UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM l0-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTlON 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from______ to_____
Commission File Number 33-18582
ITRONICS INC.
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(Exact name of small business issuer as specified in its charter)
TEXAS 75-2198369
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
6490 S. McCarran Blvd., Bldg C-23, Reno, Nevada 89509
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(Address of principal executive offices)
Issuer's telephone number, including area code: (775)689-7696
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NO CHANGE
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Former name, former address and former fiscal, if changes since last report.
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 during the
past 90 days. Yes (x) No ( ).
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
As of July 31, 1999, 68,329,758 shares of common stock were
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes ( ) No (X)
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ITRONICS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1999
and December 31, 1998 4
Condensed Consolidated Statements of Operations and
Comprehensive Income for the Three and Six Months
Ended June 30, 1999 and 1998. 6
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998. 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of
Operation 10
PART II- OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 17
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PART I - FINANCIAL INFORMATIONON
Item 1. Financial Statements
- ----------------------------
ITRONICS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
ASSETS
June 30, 1999 Dec. 31, 1998
-------------- -------------
CURRENT ASSETS
Cash $ 687,901 $ 348,829
Accounts receivable 146,824 117,397
Notes receivable, subscriptions of stock 13,833 66,325
Marketable equity securities 16,796 -
Inventories 46,640 41,107
Prepaid expenses 78,455 46,945
--------- ---------
Total Current Assets 990,449 620,603
--------- ---------
PROPERTY AND EQUIPMENT
Land 215,000 -
Building 787,526 -
Plant design/construction in progress 182,752 98,358
Leasehold improvements 14,212 14,212
Equipment and furniture 393,777 394,746
Vehicles 69,155 68,273
Equipment under capital lease 484,214 35,189
--------- ---------
2,146,636 610,778
Less: Accumulated depreciation and amortization 307,097 281,433
--------- ---------
1,839,539 329,345
--------- ---------
OTHER ASSETS
Intangibles 75,985 53,379
Note receivable, subscription of stock - 42,340
Investment in American Gold & Silver Ltd. 9,250 9,250
Deposits 19,144 7,612
--------- ---------
104,379 112,581
--------- ---------
$2,934,367 $1,062,529
========= =========
See Notes to Condensed Consolidated Financial Statements
4
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ITRONICS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, 1999 Dec. 31, 1998
-------------- -------------
CURRENT LIABILITIES
Accounts payable $ 109,882 $ 152,682
Accrued management salaries 18,286 80,914
Accrued expenses 76,704 103,136
Insurance contracts payable 24,030 19,279
Interest payable 7,114 15,084
Current maturities of long-term debt and leases 66,709 4,951
Current maturities of advances and leases from
stockholders 61,858 122,282
Other 13,130 6,326
--------- ---------
Total Current Liabilities 377,713 504,654
--------- ---------
LONG-TERM LIABILITIES
Long-term debt and leases, less current
maturities 352,662 24,786
Advances and leases from stockholders, less
current maturities 29,279 50,196
Accrued salary due stockholder 33,054 37,200
Deferred gain, less current maturities 39,370 16,111
--------- ---------
Total Long-Term Liabilities 454,365 128,293
--------- ---------
832,078 632,947
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STOCKHOLDERS' EQUITY
Preferred stock (-0- shares outstanding) - -
Common stock (67,653,688 shares outstanding at
June 30, 1999 and 56,059,727 outstanding at
December 31, 1998) 67,654 56,060
Additional paid-in capital 7,129,763 4,625,194
Accumulated deficit (5,255,622) (4,375,283)
Common stock to be issued 155,856 123,611
Accumulated other comprehensive income 4,638 -
--------- ---------
2,102,289 429,582
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$2,934,367 $1,062,529
========= =========
See Notes to Condensed Consolidated Financial Statements
5
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ITRONICS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,1999 AND 1998
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
REVENUES
Fertilizer $ 21,428 $ 17,968 $ 33,609 $ 28,051
Photobyproduct recycling 31,580 28,914 59,535 60,811
Silver 49,910 46,217 70,944 99,671
Mining technical services 88,977 67,265 159,290 149,977
-------- -------- -------- --------
Total Revenues 191,895 160,364 323,378 338,510
COST OF SALES 246,252 198,249 451,065 402,752
-------- -------- -------- --------
Gross Profit (54,357) (37,885) (127,687) ( 64,242)
-------- -------- -------- --------
OPERATING EXPENSES
Depreciation and amort. 19,527 7,638 34,176 15,276
Research and development 13,111 21,469 26,148 41,637
Sales and marketing 191,748 67,571 376,554 113,758
Plant start-up costs 3,885 4,789 26,706 4,789
General and admin. 145,146 82,203 258,542 175,428
-------- -------- -------- --------
373,417 183,670 722,126 350,888
-------- -------- -------- --------
Operating Income (Loss) (427,774) (221,555) (849,813) (415,130)
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Interest expense (22,539) (11,182) (38,174) (22,026)
Interest income 6,466 3,152 7,648 3,322
-------- -------- -------- --------
Total Other Income
(Expense) (16,073) ( 8,030) (30,526) (18,704)
-------- -------- -------- --------
Income (Loss) before provision
for income taxes (443,847) (229,585) (880,339) (433,834)
Provision for income taxes - - - -
-------- -------- -------- --------
Net Income (loss) (443,847) (229,585) (880,339) (433,834)
Other comprehensive income
Unrealized gains on
securities 4,638 - 4,638 -
-------- -------- -------- --------
Comprehensive Loss $(439,209) $(229,585) $(875,701) $(433,834)
======== ======== ======== ========
Weighted average number of
shares outstanding (1,000's) 66,172 44,370 61,985 43,871
======== ======== ======== ========
Earnings (loss) per share $(0.0067) $(0.0052) $(0.0142) $(0.0099)
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements
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ITRONICS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,1999 AND 1998
(UNAUDITED)
Six Months Ended June 30,
1999 1998
---------- ----------
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES
Net income (loss) $(880,339) $(433,834)
Adjustments to reconcile net income (loss)
to cash used by operations
Depreciation and amortization 34,176 15,276
Expenses paid with issuance of common stock 97,914 60,577
(Increase) decrease:
Trade receivables (4,394) 2,598
Interest receivable-stock subscription 917 (2,933)
Marketable equity securities (12,158) -
Inventories (5,533) 15,604
Prepaid and other assets (52,139) (690)
Increase (decrease):
Accounts payable (42,800) 79,132
Accrued expenses and contracts (84,955) 111,621
Accrued interest ( 7,970) 6,618
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Net Cash Used by Operating Activities (957,281) (146,031)
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CASH FLOWS FROM (FOR) INVESTING ACTIVITIES
Acquisition of property and equipment
and intangibles (483,102) (41,780)
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CASH FLOWS FROM (FOR) FINANCING ACTIVITIES
Proceeds from sale of common stock 1,847,839 138,175
Proceeds from debt 40,000 43,527
Payments on debt (108,384) (15,861)
--------- --------
Net Cash Provided by Financing Activities 1,779,455 165,841
--------- --------
Net Increase (Decrease) in Cash 339,072 (21,970)
Cash, beginning of period 348,829 29,213
--------- --------
Cash, end of period $ 687,901 $ 7,243
========= ========
See Notes to Condensed Consolidated Financial Statements
7
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ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. The unaudited condensed consolidated financial statements printed
herein have been prepared in accordance with the instructions to Form 10-QSB
and do not include all of the information and disclosures required by
generally accepted accounting principles. Therefore, these financial
statements should be read in conjunction with the consolidated financial
statements and related footnotes included in the Company's Form 10-KSB for
the year ended December 31, 1998. These financial statements reflect all
adjustments that are, in the opinion of management, necessary to fairly state
the results for the interim periods reported.
2. The results of operations for the three and six months ended June 30,
1999 are not necessarily indicative of the results to be expected for the
full year.
3. On March 31, 1999 the Company's subsidiary, Itronics Metallurgical,
Inc. (IMI), closed escrow on the purchase of a 35,000 square foot
manufacturing facility on approximately three acres of land pursuant to a
lease/option agreement it had entered into in January 1998. The $1,000,000
purchase price was paid with $300,000 cash and $700,000 of the Company's
restricted common stock. In addition, through June 30, 1999, a total of
$346,193 of equipment was acquired through financing leases during the
quarter and $65,033 was financed from sale/leasebacks of computer and office
equipment. Subsequent to June 30, 1999, an additional $158,000 in lease
financing has been approved, which included approximately $115,000 in cash.
4. Following is financial information for each of the Company's segments.
No changes have occurred in the basis of segmentation since December 31,
1998. Cost allocation percentages were reviewed during the quarter, resulting
in a greater percentage of corporate marketing and administrative costs being
allocated to the photobyproduct fertilizer segment to reflect the increased
emphasis on that segments activities. This resulted in approximately $25,300
in greater costs to that segment than if previous percentages had been used.
Reconciliation of segment revenues and operating income (loss) to the
respective consolidated amounts and to consolidated income (loss) before
taxes:
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
---------- ---------- ---------- ---------
Revenues:
Photobyproduct Fertilizer $ 102,918 $ 93,099 $ 164,088 $ 188,533
Mining Technical Services 88,977 67,265 159,290 149,977
--------- -------- -------- --------
Consolidated Revenues $ 191,895 $ 160,364 $ 323,378 $ 338,510
========= ======== ======== ========
Operating Income (Loss):
Photobyproduct Fertilizer $(368,796) $(175,672) $(692,526) $(334,214)
Mining Technical Services ( 58,978) ( 45,883) (157,287) (80,916)
----------- --------- -------- --------
Consolidated Operating
Income (Loss) (427,774) (221,555) (849,813) (415,130)
Other Income (Expense) ( 16,073) ( 8,030) (30,526) (18,704)
----------- --------- -------- --------
Consolidated Net Income
(Loss) before taxes $(443,847) $(229,585) $(880,339) $(433,834)
======== ======== ======== ========
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ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
Identifiable assets by business segment for the major asset
classifications and reconciliation to total consolidated assets:
June 30, December 31,
1999 1998
---------- ----------
Current Assets:
Photobyproduct Fertilizer $ 138,776 $ 103,692
Mining Technical Services 216,650 121,171
--------- ---------
355,426 224,863
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Property and Equipment, net:
Photobyproduct Fertilizer 1,738,197 276,920
Mining Technical Services 101,342 52,425
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1,839,539 329,345
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Other Assets, net:
Photobyproduct Fertilizer 21,009 13,943
Mining Technical Services 2,917,096 3,107,185
--------- ---------
2,938,105 3,121,128
--------- ---------
Total Assets:
Photobyproduct Fertilizer 1,897,982 394,555
Mining Technical Services 3,235,088 3,280,781
--------- ---------
Total Segment Assets 5,133,070 3,675,336
Itronics Inc. assets 9,015,636 6,746,058
Less: intercompany elimination (11,214,339) (9,358,865)
--------- ---------
Consolidated Assets $2,934,367 $1,062,529
========= =========
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Item 2. Management's Discussion and Analysis or Plan of Operations
I. Results of Operations
The Company reported a net loss of $443,847 or $0.0067 per share for
the quarter ended June 30, 1999, compared to a net loss of $229,585 or
$0.0052 per share for the comparable 1998 period. For the first six months of
1999 the loss was $880,339 or $0.0142 per share, compared to a loss of
$433,834 or $0.0099 per share for the 1998 comparable period. The primary
factor contributing to the increased loss for the quarter was increased
operating costs of $189,700. The increased operating costs are due primarily
to increased corporate and product marketing and administration costs for
financial management. The purpose of the substantial change in cost structure
is to convert the photobyproduct fertilizer segment from a small scale
semi-works operation to full commercial scale operation. Management focus is
now on completing the move to the new plant and completing the corporate
management team and computer systems infrastructure needed to obtain, and
manage, substantial sales growth. In that regard, the Company added one
experienced person to the management team during the quarter. He has more
than ten years experience in fertilizer manufacturing and field application.
He was recently employed by Western Farm Services, Inc. as a fertilizer and
applications chemist. He will provide technical support for fertilizer
manufacturing, fertilizer injection equipment sales and installation, and
related Gold'n Gro fertilizer nutrition program implementation.
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.
PHOTOBYPRODUCT FERTILIZER
This segment, known as Itronics Metallurgical, Inc., operates a
semi-works photobyproduct recycling plant, which includes related silver
recovery. As part of the recycling process, the Company is manufacturing and
marketing a line of liquid fertilizer products which are being introduced
into the turf and horticultural markets in California and Nevada. Revenues
are generated from photobyproduct management services, and silver and
fertilizer sales. Fertilizer sales are in the start-up phase and are expecte
to expand to a commercial level once manufacturing is relocated to the new
facility which was recently acquired.
- -----------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Sales revenue $ 102,918 $ 93,099 $ 164,088 $ 188,533
Operating income (loss) $(368,796) $(175,672) $(692,526) $(334,214)
- -----------------------------------------------------------------------------
Total segment sales for the second quarter of 1999 were approximately
$102,900, compared to $93,100 for the comparable quarter of 1998, an increase
of 10.5%. Fertilizer sales for the quarter were approximately $21,400,
compared to $18,000 for the 1998 second quarter, an increase of 19%.
Photobyproduct recycling revenue for the quarter increased by $2,700 on an
increased volume of 1.6%, compared to the second quarter of 1998. Silver
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sales increased $3,700 from the second quarter of 1998, an increase of 8%.
Sales growth will continue to be limited until the new plant is operational.
Cost of sales for the second quarter of 1999 increased $39,200 from the 1998
second quarter. The increase includes $9,300 in direct costs due to increased
sales and $11,000 in payroll costs. The increased payroll costs reflects the
limited space conditions in the pilot plant, causing inefficient handling of
materials. Moving to the commercial scale plant, combined with much larger
capacity equipment, is expected to substantially improve labor productivity.
These factors resulted in a gross loss of $72,400 for the second quarter of
1999, compared to a gross loss of $43,000 for the second quarter of 1998.
Segment operating expenses increased approximately $163,700 over the
second quarter of 1998, due primarily to increases of $106,600 in sales and
marketing and $56,500 in general and administration. The increase in sales
and marketing reflects expenditures for corporate marketing, establishment of
a fertilizer sales department, greater participation in industry trade shows,
and the ongoing introduction of Gold'n Gro fertilizer products to the Western
Farm Services sales force in California and introduction of a Gold'n Gro
fertilizer sales program in Northern Nevada. The increase in general and
administration reflects $49,500 in payroll and consulting costs related to
financial management and establishment of a computer systems infrastructure.
These factors resulted in a 1999 second quarter segment operating
loss of $368,800, compared to a loss of $175,700 for the second quarter of
1998, an increased operating loss of $193,100.
For the first six months of 1999, segment sales totaled $164,100,
compared to $188,500 for the first six months of 1998, a decrease of 13%.
Operating loss for the first six months of 1999 was approximately $692,500,
compared to $334,200 for the first six months of 1998. The primary factor
contributing to the larger loss was increased operating costs related to
converting the segment from an R&D stage to a commercial stage.
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, materials 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.
----------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Sales revenue $ 88,977 $ 67,265 $ 159,290 $ 149,977
Operating income (loss) $(58,978) $(45,883) $(157,287) $ (80,916)
- -----------------------------------------------------------------------------
Mining technical services revenue was approximately $89,000 for the
quarter ended June 30, 1999, compared to $67,300 for the comparable quarter
of 1998, an increase of $21,700, or 32%. The sales increase reflects the
addition of a new gold mining exploration client late in the first quarter of
1999. Although the gold market remains depressed, this new client has the
potential to develop into a significant long term client relationship. Cost
of sales increased by $8,800, due to increases of $5,000 in payroll costs and
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$3,600 in rent and utilities for additional office space. These factors
resulted in a gross profit for the segment of $18,000, compared to $5,100
for the prior year second quarter.
Segment operating expenses increased by $26,000 due primarily to
increases of $17,600 in sales and marketing costs and $6,400 in management
salary costs. The increase in sales and marketing expense reflects both the
allocable portion of increased corporate marketing and increased efforts in
marketing technical services.
The combination of these factors resulted in a 1999 second quarter
segment operating loss of $59,000, compared to a loss of $45,900 for the
second quarter of 1998, an increased operating loss of $13,100.
For the first six months of 1999, segment revenue totaled $159,300,
compared to $150,000 for the first six months of 1998, an increase of 6.2%.
Operating loss for the period was $157,300, compared to an operating loss of
$80,900 for the comparable 1998 period. The primary factor contributing to
the decline was increased expenditures for marketing and financial management.
SUMMARY
On a consolidated basis, the various changes in revenues and
operating expenses resulted in a second quarter 1999 operating loss of
$427,800, compared to an operating loss of $221,600 for the second quarter of
1998, an increased loss of $206,200. Consolidated operating loss for the
first six months of 1999 was $849,800, compared to $415,100 for the first
six months of 1998.
II. Changes in Financial Condition; Capitalization
Cash amounted to $687,901 as of June 30, 1999, compared to $7,243 as
of June 30, 1998. In February 1999 the Company began the Final Tranche of the
1998 Private Placement Offering to raise $780,000 in equity capital. During
the first six months of 1999, a combined total of $1,848,000 was received
from the Private Offering and the exercise of warrants from the 1998 and
previous offerings. Of this amount, $957,300 was used to finance operations,
$483,100 was invested in property and equipment and intangibles, and $339,100
was used to increase the cash balance.
Total assets increased during the six months ended June 30, 1999 by
approximately $1,872,000 to $2,934,000. Current assets increased
approximately $369,800 due to an increases in cash of $339,100, accounts
receivable of $29,400, marketable securities of $16,800, and prepaid expenses
of $31,500. These increases were partially offset by a decrease of $52,500 in
notes receivable from stock subscriptions. Current liabilities decreased by
approximately $126,900 and total liabilities increased by $199,100. The
increase to total liabilities is related primarily to long term lease
financing of $411,000 in equipment, which was partially offset by reductions
of $42,800 in accounts payable, $96,400 in the various accrued expenses, and
debt payments of $108,400.
III. Working Capital/Liquidity
During the six months ended June 30, 1999, working capital improved
by approximately $496,800 to $612,700, as a result of the Company's ongoing
program of improving working capital and liquidity through private placements
of common shares and payment of consulting and other labor services with
common shares.
IV. New Developments
As noted above, the Reno/Stead manufacturing plant purchase was
completed on March 31, 1999. Financing for the majority of the manufacturing
equipment is in place and most of the equipment has been delivered to the
plant. Originally, it was planned to move the pilot plant equipment to the
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new facility in much the same configuration as the existing plant, with some
additional equipment for increased production capacity. However, market
acceptance of the Gold'n Gro fertilizer products and regulatory changes in
California and Oregon that are tightening liquid photochemical waste disposal
requirements have shown the need for significantly expanded production
capacity. Consequently, the basic concept for the plant configuration has
been redesigned.
In addition, the building and fire codes and federal hazardous
material regulations have all changed in recent months. Consequently, the
permitting process has been slowed while the regulatory agencies develop and
implement guidelines for the new rules.
A partial building permit has been issued, the concrete pads have
been poured, and the tanks have been set up on their stands on the new
concrete pads. Plumbing the tank system is more than 50% complete. This phase
of the project is expected to be completed by the end of August. The
remaining work to be done includes minor building modifications and
installation of a fire suppression sprinkler system.
The Company is working with City of Reno officials to obtain the
final building permits needed and to plan for the Certificate of Occupancy
requirements. Subject to obtaining these permits, the plant is expected to
be operational in mid to late September.
The new federal hazardous materials regulations have significantly
reduced the amount of heavy metals allowed in secondary materials that are
applied to the land. The percentage of reduction in allowed metal content is
from 86% to 98% depending upon which standard is applied. The other major
impact of the new regulations is that all secondary materials now appear to
be regulated. Many fertilizer products are derived from heavy metal bearing
secondary materials which suggests that the new guidelines may have a major
long term impact on the way that fertilizers are manufactured and the types
of materials used in the manufacturing process.
Another area of potentially significant impact is on sewage sludge
(biosolids) generated by municipal sewage treatment plants(POTW's). In
recent years many POTW's have shifted to application of biosolids to the
land as a soil amendment and a method of disposal. Biosolids of many POTW's
do not meet the allowed heavy metal content under federal EPA regulations and
so are disposed at solid waste disposal sites. The land applied and solid
waste disposal biosolids are regulated under the new standards that apply a
96% reduction of allowed heavy metal content. The result is that these
biosolids will now have to be disposed at licensed hazardous waste disposal
sites while the municipalities find ways to reduce the amount of heavy metals
being disposed to sewer.
The long term impact of the new regulations as they apply to POTW
biosolids will be very significant in that municipalities will now have
strong economic justification to apply source control measures in their
communities. In most cases discharge of heavy metal bearing waste streams
to sewer will probably have to be banned. This is significant for used
photochemicals. It is estimated that more than 100 million gallons of used
photochemicals are generated annually in the United States. It is also
estimated that more than 70% of these used photochemicals are discharged to
sewer. If the new heavy metal content rules are enforced, then most
communities will have to ban the discharge of heavy metal bearing metal waste
streams, including photochemicals, to sewer. As the new rules are enforced a
nd communities respond, accelerated tightening of sewer discharge rules can
be expected. This should substantially improve the attractiveness of
Itronics' "beneficial use photochemical recycling program" to municipalities
throughout the United States.
During the quarter the Company completed a review of its quality
control procedures and processing records for the prior year. It appears
that established operational procedures are sufficient to meet the new
tighter requirements, but quality control procedures are being tightened to
reduce the fluctuations that normally occur when processing the used
photographic chemicals. It is the Company's belief that many existing
operators will not be able to easily meet the new requirements and that some
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operators will not be able to meet them at all. It is also the Company's
belief that the newly tightened regulations will make it quite difficult for
anyone to develop new fertilizer products from photochemical waste materials,
reducing the likelihood that the Company's technology will be duplicated by
a U.S. based competitor.
The new fire code and building code regulations have the effect of
bringing all chemical materials under regulation. The rules are very
detailed and require a level of operational and organizational planning that
was not previously required. The application of the rules is very broad and
applies to all chemicals used in a business operation. These new guidelines
apply to all new or used buildings in which operations are moving, starting
up, or expanding. The Company believes that because of the extreme detail of
planning and disclosure required by the new regulations, the zoning and
operational permits for a new plant will begin to have significant value as
compared to the recent past. It is quite likely that the permits could become
as valuable as the land to which the permits apply. The other result of the
new fire and building code regulations is that the time required to obtain
needed permits for any operation that handles or uses chemicals will be
greatly increased, making it difficult or impossible to rapidly build new
facilities in new locations.
The permitting knowledge being gained at this stage of Itronics'
development is leading to a re-evaluation of the company's expansion plans.
It is clear that some significant changes in corporate growth strategy are
required if the Company is going to achieve a rapid growth rate with the new
regulations that are in place. One of the obvious changes is that
acquisition of already permitted facilities, or businesses with already
permitted facilities, is going to be the most efficient method for rapid
geographical expansion within the United States.
The Company will be revising its business plan during the third and
fourth quarters of this year, and shareholders will be informed if
significant changes in the expansion plans are deemed necessary to achieve
the growth objectives that have been established.
During the quarter the Company announced the hiring of an individual
with expertise in fertilizer chemistry. It also announced that sales of
systems that are designed to inject liquid fertilizer into irrigation lines
(injector systems) had been initiated. The Company is negotiating a sales
agreement with the manufacturer of the injection systems and plans to use the
sales of the injector systems as a lead to establishing volume sales of
Gold'n Gro liquid fertilizer products to golf courses, wine grape growers,
and citrus growers. The dollar value of individual injector systems will
range between $5,000 and $50,000 and will make a meaningful contribution to
sales. During the second quarter systems with a gross installed value
exceeding $200,000 were quoted to prospective golf course customers.
Golf courses with injector systems will typically purchase 1,000
gallons of fertilizer at a time. Several golf courses are evaluating bulk
applications, but up to now, none of the golf courses using or evaluating
Gold'n Gro products have become steady large volume users. However, field
application results are continuing to be quite positive and several of the
courses presently using the products for tank sprayer application are
actively considering shifting to larger volume usage by acquiring and
installing an injector system. It is anticipated that each golf course that
buys and utilizes an injector system for fertigation would use between 3,000
gallons and 6,000 gallons of Gold'n Gro liquid fertilizer products per year.
The announced Stead manufacturing plant capacity is in the range of 30,000 to
70,000 gallons of Gold'n Gro products per month. It would only take 60 to
120 bulk user golf courses to utilize the announced capacity. There are more
than 900 golf courses in California and Nevada alone. It is now apparent
that the Stead manufacturing plant will need to be expanded within a
relatively short period of time if the high level of Gold'n Gro product
acceptance continues.
The Gold'n Gro products continue to be used or tested by more than
100 golf courses in California, up from four courses in June 1998. Sales
efforts in northern Nevada were initiated during the first quarter, resulting
in 14 golf courses now using or testing the Gold'n Gro fertilizer products.
14
<PAGE>
Sales within the established customer base are continuing to expand and the
pilot plant is presently operating at its maximum capacity, so additional
bulk fertilizer sales are being delayed until occupation of the new plant is
achieved.
During the quarter work continued on used photochemical supply
development. New customers have been qualified and are now being added to
the service base in the northern California market. It is anticipated that
within a short period of time after occupancy of the new plant is achieved,
the used photochemical supplies will increase in the range of 30 to 50%. It
appears that used photochemical supplies will be more than adequate to meet
the needs for Gold'n Gro fertilizer manufacturing.
During the quarter work also continued on developing the service
center concept that will be applied to expand the supplies of photochemical
raw materials. The Company's focus for development of new supplies is
northern California and Oregon. The service centers will be diversified
collection and photochemical supply operations that will be linked to a
distillation operation for reducing the bulk volume of liquid that will be
shipped to Reno/Stead for processing. Work is underway to develop the
business relationships necessary for the first service centers in northern
California to be established. Planning is also underway to develop a service
center in the vicinity of Portland, Oregon. It is also expected that later
in the year the Company will begin handling used phosphoric acid produced by
some of the computer chip manufacturers in the silicon forest south of
Portland.
Late in the second quarter, a sales program for the "Silver Nevada
Miner" 5 oz. silver bars was initiated. A silver quote and price section was
added to the Company's web page and the Silver Nevada Miner bars are now
advertised with a banner in that section. The response to this initial
marketing has been substantial and it is anticipated that addition of the
bars to the silver product line will provide a meaningful increase in silver
sales beginning in the fourth quarter.
Establishment of a computer network/communication system was
initiated during the quarter. All of the computer hardware has been received
and installation of the network is nearly complete. Installation of this
system will be followed by development of a more complete information
management system for the Company. It is believed that this communication
system approach is critical to facilitate rapid growth. It is also believed
that the new systems, when installed and operational, will have sufficient
expandability to support the Company into the $100 to $150 million annual
sales range.
V. Year 2000 Assessment
The Company is assessing the potential effects of the Year 2000 issue
on the Company's operations. The assessment is in two parts. First, an
evaluation of the Company's computer systems and equipment with embedded
computer chips for Year 2000 compliance. The majority of the Company's
computers and software have been acquired within the last year. Therefore,
management anticipates only minor Year 2000 compliance problems with its
computer systems.
The second part of the assessment process involves the Year 2000
readiness of third parties. There are two primary issues related to the
evaluation of the potential impact on the Company.
First, interruption of the services provided by local public
utilities, namely power and telephone service, would have a material negative
impact on the Company's operations. Based on attendance at seminars and
public reports, management believes that the local utility service providers
are actively working on their Year 2000 compliance issues. At this time,
management believes that no interruption of service will occur.
Second, significant Year 2000 problems with the Company's major
customers and suppliers could have a material negative impact on the
Company's operations. At the present time, there are two major customers in
the photobyproduct fertilizer segment and three major customers in the
Company's mining technical services segment. The Year 2000 assessment process
15
<PAGE>
involves discussing the issue with these customers and evaluating the impact
their operations could have on the Company's operations. No significant
problems with these customers are anticipated at this time.
Based on current information, management does not anticipate the Year
2000 issue will have a material impact on the Company's operations.
VI. Forward-Looking Statements
The statements in this Form 10-QSB that are not historical facts or
statements of current status are forward-looking statements (as defined in
the Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties. Actual results may differ materially.
PART II- OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
1. The former president of Seahawk, Inc. (Seahawk) filed suit on June
30, 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. 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.
In May 1998 agreement was reached with the plaintiff that if the
appeal of the first suit fails, the second suit will be dropped. Due to a
civil court backlog, the appeal hearing has been delayed for at least a year.
As of the date of this report, a hearing date has not been set.
Item 2. Changes in Securities and Use of Proceeds
- -------------------------------------------------
(c) Recent Sales of Unregistered Securities:
Following is a summary of sales of unregistered securities for the
three months ended June 30, 1999. All securities were issued as restricted
common shares which are subject to Rule 144 of the Securities and Exchange
Commission. Generally, Rule 144 requires shareholders to hold the shares for
a minimum of one year before sale. In addition, officers, directors and more
than 10% shareholders are further restricted in their ability to sell such
shares. There have been no underwriters of these securities and no
commissions or underwriting discounts have been paid.
Shares Value
Issued Received
--------- ----------
Private placement for cash 1,114,125 $ 388,500
Exercise of warrants for cash 1,585,000 282,750
Interest on accrued management salaries 7,681 1,810
16
<PAGE>
Shares Value
Issued Received
--------- ----------
Current labor services of management,
directors and consultants 86,648 $ 23,425
Prior years labor services of management 596,574 61,657
--------- ---------
3,390,028 $ 758,142
========= =========
The above transactions qualified for exemption from registration
under Sections 3(b) or 4(2) of the Securities Act of 1933. Private placements
for cash were non-public transactions. The Company believes that all such
investors are either accredited or, either alone or with their purchaser
representative, have such knowledge and experience in financial and business
matters that they are capable of evaluating the merits and risks of the
prospective investment.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(b) No reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1999.
17
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
DATED: August 13, 1999 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
DATED: August 13, 1999 By: JOHN W. WHITNEY
----------------- ---------------------------------
John W. Whitney
President, Treasurer and Director
(Principal Executive Officer)
DATED: August 13, 1999 By: MICHAEL C. HORSLEY
----------------- ---------------------------------
Michael C. Horsley
Controller
(Principal Accounting Officer)
18
<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
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FINANCIAL STATEMENTS.
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