##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended June 30, 2009
 or
 o
    
    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
  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)
  
  
   þ o
  o o
  o þ
   Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ




---



##### 



IKONICS Corporation
  PAGE NO.PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Balance Sheets as of June 30, 2009 (unaudited)
and December 31, 2008
    
    
    3Condensed Statements of Operations for the Three Months and
Six Months Ended June 30, 2009 and 2008 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the Six Months Ended
June 30, 2009 and 2008 (unaudited)
    
    
    5Notes to Condensed Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    20PART II.
    
    OTHER INFORMATION
    
    
    21SIGNATURES
    
    
    23EX-31.1EX-31.2EX-32




---



##### Table of Contents



FINANCIAL INFORMATION
 
 ITEM 1. Condensed Financial Statements
 IKONICS CORPORATION
 
 CONDENSED BALANCE SHEETS
 June 30
    
    
    December 312009
    
    2008(unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    882,023
    
    
    $
    901,738Short term investments
    
    
    600,000
    
    
    
    Trade receivables, less allowance of $88,000 in 2009 and
$56,000 in 2008
    
    
    2,055,030
    
    
    
    2,077,158Inventory
    
    
    2,018,486
    
    
    
    2,109,164Deposits, prepaid expenses and other assets
    
    
    99,358
    
    
    
    192,201Income tax refund receivable
    
    
    37,246
    
    
    
    185,869Deferred income taxes
    
    
    96,000
    
    
    
    96,000Total current assets
    
    
    5,788,143
    
    
    
    5,562,130PROPERTY, PLANT, AND EQUIPMENT, at cost:Land and building
    
    
    5,913,458
    
    
    
    5,928,275Machinery and equipment
    
    
    2,477,156
    
    
    
    2,430,857Office equipment
    
    
    763,595
    
    
    
    763,595Vehicles
    
    
    241,905
    
    
    
    241,9059,396,114
    
    
    
    9,364,632Less accumulated depreciation
    
    
    (3,967,017
    )
    
    
    (3,762,569
    )5,429,097
    
    
    
    5,602,063INTANGIBLE ASSETS, less accumulated amortization of $297,950 in
2009 and $270,325 in 2008
    
    
    367,092
    
    
    
    403,285INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES
    
    
    918,951
    
    
    
    918,951$
    12,503,283
    
    
    $
    12,486,429LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payableTrade
    
    $
    433,232
    
    
    $
    344,783Construction
    
    
    
    
    
    
    120,000Accrued compensation
    
    
    281,043
    
    
    
    335,126Other accrued liabilities
    
    
    90,933
    
    
    
    109,880Total current liabilities
    
    
    805,208
    
    
    
    909,789DEFERRED INCOME TAXES
    
    
    178,000
    
    
    
    143,000Total liabilities
    
    
    983,208
    
    
    
    1,052,789STOCKHOLDERS EQUITY:Preferred stock, par value $.10 per share; authorized 250,000 shares; issued noneCommon stock, par value $.10 per share; authorized 4,750,000 shares;
issued and outstanding 1,967,057 shares in 2009 and 1,993,983 in 2008
    
    
    196,706
    
    
    
    199,398Additional paid-in capital
    
    
    2,185,036
    
    
    
    2,202,888Retained earnings
    
    
    9,138,333
    
    
    
    9,031,354Total stockholders equity
    
    
    11,520,075
    
    
    
    11,433,640$
    12,503,283
    
    
    $
    12,486,429
  3




---



##### Table of Contents



IKONICS CORPORATION
 CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months
    
    
    Six MonthsEnded June 30
    
    
    Ended June 302009
    
    
    2008
    
    
    2009
    
    
    2008NET SALES
    
    $
    3,786,501
    
    
    $
    4,330,059
    
    
    $
    7,349,713
    
    
    $
    8,110,907COST OF GOODS SOLD
    
    
    2,329,999
    
    
    
    2,468,468
    
    
    
    4,487,897
    
    
    
    4,620,261GROSS PROFIT
    
    
    1,456,502
    
    
    
    1,861,591
    
    
    
    2,861,816
    
    
    
    3,490,646SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
    
    
    1,095,839
    
    
    
    1,154,850
    
    
    
    2,317,420
    
    
    
    2,521,930RESEARCH AND DEVELOPMENT
EXPENSES
    
    
    155,993
    
    
    
    167,855
    
    
    
    323,276
    
    
    
    382,710INCOME FROM OPERATIONS
    
    
    204,670
    
    
    
    538,886
    
    
    
    221,120
    
    
    
    586,006GAIN ON SALE OF NON-MARKETABLE
EQUITY SECURITIES
    
    
    9,631
    
    
    
    
    
    
    
    29,762
    
    
    
    INTEREST INCOME
    
    
    2,050
    
    
    
    23,697
    
    
    
    2,120
    
    
    
    67,372INCOME BEFORE INCOME TAXES
    
    
    216,351
    
    
    
    562,583
    
    
    
    253,002
    
    
    
    653,378INCOME TAX EXPENSE
    
    
    69,603
    
    
    
    204,146
    
    
    
    53,119
    
    
    
    189,303NET INCOME
    
    $
    146,748
    
    
    $
    358,437
    
    
    $
    199,883
    
    
    $
    464,075EARNINGS PER COMMON SHARE:Basic
    
    $
    0.07
    
    
    $
    0.17
    
    
    $
    0.10
    
    
    $
    0.22Diluted
    
    $
    0.07
    
    
    $
    0.17
    
    
    $
    0.10
    
    
    $
    0.22WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING :Basic
    
    
    1,971,938
    
    
    
    2,076,828
    
    
    
    1,980,532
    
    
    
    2,064,216Diluted
    
    
    1,973,514
    
    
    
    2,080,617
    
    
    
    1,981,677
    
    
    
    2,068,292
  4




---



##### Table of Contents



IKONICS CORPORATION
 CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
 Six MonthsEnded June 302009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    199,883
    
    
    $
    464,075Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    214,318
    
    
    
    142,205Amortization
    
    
    27,625
    
    
    
    26,855Excess tax benefit from share-based payment arrangement
    
    
    
    
    
    
    (39,319
    )Tax benefit from stock option exercise
    
    
    
    
    
    
    4,388Stock based compensation
    
    
    10,396
    
    
    
    8,028Loss (gain) on sale of equipment and vehicles
    
    
    13,582
    
    
    
    (1,725
    )Loss on intangible asset abandonment
    
    
    12,700
    
    
    
    Gain on sale of non-marketable equity securities
    
    
    (29,762
    )
    
    
    Deferred income taxes
    
    
    35,000
    
    
    
    Changes in working capital components:Trade receivables
    
    
    22,128
    
    
    
    (149,431
    )Inventory
    
    
    90,678
    
    
    
    368,073Deposits, prepaid expenses and other assets
    
    
    92,843
    
    
    
    (195,524
    )Income tax refund receivable
    
    
    148,623
    
    
    
    Accounts payable
    
    
    (31,551
    )
    
    
    94,054Accrued liabilities
    
    
    (73,030
    )
    
    
    (41,694
    )Income taxes payable
    
    
    
    
    
    
    36,166Net cash provided by operating activities
    
    
    733,433
    
    
    
    716,151CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (72,934
    )
    
    
    (829,950
    )Proceeds from sale of equipment and vehicles
    
    
    18,000
    
    
    
    8,500Purchase of intangibles
    
    
    (4,132
    )
    
    
    (33,130
    )Purchase of short-term investments
    
    
    (600,000
    )
    
    
    Proceeds on sale of short-term investments
    
    
    
    
    
    
    3,550,000Proceeds from sale of non-marketable equity securities
    
    
    29,762
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (629,304
    )
    
    
    2,695,420CASH FLOWS FROM FINANCING ACTIVITIES:Excess tax benefit from share-based payment arrangement
    
    
    
    
    
    
    39,319Repurchase of common stock
    
    
    (123,844
    )
    
    
    Proceeds from exercise of stock options
    
    
    
    
    
    
    106,712Net cash provided by (used in) financing activities
    
    
    (123,844
    )
    
    
    146,031NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (19,715
    )
    
    
    3,557,602CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    901,738
    
    
    
    1,230,020CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    882,023
    
    
    $
    4,787,622SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for income taxes, net of refunds received
    
    $
    (106,514
    )
    
    $
    191,644SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIESConstruction payables incurred for building expansion
    
    $
    
    
    
    $
    390,424
  5




---



##### Table of Contents



IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  1.
    
    Basis of PresentationThe balance sheet of IKONICS Corporation (the Company) as of June 30, 2009, and the
related statements of operations for the three and six months ended June 30, 2009 and 2008,
and cash flows for the six months ended June 30, 2009 and 2008, 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, 2009, 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, 2008.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 InvestmentsThe Companys $600,000 of short-term investment is comprised of fully insured certificates of
deposit with maturities ranging from seven to twelve months and interest rates ranging from
1.9% to 2.3%.3.
    
    InventoryThe major components of inventory are as follows:
 June 30, 2009
    
    
    Dec 31, 2008Raw materials
    
    $
    1,403,753
    
    
    $
    1,447,063Work-in-progress
    
    
    270,216
    
    
    
    324,361Finished goods
    
    
    1,234,158
    
    
    
    1,194,148Reduction to LIFO cost
    
    
    (889,641
    )
    
    
    (856,408
    )Total Inventory
    
    $
    2,018,486
    
    
    $
    2,109,164
 6




---



##### Table of Contents



IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  4.
    
    Earnings Per Common Share (EPS)Basic EPS is calculated using net income 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 EndedJune 30, 2009
    
    
    June 30, 2008Weighted average common shares outstanding
    
    
    1,971,938
    
    
    
    2,076,828Dilutive effect of stock options
    
    
    1,576
    
    
    
    3,789Weighted average common and common equivalent shares outstanding
    
    
    1,973,514
    
    
    
    2,080,617
 Six Months EndedJune 30, 2009
    
    
    June 30, 2008Weighted average common shares outstanding
    
    
    1,980,532
    
    
    
    2,064,216Dilutive effect of stock options
    
    
    1,145
    
    
    
    4,076Weighted average common and common equivalent shares outstanding
    
    
    1,981,677
    
    
    
    2,068,292
 5.
    
    Stock-based CompensationThe Company has a stock incentive plan for the issuance of up to 442,750 shares of common
stock including the 100,000 additional shares approved by the shareholders at the April 24,
2009 annual meeting. 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 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. A
total of 127,423 shares of common stock are reserved for additional grants of options under
the plan at June 30, 2009.The Company charged compensation cost of $6,600 against income for the three months ended
June 30, 2009 compared to $4,700 for the three months ended June 30, and 2008. For the first
six months of 2009, the Company charged compensation cost of approximately $10,400 against
income compared to approximately $8,000 for the same period in 2008. As of June 30, 2009
there was approximately $67,000 of unrecognized compensation cost related to unvested
share-based compensation awards granted. That cost is expected to be recognized over the
next three years.There were no excess tax benefits recognized during the three or six month period ended June
30, 2009. For the six months ended June 30, 2008, $39,319 of excess tax benefits were
reported as operating and financing cash flows. The Companys APIC pool totaled $111,029 at
June 30, 2009 and December 31, 2008.Proceeds from the exercise of stock options were $106,712 for the six months ended June 30,
2008. There were no options exercised during the six months ended June 30, 2009.
 7




---



##### Table of Contents



IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  The fair value of options granted during the six months ended June 30, 2009 and 2008 were
estimated using the Black-Scholes option pricing model with the following assumptions:
 2009
    
    2008Dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    47.2
    %
    
    
    55.0
    %Expected life of option
    
    Five Years
    
    Five YearsRisk-free interest rate
    
    
    2.0
    %
    
    
    3.0
    %Fair value of each option on grant date
    
    $
    2.10
    
    
    $
    4.05
 There were 21,750 options and 5,000 options granted during the six months ended June 30, 2009
and 2008, respectively.Stock option activity during the six months ended June 30, 2009 was as follows:
 WeightedAverageExerciseShares
    
    PriceOutstanding at beginning of period
    
    
    26,250
    
    
    $
    6.69Granted
    
    
    21,750
    
    
    
    5.00Exercised
    
    
    
    
    
    
    Expired and forfeited
    
    
    (2,500
    )
    
    
    6.14Outstanding at June 30, 2009
    
    
    45,500
    
    
    
    5.91Exercisable at June 30, 2009
    
    
    15,916
    
    
    
    6.40
 The aggregate intrinsic value of all options outstanding and for those exercisable at June
30, 2009 was $9,000 and $6,000, respectively.
 8




---



##### Table of Contents



IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  6.
    
    Segment InformationThe Companys reportable segments are strategic business units that offer different products
and have varied customer bases. There are three reportable segments: Domestic, Export, and
IKONICS Imaging.
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. It is also entering the market for etched ceramics,
glass and silicon wafers; and is developing and selling proprietary inkjet technology.
Export sells primarily the same products as Domestic and IKONICS Imaging to foreign
customers. The accounting policies applied to determine the segment information are the same
as those described in the summary of significant accounting policies included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2008.Management evaluates the performance of each segment based on the components of divisional
income, and with the exception of trade receivables, does not allocate assets and liabilities
to segments. Financial information with respect to the reportable segments follows:For the three months ended June 30, 2009:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet sales
    
    $
    1,705,462
    
    
    $
    1,169,869
    
    
    $
    911,170
    
    
    $
    
    
    
    $
    3,786,501Cost of goods sold
    
    
    912,497
    
    
    
    928,447
    
    
    
    489,055
    
    
    
    
    
    
    
    2,329,999Gross profit
    
    
    792,965
    
    
    
    241,422
    
    
    
    422,115
    
    
    
    
    
    
    
    1,456,502Selling, general and
administrative*
    
    
    233,341
    
    
    
    116,309
    
    
    
    292,619
    
    
    
    453,570
    
    
    
    1,095,839Research and
development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155,993
    
    
    
    155,993Income (loss) from
operations
    
    $
    559,624
    
    
    $
    125,113
    
    
    $
    129,496
    
    
    $
    (609,563
    )
    
    $
    204,670
 For the three months ended June 30, 2008:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet sales
    
    $
    1,799,163
    
    
    $
    1,350,783
    
    
    $
    1,180,113
    
    
    $
    
    
    
    $
    4,330,059Cost of goods sold
    
    
    963,903
    
    
    
    908,520
    
    
    
    596,045
    
    
    
    
    
    
    
    2,468,468Gross profit
    
    
    835,260
    
    
    
    442,263
    
    
    
    584,068
    
    
    
    
    
    
    
    1,861,591Selling, general and
administrative*
    
    
    295,068
    
    
    
    89,605
    
    
    
    326,841
    
    
    
    443,336
    
    
    
    1,154,850Research and
development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    167,855
    
    
    
    167,855Income (loss) from
operations
    
    $
    540,192
    
    
    $
    352,658
    
    
    $
    257,227
    
    
    $
    (611,191
    )
    
    $
    538,886
 9




---



##### Table of Contents



IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  For the six months ended June 30, 2009:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet sales
    
    $
    3,353,332
    
    
    $
    2,123,473
    
    
    $
    1,872,908
    
    
    $
    
    
    
    $
    7,349,713Cost of goods sold
    
    
    1,796,024
    
    
    
    1,643,136
    
    
    
    1,048,737
    
    
    
    
    
    
    
    4,487,897Gross profit
    
    
    1,557,308
    
    
    
    480,337
    
    
    
    824,171
    
    
    
    
    
    
    
    2,861,816Selling, general and
administrative*
    
    
    505,528
    
    
    
    255,622
    
    
    
    584,527
    
    
    
    971,743
    
    
    
    2,317,420Research and
development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    323,276
    
    
    
    323,276Income (loss) from
operations
    
    $
    1,051,780
    
    
    $
    224,715
    
    
    $
    239,644
    
    
    $
    (1,295,019
    )
    
    $
    221,120
 For the six months ended June 30, 2008:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet sales
    
    $
    3,191,389
    
    
    $
    2,579,728
    
    
    $
    2,339,790
    
    
    $
    
    
    
    $
    8,110,907Cost of goods sold
    
    
    1,747,858
    
    
    
    1,715,346
    
    
    
    1,157,057
    
    
    
    
    
    
    
    4,620,261Gross profit
    
    
    1,443,531
    
    
    
    864,382
    
    
    
    1,182,733
    
    
    
    
    
    
    
    3,490,646Selling, general and
administrative*
    
    
    586,752
    
    
    
    201,503
    
    
    
    676,039
    
    
    
    1,057,636
    
    
    
    2,521,930Research and
development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    382,710
    
    
    
    382,710Income (loss) from
operations
    
    $
    856,779
    
    
    $
    662,879
    
    
    $
    506,694
    
    
    $
    (1,440,346
    )
    
    $
    586,006
 
 *
    
    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, 2009 and December 31, 2008 were as follows:
 June 30, 2009
    
    
    Dec 31, 2008Domestic
    
    $
    974,358
    
    
    $
    957,617Export
    
    
    806,439
    
    
    
    874,068IKONICS Imaging
    
    
    317,680
    
    
    
    276,718Other, net of allowances
    
    
    (43,447
    )
    
    
    (31,245
    )Total
    
    $
    2,055,030
    
    
    $
    2,077,158
 7.
    
    Sale of Non-Marketable Equity SecuritiesThe Company received and realized a gain of $29,762 during the first six months of 2009
related to the 2007 sale of its equity investment in Apprise Technologies, Inc (Apprise).
The Company realized a gain of approximately $55,000 on the $253,000 cash payment received in
2007. During 2008 the Company received an additional $25,000 related to the Apprise sale.
 10




---



##### Table of Contents



IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  8.
    
    Income TaxesThe Company accounts for its uncertain tax positions under the provisions of Financial
Standards Accounting Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48). During the first quarter of 2009 and 2008, the statute of limitations for the
relevant taxing authority to examine and challenge the tax position for open years expired,
resulting in decreases in income tax expense of $21,000 for the first six months of 2009 and
$44,000 for the first six months of 2008. As of June 30, 2009, the liability for
unrecognized tax benefits totaled $27,000 compared to a liability of $48,000 as of June 30,
2008. The liability for unrecognized tax benefits is included in other accrued liabilities.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 2006, 2007, and 2008.It has been the Companys policy to recognize interest and penalties related to uncertain
tax positions in income tax expense. The Company had accrued approximately $6,000 of
interest related to uncertain tax positions at June 30, 2009. The unrecognized tax benefits
at June 30, 2009 relate to taxation of foreign export sales.A reconciliation of the beginning and ending amounts of unrecognized tax benefit for the
first six months of 2009 is as follows:
 Balance at December 31, 2008
    
    $
    48,000Expiration of the statute of limitations for the
assessment of taxes
    
    
    (21,000
    )Balance at June 30, 2009
    
    $
    27,000
 The balance of unrecognized tax benefits at June 30, 2009, if reversed, would decrease the
provision for income taxes and increase net income by the same amount and reduce the
Companys effective tax rate. The Company expects its unrecognized tax benefit to be reduced
by approximately $27,000 during the next twelve months as a result of the expiration of the
statutes of limitations for the assessment of taxes.9.
    
    Subsequent EventsIn May 2009, the FASB issued and the Company adopted SFAS No. 165, Subsequent Events
(SFAS 165). SFAS 165 establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financials statements are issued
or are available to be issued. SFAS 165 requires the disclosure of the date through which
an entity has evaluated subsequent events and the basis for that date, that is, whether the
date represents the date the financial statements were issued or were available to be
issued. SFAS 165 was effective for the Companys quarter ending June 30, 2009.
Accordingly, the Company evaluated subsequent events for recognition and disclosure through
August 14, 2009. The evaluation resulted in no impact to the interim consolidated financial
statements.
 11




---



##### Table of Contents



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. Such statements are
subject to risks and uncertainties, including those discussed under Factors that May Affect Future
Results below, that 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. Certain forward-looking statements are indicated by italics.
 
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Factors that May Affect Future Results
 
    
    The possibility that the Company may need to record an adjustment reducing the value
of its investment in imaging Technology international (iTi)This investment is
periodically assessed for an other-than-temporary impairment and recorded at the lower
of cost or market value and is currently recorded at $919,000, which represents
approximately 8% of outstanding shares of iTi. In assessing whether a decline has
occurred in the fair value of this investment, the Company may consider a number of
factors, including, any recent transactions in iTi equity securities occurring at lower
valuations than past transactions, uncertainty or failures in iTis technology or
business strategies, and declines in iTis financial condition, results of operations
and ability to achieve its forecasted results without reasonable prospects for
improvement. An occurrence of any of these factors may cause the Company to record an
adjustment lowering the value of this investment. iTi is in the early stages of
developing its business and, as a result, this investment is highly speculative.
    
    The Companys expectation that its effective tax rate will return to 35% to 36% of
pretax income for the remainder of 2009 compared to effective tax rate of 21% recorded
in the first six month of 2009The effective tax rate for the final six months of 2009
may be affected by changes in federal and state tax law, unanticipated changes in the
Companys financial position or the Companys operating activities and/or management
decisions could increase or decrease its effective tax rate.
    
    The Companys belief that the quality of its receivables is high and that strong
internal controls are in place to maintain proper collectionsThis belief may be
impacted by domestic economic conditions, by economic, political, regulatory or social
conditions in foreign markets, or by the failure of the Company to properly implement
or maintain internal controls.
    
    The belief that the Companys current financial resources, 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 and capital
expenditures. The belief that the Companys low debt levels and available line of
credit make it unlikely that a decrease in product demand would impair the Companys
ability to fund operationsChanges in anticipated operating results, credit
availability, equity market conditions or the Companys debt levels may further enhance
or inhibit the Companys ability to maintain or raise appropriate levels of cash.
    
    The Companys expectation that it will obtain a new line of credit similar to its
current line of credit when the current line of credit expiresThis expectation may be
impacted by factors such as changes
 12




---



##### Table of Contents



in capital markets, general economic conditions, the Companys financial results and condition, and the Companys anticipated need for
capital to fund business operations and capital expenditures.
 
    
    The Companys expectations as to the level and use of planned capital expenditures
and that capital expenditures will be funded with cash on hand and cash generated from
operating activitiesThis expectation may be affected by changes in the Companys
anticipated capital expenditure requirements resulting from unforeseen required
maintenance, repairs, or capital asset additions. The funding of planned or unforeseen
expenditures may also be affected by changes in anticipated operating results resulting
from decreased sales, lack of acceptance of new products or increased operating
expenses or by other unexpected events affecting the Companys financial position.
    
    The Companys belief that its vulnerability to foreign currency fluctuations and
general economic conditions in foreign countries is not significantThis belief may be
impacted by economic, political and social conditions in foreign markets, changes in
regulatory and competitive conditions, a change in the amount or geographic focus of
the Companys international sales, or changes in purchase or sales terms.
    
    The Companys plans to continue to invest in research and development efforts,
expedite internal product development and invest in technological alliances, as well as
the expected focus and results of such investmentsThese plans and expectations may be
impacted by general market conditions, unanticipated changes in expenses or sales,
delays in the development of new products, technological advances, the ability to find
suitable and willing technology partners or other changes in competitive or market
conditions.
    
    The Companys efforts to grow its international businessThese efforts may be
impacted by economic, political and social conditions in current and anticipated
foreign markets, regulatory conditions in such markets, unanticipated changes in
expenses or sales, changes in competitive conditions or other barriers to entry or
expansion.
    
    The Companys belief as to future activities that may be undertaken to expand the
Companys businessActual activities undertaken may be impacted by general market
conditions, competitive conditions in the Companys industry, unanticipated changes in
the Companys financial position, lack of acceptance of new products or the inability
to identify attractive acquisition targets or other business opportunities.
 Critical Accounting Estimates
  Trade Receivables.
 13




---



##### Table of Contents



Inventory.
 Income Taxes.
 Investments in Non-Marketable Equity Securities
 Revenue Recognition.
 Results of Operations
 Quarter Ended June 30, 2009 Compared to Quarter Ended June 30, 2008
 Sales.
 Gross Profit
 Selling, General and Administrative Expenses
 Research and Development Expenses
 14




---



##### Table of Contents



Gain on Sale of Non-Marketable Equity Securities.
 Interest Income.
 Income Taxes.
 Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008
 Sales.
 Gross Profit
 Selling, General and Administrative Expenses
 Research and Development Expenses
 Gain on Sale of Non-Marketable Equity Securities.
 15




---



##### Table of Contents



Interest Income.
 Income Taxes
 Liquidity and Capital Resources
     16




---



##### Table of Contents



Capital Expenditures
  International Activity
   17




---



##### Table of Contents



Future Outlook
     Recent Accounting Pronouncements
    18




---



##### Table of Contents



Off Balance Sheet Arrangements
  19




---



##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4. Controls and Procedures
   20




---



##### Table of Contents



OTHER INFORMATION
 ITEM 1. Legal Proceedings
  ITEM 1A. Risk Factors
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (1)
 (c) Total Number ofShares Purchased as
    
    (d) Maximum Number of(a) Total Number
    
    
    
    
    
    Part of Publicly
    
    Shares that Mayof
    
    (b) Average Price
    
    Announced Plans
    
    Yet Be Purchased UnderShares Purchased
    
    Paid per Share
    
    or Programs
    
    The Plans or ProgramsApril 1, 2009 through April 30, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    May 1, 2009 through May 31, 2009
    
    
    10,599
    
    
    $
    5.15
    
    
    
    10,599
    
    
    
    35,231June 1, 2009 through June 30, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    In prior years, the Companys board of directors had authorized the repurchase of
150,000 shares of common stock. In August 2008, the Companys Board of Directors approved
the repurchase of an additional 100,000 shares of common stock bringing the total shares
eligible for repurchase to 250,000. A total of 204,170 shares have been repurchased under
this program including 10,599 shares repurchased during the second quarter of 2009. The
plan allows for an additional 35,231 shares to be repurchased. ITEM 3. Defaults upon Senior Securities
  ITEM 4. Submission of Matters to a Vote of Security Holders
   Votes for (at least)
    
    Votes Withheld (no more than)Charles H. Andresen
    
    
    1,746,753
    
    
    
    53,418Lockwood Carlson
    
    
    1,746,753
    
    
    
    53,418David O. Harris
    
    
    1,746,753
    
    
    
    53,418Gerald W. Simonson
    
    
    1,746,753
    
    
    
    53,418William C. Ulland
    
    
    1,746,753
    
    
    
    53,418Rondi Erickson
    
    
    1,746,753
    
    
    
    53,418H. Leigh Severance
    
    
    1,746,753
    
    
    
    53,418
 21




---



##### Table of Contents



Votes For
    
    Votes Against
    
    Abstain1,095,470
    
    42,789
    
    4,490
 ITEM 5. Other Information
  ITEM 6. Exhibits
  Exhibit
    
    Description3.1
    
    Restated Articles of Incorporation of Company, as amended.13.2
    
    By-Laws of the Company, as amended.210
    
    IKONICS Corporation 1995 Stock Incentive Plan, as amended.331.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of CEO31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of CFO32
    
    Section 1350 Certifications
  
 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).3
    
    Incorporated by reference to the like numbered Exhibit to the Companys
Registration Statement on Form S-8 filed with the Commission on August 14, 2009
(File No. 000-25727). 22




---



##### Table of Contents



SIGNATURES
  IKONICS CORPORATIONDATE: August 14, 2009
    By:
    /s/ Jon GerlachJon Gerlach,Chief Financial Officer, and
Vice President of Finance 23




---



##### Table of Contents



INDEX TO EXHIBITS
 Exhibit
    
    Description
    
    Page3.1
    
    Restated Articles of Incorporation of Company, as amended
    
    Incorporated by reference3.2
    
    By-Laws of the Company, as amended
    
    Incorporated by reference10
    
    IKONICS Corporation 1995 Stock Incentive Plan, as amended
    
    Incorporated by reference31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of CEO
    
    Filed Electronically31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of CFO
    
    Filed Electronically32
    
    Section 1350 Certifications
    
    Filed Electronically