the Company. During the
fourth quarter of 2020, the Company submitted an application for 100% forgiveness of the PPP Loan. Prior to end of 2020,
both the Lender and the SBA forgave 100% of the Company's PPP loan.

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 $144,000 and $140,000 during 2020 and 2019, respectively.

The Company is subject to certain customary covenants set forth in the Loan, including a requirement that the
Company maintain a debt service coverage ratio of not less than 1.25 to 1.00. As of December 31, 2020 the Company was
in compliance with the debt service coverage ratio loan covenant, however, as of December 31, 2019 the Company was out
of compliance with the debt service coverage ratio but obtained a waiver for the covenant violation. There is no certainty
that a waiver can be obtained in the future if similar violations occur. The Company amended the covenant terms in
February of 2020 to change the debt service coverage ratio calculation from a rolling quarterly calculation to an annual
calculation beginning December 31, 2020. If the Company has future violations of its covenants, and is unable to obtain
appropriate waivers, it could have a significant adverse effect on the Company's liquidity. Subsequent to December
31, 2020, the Company was notified by the bank that per the loan agreement the bank will recall the loan on April 1,

2021. The Company believes that any adverse effect of the loan recall is mitigated by its strong working capital including
cash and cash equivalents of $3.7 million along with the Company's $2.0 million available line of credit as of December
31, 2020. 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 coronavirus (COVID-19) pandemic.

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 2020 or 2019, and there were no borrowings outstanding as of December
31, 2020 or December 31, 2019. There are no financial covenants related to the line of credit, and the Company expects that
it will secure a similar line of credit when the current line of credit expires.

The Company believes that current financial resources, its line of credit, and cash 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 operations. However, the full extent of 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 Company’s operating results will depend on future developments, which
are highly uncertain and cannot be predicted, including governmental and business reactions to the pandemic.

Capital Expenditures

In 2020, the Company incurred $150,000 of capital expenditures mainly for improvements to production and process
capabilities and to replace a vehicle. In 2019, the Company incurred $478,000 of capital expenditures which were mainly
for improvements to production and process capabilities and to replace two vehicles.

The Company expects capital expenditures in 2021 of approximately $220,000. The planned expenditures primarily
will be to upgrade some of the Company's production and research equipment. These commitments are expected to be funded
with cash generated from operating activities or cash on hand.

International Activity

The Company markets its products in numerous countries in various regions of the world, including North America,
Europe, Latin America, and Asia. The Company’s 2020 foreign sales of $4.0 million were approximately 29.7% of total
sales, compared to the 2019 foreign sales of $5.2 million, which were 29.4% of total sales.

The Company’s foreign transactions are primarily negotiated, invoiced and paid in U.S. dollars, though a portion is
transacted in Euros. IKONICS has not implemented an economic hedging strategy to reduce the risk of foreign currency
translation exposures, which management does not believe to be significant 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 2020 or 2019.

Future Outlook

See the discussion under the heading “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% 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 anticipates reduced order volume for 2021 due to the COVID-19 pandemic.

Both the Chromaline and IKONICS Imaging units operate 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.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not applicable

Item 8. Financial Statements

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of IKONICS Corporation

Opinion on the Financial Statements
We have audited the accompanying balance sheets of IKONICS Corporation (the Company) as of December 31, 2020 and
2019, the related statements of operations, stockholders' equity and cash flows for the years then ended, and the related notes
to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in
all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations
and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States
of America.

Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the
Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial
reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures
that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.
The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a
whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit
matter or on the accounts or disclosures to which they relate.

Liquidity
As discussed in Note 1 to the financial statements, the Company experienced a significant decrease in sales activity due to
the COVID-19 pandemic, and the future financial impact and duration is difficult to estimate at this time. As a result of the
decrease in sales activity, the Company executed a plan to mitigate the impact of COVID-19, which included permanent
reductions to the Company’s workforce, reductions in board and officer compensation, and elimination of all non-essential
expenditures. The impact of COVID-19 on the Company’s operating results will depend on future developments, which are
highly uncertain and are difficult to predict, including governmental and business reactions to the pandemic. Managements’
liquidity analysis involves an assessment of future operating results, which involves subjective assumptions related to sales
levels, margins, and expenses. Managements’ liquidity analysis also involves an assessment of the ability to fund cash flow
needs from financing activities.

We identified the Company's liquidity disclosure as a critical audit matter due to certain significant assumptions management
makes in the estimate, including future sales, margin and payroll expense projections. Auditing management's assumptions
of future sales, margin, and payroll expense projections, involved a high degree of auditor judgement and increased audit
effort to evaluate management's conclusion that it is probable the Company's operations will provide adequate cash flow to
fund the Company's obligations.

Our audit procedures related to the auditor’s evaluation of the Company’s liquidity included the following, among others:

● We evaluated the reasonableness of management’s assessment of the sufficiency of the Company’s current cash
position in comparison to management’s estimate of expected future cash flows and other operating and
investing needs.

● We evaluated the reasonableness of significant assumptions related to management’s future projections
including revenue projections, margins, and expenses by comparing forecasts to historical results, review of
recent trends, review of interim financial information, and discussions with management personnel.

● We evaluated the sufficiency of the Company’s plans to mitigate the impact of COVID-19 including
management’s estimate of costs reductions by review of recent trends, review of interim financial information,
and discussions with management personnel.

/s/ RSM US LLP

We have served as the Company's auditor since 2002.

Minneapolis, Minnesota
March 3, 2021

IKONICS CORPORATION

BALANCE SHEETS
DECEMBER 31, 2020 AND 2019

ASSETS

CURRENT ASSETS:

December 31, December 31,

2020

2019

Cash and cash equivalents ........................................................................................... $
Short-term investments ................................................................................................
Trade receivables, less allowance of $55,000 in 2020 and $58,000 in 2019 ...............
Inventories, net ............................................................................................................
Prepaid expenses and other assets ...............................................................................
Income taxes receivable ...............................................................................................
Total current assets...................................................................................................

3,693,845 $
—
2,119,213
1,644,975
125,969
219,451
7,803,453

963,649
2,205,000
2,434,718
2,180,536
906,916
1,369
8,692,188

PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land and building ...........................................................................................................
Machinery and equipment ...............................................................................................
Office equipment .............................................................................................................
Vehicles ...........................................................................................................................

Less accumulated depreciation ........................................................................................
Total property, plant and equipment at cost, net ......................................................

9,556,586
5,263,586
1,417,219
245,674
16,483,065
(9,094,702 )
7,388,363

9,556,984
5,198,784
1,402,369
245,674
16,403,811
(8,487,827 )
7,915,984

PATENTS, less accumulated amortization of $207,399 in 2020 and $181,609
in 2019 .........................................................................................................................
Total assets ...................................................................................................................... $

243,583
15,435,399 $

271,369
16,879,541

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

Current portion of long-term debt ................................................................................ $
Accounts payable .........................................................................................................
Accrued compensation ................................................................................................
Other accrued liabilities ...............................................................................................
Total current liabilities .............................................................................................

2,688,396 $
459,836
279,755
168,066
3,596,053

133,287
761,641
382,303
657,255
1,934,486

LONG-TERM LIABILITIES

Long-term debt, less current portion ............................................................................
Total liabilities .........................................................................................................

—
3,596,053

2,688,357
4,622,843

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 1,976,354 shares in 2020 and 2019 .........................................................
Additional paid-in-capital ...............................................................................................
Retained earnings ............................................................................................................
Total stockholders' equity ...............................................................................................
Total liabilities and stockholders' equity .................................................................. $

—

197,635
2,743,930
8,897,781
11,839,346
15,435,399 $

197,635
2,721,962
9,337,101
12,256,698
16,879,541

See notes to financial statements.

IKONICS CORPORATION

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2020 AND 2019

Year Ended
December 31,

2020

2019

NET SALES ................................................................................................................... $

13,432,220 $

17,618,559

COST OF GOODS SOLD .............................................................................................

9,527,143

12,221,370

GROSS PROFIT ............................................................................................................

3,905,077

5,397,189

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .................................

5,019,604

5,483,586

RESEARCH AND DEVELOPMENT EXPENSES ......................................................

671,493

870,279

LOSS FROM OPERATIONS ........................................................................................

(1,786,020 )

(956,676 )

INTEREST EXPENSE ..................................................................................................

(86,561 )

(90,058 )

OTHER INCOME ..........................................................................................................

1,223,261

61,176

LOSS BEFORE INCOME TAXES ...............................................................................

(649,320 )

(985,558 )

INCOME TAX BENEFIT .............................................................................................

(210,000 )

(172,000 )

NET LOSS ..................................................................................................................... $

(439,320 ) $

(813,558 )

LOSS PER COMMON SHARE
Basic ............................................................................................................................... $
Diluted ............................................................................................................................ $

(0.22 ) $
(0.22 ) $

(0.41 )
(0.41 )

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

Basic ...........................................................................................................................
Diluted ........................................................................................................................

1,976,354
1,976,354

1,980,253
1,980,253

See notes to financial statements.

IKONICS CORPORATION

STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2020 AND 2019

Common Stock

Additional
Paid-in
Amount Capital

Total
Stock-
Retained holders’
Earnings Equity

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

Net loss .........................................................
Common stock repurchased ..........................
Stock based compensation ............................

—
(7,199)
—

—
(720)
—

—
(9,883 )
8,821

(813,558)
(38,992)
—

(813,558)
(49,595)
8,821

BALANCE AT DECEMBER 31, 2019 ............... 1,976,354

197,635 2,721,962 9,337,101 12,256,698

Net loss .........................................................
Stock based compensation ............................

—
—

—
21,968

(439,320)
—

(439,320)
21,968

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

See notes to financial statements.

IKONICS CORPORATION

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2020 AND 2019

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss ........................................................................................................................ $
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation .............................................................................................................
Amortization ............................................................................................................
Stock based compensation .......................................................................................
Forgiveness on paycheck protection loan .................................................................
Net gain on sale and disposal of equipment .............................................................
.................................................................................................................................
Deferred income taxes
Abandonment of patents ..........................................................................................
Changes in operating assets and liabilities:

Trade receivables ..................................................................................................
Inventories ............................................................................................................
Prepaid expenses and other assets ........................................................................
Income tax receivable ...........................................................................................
Accounts payable .................................................................................................
Accrued expenses .................................................................................................
Net cash used in operating activities .................................................................

Year Ended
December 31,

2020

2019

(439,320) $

(813,558)

661,565
36,489
21,968
(1,214,500)

(2,325)
—
16,906

315,505
535,561
780,947
(218,082)
(301,805)
(591,737)
(398,828)

639,997
43,014
8,821
—

(8,482)
(183,000)
92,833

(219,503)
(133,948)
(531,554)
1,399
114,113
512,837
(477,031)

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment ..........................................................................
Proceeds from sales of equipment
Purchases of patents .....................................................................................................
Purchases of short-term investments ...........................................................................
Proceeds on sale of short-term investments .................................................................
Net cash provided by investing activities ..........................................................

(149,916)
18,297
(14,910)
—
2,205,000
2,058,471

(478,353)
15,596
(19,665)
(5,635,000)
6,125,000
7,578

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from paycheck protection program loan ......................................................
Principal payments on long-term debt .........................................................................
Repurchase of common stock ......................................................................................
Net cash provided by (used in) financing activities ..........................................

1,214,500
(143,947)
—
1,070,553

—
(140,440)
(49,595)
(190,035)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................

2,730,196

(659,488)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .............................

963,649

1,623,137

CASH AND CASH EQUIVALENTS AT END OF YEAR ........................................... $

3,693,845 $

963,649

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid for interest ................................................................................................... $
Cash paid for income taxes, net ................................................................................... $

75,227 $
8,082 $

79,008
9,457

See notes to financial statements.

IKONICS CORPORATION

NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Foreign Export Sales - IKONICS Corporation’s (the Company or IKONICS) traditional
business has been the development and manufacturing of high-quality photochemical imaging systems for sale primarily
to a wide range of printers and decorators of surfaces. Customers’ applications are primarily screen printing and abrasive
etching. These sales have been augmented with inkjet receptive films, ancillary chemicals and related equipment to
provide a full line of products and services to its customers. Leveraging these technologies the Company is also
diversifying and expanding its business to industrial markets. These efforts also include the Company’s Advanced Material
Solutions (AMS) business unit which uses the Company’s proprietary process and photoresist film for the abrasive etching
of composite materials, industrial ceramics, silicon wafers, and glass wafers. The customer base for AMS is primarily the
aerospace and electronics industries. Based on its expertise in ultraviolet curable fluids and inkjet receptive substrates, the
Company has also developed a patented digital texturing technology (DTX) for putting patterns and textures into steel
molds for the plastic injection molding industry. The original equipment manufacturer (“OEM”) for the Company’s DTX
technology is primarily the automotive industry. Industrial inkjet printers, which are integral to the DTX system, are
manufactured and sold by a strategic partner. The Company’s business plan is to sell a suite of products including
consumable fluids and transfer films. For most markets these sales are direct to the mold maker. The DTX technology is
being expanded to prototyping where the Company’s technology offers a unique combination of high definition and large
format prints. The Company’s principal markets include the United States, Europe, Latin America, Asia, and other parts
of the world. The Company extends credit to its customers, all on an unsecured basis, on terms that it establishes for
individual customers.

The full extent of the effect of the COVID-19 pandemic on the Company’s customers, supply chain and business is difficult
to assess at this time although the Company's 2020 results of operations were adversely affected. The Company has
developed a plan to mitigate the impact of COVID-19 which includes the implementation of a series of specific and
identified cost reductions, in addition to actions already taken, including further reducing its direct and indirect operating
costs. The impact of COVID-19 on the Company’s operating results will depend on future developments, which are highly
uncertain and difficult to predict, including governmental and business reactions to the pandemic.

Based on the Company’s current cash position, and expected future cash flows, the Company believes it will have
sufficient cash to repay its entire $2.7 million loan and continue to fund its operations beyond twelve months from the
date of the issuance of the financial statements

The Company has evaluated subsequent events occurring after the date of the financial statements for events requiring
recording or disclosure in the financial statements. As a result of the novel strain of COVID-19 pandemic effect on the
Company’s business as well as the businesses of its customers and suppliers, a significant decline in the Company’s
business has occurred and that decline is expected to continue. Although the Company continues to operate, the Company
has experienced a significant decrease in sales activity, and the future financial impact and duration is difficult to
reasonably estimate at this time.

Foreign sales approximated 29.7% and 29.4% of net sales in 2020 and 2019, respectively. Foreign receivables are
comprised primarily of open credit arrangements with terms ranging from 30 to 90 days. No single customer or foreign
country represented greater than 10% of net sales in 2020 or in 2019.

The Company considers events or transactions that occur after the balance sheet date but before the financial statements
are issued to provide additional evidence relative to certain estimates or to identify matters that require additional
disclosure.

A summary of the Company’s significant accounting policies follows:

Cash Equivalents — The Company considers all highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents. Cash equivalents consist of money market funds in which the carrying value approximates
fair value because of the short maturity of these instruments. The money market fund invests in United States dollar
denominated securities that present minimal credit risk and consist of investments in debt securities issued or guaranteed
by the United States government or by United States government agencies or instrumentalities, repurchase agreements
fully collateralized by the United States Treasury, and United States government securities. The Company maintains its
cash balances primarily in two financial institutions. As of December 31, 2020, the balance at both institutions exceeded
the Federal Deposit Insurance Corporation coverage.

Short-Term Investments — Short-term investments consist of fully insured certificates of deposit with original maturities
ranging from three to six months as of December 31, 2019. There were no short-term investments at December 31, 2020.

Inventories — Inventories are stated at the lower of cost or net realizable value using the last-in, first-out (LIFO)
method. If the first-in, first-out (FIFO) cost method had been used, inventories would have been approximately
$1,173,000 and $1,356,000 higher than reported at December 31, 2020 and 2019, respectively. Inventory quantities were
reduced during 2020, resulting in a liquidation of LIFO inventory layers (a "LIFO decrement"). A LIFO decrement results
in the erosion of layers created in earlier years, and, therefore, a LIFO layer is not created for years that have
decrements. The Company had a decrement of its LIFO inventory layers of approximately $116,000 in 2020. There was
no LIFO decrement in 2019. The inventory reserve for obsolescence was $13,000 and $12,000 at December 31, 2020 and
2020, respectively. The major components of inventories, net of inventory reserve, are as follows:

Dec 31, 2020 Dec 31, 2019

Raw materials ........................................................................................................... $
Work-in-progress .....................................................................................................
Finished goods..........................................................................................................
Reduction to LIFO cost ............................................................................................

1,323,655 $
428,753
1,065,458
(1,172,891)

1,667,154
419,906
1,449,854
(1,356,378)

Total Inventories ............................................................................................... $

1,644,975 $

2,180,536

Property, Plant and Equipment — Major expenditures extending the life of the property, plant and equipment are
capitalized. Repair and maintenance costs are expensed in the period in which they are incurred. Depreciation of property,
plant and equipment is computed using the straight-line method over the following estimated useful lives:

Buildings ................................................................................................................................................
Machinery and equipment ......................................................................................................................
Office equipment ....................................................................................................................................
Vehicles ..................................................................................................................................................

Years

15-40
5-10
3-10
3

Patents — Patents are amortized on a straight-line basis over their estimated useful lives or agreement terms. As of
December 31, 2020, the Company's patents had a remaining estimated weighted average useful life of 8.5 years.

Impairment of Long-lived Assets — The Company reviews its long-lived assets, including property, plant and equipment
and patents, for impairment when indicators of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets’ carrying amount. Any impairment loss recorded is measured as the
amount by which the carrying value of the assets exceeds the fair value of the assets. To date, the Company has determined
that no loss on impairment of long-lived assets exists.

Fair Value of Financial Instruments — The carrying amounts of financial instruments, including cash and cash
equivalents, short-term investments, trade receivables, accounts payable, and accrued liabilities approximate fair value
due to the short maturities of these instruments. The fair value of long-term debt approximates its carrying value and has
been estimated based on interest rates being offered for similar debt having the same or similar remaining maturities and
collateral requirements.

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 from revenue governmental assessed and imposed taxes on revenue transactions that are invoiced
to customers. 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 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 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.

Trade receivables. Trade receivables include amounts invoiced and currently due from customers and are financial
instruments that also expose the Company to concentration of credit risk. The large number of customers comprising the
Company’s customer base and their dispersion across different geographic areas limits such exposure. 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 and adequately provide for credit losses. 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. 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. Foreign currency transactions and translation adjustments did not have a significant effect on the Balance
Sheets, the Statements of Operations, Stockholders’ Equity or Cash Flows for 2020 and 2019.

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 recognizes 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 warranties. 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 29.7% and 29.4% of total sales in 2020 and
2019, respectively.

Deferred 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 basis. 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. The Company
classifies deferred tax assets and liabilities as noncurrent. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.

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.

Earnings Per Share (EPS) — Basic EPS is calculated using net income (loss) divided by the weighted average of common
shares outstanding. Diluted EPS is similar to Basic EPS except that the weighted average number of common shares
outstanding is increased to include the number of additional common shares, when dilutive, that would have been
outstanding if the potential dilutive common shares, such as those shares subject to options, had been issued.

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

Dec 31, 2020 Dec 31, 2019

Weighted average common shares outstanding ......................................................
Dilutive effect of stock options and restricted stock units ......................................
Weighted average common and common equivalent shares outstanding ..............

1,976,354
—
1,976,354

1,980,253
—
1,980,253

If the Company was in a net income position at December 31, 2020, all 17,500 options outstanding with a weighted
average exercise price of $6.97 would have remained excluded from the computation of weighted average common and
common equivalent shares outstanding as the options were anti-dilutive.

Restricted stock units of approximately 54,300 shares for the year-end December 31, 2020 would have remained excluded
from the computation of weighted average common and common equivalent shares outstanding as they were anti-dilutive
due to the amount of weighted-average unrecognized compensation related to these grants.

At December 31, 2019, options to purchase 19,250 shares of common stock with a weighted average exercise price of
$11.32 were outstanding, but were excluded from the computation of common share equivalents because they were anti-
dilutive.

Employee Stock Plan - The Company accounts for employee stock options under the provision of ASC 718, Compensation
— Stock Compensation.

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.

Use of Estimates — The preparation of the financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates include the allowance for doubtful trade receivables, the reserve for inventory
obsolescence, undiscounted cash flows generated from long-live assets and the valuation allowance for deferred tax assets.

INCOME TAXES

Income tax benefit for the years ended December 31, 2020 and 2019 consists of the following:

Current:

Federal .................................................................................................................. $
State ......................................................................................................................

Deferred – Federal ....................................................................................................
$

2020

2019

(216,000) $
6,000
(210,000)
—
(210,000) $

—
11,000
11,000
(183,000)
(172,000)

The expected (benefit) provision for income taxes, computed by applying the U.S. federal income tax rate of 21% to
income (loss) before taxes, is reconciled to income benefit as follows:

2020

2019

Expected provision for federal income taxes ........................................................... $
State income taxes, net of federal benefit .................................................................
Permanent items .......................................................................................................
Research and development credit .............................................................................
Change in valuation allowance .................................................................................
Change in tax law allowing NOL carryback claim ..................................................
Prior year true-ups and other ....................................................................................
$

(136,000) $
(24,000)
(249,000)
(23,000)
440,000
(217,000)
(1,000)
(210,000) $

(207,000)
(7,000)
11,000
(29,000)
51,000
—
9,000
(172,000)

Net deferred tax liabilities consist of the following as of December 31, 2020 and 2019:

2020

2019

Deferred tax liabilities:

Accrued vacation .................................................................................................. $
Inventories reserve ................................................................................................
Allowance for doubtful accounts ..........................................................................
Allowance for sales returns ...................................................................................
Research and development credit carryforward ....................................................
Accrued self-insured medical ...............................................................................
Property and equipment ........................................................................................
Patents ...................................................................................................................
Net operating loss .................................................................................................
Other .....................................................................................................................
Valuation allowance .............................................................................................
Net deferred tax liabilities ..................................................................................... $

33,000 $
17,000
2,000
10,000
285,000
—
(257,000)
(50,000)
411,000
17,000
(468,000)
— $

21,000
42,000
3,000
10,000
245,000
3,000
(295,000)
(53,000)
230,000
8,000
(214,000)
—

As of December 31, 2020, the Company has federal net operating loss carry-forwards and research and development credit
carryovers of $1,847,000 and $104,000, respectively, and begin expiring in 2037. The Company’s state net operating loss
carryforwards and research and development credit carryovers at December 31, 2020 total $468,000 and $214,000,
respectively, and begin expiring in 2026.

The Company is subject to federal and state taxation. As of December 31, 2020, with few exceptions, the Company is no
longer subject to examination prior to tax year 2017.

In accounting for uncertainty in income taxes, we recognize the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax
positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit
that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. As
of December 31, 2020, the Company does not have any unrecognized tax benefits. The Company recognizes interest and
penalties accrued on any unrecognized tax benefits as a component of income tax expense. We do not expect any material
changes in our unrecognized tax benefits over the next 12 months.

The Company establishes a valuation allowance to reduce the deferred tax assets when it is more likely than not that a
deferred tax asset will not be realizable. On the basis of this evaluation, as of December 31, 2020 and 2019, a full valuation
allowance has been recorded to reserve for deferred tax assets, which are not expected to be realized.

INTANGIBLE ASSETS

Intangible assets consist of patents, and patent applications. Capitalized patent application costs are included with
patents. Intangible assets are amortized on a straight-line basis over their estimated useful lives or terms of their
agreement, whichever is shorter. The Company wrote off costs related to abandoned patent applications of $17,000 in
2020 and $93,000 in 2019.

Intangible assets at December 31, 2020 and 2019 consist of the following:

December 31, 2020

December 31, 2019

Gross

Carrying Accumulated

Carrying Accumulated
Amount Amortization Amount Amortization

Amortized intangible assets:

Patents ................................................................................. $ 450,982 $

(207,399 ) $ 452,978 $

(181,609 )

Aggregate amortization expense:

For the years ended December 31 ......................................................................... $

25,790 $

31,869

2020

2019

Estimated amortization expense for the years ending December 31:

2021 ................................................................................................................................................ $
2022 ................................................................................................................................................
2023 ................................................................................................................................................
2024 ................................................................................................................................................
2025 ................................................................................................................................................
Thereafter .......................................................................................................................................

25,000
25,000
25,000
24,000
24,000
67,000

In connection with a license agreement, the Company has agreed to pay royalties ranging from 3% to 5% on the sales of
products subject to the agreement. The Company incurred $8,000 and $10,000 of expense under these agreements during
2020 and 2019, respectively, which are included in selling, general and administrative expenses in the Statements of
Operations.

RETIREMENT PLAN

The Company has established a salary deferral plan under Section 401(k) of the Internal Revenue Code. Such deferrals
accumulate on a tax-deferred basis until the employee withdraws the funds. Historically, the Company has contributed up
to 5% of each eligible employee’s compensation. As part of cost reduction efforts in 2020 the Company temporarily
suspended its 5% contribution in 2020. Total retirement expense for the years ended December 31, 2020 and 2019 was
approximately $120,000 and $241,000, respectively. The Company anticipates it will resume at least a portion of its 5%
401(k) contribution in 2021 as business conditions allow.

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 of the segments are the same as those described in the summary of
significant accounting policies included in Note 1.

Management evaluates the performance of each segment based on the components of divisional income, and does not
allocate assets and liabilities to segments except for trade receivables. Financial information with respect to the reportable
segments follows:

For the year ended December 31, 2020:

IKONICS

Chromaline Imaging DTX

AMS

Unalloc. Total

Net sales ..................................... $ 8,475,743 $ 3,709,318 $ 294,929 $ 952,230 $
Cost of goods sold ...................... 6,222,902 1,972,076 140,866 1,191,299
Gross profit (loss) ....................... 2,252,841 1,737,242 154,063 (239,069)
Selling, general, and

— $ 13,432,220
— 9,527,143
— 3,905,077

administrative* ....................... 1,297,045 880,404 125,752 275,147 2,441,256 5,019,604
671,493
—
28,311 $ (514,216) $ (3,112,749) $ (1,786,020)
955,796 $ 856,838 $

Research and development* .......
Income (loss) from operations .... $

671,493

—

For the year ended December 31, 2019:

IKONICS

Chromaline Imaging DTX

AMS

Unalloc. Total

Net sales ..................................... $ 11,472,111 $ 4,191,175 $ 393,804 $ 1,561,469 $
Cost of goods sold ...................... 8,389,404 2,273,641 157,650 1,400,675
Gross profit ................................. 3,082,707 1,917,534 236,154 160,794
Selling, general, and

— $ 17,618,559
— 12,221,370
— 5,397,189

administrative* ....................... 1,832,473 1,081,847 149,924 361,342 2,058,000 5,483,586
870,279
—
Research and development* .......
(956,676)
Income (loss) from operations .... $ 1,250,234 $ 835,687 $

870,279
86,230 $ (200,548) $ (2,928,279) $

—

*The Company does not allocate all general and administrative expenses or any research and development expenses to its

operating segments for internal reporting.

Trade receivables by segment as of December 31 were as follows:

Dec 31, 2020 Dec 31, 2019

Chromaline ............................................................................................................... $
IKONICS Imaging ...................................................................................................
DTX .........................................................................................................................
AMS .........................................................................................................................
Unallocated ..............................................................................................................

1,676,592 $
396,116
35,983
57,676
(47,154)

1,916,066
304,791
13,919
252,363
(52,421)

Total ......................................................................................................................... $

2,119,213 $

2,434,718

STOCKHOLDERS’ EQUITY

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,
5,000 were subject to outstanding options as of December 31, 2020. 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, 11,750 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 December 31, 2020, 54,300 restricted stock units (RSUs) and 13,250 options have
been granted under the 2019 Plan, of which 750 stock options have been forfeited, bringing the number of shares of
common stock available for future awards under the 2019 Plan to 47,107.

The Company charged compensation expense of $22,000 and $9,000 against the loss in 2020 and 2019, respectively.

As of December 31, 2020, there was approximately $348,000 of unrecognized compensation expense related to unvested
share-based compensation awards granted which is expected to be recognized over the next three years.

No stock options were exercised in 2020 or 2019

The fair value of options granted was estimated using the Black-Scholes option pricing model with the following
assumptions:

Dividend yield ......................................................................................................
Expected volatility ................................................................................................
Expected life of option (years) .............................................................................
Risk-free interest rate ...........................................................................................
Fair value of each option on grant date ................................................................

There were 10,000 and 3,250 options granted during 2020 and 2019, respectively.

2020
0
40.3%
10
1.4%
$2.90

2019
0
37.5%
5
1.7%
$2.53

A summary of the status of the Company’s stock option plan as of December 31, 2020 and changes during the year then
ended is presented below:

Weighted
Average
Exercise
Price

Outstanding at January 1, 2020 .........................................................................
Granted ..............................................................................................................
Exercised ...........................................................................................................
Expired and forfeited .........................................................................................
Outstanding at December 31, 2020 ...................................................................
Exercisable at December 31, 2020 ....................................................................

19,250 $
10,000
—
(11,750)
17,500 $
5,332 $

11.32
5.67
—
12.99
6.97
9.19

There were 54,300 RSUs granted in 2020. The shares underlying the awards were assigned a weighted average value of
$6.11 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 in 2019 to employees.

RSU activity during the year ended December 31, 2020 is summarized as follows:

Number of

Weighted
Average

Grant Date
Fair Value

Unvested shares at January 1, 2020 ...................................................................
Granted ..............................................................................................................
Vested ................................................................................................................
Forfeited or surrendered ....................................................................................
Unvested shares at December 31, 2020 .............................................................

—
54,300 $
—
—
54,300

—
6.11
—
—
6.11

In 2017, the Company’s board of directors had authorized the repurchase of 100,000 shares of common stock. A total
of 33,500 shares have been repurchased under this program in prior years. On April 29, 2019 the Company's board of
directors approved an additional repurchase authorization of 33,500 shares of the Company's common stock bringing
the total repurchase authorization to 100,000 shares of common stock. A total of 40,699 shares have been repurchased
under this program including the 7,199 shares repurchased during 2019. As of December 31, 2020, 92,801 shares
were authorized to be repurchased under the plan. The share repurchase authorizations do not have an expiration date
and there were no repurchases of common stock in 2020.

LONG-TERM DEBT

Duluth Economic Development Authority Loan
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”). The closing of the sale of
the Bonds occurred on April 29, 2016. The proceeds from the Loan were used 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, to be
located in Duluth, Minnesota (the “Project”). The Loan requires monthly payments of approximately $18,000, including
interest. The Loan bears interest at a rate of 2.60% per year, subject to change based upon changes to the maximum federal
corporate tax rate. Including debt costs of approximately $139,000, the Loan’s effective interest rate was 3.23% at
December 31, 2020.

The Company is subject to certain customary covenants set forth in the associated covenant agreement, including a
requirement that the Company maintain a debt service coverage ratio of not less than 1.25 to 1.00.

The Loan is subject to mandatory purchase provisions, under which any owners of the Bonds (the “Owners”) may tender
the Bonds to the Issuer on April 1, 2021, which would result in the Company repaying the outstanding loan principal and
any outstanding accrued and unpaid interest to the Issuer at that time. If in the event the Bonds are not repurchased on
April 1, 2021, the Bonds shall be subject to the interest rate and redemption provisions set forth in the associated covenant
agreement. Subsequent to December 31, 2020 the Company was informed that the bank will recall the loan and require
the Company to repay the outstanding principal and any outstanding accrued and unpaid interest on April 1, 2021. As of
December 31, 2020, the Company reclassified the entire Loan from long-term debt to current liability.

The remaining principal payments required under the agreement for years ended December 31, and the current and long-
term portion of the principal, are as follows:

2021 ...............................................................................................................................................
Less: Unamortized debt issuance costs ..........................................................................................
Less: Current portion .....................................................................................................................
Long-term portion ......................................................................................................................... $

2,773,000
85,000
2,688,000
—

In connection with the agreement, the Company incurred debt issuance costs of approximately $139,000 during 2016,
which were deferred and are being amortized over the term of the Financing Agreement. Amortization of debt issuance
costs was approximately $11,000 for 2020 and 2019 and is included in interest expense. Debt issuance costs of $85,000
are netted against long-term debt and current portion of long-term debt, respectively as of December 31, 2020 and 2019.
The entire $85,000 of unamortized debt costs will be expensed when the loan is repaid in 2021.

Paycheck Protection Program Loan
On April 18, 2020, Company entered into a loan pursuant to the Paycheck Protection Program under the CARES Act, as
administered by the U.S. Small Business Administration (the “SBA”). The loan, in the principal amount of $1,214,500
(the “PPP Loan”), was disbursed by BMO Harris Bank National Association (“Lender”) on April 22, 2020, pursuant to a
Paycheck Protection Program Promissory Note and Agreement (the “Note and Agreement”).

Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, and
covered utilities during an eight or twenty four-week period beginning on the approval date of the PPP Loan. For purposes
of the CARES Act, payroll costs exclude compensation of an individual employee earning more than $100,000, prorated
annually. Not more than 40% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time
headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more
than 25%. During the fourth quarter of 2020, the Company submitted an application for 100% forgiveness of the PPP
Loan. Prior to end of 2020, both the lender and the SBA forgave 100% of the Company's PPP loan.

The Company accounts for the PPP Loan as debt in accordance with Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 470, Debt and accrues interest in accordance with the interest method under
FASB ASC 835-30. When the loan was forgiven, the Company reduced the liability by the amount forgiven and recorded
a gain on extinguishment in the statement of operations.

Line of Credit
The Company also has a bank line of credit providing for borrowings of up to $2,050,000 which expires on August 30,
2021 and bears interest at 1.8 percentage points over the 30-day LIBOR rate. The Company did not utilize this line of
credit during 2020 or 2019 and there were no borrowings outstanding as of December 31, 2020 or 2019. There are no
financial covenants related to the line of credit, and the Company expects that it will secure a similar line of credit when
the current line of credit expires.

Both the Duluth Development Authority Loan and the line of credit are collateralized by substantially all assets of the
Company.

CHIEF EXECUTIVE OFFICER TRANSITION

On January 7, 2020, Mr. Ulland formally announced his retirement as President and Chief Executive Officer of the
Company, effective February 10, 2020. Mr. Ulland will continue to serve as Chairman of the Board. On January 7, 2020,
the Company also announced that Glenn Sandgren has been appointed to the position of Chief Executive Officer effective
February 10, 2020. Mr. Sandgren has also been appointed to the Board of Directors of the Company, also effective
February 10, 2020. The Company incurred one-time costs of approximately $365,000 in 2020 related to the Chief
Executive officer transition including severance payments, signing bonus, relocation expenses and executive search
consulting expenses.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures. As of December 31, 2020, an evaluation was carried out under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in applicable rules and forms.

Management’s Annual Report on Internal Control Over Financial Reporting. Our management is responsible for
establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f )
under the Exchange Act. Our internal control system is designed to provide reasonable assurance to our management and
board of directors regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes
those policies and procedures that:

•

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and directors of the Company;
and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the financial statements.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making
this assessment, management used the 2013 criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control — Integrated Framework. Based on management’s assessment and those criteria,
management believes that, as of December 31, 2020, the Company maintained effective internal control over financial
reporting.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal
control over financial reporting. Our management’s report of the effectiveness on the design and operation of our internal
control over financial reporting was not subject to attestation by the Company’s registered public accounting firm pursuant
to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this
annual report.

Changes in Internal Control Over Financial Reporting. 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 was no change in the Company’s internal control over financial reporting identified in connection with the evaluation
required by Rule 13a-15(d) and Rule 15d-15(d) of the Exchange Act that occurred during the period covered by this report
and that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting.

Item 9B. Other Information

None.

Item 10. Directors and Executive Officers of the Registrant

PART III

The information to be included in the Company’s definitive proxy statement for the 2021 Annual Meeting of
Shareholders under the captions “Election of Directors,” “Executive Officers” and “Delinquent Section 16(a) Reports” is
incorporated by reference. The following information completes the Company’s response to this Item 10.

The Company has adopted a code of ethics that applies to the Company’s Chief Executive Officer, Chief Financial
Officer, and other employees performing similar functions. A copy of this code of ethics is available on the Company’s
website at www.ikonics.com under the “Investor Relations” caption. The Company intends to satisfy the disclosure
requirement under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, this code of ethics by posting such
information on its web site which is located at www.ikonics.com.

Item 11. Executive Compensation

The information to be included in the Company’s definitive proxy statement for the 2021 Annual Meeting of
Shareholders under the captions “Election of Directors—Director Compensation,” “Summary Compensation Table,”
“Outstanding Equity Awards at Fiscal Year-End” and “Employment Contracts; Termination of Employment and Change-In-
Control Arrangements” is incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information to be included in the Company’s definitive proxy statement for the 2021 Annual Meeting of
Shareholders under the captions “Security Ownership of Principal Shareholders and Management” and “Equity
Compensation Plan Information” is incorporated by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information to be included in the Company’s definitive proxy statement for the 2021 Annual Meeting of
Shareholders under the caption “Election of Directors” is incorporated by reference. The Company has not engaged in any
transaction since the beginning of its last fiscal year and does not currently propose to engage in any transaction required to
be disclosed pursuant to Item 404 of Regulation S-K.

Item 14. Principal Accountant Fees and Services

The information to be included in the Company’s definitive proxy statement for the 2021 Annual Meeting of

Shareholders under the caption “Principal Accounting Firm Fees” is incorporated by reference.

Item 15. Exhibits and Financial Statement Schedules

PART IV

(a)(1) The following financial statements of the Company are filed as part of this Annual Report on Form 10-K;

(i) Report of RSM US LLP, independent registered public accounting firm
(ii) Balance Sheets as of December 31, 2020 and 2019
(iii) Statements of Operations for the years ended December 31, 2020 and 2019
(iv) Statements of Stockholders’ Equity for the years ended December 31, 2020 and 2019
(v) Statements of Cash Flows for the years ended December 31, 2020 and 2019
(vi) Notes to the Financial Statements

(b) The following exhibits are filed as part of this Annual Report on Form 10-K for the fiscal year ended December 31,

Description
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
(Registration No. 000-25727)).
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)).
Specimen of Common Stock Certificate. (Incorporated by reference to the like numbered Exhibit to Amendment No. 1
to the Company’s Registration Statement on Form 10-SB filed with the Commission on May 26, 1999 (Registration
No. 000-25727)).

Description of Capital Stock

IKONICS Corporation 1995 Stock Incentive Plan, as amended. (Incorporated by reference to the like numbered
Exhibit to the Company’s Annual Report on Form 10-K filed with the Commission on March 3, 2011 (File No. 000-
25727)).
Confidentiality Agreement, dated March 11, 2013, between the Company and Joseph R. Nerges. (Incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 13,
2013 (File No. 000-25727)).
IKONICS Corporation 2019 Equity Incentive Plan (Incorporated by reference to Exhibit 99 to the Company’s
Registration Statement on Form S-8 filed with the Commission on May 13, 2019 (Registration No. 333-231426)).
Form of Non-Qualified Stock Option Agreement (for grants under the IKONICS Corporation 2019 Equity Incentive
Plan) (Incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K filed with the
Commission on March 3, 2020).
Transition Agreement, dated January 7, 2020, between the Company and William C. Ulland (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 9,
2020)
Employment Agreement, dated January 7, 2020, between the Company and Glenn Sandgren (incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on January 9,
2020).
Promissory Note dated April 18, 2020, issued by the Company, as Borrower, payable to BMO Harris Bank National
Association, as Lender (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on April 22, 2020 (File No. 000-25757).
Form of Restricted Stock Unit Award Agreement under the IKONICS Corporation 2019 Equity Incentive Plan
(Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 14,
2020)

Consent of Independent Registered Public Accounting Firm.
Powers of Attorney.
Rule 13a-14(a)/15d-14(a) Certifications of CEO.
Rule 13a-14(a)/15d-14(a) Certifications of CFO.
Section 1350 Certifications.
Interactive data files pursuant to Rule 405 of Regulation S-T.**

2020:

Exhibit
3.1

3.2

4.1

4.2
10.1*

10.2

10.3*

10.4

10.5*

10.6*

10.7

10.8

23
24
31.1
31.2
32
101

* Management contract or compensatory plan, contract or arrangement required to be filed as an exhibit to this Annual Report on
Form 10-K.
** In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on
Form 10-K is deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities
Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended,
and otherwise is not subject to liability under those sections.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly

caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 3, 2021.

SIGNATURES

IKONICS CORPORATION

/s/ Glenn Sandgren
Glenn Sandgren, Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the

following persons on behalf of the registrant and in the capacities indicated on March 3, 2021.

/s/ Glenn Sandgren

Glenn Sandgren, Chairman, Chief Executive Officer and
Director
(Principal Executive Officer)

/s/ Jon Gerlach

Jon Gerlach, Chief Financial Officer and Vice President of
Finance
(Principal Financial and Accounting Officer)

Marianne Bohren*

Lockwood Carlson*

Gregory W. Jackson*

Ernest M. Harper Jr.*

Darrell B. Lee*

Jeffrey D. Engbrecht*

William C. Ulland*

Director

*Glenn Sandgren by signing his name hereto, does hereby sign this document on behalf of each of the above named Directors

of the registrant pursuant to Powers of Attorney duly executed by such persons.

Glenn Sandgren, Attorney-in-Fact

/s/ Glenn Sandgren

(This page has been left blank intentionally.)

Board of Directors

Corporate Officers

Glenn Sandgren

Chief Executive Officer

Glenn Sandgren

Chief Executive Officer

IKONICS Corporation

Duluth, MN

Director Since 2020

Ken Hegman

Chief Operating Officer

Claude Piguet

Executive Vice President

William C. Ulland

Chairman

IKONICS Corporation

Jon Gerlach

Duluth, MN

Director Since 1972

Vice President, Finance, CFO,
Treasurer, and Secretary

Marlanne Bohren

Executive Director

Western Lake Superior Sanitary District

Duluth, MN

Director Since 2016

Lockwood Carlson

President

Carlson Consulting Group

Minneapolis, MN

Director Since 2009

Jeffrey D. Engbrecht

President & CEO

Clearwater Composites

Duluth, MN

Director Since 2016

Ernest M. Harper Jr.

Chief Tax Officer (retired 2010)

General Mills, Inc.

Minneapolis, MN

Director Since 2012

Greg W. Jackson

Executive Vice President

Taylor Corporation

North Mankato, MN

Director Since 2017

Darrell B. Lee

Vice President, Chief Financial

Officer, Treasurer, Secretary (retired
2014)

MOCON, Inc.

Minneapolis, MN

Director Since 2012

Common Stock

IKONICS Corporation common stock is traded on the Nasdaq
Capital Market under the symbol IKNX. For investment and stock
information contact:

Jon Gerlach, Chief Financial Officer
IKONICS Corporation
4832 Grand Avenue
Duluth, MN 55807
Phone: (218) 628-2217
email: jgerlach@ikonics.com

Transfer Agent

Equiniti Shareowner Services
PO Box 64854
St. Paul, MN 55164-0854

Shareholders with questions on stock holdings, transfer
requirements and address changes contact Equiniti Shareowner
Services at: (800) 468-9716

Auditor

RSM US LLP
801 Nicollet Mall, West Tower, Ste. 1200
Minneapolis, MN 55402
(612) 332-4300

Counsel

HANFT FRIDE
1000 U.S. Bank Place
130 W. Superior Street
Duluth, MN 55802
(218) 722-4766

Additional Financial Information

For a copy of the Form 10-K, as filed with the Securities and
Exchange Commission, and other financial information avail able
at no charge to shareholders, please contact:

Jon Gerlach, Chief Financial Officer
IKONICS Corporation
4832 Grand Avenue
Duluth, MN 55807
Phone: (218) 628-2217
email: jgerlach@ikonics.com

Annual Meeting

The Company’s annual meeting of shareholders
will be held virtually:

April 29, 2021, 1:00 p.m.