10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2015

or

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

For the Transition Period From                 to                 .

Commission file number 000-25727

IKONICS CORPORATION

(Exact name of registrant as specified in its charter)

Minnesota	41-0730027
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification no.)
4832 Grand Avenue Duluth, Minnesota	55807
(Address of principal executive offices)	(Zip code)

(218) 628-2217

Issuer’s telephone number

Not Applicable

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

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  xNo  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Yes  xNo  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  oNo  x

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer (Do not check if a smaller reporting company) o	Smaller reporting company x

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date:  Common Stock, $.10 par value - 2,018,253 shares outstanding as of August 7, 2015.

IKONICS Corporation

QUARTERLY REPORT ON FORM 10-Q

			PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.		Financial Statements:
		Condensed Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014	3
		Condensed Statements of Operations for the Three Months and Six Months Ended June 30, 2015 and 2014 (unaudited)	4
		Condensed Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (unaudited)	5
		Notes to Condensed Financial Statements (unaudited)	6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.		Quantitative and Qualitative Disclosures about Market Risk	18
Item 4.		Controls and Procedures	18
PART II.	OTHER INFORMATION		19
	SIGNATURES		20

2

PART I — FINANCIAL INFORMATION

ITEM 1.  Condensed Financial Statements

IKONICS CORPORATION

CONDENSED BALANCE SHEETS

	June 30		December 31
	2015		2014
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,368,778	$	1,936,214
Short-term investments	1,205,000		1,766,000
Trade receivables, less allowance of $56,000 in 2015 and $49,000 in 2014	2,154,908		2,096,328
Inventories	2,363,893		2,630,650
Prepaid expenses and other assets	145,920		86,400
Income taxes receivable	246,111		163,651
Deferred income taxes	178,000		178,000
Total current assets	8,662,610		8,857,243
PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land and building	6,500,802		6,247,781
Machinery and equipment	4,208,267		3,956,561
Office equipment	817,072		754,220
Vehicles	247,356		247,356
	11,773,497		11,205,918
Less accumulated depreciation	6,116,830		5,789,070
	5,656,667		5,416,848
INTANGIBLE ASSETS, less accumulated amortization of $212,079 in 2015 and $198,918 in 2014	325,113		353,871
	$	14,644,390	$	14,627,962
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	596,217	$	371,181
Accrued compensation	248,483		294,706
Other accrued liabilities	107,015		78,610
Total current liabilities	951,715		744,497
DEFERRED INCOME TAXES	545,000		545,000
Total liabilities	1,496,715		1,289,497
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 2,018,253 shares in 2015 and 2014	201,825		201,825
Additional paid-in capital	2,691,740		2,681,307
Retained earnings	10,254,110		10,455,333
Total stockholders’ equity	13,147,675		13,338,465
	$	14,644,390	$	14,627,962

See notes to condensed financial statements

3

IKONICS CORPORATION

CONDENSED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months				Six Months
	Ended June 30				Ended June 30
	2015		2014		2015			2014
NET SALES	$	4,653,548	$	4,924,747	$	8,251,437		$	9,389,323
COST OF GOODS SOLD	3,013,806		3,213,875		5,511,020			5,919,298
GROSS PROFIT	1,639,742		1,710,872		2,740,417			3,470,025
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES	1,252,521		1,240,413		2,668,118			2,541,063
RESEARCH AND DEVELOPMENT EXPENSES	192,539		177,479		348,383			320,809
INCOME (LOSS) FROM OPERATIONS	194,682		292,980		(276,084		)	608,153
OTHER	1,510		1,552		3,206			3,510
INCOME (LOSS) BEFORE INCOME TAXES	196,192		294,532		(272,878		)	611,663
INCOME TAX EXPENSE (BENEFIT)	168,468		96,100		(71,655		)	208,316
NET INCOME (LOSS)	$	27,724	$	198,432	$	(201,223	)	$	403,347
EARNINGS (LOSS) PER COMMON SHARE:
Basic	$	0.01	$	0.10	$	(0.10	)	$	0.20
Diluted	$	0.01	$	0.10	$	(0.10	)	$	0.20
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	2,018,253		2,016,885		2,018,253			2,014,836
Diluted	2,018,792		2,019,721		2,018,253			2,016,774

See notes to condensed financial statements.

4

IKONICS CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months
	Ended June 30
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(201,223	)	$	403,347
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	327,759			320,140
Amortization	13,161			12,887
Stock based compensation	10,433			11,502
Loss on disposal of property, plant and equipment	—			3,102
Loss on intangible asset abandonment	45,873			—
Changes in working capital components:
Trade receivables	(58,580		)	(193,186		)
Inventories	266,757			(76,405		)
Prepaid expenses and other assets	(59,520		)	(31,713		)
Income taxes receivable	(82,460		)	(33,307		)
Accounts payable	225,036			(20,571		)
Accrued expenses	(17,818		)	(31,419		)
Net cash provided by operating activities	469,418			364,377
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(567,578		)	(403,212		)
Proceeds from sales of equipment and vehicles	—			9,163
Purchases of intangibles	(30,276		)	(38,590		)
Purchases of short-term investments	(650,000		)	(1,510,000		)
Proceeds on sale of short-term investments	1,211,000			958,948
Net cash used in investing activities	(36,854		)	(983,691		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	—			44,730
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	432,564			(574,584		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	1,936,214			1,704,300
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	2,368,778		$	1,129,716
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes.	$	10,805		$	241,624

See notes to condensed financial statements.

5

IKONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.Basis of Presentation

The condensed balance sheet of  IKONICS Corporation (the “Company”) as of  June 30, 2015, and the related condensed statements of operations for the three and six months ended June 30, 2015 and 2014, and cash flows for the six months ended June 30, 2015 and 2014, have been prepared without being audited.

In the opinion of management, these statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of IKONICS Corporation as of June 30, 2015, and the results of operations and cash flows for all periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted.  Therefore, these statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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

2.Short-Term Investments

The Company’s $1,205,000 of short-term investments at June 30, 2015 is comprised of fully insured certificates of deposit with original maturities ranging from six to twelve months and interest rates ranging from 0.3% to 0.5%.

3.Inventories

The major components of inventories are as follows:

	June 30, 2015			Dec 31, 2014
Raw materials	$	1,854,302		$	2,020,151
Work-in-progress	421,764			407,964
Finished goods	1,399,940			1,517,151
Reduction to LIFO cost	(1,312,113		)	(1,314,616		)
Total Inventory	$	2,363,893		$	2,630,650

6

IKONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

4.Earnings Per Common 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 that would have been outstanding if the potential dilutive common shares, such as those shares subject to options, had been issued.

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

	Three Months Ended
	June 30, 2015	June 30, 2014
Weighted average common shares outstanding	2,018,253	2,016,885
Dilutive effect of stock options	539	2,836
Weighted average common and common equivalent shares outstanding	2,018,792	2,019,721

	Six Months Ended
	June 30, 2015	June 30, 2014
Weighted average common shares outstanding	2,018,253	2,014,836
Dilutive effect of stock options	—	1,938
Weighted average common and common equivalent shares outstanding	2,018,253	2,016,774

For three months ended June 30, 2015, options to purchase 6,250 shares of common stock with a weighted average price of $18.28 were outstanding but were excluded from the computation of common share equivalents because they were anti-dilutive.   Options to purchase 1,250 shares of common stock with a weighted average price of $28.25 were outstanding during the three and six months ended June 30, 2014, but were excluded from the computation of common share equivalents because they were anti-dilutive.

If the Company was in a net income position for the first six months of 2015, 5,918 options with a weighted average exercise price of $12.49 would have been included as part of the weighted average common and common equivalent shares outstanding as the options would have been dilutive while 6,250 options with a weighted average exercise price of $18.28 would have remained excluded as the options were anti-dilutive.

5.Stock-Based Compensation

The Company maintains a stock incentive plan which authorizes the issuance of up to 442,750 shares of common stock. Of those shares, 12,168 were subject to outstanding options and 108,739 were reserved for future grants at June 30, 2015.  The plan provides for granting eligible participants stock options or other stock awards, as described by the plan, at option prices ranging from 85% to 110% of fair market value at the date of grant.  Options granted expire up to seven years after the date of grant.  Such options generally become exercisable over a one to three year period.

The Company charged compensation cost of approximately $5,700 against income for the three months ended June 30, 2015 and approximately $8,900 for the three months ended June 30, 2014.  For the first six months of 2015, the Company charged compensation cost of approximately $10,400 against income and approximately $11,500 for the same period in 2014.  As of June 30, 2015, there was approximately $51,000 of unrecognized compensation cost related to unvested share-based compensation awards granted.  That cost is expected to be recognized over the next three years.

7

IKONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

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

Proceeds from the exercise of 5,916 stock options were approximately $45,000 for the six months ended June 30, 2014.  No stock options were exercised during the six months ended June 30, 2015.

The fair value of options granted during the six months ended June 30, 2015 and 2014 was estimated using the Black-Scholes option pricing model with the following assumptions:

	2015	2014
Dividend yield	0%	0%
Expected volatility	42.3% - 42.4%	44.3%
Expected life of option	Five Years	Five Years
Risk-free interest rate	1.4% -1.5%	1.7%
Fair value of each option on grant date	$5.43 - $6.14	$11.49

There were 7,250 and 1,250 options granted during each of the six months ended June 30, 2015 and 2014, respectively.

Stock option activity during the six months ended June 30, 2015 was as follows:

		Weighted
		Average
		Exercise
	Shares	Price
Outstanding at January 1, 2015	4,918	$	15.78
Granted	7,250	15.25
Exercised	—	—
Expired and forfeited	—	—
Outstanding at June 30, 2015	12,168	$	15.47
Exercisable at June 30, 2015	2,833	$	13.53

The aggregate intrinsic value of all options outstanding and for those exercisable at June 30, 2015 was approximately $18,000 and $11,000, respectively.

6.Commitments

Building:

In July 2015, the Company committed to proceed with a 27,300 square-foot building expansion project. The new, 27,300 square-foot structure will contain a 20,500 square-foot production floor in addition to offices and ancillary facilities and is expected to cost $3.5 million. The building will be an addition to IKONICS 37,000 square-foot building on its Morgan Park site in western Duluth, which currently houses AMS production, warehousing, shipping and film conversion for all IKONICS business units. All AMS activities will relocate to the new facility with an expected project completion date in second quarter of 2016.

8

IKONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

ERP System:

During the second quarter of 2015, the Company committed to purchase $140,000 of software related to the implementation of a new Enterprise Resource Planning (ERP) system.  The new ERP system will better support and accommodate IKONICS’ operations and replacing the Company’s existing ERP system.  The total ERP system project is expected to cost approximately $400,000 and is expected to be completed by the second quarter of 2016.

Line of Credit:

A bank line of credit exists providing for borrowings of up to $1,250,000 and expires on May 31, 2017.  The line of credit is collateralized by the Company’s assets and bears interest at 2.5 percentage points over the 30-day LIBOR rate.  The Company did not utilize this line of credit during the first six months of 2015 or 2014 and there were no borrowings outstanding as of June 30, 2015 and 2014.  There are no financial covenants related to the line of credit.  In July 2015, the bank line of credit was increased to $2,050,000 and the interest rate was decreased to 1.8 percentage points over the 30-day LIBOR rate.  The bank line of credit expiration date did not change from May 31, 2017.

7.Segment Information

The Company’s reportable segments are strategic business units that offer different products and have varied customer bases.  There are five reportable segments:  Domestic, Export, IKONICS Imaging, Digital Texturing (DTX) and Advanced Material Solutions (AMS).  Domestic sells screen printing film, emulsions, and inkjet receptive film to distributors located in the United States and Canada.  IKONICS Imaging sells photo resistant film, art supplies, glass, metal medium and related abrasive etching equipment to end user customers located in the United States and Canada.  AMS provides sound deadening 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.  Export sells primarily the same products as Domestic and the IKONICS Imaging products not related to AMS or DTX.  The accounting policies applied to determine the segment information are the same as those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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 which are allocated based on the previous segmentation.  Financial information with respect to the reportable segments follows:

For the three months ended June 30, 2015:

	IKONICS
	Domestic		Export		Imaging		DTX			AMS			Unalloc.			Total
Net sales	$	2,111,510	$	1,337,121	$	991,108	$	101,662		$	112,147		$	—		$	4,653,548
Cost of goods sold	1,207,376		1,018,025		449,116		69,003			270,286			—			3,013,806
Gross profit (loss)	904,134		319,096		541,992		32,659			(158,139		)	—			1,639,742
Selling general and adminstrative*	323,730		137,271		237,167		54,711			75,557			424,085			1,252,521
Research and development*	—		—		—		—			—			192,539			192,539
Income (loss) from operations	$	580,404	$	181,825	$	304,825	$	(22,052	)	$	(233,696	)	$	(616,624	)	$	194,682

9

IKONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

For the three months ended June 30, 2014:

	IKONICS
	Domestic		Export		Imaging		DTX			AMS			Unalloc.			Total
Net sales	$	2,089,767	$	1,626,682	$	1,046,592	$	94,612		$	67,094		$	—		$	4,924,747
Cost of goods sold	1,220,452		1,194,219		510,508		84,705			203,991			—			3,213,875
Gross profit (loss)	869,315		432,463		536,084		9,907			(136,897		)	—			1,710,872
Selling general and adminstrative*	332,442		142,716		227,816		50,657			95,334			391,448			1,240,413
Research and development*	—		—		—		—			—			177,479			177,479
Income (loss) from operations	$	536,873	$	289,747	$	308,268	$	(40,750	)	$	(232,231	)	$	(568,927	)	$	292,980

For the six months ended June 30, 2015:

	IKONICS
	Domestic		Export		Imaging		DTX			AMS			Unalloc.			Total
Net sales	$	3,489,299	$	2,455,415	$	1,884,873	$	197,056		$	224,794		$	—		$	8,251,437
Cost of goods sold	2,048,332		1,902,353		909,487		142,094			508,754			—			5,511,020
Gross profit (loss)	1,440,967		553,062		975,386		54,962			(283,960		)	—			2,740,417
Selling general and adminstrative*	639,897		291,991		498,423		90,243			177,659			969,905			2,668,118
Research and development*	—		—		—		—			—			348,383			348,383
Income (loss) from operations	$	801,070	$	261,071	$	476,963	$	(35,281	)	$	(461,619	)	$	(1,318,288	)	$	(276,084	)

For the six months ended June 30, 2014:

	IKONICS
	Domestic		Export		Imaging		DTX			AMS			Unalloc.			Total
Net sales	$	3,599,931	$	2,813,394	$	2,608,396	$	207,129		$	160,473		$	—		$	9,389,323
Cost of goods sold	2,103,556		2,069,119		1,166,507		164,468			415,648			—			5,919,298
Gross profit (loss)	1,496,375		744,275		1,441,889		42,661			(255,175		)	—			3,470,025
Selling general and adminstrative*	628,793		266,844		472,164		85,866			207,589			879,807			2,541,063
Research and development*	—		—		—		—			—			320,809			320,809
Income (loss) from operations	$	867,582	$	477,431	$	969,725	$	(43,205	)	$	(462,764	)	$	(1,200,616	)	$	608,153

*  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 June 30, 2015 and December 31, 2014 were as follows:

	June 30, 2015			Dec 31, 2014
Domestic	$	1,005,847		$	1,068,170
Export	750,167			640,464
IKONICS Imaging	272,551			254,483
DTX	62,285			86,507
AMS	86,743			85,170
Unallocated	(22,685		)	(38,466		)
Total	$	2,154,908		$	2,096,328

10

IKONICS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

8.Income Taxes

The Company reports a liability for unrecognized tax benefits taken or expected to be taken when they are uncertain.  As of June 30, 2015 and 2014, there was no liability for unrecognized tax benefits.

The Company is subject to taxation in the United States and various states.  The material jurisdictions that are subject to examination by tax authorities primarily include Minnesota and the United States, for tax years 2012, 2013, and 2014.

11

IKONICS CORPORATION

The information presented below in Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended.  Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These forward-looking statements include statements relating to our future plans and objectives and results. Such statements are subject to risks and uncertainties, including those discussed elsewhere in this report and under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014, as updated in our subsequent reports filed with the SEC, which could cause actual results to differ materially from those projected.  Because actual results may differ, readers are cautioned not to place undue reliance on these forward-looking statements.

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

The following management’s discussion and analysis focuses on those factors that had a material effect on the Company’s financial results of operations during the second quarter of 2015 and for the same period of 2014.  It should be read in connection with the Company’s condensed unaudited financial statements and notes thereto included in this Form 10-Q.

Critical Accounting Estimates

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

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

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

Income Taxes.  Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences.  Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  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

12

return should be recorded in the financial statements.  Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement.  The guidance on accounting for uncertainty in income taxes also addresses derecognition, classification, interest and penalties on income taxes, and accounting in interim periods.

Revenue Recognition.  The Company recognizes revenue on sales of products when title passes which can occur at the time of shipment or when the goods arrive at the customer location depending on the agreement with the customer.  The Company sells its products to both distributors and end-users.  Sales to distributors and end-users are recorded based upon the criteria governed by the sales, delivery, and payment terms stated on the invoices from the Company to the purchaser.  In addition to transfer of title / risk of loss, all revenue is recorded in accordance with the criteria outlined within SAB 104 and FASB ASC 605 Revenue Recognition:

(a)persuasive evidence of an arrangement (principally in the form of customer sales orders and the Company’s sales invoices)

(b)delivery and performance (evidenced by proof of delivery, e.g. the shipment of film and substrates with bill of lading used for proof of delivery for FOB shipping point terms, and the carrier booking confirmation report used for FOB destination terms).  Once the finished product is shipped and physically delivered under the terms of the invoice and sales order, the Company has no additional performance or service obligations to complete

(c)a fixed and determinable sales price (the Company’s pricing is established and is not based on variable terms, as evidenced in either the Company’s invoices or the limited number of distribution agreements; the Company rarely grants extended payment terms and has no history of concessions)

(d)a reasonable likelihood of payment (the Company’s terms are standard, and the Company does not have a substantial history of customer defaults or non-payment)

Sales are reported on a net basis by deducting credits, estimated normal returns and discounts.  The Company’s return policy does not vary by geography.  The customer has no rotation or price protection rights and the Company is not under a warranty obligation.  Freight billed to customers is included in sales.  Shipping costs are included in cost of goods sold.

Results of Operations

Quarter Ended June 30, 2015 Compared to Quarter Ended June 30, 2014

Sales.  The Company realized a 5.5% sales decrease during the second quarter of 2015 with sales of $4.7 million, compared to $4.9 million in sales during the same period in 2014.  Second quarter sales were unfavorably impacted by the weaker European economy and the stronger U.S. dollar as Export sales decreased 17.8% to $1.3 million in the second quarter of 2015 compared to $1.6 million during the same period in 2014.  IKONICS Imaging also posted lower sales in the second quarter of 2015 with a 5.3%, or $55,000, sales decrease versus the second quarter of 2014 as glass sales for the quarter lagged behind last year.  Partially offsetting these sales decreases was a $45,000, or 67%, AMS sales increase due to growth for both composite machining and industrial masks.  Improved emulsion sales resulted in a $22,000, or 1%, Domestic sales increase for the second quarter of 2015 over the same period in 2014 while DTX sales grew by $7,000, or 7.5%, in the second quarter of 2015.

Gross Profit.  Gross profit was $1.6 million, or 35.2% of sales, in the second quarter of 2015 compared to $1.7 million, or 34.7% of sales, for the same period in 2014.  The gross profit as a percentage of sales increased in second quarter of 2015 over the same period in 2014 due to improved sales mix.  Both lower margin Export and IKONICS Imaging glass sales comprised a smaller percentage of total sales during the second quarter of 2015 versus

13

the second quarter of 2014.  However, the lower Export and glass sales volumes negatively impacted overall gross margin dollars.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $1.3 million, or 26.9% of sales, in the second quarter of 2015 compared to $1.2 million, or 25.2% of sales, for the same period in 2014.  The slight increase in selling, general and administrative expenses reflects higher travel and trade show expenses for domestic markets in addition to consulting expenses related to the Company’s ERP system selection process.

Research and Development Expenses.  Research and development expenses during the second quarter of 2015 were $193,000, or 4.1% of sales, versus $177,000, or 3.6% of sales, for the same period in 2014.  The increase is related to a cost of $46,000 relating to abandonment of patent applications.   The Company records patent application costs as an asset and amortizes those costs upon successful completion of the application process or expenses those costs when an application is abandoned.

Income Taxes.  For the second quarter of 2015, the Company realized income tax expense of $168,000, or an effective rate of 85.9%, versus $96,000, or an effective rate of 32.6% for the second quarter of 2014.  The increase in the effective tax rate for the second quarter of 2015 over the second quarter of 2014 is a result of the lower earnings for 2015, causing the non-deductible items to have a more significant rate impact.  The income tax provision for the 2015 and 2014 periods also differs from the expected tax expense due to the benefits of the domestic manufacturing deduction and other non-deductible items.

Six Months Ended June 30, 2015 Compared to the Six Months Ended June 30, 2014

Sales.  The Company’s sales decreased 12.1% during the first six months of 2015 to $8.3 million versus sales of $9.4 million during the first six months of 2014.  Compared to the first half of 2014, IKONICS Imaging sales for the first half of 2015 decreased $724,000.  IKONICS Imaging sales in the first six months of 2014 benefitted from a large non-recurring initial stocking order from its new distributor, JDS Industries.  Lower IKONICS Imaging equipment and glass sales also contributed to the decrease in first half sales, year over year.  Export sales for the first half of 2015 also decreased $358,000, or 12.7%, compared to the same period in 2014 as sales were negatively impacted by the weaker European economy and stronger U.S. dollar. Lower film and emulsion sales in the first half of 2015 resulted in a $111,000 decrease in Domestic sales versus the same period in 2014, while DTX film sales also decreased by $10,000.  Partially offsetting these 2015 first half sales decreases versus the same period in 2014, was a $64,000 increase in AMS sales related to both improved mask and composite machining sales.

Gross Profit.  Gross profit for the first six months of 2015 was $2.7 million, or 33.2% of sales, compared to $3.5 million, or 37.0% of sales, for the same period in 2014.  The 2014 first half gross margin percentage benefited from the initial stocking order from JDS Industries.  The 2014 JDS Industries initial stocking order was mainly comprised of film products, which have higher gross margins.  Export’s 2015 gross margin also was down compared to the same period in 2014 due to a decrease in higher margin sales to Europe.  Lower volumes also negatively impacted the Domestic gross margin in the first half of 2015.  The DTX gross margin improved in the first half of 2015 compared to the same period in 2014 due to higher 2014 maintenance costs.  The 2015 AMS first half gross margin percentage improved over the same period in 2014 due to an increase in volume although the 2015 AMS gross profit in aggregate decreased as a result of higher labor costs.  Beginning in the second half of 2016, the Company expects AMS production costs to increase and gross profit in the aggregate to decrease in the short term due to the building expansion to improve AMS production capacity and capabilities.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $2.7 million, or 32.3% of sales, in the first half of 2015 compared to $2.5 million, or 27.1% of sales, for the same period in 2014.  The increase in selling, general and administrative expenses reflects higher travel and trade show expenses for both domestic and export markets in addition to consulting expenses related the Company’s ERP system selection process and employee training.

14

Research and Development Expenses.  Research and development expenses during the first half of 2015 were $348,000, or 4.2% of sales, versus $321,000, or 3.4% of sales, for the same period in 2014.   The increase is related to a cost of $46,000 relating to abandonment of patent applications.   The Company records patent application costs as an asset and amortizes those costs upon successful completion of the application process or expenses those costs when an application is abandoned.

Income Taxes.  For the first six months of 2015, the Company realized an income tax benefit of $72,000, or an effective rate of 26.26%, compared to income tax expense of $208,000, or an effective rate of 34.1%, for the same period in 2014.  The Company’s income tax benefit for the first half of 2015 was due to the year to date net loss.  The income tax provision for 2015 and 2014 differs from the expected tax expense due to the benefits of the domestic manufacturing deduction, other non-deductible items and state income tax.

Liquidity and Capital Resources

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 $2.4 million and $1.9 million at June 30, 2015 and December 31, 2014, respectively.  Operating activities provided $469,000 in cash to the Company during the first six months of 2015 compared to $364,000 of cash provided by operating activities during the same period in 2014.  Cash provided by operating activities is primarily the result of net income or loss adjusted for non-cash depreciation, amortization, and certain changes in working capital components discussed in the following paragraph.

During the first six months of 2015, the timing of collections resulted in a $59,000 increase in trade receivables.  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 $267,000 due to the timing of raw material purchases and efforts to more tightly manage finished inventory levels.   Prepaid expenses and other assets increased $60,000, reflecting insurance premiums paid in advance.  Accounts payable increased $225,000 due to the timing of vendor payments.   Accrued expenses decreased $18,000, reflecting the timing of compensation payments while income taxes receivable increased $83,000 due to the timing of estimated tax payments and the volume of taxable income.

During the first six months of 2014, increased sales volumes resulted in a $193,000 increase in trade receivables.  The Company believes that the quality of its receivables is high and that strong internal controls are in place to maintain proper collections.   Inventories also increased by $76,000 due to the timing of raw material purchases.  Prepaid expenses and other assets increased $32,000, reflecting insurance premiums paid in advance in the first six months of 2014.  Accounts payable decreased $21,000 due to the timing of vendor payments.   Accrued expenses decreased $31,000, reflecting the timing of compensation payments while income taxes receivable increased $33,000 due to the timing of estimated tax payments compared to the calculated 2014 tax liability

During the first six months of 2015, cash used in investing activities was $37,000.  Nine certificates of deposits totaling $1.2 million matured during the first half of 2015.  The Company purchased three certificates of deposits totaling $650,000.  The Company’s purchases of property and equipment were $568,000, mainly for upgrades to improve AMS production and process capabilities along with costs associated with mandatory elevator upgrades.  Also during the first six months of 2015, the Company incurred $30,000 in patent application costs that the Company records as an asset and amortizes upon successful completion of the application process.

During the first six months of 2014, cash used in investing activities was $984,000.  The Company purchased ten certificates of deposits totaling $1.5 million.  Six certificates of deposits totaling $959,000 matured during the first half of 2014.  The Company’s purchases of property and equipment were $403,000, mainly for improvements to AMS equipment, mandatory elevator upgrades, two forklifts and two vehicles.  The Company realized $9,000 in proceeds from the sale of two vehicles.  Also during the first six months of 2014, the Company

15

incurred $39,000 in patent application costs that the Company records as an asset and amortizes upon successful completion of the application process.

During the first six months of 2014, the Company received $45,000 from financing activities from the issuance of 5,916 shares of common stock from the exercise of stock options.  There were no exercises of stock options during the first six months of 2015.

A bank line of credit exists providing for borrowings of up to $1,250,000 and expires on May 31, 2017.  The line of credit is collateralized by the Company’s assets and bears interest at 2.5 percentage points over the 30-day LIBOR rate.  The Company did not utilize this line of credit during the first six months of 2015 or 2014 and there were no borrowings outstanding as of June 30, 2015 and 2014.  There are no financial covenants related to the line of credit.  In July 2015, the bank line of credit was increased to $2,050,000 and the interest rate was decreased to 1.8 percentage points over the 30-day LIBOR rate.  The bank line of credit expiration date did not change from May 31, 2017.

The Company believes that current financial resources, its line of credit, cash generated from operations and the Company’s capacity for debt and/or equity financing will be sufficient to fund current and anticipated business operations.  The Company also believes that its low debt levels and available line of credit make it unlikely that a decrease in demand for the Company’s products would impair the Company’s ability to fund operations.

Capital Expenditures

Through the first six months of 2015, the Company spent $568,000 on capital expenditures.  Capital expenditures during the first six months were mainly for improvements to AMS capabilities and mandatory elevator upgrades.  The Company expects total capital expenditures in 2015 of approximately $950,000, excluding building expansion expenditures.  Plans for capital expenditures include additional AMS and other production equipment, a new enterprise resource planning system (ERP) to replace the Company’s current system, research and development equipment and a vehicle.  Additionally, the Company is proceeding with a building expansion to accommodate the growth of its AMS operations.  The expansion cost currently is estimated to be approximately $3.5 million, although the expansion cost could vary based on unexpected factors that arise once construction begins.  The Company anticipates the amounts for the building expansion will be spent over the remainder of 2015 and the first half of 2016.  The Company expects to fund its capital expenditures with existing cash and investments, cash generated from operating activities and utilization of the Company’s line of credit.  The amount borrowed from the line of credit is not certain and will be dependent on Company’s operating results and the timing of cash outlays for these projects.

International Activity

The Company markets its products to numerous countries in North America, Europe, Latin America, Asia and other parts of the world.  Foreign sales were approximately 30% of total sales during the first six months of 2015 and 2014.   Although the percent of Export sales to total sales did not change in the first six months of 2015 versus 2014, Export sales volume for the first half of 2015 were down compared to the same period in 2014 due the weaker European economy and stronger U.S. dollar.  Fluctuations of certain foreign currencies have not significantly impacted the Company’s operations because the Company’s foreign sales are not concentrated in any one region of the world. The Company believes its vulnerability to uncertainties due to foreign currency fluctuations and general economic conditions in foreign countries is not significant.

The Company’s foreign transactions are primarily negotiated, invoiced and paid in U.S. dollars, while a portion is transacted in Euros.  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 as of June 30, 2015.  Furthermore, the impact of foreign exchange on the Company’s balance sheet and operating results was not material in either 2015 or 2014.

16

Future Outlook

IKONICS has spent on average approximately 4% of its sales dollars for the past few years in research and development and has made capital expenditures related to its DTX and AMS programs.  The Company plans to maintain its efforts in this area to expedite internal product development as well as to form technological alliances with outside experts to commercialize new product opportunities.

The Company continues to make progress on its AMS business initiative.  The Company has entered into agreements with major aerospace companies and smaller programs to determine the feasibility of using its unique technologies in the production of military and commercial aircraft.  Progress is being made on a number of these in-house feasibility projects, and the Company believes that several of these could lead to ongoing business.  In anticipation of this business, the Company is expanding its AMS capacity and patent applications.

The Company is also continuing to make progress on its DTX business initiatives.  In addition to its growing 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 to enhance its customer offerings.  The Company has been awarded European, Japanese and United States patents on its DTX technologies.  The Company has modified its DTX technology to enter the market for prototyping and 3D printing.

Domestically, both the Domestic and IKONICS Imaging units remain profitable in mature markets and require aggressive strategies to grow market share. Although there will be challenges, the Company believes these businesses will continue to grow and prosper.  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 made this more challenging in the first half of 2015, and the Company anticipates continued strength of the U.S. dollar in the near term.

In addition to the $3.5 million building expansion to accommodate the AMS division and the implementation of the a new ERP system, other future activities undertaken to expand the Company’s business may include acquisitions, building improvements, equipment additions, new product development and marketing opportunities.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers.  ASU 2014-09 supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for the Company in its fiscal year beginning on January 1, 2017, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted.  The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated results of operations, cash flows and financial position.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs.  ASU 2015-03 amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge.  It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted.  The Company does not expect the provision of ASU 2015-03 to have a material impact on its consolidated financial statements.

Off Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

17

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

Not applicable

ITEM 4.  Controls and Procedures

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

There 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 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

18

PART II.OTHER INFORMATION

ITEM 1.Legal Proceedings

None

ITEM 1A.Risk Factors

Not applicable

ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable

ITEM 3.Defaults upon Senior Securities

Not applicable

ITEM 4.Mine Safety Disclosures

Not applicable

ITEM 5.Other Information

None

ITEM 6.Exhibits

The following exhibits are filed as part of this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015:

Exhibit	Description
3.1	Restated Articles of Incorporation of Company, as amended.(1)
3.2	By-Laws of the Company, as amended.(2)
31.1	Rule 13a-14(a)/15d-14(a) Certifications of CEO
31.2	Rule 13a-14(a)/15d-14(a) Certifications of CFO
32	Section 1350 Certifications
101	Interactive Data Files Pursuant to Rule 405 of Regulation S-T

Copies of Exhibits will be furnished upon request and payment of the Company’s reasonable expenses in furnishing the Exhibits.

(1)Incorporated by reference to the like numbered Exhibit to the Company’s Registration Statement on Form 10-SB (File No. 000-25727).

(2)Incorporated by reference to the like numbered Exhibit to the Company’s Current Report on Form 8-K filed with the Commission on February 22, 2007 (File No. 000-25727).

19

IKONICS CORPORATION

SIGNATURES

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

	IKONICS CORPORATION
DATE: August 13, 2015	By:	/s/ Jon Gerlach
		Jon Gerlach,
		Chief Financial Officer, and
		Vice President of Finance

20

INDEX TO EXHIBITS

Exhibit	Description	Page
3.1	Restated Articles of Incorporation of Company, as amended	Incorporated by reference
3.2	By-Laws of the Company, as amended	Incorporated by reference
31.1	Rule 13a-14(a)/15d-14(a) Certifications of CEO	Filed Electronically
31.2	Rule 13a-14(a)/15d-14(a) Certifications of CFO	Filed Electronically
32	Section 1350 Certifications	Filed Electronically
101	Interactive Data Files Pursuant to Rule 405 of Regulation S-T	Filed Electronically

21

EX-31.1

EXHIBIT 31.1

RULE 13a-14(a)/15d-14(a) CERTIFICATIONS OF CEO

I, William C. Ulland, certify that:

1.I have reviewed this quarterly report on Form 10-Q of IKONICS Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15f and 15d-15(f)) for the registrant and we have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 13, 2015	/s/ William C. Ulland
	William C. Ulland
	Chairman, Chief Executive Officer
	and President

EX-31.2

EXHIBIT 31.2

RULE 13a-14(a)/15d-14(a)/CERTIFICATIONS OF CFO

I, Jon Gerlach, certify that:

1.I have reviewed this quarterly report on Form 10-Q of IKONICS Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15f and 15d-15(f)) for the registrant and we have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 13, 2015	/s/ Jon Gerlach
	Jon Gerlach
	Chief Financial Officer and Vice President of Finance

EX-32

EXHIBIT 32

SECTION 1350 CERTIFICATIONS

Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002, each of the undersigned certifies that this periodic report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this periodic report fairly presents, in all material respects, the financial condition and results of operations of IKONICS Corporation.

Date: August 13, 2015	/s/ William C. Ulland
	William C. Ulland
	Chairman, Chief Executive Officer
	and President

Date: August 13, 2015	/s/ Jon Gerlach
	Jon Gerlach
	Chief Financial Officer
	and Vice President of Finance

XML

Income Taxes (Details) - USD ($)	Jun. 30, 2015	Jun. 30, 2014
Deferred tax amounts included in balance sheet
Unrecognized tax benefits	$ 0	$ 0

XML

Earnings Per Common Share (EPS)

6 Months Ended

Jun. 30, 2015

Earnings Per Common Share (EPS)

Earnings Per Common Share (EPS)

4.Earnings Per Common 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 that would have been outstanding if the potential dilutive common shares, such as those shares subject to options, had been issued.

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

	Three Months Ended
	June 30, 2015	June 30, 2014
Weighted average common shares outstanding	2,018,253	2,016,885
Dilutive effect of stock options	539	2,836
Weighted average common and common equivalent shares outstanding	2,018,792	2,019,721

	Six Months Ended
	June 30, 2015	June 30, 2014
Weighted average common shares outstanding	2,018,253	2,014,836
Dilutive effect of stock options	—	1,938
Weighted average common and common equivalent shares outstanding	2,018,253	2,016,774

For three months ended June 30, 2015, options to purchase 6,250 shares of common stock with a weighted average price of $18.28 were outstanding but were excluded from the computation of common share equivalents because they were anti-dilutive.   Options to purchase 1,250 shares of common stock with a weighted average price of $28.25 were outstanding during the three and six months ended June 30, 2014, but were excluded from the computation of common share equivalents because they were anti-dilutive.

If the Company was in a net income position for the first six months of 2015, 5,918 options with a weighted average exercise price of $12.49 would have been included as part of the weighted average common and common equivalent shares outstanding as the options would have been dilutive while 6,250 options with a weighted average exercise price of $18.28 would have remained excluded as the options were anti-dilutive.

XML

Inventories

6 Months Ended

Jun. 30, 2015

Inventories

Inventories

3.Inventories

The major components of inventories are as follows:

	June 30, 2015			Dec 31, 2014
Raw materials	$	1,854,302		$	2,020,151
Work-in-progress	421,764			407,964
Finished goods	1,399,940			1,517,151
Reduction to LIFO cost	(1,312,113		)	(1,314,616		)
Total Inventory	$	2,363,893		$	2,630,650

XML

CONDENSED BALANCE SHEETS - USD ($)	Jun. 30, 2015	Dec. 31, 2014
CURRENT ASSETS:
Cash and cash equivalents	$ 2,368,778	$ 1,936,214
Short-term investments	1,205,000	1,766,000
Trade receivables, less allowance of $56,000 in 2015 and $49,000 in 2014	2,154,908	2,096,328
Inventories	2,363,893	2,630,650
Prepaid expenses and other assets	145,920	86,400
Income taxes receivable	246,111	163,651
Deferred income taxes	178,000	178,000
Total current assets	8,662,610	8,857,243
PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land and buildings	6,500,802	6,247,781
Machinery and equipment	4,208,267	3,956,561
Office equipment	817,072	754,220
Vehicles	247,356	247,356
Gross property, plant, and equipment, at cost	11,773,497	11,205,918
Less accumulated depreciation	6,116,830	5,789,070
Net property, plant, and equipment, at cost	5,656,667	5,416,848
INTANGIBLE ASSETS, less accumulated amortization of $212,079 in 2015 and $198,918 in 2014	325,113	353,871
Total assets	14,644,390	14,627,962
CURRENT LIABILITIES:
Accounts payable	596,217	371,181
Accrued compensation	248,483	294,706
Other accrued liabilities	107,015	78,610
Total current liabilities	951,715	744,497
DEFERRED INCOME TAXES	545,000	545,000
Total liabilities	$ 1,496,715	$ 1,289,497
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 2,018,253 shares in 2015 and 2014	$ 201,825	$ 201,825
Additional paid-in capital	2,691,740	2,681,307
Retained earnings	10,254,110	10,455,333
Total stockholders' equity	13,147,675	13,338,465
Total liabilities and stockholders' equity	$ 14,644,390	$ 14,627,962

XML

Basis of Presentation

6 Months Ended

Jun. 30, 2015

Basis of Presentation

Basis of Presentation

1.Basis of Presentation

The condensed balance sheet of  IKONICS Corporation (the “Company”) as of  June 30, 2015, and the related condensed statements of operations for the three and six months ended June 30, 2015 and 2014, and cash flows for the six months ended June 30, 2015 and 2014, have been prepared without being audited.

In the opinion of management, these statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of IKONICS Corporation as of June 30, 2015, and the results of operations and cash flows for all periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted.  Therefore, these statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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

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Stock-Based Compensation (Details 2) - USD ($)	3 Months Ended	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2015	Jun. 30, 2014
Weighted Average Exercise Price
Aggregate intrinsic value of all options outstanding	$ 18,000	$ 18,000
Aggregate intrinsic value of all options exercisable	$ 11,000	$ 11,000
Stock Options
Assumptions used to determine fair value of stock options granted
Dividend yield (as a percent)		0.00%	0.00%
Expected volatility (as a percent)		42.30%	44.30%
Expected life of option		5 years	5 years
Risk-free interest rate (as a percent)		1.40%	1.70%
Fair value of each option on grant date (in dollars per share)		$ 5.43	$ 11.49
Granted (in shares)		7,250	1,250
Shares
Outstanding at beginning of period (in shares)		4,918
Granted (in shares)		7,250	1,250
Exercised (in shares)	0		(5,916)
Outstanding at end of period (in shares)	12,168	12,168
Exercisable at end of period (in shares)	2,833	2,833
Weighted Average Exercise Price
Outstanding at beginning of period (in dollars per shares)		$ 15.78
Granted (in dollars per share)		15.25
Outstanding at end of period (in dollars per share)	$ 15.47	15.47
Exercisable at end of period (in dollars per share)	$ 13.53	$ 13.53
Maximum | Stock Options
Assumptions used to determine fair value of stock options granted
Expected volatility (as a percent)		42.40%
Risk-free interest rate (as a percent)		1.50%
Fair value of each option on grant date (in dollars per share)		$ 6.14

XML

Segment Information (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2015 USD ($)	Jun. 30, 2014 USD ($)	Jun. 30, 2015 USD ($) segment	Jun. 30, 2014 USD ($)	Dec. 31, 2014 USD ($)
Segment Reporting Information
Number of reportable segments | segment			5
Financial information with respect to the reportable segments
Net sales	$ 4,653,548	$ 4,924,747	$ 8,251,437	$ 9,389,323
Cost of goods sold	3,013,806	3,213,875	5,511,020	5,919,298
GROSS PROFIT	1,639,742	1,710,872	2,740,417	3,470,025
Selling general and administrative	1,252,521	1,240,413	2,668,118	2,541,063
Research and development	192,539	177,479	348,383	320,809
INCOME (LOSS) FROM OPERATIONS	194,682	292,980	(276,084)	608,153
Trade receivables by segment
Trade receivables	2,154,908		2,154,908		$ 2,096,328
Corporate, Non-Segment
Financial information with respect to the reportable segments
Selling general and administrative	424,085	391,448	969,905	879,807
Research and development	192,539	177,479	348,383	320,809
INCOME (LOSS) FROM OPERATIONS	(616,624)	(568,927)	(1,318,288)	(1,200,616)
Trade receivables by segment
Trade receivables	(22,685)		(22,685)		(38,466)
Domestic
Financial information with respect to the reportable segments
Net sales	2,111,510	2,089,767	3,489,299	3,599,931
Cost of goods sold	1,207,376	1,220,452	2,048,332	2,103,556
GROSS PROFIT	904,134	869,315	1,440,967	1,496,375
Selling general and administrative	323,730	332,442	639,897	628,793
INCOME (LOSS) FROM OPERATIONS	580,404	536,873	801,070	867,582
Trade receivables by segment
Trade receivables	1,005,847		1,005,847		1,068,170
Export
Financial information with respect to the reportable segments
Net sales	1,337,121	1,626,682	2,455,415	2,813,394
Cost of goods sold	1,018,025	1,194,219	1,902,353	2,069,119
GROSS PROFIT	319,096	432,463	553,062	744,275
Selling general and administrative	137,271	142,716	291,991	266,844
INCOME (LOSS) FROM OPERATIONS	181,825	289,747	261,071	477,431
Trade receivables by segment
Trade receivables	750,167		750,167		640,464
IKONICS Imaging
Financial information with respect to the reportable segments
Net sales	991,108	1,046,592	1,884,873	2,608,396
Cost of goods sold	449,116	510,508	909,487	1,166,507
GROSS PROFIT	541,992	536,084	975,386	1,441,889
Selling general and administrative	237,167	227,816	498,423	472,164
INCOME (LOSS) FROM OPERATIONS	304,825	308,268	476,963	969,725
Trade receivables by segment
Trade receivables	272,551		272,551		254,483
DTX
Financial information with respect to the reportable segments
Net sales	101,662	94,612	197,056	207,129
Cost of goods sold	69,003	84,705	142,094	164,468
GROSS PROFIT	32,659	9,907	54,962	42,661
Selling general and administrative	54,711	50,657	90,243	85,866
INCOME (LOSS) FROM OPERATIONS	(22,052)	(40,750)	(35,281)	(43,205)
Trade receivables by segment
Trade receivables	62,285		62,285		86,507
Micro-Machining
Financial information with respect to the reportable segments
Net sales	112,147	67,094	224,794	160,473
Cost of goods sold	270,286	203,991	508,754	415,648
GROSS PROFIT	(158,139)	(136,897)	(283,960)	(255,175)
Selling general and administrative	75,557	95,334	177,659	207,589
INCOME (LOSS) FROM OPERATIONS	(233,696)	$ (232,231)	(461,619)	$ (462,764)
Trade receivables by segment
Trade receivables	$ 86,743		$ 86,743		$ 85,170

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Short-Term Investments

6 Months Ended

Jun. 30, 2015

Short-Term Investments

Short-Term Investments

2.Short-Term Investments

The Company’s $1,205,000 of short-term investments at June 30, 2015 is comprised of fully insured certificates of deposit with original maturities ranging from six to twelve months and interest rates ranging from 0.3% to 0.5%.

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CONDENSED BALANCE SHEETS (Parenthetical) - USD ($)	Jun. 30, 2015	Dec. 31, 2014
CONDENSED BALANCE SHEETS
Trade receivables, allowance (in dollars)	$ 56,000	$ 49,000
INTANGIBLE ASSETS, accumulated amortization (in dollars)	$ 212,079	$ 198,918
Preferred stock, par value (in dollars per share)	$ 0.10	$ 0.10
Preferred stock, shares authorized	250,000	250,000
Preferred stock, shares issued	0	0
Common stock, par value (in dollars per share)	$ 0.10	$ 0.10
Common stock, shares authorized	4,750,000	4,750,000
Common stock, shares issued	2,018,253	2,018,253
Common stock, shares outstanding	2,018,253	2,018,253

XML

Segment Information (Tables)

6 Months Ended

Jun. 30, 2015

Segment Information

Schedule of financial information with respect to the reportable segments

For the three months ended June 30, 2015:

	IKONICS
	Domestic		Export		Imaging		DTX			AMS			Unalloc.			Total
Net sales	$	2,111,510	$	1,337,121	$	991,108	$	101,662		$	112,147		$	—		$	4,653,548
Cost of goods sold	1,207,376		1,018,025		449,116		69,003			270,286			—			3,013,806
Gross profit (loss)	904,134		319,096		541,992		32,659			(158,139		)	—			1,639,742
Selling general and adminstrative*	323,730		137,271		237,167		54,711			75,557			424,085			1,252,521
Research and development*	—		—		—		—			—			192,539			192,539
Income (loss) from operations	$	580,404	$	181,825	$	304,825	$	(22,052	)	$	(233,696	)	$	(616,624	)	$	194,682

For the three months ended June 30, 2014:

	IKONICS
	Domestic		Export		Imaging		DTX			AMS			Unalloc.			Total
Net sales	$	2,089,767	$	1,626,682	$	1,046,592	$	94,612		$	67,094		$	—		$	4,924,747
Cost of goods sold	1,220,452		1,194,219		510,508		84,705			203,991			—			3,213,875
Gross profit (loss)	869,315		432,463		536,084		9,907			(136,897		)	—			1,710,872
Selling general and adminstrative*	332,442		142,716		227,816		50,657			95,334			391,448			1,240,413
Research and development*	—		—		—		—			—			177,479			177,479
Income (loss) from operations	$	536,873	$	289,747	$	308,268	$	(40,750	)	$	(232,231	)	$	(568,927	)	$	292,980

For the six months ended June 30, 2015:

	IKONICS
	Domestic		Export		Imaging		DTX			AMS			Unalloc.			Total
Net sales	$	3,489,299	$	2,455,415	$	1,884,873	$	197,056		$	224,794		$	—		$	8,251,437
Cost of goods sold	2,048,332		1,902,353		909,487		142,094			508,754			—			5,511,020
Gross profit (loss)	1,440,967		553,062		975,386		54,962			(283,960		)	—			2,740,417
Selling general and adminstrative*	639,897		291,991		498,423		90,243			177,659			969,905			2,668,118
Research and development*	—		—		—		—			—			348,383			348,383
Income (loss) from operations	$	801,070	$	261,071	$	476,963	$	(35,281	)	$	(461,619	)	$	(1,318,288	)	$	(276,084	)

For the six months ended June 30, 2014:

	IKONICS
	Domestic		Export		Imaging		DTX			AMS			Unalloc.			Total
Net sales	$	3,599,931	$	2,813,394	$	2,608,396	$	207,129		$	160,473		$	—		$	9,389,323
Cost of goods sold	2,103,556		2,069,119		1,166,507		164,468			415,648			—			5,919,298
Gross profit (loss)	1,496,375		744,275		1,441,889		42,661			(255,175		)	—			3,470,025
Selling general and adminstrative*	628,793		266,844		472,164		85,866			207,589			879,807			2,541,063
Research and development*	—		—		—		—			—			320,809			320,809
Income (loss) from operations	$	867,582	$	477,431	$	969,725	$	(43,205	)	$	(462,764	)	$	(1,200,616	)	$	608,153

Schedule of trade receivables by segment

	June 30, 2015			Dec 31, 2014
Domestic	$	1,005,847		$	1,068,170
Export	750,167			640,464
IKONICS Imaging	272,551			254,483
DTX	62,285			86,507
AMS	86,743			85,170
Unallocated	(22,685		)	(38,466		)
Total	$	2,154,908		$	2,096,328

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2015	Aug. 07, 2015
Document and Entity Information
Entity Registrant Name	IKONICS CORP
Entity Central Index Key	0001083301
Document Type	10-Q
Document Period End Date	Jun. 30, 2015
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		2,018,253
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q2

XML

Short-Term Investments (Details) - Jun. 30, 2015 - Certificates of Deposit - USD ($)	Total
Short-term investments
Fully insured certificates of deposit	$ 1,205,000
Minimum
Short-term investments
Maturity period	6 months
Interest rate (as a percent)	0.30%
Maximum
Short-term investments
Maturity period	12 months
Interest rate (as a percent)	0.50%

XML

CONDENSED STATEMENTS OF OPERATIONS - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
CONDENSED STATEMENTS OF OPERATIONS
NET SALES	$ 4,653,548	$ 4,924,747	$ 8,251,437	$ 9,389,323
COST OF GOODS SOLD	3,013,806	3,213,875	5,511,020	5,919,298
GROSS PROFIT	1,639,742	1,710,872	2,740,417	3,470,025
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES	1,252,521	1,240,413	2,668,118	2,541,063
RESEARCH AND DEVELOPMENT EXPENSES	192,539	177,479	348,383	320,809
INCOME (LOSS) FROM OPERATIONS	194,682	292,980	(276,084)	608,153
OTHER	1,510	1,552	3,206	3,510
INCOME (LOSS) BEFORE INCOME TAXES	196,192	294,532	(272,878)	611,663
INCOME TAX EXPENSE (BENEFIT)	168,468	96,100	(71,655)	208,316
NET INCOME (LOSS)	$ 27,724	$ 198,432	$ (201,223)	$ 403,347
EARNINGS (LOSS) PER COMMON SHARE:
Basic (in dollars per share)	$ 0.01	$ 0.10	$ (0.10)	$ 0.20
Diluted (in dollars per share)	$ 0.01	$ 0.10	$ (0.10)	$ 0.20
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic (in shares)	2,018,253	2,016,885	2,018,253	2,014,836
Diluted (in shares)	2,018,792	2,019,721	2,018,253	2,016,774

XML

Segment Information

6 Months Ended

Jun. 30, 2015

Segment Information

Segment Information

7.Segment Information

The Company’s reportable segments are strategic business units that offer different products and have varied customer bases.  There are five reportable segments:  Domestic, Export, IKONICS Imaging, Digital Texturing (DTX) and Advanced Material Solutions (AMS).  Domestic sells screen printing film, emulsions, and inkjet receptive film to distributors located in the United States and Canada.  IKONICS Imaging sells photo resistant film, art supplies, glass, metal medium and related abrasive etching equipment to end user customers located in the United States and Canada.  AMS provides sound deadening 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.  Export sells primarily the same products as Domestic and the IKONICS Imaging products not related to AMS or DTX.  The accounting policies applied to determine the segment information are the same as those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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 which are allocated based on the previous segmentation.  Financial information with respect to the reportable segments follows:

For the three months ended June 30, 2015:

	IKONICS
	Domestic		Export		Imaging		DTX			AMS			Unalloc.			Total
Net sales	$	2,111,510	$	1,337,121	$	991,108	$	101,662		$	112,147		$	—		$	4,653,548
Cost of goods sold	1,207,376		1,018,025		449,116		69,003			270,286			—			3,013,806
Gross profit (loss)	904,134		319,096		541,992		32,659			(158,139		)	—			1,639,742
Selling general and adminstrative*	323,730		137,271		237,167		54,711			75,557			424,085			1,252,521
Research and development*	—		—		—		—			—			192,539			192,539
Income (loss) from operations	$	580,404	$	181,825	$	304,825	$	(22,052	)	$	(233,696	)	$	(616,624	)	$	194,682

For the three months ended June 30, 2014:

	IKONICS
	Domestic		Export		Imaging		DTX			AMS			Unalloc.			Total
Net sales	$	2,089,767	$	1,626,682	$	1,046,592	$	94,612		$	67,094		$	—		$	4,924,747
Cost of goods sold	1,220,452		1,194,219		510,508		84,705			203,991			—			3,213,875
Gross profit (loss)	869,315		432,463		536,084		9,907			(136,897		)	—			1,710,872
Selling general and adminstrative*	332,442		142,716		227,816		50,657			95,334			391,448			1,240,413
Research and development*	—		—		—		—			—			177,479			177,479
Income (loss) from operations	$	536,873	$	289,747	$	308,268	$	(40,750	)	$	(232,231	)	$	(568,927	)	$	292,980

For the six months ended June 30, 2015:

	IKONICS
	Domestic		Export		Imaging		DTX			AMS			Unalloc.			Total
Net sales	$	3,489,299	$	2,455,415	$	1,884,873	$	197,056		$	224,794		$	—		$	8,251,437
Cost of goods sold	2,048,332		1,902,353		909,487		142,094			508,754			—			5,511,020
Gross profit (loss)	1,440,967		553,062		975,386		54,962			(283,960		)	—			2,740,417
Selling general and adminstrative*	639,897		291,991		498,423		90,243			177,659			969,905			2,668,118
Research and development*	—		—		—		—			—			348,383			348,383
Income (loss) from operations	$	801,070	$	261,071	$	476,963	$	(35,281	)	$	(461,619	)	$	(1,318,288	)	$	(276,084	)

For the six months ended June 30, 2014:

	IKONICS
	Domestic		Export		Imaging		DTX			AMS			Unalloc.			Total
Net sales	$	3,599,931	$	2,813,394	$	2,608,396	$	207,129		$	160,473		$	—		$	9,389,323
Cost of goods sold	2,103,556		2,069,119		1,166,507		164,468			415,648			—			5,919,298
Gross profit (loss)	1,496,375		744,275		1,441,889		42,661			(255,175		)	—			3,470,025
Selling general and adminstrative*	628,793		266,844		472,164		85,866			207,589			879,807			2,541,063
Research and development*	—		—		—		—			—			320,809			320,809
Income (loss) from operations	$	867,582	$	477,431	$	969,725	$	(43,205	)	$	(462,764	)	$	(1,200,616	)	$	608,153

*  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 June 30, 2015 and December 31, 2014 were as follows:

	June 30, 2015			Dec 31, 2014
Domestic	$	1,005,847		$	1,068,170
Export	750,167			640,464
IKONICS Imaging	272,551			254,483
DTX	62,285			86,507
AMS	86,743			85,170
Unallocated	(22,685		)	(38,466		)
Total	$	2,154,908		$	2,096,328

XML

Commitments

6 Months Ended

Jun. 30, 2015

Commitments

Commitments

6.Commitments

Building:

In July 2015, the Company committed to proceed with a 27,300 square-foot building expansion project. The new, 27,300 square-foot structure will contain a 20,500 square-foot production floor in addition to offices and ancillary facilities and is expected to cost $3.5 million. The building will be an addition to IKONICS 37,000 square-foot building on its Morgan Park site in western Duluth, which currently houses AMS production, warehousing, shipping and film conversion for all IKONICS business units. All AMS activities will relocate to the new facility with an expected project completion date in second quarter of 2016.

ERP System:

During the second quarter of 2015, the Company committed to purchase $140,000 of software related to the implementation of a new Enterprise Resource Planning (ERP) system.  The new ERP system will better support and accommodate IKONICS’ operations and replacing the Company’s existing ERP system.  The total ERP system project is expected to cost approximately $400,000 and is expected to be completed by the second quarter of 2016.

Line of Credit:

A bank line of credit exists providing for borrowings of up to $1,250,000 and expires on May 31, 2017.  The line of credit is collateralized by the Company’s assets and bears interest at 2.5 percentage points over the 30-day LIBOR rate.  The Company did not utilize this line of credit during the first six months of 2015 or 2014 and there were no borrowings outstanding as of June 30, 2015 and 2014.  There are no financial covenants related to the line of credit.  In July 2015, the bank line of credit was increased to $2,050,000 and the interest rate was decreased to 1.8 percentage points over the 30-day LIBOR rate.  The bank line of credit expiration date did not change from May 31, 2017.

XML

Commitments (Details)	1 Months Ended	6 Months Ended
	Jul. 31, 2015 USD ($) ft²	Jun. 30, 2015 USD ($) ft²	Jun. 30, 2016 USD ($)	Jun. 30, 2014 USD ($)
ERP System
Expected ERP system project cost		$ 140,000
Forecast
ERP System
Expected ERP system project cost			$ 400,000
Line Of Credit.
Line of Credit
Maximum borrowing capacity	$ 2,050,000	1,250,000
Outstanding borrowings		$ 0		$ 0
Line Of Credit. | 30-day LIBOR
Line of Credit
Variable rate margin	1.80%	2.50%
Production Floor
Building
Area of property | ft²	20,500
Expansion Project
Building
Area of property | ft²	27,300
Expected cost of expansion	$ 3,500,000
Morgan Park site
Building
Area of property | ft²		37,000

XML

Inventories (Details) - USD ($)	Jun. 30, 2015	Dec. 31, 2014
Inventories
Raw materials	$ 1,854,302	$ 2,020,151
Work-in-progress	421,764	407,964
Finished goods	1,399,940	1,517,151
Reduction to LIFO cost	(1,312,113)	(1,314,616)
Total inventory	$ 2,363,893	$ 2,630,650

XML

Earnings Per Common Share (EPS) (Tables)

6 Months Ended

Jun. 30, 2015

Earnings Per Common Share (EPS)

Summary of shares used in the calculation of diluted EPS

	Three Months Ended
	June 30, 2015	June 30, 2014
Weighted average common shares outstanding	2,018,253	2,016,885
Dilutive effect of stock options	539	2,836
Weighted average common and common equivalent shares outstanding	2,018,792	2,019,721

	Six Months Ended
	June 30, 2015	June 30, 2014
Weighted average common shares outstanding	2,018,253	2,014,836
Dilutive effect of stock options	—	1,938
Weighted average common and common equivalent shares outstanding	2,018,253	2,016,774

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Income Taxes

6 Months Ended

Jun. 30, 2015

Income Taxes

Income Taxes

8.Income Taxes

The Company reports a liability for unrecognized tax benefits taken or expected to be taken when they are uncertain.  As of June 30, 2015 and 2014, there was no liability for unrecognized tax benefits.

The Company is subject to taxation in the United States and various states.  The material jurisdictions that are subject to examination by tax authorities primarily include Minnesota and the United States, for tax years 2012, 2013, and 2014.

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Inventories (Tables)

6 Months Ended

Jun. 30, 2015

Inventories

Schedule of major components of inventories

	June 30, 2015			Dec 31, 2014
Raw materials	$	1,854,302		$	2,020,151
Work-in-progress	421,764			407,964
Finished goods	1,399,940			1,517,151
Reduction to LIFO cost	(1,312,113		)	(1,314,616		)
Total Inventory	$	2,363,893		$	2,630,650

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Stock-based Compensation (Tables)

6 Months Ended

Jun. 30, 2015

Stock-based Compensation

Assumptions used in estimating fair value of stock options

	2015	2014
Dividend yield	0%	0%
Expected volatility	42.3% - 42.4%	44.3%
Expected life of option	Five Years	Five Years
Risk-free interest rate	1.4% -1.5%	1.7%
Fair value of each option on grant date	$5.43 - $6.14	$11.49

Stock option activity

		Weighted
		Average
		Exercise
	Shares	Price
Outstanding at January 1, 2015	4,918	$	15.78
Granted	7,250	15.25
Exercised	—	—
Expired and forfeited	—	—
Outstanding at June 30, 2015	12,168	$	15.47
Exercisable at June 30, 2015	2,833	$	13.53

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Stock-Based Compensation (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Stock options
Common stock reserved for future grants (in shares)	108,739		108,739
Proceeds from the exercise of stock				$ 44,730
Maximum
Stock options
Number of shares of common stock authorized for issuance	442,750		442,750
Stock Options
Stock options
Compensation cost recognized	$ 5,700	$ 8,900	$ 10,400	$ 11,500
Unrecognized compensation cost	$ 51,000		$ 51,000
Period during which compensation cost is expected to be recognized			3 years
Exercise of stock options (in shares)	0			5,916
Stock Options | Minimum
Stock options
Option price range(as a percent)			85.00%
Period over which options become exercisable			1 year
Stock Options | Maximum
Stock options
Option price range(as a percent)			110.00%
Expiration period of options granted			7 years
Period over which options become exercisable			3 years

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CONDENSED STATEMENTS OF CASH FLOWS - USD ($)	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$ (201,223)	$ 403,347
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	327,759	320,140
Amortization	13,161	12,887
Stock based compensation	10,433	11,502
Loss on disposal of property, plant and equipment		3,102
Loss on intangible asset abandonment	45,873
Changes in working capital components:
Trade receivables	(58,580)	(193,186)
Inventories	266,757	(76,405)
Prepaid expenses and other assets	(59,520)	(31,713)
Income taxes receivable	(82,460)	(33,307)
Accounts payable	225,036	(20,571)
Accrued expenses	(17,818)	(31,419)
Net cash provided by operating activities	469,418	364,377
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(567,578)	(403,212)
Proceeds from sales of equipment and vehicles		9,163
Purchases of intangibles	(30,276)	(38,590)
Purchases of short-term investments	(650,000)	(1,510,000)
Proceeds on sale of short-term investments	1,211,000	958,948
Net cash used in investing activities	(36,854)	(983,691)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options		44,730
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	432,564	(574,584)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	1,936,214	1,704,300
CASH AND CASH EQUIVALENTS AT END OF PERIOD	2,368,778	1,129,716
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes	$ 10,805	$ 241,624

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Stock-based Compensation

6 Months Ended

Jun. 30, 2015

Stock-based Compensation

Stock-Based Compensation

5.Stock-Based Compensation

The Company maintains a stock incentive plan which authorizes the issuance of up to 442,750 shares of common stock. Of those shares, 12,168 were subject to outstanding options and 108,739 were reserved for future grants at June 30, 2015.  The plan provides for granting eligible participants stock options or other stock awards, as described by the plan, at option prices ranging from 85% to 110% of fair market value at the date of grant.  Options granted expire up to seven years after the date of grant.  Such options generally become exercisable over a one to three year period.

The Company charged compensation cost of approximately $5,700 against income for the three months ended June 30, 2015 and approximately $8,900 for the three months ended June 30, 2014.  For the first six months of 2015, the Company charged compensation cost of approximately $10,400 against income and approximately $11,500 for the same period in 2014.  As of June 30, 2015, there was approximately $51,000 of unrecognized compensation cost related to unvested share-based compensation awards granted.  That cost is expected to be recognized over the next three years.

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

Proceeds from the exercise of 5,916 stock options were approximately $45,000 for the six months ended June 30, 2014.  No stock options were exercised during the six months ended June 30, 2015.

The fair value of options granted during the six months ended June 30, 2015 and 2014 was estimated using the Black-Scholes option pricing model with the following assumptions:

	2015	2014
Dividend yield	0%	0%
Expected volatility	42.3% - 42.4%	44.3%
Expected life of option	Five Years	Five Years
Risk-free interest rate	1.4% -1.5%	1.7%
Fair value of each option on grant date	$5.43 - $6.14	$11.49

There were 7,250 and 1,250 options granted during each of the six months ended June 30, 2015 and 2014, respectively.

Stock option activity during the six months ended June 30, 2015 was as follows:

		Weighted
		Average
		Exercise
	Shares	Price
Outstanding at January 1, 2015	4,918	$	15.78
Granted	7,250	15.25
Exercised	—	—
Expired and forfeited	—	—
Outstanding at June 30, 2015	12,168	$	15.47
Exercisable at June 30, 2015	2,833	$	13.53

The aggregate intrinsic value of all options outstanding and for those exercisable at June 30, 2015 was approximately $18,000 and $11,000, respectively.

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Earnings Per Common Share (EPS) (Details) - $ / shares	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Shares used in calculation of diluted EPS
Weighted average common shares outstanding	2,018,253	2,016,885	2,018,253	2,014,836
Dilutive effect of stock options	539	2,836		1,938
Weighted average common and common equivalent shares outstanding	2,018,792	2,019,721	2,018,253	2,016,774
Anti-dilutive securities
Outstanding options to purchase shares of common stock not included			5,918
Weighted average exercise price of outstanding options not included (in dollars per share)	$ 12.49		$ 12.49
Stock Options
Anti-dilutive securities
Outstanding options to purchase shares of common stock not included	6,250	1,250		1,250
Weighted average exercise price of outstanding options not included (in dollars per share)	$ 18.28	$ 28.25	$ 18.28	$ 28.25