U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒

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

For the Quarterly Period Ended June 30, ~~2019~~2020

☐

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

For the Transition Period From to .

Commission file number 000-25727

IKONICS CORPORATION

(Exact name of registrant as specified in its charter)

Minnesota		41-0730027
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

4832 Grand Avenue Duluth, Minnesota		55807
(Address of principal executive offices)		(Zip code)

(218) 628-2217

(Registrant’s telephone number, including area code)

Not Applicable

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.10 per share	IKNX	Nasdaq Capital Market LLC

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ☒ No ☐

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

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☐		Smaller reporting company ☒
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $.10 par value - ~~1,980,811~~1,976,354 shares outstanding as of August ~~1, 2019.~~7, 2020.

Table of Contents

~~For the six months ended June 30, 2018:~~See notes to condensed financial statements.

If the Company was in a net income position for the three and six months ended June 30, 2020, all 21,500 options outstanding with a weighted average exercise price of $7.38 would have remained excluded from the computation of common share equivalents as the options were anti-dilutive.

If the Company was in a net income position for the three and six months ended June 30, 2019, all 16,000 options outstanding with a weighted average exercise price of $12.17 would have remained excluded from the computation of common share equivalents as the options were anti-dilutive.

For the three and six months ended June 30, 2018, options to purchase all 18,000 shares of common stock with a weighted average exercise price of $13.22 were outstanding but were excluded from the computation of common shares equivalent because they were anti-dilutive.

~~The~~There was not aggregate intrinsic value ~~of all~~to the options outstanding and exercisable at June 30, ~~2019 was $0.~~2020.

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

Trade receivables by segment as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 were as follows:

The information presented below in Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These forward-looking statements include but are not limited to statements relating to our future plans, ~~and~~ objectives and ~~results.~~results and the impact of the COVID-19 pandemic on our financial results and the effectiveness of the Company’s responses to the pandemic. Such statements are subject to risks and uncertainties, including those discussed elsewhere in this report and under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, 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 ~~2019~~2020 and the first six months of ~~2019,~~2020, as well as the same periods of ~~2018.~~2019. It should be read in connection with the Company’s condensed unaudited financial statements and notes thereto included in this Form 10-Q.

The Company is closely monitoring the novel strain of coronavirus (COVID-19) pandemic and its impact on its business. The outbreak and continuing spread of COVID-19 has resulted in a substantial curtailment of business activities worldwide and is causing weakened economic conditions, both nationally and globally. As part of intensifying efforts to contain the spread of COVID-19, a growing number of state, local and foreign governments have imposed various restrictions on the conduct of business and travel. Government restrictions, such as stay-at-home orders and quarantines and company remote work policies have led to a significant number of business closures and slowdowns. These business closures and slowdowns have already adversely impacted and will likely continue to adversely impact the Company directly, as well as cause its customers and suppliers to slow or stop production, which will likely significantly disrupt the Company's sales, production and supply chain. For example, as a result of the COVID-19 pandemic, the Company began to experience decreased demand for its products and services during the six months ended June 30, 2020. The Company anticipates a significant decrease in global demand for its products and services during second half of 2020 and beyond. This significant decrease in demand will likely have a material adverse impact on the Company's business, operating results and financial condition. The Company has been deemed an essential operation. As a result, the Company’s facilities continue to operate and are doing so safely, having implemented social distancing and enhanced health, safety and sanitization measures. The Company's leadership continues to address the rapidly evolving situation and is adjusting as necessary. The Company has also implemented necessary procedures to enable a significant portion of its employee base to work remotely. As the situation evolves into a more prolonged pandemic, the Company expects the COVID-19 pandemic to have a significant adverse effect on economies and financial markets globally, potentially leading to a significant worldwide economic downturn, which could have a significant adverse effect on the Company's business, operating results and financial condition. However, the duration of these trends and the magnitude of such impacts cannot be precisely estimated at this time, as they are affected by a number of factors (some of which are outside management’s control), including those presented in Part II, Item 1A. “Risk Factors” below. To partially mitigate the negative impact of the COVID-19 pandemic, the Company implemented cost reduction efforts including furloughing approximately 40% of the Company's workforce, reductions in board and officer compensation, suspension of the Company’s contribution to its 401(k) retirement plan and the elimination of all non-essential expenditures.

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~~the Company believes are the most critical to aid in fully understanding and evaluating its reported financial results, include the following:

Trade Receivables. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by review of the current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same collection history that has occurred in the ~~past.~~past especially given the unpredictability of any effects related to the COVID-19 pandemic. The general payment terms are net 30-45 days for domestic customers and net 30-90 days for foreign customers. A small percentage of the trade receivables balance is denominated in a foreign currency with no concentration in any given country. At the end of each reporting period, the Company analyzes the receivable balance for customers paying in a foreign currency. These balances are adjusted to each quarter or year-end spot rate in accordance with FASB ASC 830, Foreign Currency Matters. The Company also maintains a provision for any customer related returns based upon historical experience of actual returns and any specifically identified product issues, refunds or credits.

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

Income Taxes. ~~Deferred~~Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred tax assets and liabilities are presented as long-term on a net basis. The Company follows the accounting standard on accounting for uncertainty in income taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also addresses derecognition, classification, interest and penalties on income taxes, and accounting in interim periods.

Revenue recognition. Revenue is measured based on consideration specified in the contract with a customer, adjusted for any applicable estimates of variable consideration and other factors affecting the transaction price, including noncash consideration, consideration paid or payable to customers and significant financing components. While most of the Company’s revenue is contracted with customers through one-time purchase orders and short-term contracts, the Company does have long-term arrangements with certain customers. Revenue from all customers is recognized when a performance obligation is satisfied by transferring control of a distinct good or service to a customer.

Individually promised goods and services in a contract are considered a distinct performance obligation and accounted for separately if the customer can benefit from the individual good or service on its own or with other resources that are readily available to the customer and the good or service is separately identifiable from other promises in the arrangement. When an arrangement includes multiple performance obligations, the consideration is allocated between the performance obligations in proportion to their estimated standalone selling price. Costs related to products delivered are recognized in the period incurred, unless criteria for capitalization of costs are met. Costs of revenues consist primarily of direct labor, manufacturing overhead, materials and components. The Company does not incur significant upfront costs to obtain a contract. If costs to obtain a contract were to become material, the costs would be recorded as an asset and amortized to expense in a manner consistent with the related recognition of revenue.

The Company excludes governmental assessed and imposed taxes on revenue transactions that are invoiced to customers from revenue. The Company includes freight billed to customers in revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.

The timing of revenue recognition, billings and cash collections results in accounts receivable on the balance sheet.

Performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation in proportion to its standalone selling price and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s various performance obligations and the timing or method of revenue recognition are discussed below:

The Company sells its products to both distributors and end-users. Each unit of product delivered under a customer order represents a distinct and separate performance obligation as the customer can benefit from each unit on its own or with other resources that are readily available to the customer and each unit of product is separately identifiable from other products in the arrangement.

The transaction price for the Company’s products is the invoiced amount. The Company does not have variable consideration in the form of refunds, credits, rebates, price concessions, pricing incentives or other items impacting transaction price. The purchase order pricing in arrangements with customers is deemed to approximate standalone selling price; therefore, the Company does not need to allocate proceeds on a relative standalone selling price allocation between performance obligations. The Company applies the practical expedient in ~~paragraph~~FASB ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less. There are no material obligations that extend beyond one year.

Revenue is recognized when transfer of control occurs as defined by the terms in the customer agreement. The Company immediately recognizes incidental items that are immaterial in the context of the contract. The Company has also applied the practical expedient in ~~paragraph~~FASB ASC 606-10-32-18 regarding the adjustment of the promised amount of consideration for the effects of a significant financing component when the customer pays for that good or service within one year or less, as the Company does not have any significant financing components in its customer arrangements as payment is received at or shortly after the point of sale, generally thirty to ninety days.

The Company estimates returns based on an analysis of historical experience if the right to return products is granted to its customers. The Company does not record a return asset as non-conforming products are generally not returned. The Company’s return policy does not vary by geography. The customer has no rotation or price protection ~~rights, and the~~rights. The Company is not under a warranty ~~obligation.~~

~~Trade receivables.~~ Trade receivables include amounts invoiced and currently due from customers. The amounts due are stated at their net estimated realizable value. The Company records an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based on a review of all outstanding amounts on an on-going basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considers a customer’s financial condition, credit history, and current economic conditions. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. Accounts are considered past due if payment is not received according to agreed-upon terms.obligation except as described below.

Sales commissions. Sales commissions paid to sales representatives are eligible for capitalization as they are incremental costs that would not have been incurred without entering into a specific sales arrangement and are recoverable through the expected margin on the transaction. The Company has elected to apply the practical expedient provided by FASB ASC 340-40-25-4 and recognize the incremental costs of obtaining contracts as an expense when incurred, as the amortization period of the assets that would have otherwise been recognized is one year or less. The Company records these costs in selling, general, and administrative expense.

Product warranty. The Company offers warranties on various products and services. These warranties are assurance type warranties that are not sold on a standalone basis; therefore, they are not considered distinct performance obligations. The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time the revenue is recognized for the product sale.

International revenue. The Company markets its products to numerous countries in North America, Europe, Latin America, Asia and other parts of the world. Foreign sales were approximately ~~29%~~34% of total sales during the first six months of ~~2019 compared to 28% for~~2020 and 29% during the first six months of ~~2018.~~2019.

Quarter Ended June 30, ~~2019~~2020 Compared to Quarter Ended June 30, ~~2018~~2019

Sales. The Company’s 2020 second quarter sales of $2.6 million were $2.0 million, or 44.0%, lower than the 2019 second quarter sales of $4.6 ~~million~~million. Each of the Company's divisions were ~~$38,000, or 0.8%, lower than~~negatively impacted by the ~~2018~~slow down in economic activity due to the COVID-19 pandemic. Chromaline's 2020 second quarter sales of ~~$4.6 million. AMS~~$1.6 million decreased by 47.9% from second quarter 2019 sales of ~~$419,000 decreased by 11.1% from second quarter 2018 sales of $471,000 due to lower sales to its two largest customers. 2019 second quarter~~$3.1 million. IKONICS Imaging sales of $958,000 were $11,000, or 1.1%, lower than the sales for the same period in 2018 as equipment sales continue to lag behind 2018. Partially offsetting these sales decreases, DTX had improved film sales, increasing from $94,000 in the second quarter of 2018 to $113,000 in the second quarter of 2019, a 19.4% increase. Chromaline sales for the second quarter of 2020 also decreased versus the second quarter of 2019 as 2020 IKONICS Imaging second quarter sales of $626,000 were ~~similar~~$332,000, or 34.7%, lower than 2019 second quarter sales. After a strong first quarter, AMS realized lower second quarter sales. Second quarter AMS sales in 2020 were $278,000 compared to $419,000 for the same period last year, ~~at $3.1 million.~~

Gross Profit. Gross profit was ~~$1.4 million,~~$385,000, or ~~31.1%~~15.0% of sales, in the second quarter of ~~2019~~2020 compared to ~~$1.7~~$1.4 million, or ~~35.9%~~31.1% of sales, for the same period in ~~2018.~~2019. The Chromaline gross margin ~~decrease~~decreased from ~~34.3% in the second quarter of 2018 to~~ 26.6% for the second quarter of 2019 was due to a less favorable sales mix as an increase in lower margin sales into Asia were offset by a decrease in higher margin domestic sales. An increase in certain raw material pricing also unfavorably impacted the gross margin for some Chromaline emulsion products. The DTX gross margin for the second quarter of 2019 was also lower at 54.2% compared to 64.4% for the same period in 2018. Despite lower sales volumes, the AMS gross margin improved to 19.9% in the second quarter of 2019 upto 13.1% for the second quarter of 2020 while the IKONICS Imaging gross margin decreased from ~~17.1%~~47.7% in the second quarter of ~~2018 as~~2019 to 32.9% in the second quarter of 2020. Both the Chromaline and IKONICS Imaging gross margins in 2020 were unfavorably impacted by lower sales volumes and lower production output caused by the COVID-19 pandemic. A decrease in sales volumes resulted in the AMS 2020 second quarter gross margin decreasing to a ~~result of lower costs~~negative 21.0% from a 19.9% in 2019. The ~~IKONICS Imaging~~2020 and 2019 second quarter ~~margin of 47.7% was similar~~DTX gross margins were 50.4% and 54.2%, respectively. IKONICS anticipates that the COVID-19 outbreak will continue to adversely impact gross margins in the second ~~quarter 2018 gross margin~~half of ~~47.4%~~2020 and beyond due to both lower sales volumes and production levels.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were ~~$1.3~~$1.2 million, or ~~29.1%~~46.7% of sales, in the second quarter of ~~2019~~2020 compared to $1.3 million, or ~~28.2%~~29.1% of sales, for the same period in ~~2018.~~2019. Selling, general and administrative expenses for the second quarter of ~~2019 increased~~2020 decreased primarily due to ~~higher medical insurance~~a reduction in travel, trade show, promotional and consulting expenses. The Company expects lower selling, general and administrative expenses in the second half of 2020 as it continues its costs reduction efforts including furloughing approximately 40% of the Company's workforce, reductions in board and officer compensation, suspension of the Company’s contribution to its 401(k) retirement plan and the elimination of all non-essential expenditures.

Research and Development Expenses. Research and development expenses during the second quarter of ~~2019~~2020 were $201,000, or 7.8% of sales, versus $270,000, or 5.9% ~~of sales, versus $156,000, or 3.4%~~, of sales for the same period in ~~2018. The 2019 second quarter increase is related to additional research~~2019. Research and development ~~staffing expenses. Additionally, legal and patent~~ expenses in the second quarter of 2019 ~~increased due to the write off of patent application costs of $72,000 that~~ were ~~previously recorded as an asset, as the Company determined that it would no longer continue to pursue those patent applications.~~

~~Interest Expense.~~ ~~Interest expense for the second quarter of 2019 was $23,000 compared to interest expense of $24,000 during the second quarter of 2018.~~

~~Income Taxes.~~ For the second quarter of 2019, the Company realized an income tax benefit of $70,000, or an effective rate of 37.8%, compared to expense of $40,000, or an effective tax of 21.4% for the three months ended June 30, 2018. The primary driver of the change in the Company's effective tax rate is the quarterly loss as compared to income for the same period last year. The income tax provision for the 2019 and 2018 periods differ from the expected tax benefit due to unfavorable non-deductible items and generation of research and development tax credits.

~~Sales.~~ The Company’s 2019 first half sales of $8.1 million were 6.7% lower than the 2018 first half sales of $8.7 million. Chromaline sales for the first six months of 2019 decreased by $304,000, or 5.6%, compared to the same period last year. Chromaline 2019 first half sales were adversely affected by cold weather shipping constraints in the first quarter since its emulsion products are not freeze-thaw stable. AMS sales for the first six months of 2019 decreased from $894,000 during the same period in 2018 to $736,000, a 17.6% decrease resulting from a decrease in sales to its two largest customers. IKONICS Imaging sales for the first six months of 2019 were $2.0 million, $141,000, or 6.5%, lower than the sales for the first half of 2018 mainly due to lower equipment and film sales. Partially offsetting these sales decreases, DTX sales increased from $183,000 in the first half of 2018 to $205,000 in the first half of 2019, a 12.2% increase resulting from increased film sales.

~~Gross Profit~~. Gross profit was $2.4 million, or 30.0% of sales, in the first half of 2019 compared to $3.0 million, or 34.7% of sales, for the same period in 2018. The Chromaline gross margin decreased from 31.9% in the first half of 2018 to 25.4% for the first six months of 2019 due to a decrease in higher margins sales in the United States which were partially offset by an increase in lower margin sales into Asia. The Chromaline gross margin in the first half of 2019 was also unfavorably impacted by an increase in certain raw material pricing for some emulsion products along with higher manufacturing costs. Lower sales volumes negatively impacted the 2019 first half AMS gross margin which decreased from 12.1% in first half of 2018 to 7.4% for the first six months of 2019. A large portion of the AMS cost structure is fixed, causing sales volumes to have a significant impact on its gross margin. The 2019 AMS margin decrease due to lower sales volumes was partially mitigated by overall lower costs in 2019. For the first six months of 2019, the IKONICS Imaging gross margin was 46.9% compared to 48.2% for the same period in 2018 while the DTX gross margin for the first six months of 2019 was 58.3% versus 67.8% for the same period last year.

~~Selling, General and Administrative Expenses~~. Selling, general and administrative expenses were $2.7 million, or 33.5% of sales, in the first half of 2019 compared to $2.7 million, or 30.5% of sales, for the same period in 2018. Selling, general and administrative expenses for the first six months of 2019 increased primarily due to higher health insurance costs. Additionally, the increase in the percentage of expense as it relates to sales increased in 2019 versus 2018 for the first six months due to lower sales in 2019.

Income Taxes.

For the ~~first six months~~second quarter of ~~2019,~~2020, the Company realized an income tax benefit of ~~$173,000, or an effective rate of 23.3%,~~$0, compared to ~~expense~~a benefit of ~~$19,000,~~$70,000, or an effective tax rate of ~~56.7%~~37.8% for the ~~six~~three months ended June 30, ~~2018.~~2019. The primary driver of the ~~decrease~~change in ~~our~~the Company’s effective tax rate is attributable to a valuation allowance recorded in the ~~year-to-date loss as compared~~current period to offset any income ~~for the same period last year.~~tax benefit from current losses. The income tax provision for ~~the~~ 2019 ~~and 2018 periods differ~~differs from the expected tax benefit due to unfavorable non-deductible items and generation of research and development tax credits.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Sales. The Company’s 2020 first half sales of $6.1 million were $2.1 million, or 25.3%, lower than the 2019 first half sales of $8.1 million due to the slowdown in economic activity related to the COVID-19 pandemic. Chromaline 2020 sales for the first six months of $3.6 million decreased by 30.2% from 2019 first half sales of $5.1 million. IKONICS Imaging first half sales of $1.6 million in 2020 were $451,000, or 22.0% lower than sales for the first six months of 2019. DTX sales also decreased in the first half of 2020 from $205,000 in 2019 to $162,000 in 2020. AMS sales for the first six months of 2020 were $728,000 compared to $736,000 for the first half of 2019. The Company was notified by AMS's largest customer that orders will be significantly reduced in second half of 2020 and into 2021 due to the COVID-19 pandemic. IKONICS anticipates that the COVID-19 outbreak will continue to adversely impact sales in all of its divisions in the second half of 2020 and beyond due to decreasing demand for its products and services.

Table of Contents

Gross Profit. Gross profit was $1.5 million, or 25.3% of sales, in the first half of 2020 compared to $2.4 million, or 30.0% of sales, for the same period in 2019. The Chromaline gross margin decreased from 25.4% in the first half of 2019 to 21.2% for the first six months of 2020 while the IKONICS Imaging gross margin decreased from 46.9% in the first half of 2019 to 43.7% in the first half of 2020. Both the Chromaline and IKONICS Imaging gross margins in 2020 were unfavorably impacted by lower sales volumes and lower production output caused by the COVID-19 pandemic. A price decrease for AMS' largest selling product resulted in its gross margin decreasing from 7.4% in first half of 2019 to a negative 0.6% for the first six months of 2020. The 2020 and 2019 first half DTX gross margins were 52.9% and 58.3%, respectively. IKONICS anticipates that the COVID-19 outbreak will continue to adversely impact gross margins in the second half of 2020 and beyond as sales volumes and production output decreases.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $3.0 million, or 49.2% of sales, in the first half of 2020 compared to $2.7 million, or 33.5% of sales, for the same period in 2019. Selling, general and administrative expenses for the first half of 2020 increased primarily due to $365,000 of one-time costs related to the Chief Executive Officer transition occurring in the first half of 2020. These costs include severance payments, a signing bonus, relocation expenses and executive search consulting expenses. Lower travel, trade show, and promotional expense in the first half of 2020 partially offset the expense increase related to the Chief Executive Officer transition.

Research and Development Expenses. Research and development expenses during the first half of 2020 were $385,000, or 6.3% of sales, versus $449,000, or 5.5%, of sales for the same period in 2019. Research and development expenses in the first half of 2019 were unfavorably impacted by a $72,000 write off of patent application costs that were previously recorded as an asset as the Company determined that it would no longer continue to pursue those patent applications.

Interest Expense. Interest expense for the first six months of 2020 and 2019 was $46,000 and $45,000, respectively.

Income Taxes. For the first half of 2020, the Company realized an income tax benefit of $239,000, or an effective tax rate of 12.8%, compared to a benefit of $173,000, or an effective tax rate of 23.3% for the six months ended June 30, 2019. The primary driver of the change in the Company’s effective tax rate is attributable to a tax benefit in the current period to recognize a net operating loss carryback claim as a result from the recently passed CARES Act. The income tax provision for 2019 differs from the expected tax benefit due to unfavorable non-deductible items and generation of research and development tax credits.

Liquidity and Capital Resources

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

~~Table of Contents~~

Cash and cash equivalents were ~~$297,000~~$3.0 million and ~~$1.6 million~~$960,000 at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Operating activities used ~~$769,000~~$1.2 million in cash during the first six months of ~~2019~~2020 compared to ~~providing $878,000~~using $769,000 of cash ~~used in operating activities~~ during the same period in ~~2018.~~2019. Cash ~~provided by (used in)~~used in operating activities is primarily the result of net ~~income (losses)~~losses adjusted for non-cash depreciation, amortization, and certain changes in working capital components discussed in the following paragraph.

During the first six months of ~~2019,~~2020, trade receivables ~~increased $8,000.~~decreased by $1.0 million. This decrease was due primarily to a slowdown in sales of products and services during the first six months of 2020, as a result of the aforementioned COVID-19 pandemic. The Company believes that the quality of its receivables is high and that strong internal controls are in place to maintain proper collections. Inventories increased by $501,000 due to higher finished goods levels as the Company experienced lower than expected sales during the first half of 2020. Prepaid expenses and other assets decreased by $749,000 reflecting a decrease in a receivable related to the reimbursement of 2019 medical insurance costs that the Company received from its stop-loss insurance carrier. Accrued expenses decreased $512,000, reflecting a decrease in the accrual for health insurance costs. Accounts payable decreased by $446,000 due to the Company's cost reduction efforts and a reduction in raw material purchases in anticipation of lower sales volumes. Income taxes receivable increased by $247,000 as the Company recognized an income tax benefit attributable to a net operating loss carryback claim.

During the first six months of 2019, trade receivables increased $8,000. Inventories increased by $466,000 due to higher finished goods and raw material levels as the Company iswas ramping up inventory levels to meet demand for the remainder of 2019 in addition to lower than expected sales for the first half of 2019. Prepaid expenses and other assets decreased by $113,000, reflecting a decrease in a receivable related to the reimbursement of 2018 medical insurance costs that the Company received from its stop-loss insurance carrier. Accounts payable decreased by $114,000 due to the timing of vendor payments. Accrued expenses increased by $47,000, reflecting the timing of compensation payments while income taxes receivable increased by $182,000 due to the recognition of the 2019 first six month tax benefit.

During the first six months of ~~2018,~~2020, cash provided by investing activities was $2.0 million. Nine certificates of deposits totaling $2.2 million matured during the ~~timing~~first six months of ~~collections resulted in~~2020. The Company’s purchases of equipment of $150,000 were mainly for improvements to production and process capabilities and to replace a ~~$321,000 decrease in trade receivables.~~vehicle. The Company ~~believes~~received $18,000 in proceeds from the sale of a vehicle. Also, during the first six months of 2020, the Company incurred $12,000 in patent application costs that the ~~quality~~Company records as an asset and amortizes upon successful completion of its receivables is high and that strong internal controls are in place to maintain proper collections. Inventories increased by $385,000 due to higher raw material and finished goods levels. Prepaid expenses and other assets increased by $16,000, reflecting prepayments on inventory items which were not received by the ~~Company until the third quarter~~application process.

Table of 2018. Accounts payable increased by $508,000 due to the timing of vendor payments for large raw materials purchases. Accrued expenses increased by $3,000, reflecting the timing of compensation payments while income taxes receivable increased by $1,000 due to the timing of estimated tax payments compared to the calculated 2018 tax liability.

Contents

During the first six months of 2019, cash used in investing activities was $466,000. Twelve certificates of deposits totaling $2.9 million matured during the first six months of 2019. The Company purchased thirteen certificates of deposits totaling $3.2 million. The Company’s purchases of property and equipment of $231,000 were mainly for improvements to production and process capabilities and to replace two vehicles. The Company received $16,000 in proceeds from the sale of two vehicles and equipment. Also, during the first six months of 2019, the Company incurred $6,000 in patent application costs that the Company records as an asset and amortizes upon successful completion of the application process.

~~During~~On April 18, 2020, the ~~first six months~~Company entered into a loan pursuant to the Paycheck Protection Program under the CARES Act, as administered by the U.S. Small Business Administration (the “SBA”). The loan, in the principal amount of ~~2018, cash used~~$1,214,500 (the “PPP Loan”), was disbursed by BMO Harris Bank National Association (“Lender”) on April 22, 2020, pursuant to a Paycheck Protection Program Promissory Note and Agreement (the “Note and Agreement”).

The PPP Loan matures on the two-year anniversary of the funding date and bears interest at a fixed rate of 1.00% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed below), will commence after the six-month anniversary of the funding date. The Company did not provide any collateral or guarantees in ~~investing activities was $382,000. Twelve certificates~~connection with the PPP Loan, nor did the Company pay any facility charge to obtain the PPP Loan. The Note and Agreement provides for customary events of ~~deposits totaling $2.9 million matured~~default, including those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company may prepay the principal of the PPP Loan at any time without incurring any prepayment charges.

All or a portion of the PPP Loan may be forgiven by the SBA and the Lender upon application by the Company. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, and covered utilities during the eight-week period beginning on the approval date of the PPP Loan. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee earning more than $100,000, prorated annually. Not more than 40% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. Although the Company currently believes that its use of the PPP Loan will meet the conditions for forgiveness of the PPP Loan, the Company cannot assure that the PPP Loan will be forgiven, in whole or in part.

On April 1, 2016, the Company entered into a financing agreement (the “Financing Agreement”) under which the Duluth Economic Development Authority (the “Issuer”) agreed to sell $3,415,000 of its Tax Exempt Industrial Revenue Bonds, Series 2016 (IKONICS Project) (the “Bonds”) to Wells Fargo Bank, National Association (the “Bank”), and the Bank agreed to lend to the Company the proceeds received from the sale of the Bonds (the “Loan”). Related to the Company’s Loan, the Company made principal payments of $72,000 during the first six months of ~~2018. The Company purchased twelve certificates of deposits totaling $2.9 million. The Company’s purchases of property~~2020 and equipment of $324,000 were mainly for building upgrades and improvements to production and process capabilities. Also, during the first six months of 2018, the Company incurred $32,000 in patent application costs that the Company records as an asset and amortizes upon successful completion of the application process.

~~Related to the Company’s loan, the Company made principal payments of~~ $70,000 during the first six months of 2019.

The Company is subject to certain customary covenants set forth in the Loan, including a requirement that the Company maintain a debt service coverage ratio of not less than 1.25 to 1.00. As of December 31, 2019, ~~and 2018. During~~ the ~~first six months~~Company was not in compliance with the debt service coverage ratio covenant, but obtained a waiver for the non-compliance. There is no certainty that a waiver can be obtained in the future if similar violations occur. The Company amended the covenant terms in February of ~~2019,~~2020 to change the debt service coverage ratio calculation from a rolling quarterly calculation to an annual calculation beginning December 31, 2020. If the Company ~~repurchased 2,742 shares~~has future violations of its ~~own stock for $21,000.~~covenants, and is unable to obtain appropriate waivers, it could have a significant adverse effect on the Company's liquidity. The Company believes that any adverse effect of such a possible outcome is mitigated by its strong working capital including cash and cash equivalents of $3.0 million along with the Company's $2.0 million available line of credit as of June 30, 2020. However, the Company cannot reasonably estimate the future financial impact on its operations or working capital position given the recent downturn in business due to the coronavirus (COVID-19) pandemic.

A bank line of credit providing for borrowings of up to $2,050,000 ~~expired on June 30, 2019. The line of credit was renewed and will expire on~~expires August 30, 2021. The ~~new~~ line of credit is collateralized by the Company’s assets and bears interest at 1.8 percentage points over the 30-day LIBOR rate. The Company did not utilize this line of credit during the first six months of ~~2019~~2020 or ~~2018,~~2019, and there were no borrowings outstanding as of June 30, ~~2019~~2020 or December 31, ~~2018.~~2019. There are no financial covenants related to the line of credit.

The Company ~~believes that current financial resources, its line of credit,~~relies on cash flow generated from operations and ~~secured through debt financing, and short-term investments, along with the Company’s capacity for additional debt and/or equity financing will be sufficient~~available borrowings under its bank line of credit to fund ~~current~~its working capital and ~~anticipated business operations.~~other operating and investing needs. The ~~Company also believes that it is unlikely that a decrease in demand for the Company’s products would impair the~~ Company’s ability to ~~fund operations given its excess cash and available~~borrow under the bank line of credit is based on its continued compliance with its debt service coverage ratio covenant, as defined.

The full extent of the effect of the COVID-19 pandemic on the Company’s customers, supply chain and business cannot be reasonably assessed at this time although the Company expects its full year 2020 results of operations to be adversely affected. The Company has developed a plan to mitigate the impact of COVID-19 which includes furloughing approximately 40% of the Company's workforce, reductions in board and officer compensation, suspension of the Company’s contribution to its 401(k) retirement plan and the elimination of all non-essential expenditures. The impact of COVID-19 on the Company’s operating results will depend on future developments, which are highly uncertain and cannot be predicted, including governmental and business reactions to the pandemic.

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

Capital Expenditures

Through the first six months of ~~2019,~~2020, the Company incurred ~~$231,000~~$150,000 of capital expenditures mainly for improvements to production and process capabilities and to replace ~~two vehicles.~~a vehicle.

The Company ~~expects~~was planning additional capital expenditures in ~~2019~~2020 of approximately ~~$346,000~~$200,000 including improvements to the Company's ~~coating~~production capabilities, process improvements, ~~and~~ information technology ~~upgrades.~~upgrades and two replacement vehicles. With the recent downturn in business related to the COVID-19 pandemic, the Company anticipates that additional capital expenditures in 2020 will be minimal. Currently, the Company expects to fund its capital expenditures with existing cash and cash generated from operating activities.

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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 ~~29%~~34% of total sales during the first six months of ~~2019 compared to 28% of total sales~~2020 and 29% during the first six months of ~~2018.~~2019. International sales during the first half of 2020 were slightly less impacted by the COVID-19 pandemic when compared to domestic sales. The fluctuations of certain foreign currencies have not significantly impacted the Company’s operations, as the Company’s foreign sales are not concentrated in any one region of the world, although a strong U.S. dollar does make the Company’s products less competitive internationally. The Company believes its vulnerability due to uncertainties in foreign currency fluctuations and general economic conditions in foreign countries is not significant.

The Company’s foreign transactions are primarily negotiated, invoiced and paid in U.S. dollars, while a portion is transacted in Euros. The Company has not implemented an economic hedging strategy to reduce the risk of foreign currency translation or transaction exposures, as management does not believe this to be a significant risk based on the scope and geographic diversity of the Company’s foreign ~~operations as of June 30, 2019.~~operations. Furthermore, the impact of foreign exchange on the Company’s balance sheet and operating results was not material in either ~~2019~~2020 or ~~2018.~~2019.

Future Outlook

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

IKONICS has spent an average of approximately ~~4.0%~~5.0% of annual sales in research and development and has made capital expenditures related to new products and programs. The Company plans to maintain its efforts in these areas to expedite internal product development as well as to form technological alliances with outside entities to commercialize new product opportunities.

Despite lower sales for the first half of 2019, the Company continues to make progress on its AMS business. The Company has three long-term sales agreements in place for its technology with major aerospace companies.

The Company is also continuing to pursue DTX-related business initiatives. In addition to making efforts towards growing the inkjet technology business, the Company offers a range of products for creating texture surfaces and has introduced a fluid for use in prototyping. The Company is currently working on production improvements as part of its joint development agreement with AKK, a German manufacturer of high quality printers, to enhance its customer offerings. The Company has been awarded European, Japanese, and United States patents on its DTX technologies. The Company has also modified its DTX technology to facilitate entry into the market for prototyping.

The Company continues to make progress on its AMS business. The Company has three long-term sales agreements in place for its technology with major aerospace companies. However, the Company was notified by AMS' largest customer that it will reduce order volume for the remainder of 2020 and into 2021 due to the COVID-19 pandemic.

Both the Chromaline and IKONICS Imaging units ~~remain profitable~~operate in mature markets. Although these business units require aggressive strategies to grow market share, both are developing new products and business relationships that the Company believes will contribute to growth. ~~In October 2017, the Company introduced SubTHAT!™, a patent-pending product for the dye-sublimation market.~~ Early in 2019, the Company introduced its new ~~IKONART™~~IKONART® product to positive reviews and is generating sales. ~~IKONART™~~IKONART® provides a new way to make custom reusable stencils for the creative arts markets. In addition to its traditional emphasis on domestic markets, the Company will continue efforts to grow its business internationally by attempting to develop new markets and expanding market share where it has already established a presence. However, the strong U.S. dollar has made ~~this~~international growth challenging.

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

~~Table of Contents~~

Recent Accounting Pronouncements

~~During February~~In June 2016, the FASB issued ASU No. ~~2016-02, Leases.~~2016-13, Measurement of Credit Losses on Financial Instruments, which revises guidance for the accounting for credit losses on financial instruments within its scope, and in November 2018, issued ASU No. ~~2016-02 was~~2018-19 and in April 2019, issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). ASU No. ~~2016-02~~2019-04 and in May 2019, issued ASU No. 2019-05, and in November 2019, issued ASU No. 2019-11, which amended the standard. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, ~~2018,~~2022, including interim periods within those fiscal years, with ~~earlier application~~early adoption permitted. ~~Upon adoption, the lessee will~~Entities are required to apply the ~~new standard retrospectively~~standard’s provisions as a cumulative-effect adjustment to ~~all periods presented or retrospectively using a cumulative effect adjustment~~retained earnings as of the beginning of the first reporting period in which the ~~year of adoption.~~guidance is adopted. The Company ~~adopted ASU No. 2016-02 as of January 1, 2019. The adoption~~is still evaluating the impact of this ~~standard did not have a material impact on its financial statements.~~

ASU.

Off Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable

ITEM 4. Controls and Procedures

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

There were no changes to the Company's internal control over financial reporting that occurred during the first six months of ~~2019~~2020 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1.

Legal Proceedings

None

ITEM 1A.

Risk Factors

~~Not applicable~~You should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. There have been no material changes or additions to our risk factors discussed in such report, which could materially affect the Company’s business, financial condition, or future results, with the exception of the following new risk factor:

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

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

The Company received funding under the Coronavirus Aid, Relief and Economic Security (CARES) Act and there is no guarantee that the Company will not become subject to penalties or that the Company will be able to attain loan forgiveness, in whole or in part.

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

The promissory note provides for a fixed interest rate of one percent per year with a maturity date of April 18, 2022. Monthly principal and interest payments due on the loan are deferred for a six-month period beginning from the date of disbursement. The loan may be prepaid by the Company at any time prior to April 18, 2022 with no prepayment penalties or premiums.

Under the terms of the CARES Act, loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under the PPP. Such forgiveness will be subject to approval by the SBA and the lender and determined, subject to limitations, based on factors set forth in the CARES Act, including verification of the use of loan proceeds for payment of payroll costs and payments of mortgage interest, rent and utilities. In the event the loan, or any portion thereof, is forgiven, the amount forgiven is applied to outstanding principal. The terms of any forgiveness may also be subject to further regulations and guidelines that the SBA may adopt. If the loan is not forgiven, we will be required to repay the outstanding principal, along with accrued interest. The Company will carefully monitor all qualifying expenses and other requirements necessary to attain loan forgiveness; however, no assurance is provided that the Company will ultimately apply for or obtain forgiveness of the PPP loan in whole or in part.

The PPP loan application required the Company to certify, among other things, that the current economic uncertainty made the PPP loan request necessary to support our ongoing operations. On April 18, 2020, the SBA, in consultation with the Department of Treasury, issued new guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The Company made the certification in good faith after analyzing its financial situation and access to capital and believe that it has satisfied all eligibility criteria for the PPP loan, but the SBA guidance and criteria is subject to interpretation and if the Company is found to be ineligible, the Company could be subject to significant penalties and required to repay the loan. If the Company became subject to penalties or are not able to attain loan forgiveness, it could result in harm to its business, results of operation and financial condition.

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ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

~~The Company repurchased shares as indicated in the table below during the second quarter of 2019~~⁽¹⁾:

Not applicable

(c) Total Number of

Shares Purchased

as

(d) Maximum Number

(a) Total Number

(b) Average

Part of Publicly

of Shares that May

of

Price

Announced Plans

Yet Be Purchased Under

Shares Purchased

Paid per Share

or Programs

The Plans or Programs

April 1, 2019 through April 30, 2019…………
— $ — — —
May 1, 2019 through May 31, 2019…………
2,189 $ 7.62 2,189 97,811
June 1, 2019 through June 30, 2019………..
553 $ 7.76 553 97,258

(1) In 2017, the Company’s board of directors had authorized the repurchase of 100,000 shares of common stock. A total of 33,500 shares have been repurchased under this program in prior years. On April 29, 2019 the Company' board of directors approved an additional repurchase authorization of 33,500 shares of the Company's common stock bringing the total repurchase authorization to 100,000 shares of common. A total of 36,242 shares have been repurchased under this program including the 2,742 share repurchased during the second quarter of 2019. The plan allows for an additional 97,258 share to be repurchased. The share repurchase authorizations do not have an expiration date.

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, ~~2019:~~2020:

Exhibit		Description
	3.1	Restated Articles of Incorporation of Company, as amended. (Incorporated by reference to the like numbered Exhibit to the Company’s Registration Statement on Form 10-SB filed with the Commission on April 7, 1999 (File No. 000-25727).)
	3.2	Amended and Restated By-Laws of the Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 30, 2018 (File No. 000-25757).)
	10.1	Promissory Note dated April 18, 2020, issued by the Company, as Borrower, payable to BMO Harris Bank National Association, as Lender (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 22, 2020 (File No. 000-25757).
	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

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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, 2019~~12, 2020	By:	/s/ Jon Gerlach
		Jon Gerlach,
		Chief Financial Officer, and
		Vice President of Finance

			PAGE NO.
PART I.	FINANCIAL INFORMATION

Item 1.		Condensed Financial ~~Statements:~~Statements	3

		Condensed Balance Sheets as of June 30, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019	3

		Condensed Statements of Operations for the Three and Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019 (unaudited)	4

		Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019 (unaudited)	5

		Condensed Statements of Cash Flows for the Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019 (unaudited)	6

		Notes to Condensed Financial Statements (unaudited)	7

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	1112

Item 3.		Quantitative and Qualitative Disclosures about Market Risk	1617

Item 4.		Controls and Procedures	1617

PART II.	OTHER INFORMATION		1718

	SIGNATURES		1820

	June 30,			December 31,			June 30,			December 31,
	2019			2018			2020			2019
ASSETS	(unaudited)						(unaudited)

CURRENT ASSETS:
Cash and cash equivalents	$	297,186		$	1,623,137		$	2,978,109		$	963,649
Short-term investments		2,940,000			2,695,000			—			2,205,000
Trade receivables, less allowance of $53,000 in 2019 and 2018		2,223,445			2,215,215
Trade receivables, less allowance of $129,000 in 2020 and $58,000 in 2019								1,414,019			2,434,718
Inventories		2,512,249			2,046,588			2,681,940			2,180,536
Prepaid expenses and other assets		262,325			375,362			157,840			906,916
Income taxes receivable		185,219			2,768			248,380			1,369
Total current assets		8,420,424			8,958,070			7,480,288			8,692,188

PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land and building		9,500,429			9,500,429			9,556,585			9,556,984
Machinery and equipment		5,132,719			4,964,816			5,285,503			5,198,784
Office equipment		1,565,456			1,559,728			1,440,964			1,402,369
Vehicles		245,674			245,679			245,674			245,674
		16,444,278			16,270,652			16,528,726			16,403,811
Less accumulated depreciation		(8,457,143	)		(8,185,910	)		(8,814,234	)		(8,487,827	)
Total property, plant and equipment at cost, net		7,987,135			8,084,742			7,714,492			7,915,984

INTANGIBLE ASSETS, less accumulated amortization of $168,488 in 2019 and $149,740 in 2018		292,380			376,406
INTANGIBLE ASSETS, less accumulated amortization of $194,731 in 2020 and $181,609 in 2019								253,824			271,369
Total assets	$	16,699,939		$	17,419,218		$	15,448,604		$	16,879,541

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Current portion of long-term debt	$	131,385		$	129,282		$	3,288,361		$	133,287
Accounts payable		533,424			647,528			315,224			761,641
Accrued compensation		331,334			366,900			414,638			382,303
Other accrued liabilities		242,284			159,821			113,306			657,255
Total current liabilities		1,238,427			1,303,531			4,131,529			1,934,486

LONG-TERM LIABILITIES
Long-term debt, less current portion		2,755,353			2,821,657			681,510			2,688,357
Deferred income taxes		183,000			183,000
Total long-term liabilities		2,938,353			3,004,657
Total liabilities		4,176,780			4,308,188			4,813,039			4,622,843

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY

Preferred stock, par value $.10 per share; authorized 250,000 shares; issued none		—			—			—			—

Common stock, par value $.10 per share; authorized 4,750,000 shares; issued and outstanding 1,980,811 shares in 2019 and 1,983,553 in 2018.		198,081			198,355
Common stock, par value $.10 per share; authorized 4,750,000 shares; issued and outstanding 1,976,354 shares in 2020 and 2019.								197,635			197,635
Additional paid-in-capital		2,723,099			2,723,024			2,729,338			2,721,962
Retained earnings		9,601,979			10,189,651			7,708,592			9,337,101
Total stockholders' equity		12,523,159			13,111,030			10,635,565			12,256,698
Total liabilities and stockholders' equity	$	16,699,939		$	17,419,218		$	15,448,604		$	16,879,541

	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	June 30,						June 30,						June 30,						June 30,
	2019			2018			2019			2018			2020			2019			2020			2019

NET SALES	$	4,596,411		$	4,634,177		$	8,125,102		$	8,705,655		$	2,572,439		$	4,596,411		$	6,069,631		$	8,125,102

COST OF GOODS SOLD		3,167,982			2,971,862			5,687,554			5,680,921			2,187,544			3,167,982			4,531,504			5,687,554

GROSS PROFIT		1,428,429			1,662,315			2,437,548			3,024,734			384,895			1,428,429			1,538,127			2,437,548

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		1,338,861			1,308,963			2,720,826			2,657,946			1,202,307			1,338,861			2,983,327			2,720,826

RESEARCH AND DEVELOPMENT EXPENSES		270,465			156,472			449,307			310,548			201,234			270,465			384,814			449,307

(LOSS) INCOME FROM OPERATIONS		(180,897	)		196,880			(732,585	)		56,240
LOSS FROM OPERATIONS														(1,018,646	)		(180,897	)		(1,830,014	)		(732,585	)

INTEREST EXPENSE		(22,515	)		(23,807	)		(44,790	)		(43,742	)		(24,623	)		(22,515	)		(46,107	)		(44,790	)

OTHER		17,303			11,805			33,497			21,226
OTHER INCOME														1,766			17,303			8,683			33,497

(LOSS) INCOME BEFORE INCOME TAXES		(186,109	)		184,878			(743,878	)		33,724
LOSS BEFORE INCOME TAXES														(1,041,503	)		(186,109	)		(1,867,438	)		(743,878	)

INCOME TAX (BENEFIT) EXPENSE		(70,398	)		39,542			(173,136	)		19,126
INCOME TAX BENEFIT														—			(70,398	)		(238,929	)		(173,136	)

NET (LOSS) INCOME	$	(115,711	)	$	145,336		$	(570,742	)	$	14,598
NET LOSS													$	(1,041,503	)	$	(115,711	)	$	(1,628,509	)	$	(570,742	)

(LOSS) INCOME PER COMMON SHARE
LOSS PER COMMON SHARE
Basic	$	(0.06	)	$	0.07		$	(0.29	)	$	0.01		$	(0.53	)	$	(0.06	)	$	(0.82	)	$	(0.29	)
Diluted	$	(0.06	)	$	0.07		$	(0.29	)	$	0.01		$	(0.53	)	$	(0.06	)	$	(0.82	)	$	(0.29	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		1,982,275			1,983,553			1,982,910			1,983,553			1,976,354			1,982,275			1,976,354			1,982,910
Diluted		1,982,275			1,983,553			1,982,910			1,983,553			1,976,354			1,982,275			1,976,354			1,982,910

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

BALANCE AT MARCH 31, 2020		1,976,354	$	197,635	$	2,725,650	$	8,750,095		$	11,673,380

Net loss		—		—		—		(1,041,503	)		(1,041,503	)
Stock based compensation		—		—		3,688		—			3,688

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

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

BALANCE AT MARCH 31, 2019		1,983,553		$	198,355		$	2,724,944		$	9,734,620		$	12,657,919

Net loss		—			—			—			(115,711	)		(115,711	)
Common stock repurchased		(2,742	)		(274	)		(3,765	)		(16,930	)		(20,969	)
Stock based compensation		—			—			1,920			—			1,920

BALANCE AT JUNE 30, 2019		1,980,811		$	198,081		$	2,723,099		$	9,601,979		$	12,523,159

	Jun 30, 2019			Dec 31, 2018

Raw materials	$	1,794,771		$	1,767,458
Work-in-progress		449,081			370,075
Finished goods		1,596,497			1,196,516
Reduction to LIFO cost		(1,328,100	)		(1,287,461	)

Total Inventories	$	2,512,249		$	2,046,588

	Jun 30, 2020			Dec 31, 2019

Raw materials	$	1,511,629		$	1,667,154
Work-in-progress		475,194			419,906
Finished goods		2,013,510			1,449,854
Reduction to LIFO cost		(1,318,393	)		(1,356,378	)

Total Inventories	$	2,681,940		$	2,180,536

		Six Months Ended
	Jun 30, 2020		Jun 30, 2019

Weighted average common shares outstanding		1,976,354		1,982,910
Dilutive effect of stock options		—		—
Weighted average common and common equivalent shares outstanding		1,976,354		1,982,910

	Six Months Ended
	Jun 30, 2019		Jun 30, 2018

Weighted average common shares outstanding		1,982,910		1,983,553
Dilutive effect of stock options		—		—
Weighted average common and common equivalent shares outstanding		1,982,910		1,983,553

	~~2018~~
~~Dividend yield~~		0
~~Expected volatility~~		~~40.0%~~
~~Expected life of option (years)~~		5
~~Risk-free interest rate~~		~~2.8%~~
~~Fair value of each option on grant date~~		~~$3.38~~

	2020
Dividend yield		0
Expected volatility		40.3	%
Expected life of option (years)		10
Risk-free interest rate		1.4	%
Fair value of each option on grant date	$	2.90

				Weighted					Weighted
				Average					Average
				Exercise					Exercise
	Shares			Price		Shares			Price
Outstanding at January 1, 2019		18,000		$	13.22
Outstanding at January 1, 2020							19,250		$	11.32
Granted		—			—		10,000			5.67
Exercised		—			—		—			—
Expired and forfeited		(2,000	)		21.69		(7,750	)		14.96
Outstanding at June 30, 2019		16,000		$	12.17
Exercisable at June 30, 2019		13,415		$	12.83
Outstanding at June 30, 2020							21,500		$	7.38
Exercisable at June 30, 2020							7,333		$	9.66

	IKONICS															IKONICS
			IKONICS																IKONICS
	Chromaline		Imaging		DTX		AMS			Unalloc.			Total			Chromaline			Imaging			DTX			AMS			Unalloc.			Total
Net sales	$	3,107,116	$	958,128	$	112,601	$	418,566		$	—		$	4,596,411		$	1,619,986		$	625,800		$	49,053		$	277,600		$	—		$	2,572,439
Cost of goods sold		2,280,224		501,006		51,547		335,205			—			3,167,982			1,407,362			419,985			24,346			335,851			—			2,187,544
Gross profit		826,892		457,122		61,054		83,361			—			1,428,429
Gross profit (loss)																	212,624			205,815			24,707			(58,251	)		—			384,895
Selling general and administrative*		467,091		248,050		34,761		88,362			500,597			1,338,861			366,136			224,573			30,059			57,035			524,504			1,202,307
Research and development*		—		—		—		—			270,465			270,465			—			—			—			—			201,234			201,234
Income (loss) from operations	$	359,801	$	209,072	$	26,293	$	(5,001	)	$	(771,062	)	$	(180,897	)
Loss from operations																$	(153,512	)	$	(18,758	)	$	(5,352	)	$	(115,286	)	$	(725,738	)	$	(1,018,646	)

					(c) Total Number of
					Shares Purchased
					as		(d) Maximum Number
	(a) Total Number		(b) Average		Part of Publicly		of Shares that May
	of		Price		Announced Plans		Yet Be Purchased Under
	Shares Purchased		Paid per Share		or Programs		The Plans or Programs
April 1, 2019 through April 30, 2019…………		—	$	—		—		—
May 1, 2019 through May 31, 2019…………		2,189	$	7.62		2,189		97,811
June 1, 2019 through June 30, 2019………..		553	$	7.76		553		97,258