UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM l0-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
( ) 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 registrant 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)
Registrant's telephone number, including area code:
(775)689-7696
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements during the past 90 days. Yes (x) No (
)
Indicate by checkmark whether the registrant is a large accelerated, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
"large accelerated filer", accelerated filer" and smaller reporting
company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ( )
Accelerated filer ( )
Non-accelerated filer ( ) (Do not check if a
Smaller reporting company (X)
Smaller reporting company)
Indicate by checkmark whether the registrant is a shell company ( as defined in Rule
12b-2 of the Exchange Act). Yes ( ) No (X)
As of April 30, 2008, 999,996,999 shares of common stock were
outstanding.
2
ITRONICS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL
INFORMATION
|
PAGE
|
|
|
Item 1. Financial
Statements
|
|
Condensed Consolidated
Balance Sheets March 31, 2008 (Unaudited)
|
|
and December 31, 2007
|
4
|
|
|
Condensed Consolidated
Statements of Operations for the Three
|
|
Months Ended
March 31, 2008 and 2007 (Unaudited)
|
6
|
|
|
Condensed Consolidated
Statements of Stockholders Equity (Deficit)
|
|
For the Three Months Ended
March 31, 2008 and the Year Ended
|
|
December 31, 2007
(Unaudited)
|
7
|
|
|
Condensed Consolidated
Statements of Cash Flows for the
|
|
Three Months Ended March
31, 2008 and 2007 (Unaudited)
|
8
|
|
|
Notes to Condensed
Consolidated Financial Statements (Unaudited)
|
10
|
|
|
|
|
Item 2. Management's
Discussion and Analysis or Plan of Operation
|
24
|
|
|
Item 4T. Controls and
Procedures
|
35
|
|
|
|
|
PART II- OTHER INFORMATION
|
|
|
|
Item 1. Legal Proceedings
|
36
|
|
|
Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds
|
37
|
|
|
Item 3 Defaults upon Senior
Securities
|
38
|
|
|
Item 4 Submission of
Matters to a Vote of Security Holders
|
39
|
|
|
Item 6. Exhibits
|
39
|
|
|
Certifications
|
43
|
|
|
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ITRONICS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2008 AND DECEMBER 31, 2007
ASSETS
|
March 31,
|
December
31,
|
|
2008
|
2007
|
|
(Unaudited)
|
|
CURRENT ASSETS
|
|
|
Cash
|
$ 241,667
|
$92,987
|
Accounts receivable, less
allowance for
|
|
|
doubtful accounts, 2008,
$4,600; 2007, $4,600
|
162,983
|
17,561
|
Inventories
|
836,278
|
889,996
|
Prepaid expenses
|
60,671
|
94,952
|
Total Current Assets
|
1,301,599
|
1,095,496
|
|
|
|
PROPERTY AND EQUIPMENT
|
|
|
Land
|
215,000
|
215,000
|
Building and improvements
|
1,312,409
|
1,312,409
|
Design and construction in
progress,
|
|
|
manufacturing facility
|
105,609
|
97,110
|
Equipment and furniture
|
2,881,247
|
2,879,938
|
Vehicles
|
222,298
|
222,298
|
Equipment under capital
lease-equipment and furniture
|
466,571
|
466,571
|
|
5,203,134
|
5,193,326
|
Less: Accumulated
depreciation and amortization
|
2,387,923
|
2,341,004
|
Total Property and
Equipment
|
2,815,211
|
2,852,322
|
|
|
|
OTHER ASSETS
|
|
|
Intangibles
|
76,500
|
76,500
|
Deferred loan fees, less
accumulated amortization 2008,
|
|
|
$358,486; 2007,
$521,727
|
315,070
|
323,042
|
Deposits
|
8,508
|
8,508
|
Total Other Assets
|
400,078
|
408,050
|
|
$4,516,888
|
$4,355,868
|
The accompanying notes are an integral part of these financial
statements
4
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
March 31,
|
December 31,
|
|
2008
|
2007
|
|
(Unaudited)
|
|
CURRENT
LIABILITIES
|
|
|
Accounts
payable
|
$ 771,207
|
$ 672,163
|
Accrued
management salaries
|
862,034
|
779,873
|
Accrued
expenses
|
255,601
|
272,267
|
Insurance
contracts payable
|
27,222
|
13,761
|
Interest
payable to officer/stockholders
|
208,084
|
157,181
|
Interest
payable, long-term debt and lease obligations
|
224,406
|
225,533
|
Current
maturities of long-term debt
|
429,305
|
436,523
|
Current
maturities of capital lease obligations
|
426,755
|
463,996
|
Advances from
stockholder
|
188,025
|
143,025
|
Current
maturities of convertible notes and accrued interest
|
3,603,793
|
3,497,838
|
Convertible
debt derivatives
|
16,514,068
|
13,003,762
|
Warrant and
option liability
|
760,493
|
231,224
|
Other
|
170,746
|
40,498
|
Total Current
Liabilities
|
24,441,739
|
19,937,644
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
Long-term debt,
less current maturities
|
80,379
|
82,197
|
Capital lease
obligations, less current maturities
|
-
|
-
|
Total Long-Term
Liabilities
|
80,379
|
82,197
|
Commitments and
Contingencies (see Note 4)
|
-
|
-
|
Total
Liabilities
|
24,522,118
|
20,019,841
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
Preferred
stock, par value $0.001 per share;
|
|
|
authorized 999,500 shares; issued and outstanding
|
|
|
2007, 0
shares; 2006, 0 shares
|
-
|
-
|
Common stock,
par value $0.001 per share;
|
|
|
authorized 1,000,000,000 shares; issued and outstanding,
|
|
|
999,996,999 at March 31, 2008 and December 31, 2007
|
999,997
|
999,997
|
Additional
paid-in capital
|
24,705,967
|
24,692,645
|
Accumulated
deficit
|
(46,502,758)
|
(42,143,980)
|
Common stock to
be issued
|
791,564
|
787,365
|
Total
Stockholders Equity (Deficit)
|
(20,005,230)
|
(15,663,973)
|
|
$4,516,888
|
$4,355,868
|
The accompanying notes are an integral part of these financial
statements.
5
ITRONICS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
|
Three Months Ended Mar. 31,
|
|
2008
|
2007
|
REVENUES
|
|
|
GOLDn GRO
fertilizer
|
$597,289
|
$527,902
|
Mining
technical services
|
55,842
|
4,953
|
Total Revenues
|
653,131
|
532,855
|
COST OF
REVENUES (exclusive of
|
|
|
depreciation
and amortization
|
|
|
shown
separately below)
|
|
|
GOLDn GRO
fertilizer
|
517,167
|
511,871
|
Mining
technical services
|
30,250
|
8,063
|
Total Cost of
Revenues
|
547,417
|
519,934
|
Gross Profit
(Loss)(exclusive
|
|
|
of depreciation
and amortization
|
|
|
shown
separately below
|
105,714
|
12,921
|
|
|
|
OPERATING
EXPENSES
|
|
|
Depreciation
and amortization
|
46,919
|
52,229
|
Research and
development
|
78,329
|
97,282
|
Sales and
marketing
|
192,856
|
277,211
|
Delivery and
warehousing
|
31,569
|
24,916
|
General and
administrative
|
199,412
|
234,652
|
Total Operating
Expenses
|
549,085
|
686,290
|
Operating
(Loss)
|
(443,371)
|
(673,369)
|
|
|
|
OTHER INCOME
(EXPENSE)
|
|
|
Interest
expense
|
(304,777)
|
(281,676)
|
Gain (loss) on
derivative instruments
|
(3,653,069)
|
142,389
|
Gain on sale of
investments
|
-
|
344,291
|
Debt
forgiveness
|
42,439
|
-
|
Total Other
Income (Expense)
|
(3,915,407)
|
205,004
|
|
|
|
Income (Loss)
before provision
for income tax
|
(4,358,778)
|
(468,365)
|
Provision for
income tax
|
-
|
-
|
Net
Income(Loss)
|
(4,358,778)
|
(468,365)
|
Other
comprehensive income (loss)
|
|
|
Unrealized gains(losses) on
securities
|
-
|
2,247
|
Comprehensive
Income (Loss)
|
$(4,358,778)
|
$(466,118)
|
|
|
|
Weighted
average number of shares
|
|
|
Outstanding
(1,000s)- Basic and diluted
|
999,997
|
358,591
|
Earnings (Loss)
per share, basic and diluted
|
$(0.004)
|
$(0.001)
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
6
ITRONICS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND THE YEAR ENDED DECEMBER
31, 2007
(UNAUDITED)
|
COMMON STOCK
|
|
|
COMMON
|
|
|
NUMBER
OF
|
|
ADDITIONAL
|
|
STOCK TO
|
STOCK
|
|
|
SHARES
|
|
PAID-IN
|
ACCUMULATED
|
BE
|
OPTIONS,
|
|
|
(1,000s)
|
AMOUNT
|
CAPITAL
|
DEFICIT
|
ISSUED
|
NET
|
TOTAL
|
Balance, Dec. 31, 2006
|
337,582
|
$337,582
|
$23,305,788
|
$(31,661,456)
|
$ 583,868
|
$4,713
|
$(7,429,505)
|
Issue of common stock:
|
|
|
|
|
|
|
|
For cash
|
|
|
|
|
|
|
|
For services
|
99,274
|
99,274
|
588,713
|
-
|
217,097
|
-
|
905,084
|
For debt conversion
|
555,410
|
555,410
|
698,057
|
-
|
(13,600)
|
-
|
1,239,867
|
For asset acquisition
|
7,731
|
7,731
|
100,087
|
-
|
-
|
-
|
107,818
|
Net (loss) for the year
|
|
|
|
|
|
|
|
ended Dec. 31, 2007
|
-
|
-
|
-
|
(10,482,524)
|
-
|
-
|
(10,482,524)
|
Common stock options
|
|
|
|
|
|
|
|
outstanding
|
-
|
-
|
-
|
-
|
-
|
(4,713)
|
(4,713)
|
|
|
|
|
|
|
|
|
Balance, Dec. 31, 2007
|
999,997
|
999,997
|
24,692,645
|
(42,143,980)
|
787,365
|
-
|
(15,663,973)
|
Issue of common stock
|
|
|
|
|
|
|
|
For services
|
-
|
-
|
13,322
|
-
|
4,199
|
-
|
17,521
|
Net (loss) for the
three
months ended
Mar. 31, 2008
|
-
|
-
|
-
|
(4,358,778)
|
-
|
-
|
(4,358,778)
|
|
|
|
|
|
|
|
|
Balance, Mar. 31, 2008
|
999,997
|
$ 999,997
|
$24,705,967
|
$(46,502,758)
|
$ 791,564
|
$ -
|
$(20,005,230)
|
The accompanying notes are an integral part of these financial
statements.
7
ITRONICS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
|
Three Months Ended Mar. 31,
|
|
2008
|
2007
|
Cash flows from operating
activities
|
|
|
Net loss
|
$(4,358,778)
|
$(468,365)
|
Adjustments to reconcile
net loss to
cash used by operating activities:
|
|
|
Depreciation and
amortization
|
92,691
|
97,551
|
Interest on
convertible notes
|
182,206
|
163,283
|
(Gain) loss on
change in fair value of derivative instruments
|
3,653,069
|
(142,389)
|
(Gain) on sale of
investments
|
-
|
(344,291)
|
Addition of silver
in solution inventory by
|
|
|
offsetting
photochemical processing fees
|
(61,269)
|
(66,354)
|
Stock and option
compensation
|
(16,141)
|
988
|
(Gain) on debt
forgiveness
|
(42,439)
|
-
|
Expenses paid with
issuance of common stock:
|
|
|
Consulting expenses
|
14,444
|
84,367
|
Director fees
|
3,000
|
7,388
|
Salaries
|
54,117
|
72,737
|
(Increase) decrease
in:
|
|
|
Trade
accounts receivable
|
(145,422)
|
(83,215)
|
Inventories
|
114,987
|
(23,738)
|
Prepaid
expenses, deposits and other
|
(3,363)
|
(34,307)
|
Increase (decrease)
in:
|
|
|
Accounts
payable
|
99,044
|
(71,103)
|
Accrued
management salaries
|
82,161
|
62,225
|
Accrued
expenses and other
|
127,043
|
75,233
|
Accrued
interest
|
58,690
|
37,888
|
Net cash used by operating
activities
|
(145,960)
|
(632,102)
|
|
|
|
Cash flows from investing
activities:
|
|
|
Acquisition of
property and equipment
|
(9,808)
|
(27,810)
|
Sale of investments
|
-
|
205,938
|
Net cash provided by
investing activities
|
(9,808)
|
178,128
|
|
|
|
Cash flows from financing
activities:
|
|
|
Proceeds from
officer/stockholder advances
|
45,000
|
8,000
|
Proceeds from debt
|
300,000
|
990,000
|
Debt issuance costs
|
(27,800)
|
(60,000)
|
Bank overdraft
|
-
|
(13,834)
|
Payments on debt
|
(12,752)
|
(63,402)
|
Net cash provided by
financing activities
|
304,448
|
860,764
|
Net increase in cash
|
148,680
|
406,790
|
Cash, beginning of period
|
92,987
|
-
|
Cash, end of period
|
$ 241,667
|
$406,790
|
The accompanying notes are an integral part of these financial
statements.
8
ITRONICS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
|
Three Months Ended March 31,
|
|
2008
|
2007
|
Supplemental Disclosures of
Cash Flow
|
|
|
Information:
|
|
|
Cash paid during the period
for interest
|
$18,108
|
$ 38,515
|
|
|
|
Non-cash financing and
investing activities:
|
|
|
Marketable
securities received for sale of investment
|
-
|
138,353
|
Common stock issued
to settle:
|
|
|
Convertible notes
|
-
|
108,807
|
Acquisition of
assets by issuance of common stock:
|
|
|
Equipment
|
-
|
46,736
|
Amounts withheld
from proceeds of debt, unrelated:
|
|
|
Deferred loan costs
|
10,000
|
10,000
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
9
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
1. The unaudited condensed consolidated financial statements presented
herein have been prepared in accordance with the instructions to Form 10-Q 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, 2007. These financial statements reflect all
adjustments that are, in the opinion of management, necessary to fairly state the results
for the interim periods reported. All adjustments are of a normal recurring nature.
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
$4,358,778 during the three months ended March 31, 2008, a working capital deficit of
$23,140,140, and a stockholders deficit balance of $20,005,230 as of March 31, 2008.
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 months ended March 31, 2008 are not necessarily indicative of the
results to be expected for the full year.
3. Beginning in July 2005, the Company has arranged a series of
callable secured convertible debt financings (Notes) with an accredited investment group
totaling $6,620,000. The Notes bear interest at rates ranging from 6% to 8% and are due
three years from issuance. In connection with these financings, the Company has issued
warrants to acquire common stock in varying amounts and at varying exercise prices. During
2007 the Company signed Notes that added accrued interest totaling $342,171 to the
outstanding principal balance. These Notes bear interest at 2% and have a three year term.
Following is a summary of the financings:
10
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
|
ORIGINAL
|
CONVERTED
|
PRINCIPAL
|
NUMBER OF
|
WARRANT
|
|
PRINCIPAL
|
TO
|
BALANCE
|
WARRANTS
|
EXERCISE
|
DATE
|
AMOUNT
|
STOCK
|
3/31/08
|
ISSUED
|
PRICE
|
July
2005
|
$1,250,000
|
$1,250,000
|
$ -
|
1,153,846
|
$0.15
|
August
2005
|
1,000,000
|
175,645
|
824,355
|
923,077
|
$0.15
|
January
2006
|
500,000
|
-
|
500,000
|
961,539
|
$0.15
|
February
2006
|
500,000
|
-
|
500,000
|
461,539
|
$0.15
|
July
2006
|
500,000
|
500,000
|
-
|
20,000,000
|
$0.05
|
November
2006
|
500,000
|
-
|
500,000
|
20,000,000
|
$0.04
|
January
2007
|
500,000
|
-
|
500,000
|
20,000,000
|
$0.01
|
March
2007
|
500,000
|
362,106
|
137,894
|
20,000,000
|
$0.01
|
June
2007
|
335,000
|
-
|
335,000
|
10,000,000
|
$0.01
|
August
2007
|
250,000
|
-
|
250,000
|
20,000,000
|
$0.0014
|
October
2007
|
275,000
|
-
|
275,000
|
15,000,000
|
$0.004
|
December
2007
|
200,000
|
|
200,000
|
15,000,000
|
$0.001
|
March
2008
|
310,000
|
-
|
310,000
|
10,000,000
|
$0.0001
|
Totals
|
$6,620,000
|
$2,287,751
|
4,332,249
|
153,500,001
|
|
Accrued
interest
|
|
|
|
|
|
added to
principal
|
|
|
342,171
|
|
|
Balance
3/31/08
|
|
|
$4,674,420
|
|
|
|
|
|
|
|
|
The Notes are convertible into common shares at the lesser of $0.10 or
35% of the market price of the Companys common stock, as defined. The Company may
prepay the Notes at 150% of the outstanding principal and accrued interest balance, if
sufficient authorized shares are available to convert all of the outstanding principal and
accrued interest. Additionally, the Notes are secured by substantially all of the
Companys assets. The Notes are further secured by 14,550,558 Company common shares
owned by an officer/stockholder.
The Notes are potentially convertible into an unlimited number of
common shares. Accordingly, the Company has accounted for the Notes under SFAS 133, EITF
00-19 and DIGs B38 and B39 which require the beneficial conversion features and the
prepayment penalties of each of the Notes to be treated as embedded derivatives, to be
recorded as a collective liability equal to the estimated fair value of the embedded
derivatives. As of March 31, 2008 and December 31, 2007 the Notes were convertible into
3,108,744,236 and 6,450,658,596 common shares, respectively, and the conversion features
had estimated fair values of $16,514,068 and $13,003,762, respectively. As of March 31,
2008 and December 31, 2007, the Company did not have enough authorized shares to allow
conversion of all of the outstanding debt into stock. Consequently, the prepayment option
was not available and no value for the prepayment feature was included in the computation
of the estimated fair value of the derivatives for March 31, 2008 and December 31, 2007.
11
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
In addition, all warrants and options that are exercisable during the
period that the Notes are outstanding are required to be recorded as liabilities at their
estimated fair value. At March 31, 2008 and December 31, 2007 warrants and options to
acquire a total of 161,125,001 and 156,729,001 common shares, respectively, were
outstanding and had estimated fair values of $760,493 and $231,224, respectively.
The Company estimates the fair value of the embedded conversion and
prepayment options of the callable secured convertible debt in a single pricing model with
an embedded weighted average calculation. The assumptions used are to (1) determine the
number of shares it would take to convert the debt under the terms of the agreements as of
the balance sheet date; (2) estimate the future rate of debt conversions by the investors
based on recent conversion history; (3) estimate the debt balance at specified dates,
using 6 month intervals, based on the conversion rate determined in step 2; (4) value each
of the components, including the conversions and the prepayment balances determined in
step 3, using the Black-Scholes option pricing model; and (5) compute the estimated fair
value of the combined derivatives by taking a weighted average of the values of the debt
derivative and the prepayment options for the estimated prepayment dates based on
estimated probability of occurrence of each event. Steps 2 and 5 were applicable only to
the three months ended March 31, 2007, as the prepayment feature of the Notes was not
available for March 31, 2008. Volatility rates ranged from 95% to 128% and 91% to 107% for
the three months ended March 31, 2008 and 2007, respectively. Risk free interest rates
ranged from 1.22% to 3.45% and 4.54% to 5.07% for the three months ended March 31, 2008
and 2007, respectively. Volatility is calculated each reporting period and the calculation
involves matching data points of our common share market price to the length of the option
period. Fluctuations in volatility between individual derivatives and between periods are
primarily due to the length of the option period.
The Company estimates the fair value of warrants and options using the
Black-Scholes option pricing model and assumes all warrants and options would be exercised
on their respective expiration dates. Volatility and risk free interest rate ranges are
included in the ranges listed above.
The following table is a summary of the transactions and adjustments
that comprised the calculation of the estimated fair value of the derivatives from January
1, 2007 to March 31, 2008:
12
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
|
Convertible
|
Warrant
|
|
Debt
|
And Option
|
|
Derivative
|
Liability
|
Estimated fair value as of
|
|
|
December 31, 2006
|
$ 4,876,175
|
$ 380,083
|
Additional borrowing in 2007
|
2,060,000
|
-
|
Accrued interest
|
134,554
|
-
|
Warrants issued for services and
|
|
|
expensed or capitalized in 2007
|
-
|
7,337
|
Debt conversions into common shares
|
(1,021,367)
|
-
|
Year to date adjustment to Estimated
|
|
|
Fair Value at December 31, 2007
|
6,954,400
|
(156,196)
|
Estimated Fair Value at December 31, 2007
|
13,003,762
|
231,224
|
Additional borrowing in 2008
|
310,000
|
-
|
Accrued interest
|
76,252
|
-
|
Options issued for services and
|
|
|
expensed or capitalized in 2008
|
-
|
255
|
Debt conversions
|
-
|
-
|
Year to date adjustment to Estimated
|
|
|
Fair Value at March 31, 2008
|
3,124,055
|
529,014
|
Estimated Fair Value at March 31, 2008
|
$16,514,068
|
$ 760,493
|
The fair value of the beneficial conversion option, prepayment
penalties, warrants and options are estimated each reporting period with the change in
fair value recorded as gain or loss on derivative instruments. As the Companys
common stock is highly volatile, material gains or losses for the change in estimated fair
value are likely to occur in future periods.
Following is a summary of the gains and (losses) on derivative instruments by reporting
period for the three months ended March 31, 2008 and 2007:
|
Three Months
Ended
|
|
March 31,
|
|
2008
|
2007
|
Convertible debt derivative
|
$(3,124,055)
|
$ 1,226,456
|
Warrant and option liability
|
(529,014)
|
(1,084,067)
|
Combined Derivative Gain (Loss)
|
$(3,653,069)
|
$ 142,389
|
In connection with the above described financings, the Company entered
into Registration Rights Agreements with the Noteholders that either require the Company
to use its best efforts to file a registration statement within 120 days of funding or to
file a registration statement within 10 days of written demand from the Noteholders. The
2005 Agreements required the Company to increase the authorized shares by October 31, 2005
or use its best efforts to
13
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
do so. The Agreement specifies penalties of 2% per month for failing to
register the shares timely and 3% per month for failing to increase the authorized shares.
The Company registered 50 million shares in February 2006 and increased the authorized
shares in March 2006. Because it used its best efforts, the Company did not incur any
penalties. The Company completed registrations of 75 million shares each in October 2006
and June 2007. After converting their debt into the 75 million common shares from the June
2007 registration, the Noteholders began utilizing Rule 144 to convert their debt into
common shares as several of the Notes qualified for Rule 144 treatment since they were
more than two years old. In February 2008 Rule 144 was revised to allow sale of shares
after being held for six months. The holding period for debt instruments begins on the
date of the investment, and due to the shortened time period, the Company anticipates that
the Noteholders will utilize Rule 144 for future debt conversions and that no future
registrations will be necessary.
In December 2007 the Company had issued substantially all of its
authorized shares. A shareholder meeting to increase the authorized shares to 20 billion
from 1 billion shares was held on May 6, 2008, at which time the shareholders approved the
increase. Consequently, the Company believes it has used its best efforts to be in
compliance with the terms of the various Registration Rights Agreements as of March 31,
2008, and therefore believes the probability of incurring any penalties is remote.
No conversions of the debt have taken place to date in 2008. During
2007 the Noteholders converted a total of $1,021,367 of the Notes into 546,758,396 common
shares.
4.
As of March 31, 2008 we
have accrued for liabilities, including interest, of $549,022 which relate to various
lawsuits and claims for the collection of the funds due. These include 8 leases totaling
$364,635 (reflected in Capital Lease Obligations) plus $66,235 in additional interest
(reflected in Accrued Interest) and one trade payable totaling $85,801 (reflected in
Accounts Payable) plus $32,351 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 three cases that are seeking $251,522, which we believe are probable. The creditors
have received judgments in these cases, but have taken no further collection action. The
Company will continue to accrue interest until these cases are settled or paid in
full.
The Company has two cases, that originally sought $171,853, that we
deem to have a remote possibility of incurring an additional unrecorded loss. The Company
has negotiated payment agreements on these cases and, as of March 31, 2008, the recorded
liability for these cases was $161,405. We are delinquent in our payments under the
respective settlement agreements, but are in contact with counsel for the creditor, and no
collection action has been taken.
14
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
In addition to the above leases that are subject to litigation, there
are three leases, with a recorded liability of $148,871, that are in default. 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.
Successful settlement of the above claims is dependent on future
financing.
The Company 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 its business. Certain
lawsuits have been filed against the Company for collection of funds due that are
delinquent, as described above. The Company is not aware of any additional legal
proceeding or claims that it believes will have, individually or in the aggregate, a
material adverse affect on its business, financial condition or operating results.
5. In the first quarter of 2006 all of the Series 2000 Convertible
Promissory Notes became due and are now in default. The total principal and interest due
at March 31, 2008 is $3,603,793. The Company is formulating a plan to seek extensions of
these notes and has recorded these notes as current liabilities. No collection action has
been taken to date.
When these notes came due in 2006, they were convertible into
22,229,551 common shares. If the Company is successful in negotiating extensions of these
notes, the convertible options may be renewed and the eventual number of potential options
could be significantly higher than the amount that expired.
The Companys mortgage loan on the manufacturing facility is in
default due to delinquent property taxes totaling $13,535. The lender is aware of the
situation and has taken no collection action. As a result of the default, the entire
principal balance, in the amount of $411,134, is included in current liabilities.
6. Following is a summary of finished goods, work in progress, and raw
materials inventories as of March 31, 2008 and December 31, 2007. The raw material and
work in progress balances below include $684,999 and $640,484 in silver bearing
unprocessed photochemicals or partially processed materials as of March 31, 2008 and
December 31, 2007, respectively.
|
March 31,
|
Dec. 31,
|
|
2008
|
2007
|
Finished goods
|
$ 34,742
|
$46,211
|
Work in progress
|
548,452
|
522,273
|
Raw materials
|
357,245
|
425,673
|
|
940,439
|
994,157
|
Less: Silver recoverability
|
|
|
and slow moving reserves
|
104,161
|
104,161
|
Net Inventory
|
$836,278
|
$889,996
|
15
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
7. The Company has outstanding three categories of warrants and options
that may be exercised to acquire common stock; these include warrants, convertible debt
options, and employee options. The following table summarizes warrant and option activity
for the period January 1, 2007 through March 31, 2008:
|
|
Convertible
|
Employee
|
|
|
Warrants
|
Debt Options
|
Options
|
Total
|
Under option, December 31, 2006
|
58,599,501
|
586,181,548
|
6,322,000
|
651,103,049
|
Granted
|
100,000,000
|
6,411,235,444
|
252,000
|
6,511,487,444
|
Exercised
|
-
|
(546,758,396)
|
-
|
(546,758,396)
|
Expired/Adjusted
|
(8,134,500)
|
-
|
(310,000)
|
(8,444,500)
|
Under option, December 31, 2007
|
150,465,001
|
6,450,658,596
|
6,264,000
|
6,607,387,597
|
Granted
|
10,000,000
|
-
|
71,000
|
10,071,000
|
Exercised
|
-
|
-
|
-
|
-
|
Expired/Adjusted
|
(5,625,000)
|
(3,341,914,360)
|
(50,000)
|
(3,347,589,360)
|
Under option, March 31, 2008
|
154,840,001
|
3,108,744,236
|
6,285,000
|
3,269,869,237
|
|
|
|
The average price for all warrants and options granted and exercised
was $0.0013 for the three months ended March 31, 2008 and $0.0009 for the year ended
December 31, 2007.
The following table summarizes the warrants and options outstanding as
of March 31, 2008:
16
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
|
|
|
Weighted
|
|
|
|
Average
|
|
No. of
|
Exercise
|
Exercise
|
Expiration Dates
|
Shares
|
Price
|
Price
|
Warrants:
|
|
|
|
March 2015
|
10,000,000
|
$0.0001
|
|
December 2014
|
15,000,000
|
0.001
|
|
August 2014
|
20,000,000
|
0.0014
|
|
October 2014
|
15,000,000
|
0.004
|
|
January to June 2014
|
50,000,000
|
0.010
|
|
November 2013
|
20,000,000
|
0.040
|
|
July 2013
|
20,000,000
|
0.050
|
|
March 2010
|
1,000,000
|
0.100
|
|
July 2010 to February 2011
|
3,740,001
|
0.150
|
|
June 2008
|
100,000
|
0.225
|
|
Total Warrants
|
154,840,001
|
|
$0.0199
|
|
|
|
|
Convertible Debt Options:
|
|
|
|
August 2008 to March 2011
|
3,108,744,236
|
$0.0015
|
$0.0015
|
|
|
|
|
Employee Options:
|
|
|
|
August 2007 to February 2018
|
463,000
|
$0.150
|
|
One year after employment ends
|
1,600,000
|
0.150
|
|
May 2017 to October 2017
|
55,000
|
0.160
|
|
January 2015 to January 2018
|
150,000
|
0.200
|
|
One year after employment ends
|
1,000,000
|
0.250
|
|
One year after employment ends
|
3,000,000
|
0.300
|
|
October 2012 to October 2013
|
17,000
|
0.500
|
|
Total Employee Options
|
6,285,000
|
|
$0.2397
|
Total Warrants and Options
|
3,269,869,237
|
|
$0.0029
|
The 3,108,744,238 convertible debt options listed above relate to the
callable secured convertible debt discussed in Note 3 above. As of March 31, 2008
$4,751,197 of principal and accrued interest was convertible into common stock at the
lower of $0.10 per share or 35% of a calculated market price. Consequently, the number of
shares and the conversion price can vary up or down materially, depending on the
Companys stock price at any point in time.
8. Earnings (Loss) per Common Share:
Basic Earnings (loss) per common share is calculated based on the
consolidated net income (loss) for the period divided by the weighted average number of
common shares outstanding during the three months ended March 31, 2008 and 2007.
17
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
Diluted Earnings (loss) per common share assumes that any dilutive
convertible debt outstanding and stock options and warrants were converted on the first
day of the period. Interest expense (net of tax) incurred the period that is related to
convertible debt is added back to net income for purposes of the computation. Any stock
options or warrants with exercise prices below the weighted average market price for the
quarter are excluded from the computation. For purposes of computing diluted earnings per
common share, common stock equivalents are excluded for periods with net losses as their
effect would be antidilutive.
Following is a reconciliation of Net Income (Loss) and Weighted Average
number of shares outstanding, in the computation of basic and diluted earnings (loss) per
common share (EPS) for the three months ended March 31, 2008 and 2007.
|
Three months
Ended March 31,
|
|
2008
|
2007
|
Net Income (Loss)
|
$(4,358,778)
|
$(468,365)
|
Less: Preferred stock
dividends
|
-
|
-
|
Basic and diluted EPS loss
available to common
|
|
|
stockholders
|
$(4,358,778)
|
$(468,365)
|
|
|
|
Weighted average number of
shares outstanding (1,000s)
|
999,997
|
358,591
|
Common equivalent shares
(1,000s)
|
N/A
|
N/A
|
Diluted average number of
shares outstanding (1,000s)
|
999,997
|
358,591
|
Loss Per share amount
-basic
|
$(0.004)
|
$(0.001)
|
Loss Per share amount-
diluted
|
$(0.004)
|
$(0.001)
|
Warrants, options, and shares to be issued, totaling 3,290,219,698 and
491,740,285 shares as of March 31, 2008 and 2007, respectively, would dilute EPS, and
accordingly are not included in the computation of EPS for the three months ended March
31, 2008 and 2007.
9. The Company adopted the provisions of SFAS 123R,
Share-Based
Payments,
on January 1, 2006. Accordingly, compensation costs for all share-based
awards to employees are measured based on the grant date fair value of those awards and
recognized over the period during which the employee is required to perform service in
exchange for the award (generally over the vesting period of the
18
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
award). We have no awards with market or performance conditions.
Effective January 1, 2006 and for all periods subsequent to that date, SFAS 123R
supersedes our previous accounting under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees
"
("APB 25"). In March
2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
("SAB 107") relating to SFAS 123R. The Company has applied the provisions of SAB
107 in its adoption of SFAS 123R.
Total estimated share-based compensation expense recognized under SFAS
123R for the three months ended March 31, 2008 and 2007 was $(16,141) and $988,
respectively, and is included in general and administrative expenses. The 2008 amount
includes $255 for the estimated fair value of stock options granted and $(16,396)in
valuation adjustments of common stock issued to employees for their compensation.
In addition to a stock option program for employees, certain employees,
directors and various consultants receive the majority of their compensation in common
shares. Shares issued for consulting services include such services as transportation,
contracting, and corporate marketing and investor relations programs. Shares issues to
employees, directors, and consultants are valued at the closing market price of our common
stock on the transaction date. Total expenses paid in common stock for employees,
directors, and consultants was $71,561 and $164,492 for the three months ended March 31,
2008 and 2007, respectively. These expenses are allocated between the two segments and
between expense categories in the Consolidated Statements of Operations based on the type
of service provided.
10. Following is financial information for each of the Companys
segments. No changes have occurred in the basis of segmentation since December 31, 2007.
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:
19
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
|
Three Months Ended March 31,
|
|
2008
|
2007
|
|
|
|
Revenues:
|
|
|
Photochemical Fertilizer
|
$597,289
|
$527,902
|
Mining Technical Services
|
55,842
|
4,953
|
Consolidated Revenues
|
$653,131
|
$532,855
|
|
|
|
Gross Profit (Loss):
|
|
|
Photochemical Fertilizer
|
$ 80,122
|
$ 16,031
|
Mining Technical Services
|
25,592
|
(3,110)
|
Consolidated Gross Profit
(Loss)
|
$105,714
|
$ 12,921
|
|
|
|
Operating Loss:
|
|
|
Photochemical Fertilizer
|
$(318,164)
|
$(493,401)
|
Mining Technical Services
|
(125,207)
|
(179,968)
|
Consolidated Operating
Loss
|
$(443,371)
|
$(673,369)
|
|
|
|
Other Income (Expense):
|
|
|
Photochemical Fertilizer
|
$(3,915,407)
|
$ 66,651
|
Mining Technical Services
|
-
|
138,353
|
Consolidated Other Income
(Expense)
|
$(3,915,407)
|
$205,004
|
|
|
|
Net Loss before taxes:
|
|
|
Photochemical Fertilizer
|
$(4,233,571)
|
$(426,750)
|
Mining Technical Services
|
(125,207)
|
(41,615)
|
Consolidated Net Loss
|
|
|
Before Taxes
|
$(4,358,778)
|
$(468,365)
|
20
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
Identifiable assets by business segment for the major asset
classifications and reconciliation to total consolidated assets are as follows:
|
March 31,
|
December
31,
|
|
2008
|
2007
|
|
|
|
Current Assets:
|
|
|
GOLDn GRO Fertilizer
|
$1,179,216
|
$
1,033,487
|
Mining Technical Services
|
58,135
|
15,743
|
|
1,237,351
|
1,049,230
|
|
|
|
Property and Equipment,
net:
|
|
|
GOLDn GRO Fertilizer
|
2,734,709
|
2,769,179
|
Mining Technical Services
|
80,502
|
83,143
|
|
2,815,211
|
2,852,322
|
|
|
|
Other Assets, net:
|
|
|
GOLDn GRO Fertilizer
|
107,505
|
108,318
|
Mining Technical Services
|
3,483
|
3,483
|
|
110,988
|
111,801
|
|
|
|
Total Assets:
|
|
|
GOLDn GRO Fertilizer
|
4,021,430
|
3,910,984
|
Mining Technical Services
|
142,120
|
102,369
|
Total Segment Assets
|
4,163,550
|
4,013,353
|
|
|
|
Itronics Inc. assets
|
28,984,893
|
28,787,327
|
Less: inter-company
elimination
|
(28,631,555)
|
(28,444,812)
|
Consolidated Assets
|
$4,516,888
|
$4,355,868
|
|
|
|
11. The Company periodically holds marketable securities that are
available for sale, which have consisted solely of equity securities. The carrying amount
on the balance sheets of these securities is adjusted to market value at each balance
sheet date. The adjustment to market 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 Gains of $-0- at March 31, 2008 and December 31, 2007. No
gains or losses were reclassified out of accumulated other comprehensive income into
earnings during the three months ended March 31, 2008 and 2007. 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, if any,
21
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
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 Mar. 31,
|
|
2008
|
2007
|
|
|
|
Unrealized holding gains
|
|
|
arising
during the period
|
$ -
|
$ 2,247
|
Reclassification
adjustment
|
-
|
-
|
Other Comprehensive Income
|
$ -
|
$ 2,247
|
Following is a summary of gross proceeds and gains and losses from sales of available
for sale marketable securities
:
|
Three Months Ended
|
|
March 31,
|
|
2008
|
2007
|
Gross
proceeds from sale of securities
|
$ -
|
$ -
|
|
|
|
Gross
gains from sale of securities
|
$ -
|
$ -
|
Gross
losses from sale of securities
|
-
|
-
|
Net Gains from Sale of
Securities
|
$ -
|
$ -
|
12.
Fair value of financial instruments
On January 1, 2008, the Company adopted SFAS 157, Fair Value
Measurements. SFAS 157 defines fair value, establishes a three-level valuation hierarchy
for disclosures of fair value measurement and enhances disclosures requirements for fair
value measures. The carrying amounts reported in the balance sheets for receivables,
payables and short term debt qualify as financial instruments are a reasonable estimate of
fair value because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The three levels
are defined as follow:
Level 1 inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that are observable for the
assets or liability, either directly or indirectly, for substantially the full term of the
financial instruments.
Level 3 inputs to the valuation methodology are unobservable and
significant to the fair value.
22
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(UNAUDITED)
The Company analyzes all financial instruments with features of both
liabilities and equity under SFAS 150, "Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity," SFAS No 133, "Accounting
for Derivative Instruments and Hedging Activities" and EITF 00-19, "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock."
The Companys convertible debt derivatives are carried at fair
value totaling $16,514,068 and $13,003,762, as of March 31, 2008 and December 31, 2007;
the Company carries its options and warrants at fair value totaling $760,493 and $231,224
as of March 31, 2008 and December 31, 2007. The Company used Level 2 inputs for its
valuation methodology for the convertible debt derivatives, warrant and option liability,
and their fair values are determined by using current conversion rate which is determined
by the lowest three stock prices for the past 20 days at each reporting period.
|
Fair Value As of
March 31, 2008
|
Fair Value
Measurements at March 31, 2008 Using Fair Value Hierarchy
|
Liabilities
|
|
Level 1
|
Level 2
|
Level 3
|
Convertible debt derivative
|
$
16,514,068
|
|
$ 16,514,068
|
|
Warrant and option liability
|
$
760,493
|
|
$ 760,493
|
|
|
|
|
|
|
The Company recognized $3,124,055 and $529,014 as loss on derivative
instruments for the three months ended March 31, 2008.
The Company did not identify any other non-recurring assets and
liabilities that are required to be presented on the balance sheet at fair value in
accordance with SFAS No. 157. The Company also adopted SFAS 159, "The Fair Value
Option for Financial Assets and Financial Liabilities" on January 1, 2008. SFAS 159
permits entities to choose to measure certain financial and non-financial items at fair
value that are not otherwise required to be measured at fair value. The Company chose not
to elect the option to measure eligible items at fair value.
23
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 $653,131 for the quarter ended
March 31, 2008, compared to $532,855 for the prior year quarter, an increase of 23%. The
increase was due to a combination of increases in GOLDn GRO Fertilizer segment
revenue of $69,400, or 13% and Mining Technical Services segment revenue of $50,900, or
1,027%. The consolidated net loss was $4,358,778, or $0.004 per share, for the quarter
ended March 31, 2008, compared to a net loss of $468,365 or $0.001 per share for the
comparable 2007 period, an increased loss of $3,890,400. The increased loss is due
primarily to an increase in the non-cash loss on derivative instruments related to our
financing.
To provide a more complete understanding of the factors contributing to
the changes in revenues, operating expenses, other income (expense) and the resulting
operating income (loss) and net income (loss) before taxes, the discussion presented below
is separated into our two operating segments.
GOLDn GRO FERTILIZER
|
Three months Ended March 31,
|
|
2008
|
2007
|
Revenues
|
|
|
Fertilizer
|
$
445,578
|
$
413,723
|
Silver
|
117,065
|
68,847
|
Photochemical recycling
|
34,646
|
45,332
|
Total Revenue
|
597,289
|
527,902
|
Gross profit (loss)
|
80,122
|
16,031
|
Operating income (loss)
|
(318,164)
|
(493,401)
|
Other income (loss)
|
(3,915,407)
|
66,651
|
Net income (loss) before
taxes
|
(4,233,571)
|
(426,750)
|
Total segment revenues for the first quarter of 2008 were approximately
$597,300, an increase of 13% from the first quarter of 2007. Total fertilizer sales for
the quarter were $445,600 (481 tons), compared to $413,700 (480 tons) for the 2007 first
quarter, an increase of 8% in
24
dollars and a nominal increase in tonnage. Sales of bulk Chelated
Liquid Micro-nutrients were $372,000 (384 tons) and $357,500 (374 tons) for the first
quarter of 2008 and 2007, respectively, an increase of 4% in dollars and 3% in tonnage.
Sales of bulk Chelated Liquid Multi-nutrients were $37,400 (87 tons) and $43,800 (107
tons) for the first quarter of 2008 and 2007, respectively, a decrease of 15% in dollars
and 19% in tonnage. A new Chelated Secondary Nutrient product was introduced in the second
quarter of 2006. Sales of this product were $13,800 (10 tons) and $-0- (0 ton) for the
first quarter of 2008 and 2007, respectively. The overall increase in sales was due
primarily to price increases. Total photochemical services revenue for the quarter
decreased $10,700 due primarily to a reduction in photoliquids from one supplier. This was
a decrease of 24% in revenue on decreased volume of 11%. Silver sales were $117,100 (6,381
ounces) for the quarter, compared to $68,800 (5,343 ounces) for the prior year first
quarter, an increase of 70% in dollars and 19% in ounces. The increase is due to a
combination of increased sales of silver contained in film and a sharply increased silver
price.
World-wide demand for fertilizers increased sharply in the first
quarter, creating shortages of certain basic fertilizer materials. Because of this, delays
were experienced in obtaining raw materials and some GOLDn GRO liquid fertilizer
deliveries were delayed to the second quarter. At the end of the first quarter, we had the
largest backlog of truck load orders since we began fertilizer manufacturing. Our sales
personnel are working closely with our sales distribution network to manage fertilizer
distribution so that the ultimate customer receives ordered materials as closely as
possible to when they are needed in the field.
Cost of sales increased $5,300 due primarily to increases in raw
materials costs of $19,300 resulting from increased sales and payroll costs of $6,500,
which was partially offset by a decrease of $17,000 in plant supplies and repairs and
maintenance. The segment recorded a gross profit of $80,100 for the quarter, compared to a
gross profit of $16,000 for the first quarter of 2007, an increased gross profit of
$64,100, or 400%.
We are continuing our efforts on sales of Photochemical Silver
Concentrators in order to provide a long term base of used photochemical supply. In March
2007 we received a deposit on a Photochemical Silver Concentrator and it was delivered in
July 2007. We are in discussions for another order from the same customer. We also are now
aggressively seeking new large scale photochemical recycling customers, and between August
2006 and April 2007, we obtained three new significant wholesale customers. In April 2008
we obtained another significant wholesale customer. As a result of these new customers, we
expect the rate of growth in sales volume will be significantly greater than the rate of
growth in sales dollars. The addition of these customers is expected to increase
photochemical raw material (on an unconcentrated basis) up to 400% greater than the volume
in 2006.
We have also initiated discussions with other large scale potential
customers. We anticipate that the new customers, along with our existing suppliers, will
provide sufficient raw material for fertilizer production into the spring 2009 fertilizer
season. If we are successful in gaining some of the other potential customers, we expect
raw material needs to be met well into the future.
Segment operating expenses decreased $111,100 from the first quarter of
2007. This was due to decreases of $65,800 in sales and marketing expenses related
primarily to decreased corporate
25
marketing, $12,800 in research and development due to the completion of
the first phase of the registration process of the GOLDn GRO Guardian deer
repellant, and $34,100 in general and administrative costs related to reduced payroll
costs of $18,000 and legal and accounting costs of $7,100.
These factors resulted in a 2008 first quarter segment operating loss
of $318,200 compared to a loss of $493,400 for the first quarter of 2007, a decreased
operating loss of $175,200, or 36%.
Other income (expense) was a net expense of $3,915,400 for the quarter,
compared to income of $66,700 for the 2007 first quarter, a decrease in other income
(expense) of $3,982,100. The increase in other expense is due primarily to an increase in
loss on derivative instruments of $3,795,500. The gain or loss on derivatives is
calculated each quarter and is subject to material changes, either up or down, based on
changes in our stock price, which is highly volatile. In addition, there was a one time
gain in the prior year quarter of $205,900 from the sale of a membership interest in our
workers compensation insurance carrier.
The changes in operating loss and other income resulted in a segment
net loss before taxes of $4,233,600 for the quarter ended March 31, 2008, compared to
segment net loss before taxes of $426,800 for the prior year quarter, an increased loss of
$3,806,800.
MINING TECHNICAL SERVICES
|
Three Months Ended March 31,
|
|
2008
|
2007
|
Revenues
|
$ 55,842
|
$ 4,953
|
Gross profit (loss)
|
25,592
|
(3,110)
|
Operating income (loss)
|
(125,207)
|
(179,968)
|
Other income (expense)
|
-
|
138,353
|
Net income (loss) before
taxes
|
(125,207)
|
(41,615)
|
Mining technical services revenue was $55,800 for the quarter ended
March 31, 2008, compared to $5,000 for the comparable quarter of 2007, an increase of
1,027%. The increase came from one technical services project that was completed in March
2008. Discussions are ongoing for additional work on that project. Cost of sales increased
$22,200, due to an increase in payroll and consulting expense of $22,900, which were
related to the technical services project discussed above. These factors resulted in a
first quarter gross profit for the segment of $25,600 compared to a gross loss of $3,100
for the prior year first quarter, an improvement of $28,700.
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 GOLDn GRO fertilizer 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 GOLDn GRO fertilizer
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 months ended March 31, 2008 and 2007 we
allocated costs of approximately $55,800 and $61,900, respectively, to the development of
the web site. The site was launched in mid-August 2005 and we are now expanding the
content of the site, as well as improving the profiled mining company information. We
expect this level of spending to continue into at least the third quarter of 2008. As
improvements to the site are completed and information maintenance becomes routine, we
will reduce or redirect staff resources as needed. A program to solicit advertising
customers was developed and is being offered to gold exploration companies beginning in
the first quarter of 2007. We hired a manager of marketing and sales in October 2006. He
was responsible for marketing efforts for both the insidemetals.com website and for
technical consulting services to the mining industry. As no revenue was generated from
this work, the position was eliminated in February 2008. We are presently evaluating the
steps we need to take to improve the revenue growth from the website.
Total segment operating expenses for the first quarter of 2008
decreased $26,100, due primarily to decreased sales and marketing costs related to
corporate marketing and to the insidemetals.com website discussed above.
The combination of these factors resulted in a 2008 first quarter
segment operating loss of $125,200, compared to an operating loss of $180,000 for the
first quarter of 2007, a decreased operating loss of $54,800, or 30%.
Other income (expense) for the first quarter of 2008 was $-0- compared
to a gain of $138,400 for the prior year first quarter. The prior year gain was a one time
sale of a membership interest in our workers compensation insurance carrier.
The changes in operating loss and other income resulted in a segment
net loss before taxes of $125,200 for the quarter ended March 31, 2008, compared to a loss
of $41,600 for the prior year quarter, an increased loss of $83,600, or 201%.
SUMMARY
On a consolidated basis, the various changes in revenues and operating
expenses resulted in a first quarter 2008 operating loss of $443,400, compared to $673,400
for the first quarter of 2007, a decreased operating loss of $230,000, or 34%. Net loss
before taxes for the first quarter 2008 was $4,358,800 compared to a net loss before taxes
of $468,400 for the prior year
27
first quarter, an increased loss of $3,890,400. The increased loss is
due primarily to an increased non-cash loss on derivatives of $3,795,500.
Changes in Financial Condition; Capitalization
Cash amounted to $241,700 as of March 31, 2008, compared to $406,800 as
of March 31, 2007. Net cash used for operating activities was approximately $146,000 for
the first three months of 2008. The cash used for operating activities during the period
was financed primarily by net proceeds of $300,000 from the issuance of callable secured
convertible notes, less $27,800 in debt issuance costs, and loans totaling $45,000 from an
officer/stockholder.
Total assets increased $161,000 during the three months ended March 31,
2008 to $4,516,900. Current assets increased $206,100 due to increases in cash of $148,700
and accounts receivable of $145,400. These increases were partially offset by a decrease
in inventory of $53,700 and prepaid expenses of $34,300. Inventory decreased primarily due
to usage of fertilizer raw materials to meet fertilizer sales demand, while at the same
time, it became difficult to purchase raw materials to replace the materials used in
manufacturing due to the increased worldwide demand for fertilizers as discussed above.
Net property and equipment decreased $37,100 due to current period depreciation and
amortization. Other assets decreased $8,000 due to amortization of deferred loan fees
related to the callable secured convertible note financing.
Current liabilities increased during the three months ended March 31,
2008 by $4,504,100 and total liabilities increased by $4,502,300. The increase is
primarily due to an increase of $4,039,600 in the estimated fair value of derivative
instruments. The major components of this increase include $310,000 in new convertible
debt borrowing, $76,300 in accrued interest, and a net increase in estimated fair value of
derivative instruments of $3,653,100. The increase in estimated fair value of the
derivative instruments is primarily due to an increased stock price at March 31, 2008
compared to December 31, 2007. The current stock price used in the Black-Scholes model
used to compute estimated fair value was $0.0067 and $0.0026 at March 31, 2008 and
December 31, 2007, respectively. The conversion price used in the same computation was
$0.0015 and $0.0007 for March 31, 2008 and December 31, 2007, respectively. The increased
stock price resulted in a reduction in the number of shares need to convert the callable
secured convertible debt from 6,450,658,596 common shares at December 31, 2007 to
3,108,744,236 common shares at March 31, 2008, in spite of the increased borrowing. This
would tend to lower the value of the debt derivative. However, the stock price increase
also increased the value of the conversion option of the convertible debt and the value of
outstanding warrants and options. The net result was the increase in estimated fair value
of the derivatives discussed above.
Other changes in current liabilities include increases of $106,000 in
current maturities of convertible notes and accrued interest, $99,000 in accounts payable,
$82,200 in accrued management salaries, $50,900 in interest payable to
officer/stockholders, and $130,200 in other liabilities. These increases were partially
offset by decreases of $16,700 in accrued expenses and $37,200 in current maturities of
capital lease obligations.
28
Liquidity and Capital Resources
During the three months ended March 31, 2008, working capital declined
by $4,298,000 to a deficit balance of $23,140,100. The decline is due primarily to the
increase in estimated fair value of derivative instrument liabilities discussed above.
In order to solve our liquidity problems, management has implemented a
plan of financing its operations through the private placements of common shares,
convertible debt, conversion of debt to common shares, and payment of consulting and other
labor services with common shares. We obtained financing of $2.06 million and $2.0 million
in 2007 and 2006, respectively, through the issuance of callable secured convertible debt.
During the first three months of 2008, we obtained financing of $310,000 from the issuance
of callable secured convertible debt. We anticipate these funds will provide for our
working capital needs until late May 2008.
We are actively working to establish a longer term financing plan that
will identify capital sources for our financing needs over a three to five year period.
Once this plan is established, needs for financing will be adjusted and the plan will be
extended annually.
In addition to continuing the above described efforts, development of
the technology necessary to manufacture fertilizer from photochemicals has been completed.
In March 1998 our subsidiary, Itronics Metallurgical, Inc., signed a definitive
manufacturing and distribution agreement with Western
Farm Services, Inc. (WFS). The agreement gives WFS the exclusive
license and right to manufacture and market the GOLDn GRO line of fertilizer
products in the states of Arizona, California, Hawaii, Idaho, Oregon and Washington. The
agreement is for five years, with five year renewal options. In March 2008, the companies
entered the third five year term of the agreement.
In addition, to meet short term cash needs, we have negotiated a 10 day
payment period on invoices to our primary distributor, at a cost of 1% of the invoice
amount. We also periodically factor certain inventory items and receivables to help with
short term cash needs. These arrangements are with unrelated individuals, carry interest
at 2% to 3% per month, and the lenders are secured by a blanket UCC on specified inventory
items and on specified invoices. As of March 31, 2008, no factored inventory and
receivables were outstanding.
We are focusing on expanding GOLDn GRO fertilizer sales and the
related photochemical and silver sales necessary to achieve profitability, but this growth
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 GOLDn GRO Fertilizer segment created the GOLDn GRO line
of liquid fertilizers. The pioneering development work is complete, many field trials have
been completed on the first products and other field trials are under way.
The Mining Technical Services segment originally provided typical
consulting services which required high level technical personnel, including our
President, devoted to each project. To
29
reduce our dependence on our President to generate new consulting
contracts, while better utilizing our core professional staff, the division has been
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 and can be accessed 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 GOLDn GRO Fertilizer segment, and with the launch of the
insidemetals.com 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.
GOLDn GRO Fertilizer Segment (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 2007 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 is being done 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.
30
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.
We are performing field trials in Idaho, Oregon, and Washington for
applications on onions, potatoes, and winter wheat. We also have begun field trials in
Rhode Island for lawn, landscape, and nursery application and have started several new
trials in California for silage corn applications.
A GOLD'n GRO base liquid nutrition program is 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 is expected to produce substantial increases in the tonnage of GOLD'n GRO
fertilizer sales.
In 2006 we began contributing to an ongoing Zinc Nutrition Research
Program at Utah State University in Logan, Utah. To date, the research has demonstrated
the effectiveness of GOLDn GRO 9-0-1+7% Zinc as a chelated liquid zinc micronutrient
fertilizer for zinc deficient corn. Results include preventing visual symptoms of zinc
deficiency, significantly increased tissue concentration of zinc compared to untreated
plants, and doubled dry mass.
3.
Expand sales to new territories.
The GOLD'n GRO products are being sold in Arizona, California,
Colorado, Idaho, Nevada, Oregon, Rhode Island, Washington, and Utah, with the majority of
our sales in central California. We completed registration of select GOLDn GRO
fertilizers in Idaho, Oregon and Washington in 2005 and in Utah in 2006; 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. Based on our experience,
commercial sales can be generated approximately one to three years 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.
The expansion into the Northwest states of Idaho, Oregon, Washington,
and Utah is being managed by one field agronomist. The cost of maintaining that position
ranges from $120,000 to $150,000 per year. The expansion into the Northeast states is
being managed by one part time person at an annual cost of approximately $30,000. That
person is also the lead person in seeking customers for our Photochemical Silver
Concentrators. We may increase these spending levels in 2008, depending on sales support
requirements.
31
In general, expansion to new regions of the country will require at
least one field agronomist for each new region at a cost similar to that for the Northwest
region. In addition, each state has varying registration requirements for product labels
and costs of registration. Development of product labels is done internally using existing
staff. Registration fees for each state vary widely, ranging from $25 to $600 per year,
largely depending on how many products are registered in the particular state. For the
near term, we anticipate utilizing present staff and management for corporate support of
the sales efforts for both existing regions and for the new regions. For the longer term,
as we expand we will need to add corporate support personnel. In 2006 we added a Ph.D.
agronomist, to support GOLDn GRO sales efforts.
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 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 California. The
registration of GOLDn GRO 8-0-0+3% Mg is planned for the second quarter of 2008 at
which time sales development will be started.
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 repellents is believed to exceed $200 million in annual sales.
Products currently in the market have limited effectiveness so we believe that 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.
We acquired ownership interest in the GOLDn GRO Guardian
trademark, product rights, and the repelling product in 2005. We now own 100% of all
rights related to GOLDn GRO Guardian. Currently, this product line is strictly for
non-food plant applications. We have engaged consultants experienced in the EPA
registration process. We are presently working with them to plan the process and lab work
needed to complete a series of registrations.
We have a three phased registration process underway to get the
repelling ingredient (denatonium benzoate) and GOLDn GRO Guardian into the market.
Phase 1
is to register a "ready-to-use" spray deer
repellent that is essentially similar in the amount of repelling ingredient to a topical
product that is already in the market, but that is being phased out due to high cost and
limited effectiveness. Using this "me too" approach provides a U.S. EPA approved
path to rapid registration to get product sales started by mid-year 2008. This phase was
completed in March 2008.
Phase 2
is to register denatonium benzoate. U.S. EPA has made a
written determination that Itronics would have a 10 year exclusive use right under this
registration that provides use
32
protection to the owner which is similar to use protection provided by
a product patent. This registration is being pursued because denatonium benzoate has not
been registered as an active ingredient for use in animal repellents in the United States,
and the U.S. EPA is now requiring that it be registered for that purpose. This
registration requires that scientific, environmental, and toxicology data be gathered to
become part of the application. We have an agreement in place with a large foreign
manufacturer of denatonium benzoate who has already supplied certain confidential
technical manufacturing and scientific information to U.S. EPA as part of our product
registration application. Our environmental consultants have informed us that the data
required will take from two to four years of elapsed time to gather and could cost in the
range of $1 million to $1.5 million. This registration is on hold until the data
requirements can be fulfilled.
Phase 3
is to register the GOLDn GRO Guardian
deer-repellent fertilizer concentrate. This registration will be pursued once denatonium
benzoate has been registered as an active ingredient for use in animal repellents in the
United States. This registration requires that scientific, environmental, and toxicology
data be gathered to become part of the application. Our environmental consultants have
informed us that the data required will take from two to four years of elapsed time to
gather and could cost in the range of $1 million to $1.5 million. A major part of the
toxicology studies for this product have been completed with a finding that the product is
relatively safe, requiring only a caution label for use. Some of the scientific data has
been supplied, but the environmental data has not yet been gathered.
We also need to register GOLDn GRO Guardian in each state in
which it will be sold. We have already registered the fertilizer component, GOLDn
GRO 8-8-8+4%S, in Nevada, Utah, and 9 northeastern states where sales will be started so
that the fertilizer registration requirements will not delay sales once they are
permissible. State
registration
of the "ready-to-use" spray as registered with the U.S. EPA was begun in early
May 2008. The plan is to file registration applications in 13 states. Sales of GOLDn
GRO Guardian can begin in each state when the state registration is received.
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.
We are developing applications of our technology to extract silver from
photoliquids to the mining sector. This work is being expanded and a small pilot circuit
is being 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
33
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 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.
The first phase, construction of a containment area, was substantially completed in late
2006. While we believe that we can handle expected growth in 2008 with the existing
load-out module, we hope to complete construction on the new load out equipment during the
second half of 2008, subject to the availability of financing.
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. Further acquisitions will depend on the
potential benefits and suitable financing.
Mining Technical Services Segment (Whitney & Whitney, Inc.)
Historically, this division provided consulting services to the mining
industry. In August 2005, we launched an Information Portal on the Internet. This division
has a two-part approach to growth:
- Continue to provide consulting services.
- "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.
a.
Continue to provide consulting services
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.
b.
"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 is beginning to generate revenue by charging a
subscription fee for monthly access to the site and by selling advertising to gold
exploration companies. 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.
34
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.
A program to solicit advertising customers was developed and is being
offered to gold exploration companies beginning in the first quarter of 2007. We hired a
manager of marketing and sales in October 2006. He was responsible for marketing efforts
for both the insidemetals.com website and for technical consulting services to the mining
industry. As no revenue was generated from this work, the position was eliminated in
February 2008. We are presently evaluating the steps we need to take to improve the
revenue growth from the website.
In September 2007, our Board of Directors approved the formation of a
subsidiary to acquire multi-mineral properties and strategic small specialty companies
that are in early stage or commercial operation. These can be combined to form a larger
operating company that will utilize our advanced environmentally compatible technologies
to mine, extract, and sell mineral and metal products from multi-mineral properties. Our
plan anticipates that shares in the subsidiary will be placed with private investors. The
plan will include provisions for taking the subsidiary public to provide an exit strategy
for the initial private investors.
Item 4T. 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 principal executive and financial officer
and principal accounting 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
principal executive and financial officer and principal accounting officer concluded that
because of the material weakness in internal control over financial reporting described
below, our disclosure controls and procedures were not effective as of March 31, 2008.
Disclosure controls and procedures refer to controls and other
procedures designed to ensure that information required to be disclosed in the reports we
file or submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms promulgated by the SEC
and that such information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply its judgment in evaluating
and implementing possible controls and procedures.
Accounting and Reporting Oversight
Because
of our size, we have ineffective segregation of duties relative to key financial reporting
functions. Additionally, only one person in our
35
company, our Principle Accounting Officer/Controller has extensive US
GAAP accounting and SEC reporting experience. However, we do not have anyone else on staff
with sufficient knowledge to review his work for completeness and accuracy. We do not have
anyone with financial expertise on our Board so we have been unable to form an audit
committee to perform oversight of this function.
In order to correct the foregoing weaknesses, we will continue to
search for independent directors; however, given our current financial condition, we
expect we will not be successful until we can become profitable and/or adequately funded.
(b)
Changes in internal controls.
There
was no change in our internal controls or in other
factors that could affect these controls
during our fiscal quarter ended March 31, 2008
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
As of March 31, 2008 we have accrued for liabilities, including
interest, of $549,022 which relate to various lawsuits and claims for the collection of
the funds due. These include 8 leases totaling $364,635 (reflected in Capital Lease
Obligations) plus $66,235 in additional interest (reflected in Accrued Interest) and one
trade payable totaling $85,801 (reflected in Accounts Payable) plus $32,351 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 three cases that are seeking $251,522, which we believe are probable. The creditors
have received judgments in these cases, but have taken no further collection action. We
will continue to accrue interest until these cases are settled or paid in full.
We have two cases, that originally sought $171,853, that we deem to
have a remote possibility of incurring an additional unrecorded loss. We have negotiated
payment agreements on these cases and, as of March 31, 2008, the recorded liability for
these cases was $161,405. We are delinquent in our payments under the respective
settlement agreements, but are in contact with counsel for the creditor, and no collection
action has been taken.
Successful settlement of the above claims is dependent on future
financing.
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 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 above.
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.
36
Item 2. Unregistered sales of Equity Securities and Use of Proceeds
(a) Recent Sales of Unregistered Securities:
We issued options to purchase an aggregate of 9,000 shares of common
stock to Michael C. Horsley, our Controller, on February 1, 2008. The options are
exercisable at $0.15 per share and expire three years after grant.
We issued options to purchase an aggregate of 62,000 shares of common
stock to five of our employees in January and February 2008. The options are exercisable
at $0.15 to $0.20 per share and expire in three to ten years from grant.
In March 2008, we entered into a Securities Purchase Agreement with
three accredited investors (the "Investors") for an aggregate amount of (i)
$310,000 in secured convertible notes, and (ii) warrants to purchase 10,000,000 shares of
the our common stock (the "Financing"). We anticipate that the proceeds of the
Financing will be used to advance our eight part business plan which was summarized in its
press release issued by us on June 3, 2005. The Financing will provide working capital to
expand GOLDn GRO fertilizer sales, EPA registration of the GOLDn GRO Guardian
deer repellant fertilizer, certain capital improvements to expand production capacity, and
payment of existing debt obligations.
The Financing was completed in one closing. The closing consisted of
gross proceeds of $310,000, less financing costs of $10,000, for net proceeds of $300,000.
The Investors received three year convertible notes (the
"Notes") bearing simple interest at 8% per annum. The Notes are convertible into
the Companys common stock at a price equal to the lesser of (i) $0.10 or (ii) 35% of
the average of the lowest 3 trading prices during the 20 trading day period ending one
trading day before the conversion date. In addition, we granted the Investors a further
security interest in substantially all of our assets, including the assets of our wholly
owned subsidiaries, and intellectual property.
The parties entered into a Registration Rights Agreement whereby we may
be required to file a registration statement with the Securities and Exchange Commission
within 10 days of written demand, registering the common stock underlying the secured
convertible notes and the warrants. If the registration statement is not declared
effective within 90 days from the filing date, we are required to pay liquidated damages
to the investors. In the event that we breach any representation or warranty in the
Securities Purchase Agreement, we may be required to pay liquidated damages in shares or
cash, at our election, equal to two percent of the outstanding principal amount of the
secured convertible notes per month plus accrued and unpaid interest.
The Investors received seven year warrants to purchase a total of
10,000,000 common shares of the Company at a purchase price of $0.0001 per share.
37
Other than under these Agreements and under certain specified
circumstances, should we issue shares of common stock below the market price, the exercise
price of the warrants will be reduced accordingly.
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay a stock
dividend, subdivide or combine outstanding shares of common stock into a greater or lesser
number of shares, or take such other actions as would otherwise result in dilution of the
selling stockholder's position.
The Investors have agreed to restrict their ability to convert their
secured convertible notes or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them in the aggregate and
their affiliates after such conversion or exercise does not exceed 4.9% of the then issued
and outstanding shares of common stock.
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,
our business associates or our executive officers, and we restricted transfers in
accordance with the requirements of the Securities Act of 1933, as amended. 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 Item 2 are unaffiliated with us.
Item 3. Defaults Upon Senior Securities
In the first quarter of 2006 all of the Series 2000 Convertible
Promissory Notes became due and are now in default. The total principal and interest due
at March 31, 2008 is $3,603,793. We are formulating a plan to seek extensions of these
notes and have recorded these notes as current liabilities. No collection action has been
taken to date.
Our mortgage loan on the manufacturing facility is in default due to
delinquent property taxes totaling $13,535. The lender is aware of the situation and has
taken no collection action. As a result of the default, the entire principal balance, in
the amount of $411,134, is included in current liabilities.
In addition to the above leases that are subject to litigation, there
are three leases, with a recorded liability of $148,871, that are in default. 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.
38
Item 4. Submission of Matters to a Vote of Security Holders
On May 6, 2008 a special meeting of shareholders was held to vote on increasing the
authorized shares from 1 billion to 20 billion. In addition, a proposal was brought to the
meeting to change the par value of our common stock from $0.001 to $0.0001. Both measures
passed with more than the required two thirds majority of the outstanding shares voting in
favor of the proposals. A summary of the voting results follows:
For
673,936,930
Against
195,187,789
Abstain
7,044,763
The amendment to the Articles of Incorporation was approved by the Secretary of State
of Texas on May 13, 2008 and is attached as Exhibit 3(i).
Item 6. Exhibits
EXHIBIT 3(i) AMENDMENT TO ARTICLES OF INCORPORATION
41
Exhibit 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL
OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
43
Exhibit 31.2 CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER
PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
45
Exhibit 32.1 CERTIFICATIONS OF PRINCIPAL EXZECUTIVE AND
FINANCIAL
OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
47
Exhibit 32.2 CERTIFICATIONS OF PRINCIPAL ACCOUNTING OFFICER
PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
48
39
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:
May 15, 2008
By:
/S/JOHN W. WHITNEY
John W. Whitney
President
(Principal Executive and Financial
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:
May 15, 2008
By:
/S/JOHN W. WHITNEY
John W. Whitney
President
(Principal Executive and Financial
Officer)
DATED:
May 15, 2008
By:
/S/MICHAEL C. HORSLEY
Michael C. Horsley
Controller
(Principal Accounting Officer)
40
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