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Proc-Type: 2001,MIC-CLEAR
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM l0-QSB (Mark One) (X) QUARTERLY REPORT UNDER SECTlON 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended June 30, 2004 ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from______ to_____ Commission File Number 33-18582 ITRONICS INC. (Exact name of small business issuer as specified in its charter)
TEXAS
75-2198369 (State or other
jurisdiction of (IRS Employer Identification Number) incorporation
or organization) 6490 S. McCarran Blvd., Bldg C-23, Reno, Nevada 89509 (Address of principal executive offices) Issuer's telephone number, including area code: (775)689-7696 NO CHANGE Former name, former address and former fiscal, if changes since last
report. Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 during the past 90 days. Yes (x) No ( ). APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of July 31, 2004, 143,737,665 shares of common
stock were outstanding. Transitional Small Business Disclosure Format (Check one): Yes ( ) No (X) 2 ITRONICS INC. AND SUBSIDIARIES TABLE OF CONTENTS PAGE 4 June 30, 2004 and 2003 6 7 8 13 23 24 24 25 25 28 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ITRONICS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2004 AND DECEMBER 31, 2003 (UNAUDITED) ASSETS JUNE 30, DECEMBER
31, 2004 2003 $ 21,475 $ 34,499 167,526 96,384 133,306 413,240 529,896 425,525 96,168 53,073 36,807 40,773 985,178 1,063,494 215,000 215,000 1,167,315 1,167,315 100,371 102,203 2,060,999 1,861,917 133,028 133,028 1,078,265 1,076,687 4,754,978 4,556,150 1,522,333 1,383,307 3,232,645 3,172,843 8,459 8,483 - 120,000 31,731 49,113 26,575 26,575 66,765 204,171 $4,284,588 $4,440,508 4 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) June 30, December
31, 2004 2003 $ 617,254 $ 517,989 270,616 218,185 233,801 213,295 51,544 9,458 217,962 217,604 46,951 537,031 955,655 994,456 248,168 248,168 5,237 4,869 1,688,988 1,686,286 19,592 27,056 4,355,768 4,674,397 589,949 123,059 1,557,000 2,376,100 811,604 879,126 30,003 75,391 maturities 11,284 14,117 2,999,840 3,467,793 7,355,608 8,142,190 - - 142,667 122,374 17,698,322 15,234,212 (21,618,376) (20,105,087) 621,533 672,255 84,493 374,346 341 218 (3,071,020) (3,701,682) $ 4,284,588 $ 4,440,508 See Notes to Condensed Consolidated Financial Statements 5 ITRONICS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED) Three Months Ended June 30, Six Months Ended June 30, 2004 2003 2004 2003 $ 476,910 $ 269,904 $ 706,389 $ 370,849 75,084 56,744 129,643 99,117 21,517 8,017 64,475 20,985 52,659 112,157 132,503 187,480 626,170 446,822 1,033,010 678,431 588,598 419,690 1,029,171 697,496 37,572 27,132 3,839 (19,065) 79,338 83,177 157,449 165,554 27,808 14,544 48,911 30,886 269,122 181,960 483,407 385,259 34,275 17,616 51,881 25,679 249,425 197,211 462,200 371,721 659,968 494,508 1,203,848 979,099 (622,396) (467,376) (1,200,009) (998,164) (202,325) (241,403) (411,095) (471,106) 22,044 90,720 97,802 154,881 5 (1,306) 13 6,856 (180,276) (151,989) (313,280) (309,369) for income tax (802,672) (619,365) (1,513,289) (1,307,533) - - - - (802,672) (619,365) (1,513,289) (1,307,533) securities (105,099) 170,474 (289,853) (31,193) $ (907,771) $ (448,891) $(1,803,142) $(1,338,726) 137,761 96,992 132,651 94,629 $(0.006) $(0.006) $(0.011) $(0.014) See Notes to Condensed Consolidated Financial Statements 6 ITRONICS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED) Six Months Ended June 30, 2004 2003 $(1,513,289) $(1,307,533) cash used by operating
activities: 157,449 165,554 261,411 306,921 (15,256) (2,573) (97,802) (154,881) 123 (93,819) - (29,370) - 15 310,925 280,562 (71,142) (145,817) (104,371) (59,198) 1,805 (27,494) 77,479 69,383 52,431 146,348 58,077 182,121 16,358 74,182 (865,802) (595,599) (8,922) (4,322) 223,139 277,819 214,217 273,497 712,000 241,595 38,641 99,771 (112,080) (58,380) 638,561 282,986 (13,024) (39,116) 34,499 57,201 $ 21,475 $ 18,085 See Notes to Condensed Consolidated Financial Statements 7 ITRONICS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) 1. The unaudited condensed consolidated financial statements printed
herein have been prepared in accordance with the instructions to Form 10-QSB and do not
include all of the information and disclosures required by U.S. Generally Accepted
Accounting Principles. Therefore, these financial statements should be read in conjunction
with the consolidated financial statements and related footnotes included in the Company's
Form 10-KSB for the year ended December 31, 2003. These financial statements reflect all
adjustments that are, in the opinion of management, necessary to fairly state the results
for the interim periods reported. 2. The Company's consolidated financial statements have been presented
on the basis that it is a going concern, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The Company and its
subsidiaries have reported recurring losses from operations, including a net loss of
$1,513,289 during the six months ended June 30, 2004, a negative working capital of
$3,370,590, and a stockholders deficit balance of $3,071,020 as of June 30, 2004.
These factors indicate the Company and its subsidiaries' ability to continue in existence
is dependent upon their ability to obtain additional long-term debt and/or equity
financing and achieve profitable operations. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be necessary
should the Company and its subsidiaries be unable to continue in existence. The results of
operations for the three and six months ended June 30, 2004 are not necessarily indicative
of the results to be expected for the full year. 3. A Private Placement of restricted stock with attached three year
warrants is continuing with offering prices ranging from $0.08 to $0.125 per share. The
attached three year warrants are for one half to an equal number of shares with exercise
prices equal to the share offering prices for the first year, double the respective
amounts for the second year, and triple the respective amounts for the third year. During
the six months ended June 30, 2004 $646,000 was received from this private placement and
$66,000 was received from the exercise of warrants. 4. In August 2002 a supplier of equipment for the Stead manufacturing
plant filed suit against the Company and its subsidiary, Itronics Metallurgical, Inc.
(IMI) in Johnson County, Indiana for the unpaid amount of $64,234 plus attorneys
fees and court costs. On October 1, 2002 the plaintiff received a default judgment
awarding the $64,234 plus $1,500 attorneys fees plus 8% interest. On November 5,
2002 the plaintiff filed a "Notice of Filing of Foreign Judgment" in Washoe
County, Nevada and has received the judgment. In December 2003 a settlement agreement was
accepted that required a $10,000 payment in December 2003 plus monthly payment of $5,161
over twelve months in 2004. As of June 30, 2004 a total of nine lawsuits filed in 2003 and prior
remain outstanding against the Companys subsidiaries by various equipment lessors.
Five of the suits were filed in Washoe County, Nevada, two in Cook County, Illinois, one
in Los Angeles County, California, and one in Oakland 8 ITRONICS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) County, Michigan. Two additional suits covering five leases were filed
in Washoe County, Nevada in May 2004. The suits seek a total of $811,245 plus attorneys
fees and other costs. Five of these suits, seeking a total of $278,301 plus costs, were
settled by restructuring the leases, signing stipulated judgments and agreeing to pay
total payments of $227,093. Monthly payments on the settlements total $10,131 and are paid
over various periods ranging from 18 to 31 months. If the restructured leases are
defaulted, judgments for the original claimed amounts can be entered and further
collection action, including repossession of the secured equipment, can be taken. Of the
six remaining unsettled suits, three have received judgments. A settlement agreement
reached on two of those is pending the ability to meet the initial payment terms. Legal
counsel is actively negotiating two of the unsettled suits. No further action has occurred
on the other two unsettled suits. In February 2003 a trade creditor filed suit against the Company in
Washoe County, Nevada seeking a total of $85,525 plus attorney fees and other costs. A
default judgment was entered in May 2003. The Company is attempting to negotiate a
settlement. Successful settlement of the above claims is dependent on future
financing. 5. As of June 30, 2004 lease payments totaling $769,529 were in
arrears. As required by U.S. Generally Accepted Accounting Principles, the principal
balance of the leases that are in default have been classified as current liabilities. The
Company is in ongoing communication with the lessors to avoid action that may be adverse
to the Company. In 2003 an offer was made to extend the Series 2000 Convertible
Promissory Notes. The holders of $80,000 of the Notes have not responded to the offer and
that amount, plus $37,700 in accrued interest, remains in default. 6. During the six months ended June 30, 2004 convertible promissory
notes totaling $828,000 principal and $323,582 accrued interest were converted into common
stock at prices ranging from $0.10 to $0.15 per share. 7. Following is financial information for each of the Companys
segments. No changes have occurred in the basis of segmentation since December 31, 2003. Reconciliation of segment revenues, gross profit (loss), operating
income (loss), other income (expense), and net income (loss) before taxes to the
respective consolidated amounts follows: 9 ITRONICS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) Three Months Ended June 30, Six Months Ended June 30, 2004 2003 2004 2003 $ 573,511 $ 334,665 $ 900,507 $ 490,951 52,659 112,157 132,503 187,480 $ 626,170 $ 446,822 $ 1,033,010 $ 678,431 $ 42,372 $ (6,924) $ 6,733 $(70,236) (4,800) 34,056 (2,894) 51,171 (Loss) $ 37,572 $ 27,132 $ 3,839 $(19,065) $(508,586) $(410,067) $(992,089) $(862,387) (113,810) (57,309) (207,920) (135,777) Income (Loss) $(622,396) $(467,376) $(1,200,009) $(998,164) $(202,325) $(241,403) $(411,095) $(471,106) 22,049 89,414 97,815 161,737 (Expense) $(180,276) $(151,989) $(313,280) $(309,369) $(710,911) $(651,470) $(1,403,184) $(1,333,493) (91,761) 32,105 (110,105) 25,960 $(802,672) $(619,365) $(1,513,289) $(1,307,533) 10 ITRONICS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) Identifiable assets by business segment for the major asset
classifications and reconciliation to total consolidated assets are as follows: June 30, December
31, 2004 2003 $ 719,030 $ 576,750 190,401 473,594 909,431 1,050,344 3,079,840 2,991,047 150,908 179,224 3,230,748 3,170,271 51,370 68,776 1,615,338 1,917,747 1,666,708 1,986,523 3,850,240 3,636,573 1,956,647 2,570,565 5,806,887 6,207,138 21,654,021 20,587,504 (23,176,320) (22,354,134) $ 4,284,588 $ 4,440,508 8. Following are the components of Other Comprehensive Income: Three Months Ended June 30, Six Months Ended June 30, 2004 2003 2004 2003
arising during the period $ (57,886) $ 143,776 $(110,588) $ 52,469 Reclassification
adjustment (47,213) 26,698 (179,265) (83,662) $(105,099) $ 170,474 $(289,853) $(31,193) 11 ITRONICS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 (UNAUDITED) 9. Significant non-cash operating, investing, and financing activities
for the six months ended June 30, 2004 include the conversion of $1,151,582 in convertible
promissory notes and accrued interest into restricted common stock, payment of $180,000 in
common stock for construction management services at the Stead manufacturing facility,
settlement of $16,855 in accounts payable with common stock, and settlement by an
officer/stockholder of $16,000 in accrued interest with common stock. 10. Warrants, options, and shares to be issued, totaling 66,217,576 and
46,351,882 shares as of June 30, 2004 and 2003, respectively, would dilute future Earnings
Per Share (EPS). No diluted EPS is presented as the effect of including these shares is
antidilutive. 11. The Company applies APB Opinion 25 in accounting for stock options. The following
table shows a comparison of option compensation expense between this method compared to
the Fair Market Value method under FASB Statement No. 123. The table also indicates the
impact on net loss and loss per share: Three Months Ended June 30, Six Months Ended June 30, 2004 2003 2004 2003 $ - $ (40,822) $ 123 $ (93,819) 38,296 40,825 39,418 93,823 $ 38,296 $ 3 $ 39,541 $ 4 $
(802,672) $
(619,365) $(1,513,289) $(1,307,533) (38,296) (40,825) (39,418) (93,823) $ (840,968) $ (660,190) $(1,552,707) $(1,401,356) $(0.006) $(0.006) $(0.011) $(0.014) $(0.006) $(0.007) $(0.012) $(0.015) 12 Item 2. Management's Discussion and Analysis or Plan of Operations I. Results of Operations The Company reported consolidated revenues of $626,170 for the quarter
ended June 30, 2004, compared to $446,822 for the prior year quarter, an increase of 40%.
The increase was primarily due to an increase of $238,800 in Photochemical Fertilizer
segment revenues, an increase of 71%, which was partially offset by a decrease in Mining
Technical Services segment revenue of $59,500, or 53%. Consolidated revenues for the first
six months of 2004 were $1,033,010 compared to $678,431 for the prior year period, an
increase of 52%. This increase was due to an 83% increase in Photochemical Fertilizer
segment revenues. The consolidated net loss was $802,672, or $0.006 per share, for the
quarter ended June 30, 2004, compared to a net loss of $619,365 or $0.006 per share for
the comparable 2003 period, an increased loss of $183,300, or 30%. The primary factors
contributing to the increased loss for the quarter were a $123,900 swing from a profit to
a loss in the Mining Technical Services segment, the prior year accounting credit of
$40,800 to general and administrative expenses for expired employee stock options, and
increased investment in future GOLDn GRO fertilizer sales expansion by the addition
of a senior sales agronomist, moving a senior sales agronomist to the Oregon/Washington
territory, development of two new GOLDn GRO fertilizer products, and
research/development of markets for GOLDn GRO Guardian. The consolidated net loss
was $1,513,289 or $0.011 per share, for the six months ended June 30, 2004, compared to a
net loss of $1,307,533, or $0.014 per share for the comparable 2003 period, an increased
loss of 16%. To provide a more complete understanding of the factors contributing to
the changes in revenues, operating expenses, other income (expense) and the resultant
operating income (loss) and net income (loss) before taxes, the discussion presented below
is separated into the Company's two operating segments. PHOTOCHEMICAL FERTILIZER This segment, managed by Itronics Metallurgical, Inc., operates a
photochemical recycling plant, which includes related silver recovery. As part of the
recycling process, the Company manufactures and markets a line of liquid fertilizer
products which are being sold under the GOLDn GRO trademark in the western U.S.
markets in Arizona, California, Colorado, Hawaii, and Nevada. GOLDn GRO fertilizer
products are being introduced in the eastern U.S. markets in Connecticut, Delaware,
Massachusetts, New Jersey, New York, Pennsylvania, and Rhode Island and will be introduced
into Oregon and Washington upon completion of registration requirements. Revenues are
generated from photochemical collection services, silver sales, and GOLDn GRO liquid
fertilizer sales. Three months Ended June 30, Six Months Ended June 30, 2004 2003 2004 2003 $ 573,511 $ 334,665 $ 900,507 $ 490,951 $ 42,372 $ (6,924) $ 6,733 $ (70,236) $(508,586) $(410,067) $ (992,089) $
(862,387) $(202,325) $(241,403) $ (411,095) $
(471,106) $(710,911) $(651,470) $(1,403,184) $(1,333,493) 13 Total segment revenues for the second quarter of 2004 were
approximately $573,500, an increase of 71% from the prior year second quarter. Fertilizer
sales for the quarter were $476,900, compared to $269,900 for the 2003 second quarter, an
increase of 77%. The fertilizer sales increase is attributable to ongoing sales and
marketing efforts with the Companys California distribution network. The
distribution networks sales efforts, with the assistance from the Companys
three senior sales agronomists, are producing larger sales volumes of the various
GOLDn GRO fertilizer products from an increasing number of the distribution
networks California stores. Total photochemical recycling revenue for the quarter
increased by 32% on increased volume of 36%, compared to the second quarter of 2003.
Photochemical volume increases are continuing to be driven by growth in digital print
photo finishing. Silver sales increased $13,500 from the second quarter of 2003, an
increase of 168%. The increase is attributable to a combination of increased sales of the
Silver Nevada Miner silver bars and recycled film. Cost of sales increased $189,600 due to
increases of $144,000 in direct material costs due to increased sales, $17,300 in payroll
and related costs due to overtime to support GOLDn GRO fertilizer sales growth, and
$14,800 in insurance costs related to increased sales. The segment recorded a gross profit
of $42,400 for the quarter, compared to a gross loss of $6,900 for the second quarter of
2003, an improvement of $49,300. Segment operating expenses increased $147,800 from the second quarter
of 2003, due primarily to an increase in sales and marketing expense of $75,100 due to a
combination of hiring a new senior sales agronomist and increased corporate marketing, an
increase in general and administrative expenses of $45,600 due primarily to a prior year
accounting credit of $36,700 from the expiration of stock options, an increase in research
and development costs of $13,300 due to development of the GOLDn GRO Guardian
fertilizer product, and an increase of $16,700 in delivery and warehousing costs
associated with increased fertilizer sales. These factors resulted in a 2004 second quarter segment operating loss
of $508,600 compared to a loss of $410,100 for the second quarter of 2003, an increased
operating loss of $98,500, or 24%. Other expense decreased $39,100 due to a decrease in interest expense
resulting from prior and current year conversions of convertible promissory notes into
common stock. The changes in operating loss and other expenses resulted in a segment
net loss before taxes of $710,900 for the quarter ended June 30, 2004, compared to a loss
of $651,500 for the prior year quarter, an increased loss of $59,400 or 9%. For the first six months of 2004 revenues were $900,500, compared to
$491,000 for the comparable 2003 period, an increase of 83%. Gross profit for the first
six months of 2004 was $6,700, compared to a gross loss of $70,200 for the comparable
prior year period, an improvement of $77,000. Operating loss for the first six months of
2004 was approximately $992,100 compared to $862,400 for the first six months of 2003, an
increased loss of $129,700, or 15%. Other expense decreased $60,000 due to a decrease in interest expense
resulting from prior and current year conversions of convertible promissory notes into
common stock. 14 The changes in operating loss and other expenses resulted in a segment
net loss before taxes of $1,403,200 for the six months ended June 30, 2004, compared to a
loss of $1,333,500 for the prior year period, an increased loss of $69,700 or 5%. MINING TECHNICAL SERVICES This segment, known as Whitney & Whitney, Inc., provides mining and
materials management, geology, engineering and economics consulting, and publishes
specialized mineral economics and materials financial reports. It employs technical
specialists with expertise in the areas of mining, geology, mining engineering, mineral
economics, materials processing and technology development. Technical services have been
provided to many of the leading U.S. and foreign mining companies, several public
utilities with mineral interests, to various state agencies, the U.S. and foreign
governments, and the United Nations and the World Bank. Three Months Ended June 30, Six Months Ended June 30, 2004 2003 2004 2003 $ 52,659 $ 112,157 $ 132,503 $ 187,480 $ (4,800) $ 34,056 $ (2,894) $ 51,171 $(113,810) $(57,309) $(207,920) $(135,777) $ 22,049 $ 89,414 $ 97,815 $ 161,737 $ (91,761) $ 32,105 $(110,105) $
25,960 Mining technical services revenue was $52,700 for the quarter ended
June 30, 2004, compared to $112,200 for the comparable quarter of 2003, a decrease of 53%.
Cost of sales decreased by $20,600, due to decreased labor and consulting costs. These
factors resulted in a second quarter gross loss for the segment of $4,800 compared to a
gross profit of $34,100 for the prior year second quarter, a decrease of $38,900. The
decline is due to a prior year litigation services project that was completed in 2003. Segment operating expenses increased $17,600 due primarily to an
increase of $12,100 in sales and marketing expenses due to increased efforts to find new
technical service projects. The combination of these factors resulted in a 2004 second quarter
segment operating loss of $113,800, compared to a loss of $57,300 for the second quarter
of 2003, an increased operating loss of $56,500, or 99%. Other income for the second quarter of 2004 was $22,000 compared to
$89,400 for the prior year second quarter., This decrease is due to reduced sales of
common shares of Golden Phoenix Minerals, Inc. (GPXM) and other marketable securities. The changes in operating loss and other income resulted in a segment
net loss before taxes of $91,800 for the quarter ended June 30, 2004, compared to a profit
of $32,100 for the prior year quarter, an increased loss of $123,900. For the first six months of 2004, segment revenue totaled $132,500
compared to $187,500 for the first six months of 2003, a decrease of 29%. Gross loss for
the first six months of 2004 was $2,900, compared to a gross profit of $51,200 for the
comparable prior year period, a decreased 15 gross profit of $54,100. Operating loss for the period was $207,900
compared to an operating loss of $135,800 for the comparable 2003 period, an increased
operating loss of $72,100, or 53%. The primary factor contributing to the decline was
decreased professional fees on technical services projects. Other income for the first six months of 2004 was $97,800 compared to
$161,700 for the prior year period. This decrease is due to reduced sales of common shares
of Golden Phoenix Minerals, Inc. (GPXM) and other marketable securities. The changes in operating loss and other income resulted in a segment
net loss before taxes of $110,100 for the six months ended June 30, 2004, compared to a
profit of $26,000 for the prior year period, an increased loss of $136,100.
SUMMARY On a consolidated basis, the various changes in revenues and operating
expenses resulted in a second quarter 2004 operating loss of $622,400, compared to
$467,400 for the second quarter of 2003, an increased operating loss of $155,000, or 33%.
Net loss before taxes for the second quarter 2004 was $802,700 compared to $619,400 for
the prior year second quarter, an increased loss of $183,300 or 30%. For the six month
period ended June 30, 2004 the operating loss was $1,200,000 compared to $998,200 for the
prior year comparable period, an increased operating loss of $201,800, or 20%. Net loss
before taxes for the six months ended June 30, 2004 was $1,513,300 compared to $1,307,500
for the prior year six month period, an increased loss of $205,800, or 16%. II. Changes in Financial Condition; Capitalization Cash amounted to $21,500 as of June 30, 2004, compared to $18,100 as of
June 30, 2003. Net cash used for operating activities was approximately $865,800 for the
first six months of 2004. The cash used for operating activities during the period was
financed by a combination of sales of common stock of $646,000 from a private placement of
restricted common stock and attached warrants, exercise of warrants totaling $66,000,
proceeds from the sale of marketable securities of $223,100, and $38,600 in account
receivable factoring. Total assets decreased during the six months ended June 30, 2004 by
$155,900 to $4,284,600. Current assets decreased $78,300 due to a decrease in marketable
securities of $279,900, partially offset by increases of $71,100 in accounts receivable
and $104,400 in inventory. Net property and equipment increased $59,800 due to $180,000 in
capitalized construction costs to install heating/cooling equipment at the Stead
manufacturing facility, partially offset by depreciation and amortization. Other assets
decreased by $137,400 due to a combination of a decline in value of marketable securities
and the reclassification of marketable securities to current assets. At June 30, 2004 the
Company owned 192,400 shares of GPXM with a current market value of $52,900. During the
six months ended June 30, 2004 the Company sold 586,500 GPXM shares, with total net
proceeds of $183,600 and sold $39,500 of other marketable securities, to assist with the
Companys cash operating requirements. 16 Current liabilities decreased during the six months ended June 30, 2004
by $318,600 and total liabilities decreased by $786,600. Total liabilities decreased due
to the conversion into common stock of a total of $1,151,600 in Convertible Promissory
Notes and accrued interest. This decrease was partially offset by current period accrued
interest on convertible promissory notes of $261,400. Changes in current liabilities
include a decrease of $490,100 in current maturities of long-term debt due to the
reclassification to long-term debt of the loan on the Stead manufacturing facility and
which was partially offset by increases of $99,300 in accounts payable, $52,400 in accrued
management salaries, $20,500 in accrued expenses, which includes $28,900 in federal and
state payroll taxes, and $42,100 in insurance contracts payable. III. Working Capital/Liquidity During the six months ended June 30, 2004, working capital improved by
$240,300 to a deficit balance of $3,370,600. The Company has had limited cash liquidity
since the third quarter of 2000. The Company has sought and obtained the funding described
above, which has not been sufficient to maintain all obligations on a current basis.
However, cash liquidity is being managed and the Company has been able to make sufficient
payments to keep most significant creditors working with it. The cash shortage is a result
of two factors. First, fertilizer sales have not expanded at the rate originally
anticipated, so operating losses were not reduced as much as expected. Second, the $15
million equity line of credit agreement with Swartz Private Equities, LLC (Swartz) was
allowed to expire in February 2004. A private placement of stock with attached warrants is
continuing, with $646,000 received during the six months ended June 30, 2004. $66,000 was
received from the exercise of warrants during the six months ended June 30, 2004, with an
additional $44,000 received subsequent to that date. In addition, operating cash
requirements were met by the sale of marketable securities for $223,100 and by payment of
certain consulting fees and some management salaries totaling $310,900 in the form of
common stock rather than cash. There has been a long term commitment by officers and other members of
management to support the Company by investing funds for the Companys growth. One
officer/shareholder has invested a total of $945,000 in cash and foregone salary during
the period 2001 to date, including $132,900 in 2004. Two other members of management have
foregone salary totaling $366,500 during the period 2001 through 2003. Additional members
of management invested $62,000 cash in 2003. All cash and foregone salary net of withheld
taxes has been invested in the Companys private placements under the same terms and
conditions as all other investors. Solid progress in implementation of the Companys business plan
has been achieved during the first half of 2004 with the Photochemical Fertilizer segment
generating a gross profit for both the quarter and the first half for the first time in
the Companys history. The Company believes that business plan implementation needs
to be accelerated to meet profitability goals and believes that can be accomplished if
sufficient capital is obtained. The Company is aggressively seeking the required capital. The actual rate of growth in fertilizer and the related photochemical
and silver sales necessary to achieve profitability is subject to a number of
uncertainties, including the annual seasonal nature of fertilizer sales related to crop
cycles, short term weather patterns in specific markets, and the availability of funding
to support sales growth. 17 IV. Growth Plans and Implementation
PART I - FINANCIAL
INFORMATION
Item 1. Financial
Statements
Condensed Consolidated
Balance Sheets June 30, 2004
and December 31,
2003
Condensed Consolidated
Statements of Operations and
Comprehensive
Income for the Three and Six Months Ended
Condensed Consolidated
Statements of Cash Flows for the
Six Months Ended
June 30, 2004 and 2003
Notes to Condensed
Consolidated Financial Statements
Item 2. Management's
Discussion and Analysis or Plan of
Operation
Item 3. Controls and
Procedures
PART II- OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in
Securities and Use of Proceeds
Item 3 Defaults upon Senior
Securities
Item 6. Exhibits and
Reports on Form 8-K
Certifications
CURRENT ASSETS
Cash
Accounts receivable, less
allowance for
doubtful accounts,
2004, $5,700; 2003, $5,700
Marketable securities,
available for sale
Inventories
Prepaid expenses
Current portion of deferred
loan fees
Total Current Assets
PROPERTY AND EQUIPMENT
Land
Building and improvements
Design and construction in
progress,
manufacturing
facility
Equipment and furniture
Vehicles
Equipment under capital
lease
Less: Accumulated
depreciation and amortization
OTHER ASSETS
Intangibles, net of
amortization
Marketable securities,
available for sale
Deferred loan fees, less
current portion, net of
amortization
Deposits
CURRENT LIABILITIES
Accounts payable
Accrued management salaries
Accrued expenses
Insurance contracts payable
Interest payable
Current maturities of
long-term debt
Current maturities of
capital lease obligations
Current maturities of
advances from an officer/stockholder
Current maturities of
capital lease due stockholder
Current maturities of
convertible notes and accrued interest
Other
Total Current Liabilities
LONG-TERM LIABILITIES
Long-term debt, less
current maturities
Convertible promissory
notes, less current maturities
Accrued interest,
convertible notes, less current maturities
Capital lease obligations,
less current maturities
Capital lease obligation,
shareholder, less current
Total Long-Term Liabilities
STOCKHOLDERS' EQUITY
(DEFICIT)
Preferred stock, par value
$0.001 per share;
authorized 999,500
shares, issued and outstanding
2004, 0 shares;
2003, 0 shares
Common stock, par value
$0.001 per share;
authorized
250,000,000 shares, issued and outstanding,
142,667,114 at June
30, 2004; 122,373,953 at
December 31, 2003
Additional paid-in capital
Accumulated deficit
Common stock to be issued
Accumulated other
comprehensive income (loss)
Common stock options
outstanding, net
REVENUES
Fertilizer
Photochemical recycling
Silver
Mining technical services
Total Revenues
COST OF SALES
Gross Profit (Loss)
OPERATING EXPENSES
Depreciation and
amortization
Research and development
Sales and marketing
Delivery and warehousing
General and administrative
Total Operating Expenses
Operating (Loss)
OTHER INCOME (EXPENSE)
Interest expense
Gain on sale of investments
Other
Total Other Income
(Expense)
Income (Loss) before
provision
Provision for income tax
Net Income(Loss)
Other comprehensive income
(loss)
Unrealized gains (losses)
on
Comprehensive Income (Loss)
Weighted average number of
shares
Outstanding
(1,000s)
Earnings (Loss) per share,
basic
and diluted
Cash flows from
operating activities
Net
income (loss)
Adjustments to reconcile net loss to
Depreciation and amortization
Interest on convertible notes
Marketable securities received for services
(Gain) Loss on investments
Stock option compensation (credit)
(Gain) on debt restructuring
Bad debts
Expenses paid with issuance of common stock
(Increase) decrease in:
Trade accounts receivable
Inventories
Prepaid expenses and deposits
Increase (decrease) in:
Accounts payable
Accrued management salaries
Accrued expenses and contracts payable
Accrued interest
Net cash used by operating activities
Cash flows from
investing activities:
Acquisition of property and equipment
Proceeds
from sale of investments
Net cash provided (used) by investing activities
Cash flows from
financing activities:
Proceeds
from sale of stock
Proceeds
from account receivable factoring, net
Payments
on long-term debt
Net cash provided by financing activities
Net increase (decrease) in cash
Cash, beginning
of period
Cash, end of
period
Revenues:
Photochemical
Fertilizer
Mining Technical
Services
Consolidated
Revenues
Gross Profit (Loss):
Photochemical
Fertilizer
Mining Technical
Services
Consolidated
Gross Profit
Operating Income (Loss):
Photochemical
Fertilizer
Mining Technical
Services
Consolidated
Operating
Other Income (Expense):
Photochemical
Fertilizer
Mining Technical
Services
Consolidated
Other Income
Net Income (Loss) before
taxes:
Photochemical
Fertilizer
Mining Technical
Services
Consolidated
Net Income
(Loss) before
taxes
Current Assets:
Photochemical
Fertilizer
Mining Technical
Services
Property and Equipment,
net:
Photochemical
Fertilizer
Mining Technical
Services
Other Assets, net:
Photochemical
Fertilizer
Mining Technical
Services
Total Assets:
Photochemical
Fertilizer
Mining Technical
Services
Total Segment Assets
Itronics Inc. assets
Less: inter-company
elimination
Consolidated Assets
Unrealized holding gains
(losses)
Other Comprehensive Income
(Loss)
Option Compensation
Expense:
As reported
Adjustment for additional
expense
for fair value of options
Pro forma
Net Income (Loss):
As reported
Adjustment for additional
expense
for fair value of
options
Pro forma
Earnings (Loss) per share,
basic and diluted
As reported
Pro forma
Revenues
Gross profit (loss)
Operating income (loss)
Other income (loss)
Net income (loss) before
taxes
Revenues
Gross profit (loss)
Operating income (loss)
Other income (expense)
Net income (loss) before
taxes
The next plant facility expansion project is to increase tank truck loading capacity. In 2002 the Company completed construction of a bulk liquid fertilizer tank truck load out facility which was expected to handle anticipated growth in demand for the chelated zinc product during the next two years. With the introduction of additional bulk products and increased demand for the chelated zinc products, additional load out capacity is needed. Engineering design for this expansion project was started during the first quarter and application for a building permit was submitted in the second quarter. The application is in the late stages of governmental review and the construction permit is expected to be issued in the third quarter.
The Companys primary focus is to increase bulk GOLDn GRO liquid fertilizer sales as rapidly as possible. A secondary area of focus is on the Urban market, which includes Home Lawn and Garden, Landscape Construction and Maintenance, and Nursery and Greenhouse markets. The plan for entry into these markets is to combine high quality GOLDn GRO fertilizer products with technologically advanced liquid fertilizer injection equipment that provides economical, easy use of fertilizers on the consumers lawn or garden. The recent addition of a line of liquid fertilizer injectors to the Companys "e" store is the first step into these markets. The third area of focus is development of specialty fertilizers that can be sold at higher profit margins than the bulk products. Development of the GOLDn GRO Guardian animal repellant is an example of this type of specialty fertilizer.
Six types of growth initiatives are underway to expand revenue now and in future years; (1) revenue growth through the rest of 2004 will be achieved by continued sales increases with established products in established sales territories, (2) expansion of GOLDn GRO crop applications, (3) geographic expansion of GOLD'n GRO fertilizer sales, (4) expansion of the GOLD'n GRO fertilizer product line, (5) processing and refining technology developments that have the objective of expanding raw material sources, reducing costs and widening profit margins for those activities, and (6) early in the second quarter Itronics Board of Directors authorized management to investigate and initiate small acquisitions with solid potential to expand internally generated sales growth that is already underway. A discussion of the progress of these growth initiatives follows and is presented in the order listed above.
(1) Sales growth of GOLD'n GRO liquid fertilizers is being generated by a broader base of distributor stores selling the products, more of the distributors sales force participating in the sales programs, and more products being sold in bulk truck load quantities.
18
The rapid growth in silver halide photofinishing for digital photographers continued to increase the Company's volume of used silver-bearing photoliquids with a 46 percent increase in the first quarter of 2004 and 36 percent increase in the second quarter compared to prior year quarters. This growth is occurring within the Company's existing customer base in northern Nevada and northern California. This continuing rapid growth in silver-bearing photoliquids, ensures the Company will continue to have a more than adequate supply to support the rapid growth in GOLD'n GRO fertilizer sales that is underway.
Silver sales more than doubled in the second quarter with a 168 percent increase. More than half of the increase in silver sales was generated by sales of the Company's 0.999 percent pure 5 troy ounce Silver Nevada Miner numismatic bars and x-ray film silver. The silver price fluctuated sharply during the quarter, but was up significantly. Wide silver price fluctuation at higher levels is expected during the balance of 2004. Silver sales are expected to continue to increase through the end of 2004.
Photochemical Concentrator sales efforts have been put on hold due to the rapid growth in used photochemical supplies within the Company's established customer base. Because of this, the Massachusetts Photochemical sales office is being expanded to assist in the GOLD'n GRO fertilizer injector sales development for the Home Lawn and Garden and the Landscape Construction and Maintenance markets. This office will assist in developing GOLD'n GRO fertilizer sales relationships with liquid fertilizer injector distributors and will assist in expanding GOLD'n GRO liquid fertilizer sales in the northeastern states. The GOLD'n GRO fertilizer package size being introduced into these markets is the 2.5 gallon bottle which is approximately equivalent in weight and analysis to the 25 pound bags of dry fertilizers typically sold in the big box stores such as The Home Depot and Lowes. Some customers in these markets will also buy product in 55 gallon drums.
(2) Several new crop applications are being evaluated. The Company and its distributor sales force are demonstrating that several of the GOLD'n GRO "field ready" blends provide improved nutrition uptake when applied foliar which creates opportunities for use on lower value large acreage field crops. Two new foliar applications that are working well are the use of GOLD'n GRO applied foliar on young oats, and GOLD'n GRO applied foliar on alfalfa. Both of these are large acreage markets that require bulk truck load quantities of GOLD'n GRO products. These new developments expand the foliar application markets for GOLD'n GRO fertilizers and open up the potential for economical large scale use in other parts of the United States.
Field trials whose objectives are to demonstrate different aspects of GOLD'n GRO product use were increased during the second quarter with 12 trials currently in various stages. Most will be completed during the third and fourth quarters, but field observations will continue for up to a year at locations where GOLD'n GRO soil conditioning effects are being examined. All trials are comparisons to standard grower fertilization practice presently in use.
Preliminary findings are that the new GOLD'n GRO base liquid is helping reduce plugging problems commonly encountered in drip and micro-sprinkler irrigation. In certain locations that have poor water quality the GOLD'n GRO base liquid appears to be improving proprietary field fertilizer mix stability. At other locations, use of the GOLD'n GRO base liquid also appears to
19
be improving plant nutrient uptake from the soil, especially when used in combination with one or more of the GOLD'n GRO chelated nutrient metal products. The target market for GOLD'n GRO base liquid is to have it used as an integral component of distributor proprietary field mixes with the usage tailored to achieve specific mix objectives.
Another group of trials is underway to evaluate low rate (1 to 2 gallons per acre) foliar application of GOLD'n GRO 8-8-8 + 4%S(sulfur) with one of the GOLD'n GRO chelated zinc products at second, third, and fourth cutting for alfalfa being grown for dairy cow feed. Early indications are that the nutrient content of the alfalfa is being improved, which benefits the dairy because less nutrient supplements are required for feeding the cows, thus reducing dairy operating expenses. The target market is large with more than 23 million acres of alfalfa being grown in the United States.
Another group of trials is evaluating low rate (1 to 2 gallons per acre) foliar application of GOLD'n GRO 8-8-8 + 4%S and GOLD'n GRO 20-1-7 + 3%S on silage corn and field corn. Early indications are that a positive growth response is obtained and in one trial the corn is putting out tassels earlier. A benefit of accelerated growth of the corn would be earlier harvest, which provides a number of benefits including lower risk of loss due to frost and fall rains, and possibly lower drying cost. Another possible outcome is greater corn stalk mass which would be beneficial to silage corn being grown for cattle feed. The target markets for these applications are large with more than 79 million acres of grain and silage corn being grown in the United States. Fertilization applications for corn are expected to become more important as the use of domestically grown corn to produce ethanol for fuel continues to expand.
Two additional large acreage crops that have potential for low rate foliar fertilization (1 to 2 gallons per acre) application development for GOLD'n GRO liquid fertilizers are cotton and soybeans. Some foliar applications have already been tested on cotton with positive results, and a small amount of work has been done on dry beans with positive results. More than 13 million acres of cotton are grown in the United States and almost 80 million acres of soybeans are grown.
Field evaluation of GOLD'n GRO 9-0-1 + 7%Zn(zinc) and GOLD'n GRO 9-0-2 + 3%Zn is continuing. GOLD'n GRO 9-0-1 + 7%Zn was introduced in late 2001 for bulk use and GOLD'n GRO 9-0-2 + 3%Zn was introduced for bulk use in early 2004. Large scale usage of GOLD'n GRO 9-0-1 + 7%Zn is demonstrating up to 2 times greater effectiveness when compared to usage of standard products. Early indications are that GOLD'n GRO 9-0-2 + 3%Zn is comparably effective. Both nutrient content and nutrient balance are being improved by use of these products and this demonstrated effectiveness is expected to continue to drive sales growth. These products are used on most crops and the Company believes that the potential United States market is in the range of 6 to 10 million gallons.
An environmental benefit that results from the effectiveness of the GOLD'n GRO chelated zinc products is a 20 percent to 90 percent reduction in the amount of zinc metal needed to satisfy the nutrient requirements of the crops being fertilized. Large scale field soil sampling is showing that with the lower application rates there is very little carry over of nutrient metal to the next crop and nutrient metal accumulation in the soil is virtually eliminated.
20
(3) During the second quarter the Company continued its geographic expansion of GOLD'n GRO liquid fertilizer sales. Expansion of sales into Oregon, Washington, and Idaho is being implemented by relocating a senior sales agronomist to Walla Walla, Washington. Early in the second quarter the Company initiated the registration process for products that will be sold in those states. Review of the registration requirements in Oregon and Washington was completed in the second quarter. In conjunction with our distributor network, the registration process for those states was begun in the third quarter. GOLDn GRO 9-0-1+7% Zinc is now registered in Idaho and additional products are being considered for registration. Registration of products in Florida has not yet been started. Based on the Company's experience to date, meaningful commercial sales can be generated about a year after these activities are initiated. Thus, these activities are foundation building for continued sales growth in 2005 and beyond. Each new geographic area developed will require the same procedural approach.
(4) GOLD'n GRO product development is continuing with two new fertilizers being developed, a high magnesium content liquid fertilizer and a calcium plus magnesium liquid fertilizer. These liquid fertilizers are technically more complex than the other GOLD'n GRO fertilizers and so their development was delayed until the basic line of GOLD'n GRO fertilizers was completed. These products will be evaluated for foliar and soil application in the third and fourth quarters and are expected to be available for sale during the first quarter of 2005.
Investigation of the registration requirements, and development of a marketing plan, for GOLDn GRO Guardian was commenced during the first quarter, with the objective of having an action plan by the end of the third quarter. GOLD'n GRO Guardian product registration could require a substantial capital investment, and the capital requirements will be defined as part of business plan development. The co-developer has informed the Company that the registration process could take two to three years. Both Federal EPA registrations and state registrations must be obtained before commercial sales can be launched.
The U.S. market for animal repellents is believed to exceed $50 million in annual sales. Products currently in the market have limited effectiveness so there is a real opportunity for a line of systemic products that are effective for several weeks after each application. GOLD'n GRO Guardian small plot tests have shown effectiveness for 8 to 12 weeks.
The animal repellent/fertilizer market is new for the Company. The users of this product will be upscale homeowners and commercial and municipal facilities, and commercial nurseries. The deer population is growing rapidly in the northeastern U.S. so the present center of gravity for this product is the northeastern seaboard states. The initial sales center will be in Rhode Island. Markets served will be the commercial landscape and wholesale and retail nursery segments. The GOLD'n GRO Guardian line of products is strictly for non-food plant applications, and therefore the distribution channels are different from the channels being developed for GOLD'n GRO fertilizers for which the major uses are food crops.
Results of the research of the GOLDn GRO Guardian animal repellant has provided a basis for a fertilizer bird (goose) repellant product that will be perfected for small plot field trial and registration after the registration of GOLDn GRO Guardian is underway.
21
(5) In early 2003 the Company re-activated its silver refining technology development at a low level and also began a low level of product development for glass and tile formulations and products. During 2003 the first pieces of glass/ceramic tile were produced. In 2004 the silver refining technology development is being expanded, but further work on the glass/ceramic tile products development effort is being delayed until 2005. During the second quarter, development of the silver recovery/glass slag production process continued with improvements in the ability to simultaneously recover pure silver and produce an acceptable glass product being achieved.
When the development of the glass/ceramic tile product line is completed, the Company achieves the ability to recycle 100 percent of the materials received from customers, including waste that is generated internally during processing of the received materials. The Company believes that these products will be commercially profitable and that the 100 percent recycling capability will provide the basis for profitable growth for the indefinite future. During the first quarter a preliminary market study was prepared and the Company now believes that the market for specialty floor and wall tile exceeds $1 billion in the United States.
The Company's development of leaching chemicals for the silver/gold mining industry has been on hold pending completion of the GOLD'n GRO liquid fertilizer development. In 2003 a small amount of laboratory testing was performed with the objective of developing technical knowledge of how the liquid photo-chemistry can be used as a leaching agent for metal extraction. In 2005 this work will be expanded and a small pilot circuit will be established to chemically process certain categories of silver-bearing solid wastes.
This on-going development work will produce the processing know-how needed to adapt the technology to the mining sector, and for processing non-photographic precious metal bearing secondary materials. During the second quarter, laboratory development of leaching procedures for silver-bearing secondary solid materials was continued and plans are being developed to expand this effort during the third quarter. This development work is expected to produce raw materials for fertilizer manufacturing while producing much higher silver content products for the silver refinery. Production of raw materials for fertilizer manufacturing will reduce the amount of raw material being purchased from outside suppliers and will reduce the cost of those raw materials. Production of higher silver content materials for the silver refinery will reduce the per ounce cost of refining and increase the capacity of the refinery. Using this approach, the capital investment that would be required to expand silver refinery capacity can be used to expand recycling capabilities while producing substantial operational cost savings for both fertilizer manufacturing and silver refining.
(6) Late in the second quarter the Company initiated review of two possible small business acquisitions. Discussions are in preliminary stages and successful completion is dependent on securing financing.
During the quarter the Company upgraded its Web site with significantly improved features, at http;//www.itronics.com. This new Web site was created as part of a project to establish separate Web sites for the Company's operating divisions and the GOLD'n GRO fertilizers. This expansion in Web site capabilities is expected to improve the Company's ability to grow using the marketing and communication efficiencies now being provided by the Internet.
22
Early in the third quarter the Company announced the formation of three new web sites. The new web address for Itronics Metallurgical, Inc. is www.itromet.com. The new web address for Whitney & Whitney, Inc. is www.whitneywhitney.com. The new web address for GOLD'n GRO is www.goldngro.com.
Acquisition of web addresses and establishment of the new web sites implements another part of Itronics growth strategy. Creating and operating separate sites for the subsidiaries and for GOLD'n GRO liquid fertilizers will make it easier for customers and investors to do business and to communicate with Itronics and its operating units. The Company's plan is to expand content of the individual web pages and to expand the Company's ability to conduct "e-commerce" as the Company completes the transition from being a small research and development company into a large commercial processing and manufacturing company.
During the second quarter the sales of the Mining Technical Services division declined due to winding up of on-going projects and delays related to client financing for new projects that are starting up. During the quarter plans were being developed for internet publication of Mining Company Profiles which are being developed using organizational formats developed by Whitney & Whitney, Inc. and using the Technical Service Division's extensive Company Annual Report library and related information. Development of this internet publishing project will be on-going during the balance of 2004 and 2005. The plan is to provide certain Mining Company & Mining Industry Profile data via on-line subscription.
V. Forward-Looking Statements
Statements in this Form 10-QSB may constitute forward-looking statements and are subject to numerous risks and uncertainties, including the failure to complete successfully the development of new or enhanced products, the Companys future capital needs, the lack of market demand for any new or enhanced products the Company may develop, any actions by the Companys partners that may be adverse to the Company, the success of competitive products, other economic factors affecting the Company and its markets, and other risks detailed from time to time in the Companys filings with the Securities and Exchange Commission. The actual results may differ materially from those contained in this Form 10-QSB.
Item 3. Controls and Procedures
Itronics management, including the Chief Executive and Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the quarter ending June 30, 2004 and has evaluated whether any changes in internal controls over financial reporting have occurred during the quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting. These evaluations were conducted pursuant to Exchange Act Rule 13a-15. Based on these evaluations, the Chief Executive and Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to him in a timely fashion. He also concluded that there were no significant changes in internal controls over financial reporting, or in factors that could significantly affect internal controls over financial reporting, during the quarter ended June 30, 2004.
23
PART II- OTHER INFORMATION
Item 1. Legal Proceedings
In August 2002 a supplier of equipment for the Stead manufacturing plant filed suit against the Company and its subsidiary, Itronics Metallurgical, Inc. (IMI) in Johnson County, Indiana for the unpaid amount of $64,234 plus attorneys fees and court costs. On October 1, 2002 the plaintiff received a default judgment awarding the $64,234 plus $1,500 attorneys fees plus 8% interest. On November 5, 2002 the plaintiff filed a "Notice of Filing of Foreign Judgment" in Washoe County, Nevada and has received the judgment. In December 2003 a settlement agreement was accepted that required a $10,000 payment in December 2003 plus monthly payment of $5,161 over twelve months in 2004.
As of June 30, 2004 a total of nine lawsuits filed in 2003 and prior remain outstanding against the Companys subsidiaries by various equipment lessors. Five of the suits were filed in Washoe County, Nevada, two in Cook County, Illinois, one in Los Angeles County, California, and one in Oakland County, Michigan. Two additional suits covering five leases were filed in Washoe County, Nevada in May 2004. The suits seek a total of $811,245 plus attorneys fees and other costs. Five of these suits, seeking a total of $278,301 plus costs, were settled by restructuring the leases, signing stipulated judgments and agreeing to pay total payments of $227,093. Monthly payments on the settlements total $10,131 and are paid over various periods ranging from 18 to 31 months. If the restructured leases are defaulted, judgments for the original claimed amounts can be entered and further collection action, including repossession of the secured equipment, can be taken. Of the six remaining unsettled suits, three have received judgments. A settlement agreement reached on two of those is pending the ability to meet the initial payment terms. Legal counsel is actively negotiating two of the unsettled suits. No further action has occurred on the other two unsettled suits.
In February 2003 a trade creditor filed suit against the Company in Washoe County, Nevada seeking a total of $85,525 plus attorney fees and other costs. A default judgment was entered in May 2003. The Company is attempting to negotiate a settlement.
Successful settlement of the above claims is dependent on future financing.
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities:
Following is a summary of unregistered securities issued during the three months ended June 30, 2004. All securities were issued subject to Rule 144 of the Securities and Exchange Commission. Generally, Rule 144 requires shareholders to hold the shares for a minimum of one year before sale. In addition, officers, directors and more than 10% shareholders are further restricted in
24
their ability to sell such shares. There have been no underwriters of these securities and no underwriting commissions or discounts have been paid.
Shares |
Value |
|
Issued |
Received |
|
Private placement for cash |
2,889,000 |
$ 355,500 |
Warrant exercises for cash |
62,500 |
5,000 |
Conversion of notes payable and accrued interest |
4,786,733 |
714,977 |
Labor and consulting |
200,000 |
21,000 |
Interest on employee salary in arrears |
120,340 |
21,988 |
Director fees |
2,500 |
475 |
8,061,073 |
$1,118,940 |
The above transactions qualified for exemption from registration under Sections 3(b) or 4(2) of the Securities Act of 1933. Private placements for cash were non-public transactions. The Company believes that all such investors are either accredited or, either alone or with their purchaser representative, have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the prospective investment.
Item 3. Defaults Upon Senior Securities
As of June 30, 2004 lease payments totaling $769,529 were in arrears. As required by U.S. Generally Accepted Accounting Principles, the principal balance of the leases that are in default have been classified as current liabilities. The Company is in ongoing communication with the lessors to avoid action that may be adverse to the Company.
In 2003 an offer was made to extend the Series 2000 Convertible Promissory Notes. The holders of $80,000 of the Notes have not responded to the offer and that amount, plus $37,700 in accrued interest, remains in default.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 31 CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002 28
Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION
1350 AS ADOPTED PURSUANT SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002 29
25
(b) Reports on Form 8-K
Following is a list of Forms 8-K filed during the three months ended June 30, 2004:
April 6, 2004 | Announcement of an improved website. |
April 13, 2004 | Announcement that first quarter fertilizer sales more than |
doubled the prior year comparable period. | |
April 22, 2004 | Announcement that the "Beneficial Use Photochemical, Silver, |
and Water Recycling Program" is being introduced to the | |
cruise ship industry. | |
April 27, 2004 | Announcement that first quarter silver sales more than |
tripled over the prior year comparable period. | |
May 20, 2004 | Announcement of first quarter financial results. |
June 24, 2004 | Announcement of the completed installation of a heat |
exchange system at the Reno, Nevada plant, significantly | |
increasing fertilizer manufacturing capacity. |
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ITRONICS INC.
DATED: August 13, 2004 By: /S/JOHN W. WHITNEY
John W. Whitney
President, Treasurer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated
DATED: August 13, 2004 By: /S/JOHN W. WHITNEY
John W. Whitney
President, Treasurer and Director
(Principal Executive Officer)
DATED: August 13, 2004 By: /S/MICHAEL C. HORSLEY
Michael C. Horsley
Controller
(Principal Accounting Officer)
27
Exhibit 31
ITRONICS INC.
CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, John W. Whitney, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Itronics Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The small business issuers other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the small business issuer and have:
c Evaluated the effectiveness of the small business issuers disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
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5. The small business issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuers auditors and the audit committee of small business issuers board of directors (or persons performing the equivalent functions):
Date: August 13, 2004 /S/ JOHN W. WHITNEY
John W. Whitney
Chief Executive Officer
Chief Financial Officer
ITRONICS INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Itronics Inc. (the Company") on Form 10-QSB for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on August 16, 2004 (the "Report") each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 13, 2004 /S/ JOHN W. WHITNEY
John W. Whitney
Chief Executive Officer
Chief Financial Officer