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 March 31, 2005**
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from______ to_____ 

 

Commission File Number 33-18582

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

 

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

          incorporation or organization) 

 

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

(Address of principal executive offices)

 

Issuer's telephone number, including area code: (775)689-7696
 

Check whether the issuer (1) filed all reports required to be filed 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

 

           As of May 15, 2005,192,907,173 shares of common stock 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 – March 31, 2005  and December 31,    2004 
4Condensed Consolidated    Statements of Operations and       Comprehensive Income for the Three Months Ended March 31, 2005        and 2004 
6Condensed Consolidated    Statements of Cash Flows for the  Three Months Ended    March 31, 2005 and 2004 
7Notes to Condensed    Consolidated Financial Statements 
8Item 2. Management's    Discussion and Analysis or Plan of            Operation 
13Item 3. Controls and    Procedures
28PART II- OTHER INFORMATIONItem 1. Legal Proceedings
28Item 2. Changes in    Securities and Use of Proceeds 
30Item 3 Defaults upon Senior    Securities
31Item 6. Exhibits and    Reports on Form 8-K 
31Certifications
33
3

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2005 AND DECEMBER 31, 2004

(UNAUDITED)

 

ASSETS
 
March 31,
December    31, 
2005
2004CURRENT ASSETS   Cash 
$ -
$ 5,180Accounts receivable, less    allowance for  doubtful accounts, 2005,    $5,700; 2004, $5,700
312,723
188,805Marketable securities,    available for sale
11,901
26,180Inventories
557,582
571,704Prepaid expenses
226,389
142,509Current portion of deferred    loan fees
14,752
14,152Total Current Assets
1,123,347
948,530   PROPERTY AND EQUIPMENT   Land 
215,000
215,000Building and improvements
1,167,315
1,167,315Design and construction in    progress,   manufacturing facility
130,071
121,171Equipment and furniture 
2,071,998
2,071,998Vehicles 
133,028
133,028Equipment under capital    lease 
1,096,104
1,096,104 
4,813,516
4,804,616Less: Accumulated    depreciation and amortization
1,732,411
1,670,668 
3,081,105
3,133,948OTHER ASSETS   Intangibles, net of    amortization 
8,423
8,435Deferred loan fees, less    current portion, net of  amortization 
30,215
34,502Deposits
22,525
22,525 
61,163
65,462 
$4,265,615
$4,147,940
4

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
March 31,
December    31, 
2005
2004CURRENT LIABILITIES   Bank overdraft
$ 60,598
$ -Accounts payable 
634,662
609,795Accrued management salaries    
448,799
389,127Accrued expenses 
312,428
398,731Insurance contracts payable    
32,249
15,048Interest payable 
222,781
211,216Current maturities of    long-term debt 
517,330
522,845Current maturities of    capital lease obligations 
784,536
807,746Current maturities of    advances from an officer/stockholder
181,525
161,525Current maturities of    capital lease due stockholder
5,420
5,420Current maturities of    convertible notes and accrued interest
2,727,496
1,020,946Other 
25,179
21,429Total Current Liabilities 
5,953,003
4,163,828   LONG-TERM LIABILITIES  Long-term debt, less    current maturities 
94,380
97,022Convertible promissory    notes, less current maturities 
- 
1,517,000Accrued interest,    convertible notes, less current maturities
-
925,216Capital lease obligation,    shareholder, less current 
maturities
7,551
9,144Total Long-Term Liabilities    
101,931
2,548,382 
6,054,934
6,712,210   STOCKHOLDERS' EQUITY    (DEFICIT)  Preferred stock, par value    $0.001 per share;  authorized 999,500 shares,    issued and outstanding  2005, 0 shares; 2004, 0    shares 
-
-Common stock, par value    $0.001 per share;  authorized 250,000,000    shares, issued and outstanding,  191,182,367 at March 31,    2005; 164,863,938 at   December 31, 2004
191,182
164,864Additional paid-in capital 
21,261,496
19,438,213Accumulated deficit 
(23,858,564)
(22,944,959)Common stock to be issued 
601,670
786,426Accumulated other    comprehensive income (loss) 
(18,450)
(9,568)Common stock options    outstanding, net 
33,347
754 
(1,789,319)
(2,564,270) 
$4,265,615
$4,147,940
 

See Notes to Condensed Consolidated Financial Statements

 

5

 

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)
 
Three Months Ended March 31, 
2005
2004REVENUES  Fertilizer 
$211,234
$229,479Photochemical recycling 
22,181
54,559Silver 
26,759
42,958Mining technical services 
49,799
79,844Total Revenues 
309,973
406,840COST OF SALES 
351,108
440,573Gross Profit (Loss) 
(41,135)
(33,733)   OPERATING EXPENSES  Depreciation and    amortization 
65,442
78,111Research and development 
80,736
21,103Sales and marketing 
280,837
214,285Delivery and warehousing
18,083
17,606General and administrative 
259,635
212,775Total Operating Expenses 
704,733
543,880Operating (Loss) 
(745,868)
(577,613)   OTHER INCOME (EXPENSE)  Interest expense 
(164,052)
(208,770)Gain (loss) on sale of    investments
(3,685)
75,758Other
-
8Total Other Income    (Expense) 
(167,737)
(133,004)   Income (Loss) before    provision 
for income tax
(913,605)
(710,617)Provision for income tax 
-
-Net Income(Loss) 
(913,605)
(710,617)   Other comprehensive income    (loss)  Unrealized gains (losses)    on 
securities 
(8,882)
(184,754)Comprehensive Income (Loss)    
$(922,487)
$(895,371)   Weighted average number of    shares   Outstanding (1,000’s)
174,495
127,541Earnings (Loss) per share,    basic   and diluted
$(0.005)
$(0.006)
See Notes to Condensed Consolidated Financial Statements

6

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)

Three Months Ended March 31,
2005
2004Cash flows from    operating activities   Net    income (loss) 
$(913,605)
$(710,617)      Adjustments to reconcile net loss to 
  cash used by operating activities:        Depreciation and amortization 
65,442
78,111        Interest on convertible notes
99,564
135,247        Marketable securities received for services
(2,518)
(12,683)        (Gain) Loss on investments
3,685
(75,758)        Stock option compensation 
32,934
123        Expenses paid with issuance of common stock 
227,422
140,918        (Increase) decrease in:          Trade accounts receivable 
(123,918)
(58,606)          Inventories 
14,122
(22,960)          Prepaid expenses and deposits 
(54,764)
3,716        Increase (decrease) in:          Accounts payable 
(22,624)
(29,081)          Accrued management salaries
59,672
29,303          Accrued expenses and contracts payable 
(65,352)
(12,410)          Accrued interest
11,565
2,687Net cash used    by operating activities 
(668,375)
(532,010)Cash flows from    investing activities:      Acquisition of property and equipment 
- 
(4,844)  Proceeds    from sale of investments
4,230
153,395Net cash    provided (used) by investing activities 
4,230
148,551Cash flows from    financing activities:  Proceeds    from sale of stock 
560,000
366,500  Proceeds    from debt, stockholder
25,000
-  Proceeds    from account receivable factoring, net
51,327
59,625  Payments    on debt 
(37,960)
(51,935)Net cash    provided by financing activities 
598,367
374,190Net increase    (decrease) in cash 
(65,778)
(9,269)Cash, beginning    of period 
5,180
34,499Cash, end of    period 
$ (60,598)
$ 25,230
See Notes to Condensed Consolidated Financial Statements

7

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2005

(UNAUDITED)

 

1. The unaudited condensed consolidated financial statements presentedherein 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, 2004. These financial statements reflect alladjustments that are, in the opinion of management, necessary to fairly state the resultsfor the interim periods reported. Certain amounts from the prior period have beenreclassified to be consistent with the current period presentation.

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$913,605 during the three months ended March 31, 2005, a working capital deficit of$4,829,656, and a stockholders’ deficit balance of $1,789,319 as of March 31, 2005.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 months ended March 31, 2005 were affected by rainy weather andare not necessarily indicative of the results to be expected for the full year.

3. A Private Placement of restricted stock with attached three yearwarrants is continuing with an offering price of $0.05 per share, plus an attached threeyear warrant for one half the number of shares with an exercise price of $0.075 for thefirst year, double that amount for the second year, and triple that amount for the thirdyear. During the three months ended March 31, 2005 $560,000 was received from this privateplacement. 

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. Payments are delinquent as of December 31, 2004. In February2005 the plaintiff received approximately $6,700 by levying three of the Company’sbank accounts. No further collection action has been taken.

As of March 31, 2005 a total of nine lawsuits filed in 2003 and prioryears remain outstanding against the Company’s subsidiaries by various 

8

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2005

(UNAUDITED)

 

equipment lessors. Five of the suits were filed in Washoe County,Nevada, two in Cook County, Illinois, one in Los Angeles County, California, and one in 

Oakland County, Michigan. Three additional suits covering six leaseswere filed in Washoe County, Nevada in 2004. The suits seek a total of $839,934 plusattorneys fees and other costs. Six of these suits, seeking a total of $306,990 pluscosts, were settled by restructuring the leases, signing stipulated judgments and agreeingto pay total payments of $258,390. Monthly payments on the settlements total $12,935 andare paid over 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. Paymentson five of the restructured leases are in default, but no additional collection action hasbeen taken. Of the six remaining unsettled suits, three have received judgments, of whichone has filed for a debtors examination which was to occur in April 2005. The Company hasagreed to payment terms on that lease and the examination has been stayed until June 2005.Legal counsel is actively negotiating two of the unsettled suits. No further action hasoccurred on the other unsettled suit. 

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. No further collection action has occurred onthis claim. 

As of December 31, 2004 the Company’s subsidiaries were delinquenton approximately $206,200 in federal payroll taxes. The Company engaged a consultant toassist in working with the IRS to formulate a payment plan. A plan was negotiated to payspecified portions of the liability on or before January 31, 2005 and on the fifteenth ofeach month beginning March 15, 2005 until paid off on May 15, 2005. The Company made therequired payments in January and March 2005, and paid a total of $115,586, but did notmake the subsequent payments as they became due. The Company has received notice of intentto levy on the subsidiaries IMI and ICI for a total amount due of $93,273. The notices aredated May 12, 2005. They indicate the Company has 30 days from that date to pay the tax,make alternative payment arrangements, or request appeals consideration. After the 30days, the IRS may seize property to satisfy the debt. The IRS may also file federal taxliens for the amounts due at any time. Successful completion of a payment plan isdependent on future financing. 

Successful settlement of the above claims is dependent on futurefinancing, which the Company is actively seeking.

5. As of March 31, 2005 lease payments totaling $758,434 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.

9

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2005

(UNAUDITED)

 

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 $51,553 in accrued interest, remains in default.

As of March 31, 2005, the Company was delinquent on real property taxesin the amount of $14,630 plus interest and penalties. This is a technical default of thepromissory note and deed of trust secured by the Stead manufacturing facility. The lenderis aware of the situation and has taken no collection action. The Company was also inarrears in the amount of $6,445 as of March 31, 2005 on a promissory note secured byequipment. The Company is working with the lender’s legal counsel to bring thepayments current. As required by U.S. Generally Accepted Accounting Principles, theprincipal balance of these notes, in the amount of $502,403, have been classified ascurrent liabilities. 

6. During the three months ended March 31, 2005 convertible promissorynotes totaling $592,600 principal and $242,630 accrued interest were converted into commonstock at $0.10 per share. 

7. Significant non-cash operating, investing, and financing activitiesfor the three months ended March 31, 2005 include the conversion of $835,230 inconvertible promissory notes and accrued interest into restricted common stock. 

8. Warrants, options, and shares to be issued, totaling 62,289,984 and66,758,507 shares as of March 31, 2005 and 2004, respectively, would dilute futureEarnings Per Share (EPS). No diluted EPS is presented as the effect of including theseshares is antidilutive.

9. Following are the components of Other Comprehensive Income:
 
Three Months Ended March 31, 
2005
2004   Unrealized holding gains    (losses)   
arising    during the period
$(12,122)
$ (73,866)
Reclassification    adjustment
3,240
(110,888)Other Comprehensive Income    (Loss)
$(8,882)
$(184,754)
 

10. Following is financial information for each of the Company’ssegments. No changes have occurred in the basis of segmentation since December 31, 2004.

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

10

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2005 

(UNAUDITED)

 
 
Three Months Ended March 31, 
2005
2004   Revenues:  Photochemical Fertilizer 
$260,174
$ 326,996Mining Technical Services 
49,799
79,844Consolidated Revenues 
$309,973
$ 406,840   Gross Profit (Loss):  Photochemical Fertilizer 
$(42,164)
$(35,639)Mining Technical Services 
1,029
1,906Consolidated Gross Profit 
(Loss)
$(41,135)
$(33,733)   Operating Income (Loss):  Photochemical Fertilizer 
$(603,545)
$(483,503)Mining Technical Services 
(142,323)
(94,110)Consolidated Operating 
Income    (Loss)
$(745,868)
$(577,613)   Other Income (Expense):  Photochemical Fertilizer
$(164,052)
$(208,770)Mining Technical Services
(3,685)
75,766Consolidated Other Income 
(Expense)
$(167,737)
$(133,004)   Net Income (Loss) before    taxes:  Photochemical Fertilizer
$(767,597)
$(692,273)Mining Technical Services
(146,008)
(18,344)Consolidated Net Income   (Loss) before taxes 
$(913,605)
$(710,617)
11

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2005

(UNAUDITED)

Identifiable assets by business segment for the major assetclassifications and reconciliation to total consolidated assets are as follows:
 
March 31,