UNITED STATES
SECURlTIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM I0-KSB
(Mark One)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the Transition period from______ to_______
Commission file number 33-18582
ITRONICS INC.
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(Name of small business issuer in its charter)
Texas 75-2198369
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(State or other jurisdiction of (I.R.S.. Employer Identification Number)
incorporation or organization)
6490 South McCarran Boulevard, Building C, Suite 23 Reno, Nevada 89509
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(Address of Principal Executive Offices) Zip Code
Issuer's telephone number: (702) 689-7696
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on
which registered
None None
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Securities registered under Section 12(g) of the Exchange Act:
None
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 for the past 90
days. Yes (x) No ( )
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. (x)
State issuer's revenues for its most recent fiscal year $878,561
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The aggregate market value of the voting stock held by non-affiliates,
computed by reference to the average of the bid and asked prices for such
stock as of July 31, 1997, was $2,733,663.
As of July 31, 1997 there were issued and outstanding 32,550,546
shares of the Registrant's Common Stock.
*This Form 10-KSB was filed after March 31, 1997 due to delays in assembling
the financial statements that were beyond the Company's control.
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ITRONICS INC. AND SUBSIDIARIES
1996 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I
PAGE
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Item 1. Description of Business 1
Item 2. Description of Property 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters 20
Item 6. Management's Discussion and Analysis or Plan of
Operation 21
Item 7. Financial Statements 24
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 24
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act 25
Item 10. Executive Compensation 27
Item 11. Security Ownership of Certain Beneficial Owners
and Management 29
Item 12. Certain Relationships and Related Transactions 31
Item 13. Financial Statements, Exhibits and Reports on Form 8K 32
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ITEM 1. DESCRIPTION OF BUSINESS.
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Itronics Inc (the Company), is a Texas corporation formed in 1987 and
is now based in Reno, Nevada. Through its subsidiaries, the Company
specializes in photobyproduct recycling and fertilizer manufacturing,
precious metals recovery and refining, mineral economics, and mining technical
services. The Company currently operates the following two business segments
under separate wholly owned subsidiaries:
1. Mining Technical Services: This segment, known as Whitney &
Whitney, Inc., provides mining and materials management,
geology, engineering and economics consulting, and publishes
specialized mineral economics and materials financial reports.
It employs technical specialists with expertise in the areas of
mining, geology, mining engineering, mineral economics,
material processing, and technology development. Technical
services have been provided to many of the leading U.S. and
foreign mining companies, several public utilities with mineral
interests, to various state agencies, the U.S. and foreign
governments, and the United Nations and the World Bank.
2. Photobyproduct Fertilizer: * This segment, known as Itronics
Metallurgical, Inc., operates a semi-works * * photobyproduct
recycling plant and is developing new silver-gold refining
technology. Parts of the photobyproduct process technology are
patentable but are not yet patented. The silver-gold refining
process is patented and has worldwide applicability. Revenues
are generated by photobyproduct management services and sale
of silver. As part of the recycling process, the Company is
manufacturing and testing a liquid turf fertilizer.
*In 1995 Itronics initiated a legal review of various segments
of RCRA (Resource Recovery and Conservation Act)law that might
pertain to Itronics and its customers. Itronics reached the
conclusion that certain of its large scale customers are
exempt from RCRA since the value of the customer's portion of
the recovered silver exceeds the processing costs charged.
Itronics also concluded that once the various photo solutions
are 100% utilized in fertilizer or other products, then all
Itronics customers will be exempt from RCRA requirements.
Itronics believes it is the only organization in the U.S.
with the ability to achieve this distinction. Consequently,
when referring to the operations of other organizations, or
to the general market, the term photowaste is used, and when
referring to Itronics' operations the term photobyproduct is
used.
** The term "semi-works" refers to a processing and/or manu-
facturing operation that is in transition between an initial
pilot scale used solely for research and development purpose
and full commercial scale, where the primary function of the
operation is to produce goods or services for sale.
The Company has two wholly owned subsidiaries, Whitney & Whitney, Inc.
("W&W") and Itronics Metallurgical, Inc. ("IMI"), a 92.5% owned partnership,
Nevada Hydrometallurgical Project ("NHP"), and an 81.4% owned joint venture,
American Hydromet. A brief description of each organization follows:
1. Whitney & Whitney. Inc.:
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W&W was incorporated in 1977 and is a wholly owned subsidiary of the
Company. W&W is primarily a mineral engineering firm that provides technical
services to the mining industry. The broad range of services provided by W&W
includes mineral economics, geological studies, mining and cost engineering,
and project management services. W&W has extensive experience with base
metals, precious metals, such as gold and silver, specialty minerals, such as
molybdenum and tungsten, coal, and industrial minerals. W&W has performed
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substantial services for small, medium, and large mining projects. W&W has
performed services for many leading U.S. and foreign mining companies,
various state agencies, for the United States and several foreign governments
and the United Nations. W&W was under contract with the Country of Bolivia
from 1986 through early 1992 to assist it in developing its mining industry.
2. Itronics Metallurgical, Inc.:
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IMI is a wholly owned subsidiary of the Company. IMI was established
in 1981 to manage the metallurgical and materials processing operations being
developed under W&W and American Hydromet research and development programs.
IMI has been the main provider of management services to American Hydromet
since 1986. IMI is now managing the photobyproduct fertilizer segment as
discussed below. IMI is responsible for precious metal and other material
product sales, and markets a line of commemorative medallions and five ounce
bars bearing a unique hallmark.
3. Nevada Hydrometallurgical Project:
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Nevada Hydrometallurgical Project ("NHP") is a research and develop-
ment partnership formed in 1981 to fund research into potential commercial
applications for certain hydrometallurgical process techniques developed by
the U.S. Bureau of Mines Research Center in Reno, Nevada between 1970 and
1979. A number of potential commercial applications were defined by NHP, one
of which is the American Hydromet silver/gold refining technique. In late
1985, NHP assigned its interest in the silver/gold refining technique to
American Hydromet. NHP retained its proprietary interest in the other
potential commercial applications for future developments. NHP continues
as a financing and technology owning partnership. The Company owns 92.5% of
NHP.
4. American Hydromet:
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American Hydromet is a Nevada joint venture that was formed in 1985
to develop certain silver and gold refining/recovery technology and to create
business based upon such technology. The photobyproduct fertilizer segment
now being managed by IMI is owned by American Hydromet. The ownership
interests in American Hydromet are: NHP for 76.5%, IMI for 1%, and American
Gold & Silver Limited Partnership ("AG&S") for 22.5%. AG&S is a Nevada
limited partnership, for which W&W serves as the general partner and owns a
general and limited partnership interest totaling 10.907%. The Company owns a
32% limited partnership interest in AG&S. In total, the Company owns approx-
imately 81.4% of American Hydromet.
SUMMARY HISTORY OF OPERATIONS
Whitney & Whitney, Inc. was incorporated in 1977 to provide a wide
range of technical services to the mining industry. During the early 1980's,
W&W completed fertilizer marketing studies for several industrial mineral
mining concerns. Also during this time period, W&W was contacted by state
and local environmental officials concerning the problem of photographic
wastes, laden with silver and other toxic heavy metals, being dumped in local
sewer systems.
Over the years, the mining technical services business was highly
cyclical, closely following the precious metals industry, and specifically,
the price of gold. This condition pointed out the necessity of expanding
the Company's business into new industries. When considering the fertilizer
marketing studies previously performed, along with the growing national issue
of sewer system contamination with toxic photowastes, it seemed to be a
natural extension of W&W's existing expertise to expand into the photowaste
recycling business. In 1987 the decision was made to move forward with
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research and development of a process to extract silver from photographic
wastes and the necessary permits to establish an R&D facility under RCRA
were obtained. In 1988 a patent and literature research project regarding
the use of photowastes in fertilizer was begun. During that year,
experimentation with processed run of plant liquids was also begun.
A description of some of the obstacles encountered and overcome over
the ensuing years, which accounts for the Company's present financial
condition follows:
A. In 1988 the Company acquired W&W. The acquisition was structured
to obtain approximately $1.7 million in equity financing to support the photo-
byproduct fertilizer R&D project. Due to a number of factors, including a
change in federal and state laws regarding trading in penny stocks, only a
small portion of this funding was received. Consequently, the Company has been
undercapitalized since the acquisition of W&W in 1988.
B. In the initial stages of the R&D project, it was believed that:
(1) the primary research on the integrated system for recycling photowaste
into fertilizer would take through 1992 to complete, and (2) the R&D effort
would be self-supported by increasing photowaste volume at the established
service pricing. The basic research for demetallizing photowaste solutions
and for refining the silver were substantially complete by the end of 1992.
However the research on the third segment of the integrated system, converting
the demetallized solutions to fertilizer, took four more years. Initially,
it was believed that "run of plant" solution, with minimal major nutrient
supplementation, would produce a quality fertilizer product. The early stages
of research determined that the product was too dilute and would need to be
concentrated by supplementation with the major nutrients, nitrogen, phosphate,
and potassium, in order to produce the desired quality product. This factor,
combined with the seasonal nature of field testing the products, resulted in
the additional years required to perfect and field test the mix formulas in
the quantities needed for large scale manufacturing.
As mentioned above, it was believed that the R&D effort would be fully
supported by photowaste service revenue. However, two major factors prevented
this from occurring. First, during 1992 and 1993, there was reduced enforce-
ment of applicable regulations by various environmental agencies, and, second,
during the same period, a competitor entered the Northern Nevada market by
offering free service in exchange for the contained silver in photowaste
solutions. In order to prevent loss of customers and to increase volume,
the Company instituted three price reductions of approximately 40% each during
the period of 1992 to 1994. The result is that 1996 volume was 135% greater
than 1992 volume, but service revenue remained essentially the same throughout
this time period, contributing to the losses that have occurred.
During this same time period, the Company worked with environmental
officials to obtain strengthened enforcement activity. Enforcement
strengthened in 1995 and 1996, not only in Northern Nevada, but in California
and most of the other 48 states in the U.S. In 1996 the Nevada regulatory
authorities made changes in the Company's permit status that increased the
number of used chemical solutions that the Company can process for utilization
in fertilizer and other chemical concentrates. Tightening of regulatory
enforcement also reduced competitive price pressures by making it more
difficult for service companies with minimal compliance capability to continue
to offer low cost services. The result was that in 1996 selective increases
in service pricing became feasible.
The second major factor preventing the R&D project from being self-
supporting is that in 1991, photowaste volume limitations were placed on the
Company by state and local environmental agencies to prevent large quantities
of photowaste being brought from out-of-state to be disposed at Nevada solid
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waste sites. Photowaste volume reached the threshold of these limitations in
1994. Consequently, the Company has had a limited ability to increase
photowaste volume to offset the price reductions dictated by market
conditions. These regulations are expected to remain in effect permanently.
The Company's path to overcoming this obstacle is through utilization of the
demetallized solutions in fertilizer and other commercial products. In other
words, the more fertilizer sold, the more photowaste the Company can receive.
This is why management has placed such strong emphasis on completion of the
fertilizer R&D and on obtaining the distribution arrangements discussed on
page 14 of this report.
To summarize, the combination of undercapitalization and the problems
encountered in the photobyproduct fertilizer R&D project produced the opera-
ting losses that have occurred.
A more detailed discussion of the business of the Company contained in
Item 1 of this report, based on the Company's two business segments which
were briefly described above, follows. The operating results of the two
segments are discussed in Note 13 to the Consolidated Financial Statements
beginning on page 57 of this report.
MINING TECHNICAL SERVICES
1. Services offered
The Mining Technical Services segment of the Company offers a wide
range of technical services to the mining industry. These include the
following:
I. Management Support
- Assistance in assembling mineral project development agreements and
ongoing technical support during project development and after operations
begin.
-Advice on mineral development strategy, economic aspects of tax
policy, long term investment strategy and infrastructure development related
to large and small scale mineral development.
- Complete project development plans.
- Expert assistance in contract disputes pertaining to various
technical aspects of mineral projects and the development of the technical
aspects for contracts.
- Ore reserve audits, metallurgical audits and material balance
reviews, and operations reviews on producing mines for senior management,
outside investors, or underlying land owners.
- Mineral property appraisals for sale, acquisition, merger or
financing.
II. Mineral Economics and Cost Studies
- Feasibility studies.
- Taxation studies and economic impact analyses
- Capital and operating cost estimates.
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- Development schedules and budgets.
- Modernization and expansion studies.
- Specialized mineral market and product market studies.
- Global commodity/competitor/industry studies.
III. Metallurgical Process Development
- Metallurgical evaluation, program definition and supervision.
- Flow sheet development and conceptual facility arrangement.
- Preliminary and intermediate process facility design.
- Complete "battery limits" layouts,
IV. Open Pit and Underground Mine Planning
- Mine design, minable reserve calculations.
- Ore and waste product scheduling.
- Site layout, haul road and facilities arrangements.
- Equipment selection.
- Assistance with grade control planning.
- Assistance with grade/metallurgical recovery distribution
studies.
V. Ore Reserve Development
- Ore reserve measurement, drilling and sampling, program
definition and supervision.
- Integration and interpretation of geological, geochemical,
geophysical and drilling data for purposes of ore definition
and development.
- Conventional and computerized ore reserve studies and assistance
in defining proven, probable and possible geological and minable
reserves for financial reporting purposes, for feasibility
studies, and for increased production planning.
2. Operations
The Mining Technical Services segment accounted for 64.1% of the
Company's 1996 consolidated revenue. Two major projects produced approxi-
mately 81% of this revenue. The first project involves litigation
support services for a mine property owner against the former operator of
the mine. The project has continued through 1996 into 1997. The work level
for this project may be reduced from prior activity until the trial, which
is presently scheduled for the third quarter of 1997. The second project
involves project management of a Nevada mine property, including sampling,
mapping and data compilation and property acquisition services. The purpose
of these services is to acquire and organize the land and information
necessary to prepare the property for presentation to major mining companies
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for potential investment for exploration and development activities. The
Company has provided technical services for this client for many years and
expects such services to be ongoing. During 1996, a third major project was
begun that produced approximately 17% of technical services revenue. The
project involves negotiating a lease on behalf of a Nevada mine property.
The property was successfully leased to a Nevada firm in January 1997.
Consequently, future work on the project will be ongoing, but work level will
be reduced form 1996 levels and will be related to monitoring lease terms and
organizing technical data to facilitate property development activities. The
details of the transaction are more fully described under Item 12, "Certain
Relationships and Related Transactions", beginning on page 31 of this report.
The primary source of new business for the Mining Technical Services
segment is the reputation of W&W and its key employees. In addition, W&W
expands its network of contacts by attendance at various mining association
conventions.
In the past W&W has published specialized mineral economics and
materials financial reports. W&W is evaluating re-entry into this market, with
a goal of producing mining publications targeted for general investors
interested in mining investments.
PHOTO BYPRODUCT FERTILIZER
1. Research and Development
The photobyproduct fertilizer (the American Hydromet Project) segment
of the Company has primarily been involved in research and development, which
has the objective of developing integrated technology that can be used to
recycle photobyproduct materials, that recovers all of the silver and all
other toxic metals from those materials, and which utilizes demetallized
liquid photobyproducts in liquid multi-nutrient fertilizer for turf appli-
cations. The status of development of the three integrated components is more
fully described below:
The technology is being developed in a semi-works plant in Reno which
is operating in about 7,000 square feet of leased facilities. Development of
the integrated technology represents a major technical innovation. There are
three separate functions for handling the waste photoliquids. The first is the
solution conditioning process. This process is used to recondition and
demetallize the metal-bearing photofixers and photodevelopers that are picked
up from photousing businesses. This portion of the process is very efficient,
recovering over 99.98% of all the contained toxic metals, and a very large
percentage of contained iron. There are two products from this part of the
operation: (1 )a metal-bearing sludge, and (2) the reconditioned, demetall-
ized, photoliquids.
The metal-bearing sludge is dried and passed to the refining operation
for separation of the contained silver. This operation is also technically
very efficient. More than 99.5% of the silver contained in the sludge is
recovered for sale. The refining was developed specifically to handle the
sludges from the liquid demetallization and conditioning process. As such,
the other heavy metals and iron contained in the sludge end up in a glass
byproduct and are rendered completely inert. The Company has formulated the
glass so that with minor additions of other compounds, it can be converted
into usable products, such as floor tile. The Company plans to pursue glass
product development once the fertilizer is commercially operational.
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The process, known as the "American Hydromet Silver-Gold Refining
Process" is a technological discovery that has the potential to significantly
alter the proprietary commercial gold-silver refining industry world-wide.
This proprietary technology is presently being further developed with contin-
uing research and development.
The major innovation in the technology consists of using wet chemistry
(hydrometallurgy) to quantitatively separate gold and silver in very pure
form, and to entirely eliminate the need for electrolytic refining. The
process is used to treat (1) electro-sludges and electro-chips derived from
photobyproducts such as developer solutions and scrap film, and (2) zinc
precipitates and electrolytic sludges from gold and silver mines such as those
found in Nevada and other locations. Based upon the technology, American
Hydromet currently has two business activities which are being commercially
developed:(1) photobyproduct recycling, and (2) silver/gold refining. The
photobyproduct recycling is a spin-off concept and additional spin-off
businesses are expected as the American Hydromet process and other technology
associated with it are further developed.
The American Hydromet process is proprietary information. The U.S.
Patent Office has issued a process patent on the gold/silver separation
process (U.S. Patent No. 4,662,938, dated May 5, 1987). A patent on the same
process was issued by South Africa in June, 1986 and patents were issued by
Canada and Australia in September, 1989. The patents are owned by American
Hydromet. Other portions of the American Hydromet process are believed to be
patentable.
A priority objective of American Hydromet is to establish the com-
plete capability for recovering all of the valuable components of photoby-
products for sale and reuse. As a result of the technology American Hydromet
has and is developing, it has the potential of becoming a major recoverer and
refiner of silver and at the same time it has the opportunity to become a
major recycler of photobyproducts.
The reconditioned photoliquids are used as a component of a turf
fertilizer. The fertilizer is a multi-nutrient nitrogen product and produces
excellent results in application. Development of the fertilizer has taken more
than 8 years and involved a number of stages of development. Important steps
in the development of the fertilizer were: (1) patent and applications lit-
erature research to determine if similar materials were being used in ferti-
lizer products, (2) initial plot testing, and chemical analysis of "run of
plant liquid" to determine the response of turf and different plants to the
non-supplemented liquid, (3) an extended period of mix testing and then large-
scale field testing of the mixes to determine the suitability for use on turf,
(4) development of manufacturing procedures for the chosen mix, and (5) large
scale field testing by different types of users to determine acceptability and
to identify problems prior to implementing a commercial manufacturing and
marketing program. A problem inherent in fertilizer product development is the
seasonal nature of the business. Each series of plot tests requires
essentially one year because of the seasonal nature of plant growth. This
lengthy product development cycle will continue to apply to new fertilizer
products that are being developed.
After having made the commitment to this long-term development,
Itronics believes it is the only company in the world that has successfully
demonstrated the ability to manufacture an environmentally acceptable
fertilizer product from liquid photobyproducts that produces excellent results
in use. As such, Itronics now has unique proprietary technology for completely
recovering the silver and for converting the waste liquids into usable
commercial products, thereby achieving total recycle of the waste stream.
Through 1996, the Company has been testing its Gold'n Gro 20-1-7 in
various commercial applications, including golf courses, turf farms, and
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professional lawn maintenance organizations. In 1995 the Company began parti-
cipating in a controlled fertilizer product application comparison program
sponsored by the University of California at Riverside. For the second consec-
utive year, Gold'n Gro 20-1-7 was rated Number 1 in the program, which
compared "top of the line" multinutrient nitrogen fertilizers produced by
leading U.S. fertilizer manufacturers. Both the Gold'n Gro 20-1-8 and 20-1-7
are registered in California and Nevada. In early 1997, Gold'n Gro Iron, a
fully chelated liquid iron supplement fertilizer, was registered in California
and Nevada. In mid 1997, development of Gold'n Gro Manganese was completed.
The manganese, iron and zinc included in this product are in a citrate
chelated form supplemented with EDTA chelate, which makes the micro-nutrients
readily available to plants. Other products in various stages of development
include a high nitrogen multi-nutrient product designed for the turf and
ornamental market and markets needing fertigation applications, several plant
foods for vegetables and fruit trees, including citrus, and a zinc product
designed for zinc deficient soils.
All Gold'n Gro products are carefully engineered to provide micro-
nutrient content adequate for plant nutrition, while also being completely
safe for the environment.
The Company has identified potential applications for the recond-
itioned photoliquids in the mining industry, but has not pursued development
of those applications until the fertilizer is commercialized.
2. Operations
The Company operates a semi-works plant for the purpose of completing
development of an integrated system to receive photobyproduct materials,
recover the silver and other metals, and convert the demetallized solutions
to liquid turf fertilizer and other products. A critical component of this
system is to match, within a reasonable range, the incoming volume of photoby-
product solutions with the volume of utilization of those solutions in
fertilizer or other manufactured products. At the outset of the technology
development program, regulatory constraints were imposed to limit the amount
of photobyproduct materials that the Company could handle until a commercial
fertilizer was perfected, or some other commercial use for the material was
developed. As a result, during the lengthy period of researching and testing
the fertilizer products, the Company has not significantly expanded photoby-
product solution volume. However, as testing of the basic products nears
completion the Company intends to aggressively seek new photobyproduct
solution business.
Photobyproduct management services is operating as a regional business
with northern Nevada as the center of its activities. The Company is serving
more than 300 customers in the northern Nevada market and believes that it has
the dominant position in this market. A satellite service operation has been
established in the San Francisco Bay Area, but it has not grown appreciably
over the last four years. Now that a commercial fertilizer product has been
perfected, the Company plans to expand its San Francisco Bay Area service
operations.
The San Francisco Bay Area is large, but there are at least three
strong competitors in the market. Market conditions have changed over the past
year and pricing has adjusted upwards from the lows seen in late 1994. Because
of this, the Company is now able to compete based upon pricing and service
quality. While expansion in this market may not be extremely rapid, growth
should be steady for the next two to three years.
In late 1995, the Company was able to sell a prototype installation of
low temperature vacuum distillation equipment to a large manufacturing company
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in northern Nevada. This equipment separates the water from the photochemistry
without destroying the basic chemical components, and produces a high value
concentrate. The separated water is further purified and is usable in manu-
facturing operations. Therefore, a valuable commercial product is produced,
and nearly 100% of water reuse is achieved.
The distillation equipment began operations in March of 1996, and was
performing effectively by mid-June. The concentrate being produced is up to
forecast standards, and water quality is proving to be excellent. Successful
startup and operation of this technology provides a business expansion
opportunity for Itronics.
The distillation concentrate has a high silver content and is
dominantly composed of ammonium thiosulfate and EDTA chelates (ATS), the
basic chemicals used in photo fixer solutions. Itronics' fertilizer blending
technology is able to utilize the concentrate in fertilizer.
Itronics' plan is to seek companies that handle sufficient volumes of
photographic liquids to justify purchase of the distillation equipment. The
ATS concentrate can be shipped in interstate commerce as a commercial product,
resulting in the opportunity to serve the national market. Successful intro-
duction of this technology will increase the value per gallon of material
handled by a factor of five to ten, and will increase the amount of silver
handled per gallon of photoliquids received. As the supply of the ATS
concentrate grows, so too will the silver refining operation. The transition
from low silver content liquids to high silver content liquids will increase
the importance of the silver refining operations and silver sales.
Achieving profitability for the photobyproduct fertilizer segment will
require expansion of the plant from the present semi-works scale to a small
commercial scale. In early 1997, the Company identified an existing facility
that would meet both plant and office space requirements for many years.
The Company is presently negotiating for the acquisition of this facility.
The Company estimates that the transition to a small scale commercial
operation will be completed in 1997.
The Company's revenues in the photobyproduct management business are
generated from three major sources: (1) the pick up and processing of photoby-
product solutions from customers for which they pay the Company a fee;
(2) recovery of silver from photographic solutions and film and sale of the
recovered silver; and (3) sale of the demetallized solutions in fertilizer or
sale for other specialized commercial markets.
The photobyproduct management services are typically performed pur-
suant to an exclusive one year service agreement that obligates the Company to
accept from the customer photobyproducts conforming to the provisions of the
agreement. The service agreement is automatically renewed annually, and can be
canceled by advance notice of 30 days. The fee is based upon the silver
content of the waste and competitive market factors. The Company periodically
reviews and adjusts the fees charged for its services. The annual contract
and service fee provisions are necessary for the Company to recover its
substantial investment in technology, and to protect it under the regulatory
framework in which it must operate.
The photobyproducts presently being handled by the Company are:
Ammonium Thiosulfate Concentrate
Aqueous Ammonia
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Developer
E1ectro-flake
Film
Fixer
Sodium meta-bisulfite concentrate
Stabilizer
Steel Wool/Metallic Ion Exchange Cartridges
Scrap paper that accompanies film
The Company is evaluating the potential for use of acetic acid in fer-
tilizer. If this proves to be technically feasible, then the Company will
begin to accept used acetic acid solutions as well. The Company is also
reviewing the potential for handling silver-bearing ion exchange resins.
The photobyproducts are transported to the Company's current semi-
works recycling facility at Reno, Nevada. All customer's material, whether it
is photographic solutions or film, is logged and recorded.
Upon receiving photographic solution into the processing facility,
two samples of the incoming waste are always taken prior to processing. One
sample is sent to an independent EPA certified laboratory for analysis. The
other sample is retained by the Company and stored on-premises for two months.
At this time, the photographic solution is also tested for contamination.
High chrome content wastes are specifically rejected. It has been the exper-
ience of the Company that new customers, with limited knowledge of the rules
and procedures, may submit materials containing foreign substances. The
Company achieves high containment control standards with its regular
customers.
Once testing is completed, the photographic solutions are processed in
American Hydromet's proprietary system.
As part of the process, silver bearing sludges are separated from the
photobyproduct solutions, filtered, and then dried. The Company then refines
the material into silver matte bars and ships them to an internationally known
silver refiner, Handy & Harman ("H&H"), at its Phoenix, Arizona refinery. H&H
refines the bars and prices the silver at its quoted closing price on the
settlement date.
Presently, the recovered silver is processed in the Company's proto-
type refining operation. This operation is small scale, and will need to be
scaled up to accommodate the larger quantities of silver that the Company
anticipates will be contained in the ATS concentrates produced by the distill-
ation machines. The current refinery is operated on a part time basis and is
adequate to meet the operational requirements into 1997. By late 1997 or early
1998, it may become necessary to move the refining operation to a more
suitable location. Plans are now being formulated, including the capital
requirements for the expected increase in capacity.
The final stage of the photobyproduct fertilizer process is to blend
the demetallized solution with other nutrients to create a liquid turf ferti-
lizer. Through 1995, the Company's primary focus had been on field testing the
products. Consequently, sales of fertilizer have been limited. In 1996,
however, the Company began small scale commercial sales, and is presently
working with several commercial users of the product to determine the optimum
application procedures. During the third quarter of 1996, the Company init-
iated discussions with three large fertilizer distribution companies
regarding potential distribution arrangements for the Company's fertilizer and
chemical products. Initial discussions center around the possible sale of
100% of the Company's fertilizer production capacity, with increasing sales as
10
<PAGE>
capacity is expanded. One of these distribution companies is presently test
marketing the Gold'n Gro iron fertilizer. A more detailed discussion of the
progress of the marketing program is located beginning on page 14 of this
report.
The fertilizer manufacturing operation is also at a small scale. In
1996, new tankage was acquired and installed and a larger mixer system was
installed. This operation is suited for automation at a larger scale and
planning is ongoing to determine the desired configuration and requirements
for a commercial scale operation. The present location is not suitable for
large scale fertilizer manufacturing and, therefore, it will be necessary to
move the operation to a different location in late 1997 or early 1998.
In 1996, the photobyproduct fertilizer segment produced 35.9% of the
Company's revenue. Over the next several years, this segment is expected to
grow significantly in relation to the mining technical services segment. Con-
sequently a major shift in the Company's operations toward the photobyproduct
fertilizer segment is anticipated. Eventually, this segment may produce the
majority of the Company's revenues.
3. Markets and Competition
I. Photobyproduct Recycling and Silver Refining
There are estimated to be more than 1,500 generators of photographic
hazardous waste in the State of Nevada and more than 500,000 throughout the
United States. This includes printed circuit board manufacturers, photo off-
set printers, photographic developers, lithographers, photographers, micro-
filming (banks, companies, etc.) and x-ray users (dentists, doctors,
hospitals, podiatrists, orthopedic surgeons, veterinarians, radiologists and
industrial x-ray users). The Company estimates the total market for recycling
this category of waste to be in the range of $500 to $600 million.
Nationally, about 70 million ounces of silver are consumed in photo-
materials annually. Approximately 30% of this is lost through disposal in
sanitary sewers nationwide. Itronics' technology recovers 99.975% of the
silver contained in these waste solutions. Thus, as the photobyproduct re-
cycling operation expands, silver refining will become more significant to the
Company. The Silver institute indicates that silver usage in photography is
increasing, and will continue to do so over the next few years.
The photowaste management industry is not systematically organized,
but is fragmented with many small operators, or large waste haulers. The small
operators typically specialize in one or more types of photowaste, but
typically prefer film. The large waste haulers pick up all categories of
waste, but do not handle film and paper. It appears that photowaste management
as a systematic business is not yet organized by any large company in the
United States. This is a niche that the Company seeks to fill.
Silver recovery from black and white and x-ray chemistry is an estab-
lished industry. Silver recovery is typically accomplished at a user's site by
specialized recovery equipment. The equipment is normally installed and main-
tained by way of a service agreement with the vendor, or vendor represent-
ative. The service of silver recovery is particularly entrenched in the
medical field where the service business supplies a silver recovery unit and
also picks up film waste for sale to a waste film processor. Black and white
and x-ray chemistry is typically monometallic with silver being the main
EP-Toxic metal. The recovery units are only about 90% efficient in routine
operation, so significant amounts of the silver are discharged into the
sewerage systems. This compares to the Company's technology which routinely
recovers 99.975% of the silver content.
11
<PAGE>
Metal recovery from color and paper processor chemistry is not as well
established, although the silver recovery units used in the medical sector are
also used by color processors. A characteristic of color chemistry and paper
processing chemistry is that it is polymetallic, and contains from four to
seven of the metals listed as EP-Toxic. There are stringent EPA discharge
limits for these metals. This sector has the normal competitive factors found
in the medical sector, except that most of the companies in the business are
only focusing their recovery efforts on silver, while ignoring the other
three to six toxic metals commonly known to occur in this chemistry.
Waste film processing is an established competitive industry in the
United States. It is highly segmented and characterized by many small proces-
sors, most of which are located in the eastern part of the United States. The
number of processors in the West Coast is limited. There are believed to be
three companies of consequence, one in California, one in Washington State
and one in Utah. Some waste film is exported to Korea, Japan and Hong Kong.
Eastman Kodak is now the largest and dominant waste film processor in the
eastern U.S. Kodak may be the largest silver recycler in the United States.
DuPont has sold its silver recovery operations and is now out of the business.
Kodak purchases scrap film from its large film processing customers.
The Company is aware of digital imaging and its potential impact on
usage of conventional photography. The potential impact is different for each
of the major segments; medical, color photography, and printing/microfiche.
Digital imaging has made significant inroads into printing/microfiche process-
ing with an almost 80% reduction in volume of photographic liquids over the
past five years. There has been little visible impact on color photography,
although the new digital cameras are getting wider usage. Digital methods are
being adopted in the medical industry. The medical sector is relatively high
growth with the aging population and therefore digital imaging has had the
effect of slowing the growth rate in the amount of waste photo liquids being
generated.
A larger impact on photo waste generation has been the pressure for
companies to reduce the amount of waste generated at the operating sites. In
photography, water was used in copious quantities for film rinsing and large
quantities of low chemical content waste liquids were generated. With the
tightening of regulation of discharge of contaminated waters to sanitary
sewers, the equipment manufacturers have focused on reducing water usage. This
attention to reduction of waste water has also contributed to a reduction in
the quantities of waste liquids being generated. It is expected that effic-
iency of use and associated waste reduction will continue, driven by
increasing waste disposal costs.
The distillation equipment now being sold by the Company will
contribute to the reduction of water usage in the photographic industry. When
the distillation equipment is used, waste water can be virtually eliminated.
The chemical product is purchased by Itronics, and so the generation of waste
at the user site is completely eliminated. This technology represents an end
point for the elimination of water waste in the photographic industry, and is
expected to gain wider acceptance as the industry recognizes the benefits
inherent in the technology when combined with Itronics service capabilities.
The Company believes that it has the following competitive advantages:
* Leading position in developing "total" photobyproduct recycling
technology and waste management procedures.
* Proprietary solution conditioning process and equipment with the
possibility of patent rights and licensing agreements.
12
<PAGE>
* Patented low cost silver refining process using wet chemistry
(hydrometallurgy) to quantitatively separate silver from photoby-
product materials.
* Proprietary liquid turf fertilizer product that eliminates the need
to dispose of treated photographic liquid waste in sewage treatment
systems, or solid waste sites (dumps).
* Systematic pick up services for photobyproduct generators.
* Quantitative material control procedures meeting all EPA reporting
guidelines.
* Regulated as a precious metals recycler and a hazardous waste
transporter, therefore, low cost and proven track record and
commitment.
As discussed under the section on Regulation, the actual rate of
growth for the photobyproduct recycling business is dependent upon the rate
and vigor of environmental enforcement. The Company's photobyproduct
recycling business development will continue to be dependent upon this fact,
however, the results of continuing expansion of regulatory enforcement are
beginning to be seen on a major scale. For example, SafetyKleen entered the
business in early 1995 by acquiring three large private photowaste handling
companies on the east and west coasts of the U.S., in Boston, San Francisco,
and Los Angeles. These acquisitions include the largest photowaste handler in
San Francisco, and one of the top three photowaste handlers in Los Angeles.
The entry of this large waste hauling company in the market, along with
continuing expansion of enforcement has created a very dynamic market
situation with many changes occurring. Opportunities for Itronics to build
relationships with the major photoproduct manufacturers and service companies
using its superior fully integrated technology are now opening up.
Toward that goal, one of the top international photoproduct manufact-
uring companies has approached Itronics because of Itronics' photobyproduct
fertilizer manufacturing technology and because of Itronics' growing service
capability in Northern California. Itronics and this company are presently
establishing a working service relationship in Northern California while the
company evaluates the potential for the fertilizer in the U.S. and European
markets. Itronics ability to develop a larger scale working relationship with
this and other large photoproduct manufacturers is dependent on its ability
to establish a nationwide service capability in a relatively short period of
time (2 to 3 years).
II. Photobyproduct Fertilizer
The urbanization of the United States has led to the development of an
"Urban Fertilizer Market",. The total fertilizer market consists of the "Agri-
cultural Market" and the "Urban Market". Each market accounts for at least
$3 billion in annual sales in the United States making the total a $6 billion
market.
The Urban market is divided into the "Home Lawn and Garden" segment
and the "Professional Care" segment. Neither of these markets is statistic-
ally well defined, since both are relatively new as large commercial markets,
both are highly fragmented with many small regional suppliers and are growing
rapidly. Two well known operators in the Home Lawn and Garden and the
Professional Care segments are Scotts, and Stern's Miracle-Gro. Several other
large companies including Monsanto and the Vigoro Corporation are active in
this market.
Itronics photobyproduct fertilizer Gold'n Gro 20-1-7 was developed for
the Urban market as a "turf" product. Its principle customers will be home
owners, professional lawn service companies, golf courses, turf farms, and
large municipal and commercial facilities.
13
<PAGE>
Itronics is developing nine additional fertilizer products which will
be suited for general use in both the Urban and Agricultural markets. As of
the date of this document, it is projected that these new products will be
introduced during 1998 and 1999. Each is being specially engineered to exact-
ing specifications for specific market applications and will be field tested
prior to commercialization.
Itronics estimates that more than 100 million gallons of photowaste
liquids are generated annually in the United States. The ratio for converting
one gallon of photobyproduct to Gold'n Gro 20-1-7 fertilizer is 1 gallon of
photobyproduct to 4 gallons of fertilizer. This means that there is enough
supply of photobyproduct to support the manufacture of 400 million gallons of
photobyproduct fertilizer annually, equivalent to approximately two million
tons.
Itronics estimates that on a commercial scale, the combined revenue of
photobyproduct services, silver and fertilizer will exceed $10.00 per gallon
of photobyproducts received. Consequently, the potential market for these
products and services exceeds $1.0 billion.
Small volume sales have been made intermittently to two turf farm
operations, to a regional lawn service company, and to two golf courses in
northern Nevada. Making these sales and working with the customers has allowed
the Company to learn the specific requirements for each market. It has also
made it possible to assess the feasibility of direct marketing the product as
compared to selling to distribution companies who would do the direct
marketing. Experience to date indicates that selling to fertilizer distribu-
tion companies will be a more efficient method of achieving large scale sales
in a reasonable period of time.
The Company's plan is to initially focus on regional fertilizer sales.
Options for distribution are being reviewed, and discussions have been init-
iated with fertilizer distribution companies and with potential large users
such as golf courses. These activities are being conducted as part of a
market development plan now being initiated for the fertilizer side of the
business. The ability to sell the fertilizer efficiently at a relatively large
scale is an important determinant of the Company's ability to grow. The
business development efforts now underway have the specific objective of
achieving this goal by identifying large acreage markets for individual
Gold'n Gro products.
Discussions regarding fertilizer distribution have gone the furthest
with Western Farm Service, Inc. (WFS), a wholly owned subsidiary of Agrium,
Inc. Agrium is the largest nitrogen fertilizer producer in North America and
the second largest retailer of agricultural fertilizer products. In April
1997 WFS initiated a test marketing program for the Company's Gold'n Iron
fertilizer and purchased a bulk quantity of the product. To date, WFS'
customer field tests have been successful. WFS has committed to marketing a
turf application program that utilizes both Gold'n Iron and Gold'n Gro 20-1-7.
WFS is also evaluating a third commercial product, Gold'n Gro Manganese.
Another Agrium subsidiary, Source- 1, has committed to marketing all three of
the Company's commercial products.
At present, it appears that WFS will take a cautious, conservative
approach to marketing the Gold'n Gro products. The reason being that these are
new products. WFS is primarily in the agricultural market which is known to
be conservative and resistant to change. This means that fertilizer sales
volume will likely grow at a steady pace as a user base is established.
14
<PAGE>
The Company is developing branded products that have the Gold'n Gro
trademark. The Company is developing a plan for consumer sales through retail
outlets. Significant capital, in the form of advertising budgets and the
ability to carry large inventories of finished goods, is required to achieve
meaningful retail sales. However, the Company is presently providing photoby-
product recycling services to large chain stores, including Walmart and Price
Costco. Because of this, the Company believes it is positioned well to be able
to sell branded fertilizer products through the chain store outlets.
Implementing and growing the retail sales program is expected to take several
years.
15
<PAGE>
4. Seasonality and Working Capital
In analyzing the market and industry competitors, it is apparent that
two factors will significantly impact the Company's ability to penetrate these
markets in a meaningful way. First, the seasonal aspect of photobyproduct and
fertilizer sales, which directly results in the second factor, the need for a
much higher level of working capital when compared to other industries.
Based on past experience, the Company's photobyproduct hauling volume
starts each year at comparatively low levels in the first quarter, steadily
increases during the second quarter, peaking in June or July, declining during
the third quarter, and reaching levels similar to that of the first quarter by
year end. Consequently, revenues from both photobyproduct services and silver
sales are significantly reduced during six months of each year. The cause of
this cyclical pattern is the tourism based economy in Northern Nevada, which
has a comparable seasonal pattern. The volume of visitors directly affects
photobyproduct volume from consumer photoprocessing companies. To mitigate the
seasonal effect on this segment of operations, the Company is focusing its
marketing efforts on larger volume customers in the medical, military,
printing and industrial photo fields.
The Company expects fertilizer sales to be seasonal, with the primary
sales season running from April through November each year, with tapering off
beginning in September. In addition to the general seasonal nature of sales
caused by normal weather patterns, unusual weather can further affect fertil-
izer sales. For example, unusually cold or wet spring seasons may delay the
growth cycle of various turfs for which the Company's fertilizer products are
utilized. To overcome weather related effects on fertilizer sales, the Company
is evaluating opportunities for markets in the southwestern United States
where growing seasons are longer and, in some cases, year round.
Due to this seasonal nature of both photobyproduct services and
fertilizer sales, the Company must increase its net working capital to a level
higher than that of non-seasonal industries. For example, some of the
Company's competitors have working capital equal to their annual sales.
Consequently, ongoing debt and equity funding will be required for the Company
to grow, even after a profitable level of operations is achieved.
5. Environment and Regulation
I. Liability
All chemistry has a "cradle to grave" regulatory life span. This term
means under Federal law, the prime generator has the ultimate liability for
all generated waste as long as it exists. Conventional services, through
storing and hauling, relocate the waste to a legal landfill in the West.
Liability then remains for the cost of cleanup if the landfill has to be
reclaimed or the contamination of groundwater develops.
However, once the spent chemistry reaches the Company's facility and
been processed, the generator's hazardous waste liability has been removed.
Using the Company's process, virtually all metals, including most of the iron,
are removed. The end result leaves the Company with a non-hazardous solution
which is legal for discharge into the environment. As discussed above, the
demetallized liquids are being used in commercial fertilizer products,
entirely safe for the environment.
16
<PAGE>
II. Increased Regulation
While in general the Company's business has benefited substantially
from increased governmental regulation of hazardous disposal by private
industry, the waste management and recycling industry itself has become
subject to extensive, costly and evolving regulation by federal, state and
local authorities. The Company makes a continuing effort to anticipate
regulatory, political and legal developments that might affect its operations,
but may not always be able to do so. The Company cannot predict the extent to
which any legislation or regulation may affect future operations.
In particular, the regulatory process requires firms in the Company's
industry to obtain and retain numerous governmental permits to conduct various
aspects of their operations, any of which permits may be subject to
revocation, modification or denial. The Company is not in a position at the
present time to assess the extent of the impact of such potential changes in
governmental policies and attitudes on the permitting process.
III. Permits and Inspections
To the best of the Company's knowledge, it has obtained permits from
governmental agencies having jurisdiction over it, such as the EPA, Nevada
Department of Environmental Quality, Washoe County Health Department and the
City of Reno, Nevada. The Company is not required to obtain federal permits,
but is required to have, and has obtained, local permits for its photo-
byproduct semi-works recycling facility under the provisions of the Federal
EPA. Similar permits will be required of all facilities that the Company may
construct. The Company's semi-works recycling facility is subject to
frequent inspections and to regulations (including certain requirements
pursuant to federal statutes) which may govern operating procedures for land,
water and air pollution, among other matters. In particular, the Company's
operations are subject to the Safe Drinking Water Act, TSCA (Toxic Substances
Control Act-pursuant to which the EPA has promulgated regulations concerning
the disposal of PCBs), the Clean Water Act (which regulates the discharge of
pollutants into surface waters and sewers by municipal, industrial and other
sources) and the Clean Air Act (which regulates emissions into the air of
certain potentially harmful substances). Employee safety and health standards
under the Occupational Safety and Health Act are also applicable to employees
of the Company.
IV. Regulatory Direction
For several years the Company has been studying the various regulatory
requirements under RCRA and has been working with state and local
environmental officials regarding the extent to which hazardous waste
regulations apply to the Company's operations. Through this process, the
Company reached the conclusion that due to use of photobyproducts as an
ingredient in its fertilizer products, the photobyproducts are not "hazardous
waste" as defined in the regulations, and therefore, materials that are
otherwise regulated as hazardous waste, are exempt from most of such
regulations. In early 1996 the Company received concurrence from State of
Nevada environmental officials that the Company's photobyproduct fertilizer
process meets the existing RCRA requirements for exemption from all
environmental regulation with the exception that certain presently conducted
lab analyses of the photobyproducts will continue to be required. Certain of
the Company's large scale customers presently meet the exemption requirements.
Present levels of fertilizer sales do not utilize all the photobyproducts
received, however, once all the photobyproduct materials are utilized in the
fertilizer or other commercial products, all the Company's Nevada customers
17
<PAGE>
will be exempt from the regulations, including hazardous material
transport/manifest rules. The Company believes that this exemption applies
nationwide. Therefore, the Company intends to pursue similar concurrence from
environmental officials in all applicable states, so that all its customers
will be recognized as exempt from the RCRA regulations.
ITEM 2. DESCRIPTION OF PROPERTY.
- ------- ------------------------
I. FACILITIES.
-----------
Itronics leases approximately 3,000 square feet of office space at
6490 South McCarran Blvd., Building C-23, Reno, Nevada. The Company shares
offices with W&W and IMI. W&W has the office equipment and furniture and
technical library typically found in a consulting business. IMI leases
approximately 7,000 square feet of space located at 35 N. Edison Way, Reno,
Nevada. This space contains the plant for the photobyproduct recycling
business, laboratory and research facilities, fertilizer manufacturing and
the Company's prototype silver refining operation.
II. EQUIPMENT.
----------
The actual equipment being used in the recycling process is
proprietary information. However, the plant for processing liquid photoby-
products is a fairly typical small chemical process facility consisting of
appropriate arrangement of tanks and pumps. Solids produced by processing
are recovered by filtration. The plant design is modular and is suited to a
small scale operation. Actual space required for commercial operation of the
liquid photobyproduct processing operation is 5,000 square feet.
The refining operation consists of a material handling section, solids
roasting, and a melting section. The actual equipment arrangements are
proprietary, but the main items are pumps, tanks, filtration equipment, drying
ovens, and the melting furnaces. Plant design is modular, is partially auto-
mated, and is currently being operated on a small scale. When sized for larger
commercial volumes, the plant will still be small. It is expected that ulti-
mately 10,000 square feet of space will be required for a relatively large
commercial volume. Presently 1,000 square feet of space is in use and is
adequate for 1997.
A unique aspect of work place environmental management is the use of
portable sumps under all items of equipment that manage the processing and
transfer of liquids whether hazardous or not. Large hoods and roof fans are
utilized in all facilities to ensure adequate air flow and ventilation.
The Company anticipates that by the end of 1997 it may be at maximum
capacity for silver refining and fertilizer manufacturing at its present
location, necessitating a move to another location for larger scale
operations.
ITEM 3. LEGAL PROCEEDINGS.
- ------- ------------------
1. The former president of Seahawk, Inc.(Seahawk) filed suit in June
1995 in the Superior Court of California, County of Orange, against the
Company, W&W, and several W&W employees, alleging libel and slander resulting
from consulting work W&W had done for Seahawk. The suit sought unspecified
damages to be proven at trial, plus punitive or exemplary damages. W&W's
liability insurance carrier defended against the suit, and in March 1997,
the suit was dismissed. The individual has filed an appeal of the dismissal.
18
<PAGE>
In February 1997, this individual served a second suit that includes
the Company, W&W, and a key employee as codefendants, along with several
unrelated parties. The suit alleges breach of contract and other causes of
action and seeks in excess of $5 million plus punitive damages. The Company's
liability insurance carrier has agreed to assume the defense of this action
with a reservation of rights, including the right to disclaim insurance
coverage. Management believes the allegations are without merit and is
vigorously defending against the suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF ITS SECURITY HOLDERS.
- ------- --------------------------------------------------------
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the year ended December 31,1996.
19
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------- --------------------------------------------------------
(a). Market Information. The securities of the Company are traded
on the over-the-counter market, and quoted in the National Quotation Bureau,
Inc.'s "pink sheets" and on the NASD Electronic Bulletin Board.
The following table sets forth the high and low bid prices for the
Company's common stock for each quarter for 1995, 1996, and the first two
quarters of 1997.
<TABLE>
<CAPTION>
High Bid Low Bid
-------- --------
<S> <C> <C>
3/31/95 $.21875 $.0625
6/30/95 $.1875 $.125
9/30/95 $.125 $.0625
12/31/95 $.0625 $.0625
3/31/96 $.0625 $.0625
6/30/96 $.0625 $.03125
9/30/96 $.0625 $.03125
12/31/96 $.125 $.03125
3/31/97 $.3125 $.03125
6/30/97 $.270 $.14063
</TABLE>
These quotations reflect inter-dealer prices without retail markup,
markdown, or commissions, and may not represent actual transactions.
(b) The number of record holders of the Common Shares on June 30,
1997 was approximately 746.
(c) Dividends.
----------
The Company has paid no dividends. The Company is prohibited from
declaring or paying any cash dividends on its common stock until all dividend
arrearages on the Series "A" Cumulative Convertible Redeemable Preferred Non-
voting shares are paid in full. As of December 31, 1996, cumulative unpaid
dividends on such shares was $251,068.
20
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------- --------------------------------------------------------
- -
I. Results of Operations
The Company reported a 1996 consolidated net loss of $156,891 or
$(.0067) per share, compared to a 1995 loss of $186,106 or $(.0081) per
share, a reduced loss of 15.7%. The primary factor contributing to the
improvement is 1996 debt forgiveness income of $135,288, compared to the 1995
amount of $52,423. The 1996 amount resulted from the settlement of a
promissory note in the amount of $43,000 for $10,000 and the write-off of
another promissory note and accrued interest in the amount of $102,288. Both
of these promissory notes were due to unrelated parties. The write-off is more
fully discussed under Note 12 to the Financial Statements on page 57 of this
report.
Consolidated sales increased approximately $6,800, or .8%, in 1996
compared to 1995. Consolidated cost of sales and operating expenses increased
approximately $56,600, or 5.4%, in 1996 compared to 1995. To provide a more
complete understanding of the factors contributing to the changes in sales,
operating expenses and the resultant operating loss, the discussion presented
below is separated into the Company's two operating segments.
MINING TECHNICAL SERVICES
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995
--------- ----------
<S> <C> <C>
Sales revenue $563,127 $630,357
Operating income $ 69,111 $107,818
</TABLE>
- -----------------------------------------------------------------------------
Mining technical services revenue totaled $563,127 for 1996, compared
to $630,357 in 1995, a decrease of 10.7%. Included in these revenue figures
are pass-through expenses of $166,307 and $164,785 for 1996 and 1995, respect-
ively. Excluding these amounts, revenues amounted to $396,820 and $465,572 for
1996 and 1995, respectively, a decease of 14.8%. This decline in revenue is
attributable to a combination of reduced work levels on the Company's two
major projects and to management concentration of effort on the photobyproduct
fertilizer segment of the Company. This concentration of effort has continued
through the first quarter and most of the second quarter of 1997, but is
expected to be split more evenly between the two segments beginning late in
the second quarter and through the third quarter of 1997.
Combined cost of sales and operating expenses totaled $494,016, com-
pared to $522,539 for 1995, a decrease of 5.5%. Included in these operating
expense figures are pass-through expenses of $166,307 and $164,785 for 1996
and 1995, respectively. Excluding these amounts, operating expenses amounted
to $327,709 and $357,754 for 1996 and 1995, respectively, a decrease of 8.4%.
The decrease is attributable to a reduction in professional salaries, reflec-
ting the reduced usage of part time professional staff.
21
<PAGE>
The above changes in revenues and operating expenses resulted in
segment operating income of $69,111 for 1996, compared to $107,818 for 1995,
a decrease of 35.9%.
PHOTOBYPRODUCT FERTILIZER
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1995
--------- ---------
<S> <C> <C>
Sales revenue $ 315,434 $ 241,420
Operating income (loss) $(301,495) $(290,382)
</TABLE>
- -----------------------------------------------------------------------------
Revenues for the photobyproduct fertilizer segment totaled $315,434 in
1996, compared to $241,420 in 1995, an increase of 30.7%. Volume for photoby-
product recycling services in 1996 increased 6.9% from 1995. Photobyproduct
recycling revenue increased by 59.6% due to the addition of the distillation
machine product line. Silver sales were unchanged from the prior year.
Fertilizer sales were $13,331 in 1996, compared to $10,653 in 1995, a 25.l%
increase. The small level of sales reflects that in 1996 and 1995 the focus
of fertilizer was on field testing the products and establishing a method of
entrance into the market.
Combined cost of sales and operating expenses for the segment amounted
to $616,929 in 1996, compared to $531,802 in 1995, a 16.0% increase. The
increase is due to an increase in cost of sales of approximately $87,300,
which resulted primarily from approximately $66,700 in cost of sales related
to the additional sales from the new distillation equipment product line and
an increase in payroll and related costs of $14,600 due to paying higher
hourly rates in order to attract higher caliber employees for plant
operations.
These changes in revenues and operating expenses resulted in a segment
operating loss of $301,495 in 1996, compared to $290,382 in 1995, an increased
operating loss of 3.8%.
SUMMARY
On a consolidated basis, then, the various changes in revenues and
operating expenses resulted in a 1996 operating loss of $232,384, compared to
an operating loss of $182,564 for 1995, an increased operating loss of 27.3%.
II. Changes in Financial Condition; Capitalization
Cash amounted to $1,091 as of December 31, 1996, compared to $43,411
as of December 31, 1995. Net cash used by operations was $96,954 in 1996,
compared to $20,268 in 1995. Operating resources utilized to finance the 1996
loss of $156,891 include approximately $45,900 in expenses paid with the
Company's common stock and increases in accounts payable and accrued expenses
totaling approximately $115,500. The cash provided by the increase in accounts
22
<PAGE>
payable and accrued expenses includes approximately $30,900 in accounts
payable, $79,000 in deferred salary to management and professional employees,
and $13,100 in accrued interest. A portion of these resources was utilized to
reduce current and delinquent payroll taxes by approximately $12,000. Cash
amounting to approximately $33,500 was invested in additional equipment in
1996. The majority of the equipment was acquired for the photobyproduct
fertilizer segment. Financing sources of cash in 1996 included approximately
$111,000 in proceeds from the private placement of the Company's common stock
and $34,800 in stockholder loans.
Total assets decreased from $281,609 at December 31, 1995 to $244,828
at December 31, 1996. The decline was due to reduced cash of approximately
$42,300.
Total liabilities decreased from $996,906 at December 31, 1995 to
$878,208 at December 31, 1996, a decrease of approximately $118,700. Of this
amount, current liabilities decreased approximately $73,100 and long-term
liabilities decreased approximately $45,600. The decrease in liabilities
resulted primarily from the settlement and write-off of notes payable to
unrelated parties.
III. Working Capital/Liquidity
As discussed in the Independent Auditor's Report to the Consolidated
Financial Statements on page 34 of this report, several factors raise
substantial doubt about the Company's ability to continue in existence. Of
these factors, the most critical is the working capital deficiency of
$365,215, which directly affects liquidity. As discussed in Note 15 to the
Consolidated Financial Statements on page 60 of this report, the Company has
implemented a plan to improve its working capital and liquidity through
private placements of common and preferred shares, conversion of debt to
common shares, and payment of consulting and labor services with common
shares. Following is a summary of the steps taken to improve the Company's
working capital and liquidity during the year ended December 31, 1996:
1. A total of $111,000 was received from the sale of common stock
through private placements and option exercises.
2. Stockholders converted debt and accrued interest totaling $8,281
into common stock.
3. Various expenses including salaries, interest, director fees, and
legal and outside services, totaling $45,906 were paid with common
stock.
4. Officer/stockholders converted $50,000 and $20,000, respectively,
in accrued payroll and accounts payable into common stock.
5. A total of $34,770 was received in stockholder loans.
The result of these steps was a decrease of the working capital
deficiency from $388,010 at December 31,1995 to $365,215 at December 31, 1996,
an improvement of approximately $22,800. The current asset component of
working capital declined from approximately $159,900 at December 31,1995 to
approximately $109,600 at December 31, 1996. The primary change in the
components of current assets was a decrease in cash of approximately $42,300.
The current liability component of working capital decreased from approx-
imately $547,900 at December 31, 1995 to approximately $474,800 at December
31, 1996, an improvement in the net working capital deficit of $73,100.
Significant decreases in the components of current liabilities include
23
<PAGE>
approximately $81,200 in current portion of long-term debt to unrelated
parties and $47,800 in accrued interest. Significant increases in the
components of current liabilities include approximately $11,000 in accounts
payable, $15,500 in accrued expenses, and $28,500 in current portion of notes
and lease obligations to related parties.
For details of Steps to improve the Company's working capital and
liquidity taken subsequent to December 31, 1996, see the discussion in Notes
15 and 17 to the Consolidated Financial Statements on pages 60 and 62 of this
report.
ITEM 7. FINANCIAL STATEMENTS
- ------- --------------------
The response to this Item is submitted under Item 13.
ITEM 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------- -----------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
------------------------------------
No change was made in the Company's auditors from the prior year.
To the Company's and its management's knowledge, there is no
accounting or financial disclosure dispute involving any present or former
accountant.
24
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
- ------- ----------------------------------------------------
PERSONS: Compliance with Section 16(a) of the Exchange Act
----------------------------------------------------------
I. Summary Information.
--------------------
The following are the directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age (96) Position Position Held Since
---- ------- -------- -------------------
<S> <C> <C> <C>
Dr. John W. Whitney 50 President/Treasurer May 1988
Director
Paul H. Durckel 79 Director September 1995
Richard W. Stumbo, Jr. 63 Vice President, Finance July 1997
Director September 1995
Gregory S. Skinner 42 Secretary December 1990
Duane H. Rasmussen 66 Vice President and May 1994
General Manager-IMI
Robert E. Gordon 64 Vice President and May 1994
General Manager-W&W
</TABLE>
1) For directors, the term of office is until the next annual meeting of
shareholders. For officers, the term of office is until the next annual
meeting of the Board of Directors, presently scheduled to be held immediately
following the annual meeting of the shareholders.
II. Narrative Information Concerning the Directors and Executive
------------------------------------------------------------
Officers of the Company.
------------------------
John W. Whitney:
----------------
In addition to being the President and a Director of the Company,
1988 to present, Dr. Whitney is the President and a Director of each of the
operating subsidiaries, Whitney & Whitney, Inc. and Itronics Metallurgical,
Inc. Dr. Whitney also serves as the General Manager of American Hydromet, a
joint venture.
He received his Ph.D. in Mineral Economics from Pennsylvania State
University in 1976, his M.S. in Mineralogy from the University of Nebraska
in 1971, and his B.S. in Geology from the University of Nebraska in 1970.
Dr. Whitney has served as President of Whitney & Whitney, Inc. since its
formation in 1977.
Prior to his serving as W&W full-time president, Dr. Whitney worked as
a consultant for the Office of Technology Assessment, U.S. Congress, doing
analysis of various Alaskan mineral issues (1977-1978), a consultant for
various government agencies, including the office of Mineral Policy Analysis
in the U.S. Department of Interior, and the Washington office of the U.S.
Bureau of Mines, consulting firms, law firms and mining companies on a
variety of mineral planning issues (1976-1977), as a consultant for BKW
25
<PAGE>
Associates, Inc. evaluating mining investment opportunities in Mexico and the
Philippines (1973-1975), and as a geologist-mineralogist for Humble Oil &
Refining Company and GeoTerrex Ltd. (1971-1972).
Dr. Whitney is an internationally recognized consultant in the field
of Metal and Material Resource Economics. Dr. Whitney has presented seminars
for various clients on Mining Economics, and has taught a three-credit
graduate course on International Metal Economics for the University of
Arizona's College of Mines. Dr. Whitney is an Honorary Faculty Member of the
Academy for Metals and Materials under the seal of the American Society for
Metals. Dr. Whitney has made numerous presentations and written a number of
publications on various technical subjects within his broad area of expertise.
Dr. Whitney is coinventor of the American Hydromet process technology and
holds four patents.
Paul H. Durckel:
----------------
Mr. Durckel has served as a director of the Company since September
1995. He has served various companies involved in fertilizer manufacturing and
sales for approximately 30 years. He is presently an Independent Real Estate
Salesman for Myers Realty, Inc. and has served them in varying capacities,
including Broker-Salesman, Consultant, Manager, Vice President of Operations,
and Director, since 1987. His experience in the fertilizer industry includes
Vice President and General Manager and Vice President- Operations for American
Plant Food Corp., Executive Assistant to the Chairman for Best Fertilizers
Co., Vice President and General Manager for Best Fertilizer of Texas, and
Vice President and General Manager for Farm Services Co.
Richard W. Stumbo. Jr.:
-----------------------
Mr. Stumbo has served as a director of the Company since September
1995. He joined the Company as Vice President, Finance and Chief Financial
Officer in July 1997 and presently spends approximately 40% of his time in
that capacity. He received his Bachelor of Science in Civil Engineering degree
from the University of Wisconsin in 1958, his M.B.A. from the Wharton Graduate
Business School in 1968 and completed the Advanced Management Program at
Harvard Business School in 1983. He has held varying financial management
positions at several large companies, including the position of Vice
President, Finance and Chief Financial Officer for Western Pacific Railroad
from 1974 to 1983, for Homestake Mining Company from 1983 to 1990 and for
FirstMiss Gold Inc. from 1990 to 1993. Prior to joining the Company as CFO,
he owned and operated a business services company in Reno, Nevada.
Gregory S. Skinner, Esq.:
-------------------------
Mr. Skinner has served as secretary and general counsel of the
Company and its subsidiaries since December 1990. He obtained his BA degree
in Economics from the University of California at Berkeley in 1976. He
obtained his JD degree from Hastings College of the Law, University of
California at San Francisco in 1979. He is licensed to practice law in the
states of California and Nevada, He is a shareholder in the Law Offices of
Skinner, Sutton & Watson, a Professional Corporation, which has offices
located in Reno and Incline Village, Nevada. Prior to becoming Secretary of
Itronics Inc., Mr. Skinner has provided legal services and advice to Whitney
& Whitney, Inc. since 1980.
Duane H. Rasmussen:
-------------------
Mr. Rasmussen has served as Vice President and General Manager of IMI
since May 1994 and presently spends approximately 40% of his time in that
capacity. He initially joined the Company in 1991 as Assistant Manager and
Business Consultant for W&W. He received his Bachelor of Science degree in
Chemical Engineering from the University of Wisconsin in 1953 and his MBA in
Industrial Management in 1955 from the same University. He served as President
of Screen Printing Systems, Inc. from 1987 to 1990 and from 1995 to the
present. Other business experience includes approximately 20 years with
26
<PAGE>
Jacobs Engineering Group, Inc. in varying capacities, including Project
Manager, Regional Sales Manager, Regional Vice President, and Group Vice
President.
Robert E. Gordon:
-----------------
Mr. Gordon has served as Vice President and General Manager of W&W
since May 1994. He initially joined the Company in December 1993 as Assistant
Site Manager of the Townsend Mine project. He received his Bachelor of Science
in Geological Engineering from the University of Arizona in 1961. Prior to
joining the Company, he was an independent mining consultant in 1993,
served as Director of Latin American Exploration for Fischer-Watt Gold
Company, Inc. from 1991 to 1993, and served as Vice President, Exploration for
Gexa Gold Corp. from 1989 to 1991.
ITEM 10. EXECUTIVE COMPENSATION.
- -------- -----------------------
Summary of Cash and Certain Other Compensation
The following table sets forth information as to the compensation of
the Chief Executive Officer and the four most highly compensated officers
whose compensation for the year ended December 31, 1996 exceeded $100,000:
<TABLE>
<CAPTION>
Name and Annual Compensation
Principal Calendar
Position Year Salary Bonus
-------- ---- -------- ------
<S> <C> <C> <C>
Dr. John W. Whitney: 1996 $96,547 $-0-
President, Treasurer 1995 $87,927 $-0-
and Director 1994 $65,339 $-0-
</TABLE>
1) As of December 31, 1996, Dr. Whitney had accumulated deferred
salary totaling $254,750. Of this amount, $49,750 was accrued in
1996, $58,333 was accrued in 1995, and $25,167 was accrued in 1994.
Dr. Whitney was granted an option in November 1992 to convert
$147,500 of the deferred salary into the Company's common stock at
$.10 per share. In December 1995, Dr. Whitney was granted an option
to convert an additional $102,500 of the deferred salary into the
Company's common stock at $.l0 per share. The combined total
convertible deferred salary is $250,000 at $.10 per share, or
2,500,000 shares. The option, originally due to expire on February
5, 1997, was extended to six months after all debts owed to, or
guaranteed by, Dr. Whitney by Itronics Inc., its subsidiaries and
partnerships are paid in full. In May 1996 Dr. Whitney received a
warrant for 100,000 shares. The warrant is exercisable for five
years at $.10 per share and was issued in conjunction with Dr.
Whitney's acquisition of 100,000 shares for cash. On December 31,
1996, Dr. Whitney exercised options on 500,000 shares by converting
$50,000 of his deferred salary. In January and June 1997 Dr.
Whitney exercised options on an additional 75,000 and 300,000
shares by cash payment of $7,500 and $30,000, respectively.
2) The salary amounts listed above include $547, $1,094, and $1,172
for 1996, 1995, and 1994, respectively, that represent compensation
paid in common stock for service as a director of the Company.
The compensation plan for all directors was 2,500 shares per
quarter for 1996. The shares are valued at the closing high bid
price as of the last business day of each quarter.
27
<PAGE>
Option Grants in Last Fiscal Year
% of Total
Options Options Granted Exercise Expiration
Name Granted to Employees Price Date
- --------------------- ------- -------------- -------- ----------
Dr. John W. Whitney 100,000 100% $.10 5/30/01
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
Options Exercised:
Shares Acquired on
Name Exercise (#) Value Realized($)
- -------------------- ------------------- ----------------
Dr. John W. Whitney 500,000 $-0-
Options Unexercised:
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at 12/31/96 At 12/31/96
---------------------- --------------------
Name Exercisable Unexercise. Exercisable Unexer.
- -------------------- ----------- ---------- ----------- -------
Dr. John W. Whitney 3,300,000 - $ -0- $ -0-
1) Fair market value of the securities underlying the options is based on the
closing high bid price as of the last business day of the fiscal year
($.0625). Value of the unexercised options is the fair market value less the
exercise price ($.10).
28
<PAGE>
ITEM II. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
a) Security Ownership of Certain Beneficial Owners.
------------------------------------------------
The following table sets forth certain data with respect to those
persons known to the Company, as of July 31, 1997, to be the beneficial
owners of more than 5% of the outstanding shares of common stock of the
Company.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership
Common Shares
Name and Which May Be Percent
Address of Common Shares Acquired Within of
Beneficial Owner Presently Held 60 days(4) Total Class
- ---------------------- -------------- ------------- ---------- ---------
<S> <C> <C> <C> <C>
John W. Whitney
P.O. Box 10725
Reno, NV 89510 10,932,759(3) 2,925,000 13,857,759 37.96
(1)(2)
Richard J. Cavell
1013 No. Marshall Dr.
Camano Island, WA 4,577,876 536,775 5,114,651 14.99
</TABLE>
(1) Director
(2) Officer
(3) Includes 89,127 shares owned by or to be issued to John B.
Whitney, Dr. John W. Whitney's minor son, 71,632 shares owned
by Maureen E. Whitney, Dr. Whitney's wife, and 600,000 shares
paid for but unissued as of July 3l, 1997.
(4) All options of Drs. Whitney and Cavell are priced at $.10
per share.
29
<PAGE>
b) Security Ownership of Management.
---------------------------------
The following table sets forth as of July 31, 1997, certain
information, with respect to director and executive officer ownership of
common stock in the Company:
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership
-----------------------------------------
Common Shares Percent
Name and Which May Be of
Address of Common Shares Acquired Within Class
Beneficial Owner Presently Held 60 days(1) Total (2)
- -------------------- -------------- -------------- ----------- --------
<S> <C> <C> <C> <C>
Dr. John W. Whitney
P.O. Box 10725
Reno, NV 89510 10,932,759(5) 2,925,000 13,857,759 37.96
(3)(4)
Paul H. Durckel
1511 Main St.
Gardnerville, NV. 89410 136,000 50,000 186,000 .55
(3)
Richard W. Stumbo, Jr.
P.O. Box 10725
Reno, NV 89510 76,081 76,081 .23
(3) (4)
All directors and
executive officers as a
group (6 persons) 13,005,788 3,225,000 16,230,788 44.10
</TABLE>
(1) All options, warrants and debt conversion rights listed in the above
table are at $.10 per share, with the exception of 100,000 shares
which are at the higher of $.10 per share or current high bid.
(2) The percent of class is based on the sum of 33,578,436 shares
outstanding or to be issued as of July 31, 1997 plus, for each
individual, the number of common shares as to which the named
individual has the right to acquire beneficial ownership within 60
days of July 31, 1997.
(3) Director
(4) Officer
(5) Includes 89,127 shares owned by or to be issued to John B. Whitney,
Dr. John W. Whitney's minor son, and 71,632 shares owned by Maureen
B. Whitney, Dr. Whitney's wife, and 600,000 shares paid for but
unissued as of July 31, 1997.
30
<PAGE>
The following table sets forth, as of July 31, 1997, certain
information with respect to director and executive officer ownership of
Series "A" Preferred Shares:
Name of Amount and Nature Percent of
Beneficial Owner of Beneficial Ownership Class(1)
- --------------------------- ----------------------- -----------
All directors and executive
officers as a group (0 persons) -0- -0-
(1) Based on 156 shares outstanding as of July 31, 1997.
c) Changes in Control.
-------------------
The Company is aware of no arrangement which at some later date
results in changes in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
During the Company's two most recent fiscal years, including those of
its subsidiaries and affiliates, the Company engaged in no transactions or
series of transactions with any director, officer, security holder or family
thereof in which the amount involved exceeded $60,000 except as follows:
1. As of December 31, 1996. Dr. Whitney has accumulated deferred
salary totaling $254,750, with $108,083 of that amount accruing during 1996
and 1995.
2. In 1993, a note payable to an unrelated party in the amount of
$151,602, including accrued interest, was settled for $92,000. The settlement
was primarily funded by a bank loan in the amount of $80,000. The makers and
guarantors of the bank note are Drs. Whitney and Cavell. The liability is
recorded in the Company's balance sheet and the Company pays the monthly
payment on the note. The balance due as of December 31, is $29,002.
3. In 1994, options totaling 2,675,000 shares for Dr. Whitney and
200,000 shares for Dr. Cavell, which were to expire in 1995, were extended to
dates ranging from February 5, 1996 to May 15, 1997. The option price of $.10
per share remained unchanged. In 1995, an additional option for 1,025,000
shares was granted to Dr. Whitney and his existing options were extended to
dates ranging from February 5, 1997 to May 15, 1997. In 1996, Dr. Whitney's
options were extended to six months after all debts owed to, or guaranteed by,
Dr. Whitney by Itronics Inc. and its subsidiaries and partnerships are paid
in full.
4. During 1996, a Nevada mine property, a majority of which is owned
by Drs. Whitney and Cavell, retained the services of W&W to negotiate a lease
for the property and to perform other technical services as needed. Total 1996
billings on the project, including pass through expenses of approximately
$26,400, amounted to approximately $97,000. Terms for providing service are
similar to that of unrelated clients and all billings due at December 31, 1996
have subsequently been received.
31
<PAGE>
ITEM 13. FINANCIAL STATEMENTS, EXHIBITS AND REPORTS ON FORM 8-K.
- -------- -------------------------------------------------------
I. List of Financial Statements and Exhibits
-----------------------------------------
1. List of Financial Statements:
-----------------------------
(a) Consolidated Balance Sheets as of December 31, 1996 and
1995.
(b) Consolidated Statements of Operations for the Years ended
December 31, 1996 and 1995.
(c) Consolidated Statements of Stockholders' (Deficit) for
the Years ended December 31, 1996 and 1995.
(d) Consolidated Statements of Cash Flows for the Years ended
December 31, l996 and 1995.
(e) Notes to Consolidated Financial Statements.
2. List of Exhibits:
-----------------
11 Statement re computation of loss per share.
21 List of significant subsidiaries.
27 Financial Data Schedule.
II. Reports on Form 8-K.
--------------------
None
32
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND SUPPLEMENTAL DATA
DECEMBER 31, 1996
PAGE
----
INDEPENDENT AUDITOR'S REPORT ON
THE FlNANCIAL STATEMENTS 34
FINANCIAL STATEMENTS
Consolidated Balance Sheets 36
Consolidated Statements of Operations 38
Consolidated Statements of Stockholders' (Deficit) 39
Consolidated Statements of Cash Flows 41
Notes to Consolidated Financial Statements 43
EXHIBITS:
11 Computation of loss per share 65
21 Significant subsidiaries 66
27 Financial Data Schedule 67
STATEMENTS AND SCHEDULES
Schedules not included are omitted for the reason that they are not
applicable or not required.
33
<PAGE>
KAFOURY, ARMSTRONG & CO.
A PROFESSIONAL CORPORATION
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Itronics Inc.
We have audited the accompanying consolidated balance sheets of
Itronics Inc, (a Texas corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' deficit, and cash flows for the years ended December 31,
1996 and 1995, These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted audit-
ing standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidating financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in
the first paragraph present fairly, in all material respects, the consolidated
financial positions of Itronics Inc. and subsidiaries as of December 31, 1996
and 1995, and the results of their operations and their cash flows for the
years ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
financial statements, the Company and its subsidiaries have reported recurring
losses from operations, including a net loss of $156,891 during the year ended
December 31, 1996, and, as of that date, had a working capital deficiency of
$365,215 and a stockholders' deficit of $1,230,248. As described more fully
in Note 15 to the financial statements, the Company and its subsidiaries are
in default on promissory notes in the amount of $101,115 out of $217,781 and
secured leases with stockholders in the amount of $50,340 at December 31,
1996. The ability to continue as a going concern is contingent primarily upon
34
<PAGE>
(a) future profitable operations, and (b) the ability to generate sufficient
cash from operations and additional operating capital raised from other
sources to meet obligations as they become due. These conditions raise
substantial doubt about the ability to continue as a going concern.
Management's plans regarding those matters are described in Note 15. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
KAFOURY, ARMSTRONG & CO.
Reno, Nevada
July 18, 1997
35
KAFOURY, ARMSTRONG & Co.
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
ITRONICS INC, AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS 1996 1995
---------- ----------
<S> <C> <C>
Cash $ 1,091 $ 43,411
Accounts receivable, less allowance for
doubtful accounts, 1996, $1,406;
1995, $1,801 - Note 16 60,626 62,316
Inventories 28,003 34,478
Prepaid expenses 19,869 19,684
--------- ---------
Total Current Assets 109,589 159,889
--------- ---------
PROPERTY AND EQUIPMENT
Leasehold improvements 14,212 10,527
Equipment 219,214 208,923
Vehicles 32,858 29,741
Equipment under capital lease - Note 11 79,690 59,259
--------- ---------
345,974 308,450
Less: Accumulated depreciation and
amortization 221,730 201,185
--------- ---------
124,244 107,265
--------- ---------
OTHER ASSETS
Patents, less accumulated amortization
1996, $10,745; 1995, $9,689 7,951 8,456
Organizational costs, less accumulated
amortization 1996, $17,629; 1995, $17,629 916 916
Non-compete covenant, less accumulated
amortization 1996, $8,115; 1995, $7,290 135 960
Deposits 1,993 4,123
--------- ---------
10,995 14,455
--------- ---------
$ 244,828 $ 281,609
========= =========
</TABLE>
36
<PAGE>
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 121,200 $ 110,202
Accrued expenses -Note 9 157,839 142,299
Contracts payable 18,205 17,220
Current maturities of long-term debt - Note 3 31,115 112,281
Due to stockholders - Note 3 69,609 59,929
Capital lease obligation due stockholder
- Note 11 37,136 18,321
Interest payable 33,374 81,198
Customer deposits 2,273 2,382
Deferred gain - Note 11 3,515 3,515
Other 538 552
--------- ---------
Total Current Liabilities 474,804 547,899
--------- ---------
LONG-TERM LIABILITIES
Due to stockholders, less current
maturities - Note 3 117,057 149,695
Accrued salary due officer/stockholder
- Note 10 250,000 250,000
Capital lease obligations due stockholders,
less current maturities - Note 11 13,204 22,653
Deferred gain, less current maturities -
Note 11 23,143 26,659
--------- ---------
Total Long-Term Liabilities 403,404 449,007
--------- ---------
Contingency - Note 14 - - ______-
--------- ---------
878,208 996,906
--------- ---------
Series "A" cumulative convertible
redeemable preferred non-voting shares,
par value $.O01 per share, 18% per annum;
authorized 500 shares, issued and out-
standing 1996, 247; 1995, 247 shares - Note 6 596,868 532,648
--------- ---------
STOCKHOLDERS' (DEFICIT)
Preferred stock, par value $.O01 per share;
authorized 999,500 shares, issued and outstand-
ing 1996, 0 shares; 1995, 0 shares - Note 6
Common stock, par value $.O01 per share;
authorized 50,000,000 shares, issued and
outstanding 1996, 29,748,046; 1995,
28,355,544 shares 29,748 28,356
Additional paid-in capital 1,444,913 1,373,821
Accumulated deficit (2,819,500) (2,662,609)
Common stock to be issued - Note 8 114,591 12,487
--------- ---------
(1,230,248) (1,247,945)
--------- ---------
$ 244,828 $ 281,609
========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
37
<PAGE>
ITRONICS INC, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
REVENUES:
Mining technical services $ 563,127 $ 630,357
Photobyproduct recycling 190,988 119,633
Silver 111,115 111,134
Fertilizer 13,331 10,653
--------- ---------
Total Revenues 878,561 871,777
COST OF SALES 792,138 732,051
--------- ---------
Gross Profit 86,423 139,726
--------- ---------
OPERATING EXPENSES:
Depreciation and amortization 18,910 14,891
Research and development 40,501 50,762
Sales and marketing 58,418 42,866
General and administrative 200,978 213,771
--------- ---------
318,807 322,290
--------- ---------
Operating Loss (232,384) (182,564)
--------- ---------
OTHER INCOME (EXPENSE)
Forgiveness of debt - Note 12 135,288 52,423
Interest expense (59,814) (56,250)
Other, net 19 285
--------- ---------
Total Other Income (Expense) 75,493 ( 3,542)
--------- ---------
Loss before provision for income tax (156,891) (186,106)
Provision for income taxes - Note 5 - -
--------- ---------
Net loss $ (156,891) $ (186,106)
========= =========
Weighted average number of shares outstanding 29,362,017 27,716,700
========== ==========
Loss per share $.0067 $.0081
========== ==========
</TABLE>
\
The accompanying notes are an integral part of these financial
statements.
38
<PAGE>
ITRONICS INC, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------
NUMBER OF
SHARES AMOUNT
--------- --------
<S> <C> <C>
Balance, December 31, 1994 247 $ -
Sale/issue of preferred/common stock - -
Net (loss) for the year ended
December 31, 1995 - -
Increase in mandatory redemption of
preferred stock - -
------- -------
Balance, December 31, 1995 247 -
Sale/issue of preferred/common stock - -
Net (loss) for the year ended - -
December 31, 1996
Increase in mandatory redemption of - -
preferred stock
------- -------
Balance, December 31, 1996 247 $ -
======= =======
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- ----------
NUMBER OF PAID-IN ACCUMULATED COMMON STOCK
SHARES AMOUNT CAPITAL DEFICIT TO BE ISSUED TOTAL
--------- -------- ---------- ------------ ------------ ------------
<S><C> <C> <C> <C> <C> <C>
27,077,895 $ 27,078 $1,297,549 $(2,476,503) $ 66,702 $(1,085,174)
1,277,649 1,278 140,492 - (54,215) 87,555
- - - (186,106) - (186,106)
- (64,220) - - (64,220)
---------- --------- ---------- ----------- -------- -----------
28,355,544 28,356 1,373,821 (2,662,609) 12,487 (1,247,945)
1,392,502 1,392 135,312 - 102,104 238,808
- - - (156,891) - (156,891)
- - (64,22O) - - (64,220)
---------- -------- ---------- ------------ -------- -----------
29,748,046 $ 29,748 $1,444,913 $(2,819,500) $114,591 $(1,230,248)
========== ======== ========== ============ ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
40
<PAGE>
ITRONICS INC, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash flows for operating activities
Net loss $ (156,891) $ (186,106)
Adjustments to reconcile net loss to cash
used by operating activities:
Depreciation and amortization 18,910 14,891
Forgiveness of debt (135,288) (52,423)
Interest expense paid with issuance of
common stock 20,058 7,121
Interest expense forgiven 6,888 8,888
Legal and consulting expenses paid with
issuance of common stock 4,500 11,995
Directors fees paid with issuance of
common stock 3,048 5,391
Salaries paid with issuance of common stock 18,300 8,125
(Increase) decrease in:
Accounts receivable 1,690 22,663
Insurance refund receivable - 6,142
Inventories and other assets 6,475 2,919
Prepaid expenses (185) 2,709
Increase in:
Accounts payable and other liabilities 30,875 28,962
Accrued expenses 71,524 78,788
Interest payable 13,142 19,667
--------- ---------
Net cash (used) by operating activities (96,954) (20,268)
--------- ---------
Cash flows from investing activities
Acquisition of fixed assets (33,482) (28,389)
Acquisition of intangibles (551) (200)
--------- ---------
Net cash provided by (used) by
investing activities (34,033) (28,589)
--------- ---------
Cash flows from financing activities
Proceeds from long-term debt, stockholders 34,770 124,870
Payments on long-term debt, stockholders (47,103) (80,426)
Payments on long-term debt, unrelated parties (10,000) (5,000)
Proceeds from sale of stock 111,000 42,300
--------- ---------
Net cash provided by financing
activities 88,667 81,744
--------- ---------
Net increase (decrease) in cash (42,320) 32,887
Cash, beginning of year 43,411 10,524
--------- ---------
Cash, end of year $ l,091 $ 43,411
========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
41
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period for interest
expense $ 20,016 $ 23,068
Schedule of noncash financing transactions:
Settlement of debt/accruals for
issuance of common stock:
Accounts payable 20,000 -
Accrued liabilities 52,869 1,606
Notes payable 8,000 17,000
Capital lease payments - 6,013
Accrued interest payable 233 -
Interest expense 20,058 7,121
Director fees 3,048 5,391
Legal and consulting fees 4,500 11,995
Salaries 18,300 8,125
Settlement of accrued interest for 3,500 -
promissory note
Equipment financed with capital lease 3,242 1,837
Purchase of equipment for issuance of
common stock 800 -
Application of officer/stockholder
tax refunds to payroll tax liability 6,270 16,170
</TABLE>
The accompanying notes are an integral part of these financial
statements.
42
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - Summary of Significant Accounting Policies:
Company's Activities:
The Company, a Texas corporation, was incorporated on October
29, 1987. The Company was to seek out and obtain through an acquisition
and/or merger transactions, assets which could benefit its shareholders.
In May of 1988, the Company acquired Whitney & Whitney, Inc. and its
related entities through the issuance of its common stock. This
acquisition was accounted for using the pooling of interests method. The
Company, through its subsidiaries, is involved in mining technical
services, developing, and implementing silver recovery and photobyproduct
recycling techniques, and research and development of manufacturing
fertilizer from photobyproducts.
Financial Statement Estimates and Assumptions:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of Consolidation:
The consolidated financial statements include the accounts of
Itronics Inc. and its subsidiaries owned and/or controlled by the Company
as follows:
1996 1995
PERCENTAGE PERCENTAGE
---------- ----------
Whitney & Whitney, Inc. 100.00 100.00
Itronics/Nevada Metallurgical, Inc. 100.00 100.00
Nevada Hydrometallurgical Project
(A Partnership) 92.50 92.50
American Hydromet (A Joint Venture) 81.40 81.40
American Gold & Silver
(A Limited Partnership) 42.85 42.85
Whitney & Whitney, Inc. is the general partner for American Gold &
Silver. As such, the Company has control over American Gold & Silver and
has included it in its consolidation.
American Gold & Silver and Nevada Hydrometallurgical Project possess
no material tangible assets or liabilities.
No amount for minority interests is reflected in the consolidated
balance sheets as the equity of minority interests in the net losses
exceed the carrying value of the minority interests.
43
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
No amount for minority interests is reflected in the consolidated
statement of operations since losses applicable to the minority interest
in each subsidiary exceed the minority interest in the equity capital of
each subsidiary. As a result, losses applicable to the minority interest
are charged against the majority interest. When future earnings
materialize, the majority interest will be credited to the extent of such
losses previously absorbed.
All significant intercompany accounts and transactions have been
eliminated in the consolidation.
Revenue Accounting for Contracts:
When the mining technical services segment of the Company is
responsible for the procurement of materials and equipment, property, or
subcontracts in its consulting business, it includes such amounts in both
revenues and cost of sales. The amount of such pass-through costs included
in both mining consulting revenues and cost of sales for the year ended
December 31, 1996 and 1995 were $166,307 and $164,785, respectively.
Accounts Receivable Allowance Account:
The photobyproduct fertilizer segment of the Company uses the
allowance method to account for uncollectible accounts receivable.
The Company considers accounts receivable for the mining technical
services segment to be fully collectible; accordingly, no allowance for
doubtful accounts is required.
Inventories:
Inventory is determined utilizing the lower of cost or market value
determined on the average cost valuation method and consists primarily of
unprocessed scrap and precious metals.
Cost of inventories is either the actual cost, or 80% of the fair
market value of the silver content of the photobyproducts as determined by
laboratory assays. (See Note 16.)
Property and Equipment:
Property and equipment are stated at cost. Depreciation is computed
by accelerated and straight-line methods over five to forty years.
Repairs and maintenance are charged to operations as incurred.
44
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
Amortization:
Intangible assets are amortized by the straight-line method over the
following lives:
YEARS
-----
Patents 17
Organization costs 5
Non-compete agreement 10
Research and Development:
The Company's fertilizer production process is in the research and
development stage. Accordingly, estimated wages, benefits, rent, and other
costs associated with the research are expensed as research and
development expenses when incurred. Nominal sales, and the related cost of
sales, are included in revenues and cost of sales, respectively.
Income Taxes:
Effective January 1, 1993, the Company has accounted for income taxes
to conform to the requirements of Statements of Financial Accounting
Standards No. 109, Accounting for Income Taxes. Under the provisions of
SFAS 109, an entity recognizes deferred tax assets and liabilities for
future tax consequences of events that have already been recognized in
the Company's financial statements or tax returns. The measurement of
deferred tax assets and liabilities is based on provisions of the enacted
tax law; the effects of future changes in tax laws or rates are not
anticipated. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Loss per Common Share:
Loss per common share is calculated based on the consolidated net
loss plus cumulative preferred dividends for the period divided by the
weighted average number of common shares outstanding during 1996 and 1995.
Common stock equivalents are not included, as their effect would be
antidilutive.
Loss per common share for the period is $.0067 and $.0081 for 1996
and 1995, respectively. Loss per common share, excluding the effects of
cumulative preferred dividends for the period is $.0053 and $.0067 for
1996 and 1995, respectively. Loss per common share assuming all shares
issued for the settlement of services and liabilities during 1996 and 1995
were outstanding as of the beginning of each year (or issuance/accrual
date, if later) is $.0052 and $.0066, respectively, excluding the effects
of cumulative preferred dividends for the period which is anti-dilutive.
45
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
Redeemable Preferred Stock:
The Company presents redeemable preferred stock at redemption value.
This carrying amount is increased by amounts representing dividends not
currently declared or paid, but which will be payable under the mandatory
redemption agreement. This carrying amount is also increased by the $100
per annum premium feature effective October 31, 1993 (see Note 6). These
increases are charged against additional paid-in capital due to the
absence of retained earnings.
NOTE 2 - Reclassification:
The prior year's financial statements have been reclassified,
where necessary, to conform with the current year presentation.
NOTE 3 - Long-Term Debt:
Long-term debt at December 31, 1996 and 1995 is comprised of the
following (all debt payments are applied to outstanding interest owed at
date of payment prior to being applied to the principal balance). The
carrying amount approximates fair value. The fair value of long-term debt
is based on current rates at which the Company could borrow funds with
similar remaining maturities.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Notes due to unrelated outside parties:
---------------------------------------
Unsecured note payable dated September 1,
1989 for legal services related to the
Company's acquisition of Whitney & Whitney,
Inc., stated interest rate is 10%. In
December 1995, an agreement was reached to
settle this note and accrued interest for a
total of $15,000, to be paid in three
monthly installments of $5,000. The final
installment was paid in February, 1996. The
remainder of this note was written off as
debt forgiveness income in 1996. (See Note
12.) $ - $ 43,000
Unsecured note payable for loan made as part
of the Company's acquisition of Whitney &
Whitney, Inc., 10.5% interest, due on
demand, note is in default. 31,115 31,115
Unsecured 10% note payable dated October 6,
1989, for legal services in connection with
the Company's acquisition of Whitney &
Whitney, Inc. This note and related accrued
interest was written off as debt forgiveness
income in December 1996. (See Note 12.) - 38,166
-------- --------
$ 31,115 $ 112,281
</TABLE>
46
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Less current portion due within one year $ (31,115) $(112,281)
Total long-term liabilities due to unrelated -------- --------
parties $ - $ -
======== ========
Loans from Stockholders/Related Transactions:
---------------------------------------------
Unsecured note payable to two stockholders (one
of which is an officer of the Company). Interest
on the loan is 3% over Bank of America's prime
rate (9% at the date of the loan), terms of
payment include 23 monthly installments of
$1,669 commencing June 5, 1993. (On May 28, 1997,
the due date of the note was extended from May 5,
1997 to May 5, 1998.) $ 29,002 $ 44,214
Seven unsecured notes payable, quarterly
interest only installments to commence on
March 1, 1994 at 5% until December 1, 1996,
when all principal and unpaid interest is due.
In late 1995 and early 1996 these notes were
converted into the Company's common stock.
- 8,000
Unwritten, unsecured 14% interest bearing advance
payable to officer/stockholder, due on demand.
Monthly installments are estimated at $1,000,
but are contingent upon the Company's future
cash flows. 15,097 19,307
Six unsecured notes payable to a stockholder with
various 1994 and 1995 dates. Variable interest to
accrue at a local bank rate (12.0% as of
December 31, 1995) through January 1995, at which
time repayment was to be reviewed with the note
holder. In March 1996 these notes and accrued
interest of $3,500, were restructured into one
note for $50,000 with a fixed interest rate of 12%
per annum. Payments are interest only at $500 per
month through March 1997 and $1,500 per month to
March 2000, at which time the unpaid balance will
be due and payable. Payments are in arrears,
but no demand or other collection action has
been taken. 50,000 46,500
</TABLE>
47
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Unsecured note payable to stockholder in the
amount of $20,000, dated May 29, 1994. Variable
interest at a local bank rate (11.25% as of
December 31, 1996). In July 1997 the due date
of the note and accrued interest was extended
to July 31, 1998 and an option was continued
to convert the note into the Company's common
stock. $ 5,315 $ 5,315
Unsecured notes payable to stockholder in the
original amount of $27,000, with varying
maturity dates. Variable interest at a local bank
rate (11.25% as of December 31, 1996). In
July 1997 the due date of the notes and accrued
interest was extended to July 31, 1998 and an
option was continued to convert the note into
the Company's common stock. 22,211 22,211
Unsecured note payable to stockholder in the
amount of $10,000, dated December 28, 1994.
Interest only at 11.5% is payable quarterly,
with the principal payable in full on
June 28, 1997. In December 1995 this note
was restructured. Quarterly interest only
payments are due through December 1996.
Monthly payments of $220 begin January 1997 and
are to continue to December 2000, at which time
the unpaid balance will be due and payable.
Payments are in arrears, but no demand or other
collection action has been taken. 10,000 10,000
Three unsecured notes payable to a stockholder for
$5,000 each, dated January 27, 1995. Interest is
payable quarterly at 11.5% per annum. One note
was paid in 1996. The other two are due on July
20, 1997. Payments are in arrears, but no
demand or other collection action has been taken. 10,000 15,000
</TABLE>
48
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Four unsecured notes payable to an unaffiliated
company owned by an officer/ stockholder
totaling $22,440, dated in July 1995 and 1996.
The notes are payable in monthly installments
of $534, including variable interest at 6% over
prime (15% as of December 31, 1996). $ 19,541 $ 15,577
Unsecured note payable for legal services to an
officer/stockholder due on July 31, 1998. The
payable is non-interest bearing. An option has
been granted to convert the payable into the
Company's common stock. 15,000 15,000
Short-term loan due to a stockholder. The loan
is non-interest bearing and was repaid in early
1996. - 5,000
Unwritten, unsecured advance payable to an
officer/stockholder. Variable interest (ranging
from 10.75% to 18.53%) as of December 31, 1996
is payable monthly. The advance is due on demand. 10,500 3,500
-------- --------
186,666 209,624
Less current portion due within one year (69,609) (59,929)
-------- --------
Total long-term liabilities due to stock-
holders $ 117,057 $ 149,695
======== ========
</TABLE>
Long-term debt matures as follows:
YEAR UNRELATED PARTIES STOCKHOLDERS
-------- ----------------- ------------
1997 $ 31,115 $ 69,609
1998 - 72,867
1999 - 22,742
2000 - 21,448
2001 - -
------ -------
$ 31,115 $186,666
====== ========
49
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 4 - Major Customers:
Technical services revenue (including pass through funds described in
Note 1) for the year ended December 31, 1996 includes $250,458, $206,815
and $97,119 from three major customers which represents 98.4% of technical
services revenues. Technical services revenue (including pass through funds
described in Note 1) for the year ended December 31, 1995 includes $317,573
and $314,944 from two major customers, which represents approximately
100% of technical services revenues. Receivables from these major customers
as of December 31, 1996 and 1995, amount to $39,315 and $35,525, which
represents 98.8% and 98.9%, respectively, of consulting accounts receiv-
able. The Company's major technical services customers operate within the
mining industry, both nationally and internationally. Due to the nature of
the Company's operations, the major sources of sales revenues may change
from year to year.
NOTE 5 - Income Taxes:
Although the Company has incurred net losses for 1996 and 1995, the
majority of the loss from the photobyproduct fertilizer segment is
allocated to American Hydromet, which is a joint venture. Consequently,
the Company utilized $134,190 and $115,992 of its net operating loss carry-
forwards in 1996 and 1995, respectively. Net income before taxes, after
application of the above, amount to $42,721 and $81,859 for 1996 and 1995,
respectively. Based on these earnings, following is a reconciliation of
the federal statutory tax and tax rate to the Company's provision for taxes
and its effective tax rate.
<TABLE>
<CAPTION>
1996 1995
-------------- -------------------
PERCENT PERCENT
OF PRE-TAX OF PRE-TAX
AMOUNT INCOME AMOUNT INCOME
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Federal tax at statutory rate $ 14,525 34.0% $ 27,832 34.0%
Temporary differences,
primarily bad debt and
compensation related
expenses 30,708 71.9% 13,779 16.8%
Non-deductible expenses 391 0.9% 390 0.5%
Utilization of NOL (45,624) (106.8%) (42,001) (51.3%)
------- ------- ------- -------
Total Income Tax Expense $ - 0.0% $ - 0.0%
======= ======= ======= =======
</TABLE>
The Company's consolidated net operating loss available for carry-
forward to offset future taxable income and tax liabilities for income tax
reporting purposes expire as follows:
50
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
Year Ending December 31: Net 0perating Loss
----------------------- ------------------
1999 $ 12,260
2001 33,828
2002 26,089
2003 14,737
2005 64,174
2006 430,403
2007 188,146
2008 113,253
-------
$882,890
=======
The Company's total deferred tax assets, and deferred tax asset
valuation allowances at December 31, 1996 and 1995 are as follows:
1996 1995
--------- ---------
Total deferred tax assets $ 403,981 $ 385,325
Less valuation allowance (403,981) (385,325)
-------- --------
Net deferred tax asset $ - $ -
======== ========
NOTE 6 - Redeemable Preferred Stock:
On June 15, 1989, the Company authorized 1,000,000 shares of Preferred
Stock (par value of $.001 per share). In addition, 500 shares of the
Preferred Stock were designated as Series "A" Cumulative Convertible
Redeemable Preferred Non-Voting shares (hereinafter called Series "A"
Preferred Shares). Except for the Series "A" Preferred Shares, the
Company's Board of Directors has the authority to divide the Preferred
Shares into series and to set the relative rights and preferences of each
series.
As of December 31, 1996 and 1995, there were 247 shares of Series "A"
Preferred Shares issued and outstanding. These shares were issued at a
price of $900 per share, and have provisions for a cumulative dividend of
$160 per annum per share, or approximately 18% per annum. As of December
31, 1996 and 1995, cumulative unpaid dividends on Series "A" Preferred
Shares were $251,068 and $211,548 ($1,016 and $0.0086 per preferred and
common shares, respectively, as of December 31, 1996), respectively. The
Company is prohibited from declaring or paying any cash dividends on its
common stock until all dividend arrearages on Preferred Stock are paid in
full.
The Series "A" Preferred Shares are redeemable by the Company after
October 31, 1992, in whole or in part, at a price of $1,000 per share
plus cumulative unpaid dividends. Commencing after October 31, 1993 and
51
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
annually thereafter, the redemption price increases at the rate of $100 per
share per annum. The Company, subject to applicable law, is to redeem all
issued and outstanding Series "A" Preferred Shares on October 31, 1998.
The Company presents redeemable preferred stock at redemption value
(see Note 1).
Series "A" Preferred shareholders have the right to convert their
shares, at any time, into Common Stock of the Company at the rate of 3,000
shares of Common Stock for each share of Series "A" Preferred Stock. In
addition, any cumulative unpaid dividends will be converted into the
Company's Common Stock at the rate of $.33 1/3 per share of Common Stock.
At the time of acquiring Series "A" Preferred Shares, the investor has
the right to purchase up to 4,000 shares of the Company's Common Stock at
the rate of $.16 per share.
Other rights, preferences, and limitations of the Series "A" Preferred
Shares include provisions that the shares carry no voting rights, have
preference over all other classes of stock as to payment of dividends, and
preference over all other classes of stock if the Company is liquidated.
Upon involuntary liquidation, holders of Series "A" Preferred Shares would
receive no more than the redemption price.
Mandatory redemption requirements, excluding cumulative unpaid divi-
dends, if any, for the five years following December 31, 1996 are as
follows:
1997 $ -
1998 370,500
1999 -
2000 -
2001
-
--------
$ 370,500
========
Mandatory redemption of preferred stock is to be paid out of future
earnings.
On May 30, 1997 the Series "A" Preferred shareholders were offered
an exchange of 9,000 common shares for each Preferred Share. Preferred
shareholders accepting the exchange offer agree to forego all cumulative
and future dividends related to the Preferred shares. As of July 18,
1997, 78 Preferred Shares have been exchanged, representing 32% of the
total outstanding Preferred Shares. As a result, the Preferred Stock
Mandatory Redemption amount and the Stockholders' Deficit will be reduced
by $176,792 as of July 18, 1997.
52
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 7 - Stock Option and Purchase Plans:
Pursuant to various Board of Director authorizations, the Company has
adopted an ongoing debt restructuring plan which includes the private
placement of its Common Shares and/or warrants to acquire Common Shares at
a minimum of $.l0 per share. The warrants issued under this plan are exer-
cisable at varying dates through November 15, 2001.
In addition to the above private placement warrants, the Company has
granted options for Common Shares to certain officers, directors, employees
and consultants of the Company. The options are exercisable at varying
dates through six months after all obligations owed to, or guaranteed by,
the respective individuals are paid in full.
Following is a summary of all the above described warrants and options
granted for the years ending December 31, 1996 and 1995.
NUMBER OF SHARES
----------------------
1996 1995
--------- ---------
Under option, beginning of year 4,874,998 3,773,750
Granted 1,828,163 1,916,248
Exercised (580,000) (250,000)
Expired (17,083) (565,000)
--------- ---------
Under option, end of year 6,106,078 4,874,998
--------- ---------
Average price for all options
granted and exercised $.l0 $.ll
--------- ---------
NOTE 8 - Common Stock to be Issued:
The following summarizes stock transactions commencing prior to
December 31, with stock issued subsequent to that date:
1996 1995
---------- ---------
Payment of legal fees $ 20,000 $ -
Payment of director fees 781 937
Payment of salaries 73,800 6,931
Payment of interest 20,010 4,619
------- -------
$114,591 $ 12,487
======= =======
NOTE 9 - Accrued Expenses:
The following is the composition of accrued expenses as of
December 31:
53
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1996 1995
-------- --------
Payroll $130,580 $103,106
Payroll taxes* 16,493 34,397
Federal and State payroll taxes 10,473 4,607
Sales tax 293 189
------- -------
$157,839 $142,299
======= =======
* One subsidiary is on a payment schedule with the Internal Revenue
Service of $1,184 per month (subject to change) until the balance is paid
in full.
NOTE 10 - Related Party Transactions:
Several promissory notes are held by stockholders at December 31, 1996
and 1995 (see Note 3 for terms).
Interest expense includes $46,827 and $27,982 for December 31, 1996
and 1995, respectively, relating to the Company's notes payable and accrued
salaries to stockholders. Accrued interest payable includes $18,376 and
$11,801 for the notes and leases payable to stockholders as of December 31,
1996 and 1995, respectively.
An officer/stockholder of the Company was owed $254,750 and $255,000
for salary in arrears as of December 31, 1996 and 1995, respectively. The
officer/stockholder made an agreement with the Company not to make demand
on these arrearages prior to March 1, 1998 (to a maximum of $250,000).
$119,956 and $93,786 of the accrued payroll as of December 31, 1996
and 1995, respectively (see Note 9) is for salary in arrears due to several
officer/stockholders and employee/stockholders. Interest amounting to
$4,619 for 1995 was paid by issuance of 46,190 shares of common stock in
January 1996. Interest amounting to $20,010 for 1996 will be paid in 1997
by issuance of 200,095 shares of common stock.
Accounts payable for legal fees of $20,000 were paid by issuance of
200,000 shares of common stock, which were issued on January 22, 1997.
(The Company's attorney was a stockholder prior to this transaction.) On
July 28, 1994 the Company entered into a sale/leaseback agreement with a
stockholder for a substantial portion of its photobyproduct fertilizer
equipment. The transaction is more fully described in Note 11.
$8,281 of long-term debt and related accrued interest was paid by
issuance of common stock. The transaction is detailed in Note 3.
Consulting and labor services, including accruals from prior years,
amounting to $75,669 and $9,731 for 1996 and 1995, respectively, were paid
by issuance of 756,690 and 97,310 shares, respectively, of common stock.
54
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
The shares were or are to be issued at varying dates in 1995, 1996, and
1997.
On August 5, 1995, January 30, 1996, and March 20, 1996, the Company
entered into lease transactions with two stockholders to acquire additional
photobyproduct fertilizer equipment. The transactions are more fully
described in Note 11.
Consulting services provided by a stockholder during 1995, amounting
to $11,995, were offset against a promissory note due the Company. The
promissory note related to the exercise of a stock option for 120,000
shares of common stock in connection with the sale/leaseback transaction
described in Note 11.
During 1996 and 1995 a total of $6,270 and $16,170, respectively, in
federal income tax refunds due an officer/stockholder were applied to the
payroll tax liabilities owed by two of the Company's subsidiaries. The
promissory notes issued to repay the officer/stockholder are described in
Note 3.
In 1996 technical services were performed for a client, the majority
of which is owned by officer/director/shareholders of the Company. Total
1996 technical services revenue from the project was $97,119. Accounts
receivable includes $22,454 from this project as of December 31, 1996, all
of which has been received subsequent to December 31, 1996.
For related party transactions subsequent to December 31, 1996, see
Note 17.
NOTE 11 - Lease Commitments and Rent Expense:
0perating Leases
----------------
The Company leases its office facility under a noncancellable
agreement which expires June 30, 1999.
A wholly owned subsidiary of the Company (Itronics Metallurgical,
Inc.) leases plant facilities under a noncancellable agreement which
expired June 30, 1997. Beginning July 1, 1997 the lease is on a month-to-
month basis and, therefore, no long-term binding contractual obligation
exists with regards to minimum lease payments. The monthly rent payment
is $3,000.
Future minimum rental commitments at December 31, 1996, under these
operating lease agreements are due as follows:
1997 $ 68,285
1998 54,264
1999 27,534
-------
$150,083
=======
55
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
Total rental expense included in the statements of operations for the
above leases for the years ended December 31, 1996 and 1995 are $81,786
and $85,541, respectively.
Capital Leases
--------------
On July 28, 1994, a sale/leaseback of equipment for $40,000 was made
to a stockholder. This transaction was recorded as a capital lease. Lease
payments for the first six months were paid with the issuance of 80,915
shares of common stock. In 1995, an additional six months lease payments
were paid by issuance of 80,915 shares of common stock. Subsequent lease
payments are $1,443 per month. After the lease expires (36 months), there
is an optional buy back clause for either 10% of the value of the assets
or four months additional payments. One provision of the lease granted an
option to acquire 120,000 shares of common stock at $.l0 per share. This
option was exercised on September 12, 1994 for receipt of a promissory
note. As discussed in Note 10, this note was offset with consulting
services during 1995.
A deferred gain of $35,154 was realized on the sale portion of the
transaction. The gain is being amortized over ten years to coincide with
the estimated lives of the related assets and is being recorded as a
reduction in amortization expense. The amount of such gain recognized for
the year ended December 31, 1996 and 1995 is $3,516 and $3,515, respect-
ively.
On August 5, 1995 the Company entered into a lease agreement for new
photobyproduct equipment with a stockholder. The lease is in the amount of
$10,000, and is payable at $332 per month for 36 months. At the end of the
lease there is an optional buyback clause for either 10% of the value of
the assets or two months additional payments.
On January 30, 1996 and March 20, 1996, the Company entered into
lease agreements for new photobyproduct equipment with two stockholders.
The leases, in the amounts of $7,000 and $10,000, are payable at $233 and
$355 per month, respectively, for 36 months. There are optional buyback
clauses at the end of the leases for either 10% of the value of the assets
or two to four months of additional payments.
The payments on all four leases are in arrears. No demand or other
collection action has been taken. Amortization on all leases is included
in depreciation expense.
Future minimum lease commitments at December 31, 1996 is due as
follows:
1997 $38,128
1998 9,738
1999 1,315
------
$49,181
======
56
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 12 - Forgiveness of Debt:
Forgiveness of debt has the following components:
1996 1995
-------- --------
Write-off of various account
payable balances $ - $ 2,237
Write-off of notes payable and
accrued interest 135,288 50,186
------- ------
$135,288 $52,423
======= ======
Income of $15,600 in 1995 resulted from a note going beyond the six
year statute of limitations. Accordingly, all accrued interest and the
individual monthly payments that are more than six years past due have
been written off.
Income of $33,000 and $34,586 in 1996 and 1995, respectively, resulted
from settlement of a note and accrued interest totaling $82,586 for
$15,000. The settlement agreement called for three monthly payments of
$5,000, beginning in December 1995. The accrued interest was forgiven at
the date of the agreement. Therefore, the income from the accrued interest
was recognized in 1995 and the remainder of the debt forgiven was
recognized in 1996.
Income of $102,288 in 1996 resulted from a portion of a note going
beyond the six year statute of limitations. Due to a lack of contact from
the note holder and due to certain claims and defenses the Company could
use to dispute the note, it was deemed that the entire note and accrued
interest should be written off.
NOTE 13 - Business Segments:
The Company and its subsidiaries operate primarily in two business
segments as identified in Note 1. The following defines business segment
activities:
Mining Technical Services: Mining industry services
Photobyproduct Fertilizer: Photobyproduct recycling,
Silver recovery,
Fertilizer production and
sales
Based on revenues and operating income, the mining technical services
segment is the most significant of the two segments. This segment performs
its services primarily out of the Company's Reno, Nevada offices, but its
source of clients is not limited to organizations based locally. It has
served both national and international clients in the past. As discussed
in Note 4, at present the segment is serving primarily three clients in
the gold mining industry, who are based in different areas of the United
States.
57
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
The photobyproduct fertilizer segment operates principally in the
Northern Nevada area and, to a lesser extent, Northern California area.
The primary source of revenue for this segment is from the pick-up and
processing of photobyproducts and recovery of silver therefrom. The
customer base is diverse and includes organizations in the photo
processing, printing, x-ray and medical fields. Fertilizer sales are
concentrated in the same geographic markets and the customer base is
principally in commercial markets, including turf farms, professional lawn
maintenance organizations, and golf courses.
<TABLE>
<CAPTION>
Operating income (loss) by business segment:
1996 1995
--------- ---------
<S> <C> <C>
Mining Technical Services:
Technical services
revenues (Note 1) $ 563,127 $ 630,357
Operating expenses 494,016 522,539
-------- --------
Operating Income $ 69,111 $ 107,818
======== ========
Photobyproduct Fertilizer:
Revenues:
Photobyproduct recycling $ 190,988 $ 119,633
Silver recovery (Note 16) 111,115 111,134
Fertilizer sales (Note 15) 13,331 10,653
-------- --------
315,434 241,420
-------- --------
Operating expenses 576,428 481,040
Research and development 40,501 50,762
-------- --------
616,929 531,802
-------- --------
Operating (loss) $(301,495) $(290,382)
======== ========
</TABLE>
Indirect operating expenses of $51,198 and $61,692 incurred by
Itronics Inc. were equally divided between the two segments for 1996 and
1995, respectively.
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Cost of sales by business segment:
Mining Technical Services (Note 1) $370,148 $397,376
Photobyproduct Fertilizer 421,990 334,675
------- -------
$792,138 $732,051
======= =======
Capital expenditures by business
segment:
Mining Technical Services $ 3,813 $ 1,998
Photobyproduct Fertilizer (Note 11) 33,711 28,228
------- -------
$ 37,524 $ 30,226
======= =======
</TABLE>
58
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
Depreciation and amortization expense
by business segment:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Mining Technical Services
Depreciation $ 3,817 $ 3,477
------ ------
Photobyproduct Fertilizer
Depreciation $ 9,571 $ 8,177
Amortization 5,522 3,237
------ ------
$15,093 $11,414
====== ======
</TABLE>
Identifiable assets by business segment (net of accumulated
depreciation and allowance for doubtful accounts):
<TABLE>
<CAPTION>
1996 1995
--------------------- -------------------
MINING PHOTO- MINING PHOTO-
TECHNICAL BYPRODUCT TECHNICAL BYPRODUCT
ASSET DESCRIPTION SERVICES FERTILIZER SERVICES FERTILIZER
------------------------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Current Assets
Cash $(l,107) $ 2,198 $ 41,948 $ 1,463
Accounts receivable, net 39,794 20,832 35,932 26,384
Inventories 1,826 26,177 1,826 32,652
Prepaid expenses 751 19,118 944 18,740
------ ------- ------- -------
41,264 68,325 80,650 79,239
------ ------- ------- -------
Property and Equipment, net
Leasehold improvements - 9,095 - 6,234
Equipment 10,387 27,983 13,371 22,779
Vehicles 4,104 7,000 2,760 9,720
Equipment under capital
lease - 65,675 - 52,401
------ ------- ------- -------
14,491 109,753 16,131 91,134
------- ------- ------- -------
Other Assets, net
Patents - 7,951 - 8,456
Organizational costs - 916 - 916
Non-Compete Covenant - 135 - 960
Deposits 1,520 473 2,192 1,931
------- ------- ------- -------
1,520 9,475 2,192 12,263
------ ------- ------- -------
$57,275 $187,553 $ 98,973 $182,636
====== ======= ======= =======
</TABLE>
Assets of Itronics Inc. totaling $132 and $499 for 1996 and 1995,
respectively, were equally divided between the two segments.
59
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 14 - Contingencies:
In June 1995 the former President of a former mining client filed suit
against the Company, Whitney & Whitney, Inc. (W&W) and several key
employees, alleging libel and slander related to the issuance of W&W's
final report on the project. The Company's liability insurance carrier is
presently defending W&W and its key employees in this case. Management
believes the allegations to be without merit, and is vigorously defending
against the suit, and has served a countersuit against the individual. In
March 1997 the suit was dismissed by the Court. The individual has subse-
quently filed an appeal of the dismissal.
In February 1997, this same individual filed a second suit that
includes the Company, W&W and a key employee as co-defendants, along with
several unrelated parties. The suit alleges breach of contract and other
causes of action and seeks in excess of $5 million plus punitive damages.
The Company's liability insurance carrier has agreed to assume the defense
of this action with a reservation of rights, including the right to
disclaim insurance coverage. Management believes the allegations are
without merit and is vigorously defending against the suit.
In management's judgment, no accrual of a loss contingency is required
in the financial statements.
NOTE 15 - Going Concern:
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 $156,891 during the year ended
December 31, 1996, and as of December 31, 1996, the Company and its
subsidiaries' current liabilities exceeded their current assets by $365,215
and their total liabilities exceeded their total assets by $1,230,248.
The Company and its subsidiaries are in default on unsecured promissory
notes in the amount of $101,115 out of $217,781 (see Note 3) and secured
leases with stockholders in the amount of $50,340 at December 31, 1996.
These factors indicate the Company and its subsidiaries' ability to
continue in existence is dependent upon its 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.
Prior to acquiring Whitney & Whitney, Inc., the Company registered
1,777,000 common shares for public offering. Each common share included
one Class A and one Class B warrant. Due to security law changes
60
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
immediately subsequent to the offering, the offering did not raise
sufficient equity capital to complete the Company's business plan. In
order to solve the Company's liquidity problems, management has been
implementing a plan of increasing equity through private placements of
preferred and common shares, conversion of debt to common shares, and
payment of consulting and other labor services with common shares.
In addition to continuing the above described efforts, development of
the technology necessary to manufacture fertilizer from photobyproducts has
been completed. Management is now organizing the resources needed to market
the products and is in discussions with several large fertilizer distrib-
ution companies regarding sales and distribution arrangements.
Subsequent to December 31, 1996, the Company issued a Private
Placement Memorandum to raise $500,000 in equity funds and has made an
offer to exchange its Preferred Shares for restricted common shares.
The Private Placement is more fully discussed at Note 17 and the
Preferred Exchange is discussed at Note 6.
Much of the Company's short-term and long-term cash requirements have
been met by funding from the Company's principal officers and stockholders.
Management anticipates that such support will continue.
NOTE 16 - Off-Balance Sheet Risks and Concentration of Credit Risk:
The Company operates within the mining, photo, and fertilizer
industries. It provides mining technical services and recycles
photobyproducts into high quality liquid fertilizer products for the
professional and consumer markets. As of December 31, 1996 and 1995, all
of the Company's outstanding unsecured accounts receivable were due
directly or indirectly from entities within the mining and photo
industries.
As discussed in Note 4, a significant portion of the Company's
accounts receivable are concentrated with two mining industry clients. This
concentration of credit risk is somewhat mitigated due to the fact that the
Company has been providing services for these clients for over ten years.
Increase or decrease in photobyproduct recycling service and silver
extraction revenues has a direct relationship with federal, state, and
local regulations and enforcement of said regulations. Increase or decrease
in fertilizer revenues will be related to crop cycles, seasonal variations,
and weather patterns.
The ability to recognize a net profit from silver recovery sales is
based on the fair market value of silver (London five day average) at the
time the photobyproducts are obtained versus the fair market value of
silver when recovered silver is sold, Most customers are given an 80%
61
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
silver credit against recycling services based on the content of silver in
the photobyproducts. When the fair market value of silver is declining, the
possibility exists that the 80% credit, plus operating costs associated
with the silver extraction, could exceed the revenues generated at the
time the silver is sold.
Management's plan to reduce the market risk of silver is to increase
the volume of photobyproducts and the resultant silver recovery, and then
to implement a hedging program in which silver will be sold forward,
thereby matching the price to be received to the price paid to the
Company's customers.
As a handler of photobyproduct materials, the Company is subject to
various federal, state, and local environmental, safety, and hazardous
waste regulations. The Company believes that its policies and procedures
for handling hazardous wastes are in compliance with the applicable laws
and regulations and are consistent with industry standards. Costs for
these compliance activities have not been segregated in the Company's
records, but are expensed as incurred. As the Company's photobyproduct
fertilizer business expands, the various laws and regulations that are
applicable to the Company's activities will change. During 1996, the
Company received concurrence from the State of Nevada environmental
officials that the Company's photobyproduct fertilizer process meets the
existing requirements for exemption from all environmental regulations,
except toxic metal content standards, and with the exception that certain
presently conducted lab analyses of the photobyproducts will continue to
be required. Certain of the Company's large scale customers presently meet
the exemption requirements. Once all the photobyproducts are utilized in
the fertilizer or other commercial products, all the Company's customers
will be exempt. As a result, the Company's cost of compliance could
decrease.
NOTE 17 - Subsequent Events:
Through July 18, 1997, new debt (original principal amount) in the
amount of $59,500 was incurred. The majority of this debt was funded by an
officer/stockholder.
The following summarizes common stock activity from January 1, 1997,
through July 18, 1997:
<TABLE>
<CAPTION>
ISSUED TO BE ISSUED
------------------- -----------------
SHARES AMOUNT SHARES AMOUNT
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Option exercise 375,000 $ 37,500 - $ -
Private placement 735,500 73,550 - -
Labor services 460,000 46,000 663,608 68,228
Director's fees 20,000 1,625 10,000 1,000
Interest - - 304,230 34,820
Preferred stock conversion 702,000 176,852 - -
Note receivable 500,000 50,000 - -
--------- ------- ------- -------
2,792,500 $385,527 977,838 $104,048
========= ======= ======= =======
</TABLE>
62
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
In February 1997 the Company issued a Private Placement Memorandum to
raise $500,000 by offering 5,000,000 shares at $.l0 per share.
In March 1997, an unaffiliated shareholder invested $10,000 for
restricted common shares through the above described Private Placement. In
addition, the individual executed a promissory note to invest an additional
$60,000, to be paid over approximately eighteen months. Through July 18,
1997, $10,000 plus interest has been received under the agreement. 600,000
restricted common shares have been issued and are being held by the
Company as collateral for the note.
In May 1997, the Company proposed to its Preferred Shareholders to
exchange their Preferred Shares for restricted common shares of the
Company. The offer is more fully discussed at Note 6.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
--------------
Date: August 29, 1997 By: JOHN W. WHITNEY
--------------- ----------------------------------
John W. Whitney
President, Treasurer and Director
(Principal Executive 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.
Date:August 29, 1997 By: JOHN W. WHITNEY
--------------- ----------------------------------
John W. Whitney
President, Treasurer and Director
(Principal Executive Officer)
Date:August 29, 1997 By: RICHARD W STUMBO, JR.
--------------- ----------------------------------
Richard W. Stumbo, Jr.
Vice President, Finance and Chief
Financial Officer and Director
(Principal Financial Officer)
Date:August 29, 1997 By: MICHAEL C. HORSLEY
--------------- ----------------------------------
Michael C. Horsley
Controller
(Principal Accounting Officer)
Date:August 29, 1997 By: PAUL H. DURCKEL
--------------- ----------------------------------
Paul H. Durckel
Director
64
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER SHARE
FOR THE YEARS ENDED DECEMBER 31,1996 AND 1995
EXHIBIT 11
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Common and common equivalent shares
used in determining net loss per share
Weighted average number of common shares
outstanding during the period 29,362,017 27,716,700
Common equivalent shares 0 0
---------- ----------
29,362,017 27,716,700
========== ==========
Net loss $ 156,891 $ 186,106
Cumulative preferred dividends for the period 39,520 39,520
-------- --------
Net loss plus cumulative preferred dividends
for the period $ 196,411 $ 225,626
======== ========
Loss per share $ .0067 $ .0081
======== ========
</TABLE>
65
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
SIGNIFICANT SUBSIDIARIES
EXHIBIT 21
STATE OF NAMES UNDER WHICH
NAME INCORPORATION THEY DO BUSINESS
- ---------------------- ------------- -----------------
Whitney & Whitney, Inc. Nevada Same
Itronics Metallurgical, Inc. Nevada Same
Nevada Hydrometallurgical Project
(A Partnership) Nevada Same
American Hydromet
(A Joint Venture) Nevada Same
66
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-KSB FOR DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1091
<SECURITIES> 0
<RECEIVABLES> 62032
<ALLOWANCES> 1406
<INVENTORY> 28003
<CURRENT-ASSETS> 109589
<PP&E> 345974
<DEPRECIATION> 221730
<TOTAL-ASSETS> 244828
<CURRENT-LIABILITIES> 474804
<BONDS> 403404
596868
0
<COMMON> 29748
<OTHER-SE> (1259996)
<TOTAL-LIABILITY-AND-EQUITY> 244828
<SALES> 315434
<TOTAL-REVENUES> 878561
<CGS> 421990
<TOTAL-COSTS> 792138
<OTHER-EXPENSES> 59411
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59814
<INCOME-PRETAX> (156891)
<INCOME-TAX> 0
<INCOME-CONTINUING> (156891)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (156891)
<EPS-PRIMARY> (.007)
<EPS-DILUTED> (.007)
</TABLE>
