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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 September 30, 2005 ( ) 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 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 As of October 31, 2005, 197,057,628 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 6 7 9 16 27 27 28 29 30 32 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ITRONICS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2005 AND DECEMBER 31, 2004 (UNAUDITED) ASSETS September
30, December
31, 2005 2004 $702,014 $ 5,180 102,187 188,805 109,735 26,180 567,834 571,704 168,429 142,509 113,929 14,152 1,764,128 948,530 215,000 215,000 1,167,315 1,167,315 178,921 121,171 3,095,572 3,080,430 216,474 220,700 4,873,282 4,804,616 1,851,671 1,670,668 3,021,611 3,133,948 77,051 8,435 204,952 34,502 17,212 22,525 299,215 65,462 $5,084,954 $4,147,940 4 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) September 30, December 31, 2005 2004 $ 429,041 $ 558,566 94,777 51,229 570,771 389,127 191,968 398,731 27,309 15,048 12,917 6,307 252,454 204,909 57,779 522,845 665,697 807,746 161,525 161,525 5,600 5,420 2,839,502 1,020,946 31,621 21,429 5,340,961 4,163,828 541,045 97,022 114,582 - - 1,517,000 - 925,216 maturities 4,965 9,144 660,592 2,548,382 6,001,553 6,712,210 - - 196,908 164,864 23,895,053 19,438,213 (25,609,971) (22,944,959) 579,530 786,426 (21,911) (9,568) 43,792 754 (916,599) (2,564,270) $5,084,954 $4,147,940 See Notes to Condensed Consolidated Financial Statements 5 ITRONICS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) Three Months Ended Sept. 30, Nine Months Ended Sept. 30, 2005 2004 2005 2004 $ 231,166 $ 251,888 $1,015,007 1,152,395 12,230 37,846 95,690 170,349 243,396 289,734 1,110,697 1,322,744 279,011 291,322 1,084,298 1,185,096 15,698 51,199 108,177 186,596 294,709 342,521 1,192,475 1,371,692 (51,313) (52,787) (81,778) (48,948) 81,834 82,119 212,718 239,568 64,313 45,338 197,969 94,249 214,325 215,549 739,596 698,956 9,366 10,807 62,357 62,688 204,381 210,405 689,950 672,605 574,219 564,218 1,902,590 1,768,066 (625,532) (617,005) (1,984,368) (1,817,014) (215,511) (191,379) (581,285) (602,474) discount (114,582) - (114,582) - investments - 38,418 (10,116) 136,220 23,607 10 25,339 23 (306,486) (152,951) (680,644) (466,231) for income tax (932,018) (769,956) (2,665,012) (2,283,245) - - - - (932,018) (769,956) (2,665,012) (2,283,245) securities (2,269) (53,966) (12,343) (343,819) $(934,287) $(823,922) $(2,677,355) $(2,627,064) 195,625 144,755 187,671 136,715 $(0.005) $(0.005) $(0.014) $(0.017) See Notes to Condensed Consolidated Financial Statements 6 ITRONICS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) Nine Months Ended Sept. 30, 2005 2004 $(2,665,012) $(2,283,245) cash used by operating activities: 212,718 239,568 286,537 383,572 114,582 - (116,193) (33,318) 10,116 (136,220) offsetting photochemical processing fees (28,598) (82,549) 43,379 536 (24,832) - 2,200 - 480,322 478,045 86,618 (33,593) 32,468 (14,427) (25,021) (3,207) (117,678) 52,706 181,644 104,711 (184,310) 174,700 67,360 35,339 (1,643,700) (1,117,382) (57,142) (16,506) (195,490) - 10,177 320,390 500 - (241,955) 303,884 570,000 881,008 95,000 - 2,031,200 - 43,548 6,191 (157,259) (139,011) 2,582,489 748,188 696,834 (65,310) 5,180 34,499 $702,014 $(30,811) See Notes to Condensed Consolidated Financial Statements 7 ITRONICS INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) (continued) Nine Months Ended Sept. 30, 2005 2004 $ 182,321 $ 142,901 11,845 16,855 867,101 1,164,126 90,000 145,029 - 2,236 71,500 - - 181,804 12,042 - - 28,276 2,099,464 - 150,536 - 90,000 - 90,000 - 20,000 - 143,800 - The accompanying notes are an integral part of these financial
statements 8 ITRONICS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 (UNAUDITED) 1. The unaudited condensed consolidated financial statements presented
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, 2004. These financial statements reflect all
adjustments that are, in the opinion of management, necessary to fairly state the results
for the interim periods reported. Certain amounts from the prior period have been
reclassified to be consistent with the current period presentation. 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
$2,665,012 during the nine months ended September 30, 2005, a working capital deficit of
$3,576,833, and a stockholders deficit balance of $916,599 as of September 30, 2005.
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 nine months ended September 30, 2005 were affected by rainy weather in
California and 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 was closed in June 2005. Terms of the Placement included an offering price of
$0.05 per share, plus an attached three year warrant for one half the number of shares
with an exercise price of $0.075 for the first year, double that amount for the second
year, and triple that amount for the third year. During the six months ended June 30, 2005
$570,000 was received from this private placement. 4. In July 2005, the Company arranged callable secured convertible debt
financing from four unrelated Investors totaling up to $3,250,000. The first funding of
the loan was for $1,250,000 and the Company received net proceeds after financing costs
and prepaid interest of $866,200 The second funding, for gross proceeds of $1,000,000 and
net proceeds of $860,000 was received in August 2005 after filing a registration statement
with the U.S. Securities and Exchange Commission, and the third funding, for gross
proceeds of $1,000,000, will be received once the registration statement becomes
effective. The loans are for three years and they accrue interest at 8% per annum. The
Investors receive five year warrants to acquire 3,000,000 Company common shares at an
exercise price of $0.15 per share. The warrants will be issued proportionally as each of
the fundings is completed and, accordingly, warrants to acquire 2,076,923 common shares
have been issued as of September 30, 2005. The loans are convertible into common shares at
the lesser of $0.10 or 55% of the average of the lowest 3 intraday trading prices during
the 20 trading day period ending one trading day before the conversion date. The loans are
secured by a security 9 ITRONICS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 (UNAUDITED) interest in substantially all of the Companys assets, including
the assets of its wholly owned subsidiaries, and intellectual property. The loans are
further secured by 14,550,558 Company common shares owned by an officer/stockholder. The callable secured convertible notes (convertible notes) discussed
above include warrants and a beneficial conversion feature. The warrants to acquire
2,076,923 common shares were valued at $150,536 using the Black-Scholes option pricing
model and were recorded as a discount to the related convertible notes as required under
APB 14. The intrinsic value of the beneficial conversion feature of the convertible notes
was computed at $2,908,067 under EITF 98-5; however this value is limited to the carrying
amount of the debt, or $2,099,464. This amount was also recorded as a discount to the
convertible notes as required under EITF 00-27. The combined discounts of the warrants and
the beneficial conversion features is $2,250,000, an amount equal to the face amount of
the convertible notes. This discount is being amortized to interest expense over the life
of the convertible notes, or three years, and resulted in interest expense of $114,582
during the three months ended September 30, 2005. Based on the conversion and market prices of our common stock on the
respective commitment dates of the two fundings, the convertible notes could be converted
into 67,643,908 Company common shares. However, the investors are limited under terms of
the convertible notes to beneficially owning 4.99% or less of the Companys
outstanding common stock, which would be approximately 10,342,000 shares as of September
30, 2005. The Registration Rights Agreement (Agreement), part of the Callable
Secured Convertible Note (Notes) financing described above, requires the Company to use
its best efforts to have the registration statement become effective on or before 120 days
after the initial signing of the various agreements, which was on July 15, 2005. The
Company is also required to use its best efforts to obtain shareholder approval to
increase the authorized shares in order to meet the terms of Agreement and the Notes by
October 31, 2005. The 120 days expired on November 12, 2005 and the Company has not yet
held its annual meeting to obtain the necessary shareholder approval. The Agreement
provides a penalty of 2% of the outstanding note balances per month if the registration
statement is not effective, or if there are not enough authorized shares available at the
time the registration statement becomes effective to allow sale of all the registrable
securities by the Note holders. At present the penalty would be $45,000 per month. The
penalty is payable, at the option of the Company, in cash or common stock of the Company.
The Company believes it is using its best efforts to obtain effectiveness of the
registration statement and in getting shareholder approval to increase the authorized
shares, so the penalty may not be applicable. The Company is evaluating the facts and
circumstances and will determine whether a liability for the penalty should be recorded in
the fourth quarter of 2005. 5. During the second quarter of 2005, the Company renegotiated its
account receivable factoring arrangement. The Company now factors specified raw 10 ITRONICS INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 (UNAUDITED) material inventory items, the related finished GOLDn GRO
fertilizer products, and the related accounts receivable from the sale of the specified
GOLDn GRO fertilizers. The Company also factored the sale of two Photochemical
Concentrators during the quarter. The balance due under these arrangements was $94,777 at
September 30, 2005. These loans were secured by a security interest in the related
inventory and account receivable items. Both factoring arrangements were paid in full
subsequent to September 30, 2005. 6.
PART I - FINANCIAL
INFORMATION
Item 1. Financial
Statements
Condensed Consolidated
Balance Sheets September 30, 2005
and December 31, 2004
Condensed Consolidated
Statements of Operations for the Three
and NIne Months
Ended September 30, 2005 and 2004
Condensed Consolidated
Statements of Cash Flows for the
Nine Months Ended September
30, 2005 and 2004
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, 2005,
$5,700; 2004, $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
Less: Accumulated
depreciation and amortization
OTHER ASSETS
Intangibles, net of
amortization
Deferred loan fees, less
current portion, net of
amortization
Deposits
CURRENT
LIABILITIES
Accounts
payable
Account
receivable and inventory factoring
Accrued
management salaries
Accrued
expenses
Insurance
contracts payable
Interest
payable to officer/stockholders
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
Callable
secured convertible notes, net of unamortized
discount of
$2,135,418
Convertible
promissory notes, less current maturities
Accrued
interest, convertible notes, 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
2005, 0
shares; 2004, 0 shares
Common stock,
par value $0.001 per share;
authorized 250,000,000 shares, issued and outstanding,
196,907,628 at September 30, 2005; 164,863,938 at
December
31, 2004
Additional
paid-in capital
Accumulated
deficit
Common stock to
be issued
Accumulated
other comprehensive income (loss)
Common stock
options outstanding, net
REVENUES
Photochemical fertilizer
Mining technical services
Total Revenues
COST OF REVENUES (exclusive
of
depreciation and
amortization
shown separately below)
Photochemical fertilizer
Mining technical services
Total Cost of Revenues
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
Interest-amortization of
note
Gain (loss) on sale of
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
Amortization of note
discount
Marketable
securities received for services
(Gain) Loss on
investments
Addition of silver
in solution inventory by
Stock option
compensation
(Gains)on debt
forgiveness
Other
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
Acquisition of intangibles
Proceeds from sale of
investments
Proceeds from sale of
equipment
Net cash provided (used) by investing activities
Cash flows from financing
activities:
Proceeds from sale of stock
Proceeds from debt,
stockholder
Proceeds from debt,
unrelated
Proceeds from
receivable/inventory factoring, net
Payments on debt
Net cash provided by financing activities
Net increase (decrease) in
cash
Cash, beginning of period
Cash, end of period
Supplemental Disclosures of
Cash Flow
Information:
Cash paid during the period
for interest
Schedule of non-cash
financing transactions:
Settlement of debt/accruals
by
issuance of common stock:
Accounts
payable
Convertible notes and accrued interest
Short-term debt and accrued interest due an
officer/stockholder
Equipment financed with
capital leases
Acquisition of assets by
issuance of
common stock:
GOLDn GRO Guardian product rights
Equipment
Acquisition of assets by
granting of warrants:
Deferred
loan costs
Officer/stockholder loan of
marketable securities
Intrinsic value of the
beneficial conversion feature
of callable secured
convertible notes
Discount on callable
secured convertible notes for
investor warrants
Deductions from loan
proceeds of callable secured
convertible notes:
Prepaid
interest
Deferred
loan costs
Key man
life insurance
Short
term debt and accrued interest
As of September 30, 2005 total recorded liabilities of $731,081 including accrued interest to September 30, 2005, were subject to a total of 11 separate lawsuits for the collection of the funds due. These include 8 leases totaling $531,302 (reflected in Current Maturities of Capital Lease Obligations) plus $65,900 in additional interest (reflected in Accrued Interest) and three trade payables totaling $121,263 (reflected in Accounts Payable) plus $12,616 in additional interest (reflected in Accrued Interest). The leases are individually secured by specified equipment.
The accrued interest noted above was recorded based on the Companys assessment of additional amounts the Company believes is probable and is related to four cases originally seeking $423,375; the creditors have received judgments in three of these cases and the fourth is in litigation. The Company will continue to accrue interest until these cases are settled or paid in full.
The Company estimates an additional $10,000 interest may be possible on one case; however, the Company has not accrued this amount because it does not believe it is likely to be incurred. This estimate is related to one case, seeking $35,210, that was filed in March 2003, and no further contact has taken place since then.
Six other cases, originally seeking $313,305, now have a recorded liability of $204,613. All six cases are under negotiated payment agreements and the payments are current.
Successful settlement of the above claims is dependent on future financing.
11
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
7. In addition to the above leases that are subject to litigation, there are four leases, with a recorded liability of $188,255, that are in default. No payments have been made for an extended period of time, and no collection action or recent contact from the creditors has occurred. 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.
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 $59,351 in accrued interest, remains in default.
8. During the nine months ended September 30, 2005 convertible promissory notes totaling $616,100 principal and $251,001 in accrued interest were converted into common stock at $0.10 per share.
9. Following is a summary of finished goods, work in progress, and raw materials inventories as of September 30, 2005 and December 31, 2004. The raw material balances below include $382,289 and $396,614 in unprocessed silver bearing photochemicals as of September 30, 2005 and December 31, 2004, respectively.
Sept 30, |
Dec. 31, |
|
2005 |
2004 |
|
Finished goods | $23,841 |
$ 63,615 |
Work in progress | - |
- |
Raw materials | 543,993 |
508,089 |
$567,834 |
$571,704 |
10. Warrants, options, and shares to be issued, totaling 64,083,997 and 63,860,067 shares as of September 30, 2005 and 2004, respectively, would dilute future Earnings Per Share (EPS). In addition, approximately 8,265,000 shares could be issued upon conversion of callable secured convertible notes as discussed in Note 4. No diluted EPS is presented as the effect of including these shares is antidilutive.
11. Following is financial information for each of the Companys segments. No changes have occurred in the basis of segmentation since December 31, 2004.
12
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
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:
Three Months Ended Sept. 30, |
Nine Months Ended Sept. 30, |
|||
2005 |
2004 |
2005 |
2004 |
|
Revenues: | ||||
Photochemical Fertilizer | $231,166 |
$251,888 |
$1,015,007 |
$1,152,395 |
Mining Technical Services | 12,230 |
$37,846 |
95,690 |
170,349 |
Consolidated Revenues | $243,396 |
$289,734 |
$1,110,697 |
$1,322,744 |
Gross Profit (Loss): | ||||
Photochemical Fertilizer | $(47,845) |
$(39,434) |
$(69,291) |
$(32,701) |
Mining Technical Services | (3,468) |
(13,353) |
(12,487) |
(16,247) |
Consolidated
Gross Profit (Loss) |
$(51,313) |
$(52,787) |
$(81,778) |
$(48,948) |
Operating Income (Loss): | ||||
Photochemical Fertilizer | $(514,097) |
$(498,312) |
$(1,611,904) |
$(1,490,401) |
Mining Technical Services | (111,435) |
(118,693) |
(372,464) |
(326,613) |
Consolidated
Operating Income (Loss) |
$(625,532) |
$(617,005) |
$(1,984,368) |
$(1,817,014) |
Other Income (Expense): | ||||
Photochemical Fertilizer | $(305,257) |
$(191,379) |
$(671,031) |
$(602,474) |
Mining Technical Services | (1,229) |
38,428 |
(9,613) |
136,243 |
Consolidated
Other Income (Expense) |
$(306,486) |
$(152,951) |
$(680,644) |
$(466,231) |
Net Income (Loss) before taxes: | ||||
Photochemical Fertilizer | $(819,354) |
$(689,691) |
$(2,282,935) |
$(2,092,875) |
Mining Technical Services | (112,664) |
(80,265) |
(382,077) |
(190,370) |
Consolidated Net Income | ||||
(Loss) before taxes | $(932,018) |
$(769,956) |
$(2,665,012) |
$(2,283,245) |
13
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
Identifiable assets by business segment for the major asset classifications and reconciliation to total consolidated assets are as follows:
Sept. 30, |
December 31, |
|
2005 |
2004 |
|
Current Assets: | ||
Photochemical Fertilizer | $1,415,677 |
$ 684,754 |
Mining Technical Services | 127,203 |
157,603 |
1,542,880 |
842,357 |
|
Property and Equipment, net: | ||
Photochemical Fertilizer | 2,921,758 |
3,010,749 |
Mining Technical Services | 99,644 |
122,342 |
3,021,402 |
3,133,091 |
|
Other Assets, net: | ||
Photochemical Fertilizer | 109,652 |
52,697 |
Mining Technical Services | 559,183 |
1,246,824 |
668,835 |
1,299,521 |
|
Total Assets: | ||
Photochemical Fertilizer | 4,447,087 |
3,748,200 |
Mining Technical Services | 786,130 |
1,526,769 |
Total Segment Assets | 5,233,217 |
5,274,969 |
Itronics Inc. assets | 25,378,053 |
22,504,867 |
Less: inter-company elimination | (25,526,316) |
(23,631,896) |
Consolidated Assets | $5,084,954 |
$ 4,147,940 |
|
14
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
12. The Company holds marketable securities that are available for sale, which consist solely of equity securities. The carrying amount on the balance sheets of these securities is adjusted to fair value at each balance sheet date. The adjustment to fair value is an unrealized holding gain or loss that is reported in Other Comprehensive Income. At present, these unrealized gains or losses are the only component of Accumulated and Other Comprehensive Income. The Company had Accumulated Unrealized Holding Losses of $21,911 at September 30, 2005 and $9,568 at December 31, 2004. No gains were reclassified out of accumulated other comprehensive income into earnings during 2005 and no losses were reclassified out of accumulated other comprehensive income into earnings during 2004. The table below illustrates the amount of unrealized holding gains and losses included in other comprehensive income, net of tax effects of $0. The reclassification adjustment listed in the below table represents unrealized holding gains and losses transferred into earnings as securities are sold.
Following are the components of Other Comprehensive Income:
Three Months Ended Sept. 30, |
Nine Months Ended Sept. 30, |
|||
2005 |
2004 |
2005 |
2004 |
|
Unrealized holding gains (losses) | $(2,269) |
$(2,636) |
$(20,312) |
$(27,796) |
arising during the period |
||||
Reclassification adjustment |
- |
(51,330) |
7,969 |
(316,023) |
Other Comprehensive Income (Loss) | $(2,269) |
$(53,966) |
$(12,343) |
$(343,819) |
Following is a summary of gross proceeds and gains and losses from sales of available for sale marketable securities
:Three Months Ended Sept. 30, |
Nine Months Ended Sept. 30, |
|||
2005 |
2004 |
2005 |
2004 |
|
Gross proceeds from sale of securities |
$ - |
$ 97,251 |
$10,177 |
$320,390 |
Gross gains from sale of securities |
$ - |
$41,597 |
$ - |
$ 139,399 |
Gross losses from sale of securities |
- |
(3,179) |
(10,116) |
(3,179) |
Net Gains (Losses) from sale of Securities | $ - |
$ 38,418 |
$(10,116) |
$ 136,220 |
13. 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:
15
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
Three Months Ended Sept. 30, |
Nine Months Ended Sept. 30, |
|||
2005 |
2004 |
2005 |
2004 |
|
Option Compensation Expense: | ||||
As reported | $ 6,267 |
$ 413 |
$43,379 |
$ 536 |
Adjustment for additional expense | ||||
for fair value of options | 1,588 |
20,214 |
5,343 |
59,632 |
Pro forma | $ 7,855 |
$ 20,627 |
$48,722 |
$ 60,168 |
Net Income (Loss): | ||||
As reported | $(932,018) |
$(769,956) |
$(2,665,012) |
$(2,283,245) |
Adjustment for additional expense | ||||
for fair value of options | (1,588) |
(20,214) |
(5,343) |
(59,632) |
Pro forma | $(933,606) |
$(790,170) |
$(2,670,355) |
$(2,342,877) |
Earnings (Loss) per share, | ||||
basic and diluted | ||||
As reported | $(0.005) |
$(0.005) |
$(0.014) |
$(0.017) |
Pro forma | $(0.005) |
$(0.006) |
$(0.014) |
$(0.017) |
Item 2. Management's Discussion and Analysis or Plan of Operations
Some of the information in this report contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. You should read statements that contain these words carefully because they:
- discuss our future expectations;
- contain projections of our future results of operations or of our financial condition; and
- state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there may be events in the future that we are not able to accurately predict or over which we have no control. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.
Results of Operations
We reported consolidated revenues of $243,396 for the quarter ended September 30, 2005, compared to $289,734 for the prior year quarter, a decrease of 16%. The decrease was due to a decrease in Photochemical Fertilizer segment revenue of $20,700, or 8% and to a decrease of
16
$25,600 in Mining Technical Services segment revenues, a decrease of 68%. The consolidated net loss was $932,018, or $0.005 per share, for the quarter ended September 30, 2005, compared to a net loss of $769,956 or $0.005 per share for the comparable 2004 period, an increased loss of $162,100, or 21%. Consolidated revenues for the first nine months of 2005 were $1,110,697 compared to $1,322,744 for the prior year period, a decrease of 16%. The consolidated net loss was $2,665,012 or $0.014 per share, for the nine months ended September 30, 2005, compared to a net loss of $2,283,245 or $0.017 per share for the comparable 2004 period, an increased loss of 17%.
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 our two operating segments.
PHOTOCHEMICAL FERTILIZER
Three months Ended Sept 30, |
Nine Months Ended Sept 30, |
|||||
2005 |
2004 |
2005 |
2004 |
|||
Revenues | ||||||
Fertilizer | $ 107,378 |
$ 152,230 |
$ 803,276 |
$ 858,619 |
||
Photochemical recycling | $ 59,699 |
$ 82,373 |
$ 101,768 |
$ 212,016 |
||
Silver | $ 64,089 |
$ 17,285 |
$ 109,963 |
$ 81,760 |
||
Total Revenue | $ 231,166 |
$ 251,888 |
$ 1,015,007 |
$ 1,152,395 |
||
Gross profit (loss) | $ (47,845) |
$ (39,434) |
$ (69,291) |
$ (32,701) |
||
Operating income (loss) | $(514,097) |
$(498,312) |
$(1,611,904) |
$ 1,490,401) |
||
Other income (loss) | $(305,257) |
$(191,379) |
$ (671,031) |
$ (602,474) |
||
Net income (loss) before taxes | $(819,354) |
$(689,691) |
$(2,282,935) |
$(2,092,875) |
Total segment revenues for the third quarter of 2005 were approximately $231,200, a decrease of 8% from the prior year third quarter. Total fertilizer sales for the quarter were $107,400 (187 tons), compared to $152,200 (235 tons) for the 2004 third quarter, a decrease of 29% in dollars and a decrease of 20% in tonnage. Sales of bulk Chelated Liquid Micro-nutrients were $68,400 (94 tons) and $141,200 (220 tons) for the third quarter of 2005 and 2004, respectively, a decrease of 52% in dollars and a decrease of 57% in tonnage. Sales of bulk Chelated Liquid Multi-nutrients were $31,300 (93 tons) and $6,600 (15 tons) for the third quarter of 2005 and 2004, respectively, an increase of 376% in dollars and 520% in tonnage. The overall decrease is attributable to the late spring season in the Central Valley of California, resulting in a late start to the fall season. We have had a strong fourth quarter so far, with fourth quarter fertilizer sales through November 20, 2005 exceeding the full fourth quarter of 2004 by approximately 33%. Also, as of November 20, 2005, 2005 year to date fertilizer sales now slightly exceed the prior year sales through the same date. Total photochemical recycling revenue for the quarter decreased 28% compared to the third quarter of 2004. The recycling services portion of this revenue decreased 79% on decreased volume of 81%. The decrease is due to the December 2004 mutual termination of recycling services for Shutterfly, Inc., a significant photochemical recycling customer. This decrease was partially offset by $42,000 in sales of two photochemical Silver Concentrators. We are continuing to concentrate our efforts on sales of Photochemical Silver Concentrators. Silver sales increased $46,800, or 271%, from the third quarter of 2004. Sales of all silver or silver bearing products were $63,000 (9,007 ounces) for the quarter, compared to $6,700 (999 ounces) for the 2004 third quarter. This is an increase of 835% in dollars and 802% in ounces. The increase is primarily from increased sales of processed silver bullion due to a combination of increased sales of Chelated Liquid
17
Multi-nutrient liquid fertilizers, which use a high percentage of photochemical base liquid compared to our other liquid fertilizers, and to progress in making adjustments to our refining process needed to accommodate changing conditions in the recycling process. Cost of sales decreased $12,300 due to a decrease of $16,100 in payroll and related costs. The segment recorded a gross loss of $47,800 for the quarter, compared to a gross loss of $39,400 for the third quarter of 2004, an increased gross loss of $8,400, or 21%.
Segment operating expenses increased $7,400 from the third quarter of 2004. This resulted from a modest increase in sales and marketing expenses.
These factors resulted in a 2005 third quarter segment operating loss of $514,100 compared to a loss of $498,300 for the third quarter of 2004, an increased operating loss of $15,800, or 3%.
Other expenses were $305,300 for the quarter, compared to $191,400 for the 2004 third quarter, an increased expense of $113,900. The increased expense is primarily due to increased interest expense from the third quarter 2005 borrowing of $2,250,000 in callable secured convertible notes and the related discount amortization.
The changes in operating loss and other expenses resulted in a segment net loss before taxes of $819,400 for the quarter ended September 30, 2005, compared to a loss of $689,700 for the prior year quarter, an increased loss of $129,700 or 19%.
For the first nine months of 2005, segment revenues were $1,015,000, compared to $1,152,400 for the comparable 2004 period, a decrease of 12%. The decline is due primarily to the prior year mutual termination of a significant photochemical recycling customer. Gross loss for the first nine months of 2005 was $69,300, compared to a gross loss of $32,700 for the comparable prior year period, an increased loss of $36,600. Operating loss for the first nine months of 2005 was approximately $1,611,900 compared to $1,490,400 for the first nine months of 2004, an increased loss of $121,500, or 8%.
Other expense increased $68,600 due to an increase in interest expense related to the third quarter borrowing of $2,250,000 in callable secured convertible notes and the related discount amortization.
The changes in operating loss and other expenses resulted in a segment net loss before taxes of $2,282,900 for the nine months ended September 30, 2005, compared to a loss of $2,092,900 for the prior year period, an increased loss of $190,100 or 9%.
MINING TECHNICAL SERVICES
Three Months Ended Sept 30, |
Nine Months Ended Sept 30, |
|||||
2005 |
2004 |
2005 |
2004 |
|||
Revenues | $ 12,230 |
$ 37,846 |
$ 95,690 |
$ 170,349 |
||
Gross profit (loss) | $ (3,468) |
$ (13,353) |
$ (12,487) |
$ (16,247) |
||
Operating income (loss) | $(111,435) |
$(118,693) |
$(372,464) |
$(326,613) |
||
Other income (expense) | $ (1,229) |
$ 38,428 |
$ (9,613) |
$ 136,243 |
||
Net income (loss) before taxes | $(112,664) |
$ (80,265) |
$(382,077) |
$(190,370) |
18
Mining technical services revenue was $12,200 for the quarter ended September 30, 2005, compared to $37,800 for the comparable quarter of 2004, a decrease of 68%. The decrease is due to the expiration of the Golden Phoenix Minerals, Inc. consulting contract in March 2005. Cost of sales decreased by $35,500, due primarily to decreases of $24,900 in pass through costs and $7,700 in labor and consulting costs, as we reallocate our resources to research and development. These factors resulted in a third quarter gross loss for the segment of $3,500 compared to a gross loss of $13,400 for the prior year third quarter, a decreased gross loss of $9,900.
In early May 2005 the technical services satellite office was closed due to the winding down of most of the technical service contracts and completion of the majority of the data gathering for the insidemetals.com project, but certain key staff members have been retained. Programming is continuing for insidemetals.com and launch of the website Information Portal occurred in August 2005. Revenues from the website have been nominal to date.
The redirection of Whitney & Whitney, Inc. to reduce emphasis on technical consulting services and to launch an internet information portal is brought about by the fact that Dr. Whitney, our President, has often been the lead person in generating new consulting contracts. Our Presidents increased responsibilities for managing the expanding photochemical recycling segment and overall corporate activities has reduced his time availability to actively participate in the consulting segment. Part of our objective in shifting the focus of the technical services segment is to retain our core professional staff that can provide assistance on possible future technical service contracts as well as perform administrative duties for the photochemical recycling segment, while at the same time adding a potential source of revenue that is not dependent upon labor sales and which can be managed by a professional staff. The information portal also better utilizes the Whitney & Whitney, Inc. library and information resources that are already in existence. For the three and nine months ended September 30, 2005 we allocated costs of approximately $45,500 and $144,400, respectively, to the development of the web site. The site was launched in mid-August 2005 and we are now fine-tuning the general presentation of the site, as well as improving the profiled mining company information. We expect this level of spending to continue well into the fourth quarter of 2005. As improvements to the site are completed and information maintenance becomes routine, we will reduce or redirect staff resources as needed.
Total segment operating expenses for the third quarter of 2005 increased nominally, but research and development costs increased $26,100 due to costs related to developing the insidemetals.com project, which was partially offset by decreases in various other operating expenses.
The combination of these factors resulted in a 2005 third quarter segment operating loss of $111,400, compared to a loss of $118,700 for the third quarter of 2004, a decreased operating loss of $7,300, or 6%.
Other income (loss) for the third quarter of 2005 was a loss of $1,200 compared to a gain of $38,400 for the prior year third quarter. This decrease is due to reduced sales of common shares of Golden Phoenix Minerals, Inc. and other marketable securities.
The changes in operating loss and other income resulted in a segment net loss before taxes of $112,700 for the quarter ended September 30, 2005, compared to a loss of $80,300 for the prior year quarter, an increased loss of $32,400, or 40%.
19
For the first nine months of 2005, segment revenue totaled $95,700 compared to $170,300 for the first nine months of 2004, a decrease of 44%. Gross loss for the first nine months of 2005 was $12,500, compared to a gross loss of $16,200 for the comparable prior year period, a decreased gross loss of $3,800. Operating loss for the period was $372,500 compared to an operating loss of $326,600 for the comparable 2004 period, an increased operating loss of $45,900, or 14%. The primary factor contributing to the decline was research and development costs related to the insidemetals.com project.
Other income (loss) for the first nine months of 2005 was a loss of $9,600 compared to a gain of $136,200 for the prior year period. This decrease is due to reduced sales of common shares of Golden Phoenix Minerals, Inc. and other marketable securities.
The changes in operating loss and other income resulted in a segment net loss before taxes of $382,100 for the nine months ended September 30, 2005, compared to a net loss of $190,400 for the prior year period, an increased loss of $191,700.
SUMMARY
On a consolidated basis, the various changes in revenues and operating expenses resulted in a third quarter 2005 operating loss of $625,500, compared to $617,000 for the third quarter of 2004, an increased operating loss of $8,500, or 1%. Net loss before taxes for the third quarter 2005 was $932,000 compared to $770,000 for the prior year third quarter, an increased loss of $162,100 or 21%. For the nine month period ended September 30, 2005 the operating loss was $1,984,400 compared to $1,817,000 for the prior year comparable period, an increased operating loss of $167,400, or 9%. Net loss before taxes for the nine months ended September 30, 2005 was $2,665,000 compared to $2,283,200 for the prior year nine month period, an increased loss of $381,800, or 17%.
Changes in Financial Condition; Capitalization
Cash amounted to $702,000 as of September 30, 2005, compared to $(30,800) as of September 30, 2004. Net cash used for operating activities was approximately $1,643,700 for the first nine months of 2005. The cash used for operating activities during the period was financed by a combination of sales of common stock of $570,000 from a private placement of restricted common stock and attached warrants, short term loans from an officer/stockholder of $95,000, short term financing of $125,000, net proceeds of $1,906,200 from the issuance in callable secured convertible notes and $43,500 in inventory and account receivable factoring.
Total assets increased $937,000 during the nine months ended September 30, 2005 to $5,085,000. Current assets increased $815,600 due to increases in cash of $696,800, marketable securities of $83,600 due to receipt of the final billings for services to GPXM in their restricted common stock, and current portion of deferred loan fees of $99,800 due to the callable secured convertible note financing. At September 30, 2005 we owned 567,100 shares of GPXM with a current market value of $109,700. These increases in current assets were partially offset by a decrease in accounts receivable of $86,600, which is primarily attributable to receipt of final payment of amounts due from GPXM. Net property and equipment decreased $112,300 due to
20
depreciation and amortization. Other assets increased $233,800 due to the acquisition of the product rights of the GOLDn GRO Guardian fertilizer for $71,500 in restricted common stock and to an increase in deferred loan fees of $170,500 related to the callable secured convertible note financing.
Current liabilities increased during the nine months ended September 30, 2005 by $1,177,100 and total liabilities decreased by $710,700. Total liabilities decreased due to the conversion into common stock of a total of $867,100 in Convertible Promissory Notes and accrued interest. Total debt was increased by $114,600 from the issuance of $2,250,000 in callable secured convertible notes, net of unamortized discount of $2,135,400 for warrants and the beneficial conversion feature associated with the debt. Changes in current liabilities include increases of $43,500 in account receivable and inventory factoring, $181,600 in accrued management salaries, $47,500 in accrued interest, and $1,818,600 in current maturities of convertible notes and accrued interest. The increase in current maturities of convertible notes is due to the reclassification from long term debt of the 2000 Series Convertible Promissory Notes that were extended to 2006 and are now due within one year of the balance sheet date. These increases were partially offset by decreases of $129,500 in accounts payable, $206,800 in accrued expenses, which reflects payment of all past due federal payroll tax obligations, $465,100 in current maturities of long term debt, which reflects the reclassification of the mortgage obligation on the Stead manufacturing facility to long term debt, and $142,000 in current maturities of capital lease obligations.
Addressing our financial condition, improvements have been made. The stockholders deficit, $4,587,900 at December 31, 2002, has been reduced to a deficit of $916,600 at September 30, 2005, an improvement of $3,671,300. Excluding the unamortized portion of the discounts related to the callable secured convertible note financing of $2,135,400, the improvement would be $1,535,900. This has been achieved by the conversion of approximately $4.3 million in convertible notes and accrued interest into common stock. One significant area of difficulty for us has been meeting the payments on capital lease obligations. However, the capital lease obligation at December 31, 2002 of $1,193,900 has been reduced to $665,700 at September 30, 2005, a reduction of $528,200. This includes the write off of five leases as debt forgiveness income in 2004 of $187,800.
Liquidity and Capital Resources
During the nine months ended September 30, 2005, working capital decreased by $361,500 to a deficit balance of $3,576,800. The decrease is primarily due to the reclassification from long term debt of a net $1,818,600 in convertible notes and accrued interest, which was partially offset by the various factors in current assets and liabilities discussed above in Changes in Financial Condition; Capitalization.
To meet short term cash needs, we factor certain inventory items and receivables. This process enables us to keep limited raw materials on hand for immediate production and to obtain cash immediately upon selling product. We generally receive payment from our customers within 30 days of sales; we then repay the factoring loan. Our present factoring balances were paid off in November 2005.
A private placement of stock with attached warrants was closed in June 2005, with $570,000 received during the six months ended June 30, 2005. In July 2005 we obtained 8% convertible
21
debt financing for up to $3.25 million, with the final amount dependent upon the filing and effectiveness of a registration statement relating to common shares underlying the convertible debt and warrants issued in the recent financing. As of September 30, 2005, we had completed the first two of three closings and received net proceeds after financing expenses and prepaid interest of $1,726,200. The funding will provide for working capital, manufacturing plant expansion, registration of GOLDn GRO Guardian fertilizer with the EPA, and debt reduction. It is anticipated that this funding, subject to receiving shareholder approval to increase our authorized shares and having our registration statement declared effective, will provide for our capital needs through March to June 2006, depending on fertilizer sales growth
There has been a long term commitment by officers and other members of management to support the Company by investing funds for our growth. One officer/shareholder has invested a total of $1,423,400 in cash and deferred salary during the period 2001 through September 30, 2005. Two other members of management have deferred salary totaling $567,900 during the same period. Additional members of management invested $62,000 cash in 2003. All such cash and deferred salary that have been invested in our private placements were under the same terms and conditions as all other investors.
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, the rate of GOLDn GRO fertilizer adoption in existing and new markets, and the availability of funding to support sales growth.
Growth Plans and Implementation
Our Photochemical Fertilizer Division created the GOLDn GRO line of liquid fertilizers. The pioneering development work is complete, field trials have been completed on the first products and other field trials are under way.
The Mining Technical Services Division originally provided typical consulting services which required high level technical personnel, including our President, devoted to each project. To reduce our dependence on our President to generate new consulting contracts, while better utilizing our core professional staff, the division is being reconfigured to focus most of its efforts on a global Internet Information Portal "insidemetals.com". The information portal operates 24 hours per day 7 days per week anywhere in the world where computers and the Internet are available. Anyone with access to the Internet anywhere in the world can subscribe to the service at any time using their credit card to pay the subscription fee.
With the successful completion of the initial pioneering development work by the Photochemical Fertilizer Division, and with the launch of the information portal by the Mining Technical Services Division, we are implementing growth plans for both divisions that are expected to drive expansion well into the future. The status of these plans and their implementation is described for each division.
22
Photochemical Fertilizer Division (Itronics Metallurgical, Inc.)
Our manufacturing plant is presently configured to produce 1.2 million gallons (on a single shift basis) of GOLDn GRO fertilizer annually (about 5,700 tons) and can be expanded to produce 7.2 million gallons of GOLD'n GRO per year, or about 36,000 tons. GOLD'n GRO fertilizer production in 2004 utilized about 5 percent of planned capacity. Planned expansions to achieve the 36,000 ton volume include increasing both dry raw material and liquid storage, increasing tank truck loading capacity, and automation of certain manufacturing functions. Expansion can be achieved incrementally as fertilizer sales continue to grow.
We have developed the following eight-part approach to growth:
1. Increase sales in the established market segments.
2. Develop GOLD'n GRO fertilizer applications for more crops.
3. Expand sales to new territories.
4. Expand the GOLD'n GRO specialty fertilizer product line.
5. Complete development of and commercialize the new glass/tile products.
6. Develop and commercialize environmentally friendly metal leaching reagents for recovery of silver, gold, and other metals.
7. Continue facilities expansion and technology development.
8. Acquire established companies and/or their technologies.
Plans and status of implementing each of the growth categories is explained in more detail in the following sections.
1. Increase sales in established market segments.
We are selling into or developing applications for the three major segments. These are:
a. Specialty Agriculture which includes Avocados, Citrus, Grapes, Fruit and Nut Trees, and Vegetables.
b. Bulk Field Crops which include alfalfa, cereal grains, corn, cotton, and soybeans.
c. The Urban Market, which includes Home Lawn and Garden, Landscape Construction and Maintenance, and Nursery and Greenhouse markets, and Golf Courses.
Our primary focus is to increase bulk GOLDn GRO liquid fertilizer sales as rapidly as possible. This is being achieved by expanding sales in the Specialty Agriculture segment and in the Bulk Field Crops segment. There are on-going small package sales in the Urban Market, but these are small relative to the other two segments.
2. Develop GOLD'n GRO fertilizer applications for more crops.
Based on our experience to date, it takes approximately two to five years to develop a new fertilizer product, which includes regulatory approval. It typically takes another two to four years to achieve market acceptance of successful products, which includes field trials to demonstrate product effectiveness.
New product applications are being developed for the dairy cow feed market including young oats, alfalfa, hay, and silage corn. Trials were conducted in 2004. The nutrient content of the alfalfa was improved, in some cases to the highest quality ratings. This benefits the dairy because less nutrient supplements are required for feeding the cows, thus reducing dairy operating expenses. The amount of hay produced per acre increased up to 25 percent. Results of
23
the corn crops are still being evaluated. The dairy cow feed market is large with more than 23 million acres of alfalfa hay being grown in the United States. We anticipate it will take another one to three years to complete development and launch these product applications.
In 2004, we began field trials in Idaho, Oregon, and Washington for applications on onions, potatoes, and winter wheat. In the second quarter of 2005, we began field trials in Rhode Island for lawn, landscape, and nursery application. Also in the second quarter, we started several new trials in California for silage corn applications.
A new GOLD'n GRO base liquid nutrition program is now being marketed. The program is called the "Gallon and a Quart" or "4 to 1" program. It calls for one gallon of GOLDn GRO base liquid for each quart of GOLD'n GRO chelated micro-nutrient used in soil applications. Field demonstrations have shown improved nutrition uptake and crop output under this cost effective program. Marketing of this program over the next two to three years is expected to produce a very substantial increase in the tonnage of GOLD'n GRO fertilizer sales.
3. Expand sales to new territories.
The GOLD'n GRO products are being sold in Arizona, California, Colorado, Idaho, Nevada, Oregon, Rhode Island, and Washington, with the majority of our sales in central California. We completed registration of select GOLDn GRO fertilizers in Idaho, Oregon and Washington during the first quarter of 2005; sales development is now underway. Two GOLD'n GRO products are registered in seven northeastern states and all of the products are registered in New York and in New Jersey with a distributor agreement signed for New Jersey. Based on our experience, commercial sales can be generated approximately one year after introductory sales activities are initiated. We are in the process of identifying distributors for New York and the other seven northeastern states. Each new geographic area developed will require the same procedural approach.
Our plan to expand sales in Urban Markets requires the consumer to utilize fertilizer injection equipment. This equipment provides economical, easy use of liquid fertilizers for consumer lawns and gardens. We recently added two types of fertilizer injectors to our "e" store, which is the first step into this market. Additionally, other fertilizer injectors are already available to consumers through irrigation supply stores.
4. Expand the GOLD'n GRO specialty fertilizer product line.
We are developing two new specialty products, a calcium plus magnesium fertilizer named GOLDn GRO 11-0-0+5% Ca (Calcium) and a high magnesium content fertilizer named GOLDn GRO 8-0-0+3% Mg (Magnesium), both targeting foliar and soil application. We have registered GOLDn GRO 11-0-0+5% Ca in Nevada and expect to complete registration in California in the fourth quarter of 2005. Sales development is expected to start in the first quarter of 2006. The registration of GOLDn GRO 8-0-0+3% Mg is being delayed to 2006 or 2007 to allow time to complete the introduction of GOLDn GRO 11-0-0+5% Ca in California and to complete registration in Oregon and other states where it will be sold.
We are developing a new category of repellent fertilizers that are expected to be sold at higher profit margins than our other products. The GOLDn GRO Guardian deer repellent fertilizer is an example of this type of specialty fertilizer. The U.S. market for deer
24
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 as well as excellent wintertime effectiveness.
In the second quarter of 2005 we acquired ownership interest in the GOLDn GRO Guardian trademark, product rights, and the repelling product. We now own 100% of all rights related to GOLDn GRO Guardian. Results of the research of the GOLDn GRO Guardian deer repellent fertilizer has provided a basis for a bird (goose) repellent fertilizer that will be perfected for small plot field trials and registration after the registration of GOLDn GRO Guardian is underway. Currently, this product line is strictly for non-food plant applications.
We believe the users of the GOLDn GRO deer repellent fertilizer will be upscale homeowners, commercial landscapers, and municipal facilities, and wholesale and retail nurseries. The initial sales center will be in Rhode Island.
5. Complete development of and commercialize glass/tile products.
In 2003, we developed and produced glass /tile products proving that the product concept is technically viable. When the development of the glass/ceramic tile product is completed, we will achieve the ability to recycle 100 percent of the photoliquid materials received from customers, including waste that is generated internally during fertilizer production. We have completed preliminary market research for the tile markets, but expect to do much more work to develop a plan to enter this market.
6. Develop and commercialize metal leaching reagents for recovery of silver, gold, and other metals.
In 2002 and 2003, we initiated efforts to apply our technology to extract silver from photoliquids to the mining sector. This work will be further expanded and a small pilot circuit will be established to chemically process certain categories of silver-bearing solid wastes. The gold mining sector currently uses cyanide and other toxic chemicals in their leaching process. We believe it may be possible to create and adapt new non-toxic leaching reagents and leaching procedures for processing other secondary materials and certain types of mine generated products. The specific markets for leaching reagents in gold and silver mining is large and world wide, but has not yet been studied in detail for market development. Our Technical Services Division maintains an extensive library and database of mines and mining activities worldwide, which provides us ready access to market information as we need it. Much pilot plant work, including one or more field pilot operations, must be completed before quantitative market studies can be completed.
7. Continue facilities expansion and technology development.
As fertilizer sales volume increases, we will need to increase tank truck loading capacity. With the introduction of additional bulk products and increased demand for our products, load out capacity for shipment of three more bulk products is needed. We developed a preliminary construction budget and are seeking financing so that construction can be scheduled. While we believe that we can handle expected growth in 2005 with the existing load-out module, we hope to complete construction on the new load out equipment during the first quarter of 2006.
25
8. Acquire established companies and/or their technologies.
To enhance our operations and market presence, we intend to acquire small established companies or their technologies. In 2005, we completed our acquisition of the GOLDn GRO Guardian technology. We have decided to delay any further acquisitions until additional financing is obtained.
Mining Technical Services Division (Whitney & Whitney, Inc.)
Historically, this division provided consulting services to the mining industry. In August 2005, we launched an Information Portal in the Internet. This division has a two-part approach to growth:
1. Continue to provide consulting services.
2. "e-commerce" Internet Information Portal-"insidemetals.com".
Plans and status of implementing each of the growth categories is explained in more detail in the following sections.
1. Continue to provide consulting services
During the third quarter of 2004, sales of the Mining Technical Services (Whitney & Whitney, Inc.) division declined due to winding down of on-going projects and delays related to client financing for new projects. Some of the issues related to new client project start up were resolved by the clients during the third quarter of 2004 and the remaining work was completed in early 2005. The technical services satellite consulting office was closed in early May, but certain key staff members have been retained. We intend to continue a low level effort to solicit and perform technical services for mining companies and other businesses or government agencies that have mineral interests or minerals related responsibilities
2. "e-commerce" Internet Information Portal-"insidemetals.com".
In August 2005, we launched the website "insidemetals.com," an Information Portal targeting the companies and individuals interested in the mining and precious metals industry. The website will generate revenue by charging a subscription fee for monthly access to the site. Currently, the site contains an array of information about gold and companies in the gold industry. We intend to add information on other mineral sectors gradually over time.
We anticipate that mining company professionals, all government agencies with minerals related responsibilities, financial industry investment professionals, and individual investors who have an interest in investing in mining companies but who have limited mineral industry knowledge will benefit from this Information Portal. The market scope for this service is global and is accessible with a "click of a mouse" in all countries of the world through the Internet. Whitney & Whitney, Inc. has contacts throughout the world and expects that the good will generated over a period of more than 25 years will provide market support for this service.
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Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.
(b) Changes in internal controls. There was no change in our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting."
PART II- OTHER INFORMATION
Item 1. Legal Proceedings
We may become involved in a lawsuit or legal proceeding at any time in the ordinary course of business. Litigation is subject to inherent uncertainties, and an unexpected adverse result may arise that may adversely affect our business. Certain lawsuits have been filed against us for collection of funds due that are delinquent, as described below. We are currently not aware of any litigation pending or threatened for any reason other than collection of funds due and already recorded. We are not aware of any additional legal proceeding or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.
As of September 30, 2005 total recorded liabilities of $731,081 including accrued interest to September 30, 2005, were subject to a total of 11 separate lawsuits for the collection of the funds due. These include 8 leases totaling $531,302 (reflected in Current Maturities of Capital Lease Obligations) plus $65,900 in additional interest (reflected in Accrued Interest) and three trade payables totaling $121,263 (reflected in Accounts Payable) plus $12,616 in additional interest (reflected in Accrued Interest). The leases are individually secured by specified equipment.
The accrued interest noted above was recorded based on our assessment of additional amounts we believe is probable and is related to four cases originally seeking $423,375; the creditors have received judgments in three of these cases and the fourth is in litigation. We will continue to accrue interest until these cases are settled or paid in full.
We estimate an additional $10,000 interest may be possible on one case; however, we have not accrued this amount because we do not believe it is likely to be incurred. This estimate is related to one case, seeking $35,210, that was filed in March 2003, and no further contact has taken place since then.
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Six other cases, originally seeking $313,305, now have a recorded liability of $204,613. All six cases are under negotiated payment agreements and the payments are current.
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:
In August 2005, we issued an aggregate of 2,500 shares of common stock valued at $150 to John W. Whitney, our President, as compensation for services performed on our behalf in his capacity as a director of our company for the second quarter of 2005.
In August 2005, we issued shares of common stock to the following management employees for accrued interest on their unpaid salaries. Interest is paid at 12% per annum and the share price is calculated monthly using the weighted average of the closing bid prices.
John W. Whitney, President | 371,232 shares valued at $28,263 | |
Michael C. Horsley, Controller | 212,538 shares valued at $15,890 |
In August 2005, we issued an aggregate of 21,444 shares of common stock, valued at $1,664, to one employee for accrued interest on his unpaid salary. Interest is paid at 12% per annum and the share price is calculated monthly using the weighted average of the closing bid prices.
In August 2005, we issued an aggregate of 1,200,000 shares of common stock to John W. Whitney, our President, at $0.075 per share for a total of $90,000 upon the exercise of warrants. Dr. Whitney exercised the warrants by converting $90,000 in short term loans into common stock.
We issued options to purchase an aggregate of 9,000 shares of common stock to Michael C. Horsley, our Controller, on August 1, 2005. The options are exercisable at $0.15 per share and expire three years after grant.
We issued options to purchase an aggregate of 21,000 shares of common stock to four of our employees on August 1, 2005. The options are exercisable at $0.15 per share and expire in three years from grant.
During the three months ended September 30, 2005, the accrued interest on the 2000 through 2002 Series Convertible Promissory Notes resulted in the granting of additional options to purchase an aggregate of 601,575 shares of common stock. The options are exercisable at prices ranging from $0.10 to $1.18.
Subsequent to September 30, 2005 we will issue an aggregate of 2,500 shares of common stock valued at $175 to John W. Whitney, our President, as compensation for services performed on our behalf in his capacity as a director of our company for the third quarter of 2005.
On July 15, 2005, we entered into a Securities Purchase Agreement with four accredited investors (the "Investors") for up to an aggregate amount of (i) $3,250,000 in secured
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convertible notes, and (ii) warrants to purchase 3,000,000 shares of our common stock (the "Financing"). The Financing will be completed in three separate closings. The first closing consisted of gross proceeds of $1,250,000 less financing costs and payment of existing debt totaling $383,800 for net proceeds of $866,200. The second closing of the Financing took place after we filed the registration statement required to be filed pursuant to a certain Registration Rights Agreement. Upon filing of the registration statement, we received gross proceeds of $1,000,000 less financing costs of $140,000 for net proceeds of $860,000. The third closing of the Financing will occur within five (5) business days after we have caused the Securities and Exchange Commission to declare the registration statement effective. In the third closing, we will receive gross proceeds of $1,000,000.
The Investors received three year convertible notes (the "Notes") bearing simple interest at 8% per annum. The Notes are convertible into our common stock at a price equal to the lesser of (i) $0.10 or (ii) 55% of the average of the lowest 3 intraday trading prices during the 20 trading day period ending one trading day before the conversion date. Further, the Investors received five year warrants to purchase a total of 2,076,923 shares of our common stock at an exercise price of $0.15 per share. The Investors will receive warrants to acquire an additional 923,077 shares of our common stock at an exercise price $0.15 per share at the remaining additional closing of the Financing.
As part of a finders fee, the Placement Agent for the above Financing, Confin International, was granted a five year warrant to purchase a total of 240,000 shares of our common stock at an exercise price of $0.15 per share. The warrant will be issued after the final closing of the Financing.
All of the above offerings and sales were deemed to be exempt under rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of Itronics Inc. or executive officers of Itronics Inc., and transfer was restricted by Itronics Inc. in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.
Except as expressly set forth above, the individuals and entities to whom we issued securities as indicated in this section of the registration statement are unaffiliated with us.
Item 3. Defaults Upon Senior Securities
In addition to the leases that are subject to litigation, there are four leases, with a recorded liability of $188,255, that are in default. No payments have been made for an extended period of time, and no collection action or recent contact from the creditors has occurred on these leases. 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.
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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 $59,351 in accrued interest, remains in default.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 31.1 CERTIFICATION OF PRESIDENT PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002 32
Exhibit 31.2 CERTIFICATION OF CONTROLLER PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002 34
Exhibit 32 CERTIFICATIONS OF PRESIDENT AND CONTROLLER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002 36
(b) Reports on Form 8-K
Following is a list of Forms 8-K filed during the three months ended September 30, 2005:
July 20, 2005 | Announced the signing of a $3.25 million callable secured |
convertible note financing. | |
August 8, 2005 | Announced second quarter and year to date fertilizer sales. |
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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: November 21, 2005 By:/S/JOHN W. WHITNEY
John W. Whitney
President
(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: November 21, 2005 By:/S/JOHN W. WHITNEY
John W. Whitney
President
(Principal Executive Officer)
DATED: November 21, 2005 By:/S/MICHAEL C. HORSLEY
Michael C. Horsley
Controller
(Principal Accounting Officer)
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Exhibit 31.1
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:
a)Designed such disclosure controls, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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 issuers internal control over financial reporting that occurred during the small business issuers most recent fiscal quarter (the small business issuers fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuers internal control over financial reporting; and
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5. The small business issuers 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):
a)All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the small business issuers ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuers internal control over financial reporting.
Date: November 21, 2005 /S/ JOHN W. WHITNEY
John W. Whitney
President
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Exhibit 31.2
ITRONICS INC.
CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Michael C. Horsley, 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:
a) Designed such disclosure controls, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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 issuers internal control over financial reporting that occurred during the small business issuers most recent fiscal quarter (the small business issuers fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuers internal control over financial reporting; and
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5. The small business issuers 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):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the small business issuers ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuers internal control over financial reporting.
Date: November 21, 2005 /S/ MICHAEL C. HORSLEY
Michael C. Horsley
Controller
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Exhibit 32
ITRONICS INC.
CERTIFICATIONS 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 September 30, 2005 as filed with the Securities and Exchange Commission on November 21, 2005 (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: November 21, 2005 /S/ JOHN W. WHITNEY
John W. Whitney
President
Date: November 21, 2005 /S/ MICHAEL C. HORSLEY
Michael C. Horsley
Controller
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