UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM l0-QSB/A

AMENDEMENT NO. 2

(Mark One)

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

    EXCHANGE ACT OF 1934

**                                   For the 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, 2005and December 31, 2004 
4Condensed Consolidated    Statements of Operations for the ThreeMonths Ended    March 31, 2005 and 2004 
6Condensed Consolidated    Statements of Cash Flows for theThree Months Ended March    31, 2005 and 2004 
7Notes to Condensed    Consolidated Financial Statements 
8Item 2. Management's    Discussion and Analysis or Plan ofOperation 
14Item 3. Controls and    Procedures
24PART II- OTHER INFORMATIONItem 1. Legal Proceedings
24Item 2. Changes in    Securities and Use of Proceeds 
25Item 3 Defaults upon Senior    Securities
27Item 6. Exhibits and    Reports on Form 8-K 
28Certifications
30
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 fordoubtful    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
142,509Total Current    Assets
1,108,595
934,378PROPERTY 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-equipment and furniture1,008,4321,008,432Equipment    under capital lease-vehicles87,67287,672
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, net of amortization   
44,967
48,654Deposits
22,525
22,525
75,915
79,614
$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 on    stockholder advances
11,682
6,307Interest payable 
211,099
204,909Current 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 

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)
 
Three Months Ended March 31, 
2005
2004REVENUES  Photochemical fertilizer 
$260,174
$ 326,996Mining technical services 
49,799
79,844Total Revenues 
309,973
406,840   COST OF REVENUES (exclusive    of   depreciation and    amortization  shown separately below)  Photochemical fertilizer 
302,338
362,635Mining technical services 
48,770
77,938Total Cost of Revenues
351,108
440,573Gross    Profit (Loss) (exclusive of
 
 depreciation    and amortization  shown    separately below)(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)  Addition of silver    in solution inventory by      offsetting    photochemical processing fees
(11,520)
(22,502)  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 
25,642
(458)    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
2,687    Net 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
153,395    Net cash    provided (used) by investing activities 
4,230
148,551   Cash 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
374,190    Net    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.  The Company maybecome involved in a lawsuit or legal proceeding at any time in the ordinary course ofbusiness. Litigation is subject to inherent uncertainties, and an unexpected adverseresult may arise that may adversely affect our business. Certain lawsuits have been filedagainst us for collection of funds due that are delinquent, as described below. TheCompany is currently not aware of any litigation pending or threatened for any reasonother than collection of funds due and already recorded. The Company is not aware of anyadditional legal proceeding or claims that we believe will have, individually or in theaggregate, a material adverse affect on our business, financial condition or operatingresults. 
As of March 31, 2005 total recorded liabilities of $769,972 includingaccrued interest to March 31, 2005, were subject to a total of 15 separate lawsuits forthe collection of the funds due. These include 12 leases totaling $611,934 (reflected inCurrent Maturities of Capital Lease Obligations) plus $23,660 in additional interest(reflected in Accrued Interest) and three 

8

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2005

(UNAUDITED)

 

trade payables totaling $124,542 (reflected in Accounts Payable) plus$9,836 in additional interest (reflected in Accrued Interest). The leases are individuallysecured by specified equipment. 

The accrued interest noted above was recorded based on our assessmentof additional amounts we believe is probable and is related to three cases originallyseeking $251,522; the creditors have received judgments in these cases. The Company willcontinue to accrue interest until these cases are settled or paid in full. 

  The Company estimates an additional $60,600 interest may be reasonably possible on other cases; however, the Company has not accruedthis amount because it does not believe it is probable to be incurred. This estimate isrelated to six cases. In one case, there is a negotiated payment agreement with aremaining balance of approximately $19,500. Our last payment was made in December 2004 andno contact or other collection action has been taken since then. A second case, claiming$35,210, was filed in March 2003. No contact or other collection action has taken placesince then. A third case, seeking $171,853, is being actively negotiated by legal counseland a settlement offer to pay the balance over approximately 46 months has been received.The remaining three cases, seeking a total of $181,672, are being actively negotiated witha local law firm. It has been our experience that if the Company is able to pay an accountin full, the creditor will accept a discount, in some cases a substantial discount, to getthe case settled. In the event the Company has not been able to fully pay a claim,creditors have been willing to accept extended payment terms.

The Company has a total of six cases, that originally sought $325,345,that we deem to have a remote possibility of incurring an additional unrecorded loss. TheCompany has negotiated payment agreements on these cases and, as of March 31, 2005, therecorded liability for these cases was $97,442. Three of the cases are paid current underthe settlements agreements and three are delinquent, but no further collection action hasbeen taken by the lenders.

As of December 31, 2004 our subsidiaries were delinquent onapproximately $206,200 in federal payroll taxes. These amounts are included Accruedexpenses in the Balance Sheet. The Company engaged a consultant to assist in working withthe IRS to formulate a payment plan. A plan was negotiated to pay specified portions ofthe liability on or before January 31, 2005 and on the fifteenth of each month beginningMarch 15, 2005 until paid off on May 15, 2005. The Company made the required payments inJanuary and March 2005, and paid a total of $115,586, but did not make the subsequentpayments as they became due. The Company received notice of intent to levy on thesubsidiaries IMI and ICI for a total amount due of $93,273. The notices were dated May 12,2005. The IRS also filed federal tax liens for the amounts due.

Successful settlement of the above claims is dependent on futurefinancing.

5. As of March 31, 2005 lease payments totaling $758,434 were inarrears. As required by U.S. Generally Accepted Accounting Principles, the principal 

9

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2005

(UNAUDITED)

 

balance of the leases that are in default have been classified ascurrent liabilities. The Company is in ongoing communication with the lessors to avoidaction that may be adverse to 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 $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. The Company holds marketable securities that are available for sale,which consist solely of equity securities. The carrying amount on the balance sheets ofthese securities is adjusted to fair value at each balance sheet date. The adjustment tofair value is an unrealized holding gain or loss that is reported in Other ComprehensiveIncome. At present, these unrealized gains or losses are the only component of Accumulatedand Other Comprehensive Income. The Company had Accumulated Unrealized Holding Losses of$18,450 at March 31, 2005 and $9,568 at December 31, 2004. No gains were reclassified outof accumulated other comprehensive income into earnings during 2005 and no losses werereclassified out of accumulated other comprehensive income into earnings during 2004. Thetable below illustrates the amount of unrealized holding gains and losses included inother comprehensive income, net of tax effects of $0. The reclassification adjustmentlisted in the below table represents unrealized holding gains and losses transferred intoearnings as securities are sold.

10

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2005 

(UNAUDITED)

 

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)
Following is a summary of gross proceeds and gains and losses from sales of availablefor sale marketable securities:
  
Three Months Ended March 31,   
  2005 
2004 Gross proceeds    from sales of securities
$ 5,947
$69,744   Gross gains    from sale of securities
$ -
$22,044Gross losses    from sale of securities
(6,431)
-Net Gains    (Losses) from sale of securities
$(6,431)
$22,044
 

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:

11

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)