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

**                             For the quarterly period ended March 31, 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 orother jurisdiction 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 April 30, 2004, 136,387,182 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, 2004  and December 31,    2003 
4Condensed Consolidated    Statements of Operations and      Comprehensive Income for the Three Months Ended 
  March 31, 2004 and 2003 
6Condensed Consolidated    Statements of Cash Flows for the  Three Months Ended    March 31, 2004 and 2003 
7Notes to Condensed    Consolidated Financial Statements 
8Item 2. Management's    Discussion and Analysis or Plan of             Operation 
12Item 3. Controls and    Procedures
19PART II- OTHER INFORMATIONItem 1. Legal Proceedings
20Item 2. Changes in    Securities and Use of Proceeds 
20Item 3 Defaults upon Senior    Securities
21Item 6. Exhibits and    Reports on Form 8-K 
22Certifications
24
 

3

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2004 AND DECEMBER 31, 2003

(UNAUDITED)

 

ASSETS
 
MARCH 31,
DECEMBER    31, 
2004
2003CURRENT ASSETS   Cash 
$ 25,230
$ 34,499Accounts receivable, less    allowance for    doubtful accounts,    2004, $5,700; 2003, $5,700
154,990
96,384Marketable securities,    available for sale
242,932
413,240Inventories
448,485
425,525Prepaid expenses
72,969
53,073Current portion of deferred    loan fees
38,790
40,773Total Current Assets
983,396
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
178,351
102,203Equipment and furniture 
1,866,271
1,861,917Vehicles 
133,028
133,028Equipment under capital    lease 
1,078,265
1,076,687 
4,638,230
4,556,150Less: Accumulated    depreciation and amortization
1,452,802
1,383,307 
3,185,428
3,172,843OTHER ASSETS   Intangibles, net of    amortization 
8,471
8,483Marketable securities,    available for sale 
40,600
120,000Deferred loan fees, less    current portion, net of    amortization 
40,422
49,113Deposits
26,575
26,575 
116,068
204,171 
$4,284,892
$4,440,508
 

4

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
March 31,
December    31, 
2004
2003CURRENT LIABILITIES   Accounts payable 
$ 538,533
$ 517,989Accrued management salaries    
247,488
218,185Accrued expenses 
191,547
213,295Insurance contracts payable    
30,061
9,458Interest payable 
220,291
217,604Current maturities of    long-term debt 
46,411
537,031Current maturities of    capital lease obligations 
968,075
994,456Current maturities of    lease/advances from stockholders
248,168
248,168Current maturities of    capital lease due stockholder
5,133
4,869Current maturities of    convertible notes and accrued interest
2,140,769
1,686,286Other 
13,721
27,056Total Current Liabilities 
4,650,197
4,674,397   LONG-TERM LIABILITIES  Long-term debt, less    current maturities 
601,613
123,059Convertible promissory    notes, less current maturities 
1,716,600
2,376,100Accrued interest,    convertible notes, less current maturities
782,785
879,126Capital lease obligations,    less current maturities
65,359
75,391Capital lease obligation,    shareholder, less current 
  maturities
12,633
14,117Total Long-Term Liabilities    
3,178,990
3,467,793 
7,829,187
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,    132,491,900 at March    31, 2004; 122,373,953 at     December 31, 2003
132,492
122,374Additional paid-in capital 
16,377,370
15,234,212Accumulated deficit 
(20,815,704)
(20,105,087)Common stock to be issued 
571,614
672,255Accumulated other    comprehensive income (loss) 
189,592
374,346Common stock options    outstanding, net 
341
218 
(3,544,295)
(3,701,682) 
$4,284,892
$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 MONTHS ENDED MARCH 31, 2004 AND 2003

(UNAUDITED)
 
Three Months Ended March 31, 
2004
2003REVENUES  Fertilizer 
$ 229,479
$100,945Photochemical recycling 
54,559
42,373Silver 
42,958
12,968Mining technical services 
79,844
75,323Total Revenues 
406,840
231,609COST OF SALES 
440,573
277,806Gross Profit (Loss) 
(33,733)
(46,197) 
OPERATING EXPENSES  Depreciation and    amortization 
78,111
82,377Research and development 
21,103
16,342Sales and marketing 
214,285
203,299Delivery and warehousing
17,606
8,063General and administrative 
212,775
174,510Total Operating Expenses 
543,880
484,591Operating (Loss) 
(577,613)
(530,788)   OTHER INCOME (EXPENSE)  Interest expense 
(208,770)
(229,703)Gain on sale of investments
75,758
64,161Other
8
8,162Total Other Income    (Expense) 
(133,004)
(157,380)   Income (Loss) before    provision 
for income tax
(710,617)
(688,168)Provision for income tax 
-
-Net Income(Loss) 
(710,617)
(688,168)   Other comprehensive income    (loss)  Unrealized gains (losses)    on 
  securities 
(184,754)
(201,667)Comprehensive Income (Loss)    
$(895,371)
$(889,835)   Weighted average number of    shares     Outstanding    (1,000’s)
127,541
92,240   Earnings (Loss) per share,    basic   And diluted
$(0.006)
$(0.007)
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, 2004 AND 2003

(UNAUDITED)
 
Three Months Ended March 31, 
2004
2003Cash flows from operating    activities   Net income (loss) 
$(710,617)
$(688,168)Adjustments to reconcile    net loss to 
cash used by operating activities:    Depreciation and    amortization 
78,111
82,377  Interest on    convertible notes
135,247
147,219  Marketable    securities received for services
(12,683)
-  (Gain) Loss on    investments
(75,758)
(64,161)  Stock option    compensation (credit) 
123
(52,997)  (Gain) on debt    restructuring
-
(20,564)Expenses paid with issuance    of common stock 
140,918
126,314(Increase) decrease in:    Trade accounts    receivable 
(58,606)
(25,981)  Inventories 
(22,960)
(30,081)  Prepaid expenses and    deposits 
3,716
(21,101)Increase (decrease) in:    Accounts payable 
(29,081)
(8,553)  Accrued management    salaries
29,303
69,925  Accrued expenses and    contracts payable 
(12,410)
105,878  Accrued interest
2,687
43,990Net cash used by operating    activities 
(532,010)
(335,903)   Cash flows from investing    activities:  Acquisition of property and    equipment 
(4,844)
(1,552)Proceeds from sale of    investments
153,395
120,263Net cash provided (used) by    investing activities 
148,551
118,711   Cash flows from financing    activities:  Proceeds from sale of stock    
366,500
171,595Proceeds from account    receivable factoring, net
59,625
-Payments on long-term debt 
(51,935)
(17,878)Net cash provided by    financing activities 
374,190
153,717Net increase (decrease) in    cash 
(9,269)
(63,475)Cash, beginning of period 
34,499
57,201Cash, end of period 
$ 25,230
$ (6,274)
See Notes to Condensed Consolidated Financial Statements

7

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 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$710,617 during the quarter ended March 31, 2004, a negative working capital of$3,666,801, and a stockholders’ deficit balance of $3,544,295 as of March 31, 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 months ended March 31, 2004 are not necessarily indicative of theresults 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.$300,500 was received from this private placement during the three months ended March 31,2004 and an additional $330,000 was received subsequent to March 31, 2004. In addition,during the three months ended March 31, 2004, $66,000 was received from the exercise ofwarrants. 

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.

During the period of September 2002 through September 2003 a total often lawsuits were filed against the Company’s subsidiaries by various equipmentlessors. Six 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. Thesuits seek a total of $588,706 plus attorneys fees and

8

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004

(UNAUDITED)

other costs. Six of these suits, seeking a total of $318,301 pluscosts, were settled by restructuring the leases, signing stipulated judgments and agreeingto pay total payments of $241,093. Monthly payments on the settlements total $12,464 andare paid over various periods ranging from 6 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 theremaining unsettled suits, three have received judgments and are being activelynegotiated. No further action has occurred on the fourth 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. The Company is attempting to negotiate asettlement. 

Successful settlement of the above claims is dependent on futurefinancing.

5. As of March 31, 2004 lease payments totaling $681,339 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.

Mechanics liens were filed for work done at the Company’smanufacturing facility in 2002. The Company was also delinquent in property taxes on theproperty as of December 31, 2003 in the amount of $27,035. Such liens not cleared after 60days from the date of filing and delinquencies in property tax payments become defaultsunder terms of the deed of trust securing the mortgage on the property and the lender candemand payment in full and institute foreclosure proceedings. As required by U.S.Generally Accepted Accounting Principles, the entire principal balance of the note wasincluded in current liabilities at December 31, 2003. During the three months ended March31, 2004 the remaining balance of the mechanics liens was paid and $19,044 of the propertytaxes was paid. Subsequent to March 31, 2004 the property taxes were paid current. Inaccordance with U.S. Generally Accepted Accounting Principles, the loan was reclassifiedas long term debt as of March 31, 2004 and only the portion of the loan due over thetwelve months after March 31, 2004 is included in current liabilities.

In 2003 an offer was made to extend the Series 2000 ConvertiblePromissory Notes. The holders of $90,000 of the Notes have not responded to the offer andthat amount, plus $38,633 in accrued interest, remains in default. 

6. During the three months ended March 31, 2004 convertible promissorynotes totaling $318,000 principal and $118,605 accrued interest were converted into commonstock at prices ranging from $0.10 to $0.15 per share. 

9

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004

(UNAUDITED)

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:
 
Three Months Ended March 31, 
2004
2003   Revenues:  Photochemical Fertilizer 
$ 326,996
$ 156,286Mining Technical Services 
79,844
75,323Consolidated Revenues 
$ 406,840
$ 231,609   Gross Profit (Loss):  Photochemical Fertilizer 
$(35,639)
$(63,312)Mining Technical Services 
1,906
17,115Consolidated Gross Profit 
(Loss)
$(33,733)
$(46,197)   Operating Income (Loss):  Photochemical Fertilizer 
$(483,503)
$(452,320)Mining Technical Services 
(94,110)
(78,468)Consolidated Operating 
Income    (Loss)
$(577,613)
$(530,788)   Other Income (Expense):  Photochemical Fertilizer
$(208,770)
$(229,703)Mining Technical Services
75,766
72,323Consolidated Other Income 
(Expense)
$(133,004)
$(157,380)  Net Income (Loss) before    taxes:  Photochemical Fertilizer
$(692,273)
$(682,023)Mining Technical Services
(18,344)
(6,145)Consolidated Net Income   (Loss) before taxes 
$(710,617)
$(688,168)
 

10

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004

(UNAUDITED)

Identifiable assets by business segment for the major assetclassifications and reconciliation to total consolidated assets are as follows:
 
March 31,
December    31, 
2004
2003   Current Assets:  Photochemical Fertilizer 
$ 635,440
$ 576,750Mining Technical Services 
286,981
473,594 
922,421