UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM l0-QSB

 

(Mark One)

(X) QUARTERLY REPORT UNDER SECTlON 13 OR 15(d) OF THE SECURITIES 

EXCHANGE ACT OF 1934

**                            Forthe quarterly period ended June 30, 2004**
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from______ to_____ 

 

Commission File Number 33-18582

 
**ITRONICS INC.**
(Exact name of small business issuer as specified in its charter)

 

                        TEXAS                                 75-2198369
           (State or otherjurisdiction of       (IRS Employer Identification Number)

             incorporationor organization) 

 

6490 S. McCarran Blvd., Bldg C-23, Reno, Nevada 89509

(Address of principal executive offices)

 

Issuer's telephone number, including area code: (775)689-7696
NO CHANGE

Former name, former address and former fiscal, if changes since lastreport.

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has been subject tosuch filing requirements during the past 90 days. Yes (x) No ( ).

 

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of commonequity, as of the latest practicable date:

       As of July 31, 2004, 143,737,665 shares of commonstock were outstanding.

Transitional Small Business Disclosure Format (Check one): Yes ( ) No (X)

2

 

ITRONICS INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 
PART I - FINANCIAL    INFORMATION
PAGEItem 1. Financial    StatementsCondensed Consolidated    Balance Sheets – June 30, 2004  and December 31,    2003 
4Condensed Consolidated    Statements of Operations and Comprehensive    Income for the Three and Six Months Ended 
  June 30, 2004 and 2003 
6Condensed Consolidated    Statements of Cash Flows for the  Six Months Ended    June 30, 2004 and 2003 
7Notes to Condensed    Consolidated Financial Statements 
8Item 2. Management's    Discussion and Analysis or Plan of  Operation 
13Item 3. Controls and    Procedures
23PART II- OTHER INFORMATIONItem 1. Legal Proceedings
24Item 2. Changes in    Securities and Use of Proceeds 
24Item 3 Defaults upon Senior    Securities
25Item 6. Exhibits and    Reports on Form 8-K 
25Certifications
28
3

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2004 AND DECEMBER 31, 2003

(UNAUDITED)

 

ASSETS
 
JUNE 30,
DECEMBER    31, 
2004
2003CURRENT ASSETS   Cash 
$ 21,475 
$ 34,499Accounts receivable, less    allowance for    doubtful accounts,    2004, $5,700; 2003, $5,700
167,526
96,384Marketable securities,    available for sale
133,306
413,240Inventories
529,896
425,525Prepaid expenses
96,168
53,073Current portion of deferred    loan fees
36,807
40,773Total Current Assets
985,178
1,063,494   PROPERTY AND EQUIPMENT   Land 
215,000
215,000Building and improvements
1,167,315
1,167,315Design and construction in    progress,     manufacturing    facility
100,371
102,203Equipment and furniture 
2,060,999
1,861,917Vehicles 
133,028
133,028Equipment under capital    lease 
1,078,265
1,076,687 
4,754,978
4,556,150Less: Accumulated    depreciation and amortization
1,522,333
1,383,307 
3,232,645
3,172,843OTHER ASSETS   Intangibles, net of    amortization 
8,459
8,483Marketable securities,    available for sale 
-
120,000Deferred loan fees, less    current portion, net of    amortization 
31,731
49,113Deposits
26,575
26,575 
66,765
204,171 
$4,284,588
$4,440,508
 

4

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
June 30,
December    31, 
2004
2003CURRENT LIABILITIES   Accounts payable 
$ 617,254
$ 517,989Accrued management salaries    
270,616
218,185Accrued expenses 
233,801
213,295Insurance contracts payable    
51,544
9,458Interest payable 
217,962
217,604Current maturities of    long-term debt 
46,951
537,031Current maturities of    capital lease obligations 
955,655
994,456Current maturities of    advances from an officer/stockholder
248,168
248,168Current maturities of    capital lease due stockholder
5,237
4,869Current maturities of    convertible notes and accrued interest
1,688,988
1,686,286Other 
19,592
27,056Total Current Liabilities 
4,355,768
4,674,397   LONG-TERM LIABILITIES  Long-term debt, less    current maturities 
589,949
123,059Convertible promissory    notes, less current maturities 
1,557,000
2,376,100Accrued interest,    convertible notes, less current maturities
811,604
879,126Capital lease obligations,    less current maturities
30,003
75,391Capital lease obligation,    shareholder, less current 
  maturities
11,284
14,117Total Long-Term Liabilities    
2,999,840
3,467,793 
7,355,608
8,142,190   STOCKHOLDERS' EQUITY    (DEFICIT)  Preferred stock, par value    $0.001 per share;    authorized 999,500    shares, issued and outstanding    2004, 0 shares;    2003, 0 shares 
-
-Common stock, par value    $0.001 per share;    authorized    250,000,000 shares, issued and outstanding,    142,667,114 at June    30, 2004; 122,373,953 at     December 31, 2003
142,667
122,374Additional paid-in capital 
17,698,322
15,234,212Accumulated deficit 
(21,618,376)
(20,105,087)Common stock to be issued 
621,533
672,255Accumulated other    comprehensive income (loss) 
84,493
374,346Common stock options    outstanding, net 
341
218 
(3,071,020)
(3,701,682) 
$ 4,284,588
$ 4,440,508
 

See Notes to Condensed Consolidated Financial Statements

5

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(UNAUDITED)
 
Three Months Ended June 30,
Six Months Ended June 30, 
2004
2003
2004
2003REVENUES    Fertilizer 
$ 476,910
$ 269,904
$ 706,389
$ 370,849Photochemical recycling 
75,084
56,744
129,643
99,117Silver 
21,517
8,017
64,475
20,985Mining technical services 
52,659
112,157
132,503
187,480Total Revenues 
626,170
446,822
1,033,010
678,431COST OF SALES 
588,598
419,690
1,029,171
697,496Gross Profit (Loss) 
37,572
27,132
3,839
(19,065)     OPERATING EXPENSES    Depreciation and    amortization 
79,338
83,177
157,449
165,554Research and development 
27,808
14,544
48,911
30,886Sales and marketing 
269,122
181,960
483,407
385,259Delivery and warehousing
34,275
17,616
51,881
25,679General and administrative 
249,425
197,211
462,200
371,721Total Operating Expenses 
659,968
494,508
1,203,848
979,099Operating (Loss) 
(622,396)
(467,376)
(1,200,009)
(998,164)     OTHER INCOME (EXPENSE)    Interest expense 
(202,325)
(241,403)
(411,095)
(471,106)Gain on sale of investments
22,044
90,720
97,802
154,881Other
5
(1,306)
13
6,856Total Other Income    (Expense) 
(180,276)
(151,989)
(313,280)
(309,369)     Income (Loss) before    provision 
  for income tax
(802,672)
(619,365)
(1,513,289)
(1,307,533)Provision for income tax 
-
-
-
-Net Income(Loss) 
(802,672)
(619,365)
(1,513,289)
(1,307,533)     Other comprehensive income    (loss)    Unrealized gains (losses)    on 
  securities 
(105,099)
170,474
(289,853)
(31,193)Comprehensive Income (Loss)    
$ (907,771)
$ (448,891)
$(1,803,142)
$(1,338,726)     Weighted average number of    shares       Outstanding    (1,000’s)
137,761
96,992
132,651
94,629Earnings (Loss) per share,    basic       and diluted
$(0.006)
$(0.006)
$(0.011)
$(0.014)
See Notes to Condensed Consolidated Financial Statements

6

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(UNAUDITED)

Six Months Ended June 30,
2004
2003Cash flows from    operating activities   Net    income (loss) 
$(1,513,289)
$(1,307,533)      Adjustments to reconcile net loss to 
   cash used by operating    activities:        Depreciation and amortization 
157,449
165,554        Interest on convertible notes
261,411
306,921        Marketable securities received for services
(15,256)
(2,573)        (Gain) Loss on investments
(97,802)
(154,881)        Stock option compensation (credit) 
123
(93,819)        (Gain) on debt restructuring
-
(29,370)        Bad debts
-
15        Expenses paid with issuance of common stock 
310,925
280,562        (Increase) decrease in:          Trade accounts receivable 
(71,142)
(145,817)          Inventories 
(104,371)
(59,198)          Prepaid expenses and deposits 
1,805
(27,494)        Increase (decrease) in:          Accounts payable 
77,479
69,383          Accrued management salaries
52,431
146,348          Accrued expenses and contracts payable 
58,077
182,121          Accrued interest
16,358
74,182            Net cash used by operating activities 
(865,802)
(595,599)Cash flows from    investing activities:      Acquisition of property and equipment 
(8,922)
(4,322)  Proceeds    from sale of investments
223,139
277,819           Net cash provided (used) by investing activities 
214,217
273,497Cash flows from    financing activities:  Proceeds    from sale of stock 
712,000
241,595  Proceeds    from account receivable factoring, net
38,641
99,771  Payments    on long-term debt 
(112,080)
(58,380)          Net cash provided by financing activities 
638,561
282,986            Net increase (decrease) in cash 
(13,024)
(39,116)Cash, beginning    of period 
34,499
57,201Cash, end of    period 
$ 21,475
$ 18,085
See Notes to Condensed Consolidated Financial Statements

7

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004

(UNAUDITED)

 

1. The unaudited condensed consolidated financial statements printedherein have been prepared in accordance with the instructions to Form 10-QSB and do notinclude all of the information and disclosures required by U.S. Generally AcceptedAccounting Principles. Therefore, these financial statements should be read in conjunctionwith the consolidated financial statements and related footnotes included in the Company'sForm 10-KSB for the year ended December 31, 2003. These financial statements reflect alladjustments that are, in the opinion of management, necessary to fairly state the resultsfor the interim periods reported.

2. The Company's consolidated financial statements have been presentedon the basis that it is a going concern, which contemplates the realization of assets andthe satisfaction of liabilities in the normal course of business. The Company and itssubsidiaries have reported recurring losses from operations, including a net loss of$1,513,289 during the six months ended June 30, 2004, a negative working capital of$3,370,590, and a stockholders’ deficit balance of $3,071,020 as of June 30, 2004.These factors indicate the Company and its subsidiaries' ability to continue in existenceis dependent upon their ability to obtain additional long-term debt and/or equityfinancing and achieve profitable operations. The consolidated financial statements do notinclude any adjustments relating to the recoverability and classification of recordedasset amounts or the amounts and classification of liabilities that might be necessaryshould the Company and its subsidiaries be unable to continue in existence. The results ofoperations for the three and six months ended June 30, 2004 are not necessarily indicativeof the results to be expected for the full year.

3. A Private Placement of restricted stock with attached three yearwarrants is continuing with offering prices ranging from $0.08 to $0.125 per share. Theattached three year warrants are for one half to an equal number of shares with exerciseprices equal to the share offering prices for the first year, double the respectiveamounts for the second year, and triple the respective amounts for the third year. Duringthe six months ended June 30, 2004 $646,000 was received from this private placement and$66,000 was received from the exercise of warrants. 

4. In August 2002 a supplier of equipment for the Stead manufacturingplant filed suit against the Company and its subsidiary, Itronics Metallurgical, Inc.(IMI) in Johnson County, Indiana for the unpaid amount of $64,234 plus attorney’sfees and court costs. On October 1, 2002 the plaintiff received a default judgmentawarding the $64,234 plus $1,500 attorney’s fees plus 8% interest. On November 5,2002 the plaintiff filed a "Notice of Filing of Foreign Judgment" in WashoeCounty, Nevada and has received the judgment. In December 2003 a settlement agreement wasaccepted that required a $10,000 payment in December 2003 plus monthly payment of $5,161over twelve months in 2004.

As of June 30, 2004 a total of nine lawsuits filed in 2003 and priorremain outstanding against the Company’s subsidiaries by various equipment lessors.Five of the suits were filed in Washoe County, Nevada, two in Cook County, Illinois, onein Los Angeles County, California, and one in Oakland 

8

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004

(UNAUDITED)

 

County, Michigan. Two additional suits covering five leases were filedin Washoe County, Nevada in May 2004. The suits seek a total of $811,245 plus attorneysfees and other costs. Five of these suits, seeking a total of $278,301 plus costs, weresettled by restructuring the leases, signing stipulated judgments and agreeing to paytotal payments of $227,093. Monthly payments on the settlements total $10,131 and are paidover various periods ranging from 18 to 31 months. If the restructured leases aredefaulted, judgments for the original claimed amounts can be entered and furthercollection action, including repossession of the secured equipment, can be taken. Of thesix remaining unsettled suits, three have received judgments. A settlement agreementreached on two of those is pending the ability to meet the initial payment terms. Legalcounsel is actively negotiating two of the unsettled suits. No further action has occurredon the other two unsettled suits. 

In February 2003 a trade creditor filed suit against the Company inWashoe County, Nevada seeking a total of $85,525 plus attorney fees and other costs. Adefault judgment was entered in May 2003. The Company is attempting to negotiate asettlement. 

Successful settlement of the above claims is dependent on futurefinancing.

5. As of June 30, 2004 lease payments totaling $769,529 were inarrears. As required by U.S. Generally Accepted Accounting Principles, the principalbalance of the leases that are in default have been classified as current liabilities. TheCompany is in ongoing communication with the lessors to avoid action that may be adverseto the Company.

In 2003 an offer was made to extend the Series 2000 ConvertiblePromissory Notes. The holders of $80,000 of the Notes have not responded to the offer andthat amount, plus $37,700 in accrued interest, remains in default.

6. During the six months ended June 30, 2004 convertible promissorynotes totaling $828,000 principal and $323,582 accrued interest were converted into commonstock at prices ranging from $0.10 to $0.15 per share. 

7. Following is financial information for each of the Company’ssegments. No changes have occurred in the basis of segmentation since December 31, 2003.

Reconciliation of segment revenues, gross profit (loss), operatingincome (loss), other income (expense), and net income (loss) before taxes to therespective consolidated amounts follows:

9

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004

(UNAUDITED)