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 September 30, 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 October 31, 2008, 2,049,588,005 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 September 30, 2008
|
|
(Unaudited) and December
31, 2007
|
4
|
|
|
Condensed Consolidated
Statements of Operations for the Three
|
|
And Nine Months
Ended September 30, 2008 and 2007 (Unaudited)
|
6
|
|
|
Condensed Consolidated
Statements of Stockholders Equity (Deficit)
|
|
For the Nine Months Ended
September 30, 2008 and the Year Ended
|
|
December 31, 2007
(Unaudited)
|
7
|
|
|
Condensed Consolidated
Statements of Cash Flows for the
|
|
Nine Months Ended September
30, 2008 and 2007 (Unaudited)
|
8
|
|
|
Notes to Condensed
Consolidated Financial Statements (Unaudited)
|
10
|
|
|
|
|
Item 2. Management's
Discussion and Analysis or Plan of Operation
|
25
|
|
|
Item 4T. Controls and
Procedures
|
41
|
|
|
|
|
PART II- OTHER INFORMATION
|
|
|
|
Item 1. Legal Proceedings
|
41
|
|
|
Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds
|
42
|
|
|
Item 3 Defaults upon Senior
Securities
|
46
|
|
|
Item 6. Exhibits
|
47
|
|
|
Certifications
|
49
|
|
|
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ITRONICS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2008 AND DECEMBER 31, 2007
ASSETS
|
Sept. 30,
|
December
31,
|
|
2008
|
2007
|
|
(Unaudited)
|
|
CURRENT ASSETS
|
|
|
Cash
|
$ -
|
$92,987
|
Accounts receivable, less
allowance for
|
|
|
doubtful accounts, 2008,
$4,600; 2007, $4,600
|
52,638
|
17,561
|
Inventories
|
1,064,976
|
889,996
|
Prepaid expenses
|
117,778
|
94,952
|
Total Current Assets
|
1,235,392
|
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
|
116,465
|
97,110
|
Equipment and furniture
|
2,881,463
|
2,879,938
|
Vehicles
|
222,298
|
222,298
|
Equipment under capital
lease-equipment and furniture
|
466,571
|
466,571
|
|
5,214,206
|
5,193,326
|
Less: Accumulated
depreciation and amortization
|
2,481,811
|
2,341,004
|
Total Property and
Equipment
|
2,732,395
|
2,852,322
|
|
|
|
OTHER ASSETS
|
|
|
Intangibles
|
76,500
|
76,500
|
Deferred loan fees, less
accumulated amortization 2008,
|
|
|
$457,716; 2007,
$521,727
|
241,840
|
323,042
|
Deposits
|
7,181
|
8,508
|
Total Other Assets
|
325,521
|
408,050
|
|
$4,293,308
|
$4,355,868
|
The accompanying notes are an integral part of these financial
statements
4
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
Sept. 30,
|
December
31,
|
|
2008
|
2007
|
|
(Unaudited)
|
|
CURRENT LIABILITIES
|
|
|
Bank overdraft
|
$ 24,685
|
$ -
|
Accounts payable
|
816,868
|
672,163
|
Accrued management salaries
|
563,916
|
779,873
|
Accrued expenses
|
344,138
|
272,267
|
Insurance contracts payable
|
30,094
|
13,761
|
Interest payable to
officer/stockholders
|
312,525
|
157,181
|
Interest payable, long-term
debt and lease obligations
|
240,960
|
225,533
|
Current maturities of
long-term debt
|
496,985
|
436,523
|
Current maturities of
capital lease obligations
|
384,673
|
463,996
|
Advances from stockholder
|
112,025
|
143,025
|
Current maturities of
Series 2000 convertible notes
|
|
|
and accrued interest
|
3,333,574
|
3,497,838
|
Series 2000 convertible
debt derivatives
|
153,462
|
-
|
Callable secured
convertible debt derivatives
|
15,572,704
|
13,003,762
|
Warrant and option
liability
|
520,852
|
231,224
|
Other
|
121,609
|
40,498
|
Total Current Liabilities
|
23,029,070
|
19,937,644
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
Long-term debt, less
current maturities
|
-
|
82,197
|
Series 2000 convertible
notes and accrued interest, net of
|
|
|
current maturities
and net of $153,462 fair value of the
|
|
|
conversion feature
at September 30, 2008 and $-0-
|
|
|
at December 31, 2007
|
329,099
|
-
|
Total Long-Term Liabilities
|
329,099
|
82,197
|
Commitments and
Contingencies (see Note 4)
|
-
|
-
|
Total Liabilities
|
23,358,169
|
20,019,841
|
|
|
|
STOCKHOLDERS' EQUITY
(DEFICIT)
|
|
|
Preferred stock, par value
$0.001 per share;
|
|
|
authorized 999,500
shares; issued and outstanding
|
|
|
2008, 0 shares;
2007, 0 shares
|
|
-
|
Common stock, par value
$0.0001 per share;
|
|
|
authorized 20,000,000,000 shares; issued and outstanding,
|
|
|
1,827,988,760 at
September 30, 2008 and 999,996,999 at
|
|
|
December 31, 2007
|
182,799
|
999,997
|
Additional paid-in capital
|
26,360,185
|
24,692,645
|
Accumulated deficit
|
(46,907,255)
|
(42,143,980)
|
Common stock to be
issued
|
1,299,410
|
787,365
|
Total Stockholders
Equity (Deficit)
|
(19,064,861)
|
(15,663,973)
|
|
$4,293,308
|
$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 AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
|
Three Months Ended Sept 30,
|
Nine Months Ended Sept 30,
|
|
2008
|
2007
|
2008
|
2007
|
REVENUES
|
|
|
|
|
GOLDn GRO
fertilizer
|
$ 472,124
|
$ 533,624
|
$
2,301,903
|
1,901,436
|
Mining
technical services
|
21,784
|
8,329
|
108,999
|
14,957
|
Total Revenues
|
493,908
|
541,953
|
2,410,902
|
1,916,393
|
|
|
|
|
|
COST OF
REVENUES (exclusive of
|
|
|
|
|
depreciation and amortization
|
|
|
|
|
shown
separately below)
|
|
|
|
|
GOLDn GRO
fertilizer
|
478,761
|
516,291
|
1,918,472
|
1,751,031
|
Mining
technical services
|
19,753
|
10,238
|
71,671
|
25,968
|
Total Cost of
Revenues
|
498,514
|
526,529
|
1,990,143
|
1,776,999
|
Gross Profit
(Loss)(exclusive
|
|
|
|
|
of
depreciation and amortization
|
|
|
|
|
shown
separately below)
|
(4,606)
|
15,424
|
420,759
|
139,394
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
Depreciation
and amortization
|
46,944
|
52,392
|
140,807
|
157,013
|
Research and
development
|
68,975
|
92,053
|
215,816
|
280,907
|
Sales and
marketing
|
145,048
|
423,962
|
491,641
|
984,876
|
Delivery and
warehousing
|
25,937
|
20,606
|
144,742
|
111,742
|
Stock and
option compensation
|
345,690
|
11,436
|
333,216
|
13,161
|
General and
administrative
|
236,973
|
290,245
|
704,040
|
762,916
|
Total Operating
Expenses
|
869,567
|
890,694
|
2,030,262
|
2,310,615
|
Operating
(Loss)
|
(874,173)
|
(875,270)
|
(1,609,503)
|
(2,171,221)
|
|
|
|
|
|
OTHER INCOME
(EXPENSE)
|
|
|
|
|
Interest
expense
|
(503,836)
|
(339,488)
|
(1,133,163)
|
(931,234)
|
Gain (loss) on
derivative instruments
|
(4,624,198)
|
1,762,907
|
(2,107,986)
|
1,594,154
|
Gain (loss) on
sale of investments
|
-
|
(3,983)
|
-
|
348,026
|
Other
|
44,938
|
159
|
87,377
|
630
|
Total Other
Income (Expense)
|
(5,083,096)
|
1,419,595
|
(3,153,772)
|
1,011,576
|
|
|
|
|
|
Income (Loss)
before provision
for income tax
|
(5,957,269)
|
544,325
|
(4,763,275)
|
(1,159,645)
|
Provision for
income tax
|
-
|
-
|
-
|
-
|
Net
Income(Loss)
|
(5,957,269)
|
544,325
|
(4,763,275)
|
(1,159,645)
|
Other
comprehensive income (loss)
|
|
|
|
|
Unrealized
gains (losses) on
securities
|
-
|
(3,115)
|
-
|
-
|
|
|
|
|
|
Comprehensive
Income (Loss)
|
$ (5,957,269)
|
$ 541,210
|
$(4,763,275)
|
$(1,159,645)
|
|
|
|
|
|
Weighted
average number of shares
|
|
|
|
|
Outstanding
(1,000s) - Basic
|
1,560,397
|
466,067
|
1,211,448
|
407,278
|
Diluted
|
1,560,397
|
2,753,976
|
1,211,448
|
407,278
|
Earnings
(Loss) per share: Basic
|
$(0.004)
|
$0.001
|
$(0.004)
|
$(0.003)
|
Diluted
|
$(0.004)
|
$0.0002
|
$(0.004)
|
$(0.003)
|
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 NINE MONTHS ENDED SEPTEMBER 30, 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 cash
|
16,667
|
1,667
|
23,333
|
|
70,000
|
|
95,000
|
For services
|
88,278
|
8,828
|
206,478
|
-
|
2,045
|
-
|
217,351
|
For debt conversion,
|
|
|
|
|
|
|
|
related party
|
63,333
|
6,333
|
88,667
|
-
|
440,000
|
-
|
535,000
|
For debt conversion
|
659,714
|
65,971
|
449,065
|
-
|
-
|
-
|
515,036
|
Adjustment for new par
|
|
|
|
|
|
|
|
value
|
-
|
(899,997)
|
899,997
|
-
|
-
|
-
|
-
|
Net income for the
nine
months ended
Sept. 30, 2008
|
-
|
-
|
-
|
(4,763,275)
|
-
|
-
|
(4,763,275)
|
|
|
|
|
|
|
|
|
Balance, Sept. 30, 2008
|
1,827,989
|
$ 182,799
|
$26,360,185
|
$(
46,907,255
)
|
$1,299,410
|
$ -
|
$(
19,064,861
)
|
The accompanying notes are an integral part of these financial
statements.
7
ITRONICS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
|
Nine Months Ended Sept. 30,
|
|
2008
|
2007
|
Cash flows from operating
activities
|
|
|
Net income (loss)
|
$(4,763,275)
|
$(1,159,645)
|
Adjustments to reconcile
net income (loss) to
cash used by operating activities:
|
|
|
Depreciation
and amortization
|
285,809
|
350,620
|
Interest on
convertible notes
|
741,720
|
507,799
|
(Gain) loss on
change in fair value of derivative
instruments
|
2,107,986
|
(1,594,154)
|
(Gain) on sale
of investments
|
-
|
(348,026)
|
Addition of
silver in solution inventory by
|
|
|
offsetting photochemical processing fees
|
(206,985)
|
(253,545)
|
Stock and
option compensation
|
333,216
|
13,161
|
(Gain) on debt
forgiveness
|
(87,377)
|
-
|
Bad debts
|
264
|
-
|
Expenses paid
with issuance of common stock:
|
|
|
Consulting expenses
|
68,792
|
350,155
|
Director
fees
|
9,000
|
13,388
|
Salaries
|
115,857
|
215,607
|
(Increase)
decrease in:
|
|
|
Trade
accounts receivable
|
(35,341)
|
(124,719)
|
Inventories
|
61,758
|
115,030
|
Prepaid
expenses, deposits and other
|
(53,776)
|
(24,930)
|
Increase
(decrease) in:
|
|
|
Accounts
payable
|
148,930
|
42,509
|
Accrued
management salaries
|
224,043
|
178,346
|
Accrued
expenses and other
|
169,315
|
87,527
|
Accrued
interest
|
188,986
|
38,364
|
Net cash used by operating
activities
|
(691,078)
|
(1,592,513)
|
|
|
|
Cash flows from investing
activities:
|
|
|
Acquisition of
property and equipment
|
(11,224)
|
(39,277)
|
Sale of
investments
|
-
|
348,026
|
Net cash provided by
investing activities
|
(11,224)
|
308,749
|
|
|
|
Cash flows from financing
activities:
|
|
|
Proceeds from sale of stock
|
95,000
|
-
|
Proceeds from
officer/stockholder advances
|
64,000
|
8,000
|
Proceeds from debt
|
500,000
|
1,515,000
|
Debt issuance costs
|
(43,800)
|
(102,142)
|
Bank overdraft
|
24,685
|
(13,834)
|
Payments on debt
|
(30,570)
|
(102,956)
|
Net cash provided by
financing activities
|
609,315
|
1,304,068
|
Net increase (decrease) in
cash
|
(92,987)
|
20,304
|
Cash, beginning of period
|
92,987
|
-
|
Cash, end of period
|
$ -
|
$ 20,304
|
The accompanying notes are an integral part of these financial statements.
8
ITRONICS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
|
Nine Months Ended Sept. 30,
|
|
2008
|
2007
|
Supplemental Disclosures of
Cash Flow
|
|
|
Information:
|
|
|
Cash paid during the period
for interest
|
$ 57,454
|
$ 198,732
|
|
|
|
Non-cash financing and
investing activities:
|
|
|
Marketable securities
received for sale of investment
|
-
|
138,353
|
Common stock issued to
settle:
|
|
|
Convertible notes
|
515,034
|
633,822
|
Accrued management salaries
|
440,000
|
246,000
|
Accounts payable
|
4,221
|
-
|
Short term
notes-officer/stockholder
|
95,000
|
18,500
|
Acquisition of assets by
issuance of common stock:
|
|
|
Equipment
|
9,656
|
56,818
|
Inventory
|
29,753
|
51,000
|
Amounts withheld from
proceeds of debt, unrelated:
|
|
|
Deferred loan costs
|
20,000
|
70,000
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
9
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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
$4,763,275 during the nine months ended September 30, 2008, a working capital deficit of
$21,793,678, and a stockholders deficit balance of $19,064,861 as of September 30,
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 and nine months ended September 30, 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 $6,830,000. The Notes bear interest at 12% 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 and 2008 the Company
signed Notes that added accrued interest totaling $342,170 and $163,852 to the outstanding
principal balance. These Notes bear interest at 12% and have a three year term. Following
is a summary of the financings:
10
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
|
ORIGINAL
|
CONVERTED
|
PRINCIPAL
|
NUMBER OF
|
WARRANT
|
|
PRINCIPAL
|
TO
|
BALANCE
|
WARRANTS
|
EXERCISE
|
DATE
|
AMOUNT
|
STOCK
|
9/30/08
|
ISSUED
|
PRICE
|
July
2005
|
$1,250,000
|
$1,250,000
|
$ -
|
1,153,846
|
$0.15
|
August
2005
|
1,000,000
|
1,000,000
|
-
|
923,077
|
$0.15
|
January
2006
|
500,000
|
427,212
|
72,788
|
961,539
|
$0.15
|
February
2006
|
500,000
|
-
|
500,000
|
461,539
|
$0.15
|
July
2006
|
500,000
|
3,068
|
496,932
|
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
|
122,505
|
377,495
|
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
|
July
2008
|
210,000
|
-
|
210,000
|
20,000,000
|
$0.001
|
Totals
|
$6,830,000
|
$2,802,785
|
4,027,215
|
173,500,001
|
|
|
|
|
|
|
|
Accrued
interest
|
|
|
|
|
|
added to
principal
|
|
|
506,022
|
|
|
Balance
9/30/08
|
|
|
$4,533,237
|
|
|
|
|
|
|
|
|
The Notes are convertible into common shares at the lesser of $0.10 or
30% 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 September 30, 2008 and December 31, 2007 the Notes were convertible
into 11,147,296,302 and 6,450,658,596 common shares, respectively, and the conversion
features had estimated fair values of $15,572,704 and $13,003,762, respectively. As of
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 December 31, 2007. As of September 30, 2008
the Company did have enough authorized shares to convert the debt. Consequently, the
prepayment option was
11
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
available and the estimated fair value of this feature was included in
the computation of the estimated fair value of the derivative as of September 30, 2008.
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 September 30, 2008 and December 31, 2007 warrants and options to
acquire a total of 393,580,124 and 156,729,001 common shares, respectively, were
outstanding and had estimated fair values of $520,852 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. Volatility rates ranged from 95% to
151% and 90% to 115% for the nine months ended September 30, 2008 and 2007, respectively.
Risk free interest rates ranged from 0.92% to 3.99% and 3.43% to 5.07% for the nine months
ended September 30, 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 September 30, 2008:
12
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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
|
520,000
|
-
|
Accrued interest
|
423,425
|
-
|
Options issued for services and
|
|
|
expensed or capitalized in 2008
|
-
|
322,193
|
Debt conversions
|
(515,034)
|
-
|
Year to date adjustment to
Estimated
|
|
|
Fair Value at September 30, 2008
|
2,140,551
|
(32,565)
|
Estimated Fair Value at Sept. 30, 2008
|
$15,572,704
|
$ 520,852
|
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 and nine months ended September 30, 2008 and
2007:
|
Three Months Ended Sept. 30,
|
Nine Months Ended Sept 30,
|
|
2008
|
2007
|
2008
|
2007
|
Convertible
debt derivative
|
$(4,671,147)
|
$ 868,638
|
$(2,140,551)
|
$1,489,626
|
Warrant and
option liability
|
46,949
|
894,269
|
32,565
|
104,528
|
|
$(4,624,198)
|
$1,762,907
|
$(2,107,986)
|
$1,594,154
|
13
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
From May 14, 2008 through September 30, 2008, the Noteholders converted
a total of $515,034 into 659,713,700 common shares. During 2007 the Noteholders converted
a total of $1,021,367 of the Notes into 546,758,396 common shares.
On October 10, 2008, the
Company received a Notice of Default from AJW Partners, LLC, New Millenium Capital
Partners II, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC, and AJW Master Fund,
Ltd. (collectively, the "plaintiffs"), claiming that the Company was purportedly
in default of certain obligations under the Companys notes issued to the plaintiffs.
On October 16, 2008 the plaintiffs filed suit against the Company and its subsidiaries in
the Supreme Court of the State of New York alleging a breach of contract and other claims
concerning certain agreements the Company has with those parties. The suit seeks in excess
of $5,000,000. The Company plans to vigorously defend these allegations and assert various
counter-claims that it has against those plaintiffs.
4
.
As of
September 30, 2008 we have accrued for liabilities, including interest, of $561,972 which
relate to various lawsuits and claims for the collection of the funds due. These include 8
leases totaling $366,025 (reflected in Capital Lease Obligations) plus $73,835 in
additional interest (reflected in Accrued Interest) and one trade payable totaling $85,801
(reflected in Accounts Payable) plus $36,311 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 September 30, 2008, the
recorded liability for these cases was $162,795. 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.
In addition to the above leases that are subject to litigation, there
are two leases, with a recorded liability of $107,007, 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.
14
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
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 were in default. The total principal and interest due at
September 30, 2008 is $3,816,135. In September 2008 the Company began a plan to extend the
Notes for four years and a day by offering to pay the principal and accrued interest with
common stock in 17 quarterly installments. The stock is priced at the greater of the
average of the five closing bids prior to the payment date or $0.0015 per share. In
addition, the interest rate is reduced from 12% to 6% and Noteholders agreeing to the
extension receive one year warrants to acquire 100,000 shares of common stock per $1,000
of original principal amount at an exercise price of $0.005 per share. If all the
Noteholders agree to the extension, warrants to acquire a total of 143,700,000 common
shares will be issued.
As of September 30, 2008 Noteholders holding a total of $444,299 in
principal and accrued interest extended their Notes and warrants to acquire 18,000,000
common shares were issued. The estimated fair value of these warrants is included in the
estimated fair value of warrants and options described in Note 3 above and were valued
with the same methodology as the other warrants and options. Subsequent to September 30,
2008, principal and accrued interest totaling $788,060 were extended and warrants to
acquire 32,000,000 common shares were issued. The Notes that have not been extended remain
in default, but no collection action has been taken.
As the number of shares required to repay our Callable Secured
Convertible Notes is potentially unlimited, the extended Series 2000 Convertible Notes
must be accounted for under SFAS 133 and EITF 00-19. The estimated fair value was
determined using the Black-Scholes option pricing model. Volatility and risk free interest
rate ranges are included in Note 3 above. Based on the average closing bids for the five
days prior to September 30, 2008, the extended Notes would be convertible into 267,650,000
common shares. The estimated fair value of the conversion option of the extended Notes is
$153,462. Since this amount is less than the face amount of the extended Notes, no gain or
loss on derivatives was reported.
The Companys mortgage loan on the manufacturing facility is in
default due to delinquent property taxes totaling $18,661. The lender is aware of the
15
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
situation and has taken no collection action. As a result of the
default, the entire principal balance, in the amount of $398,434, is included in current
liabilities. In addition, the Companys semi-annual payment on a City of Reno Special
Assessment District loan in the amount of $4,284 is delinquent. As a result, the entire
principal balance in the amount of $83,962 is included in current liabilities.
As of September 30, 2008 the Company owed $88,669 for federal payroll
taxes. $12,046 of this amount was paid subsequent to September 30, 2008. The Company is in
contact with the IRS and believes a payment arrangement can be made for the remaining
balance due. The IRS has filed federal tax liens and may seize Company assets if
satisfactory arrangements cannot be made.
6. Following is a summary of finished goods, work in progress, and raw
materials inventories as of September 30, 2008 and December 31, 2007. The raw material and
work in progress balances below include $785,414 and $640,484 in silver bearing
unprocessed photochemicals or partially processed materials as of September 30, 2008 and
December 31, 2007, respectively.
|
Sept. 30,
|
Dec. 31,
|
|
2008
|
2007
|
Finished goods
|
$ 54,772
|
$ 46,211
|
Work in progress
|
652,919
|
522,273
|
Raw materials
|
461,446
|
425,673
|
|
1,169,137
|
994,157
|
Less: Silver recoverability
|
|
|
and slow moving reserves
|
104,161
|
104,161
|
Net Inventory
|
$1,064,976
|
$889,996
|
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 September 30, 2008:
16
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
|
|
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
|
48,000,000
|
5,624,001,406
|
194,836,123
|
5,866,837,529
|
Exercised
|
-
|
(659,713,700)
|
-
|
(659,713,700)
|
Expired/Adjusted
|
(5,725,000)
|
-
|
(260,000)
|
(5,985,000)
|
Under option, Sept. 30, 2008
|
192,740,001
|
11,414,946,302
|
200,840,123
|
11,808,526,426
|
|
|
|
|
|
The average price for all warrants and options granted and exercised
was $0.0006 for the nine months ended September 30, 2008 and $0.0009 for the year ended
December 31, 2007.
The following table summarizes the warrants and options outstanding as
of September 30, 2008:
17
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
|
|
|
Weighted
|
|
|
|
Average
|
|
No. of
|
Exercise
|
Exercise
|
Expiration Dates
|
Shares
|
Price
|
Price
|
Warrants:
|
|
|
|
March 2015
|
10,000,000
|
$0.0001
|
|
December 2014 to July 2015
|
35,000,000
|
0.001
|
|
August 2014
|
20,000,000
|
0.0014
|
|
October 2014
|
15,000,000
|
0.004
|
|
September 2009
|
18,000,000
|
0.005
|
|
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
|
|
Total Warrants
|
192,740,001
|
|
$0.0165
|
|
|
|
|
Convertible Debt Options:
|
|
|
|
August 2008 to July 2011
|
11,147,296,302
|
$0.00043
|
|
October 2012
|
267,650,000
|
.00166
|
|
Total Convertible Debt options
|
11,414,946,302
|
|
$0.0005
|
|
|
|
|
Employee Options:
|
|
|
|
September 2018
|
194,694,123
|
$0.002
|
|
August 2008 to February 2018
|
424,000
|
0.150
|
|
One year after employment ends
|
1,450,000
|
0.150
|
|
May 2017 to May 2018
|
80,000
|
0.160
|
|
January 2015 to January 2018
|
175,000
|
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
|
200,840,123
|
|
$0.0093
|
Total Warrants and Options
|
11,808,526,426
|
|
$0.0009
|
The 11,147,296,302 convertible debt options listed above relate to the
callable secured convertible debt discussed in Note 3 above. As of September 30, 2008
$4,793,337 of principal and accrued interest was convertible into common stock at the
lower of $0.10 per share or 30% of a calculated market price. The 267,650,000 convertible
debt options listed above relate to the Series 2000 Convertible Notes discussed in Note 5
above. As of September 30, 2008 $444,299 of principal and interest will be paid in common
stock in 17 quarterly installments. The stock price is based on the greater of the average
of the five closing bid prices prior to the date of payment or $0.0015 per
18
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
share. Consequently, the number of shares and the conversion prices for
both these categories of debt 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 and nine months ended September 30, 2008 and
2007.
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 during 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 and nine months ended September 30, 2008 and 2007.
|
Three months Ended Sept 30,
|
Nine months Ended Sept 30,
|
|
2008
|
2007
|
2008
|
2007
|
Net Income (Loss)
|
$(5,957,269)
|
$
544,325
|
$(4,763,275)
|
$(1,159,645)
|
Less: Preferred stock
dividends
|
-
|
-
|
|
-
|
Basic EPS income (loss)
available to common stockholders
|
(5,957,269)
|
544,325
|
(4,763,275)
|
(1,159,645)
|
Interest on convertible
securities,
|
|
|
|
|
net of tax
|
-
|
75,464
|
-
|
-
|
Diluted EPS income (loss)
available
|
|
|
|
|
to common shareholders
|
$(5,957,269)
|
$ 619,789
|
$(4,763,275)
|
$(1,159,645)
|
|
|
|
|
|
Weighted average number of
shares outstanding (1,000s)
|
1,560,397
|
466,067
|
1,211,448
|
407,278
|
|
|
|
|
|
Common equivalent shares
(1,000s)
|
N/A
|
2,287,909
|
N/A
|
N/A
|
|
|
|
|
|
Diluted average number of
shares outstanding (1,000s)
|
1,560,397
|
2,753,976
|
1,211,448
|
407,278
|
Per share amount -basic
|
$(0.004)
|
$0.001
|
$(0.004)
|
$(0.003)
|
Per share amount- diluted
|
$(0.004)
|
$0.0002
|
$(0.004)
|
$(0.003)
|
19
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
Warrants, options, and shares to be issued, totaling 12,124,946,764
shares as of September 30, 2008 would dilute EPS, and accordingly are not included in the
computation of EPS for the three and nine months ended September 30, 2008. Warrants,
options, and shares to be issued, totaling 2,424,844,738 shares as of September 30, 2007,
would dilute EPS, and accordingly are not included in the computation of EPS for the nine
months ended September 30, 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 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 September 30, 2008 and 2007 was $345,690 and $11,436,
respectively. Total estimated share-based compensation expense recognized under SFAS 123R
for the nine months ended September 30, 2008 and 2007 was $333,216 and $13,161,
respectively.
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 issued 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 $193,649 and $579,150 for the nine months ended September
30, 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:
20
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
|
Three Months Ended Sept 30,
|
Nine Months Ended Sept 30,
|
|
2008
|
2007
|
2008
|
2007
|
|
|
|
|
|
Revenues:
|
|
|
|
|
GOLDn GRO Fertilizer
|
$ 472,124
|
$ 533,624
|
$
2,301,903
|
$
1,901,436
|
Mining Technical Services
|
21,784
|
8,329
|
108,999
|
14,957
|
Consolidated Revenues
|
$ 493,908
|
$ 541,953
|
$ 2,410,902
|
$ 1,916,393
|
|
|
|
|
|
Gross Profit (Loss):
|
|
|
|
|
GOLDn GRO Fertilizer
|
$ (6,637)
|
$ 17,333
|
$ 383,431
|
$ 150,405
|
Mining Technical Services
|
2,031
|
(1,909)
|
37,328
|
(11,011)
|
Consolidated Gross Profit
(Loss)
|
$ (4,606)
|
$ 15,424
|
$ 420,759
|
$ 139,394
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
GOLDn GRO Fertilizer
|
$
(732,989)
|
$
(671,486)
|
$(1,207,999)
|
$(1,602,101)
|
Mining Technical Services
|
(141,184)
|
(203,784)
|
(401,504)
|
(569,120)
|
Consolidated Operating
Income
(Loss)
|
$ (874,173)
|
$ (875,270)
|
$(1,609,503)
|
$(2,171,221)
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
GOLDn GRO Fertilizer
|
$
(5,083,096)
|
$
1,423,419
|
$(3,153,772)
|
$ 868,858
|
Mining Technical Services
|
-
|
(3,824)
|
-
|
142,718
|
Consolidated Other Income
(Expense)
|
$ (5,083,096)
|
$ 1,419,595
|
$(3,153,772)
|
$1,011,576
|
|
|
|
|
|
Net Income (Loss) before
taxes:
|
|
|
|
|
GOLDn GRO Fertilizer
|
$(5,816,085)
|
$ 751,933
|
$(4,361,771)
|
$(733,243)
|
Mining Technical Services
|
(141,184)
|
(207,608)
|
(401,504)
|
(426,402)
|
Consolidated Net
Income
|
|
|
|
|
(Loss) before taxes
|
$(5,957,269)
|
$ 544,325
|
$(4,763,275)
|
$(1,159,645)
|
21
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
Identifiable assets by business segment for the major asset
classifications and reconciliation to total consolidated assets are as follows:
|
September
30,
|
December
31,
|
|
2008
|
2007
|
|
|
|
Current Assets:
|
|
|
GOLDn GRO Fertilizer
|
$1,170,650
|
$
1,033,487
|
Mining Technical Services
|
25,225
|
15,743
|
|
1,195,875
|
1,049,230
|
|
|
|
Property and Equipment,
net:
|
|
|
GOLDn GRO Fertilizer
|
2,659,843
|
2,769,179
|
Mining Technical Services
|
72,552
|
83,143
|
|
2,732,395
|
2,852,322
|
|
|
|
Other Assets, net:
|
|
|
GOLDn GRO Fertilizer
|
104,552
|
108,318
|
Mining Technical Services
|
3,483
|
3,483
|
|
108,035
|
111,801
|
|
|
|
Total Assets:
|
|
|
GOLDn GRO Fertilizer
|
3,935,045
|
3,910,984
|
Mining Technical Services
|
101,260
|
102,369
|
Total Segment Assets
|
4,036,305
|
4,013,353
|
Itronics Inc. assets
|
29,666,753
|
28,787,327
|
Less: inter-company
elimination
|
(29,409,750)
|
(28,444,812)
|
Consolidated Assets
|
$4,293,308
|
$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 September 30, 2008 and December 31, 2007.
No gains or losses were reclassified out of accumulated other comprehensive income into
earnings during the three and nine months ended September 30, 2008. No losses were
reclassified out of accumulated other comprehensive income into earnings during the three
and nine months ended September 30, 2007. The table below illustrates the amount of
22
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
unrealized holding gains and losses included in other comprehensive
income, net of tax effects of $0. The reclassification adjustment, if any, listed in the
below table represents unrealized holding gains and losses transferred into earnings as
securities are sold.
Following are the components of Other Comprehensive Income:
|
Three Months Ended Sept 30,
|
Nine Months Ended Sept 30,
|
|
2008
|
2007
|
2008
|
2007
|
|
|
|
|
|
Unrealized holding gains
(losses)
|
|
|
|
|
arising
during the period
|
$ -
|
$ -
|
$ -
|
$ 2,246
|
Reclassification
adjustment
|
-
|
(3,115)
|
-
|
(2,246)
|
Other Comprehensive Income
(Loss)
|
$ -
|
$(3,115)
|
$ -
|
$ -
|
Following is a summary of gross proceeds and gains and losses from sales of available
for sale marketable securities
:
|
Three Months Ended
|
Nine Months Ended
|
|
September 30,
|
September 30,
|
|
2008
|
2007
|
2008
|
2007
|
Gross
proceeds from sale of securities
|
$ -
|
$ 35,870
|
$ -
|
$142,088
|
Gross
gains from sale of securities
|
$ -
|
$ -
|
$ -
|
$ 7,718
|
Gross
losses from sale of securities
|
-
|
(3,983)
|
-
|
(3,983)
|
Net Gains (Losses) from
sale of Securities
|
$ -
|
$(3,983)
|
$ -
|
$3,735
|
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 that 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
carrying amounts reported in the balance sheets for long term debt obligations with no
equity component that qualify as financial instruments are a reasonable estimate of fair
value as the instruments have current market interest rates. The three levels are defined
as follow:
23
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
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.
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 Series 2000 convertible debt derivatives are carried
at fair value totaling $153,462 and $-0- as of September 30, 2008 and December 31, 2007,
respectively. The Companys callable secured convertible debt derivatives are carried
at fair value totaling $15,572,704 and $13,003,762, as of September 30, 2008 and December
31, 2007, respectively. The Company carries its warrant and option liability at fair value
totaling $520,852 and $231,224 as of September 30, 2008 and December 31, 2007,
respectively. The Company used Level 2 inputs for its valuation methodology for the Series
2000 convertible debt derivatives, the callable secured convertible debt derivatives, and
the warrant and option liability.
|
|
Fair Value As of
Sept 30, 2008
|
Fair Value
Measurements at Sept. 30, 2008 Using Fair Value Hierarchy
|
Liabilities
|
|
|
Level 1
|
Level 2
|
Level 3
|
Series 2000 convertible debt derivatives
|
$
|
153,462
|
|
$
153,462
|
|
Callable secured convertible debt derivatives
|
$
|
15,572,504
|
|
$15,572,504
|
|
Warrant and option liability
|
$
|
520,852
|
|
$
520,852
|
|
|
|
|
|
|
|
The Company recognized gains (losses) of the respective components of
the derivative instruments of $-0-, $(2,140,551) and $32,565, respectively, for the nine
months ended September 30, 2008.
24
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
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.
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 $493,908 for the quarter ended
September 30, 2008, compared to $541,953 for the prior year quarter, a decrease of 9%. The
decrease was primarily due to prior year Photochemical Silver Concentrator sales of
$164,500. A similar amount of sales will be reported in the fourth quarter of 2008.
Excluding those sales from prior year amounts results in an increase of $116,500, or 31%
in total sales. Consolidated net loss was $5,957,269, or $0.004 per share, for the quarter
ended September 30, 2008, compared to net income of $544,325 or $0.001 per share for the
comparable 2007 period, an increased loss of $6,501,600. The significant change from a
profit to a loss is due to a loss on derivatives of $4,624,200 compared to a gain of
$1,762,900 for the prior year quarter.
Consolidated revenues for the first nine months of 2008 were $2,410,902
compared to $1,916,393 for the prior year period, an increase of 26%. Excluding the
Photochemical Silver Concentrator sales from the prior year amount results in an increase
of 38%. Consolidated net loss was $4,763,275, or $0.004 per share, for the nine months
ended September 30, 2008, compared to a net loss of $1,159,645 or $0.003 per share for the
comparable 2007 period, an increased loss of
25
$3,603,600. The increased loss is due to a loss on derivatives of
$2,108,000 compared to a gain of $1,594,200 for the prior year period.
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 Sept 30,
|
Nine Months Ended Sept 30,
|
|
2008
|
2007
|
2008
|
2007
|
Revenues
|
|
|
|
|
Fertilizer
|
$ 360,288
|
$ 239,965
|
$
1,920,731
|
$
1,398,902
|
Photochemical services
|
$ 40,911
|
$ 206,265
|
$
112,229
|
$
294,243
|
Silver
|
$ 70,925
|
$ 87,394
|
$
268,943
|
$
208,291
|
Total Revenue
|
$ 472,124
|
$ 533,624
|
$
2,301,903
|
$
1,901,436
|
Gross profit (loss)
|
$ (6,637)
|
$ 17,333
|
$
383,431
|
$
150,405
|
Operating income (loss)
|
$ (732,989)
|
$(671,486)
|
$(1,207,999)
|
$(1,602,101)
|
Other income (loss)
|
$(5,083,096)
|
$1,423,419
|
$(3,153,772)
|
$
868,858
|
Net income (loss) before
taxes
|
$(5,816,085)
|
$ 751,933
|
$(4,361,771)
|
$
(733,243)
|
Total segment revenues for the third quarter of 2008 were approximately
$472,100, a decrease of 12% from the third quarter of 2007. Total fertilizer sales for the
quarter were $360,300 (315 tons), compared to $240,000 (317 tons) for the 2007 third
quarter, an increase of 50% in dollars and a nominal decrease in tonnage. Sales of bulk
Chelated Liquid Micro-nutrients were $296,800 (237 tons) and $185,000 (200 tons) for the
third quarter of 2008 and 2007, respectively, an increase of 60% in dollars and 18% in
tonnage. Sales of bulk Chelated Liquid Multi-nutrients were $42,000 (70 tons) and $49,000
(115 tons) for the third quarter of 2008 and 2007, respectively, a decrease of 14% in
dollars and 40% in tonnage. A new Chelated Secondary Nutrient product was introduced in
the second quarter of 2006. Sales of this product were $16,000 (8 tons) and $1,900(1 tons)
for the third quarter of 2008 and 2007, respectively, an increase of 742% in dollars and
500% in tonnage. The overall increase in sales was due to price increases. Total
photochemical services revenue for the quarter decreased $165,400 due primarily to prior
year Photochemical Silver Concentrator sales totaling $164,500. A similar sale was
completed early in the fourth quarter of 2008. Excluding those sales, photochemical
service revenue declined nominally on a 6% increase in volume. Silver sales were $70,900
(4,972 ounces) for the quarter, compared to $87,400 (6,337 ounces) for the prior year
third quarter, a decrease of 19% in dollars and 22% in ounces. The decrease is
attributable to a decline in ounces sold of both silver bullion and film.
Cost of sales decreased $37,500 due primarily to a decline of $109,000
in raw materials costs resulting from prior year Photochemical Silver Concentrator sales.
This decrease was partially offset by increases of $45,600 in fertilizer raw materials
costs resulting from increased sales and payroll costs of $13,200. The segment recorded a
gross loss of $6,600 for the quarter, compared to a gross profit of $17,300 for the third
quarter of 2007, a decreased gross profit of $24,000. Excluding the gross profit of
$55,500 resulting from the prior year Photochemical Silver Concentrator sales, gross
profit for the third quarter of 2008 would be improved by $31,500, or 83%.
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
26
Photochemical Silver Concentrator and it was delivered in July 2007.
During the second quarter of 2008 we received another order from the same customer.
Delivery was made early in the fourth quarter. Between August 2006 and April 2007, we
obtained three new significant wholesale customers. In April and October 2008 we obtained
two additional significant wholesale customers. 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.
We anticipate that the new customers, along with our existing
suppliers, will provide sufficient raw material for fertilizer production for the 2009
fertilizer season and future years. We expect raw material needs to be met well into the
future because these customers have national collection services and we believe we will be
able to expand supply of photo liquids as fertilizer demand grows.
Segment operating expenses increased $37,500 from the third quarter of
2007. This was due to $321,500 in stock option compensation related to a one time option
grant to members of management to compensate them for their unpaid salary and cash loans.
This increase was partially offset by decreases of $219,200 in sales and marketing
expenses related primarily to decreased corporate marketing and $67,000 in general and
administration costs due primarily to reduced outside consulting services.
These factors resulted in a 2008 third quarter segment operating loss
of $733,000 compared to a loss of $671,500 for the third quarter of 2007, an increased
operating loss of $61,500, or 9%. Excluding the non-recurring, non-cash option
compensation expense of $321,500, the operating loss would be $411,500, which would be an
improvement of $260,000 or 39%.
Other income (expense) was an expense of $5,083,100 for the quarter,
compared to other income of $1,423,400 for the 2007 third quarter, an increased expense of
$6,506,500. The increase in other (expense) is due primarily to a swing in gain (loss) on
derivative instruments from a gain of $1,762,900 in the prior year third quarter to a loss
of $4,624,200 in the current third quarter, an increased loss of $6,387,100. The gain or
loss on derivatives is related to our callable secured convertible debt, 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.
The changes in operating loss and other income (expense) resulted in a
segment net loss before taxes of $5,816,100 for the quarter ended September 30, 2008,
compared to segment net income before taxes of $751,900 for the prior year quarter, an
increased loss of $6,568,000.
For the first nine months of 2008, segment revenues were $2,301,900,
compared to $1,901,400 for the comparable 2007 period, an increase of 21%. The increase is
due to increases in fertilizer and silver revenues. Gross profit for the first nine months
of 2008 was $383,400, compared to $150,400 for the comparable prior year period, an
improvement of 155%. Operating loss for the first nine months of 2008 was approximately
$1,208,000 compared to $1,602,100 for the first nine months of 2007, a reduced operating
loss of $394,100, or 25%. Excluding the non-recurring, non-cash option compensation
expense of $321,500, the operating loss would be $886,500, which would be an improvement
of $715,600 or 45%.
27
Other income (expense) was an expense of $3,153,800 for the first nine
months of 2008, compared to other income of $868,900 for the comparable 2007 period, an
increased loss of $4,022,600. The decline is primarily due to a change from a gain to a
loss on derivative instruments totaling $3,702,100. The gain or loss on derivatives is
related to our callable secured convertible debt, 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.
The changes in operating loss and other expenses resulted in a segment
net loss before taxes of $4,361,800 for the nine months ended September 30, 2008, compared
to segment net loss before taxes of $733,200 for the prior year period, an increased loss
of $3,628,500.
MINING TECHNICAL SERVICES
|
Three Months Ended Sept 30,
|
Nine Months Ended Sept 30,
|
|
2008
|
2007
|
2008
|
2007
|
Revenues
|
$ 21,784
|
$ 8,329
|
$
108,999
|
$ 14,957
|
Gross profit (loss)
|
$ 2,031
|
$ (1,909)
|
$
37,328
|
$ (11,011)
|
Operating income (loss)
|
$(141,184)
|
$(203,784)
|
$(401,504)
|
$(569,120)
|
Other income (expense)
|
-
|
$ (3,824)
|
-
|
$ 142,718
|
Net income (loss) before
taxes
|
$(141,184)
|
$(207,608)
|
$(401,504)
|
$(426,402)
|
Mining technical services revenue was $21,800 for the quarter ended
September 30, 2008, compared to $8,300 for the comparable quarter of 2007, an increase of
162%. The increase came from one technical services project during the quarter. Cost of
sales increased $9,500, due to an increase in pass-through costs, which were related to
the technical services project discussed above. These factors resulted in a third quarter
gross profit for the segment of $2,000 compared to a gross loss of $1,900 for the prior
year third quarter, an improvement of $3,900.
The Whitney & Whitney, Inc. reduced emphasis on technical
consulting services and launch of 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 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 September 30, 2008 and 2007 we allocated costs of
approximately $48,400 and $60,900, 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 fourth 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 are
presently evaluating the steps we need to take to improve the revenue growth from the
website.
28
Total segment operating expenses for the third quarter of 2008
decreased $58,700, due primarily to decreased sales and marketing costs related to
corporate marketing and to the insidemetals.com website discussed above and to decreased
research and development costs related to the insidemetals.com website.
The combination of these factors resulted in a 2008 third quarter
segment operating loss of $141,200, compared to an operating loss of $203,800 for the
third quarter of 2007, a decreased operating loss of $62,600, or 31%.
Other income (expense) for the third quarter of 2008 was $-0- compared
to a loss of $3,800 for the prior year third quarter. The prior year loss was from the
sale of stock received in an exchange of our 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 $141,200 for the quarter ended September 30, 2008, compared to a
loss of $207,600 for the prior year quarter, a decreased loss of $66,400, or 32%.
For the first nine months of 2008, segment revenue totaled $109,000
compared to $15,000 for the first nine months of 2007, an increase of 629%. This is
primarily attributable to new technical services projects. Gross profit for the first nine
months of 2008 was $37,300, compared to a gross loss of $11,000 for the comparable prior
year period, an improvement of $48,300. Operating loss for the period was $401,500
compared to an operating loss of $569,100 for the comparable 2007 period, a decreased
operating loss of $167,600, or 29%.
Other income (loss) for the first nine months of 2008 was $-0- compared
to a gain of $142,700 for the prior year period. The prior year gain was due to the sale
of a membership interest in the Companys workers compensation mutual insurance
company.
The changes in operating loss and other income resulted in a segment
net loss before taxes of $401,500 for the nine months ended September 30, 2008, compared
to a net loss of $426,400 for the prior year period, a decreased loss of $24,900, or 6%.
SUMMARY
On a consolidated basis, the various changes in revenues and operating
expenses resulted in a third quarter 2008 operating loss of $874,200, compared to $875,300
for the third quarter of 2007, a nominal decreased operating loss. Excluding the
non-recurring, non-cash option compensation expense of $321,500, the operating loss would
be $552,700, which would be an improvement of $322,600 or 37%. Net income (loss) before
taxes for the third quarter 2008 was a loss of $5,957,300 compared to a net income before
taxes of $544,300 for the prior year third quarter, an increased loss of $6,501,600. The
decrease is primarily due to a change from a gain to a loss on derivatives totaling
$6,387,100. For the nine month period ended September 30, 2008 consolidated operating loss
was $1,609,500 compared to $2,171,200 for the prior year comparable period, a decreased
operating loss of $561,700, or 26%. Excluding the non-recurring, non-cash option
compensation expense of $321,500, the operating loss would be $1,288,000, which would be
an improvement of $883,200 or 41%. Net income (loss) before taxes for the nine months
29
ended September 30, 2008 was a net loss of $4,763,300 compared to a net
loss before taxes of $1,159,600 for the prior year nine month period, an increased loss of
$3,603,600.
Changes in Financial Condition; Capitalization
Cash amounted to $-0- as of September 30, 2008, compared to $20,300 as
of September 30, 2007. Net cash used for operating activities was approximately $691,100
for the first nine months of 2008. The cash used for operating activities during the
period was financed by net proceeds of $500,000 from the issuance of callable secured
convertible notes, less $43,800 in debt issuance costs, proceeds from the sale of stock of
$95,000, loans totaling $64,000 from officer/stockholders, and increases in current
liabilities of $148,900 in accounts payable, $224,000 in management salaries, $169,300 in
accrued expenses, and $189,000 in accrued interest.
Total assets decreased $62,600 during the nine months ended September
30, 2008 to $4,293,300. Current assets increased $139,900 due to increases in accounts
receivable of $35,100 and inventory of $175,000. These increases were partially offset by
a decrease in cash of $93,000. Inventory increased primarily due to the accumulation of
silver contained in photographic wastes received from our customers. Net property and
equipment decreased $119,900 due to current period depreciation and amortization. Other
assets decreased $82,500 due to amortization of deferred loan fees related to the callable
secured convertible note financing.
Current liabilities increased during the nine months ended September
30, 2008 by $3,091,400 and total liabilities increased by $3,338,300. The increase is
primarily due to an increase of $2,568,900 in the estimated fair value of derivative
instruments. The major components of this increase include $520,000 in new convertible
debt borrowing, $423,400 in accrued interest, conversions to common stock of $515,000 and
a net increase in estimated fair value of derivative instruments of $2,140,600. The
increase in estimated fair value of the derivative instruments is primarily due to a
decreased stock conversion price at September 30, 2008 compared to December 31, 2007. The
current stock price used in the Black-Scholes model used to compute estimated fair value
was $0.0018 at September 30, 2008 and $0.0026 at December 31, 2007. The conversion price
used in the same computation was $0.0004 and $0.0007 for September 30, 2008 and December
31, 2007, respectively. The decreased stock conversion price resulted in an increase in
the number of shares needed to convert the callable secured convertible debt from
6,450,658,596 common shares at December 31, 2007 to 11,147,296,302 common shares at
September 30, 2008.
Other changes in current liabilities include increases of, $144,700 in
accounts payable, $71,900 in accrued expenses, $155,300 in interest payable to
officer/stockholders, $60,500 in current maturities of long-term debt, and $81,100 in
other liabilities. These increases were partially offset by decreases of $216,000 in
accrued management salaries and $79,300 in current maturities of capital lease
obligations. Accrued management salaries decreased due to the conversion of $440,000 of
unpaid salary into common stock to be issued when sufficient cash is available to pay the
associated payroll taxes.
Long term liabilities increased by $246,900 due primarily to the
reclassification out of current liabilities of $329,100 in Series 2000 convertible notes
that was extended as discussed in Note 5 to the financial statements.
30
Liquidity and Capital Resources
During the nine months ended September 30, 2008, working capital
declined by $2,951,500 to a deficit balance of $21,793,700. 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 nine months of 2008, we obtained financing of $520,000 from the issuance
of callable secured convertible debt. These funds provided for a portion of our working
capital needs until the latter half of August 2008. Subsequent to September 30, 2008, we
entered into litigation with the investors in the callable secured convertible debt.
Consequently, further funding from this source is not anticipated.
In September 2008 we began a private placement of common stock or
convertible debt to raise $5 million. $95,000 in common stock was received through
September 30, 2008. The investor has the option to receive common stock at 80% of the
market price per share (calculated at the average of the five closing bids prior to the
investment) or convertible debt payable quarterly in common stock over three years for
investments up to $1 million and 5 years for investments exceeding $1 million. The payment
stock price is the greater of the average of the closing bid price for the five days
before the payment, less 15% for investments up to $1 million and 18% for investments
exceeding $1 million or $0.0015 per share. Interest at 9% compounded annually accrues on
the principal and accrued interest.
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
updated 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
31
invoices. As of September 30, 2008, no factored inventory and
receivables were outstanding.
We are 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
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, automation of
certain manufacturing functions, and expansion of silver refining capacity in two stages.
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.
32
b. Bulk Field Crops which include alfalfa, cereal grains, corn, cotton,
and soybeans.
c. The Urban Market, which includes Home Lawn and Garden, Landscape
Construction and Maintenance, and Nursery and Greenhouse markets, and Golf Courses.
Our primary focus is to increase bulk GOLDn GRO liquid fertilizer
sales as rapidly as possible. This is being achieved by expanding sales in the Specialty
Agriculture segment and in the Bulk Field Crops segment. There are on-going small package
sales in the Urban Market, but these are small relative to the other two segments.
In the second quarter 2008 the parent company of our distributor
acquired a major competitor. Early in the third quarter the parent company disclosed plans
to integrate the acquired company and its retail outlets into its existing retail
distribution system. Prior to the acquisition our distributor and its sister subsidiaries
had more than 500 retail outlets nationwide. After the merger there are more than 800
retail outlets nationwide.
Our distributor, which sells the GOLDn GRO fertilizers in
Arizona, California, Hawaii, Idaho, Oregon, and Washington, is acquiring new retail
outlets in those states. The increase in the number of retail outlets is expected to
contribute to further increases in GOLDn GRO sales in the fourth quarter of this
year and in 2009. Consideration is being given to putting the GOLDn GRO products
into a national sales program operated by a subsidiary of the acquired company. While a
commitment has not been made, we have received inquiries from some of the newly acquired
retail outlets in the southern and eastern U.S. about the availability of the GOLDn
GRO fertilizers, and GOLDn GRO Guardian Deer Repellent. The Company believes that
moving the GOLDn GRO product line into a national sales program could have a major
positive impact on the growth of GOLDn GRO fertilizer sales.
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 continuing to assist with field trials being performed by our
distributors agronomy personnel in Utah and California. We are supporting field
trials for GOLDn GRO Guardian with potential distributors in several states
beginning in the third quarter 2008.
In the fall of 2007 we began a field evaluation of using GOLDn
GRO 10-0-1+3% Manganese as a manganese fertilizer that could be applied as a spray tank
mix with glyphosate(Round Up) on "Round Up" ready corn. This is important
because most manganese fertilizers are not compatible with glyphosate in spray tank mixes.
The GOLDn GRO fertilizer was found to be compatible and no phyto-toxicity to the
corn plants was experienced. The grower was pleased with the trial results. Subsequent to
that, in the first half 2008, the Company has been working with a fertilizer raw material
supplier who has put out trials on "Round Up Ready" soybeans in several states.
Results have not yet been reported, but the supplier has an extensive nationwide
33
distribution system and is fully capable of introducing the GOLDn
GRO fertilizer in relevant markets in the mid-west and southern United States where
soybeans are a major crop.
If the GOLDn GRO 10-0-1+3% Manganese proves to work with
glyphosate for spray application on "Round Up Ready" soybeans, then three large
acreage markets will become available for sales development. These are: (1) "Round Up
Ready" sileage corn, (2) "Round Up Ready corn for grain, and (3) "Round Up
Ready" soybeans. The bulk of acreage for these crops is in the mid-west and southern
areas of the United States. There is typically one crop per year, and the demand would be
highly seasonal on a relatively large scale, and pre-season manufacturing of product
inventory would be required.
During the past two years our agronomy staff has been conducting
literature research specific to phosphorous availability and the related availability of
nutrient metals that are placed in the soil by fertilization. The objective of this
research is to establish a theoretical foundation that explains why components of the
demetallized photoliquids used to make the GOLDn GRO liquid fertilizers are
beneficial when applied. The research has identified many studies that have been conducted
relevant to this chemistry. The outcome is that the unique chemistry found in the
GOLDn GRO fertilizers is beneficial when applied to the soil by improving the
availability of phosphorous and the nutrient metals, including iron, zinc, manganese,
calcium, and magnesium. A related benefit is that residuals, to the extent they occur, are
used as a nutrient source by soil microbes producing essentially complete use of the
fertilizers. The main benefit of this nutrient technology is expected to be an ability to
reduce the amount of fertilizer applied, while maintaining adequate nutrient levels in the
crops being fertilized.
The other benefit of GOLDn GRO liquid fertilizer chemistry that
is being identified is that it is making it possible to use phosphate-bearing fertilizer
liquids in fertigation applications in locations that have hard water where this is not
normally possible.
At a time in history when fertilizer prices, especially for phosphate,
are rising sharply, the ability to improve the availability of phosphorous and nutrient
metals in the soil has significant positive economic and environmental benefits.
These developments with their associated economic and environmental
benefits are expected to lead to expanded use of the GOLDn GRO liquid fertilizers
for fertigation applications on a number of crops, and to increase the use of the
fertilizers with phosphate applications on many different crops.
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. 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
34
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 requires 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.
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.
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 are marketing one type of fertilizer
injector to our "e" store, which is the first step into this market.
Additionally, fertilizer injectors are available to consumers through irrigation supply
stores.
4.
Expand the GOLD'n GRO specialty fertilizer product line.
We are introducing 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 both fertilizers in Nevada and California.
We are working with our distributors in California to introduce a new
chelated micronutrient fertilizer which is GOLDn GRO 9-0-0 Iron Man Z. This
fertilizer is being targeted to the turf and ornamental market and for use on vegetables,
trees, and vines. Addition of this fertilizer to the GOLDn GRO line of chelated
micronutrients fills a nutrient gap and was generated by customer requests for such a
product. The Company is now offering five chelated micronutrient fertilizers for sale. The
GOLDn GRO product line now includes a total of 13 liquid multi-nutrient fertilizers.
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.
35
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. An amendment to this label that allows use with GOLDn GRO
8-8-8+4%S fertilizer was received in September 2008. Use with the fertilizer makes the
product systemic so that the treatment lasts more than 8 weeks and does not wash off in
the rain.
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 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. 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.
State Registration
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. To date, our registration applications have been
approved in Nevada, Utah, Rhode Island, Colorado, Massachusetts, New Jersey, Maryland,
Alabama, Delaware, and Pennsylvania.
36
The Company is actively working on GOLDn GRO Guardian packaging
for early customer use. It is also qualifying potential distributors in the states where
registration has been received. The amount of GOLDn GRO Guardian Deer Repellent that
can be sold under the first label registration is limited. Based on interest being
expressed in the product, the Company believes that it could quickly move into a
"sold out" position on the product until the second registration is completed.
Because of this, we are selecting as initial distributors, the companies that appear to
have the best long term potential to grow when more supply becomes available. Also because
of this, the Company plans to only focus on licensed landscape maintenance companies that
have licensed spray divisions as initial customers, along with tree and decorative plant
nurseries in those states in which we are registering the product.
During the third quarter of 2008 several shipments of one-gallon spray
kits have been made to qualified Landscape Maintenance businesses that are licensed for
spraying pesticides in states where GOLDn GRO Guardian Deer Repellent is registered.
Reports from trials underway indicate the spray applications are exceeding expectations.
In one trial, the leaves of sprayed and unsprayed trees were tested about six weeks after
application and the leaves of the sprayed trees were appropriately bitter. In another
trial, the customer reported satisfaction with the first application and is purchasing
more spray kits. In a third trial, the customer reported no evidence of deer damage in the
sixth week after application and has ordered more spray kits, and is expanding its
evaluation and testing program.
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 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.
37
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 installation of the new load out tanks during the
first half of 2009, subject to the availability of financing. The estimated capital
required for this project is $400,000.
Planning is underway to increase our silver refining capacity in two
stages, from 24,000 troy ounces per year to 2.4 million troy ounces annually, a 100 times
increase. Production at capacity with $10 per troy ounce silver would increase silver
sales from $240,000 per year to $24 million.
Stage 1 involves installing a new leaching circuit in 2009 which will
reduce the amount of solids delivered to the refining operation by 90 percent, while at
the same time producing even cleaner liquid raw materials for GOLDn GRO fertilizer
manufacturing. Stage 2 is to install a new modular melting system in 2010 which will
reduce melt cycle times, reduce cost, and increase physical capacity by up to 10
times.
Stage 1 will increase the per melt capacity of the refining operation
by 10 times with no increase in per melt cost. This produces a 90 percent reduction
of the per melt cost of each ounce of silver produced. Stage 2, installation of the
new melting system, will further reduce the per melt cost and substantially increase
operational efficiencies. This two stage capacity expansion will not only reduce
direct operating costs, but will also reduce "in process inventories" which will
reduce working capital requirements and improve the rate of inventory turnover, major
financial benefits to the Company and its shareholders.
The increase in silver refining capacity will require related expansion
and improvement of materials handling capabilities at our facility. We are estimating that
each of the two stages of expansion can be completed for $500,000, for a combined capital
investment of $1 million. Each installation is expected to take about 8 months to
complete. This relatively modest investment is made possible because we already have two
permitted locations within the facility for these new operations.
During the second quarter, we completed pilot leach tests which show
that the leach process we are developing will increase per melt refining capacity by up to
10 times and reduce per ounce refining cost up to 90 percent.
A silver-iron-zinc-sulfur concentrate is presently produced by our
photoliquid demetallization process. The concentrate is dried and sent to the refinery for
silver recovery, refining, and sale. The concentrate has a relatively low silver content
in relation to the iron and sulfur. Presently some of the iron and zinc goes into a glass
slag and some of the iron and zinc combines with the sulfur to form an "iron
matte," which has some silver in it and which must be reprocessed to recover the
remaining silver.
The purpose of the new technology is to remove the iron, zinc, and the
sulfur from the concentrate to reduce the amount of concentrate sent to the refinery, and
to reduce the amount of glass slag and iron matte produced by the refinery. The expected
financial benefits of the
38
process are to: (1) increase per melt silver refining capacity by up to
10 times with no increase in per melt cost by reducing the amount of silver concentrate
sent to the refinery by up to 90 percent; (2) reduce waste by producing an iron-zinc
bearing liquid (Itromet FeLix Process), and a sulfur bearing liquid (Itromet SuLix
Process) that can be used as raw materials in GOLDn GRO fertilizers.
Small pilot scale leaching tests conducted in the first half of 2008
are producing a recovery of iron and zinc of more than 85 percent and up to 90 percent of
the contained sulfur. The bulk volume of the residual silver bearing solids is reduced by
up to 90 percent. The residual solids contain all of the silver along with other
non-nutrient impurities. With a 90 percent reduction in bulk volume, the melting furnace
will now be able to produce up to 10 times more silver with each melt, at no increase in
cost. The other positive outcome is that the iron, zinc, and sulfur content in the
produced liquids is high enough to work well for GOLDn GRO fertilizer manufacturing.
This will help stabilize some of our fertilizer raw material costs once it is implemented.
We are now working on the Stage 1 leach plant design, preparing a
capital budget, and a construction schedule. We project the leach plant can be built
within eight months after obtaining capital funding, which is estimated at $380,000.
Related improvements in the refinery will add another $120,000 for a total budget of
$500,000.
We have identified several other potential applications where the FeLix
and SuLix processes could reduce processing costs and reduce waste by profitably
converting material presently being wasted into commercial products:
Processing steel wool (ion exchange) cartridges which are widely used
in the United States to perform on site silver removal from photographic liquids at user
sites where hauling is not required. Both iron and silver would be recovered. This is a
large source of iron and photo silver.
Processing the cores of non-mercury bearing silver batteries to recover
zinc and silver.
Processing the cores of non-mercury bearing alkaline batteries to
recover zinc and manganese.
Processing flue dusts produced by steel mills to recover zinc and iron.
This is a potentially large future use.
Processing of concentrates produced by certain silver-zinc mines. While
this would require more application development work to match the processes to specific
concentrates, its potential is huge.
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.
39
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. These efforts resulted in two
consulting projects during the first nine months of 2008. One project has been completed
and has a small potential for future services, and the other project may resume and
continue for two to three months. Resumption of this work is subject to the client
obtaining additional financing.
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.
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.
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.
40
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 September 30, 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
small size, we have ineffective segregation of duties relative to key financial reporting
functions. Additionally, only one person in our 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 September 30, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
41
PART II- OTHER INFORMATION
Item 1. Legal Proceedings
On October 10, 2008, we received a Notice of Default from AJW Partners,
LLC, New Millenium Capital Partners II, LLC, AJW Offshore, Ltd., AJW Qualified Partners,
LLC, and AJW Master Fund, Ltd. (collectively, the "plaintiffs"), claiming that
we were purportedly in default of certain obligations under the Companys notes
issued to the plaintiffs. On October 16, 2008 the plaintiffs filed suit against the
Company and its subsidiaries in the Supreme Court of the State of New York alleging a
breach of contract and other claims concerning certain agreements the Company has with
those parties. The suit seeks in excess of $5,000,000. We plan to vigorously defend these
allegations and assert various counter-claims that it has against those plaintiffs.
As of September 30, 2008 we have accrued for liabilities, including
interest, of $561,972 which relate to various lawsuits and claims for the collection of
the funds due. These include 8 leases totaling $366,025 (reflected in Capital Lease
Obligations) plus $73,835 in additional interest (reflected in Accrued Interest) and one
trade payable totaling $85,801 (reflected in Accounts Payable) plus $36,311 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 September 30, 2008, the recorded liability
for these cases was $162,795. 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.
Item 2. Unregistered sales of Equity Securities and Use of Proceeds
(a) Recent Sales of Unregistered Securities:
In September 2008, we issued an aggregate of 63,333,333 shares of
common stock valued at $95,000 to John W. Whitney, our President, upon conversion of cash
loans previously made to the Company and its subsidiaries. In September 2008 we also
issued an aggregate 16,666,666 shares of common stock valued at $25,000 to Dr. Whitney for
a cash investment made in the current Private Placement. The price of $0.0015 used for
both of these issuances is the price presently being offered in a Private Placement to
accredited investors. Dr. Whitney has an additional $108,025 in loans to the Company that
he may convert into the Private Placement at the price of $0.0015 as long as it is in
effect under those terms.
On September 26, 2008 employees listed in the table below were granted
a ten year option to acquire the below listed shares at $0.002 per share. The options
became effective on September
42
30, 2008 and vested immediately. The number of options granted was
based on the individuals deferred salary and principal amount of loans as of
September 30, 2008 and was calculated at 100,000 shares for each $1,000 of deferred salary
and loan principal. This is the same calculation being used to determine the number of
warrants to be issued to holders of the Series 2000 convertible debt that is currently
being offered to the Noteholders to restructure their Notes. In addition, these employees
can convert their deferred salary, loans, or accrued interest into common stock at the
closing trade price on the date of conversion. Issuance of shares due upon conversion of
deferred salary will be delayed pending the Company receiving adequate funds to pay the
related payroll taxes. The amounts of deferred salary that were converted as of September
30, 2008 are included in the following table:
|
|
Deferred
|
|
|
|
|
|
Salary
|
No. of
|
Deferred
|
|
|
|
and
|
Options
|
Salary
|
No. of
|
|
Position
|
Loans
|
Granted
|
Converted
|
Shares
|
John W.
Whitney
|
President
|
$1,006,341
|
100,634,123
|
$120,000
|
66,666,666
|
Duane
Rasmussen
|
Former Vice
|
652,500
|
65,250,000
|
250,000
|
138,888,888
|
|
President
|
|
|
|
|
Michael
Horsley
|
Controller
|
288,100
|
28,810,000
|
70,000
|
38,888,888
|
|
|
$1,946,941
|
194,694,123
|
$440,000
|
244,444,442
|
In October 2008, we issued an aggregate of 375,000 shares of common
stock valued at $1,500 to John W. Whitney, our President, as compensation for services
performed on our behalf in his capacity as a director of our Company for the second
quarter of 2008
In October 2008, we issued an aggregate of 10,000 shares of common
stock valued at $40 to one of our employees as compensation for services performed on our
behalf in his capacity as an employee of our Company for the second quarter of 2008.
We issued options to purchase an aggregate of 25,000 shares of common
stock to one of our employees in August 2008. The options are exercisable at $0.20 per
share and expire in ten years from grant.
In late September 2008, the Company began offering an extension and
payoff plan to the holders of Series 2000 Convertible Notes and other similar outstanding
Notes. The plan includes paying the principal and accrued interest in equal quarterly
payments with common stock over approximately 17 quarters. The number of shares for each
payment will be determined based on the average of the closing bid price for the five
trading days preceding the payment or $0.0015, whichever is higher. In addition, the
Noteholders will receive one year warrants to acquire restricted common stock at $0.005
per share, with the number of warrants to be calculated at 100,000 shares per $1,000 of
Note principal in exchange for extending the Notes and for reducing the interest rate from
12% to 6%. As of September 30, 2008 the principal amount of the Notes was $1,437,000 and
the accrued interest was $2,379,135, for a combined total of $3,816,135. If all the
Noteholders accept the plan, the number of common shares to be
43
acquired by exercising the warrants is 143,700,000, which will provide
gross proceeds to the Company of $718,500.
As of October 1, 2008, Noteholders with $210,000 in principal and
$308,038 in accrued interest, or a total of $518,038, have accepted the plan.
The first quarterly payment to these Noteholders was made in early
October 2008 and totaled 20,000,000 common shares in payment of $33,600 in Note principal.
In July 2008, we issued an aggregate of 49,790,000 common shares to
four accredited investors upon the conversion of $49,790 in callable secured convertible
notes.
In July 2008, we issued an aggregate of 26,000,000 common shares to
four accredited investors upon the conversion of $18,200 in callable secured convertible
notes.
In July 2008, we issued an aggregate of 26,000,000 common shares to
four accredited investors upon the conversion of $17,160 in callable secured convertible
notes.
In July 2008, we issued an aggregate of 10,000,000 common shares to
four accredited investors upon the conversion of $6,400 in callable secured convertible
notes.
In July 2008, we issued an aggregate of 45,013,000 common shares to
four accredited investors upon the conversion of $28,808 in callable secured convertible
notes.
In July 2008, we issued an aggregate of 55,013,900 common shares to
four accredited investors upon the conversion of $33,558 in callable secured convertible
notes.
In July 2008, we issued an aggregate of 55,013,900 common shares to
four accredited investors upon the conversion of $30,258 in callable secured convertible
notes.
In August 2008, we issued an aggregate of 55,013,900 common shares to
four accredited investors upon the conversion of $23,656 in callable secured convertible
notes.
In August 2008, we issued an aggregate of 75,439,500 common shares to
four accredited investors upon the conversion of $30,176 in callable secured convertible
notes.
In August 2008, we issued an aggregate of 75,439,500 common shares to
four accredited investors upon the conversion of $24,141 in callable secured convertible
notes.
On August 6, 2008, the Company entered into a Securities Purchase
Agreement with three accredited investors (the "Investors") for an aggregate
amount of (i) $210,000 in secured convertible notes, and (ii) warrants to purchase
20,000,000 shares of the Companys common stock (the "Financing"). The
Company anticipates that the proceeds of the Financing will be used to advance its eight
part business plan which was summarized in its press release issued by the Company on June
3, 2005. The Financing will provide working capital to expand GOLDn GRO
44
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 made in reliance upon an exemption from securities
registration afforded by the provisions of Section 4(2), Section 4(6) and/or Regulation D
as promulgated by the United States Securities and Exchange Commission under the
Securities Act of 1933, as amended.
The Financing was completed in one closing. The closing consisted of
gross proceeds of $210,000, less financing costs of $10,000, for net proceeds of $200,000.
The Investors received three year convertible notes (the
"Notes") bearing simple interest at 12% per annum. The Notes are convertible
into the Companys common stock at a price equal to the lesser of (i) $0.10 or (ii)
30% 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
20,000,000 common shares of the Company at a purchase price of $0.001 per share.
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.
The Company paid a finders fee of 8% of the net proceeds.
45
Additionally, the conversion discount rate on the new and all previous
Notes was increased from 65% to 70%, and the interest rate on the new and all previous
notes was increased to 12% retroactively to January 1, 2008.
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 were in default. The total principal and interest due at
September 30, 2008 is $3,816,135. In September 2008 the Company began a plan to extend the
Notes for four years and a day by offering to pay the principal and accrued interest with
common stock in 17 quarterly installments. The stock is priced at the greater of the
average of the five closing bids prior to the payment date or $0.0015 per share. In
addition, the interest rate is reduced from 12% to 6% and Noteholders agreeing to the
extension receive one year warrants to acquire 100,000 shares of common stock per $1,000
of original principal amount at an exercise price of $0.005 per share. If all the
Noteholders agree to the extension, warrants to acquire a total of 143,700,000 common
shares will be issued.
As of September 30, 2008 Noteholders holding a total of $444,299 in
principal and accrued interest extended their Notes and warrants to acquire 18,000,000
common shares were issued. Subsequent to September 30, 2008, principal and accrued
interest totaling $788,060 were extended and warrants to acquire 32,000,000 common shares
were issued. The Notes that have not been extended remain in default, but no collection
action has been taken.
The Companys mortgage loan on the manufacturing facility is in
default due to delinquent property taxes totaling $18,661. 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 $398,434, is included in current liabilities. In
addition, the Companys semi-annual payment on a City of Reno Special Assessment
District loan in the amount of $4,284 is delinquent. As a result, the entire principal
balance in the amount of $83,962 is included in current liabilities.
As of September 30, 2008 the Company owed $88,669 for federal payroll
taxes. $12,046 of this amount was paid subsequent to September 30, 2008. The Company is in
contact with the IRS and believes a payment arrangement can be made for the remaining
balance due. The IRS has filed
46
federal tax liens and may seize Company assets if satisfactory
arrangements cannot be made.
In addition to the above leases that are subject to litigation, there
are two leases, with a recorded liability of $107,007, 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.
Item 6. Exhibits
Exhibit 31.1 CERTIFICATION
OF PRINCIPAL EXECUTIVE AND FINANCIAL
OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT
OF 2002
49
Exhibit 31.2 CERTIFICATION
OF PRINCIPAL ACCOUNTING OFFICER PURSUANT
TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
51
Exhibit 32.1 CERTIFICATIONS
OF PRINCIPAL EXZECUTIVE AND FINANCIAL
OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT
OF 2002
53
Exhibit 32.2 CERTIFICATIONS
OF PRINCIPAL ACCOUNTING OFFICER PURSUANT
TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
54
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ITRONICS INC.
DATED:
November 14, 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:
November 14, 2008
By:
/S/JOHN
W. WHITNEY
John
W. Whitney
President
(Principal
Executive and Financial
Officer)
DATED:
November 14, 2008
By:
/S/MICHAEL
C. HORSLEY
Michael
C. Horsley
Controller
(Principal
Accounting Officer)
48
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