##### 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 September 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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##### 



IKONICS Corporation
  PAGE NO.PART I. FINANCIAL INFORMATIONItem 1. Condensed Financial Statements:Condensed Balance Sheets as of September 30, 2007 (unaudited)
and December 31, 2006
    
    
    3Condensed Statements of Operations for the Three Months and
Nine Months Ended September 30, 2007 and 2006 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the Nine Months Ended
September 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
    
    
    19CertificationCertificationCertification
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##### Table of Contents



FINANCIAL INFORMATION
 
 ITEM 1. Condensed Financial Statements
 IKONICS CORPORATION
 
 CONDENSED BALANCE SHEETS
 September 30
    
    
    December 312007
    
    
    2006(unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    4,531,100
    
    
    $
    3,428,186Trade receivables, less allowance of $55,000 in 2007 and
$70,000 in 2006
    
    
    2,097,867
    
    
    
    1,976,893Inventories (Note 2)
    
    
    2,006,608
    
    
    
    2,494,876Deposits, prepaid expenses and other assets
    
    
    186,702
    
    
    
    232,255Deferred income taxes
    
    
    88,000
    
    
    
    97,000Total current assets
    
    
    8,910,277
    
    
    
    8,229,210PROPERTY, PLANT, AND EQUIPMENT, at cost:Land and building
    
    
    1,597,516
    
    
    
    1,500,271Machinery and equipment
    
    
    2,727,529
    
    
    
    2,396,867Office equipment
    
    
    866,669
    
    
    
    817,406Vehicles
    
    
    219,965
    
    
    
    203,8165,411,679
    
    
    
    4,918,360Less accumulated depreciation
    
    
    4,082,399
    
    
    
    3,926,4401,329,280
    
    
    
    991,920INTANGIBLE ASSETS, less accumulated amortization of $199,633 in
2007 and $159,351 in 2006
    
    
    485,074
    
    
    
    485,421DEFERRED INCOME TAXES
    
    
    48,000
    
    
    
    48,000INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES
    
    
    855,201
    
    
    
    988,910$
    11,627,832
    
    
    $
    10,743,461LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    452,955
    
    
    $
    288,449Accrued compensation
    
    
    239,863
    
    
    
    324,082Other accrued liabilities
    
    
    251,511
    
    
    
    172,381Income taxes payable
    
    
    1,568
    
    
    
    94,450Total current liabilities
    
    
    945,897
    
    
    
    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 2,042,961 shares in 2007 and 2,010,861 in 2006
    
    
    204,296
    
    
    
    201,086Additional paid-in capital
    
    
    2,106,214
    
    
    
    1,979,012Retained earnings (Note 9)
    
    
    8,371,425
    
    
    
    7,684,001Total stockholders equity
    
    
    10,681,935
    
    
    
    9,864,099$
    11,627,832
    
    
    $
    10,743,461
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IKONICS CORPORATION
 
 CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months
    
    
    Nine MonthsEnded September 30
    
    
    Ended September 302007
    
    
    2006
    
    
    2007
    
    
    2006NET SALES
    
    $
    4,016,923
    
    
    $
    3,673,830
    
    
    $
    11,899,367
    
    
    $
    11,145,304COSTS AND EXPENSES:Cost of goods sold
    
    
    2,186,892
    
    
    
    1,975,667
    
    
    
    6,794,437
    
    
    
    6,197,398Selling, general, and administrative
    
    
    1,158,735
    
    
    
    1,122,399
    
    
    
    3,601,132
    
    
    
    3,410,574Research and development
    
    
    186,295
    
    
    
    196,493
    
    
    
    582,503
    
    
    
    561,4963,531,922
    
    
    
    3,294,559
    
    
    
    10,978,072
    
    
    
    10,169,468INCOME FROM OPERATIONS
    
    
    485,001
    
    
    
    379,271
    
    
    
    921,295
    
    
    
    975,836GAIN ON SALE OF NON-MARKETABLE
EQUITY SECURITIES
    
    
    
    
    
    
    
    
    
    
    55,159
    
    
    
    INTEREST INCOME
    
    
    40,616
    
    
    
    32,492
    
    
    
    110,247
    
    
    
    82,639INCOME BEFORE INCOME TAXES
    
    
    525,617
    
    
    
    411,763
    
    
    
    1,086,701
    
    
    
    1,058,475INCOME TAX EXPENSE
    
    
    171,692
    
    
    
    126,810
    
    
    
    262,277
    
    
    
    327,751NET INCOME
    
    $
    353,925
    
    
    $
    284,953
    
    
    $
    824,424
    
    
    $
    730,724EARNINGS PER COMMON SHARE:Basic
    
    $
    0.17
    
    
    $
    0.14
    
    
    $
    0.41
    
    
    $
    0.37Diluted
    
    $
    0.17
    
    
    $
    0.14
    
    
    $
    0.40
    
    
    $
    0.36WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING :Basic
    
    
    2,042,113
    
    
    
    2,010,861
    
    
    
    2,029,110
    
    
    
    1,996,363Diluted
    
    
    2,074,569
    
    
    
    2,043,981
    
    
    
    2,061,400
    
    
    
    2,029,732
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IKONICS CORPORATION
 
 CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
 Nine MonthsEnded September 302007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    824,424
    
    
    $
    730,724Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    203,981
    
    
    
    181,120Amortization
    
    
    40,282
    
    
    
    18,532Excess tax benefit from share-based payment arrangement
    
    
    (31,997
    )
    
    
    (36,712
    )Tax benefit from stock option exercise
    
    
    12,508
    
    
    
    14,055Stock based compensation
    
    
    14,185
    
    
    
    19,021Gain 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
    
    
    (120,974
    )
    
    
    (317,999
    )Inventories
    
    
    488,268
    
    
    
    94,865Prepaid expenses and other assets
    
    
    45,553
    
    
    
    (23,987
    )Accounts payable
    
    
    164,506
    
    
    
    158,426Accrued liabilities
    
    
    (142,089
    )
    
    
    (64,842
    )Income taxes payable
    
    
    (60,885
    )
    
    
    24,216Net cash provided by operating activities
    
    
    1,384,262
    
    
    
    797,419CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (545,500
    )
    
    
    (92,542
    )Proceeds from sale of vehicles
    
    
    11,500
    
    
    
    Purchase of intangibles
    
    
    (39,935
    )
    
    
    (23,314
    )Purchase of non-marketable equity securities
    
    
    (63,750
    )
    
    
    (414,370
    )Proceeds from sales of non-marketable equity securities
    
    
    252,618
    
    
    
    83,979Net cash used in investing activities
    
    
    (385,067
    )
    
    
    (446,247
    )CASH FLOWS FROM FINANCING ACTIVITIES:Excess tax benefit from share-based payment arrangement
    
    
    31,997
    
    
    
    36,712Proceeds from exercise of stock options
    
    
    71,722
    
    
    
    186,335Net cash provided by financing activities
    
    
    103,719
    
    
    
    223,047NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    1,102,914
    
    
    
    574,219CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    3,428,186
    
    
    
    3,412,072CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    4,531,100
    
    
    $
    3,986,291SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for income taxes
    
    $
    342,653
    
    
    $
    289,480
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IKONICS CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 1.
    
    Basis of Presentation

The balance sheet of IKONICS Corporation (the Company) as of September 30, 2007, and the
related statements of operations for the three and nine months ended September 30, 2007 and
2006, and cash flows for the nine months ended September 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 September 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.
    
    Inventory


The major components of inventory are as follows:
 Sep 30, 2007
    
    
    Dec 31, 2006Raw materials
    
    $
    1,149,143
    
    
    $
    1,577,165Work-in-progress
    
    
    314,510
    
    
    
    225,033Finished goods
    
    
    1,096,954
    
    
    
    1,227,806Reduction to LIFO cost
    
    
    (553,999
    )
    
    
    (535,128
    )Total Inventory
    
    $
    2,006,608
    
    
    $
    2,494,876
 3.
    
    Earnings Per Common Share (EPS)Basic EPS is calculated using net income divided by the weighted average 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 EndedSep 30, 2007
    
    Sep 30, 2006Weighted average common shares outstanding
    
    
    2,042,113
    
    
    
    2,010,861Dilutive effect of stock options
    
    
    32,456
    
    
    
    33,120Weighted average common and common equivalent shares outstanding
    
    
    2,074,569
    
    
    
    2,043,981
 Nine Months EndedSep 30, 2007
    
    Sep 30, 2006Weighted average common shares outstanding
    
    
    2,029,110
    
    
    
    1,996,363Dilutive effect of stock options
    
    
    32,290
    
    
    
    33,369Weighted average common and common equivalent shares outstanding
    
    
    2,061,400
    
    
    
    2,029,732
 Options to purchase 55,622 and 88,222 shares of common stock were outstanding as of
September 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 provided 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 September 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
September 30, 2007 and $4,600 for the three months ended September 30, 2006. For the first
nine months of 2007, the Company charged compensation cost of approximately $14,200 against
income compared to $13,300 for the same period in 2006. As of September 30, 2007 there was
approximately $20,000 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. This is the amount that represents the pool of excess tax benefits available to
absorb tax shortages. For the nine months ended September 30, 2007, $31,997 of excess tax
benefits were reported as operating and financing cash flows compared to $36,712 for the
nine months ended September 30, 2006. The Companys APIC pool totaled $71,709 and $39,712
at September 30, 2007 and December 31, 2006, respectively.Proceeds from the exercise of stock options were $71,722 and $186,335 for the nine months
ended September 30, 2007 and 2006, respectively. There were no options granted during the
nine months ending September 30, 2007.
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Stock option activity during the nine months ended September 30, 2007 was as follows:
 WeightedAverageExerciseShares
    
    PriceOutstanding at December 31, 2006
    
    
    88,222
    
    
    $
    3.33Granted
    
    
    
    
    
    
    Exercised
    
    
    (32,100
    )
    
    
    2.23Expired and forfeited
    
    
    (500
    )
    
    
    4.32Outstanding at September 30, 2007
    
    
    55,622
    
    
    
    3.95
 The aggregate intrinsic value of all options outstanding and for those exercisable at
September 30, 2007 was $282,251 and $263,675, 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. Amortization expense
for each of the next five years is estimated to be $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 September 30, 2007 and the impact of foreign exchange was not material.
Total comprehensive income was $353,925 and $284,953 for the three months ended September
30, 2007 and 2006, respectively. Total comprehensive income was $824,424 and $731,620 for
the nine months ended September 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 September 30, 2006 and $450,000 for the
nine months ended September 30, 2006. The unaudited pro forma effect on 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 nine months ended September 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 and selling proprietary inkjet
technology. Export sells primarily the same products as Domestic and IKONICS Imaging to
foreign customers.
 8




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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 September 30, 2007:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    1,741,960
    
    
    $
    1,267,710
    
    
    $
    1,007,253
    
    
    $
    
    
    
    $
    4,016,923Cost of good sold
    
    
    946,154
    
    
    
    777,616
    
    
    
    463,122
    
    
    
    
    
    
    
    2,186,892Selling, general and
administrative*
    
    
    288,455
    
    
    
    93,382
    
    
    
    348,110
    
    
    
    428,788
    
    
    
    1,158,735Research and
Development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186,295
    
    
    
    186,2951,234,609
    
    
    
    870,998
    
    
    
    811,232
    
    
    
    615,083
    
    
    
    3,531,922Income from operations
    
    $
    507,351
    
    
    $
    396,712
    
    
    $
    196,021
    
    
    $
    (615,083
    )
    
    $
    485,001
 For the three months ended September 30, 2006:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    1,419,000
    
    
    $
    1,115,328
    
    
    $
    1,139,502
    
    
    $
    
    
    
    $
    3,673,830Cost of good sold
    
    
    715,065
    
    
    
    690,319
    
    
    
    570,283
    
    
    
    
    
    
    
    1,975,667Selling, general and
administrative*
    
    
    241,967
    
    
    
    89,337
    
    
    
    363,470
    
    
    
    427,625
    
    
    
    1,122,399Research and
Development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196,493
    
    
    
    196,493957,032
    
    
    
    779,656
    
    
    
    933,753
    
    
    
    624,118
    
    
    
    3,294,559Income from operations
    
    $
    461,968
    
    
    $
    335,672
    
    
    $
    205,749
    
    
    $
    (624,118
    )
    
    $
    379,271
 For the nine months ended September 30, 2007:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    4,933,275
    
    
    $
    3,637,174
    
    
    $
    3,328,918
    
    
    $
    
    
    
    $
    11,899,367Cost of good sold
    
    
    2,764,261
    
    
    
    2,465,928
    
    
    
    1,564,248
    
    
    
    
    
    
    
    6,794,437Selling, general and
administrative*
    
    
    850,825
    
    
    
    334,182
    
    
    
    1,081,295
    
    
    
    1,334,830
    
    
    
    3,601,132Research and
Development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    582,503
    
    
    
    582,5033,615,086
    
    
    
    2,800,110
    
    
    
    2,645,543
    
    
    
    1,917,333
    
    
    
    10,978,072Income from operations
    
    $
    1,318,189
    
    
    $
    837,064
    
    
    $
    683,375
    
    
    $
    (1,917,333
    )
    
    $
    921,295
 For the nine months ended September 30, 2006:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    4,313,129
    
    
    $
    3,398,526
    
    
    $
    3,433,649
    
    
    $
    
    
    
    $
    11,145,304Cost of good sold
    
    
    2,326,156
    
    
    
    2,252,004
    
    
    
    1,619,238
    
    
    
    
    
    
    
    6,197,398Selling, general and
Administrative*
    
    
    730,918
    
    
    
    292,778
    
    
    
    1,135,764
    
    
    
    1,251,114
    
    
    
    3,410,574Research and
Development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    561,496
    
    
    
    561,4963,057,074
    
    
    
    2,544,782
    
    
    
    2,755,002
    
    
    
    1,812,610
    
    
    
    10,169,468Income from operations
    
    $
    1,256,055
    
    
    $
    853,744
    
    
    $
    678,647
    
    
    $
    (1,812,610
    )
    
    $
    975,836
 9




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##### Table of Contents



Accounts receivable as of September 30, 2007 and December 31, 2006:
 Sep 30, 2007
    
    
    Dec 31, 2006Domestic
    
    $
    1,018,990
    
    
    $
    842,144Export
    
    
    777,603
    
    
    
    780,599IKONICS Imaging
    
    
    337,126
    
    
    
    384,748Other
    
    
    (35,852
    )
    
    
    (30,598
    )Total
    
    $
    2,097,867
    
    
    $
    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, was $122,000,
the reversal 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 nine months ending September 30, 2007. As of September 30, 2007, the
liability for unrecognized tax benefits totaled $96,000 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 $12,000 of interest
related to uncertain tax positions at September 30, 2007.
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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
  Factors that May Affect Future Results
 
    
    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
advances, the ability to find suitable and willing technology partners or other changes
in competitive or market conditions.
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
    
    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.
 Results of Operations
 Quarter Ended September 30, 2007 Compared to Quarter Ended September 30, 2006
 Sales.
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Cost of Goods Sold . ®
 Selling, General and Administrative Expenses
 Research and Development Expenses
 Interest Income.
 Income Taxes.
 Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006
 Sales. ®
 Cost of Goods Sold . ®
 Selling, General and Administrative Expenses
 Research and Development Expenses
 Gain on Sale of Non-Marketable Equity Securities.
 Interest Income.
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Income Taxes
 Liquidity and Capital Resources
       14




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Capital Expenditures
   International Activity
   Future Outlook
   15




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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
  
 ITEM 3. Controls and Procedures
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17




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OTHER INFORMATION
 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
  ITEM 5. Other Information
  ITEM 6. Exhibits
  Exhibit
    
    Description3.1
    
    Restated Articles of Incorporation of Company, as amended.13.2
    
    By-Laws of the Company, as amended.231.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of CEO31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of CFO32
    
    Section 1350 Certifications
  
 1
    
    Incorporated by reference to the like numbered Exhibit
to the Companys Registration Statement on Form 10-SB
(File No. 000-25727).2
    
    Incorporated by reference to the like numbered Exhibit
to the Companys Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 22, 2007 (File No. 000-25727). 18




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SIGNATURES
  IKONICS CORPORATIONDATE: November 9, 2007
    By:
    /s/ Jon GerlachJon Gerlach,Chief Financial Officer, and
Vice President of Finance 19




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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