##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-QSB
 (Mark One)
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended June 30, 2007
 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 AvenueDuluth, Minnesota
    
    55807(Address of principal executive offices)
    
    (Zip code)
  
   
  þ o
 o þ
  o þ




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##### Table of Contents



IKONICS Corporation
  PAGE NO.PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Condensed Financial Statements:Condensed Balance Sheets as of June 30, 2007 (unaudited)
and December 31, 2006
    
    
    3Condensed Statements of Operations for the Three Months and
Six Months Ended June 30, 2007 and 2006 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the Six Months Ended
June 30, 2007 and 2006 (unaudited)
    
    
    5Notes to Condensed Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    11Item 3.
    
    Controls and Procedures
    
    
    17PART II.
    
    OTHER INFORMATION
    
    
    18SIGNATURES
    
    
    20302 Certification of CEO302 Certification of CFOSection 1350 Certifications
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##### Table of Contents



FINANCIAL INFORMATION
 
 ITEM 1. Condensed Financial Statements
 IKONICS CORPORATION
 
 CONDENSED BALANCE SHEETS
  June 30
    
    
    December 312007
    
    
    2006(unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    4,117,731
    
    
    $
    3,428,186Trade receivables, less allowance of $55,000 in 2007 and
$70,000 in 2006
    
    
    2,214,936
    
    
    
    1,976,893Inventories (Note 2)
    
    
    1,886,256
    
    
    
    2,494,876Deposits, prepaid expenses and other assets
    
    
    249,597
    
    
    
    232,255Income tax refund receivable
    
    
    75,329
    
    
    
    Deferred income taxes
    
    
    88,000
    
    
    
    97,000Total current assets
    
    
    8,631,849
    
    
    
    8,229,210PROPERTY, PLANT, AND EQUIPMENT, at cost:Land and building
    
    
    1,588,446
    
    
    
    1,500,271Machinery and equipment
    
    
    2,627,344
    
    
    
    2,396,867Office equipment
    
    
    866,668
    
    
    
    817,406Vehicles
    
    
    219,965
    
    
    
    203,8165,302,423
    
    
    
    4,918,360Less accumulated depreciation
    
    
    4,012,855
    
    
    
    3,926,4401,289,568
    
    
    
    991,920INTANGIBLE ASSETS, less accumulated amortization of $186,206 in
2007 and $159,351 in 2006
    
    
    486,144
    
    
    
    485,421DEFERRED INCOME TAXES
    
    
    48,000
    
    
    
    48,000INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES
    
    
    855,201
    
    
    
    988,910$
    11,310,762
    
    
    $
    10,743,461LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    469,068
    
    
    $
    288,449Accrued compensation
    
    
    250,405
    
    
    
    324,082Other accrued expenses
    
    
    276,008
    
    
    
    172,381Income taxes payable
    
    
    
    
    
    
    94,450Total current liabilities
    
    
    995,481
    
    
    
    879,362STOCKHOLDERS 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 2,039,961 shares in 2007 and 2,010,861 in 2006
    
    
    203,996
    
    
    
    201,086Additional paid-in capital
    
    
    2,093,785
    
    
    
    1,979,012Retained earnings (Note 9)
    
    
    8,017,500
    
    
    
    7,684,001Total stockholders equity
    
    
    10,315,281
    
    
    
    9,864,099$
    11,310,762
    
    
    $
    10,743,461
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IKONICS CORPORATION
 
 CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
  Three Months
    
    
    Six MonthsEnded June 30
    
    
    Ended June 302007
    
    
    2006
    
    
    2007
    
    
    2006NET SALES
    
    $
    4,374,677
    
    
    $
    4,099,674
    
    
    $
    7,882,444
    
    
    $
    7,471,474COSTS AND EXPENSES:Cost of goods sold
    
    
    2,533,475
    
    
    
    2,304,388
    
    
    
    4,607,545
    
    
    
    4,221,731Selling, general,
and administrative
    
    
    1,211,305
    
    
    
    1,136,189
    
    
    
    2,442,397
    
    
    
    2,288,175Research and development
    
    
    189,936
    
    
    
    184,534
    
    
    
    396,208
    
    
    
    365,0033,934,716
    
    
    
    3,625,112
    
    
    
    7,446,150
    
    
    
    6,874,909INCOME FROM OPERATIONS
    
    
    439,961
    
    
    
    474,563
    
    
    
    436,294
    
    
    
    596,565GAIN ON SALE OF NON-MARKETABLE
EQUITY SECURITIES
    
    
    
    
    
    
    
    
    
    
    55,159
    
    
    
    INTEREST INCOME
    
    
    36,724
    
    
    
    26,359
    
    
    
    69,631
    
    
    
    50,147INCOME BEFORE INCOME TAXES
    
    
    476,685
    
    
    
    500,922
    
    
    
    561,084
    
    
    
    646,712INCOME TAX EXPENSE
    
    
    145,283
    
    
    
    153,453
    
    
    
    90,586
    
    
    
    200,941NET INCOME
    
    $
    331,402
    
    
    $
    347,469
    
    
    $
    470,499
    
    
    $
    445,771EARNINGS PER COMMON SHARE:Basic
    
    $
    0.16
    
    
    $
    0.17
    
    
    $
    0.23
    
    
    $
    0.22Diluted
    
    $
    0.16
    
    
    $
    0.17
    
    
    $
    0.23
    
    
    $
    0.22WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING :Basic
    
    
    2,029,355
    
    
    
    2,006,379
    
    
    
    2,022,501
    
    
    
    1,988,994Diluted
    
    
    2,064,698
    
    
    
    2,048,958
    
    
    
    2,056,762
    
    
    
    2,030,068
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IKONICS CORPORATION
 
 CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
  Six MonthsEnded June 302007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    470,499
    
    
    $
    445,771Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    134,437
    
    
    
    122,654Amortization
    
    
    26,855
    
    
    
    12,355Excess tax benefit from share-based payment arrangement
    
    
    (31,997
    )
    
    
    (36,712
    )Tax benefit from stock option exercise
    
    
    12,508
    
    
    
    14,055Stock based compensation
    
    
    9,456
    
    
    
    12,419Gain on sale of vehicles
    
    
    (7,341
    )
    
    
    Gain on sale of non-marketable equity securities
    
    
    (55,159
    )
    
    
    Deferred income taxes
    
    
    9,000
    
    
    
    Changes in working capital components:Trade receivables
    
    
    (238,043
    )
    
    
    (233,954
    )Inventories
    
    
    608,620
    
    
    
    387,313Prepaid expenses and other assets
    
    
    (17,342
    )
    
    
    (40,447
    )Income taxes receivable
    
    
    (75,329
    )
    
    
    (9,604
    )Accounts payable
    
    
    180,619
    
    
    
    (119,383
    )Accrued liabilities
    
    
    (107,050
    )
    
    
    (61,467
    )Income taxes payable
    
    
    (62,453
    )
    
    
    (20,031
    )Net cash provided by operating activities
    
    
    857,280
    
    
    
    472,969CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (436,244
    )
    
    
    (53,479
    )Proceeds from sale of vehicles
    
    
    11,500
    
    
    
    Purchase of intangibles
    
    
    (27,578
    )
    
    
    (30,907
    )Purchase of non-marketable equity securities
    
    
    (63,750
    )
    
    
    (324,998
    )Proceeds from sale of non-marketable equity securities
    
    
    252,618
    
    
    
    83,979Net cash used in investing activities
    
    
    (263,454
    )
    
    
    (325,405
    )CASH FLOWS FROM FINANCING ACTIVITIES:Excess tax benefit from share-based payment arrangement
    
    
    31,997
    
    
    
    36,712Proceeds from exercise of stock options
    
    
    63,722
    
    
    
    186,335Net cash provided by financing activities
    
    
    95,719
    
    
    
    223,047NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    689,545
    
    
    
    370,611CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    3,428,186
    
    
    
    3,412,072CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    4,117,731
    
    
    $
    3,782,683SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for income taxes
    
    $
    251,353
    
    
    $
    216,036
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IKONICS CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  1.
    
    Basis of PresentationThe balance sheet of IKONICS Corporation (the Company) as of June 30, 2007, and the
related statements of operations for the three and six months ended June 30, 2007 and 2006,
and cash flows for the six months ended June 30, 2007 and 2006, 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, 2007, 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-KSB for the year ended December 31, 2006.The results of operations for interim periods are not necessarily indicative of results that
will be realized for the full fiscal year.2.
    
    InventoryThe major components of inventory are as follows:
 June 30, 2007
    
    
    Dec 31, 2006Raw materials
    
    $
    1,191,084
    
    
    $
    1,577,165Work-in-progress
    
    
    266,039
    
    
    
    225,033Finished goods
    
    
    989,744
    
    
    
    1,227,806Reduction to LIFO cost
    
    
    (560,611
    )
    
    
    (535,128
    )Total Inventory
    
    $
    1,886,256
    
    
    $
    2,494,876
 3.
    
    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 dilutive potential common shares, such as options,
had been issued.
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Shares used in the calculation of diluted EPS are summarized below:
 Three Months EndedJune 30, 2007
    
    June 30, 2006Weighted average common shares outstanding
    
    
    2,029,355
    
    
    
    2,006,379Dilutive effect of stock options
    
    
    35,343
    
    
    
    42,579Weighted average common and common equivalent shares outstanding
    
    
    2,064,698
    
    
    
    2,048,958
 Six Months EndedJune 30, 2007
    
    June 30, 2006Weighted average common shares outstanding
    
    
    2,022,501
    
    
    
    1,988,994Dilutive effect of stock options
    
    
    34,261
    
    
    
    41,074Weighted average common and common equivalent shares outstanding
    
    
    2,056,762
    
    
    
    2,030,068
 Options to purchase 58,622 and 88,222 shares of common stock were outstanding as of
June 30, 2007 and 2006, respectively.4.
    
    Stock-based CompensationThe Company has a stock incentive plan for the issuance of up to 342,750 shares of common
stock. 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
56,173 shares of common stock are reserved for additional grants of options under the plan
at June 30, 2007.The Company accounts for this plan under FAS 123(R), Share-Based Payment using the
modified-prospective-transition method. Under the modified-prospective-transition method,
FAS 123(R) applies to new awards and to awards that were outstanding on January 1, 2006 that
are subsequently modified, repurchased, or cancelled. Under this method compensation cost
in 2007 and 2006 includes cost for options granted in 2007 and 2006 and options granted
prior to but not vested as of December 31, 2005.The Company charged compensation cost of $4,700 against income for the three months ended
June 30, 2007 and $6,600 for the three months ended June 30, 2006. For the first six months
of 2007, the Company charged compensation cost of approximately $9,400 against income
compared to $12,400 for the same period in 2006. As of June 30, 2007 there was
approximately $25,000 of unrecognized compensation cost related to unvested share-based
compensation awards granted. That cost is expected to be recognized over the next three
years.The Company receives a tax deduction for certain stock option exercises during the period in
which the options are exercised, generally for the excess of the market price at the time
the stock options are exercised over the exercise price of the options, which increased the
APIC pool, which is the amount that represents the pool of excess tax benefits available to
absorb tax shortages. For the six months ended June 30, 2007, $31,997 of excess tax
benefits were reported as operating and financing cash flows compared to $36,712 for the six
months ended June 30, 2006. The Companys APIC pool totaled $71,709 and $39,712 at June 30,
2007 and December 31, 2006, respectively.Proceeds from the exercise of stock options were $63,722 and $186,335 for the six months
ended June 30, 2007 and 2006, respectively. There were no options granted during the six
months ending June 30, 2007.
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Stock option activity during the six months ended June 30, 2007 was as follows:
 WeightedAverageExerciseShares
    
    PriceOutstanding at beginning of period
    
    
    88,222
    
    
    $
    3.33Granted
    
    
    
    
    
    
    Exercised
    
    
    (29,100
    )
    
    
    2.19Expired and forfeited
    
    
    (500
    )
    
    
    4.32Outstanding at 6/30/07
    
    
    58,622
    
    
    
    3.89
 The aggregate intrinsic value of all options outstanding and for those exercisable at June
30, 2007 was $300,133 and $281,716, respectively.5.
    
    Intangible AssetsIntangible assets consist primarily of patents, licenses and covenants not to compete
arising from business combinations. Intangible assets are amortized on a straight-line
basis over their estimated useful lives or terms of their agreements. Estimated
amortization expense for each of the next five years is $54,000 annually. In connection
with license agreements, the Company has agreed to pay royalties ranging from 3% to 5% on
the future sales of products subject to the agreements.6.
    
    Comprehensive IncomeComprehensive income includes unrealized gains and losses on the Companys available for
sale marketable securities. There were no marketable securities available for sale at
December 31, 2006 or June 30, 2007 and the impact of foreign exchange was not material.
Total comprehensive income was $331,402 and $347,469 for the three months ended June 30,
2007 and 2006, respectively. Total comprehensive income was $470,499 and $446,667 for the
six months ended June 30, 2007 and 2006, respectively.7.
    
    Purchase of AssetsOn December 29, 2006, the Company acquired certain assets of Franklin International Inc.
related to the image mate product line. If the acquisition had occurred on January 1,
2006, the unaudited pro forma impact on revenues would have been to increase revenues by
approximately $150,000 for the three months ended June 30, 2006 and $300,000 for the six
months ended June 30, 2006. The unaudited pro forma adjustment to net income and earnings
per common share would not have been significant to the amounts reported in the Companys
income statement for the both the three and six months ended June 30, 2006.8.
    
    Segment InformationThe Companys reportable segments are strategic business units that offer different products
and have a varied customer base. There are three reportable segments: Domestic, Export,
and IKONICS Imaging.
Domestic sells screen printing film, emulsions, and inkjet receptive film which is sold 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
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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-KSB for the year ended December 31, 2006.Management evaluates the performance of each segment based on the components of divisional
income, and with the exception of accounts receivable, does not allocate assets and
liabilities to segments. Financial information with respect to the reportable segments
follows:For the three months ended June 30, 2007:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    1,811,968
    
    
    $
    1,382,514
    
    
    $
    1,180,195
    
    
    $
    
    
    
    $
    4,374,677Cost of good sold
    
    
    1,017,503
    
    
    
    965,229
    
    
    
    550,743
    
    
    
    
    
    
    
    2,533,475Selling, general and
administrative*
    
    
    276,803
    
    
    
    1   117,386
    
    
    
    338,981
    
    
    
    478,135
    
    
    
    1,211,305Research and
Development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    189,936
    
    
    
    189,9361,294,306
    
    
    
    1,082,615
    
    
    
    889,724
    
    
    
    668,071
    
    
    
    3,934,716Income from operations
    
    $
    517,662
    
    
    $
    299,899
    
    
    $
    290,471
    
    
    $
    (668,071
    )
    
    $
    439,961
 For the three months ended June 30, 2006:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    1,636,245
    
    
    $
    1,321,055
    
    
    $
    1,142,374
    
    
    $
    
    
    
    $
    4,099,674Cost of good sold
    
    
    891,281
    
    
    
    911,863
    
    
    
    501,244
    
    
    
    
    
    
    
    2,304,388Selling, general and
administrative*
    
    
    228,522
    
    
    
    82,898
    
    
    
    346,949
    
    
    
    477,820
    
    
    
    1,136,189Research and
Development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    184,534
    
    
    
    184,5341,119,803
    
    
    
    994,761
    
    
    
    848,193
    
    
    
    662,354
    
    
    
    3,625,112Income (loss) from
Operations
    
    $
    516,442
    
    
    $
    326,294
    
    
    $
    294,181
    
    
    $
    (662,354
    )
    
    $
    474,563
 For the six months ended June 30, 2007:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    3,191,315
    
    
    $
    2,369,464
    
    
    $
    2,321,665
    
    
    $
    
    
    
    $
    7,882,444Cost of good sold
    
    
    1,818,107
    
    
    
    1,688,312
    
    
    
    1,101,126
    
    
    
    
    
    
    
    4,607,545Selling, general and
administrative*
    
    
    562,370
    
    
    
    240,800
    
    
    
    733,185
    
    
    
    906,042
    
    
    
    2,442,397Research and
Development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    396,208
    
    
    
    396,2082,380,477
    
    
    
    1,929,112
    
    
    
    1,834,311
    
    
    
    1,302,250
    
    
    
    7,446,150Income (loss) from
operations
    
    $
    810,838
    
    
    $
    440,352
    
    
    $
    487,354
    
    
    $
    (1,302,250
    )
    
    $
    436,294
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For the six months ended June 30, 2006:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    2,894,129
    
    
    $
    2,283,198
    
    
    $
    2,294,147
    
    
    $
    
    
    
    $
    7,471,474Cost of good sold
    
    
    1,611,091
    
    
    
    1,561,685
    
    
    
    1,048,955
    
    
    
    
    
    
    
    4,221,731Selling, general and
administrative*
    
    
    488,951
    
    
    
    203,441
    
    
    
    772,294
    
    
    
    823,489
    
    
    
    2,288,175Research and
Development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    365,003
    
    
    
    365,0032,100,042
    
    
    
    1,765,126
    
    
    
    1,821,249
    
    
    
    1,188,492
    
    
    
    6,874,909Income (loss) from
Operations
    
    $
    794,087
    
    
    $
    518,072
    
    
    $
    472,898
    
    
    $
    (1,188,492
    )
    
    $
    596,565
 Accounts receivable as of June 30, 2007 and December 31, 2006:
 June 30, 2007
    
    
    Dec 31, 2006Domestic
    
    $
    1,035,582
    
    
    $
    842,144Export
    
    
    796,367
    
    
    
    780,599IKONICS Imaging
    
    
    368,596
    
    
    
    384,748Other
    
    
    14,391
    
    
    
    (30,598
    )Total
    
    $
    2,214,936
    
    
    $
    1,976,893
 
 *
    
    The Company does not allocate all general and administrative expenses or any research and
development expenses to its operating
segments for internal reporting. 9.
    
    Income TaxesOn January 1, 2007, the Company adopted the provisions of Financial Standards Accounting
Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes(FIN 48). As a
result of the implementation of FIN 48, the Company recorded a liability for unrecognized
tax benefits of $137,000, which was accounted for as a reduction to retained earnings. The
balance of the unrecognized tax benefits at adoption, exclusive of interest, is $122,000,
the reversal of all of which would decrease the provision for income taxes and increase net
income by the same amount. During the first quarter of 2007, the statute of limitations for
the relevant taxing authority to examine and challenge the tax position for an open year
expired, resulting in a decrease in income tax expense of $45,000 for the first quarter of
2007 and for the six months ending June 30, 2007. As of June 30, 2007, the liability for
unrecognized tax benefits totaled $94,000 and is included in other accrued expenses.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 after 2002 and 2003 respectively.It is the Companys policy to recognize interest and penalties related to uncertain tax
positions in income tax expense. The Company had accrued approximately $15,000 of interest
related to uncertain tax positions at the date of adoption. The accrued interest was
reduced to $7,500 during the first quarter as a result of the statue of limitations expiration on an earlier year. An additional $2,000 of interest was
accrued during the second quarter of 2007.
 10




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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
  
    
    The Companys belief that additional proceeds will be received from the sale of
Apprise common and preferred stockActual proceeds received may be impacted by
unanticipated expenses related to indemnification clauses as part of the agreement
between Apprise and its purchaser.
    
    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 strong internal controls.
    
    The belief that the Companys current financial resources, its line of credit, cash
generated from operations and the Companys capacity for debt and/or equity financing
will be sufficient to fund current and anticipated business operations. The 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, acceptance of new products,
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 expectations as to the level and use of planned capital expenditures
and that capital expenditures will be funded with 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
 11




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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 or the inability to identify attractive acquisition
targets, new products or other business opportunities.
 Critical Accounting Policies
  Accounts Receivable.
 Inventories.
 Deferred Tax Assets.
 Investments in Non-Marketable Equity Securities.
 Revenue Recognition.
 12




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##### Table of Contents



Results of Operations
 Quarter Ended June 30, 2007 Compared to Quarter Ended June 30, 2006
 Sales.
 Cost of Goods Sold .
 Selling, General and Administrative Expenses
 Research and Development Expenses
 Interest Income.
 Income Taxes.
 Six Months Ended June 30, 2007 Compared to the Six Months Ended June 30, 2006
 Sales.
 Cost of Goods Sold .
 Selling, General and Administrative Expenses
 Research and Development Expenses
 13




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Gain on Sale of Non-Marketable Equity Securities.
 Interest Income.
 Income Taxes
 Liquidity and Capital Resources
     14




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Capital Expenditures
   International Activity
   15




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Future Outlook
     Recent Accounting Pronouncements
    How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation)
 Off Balance Sheet Arrangements
  16




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ITEM 3. Controls and Procedures
   17




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##### Table of Contents



ITEM 1. Legal Proceedings
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  ITEM 3. Defaults upon Senior Securities
  ITEM 4. Submission of Matters to a Vote of Security Holders
   Votes For
    
    Votes WithheldCharles H. Andresen
    
    
    1,814,376
    
    
    
    6,200David O. Harris
    
    
    1,814,376
    
    
    
    6,200Gerald W. Simonson
    
    
    1,814,376
    
    
    
    6,200William C. Ulland
    
    
    1,807,461
    
    
    
    13,115Rondi Erickson
    
    
    1,814,376
    
    
    
    6,200H. Leigh Severance
    
    
    1,814,376
    
    
    
    6,200
  Votes
    
    
    
    BrokerVotes For
    
    Against
    
    Abstain
    
    Non-Votes1,819,126
    
    450
    
    1,000
    
    0
 ITEM 5. Other Information
  ITEM 6. Exhibits
  18




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##### Table of Contents



Exhibit
    
    Description3.1
    
    Restated Articles of Incorporation of Company, as amended.13.2
    
    By-Laws of the Company, as amended.131.1
    
    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). 19




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##### Table of Contents



SIGNATURES
  IKONICS CORPORATIONDATE: August 14, 2007
    By:
    /s/ Jon GerlachJon Gerlach,Chief Financial Officer, and
Vice President of Finance 20




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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 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