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, 1998
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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)
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State issuer's revenues for its most recent fiscal year: $766,720.
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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 February 28, 1999, was $19,675,733.
As of February 28, 1999 there were issued and outstanding 56,423,631
shares of the Registrant's Common Stock.
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ITRONICS INC. AND SUBSIDIARIES
1998 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I
PAGE
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Item 1. Description of Business 4
Item 2. Description of Property 22
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters 24
Item 6. Management's Discussion and Analysis or Plan of
Operation 26
Item 7. Financial Statements 30
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 30
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act 31
Item 10. Executive Compensation 33
Item 11. Security Ownership of Certain Beneficial Owners
and Management 35
Item 12. Certain Relationships and Related Transactions 37
Item 13. Financial Statements, Exhibits and Reports on Form 8K 37
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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, sale
of silver, and sale of Gold'n Gro liquid fertilizer products.
In the first half of 1999 the recycling operations are being
moved to a commercial size facility. The Company is expected
to achieve a commercial level of fertilizer sales in the
second half of 1999.
*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
manufacturing operation that is in transition between an
initial pilot scale used solely for research and development
purposes 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 81.63% owned joint venture,
American Hydromet. A brief description of each organization follows:
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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 consulting 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
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 five ounce bar bearing a unique hallmark,
"Silver Nevada Miner".
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
32.99% limited partnership interest in AG&S. In total, the Company owns
approximately 81.63% of American Hydromet.
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SUMMARY HISTORY OF OPERATIONS
Whitney & Whitney, Inc. was incorporated in Nevada in 1977 to provide
a wide range of technical services to the mining industry. During the 1980's,
W&W completed several multi-client fertilizer marketing studies. 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 base and precious metals industries, and
specifically, the price of copper, other base metals and 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 and silver toxicity to fish, 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 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 as fertilizer 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
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this from occurring. First, during 1992 and 1993, there was reduced
enforcement 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 1997 volume was
159% 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 1996 and 1997, 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 beginning 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
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 19 of this report.
To summarize, the combination of under-capitalization 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 60 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:
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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.
Other Specialized Technical Services:
- Mineral economics and cost studies.
- Metallurgical process development.
- Open pit and underground mine planning.
- Ore reserve development.
2. Operations
The Mining Technical Services segment accounted for 55.2% of the
Company's 1998 consolidated revenue. One major client produced 93% of this
revenue. At present this client has two ongoing projects. The first 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 for potential
investment for exploration and development activities. The second project
involves locating water resources in Southern California. The Company has
provided technical services for this client for many years and expects such
services to be ongoing.
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.
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3. Expansion Plans
Prior to 1991, the Company had plans to directly invest or joint
venture in mining projects and had formed a subsidiary to enter that market.
Those plans were put on hold until completion of the photobyproduct
fertilizer R&D program. Now that the R&D program is nearly converted to
commercial operations, the Company has recently taken steps to expand the
mining technical services presence in the mining industry, both from a
services perspective and from a mining operations perspective.
In December 1998 a new Manager of Mining Technical Services was
appointed to lead W&W's efforts to expand its operations on several fronts.
First, it had been previously identified that in order to compete for
technical services projects, W&W needed mine planning computer software and
the appropriate hardware and personnel to operate it. With completion of the
first and second tranche of the 1998 Private Placement, W&W acquired the
needed software and equipment and hired an experienced computer specialist
to assist in marketing the new services. Second, in January 1999 W&W
initiated a long term R&D project to replace the use of cyanide in the
extraction of metals from silver/gold and gold/copper ores. The new
thiosulfate leaching technology being developed under this program utilizes
the same technology as the Company's proprietary photochemical recycling
process. The project, called Itronics Thiomet, is seeking to establish
operating joint ventures at specific mine sites to apply the thiosulfate
leaching technology. Third, in March 1999 W&W signed a consulting agreement
with Golden Phoenix Minerals, Inc. (GPXM). Under the agreement, W&W will
provide management, merger and property acquisition, and technical services
to GPXM.
PHOTOBYPRODUCT 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 a "heavy-metal-free" liquid multi-nutrient
fertilizer product line for turf and other applications. 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 demetallization and conditioning process. This process is used to
demetallize and recondition 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
conditioned, demetallized, liquids.
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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 wall and floor tile. The Company plans to
pursue glass product development once the fertilizer is commercially
operational.
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
continuing 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 turf and
other fertilizers. The fertilizers are multi-nutrient nitrogen products and
produce excellent results in application. Development of the fertilizer took
more than 9 years and involved a number of stages of development. Important
steps in the development of the fertilizer were: (1) patent and applications
literature research to determine if similar materials were being used in
fertilizer 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
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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 line 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 "heavy-metal-free" commercial products, thereby achieving
environmentally acceptable total recycle of the total waste stream.
Through 1997, the Company has been testing its Gold'n Gro 20-1-7 in
various commercial applications, including golf courses, turf farms, and
professional lawn maintenance organizations. In 1995 the Company began
participating in a controlled fertilizer product application comparison
program sponsored by the University of California at Riverside. For the
second consecutive 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. Gold'n Gro 20-1-7 is 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. In December 1997 development of Gold'n Gro 6-0-10 was
completed. This product is designed for use in drip irrigation systems and
for grape, vegetable and citrus applications. In August 1997, the Company
received a national trademark for the name "Gold'n Gro".
In early 1998 development of eleven new Gold'n Gro fertilizer
products was completed. These include Gold'n Gro 10-1-10 for vegetables,
especially potatoes, Gold'n Gro 7-3-9 for grapes, vegetables and citrus,
Gold'n Gro 20-0-4 for use by nurseries and for vegetables, Gold'n Gro 8-12-9
for use as a plant starter for vegetables and field crops, and Gold'n Gro
6-3-9 for use by nurseries and for house plants and garden vegetables. In
addition there are three formulas each for golf course tees/greens and golf
course fairways/roughs. The formulas are designed for cool season, mid-season
(spring and fall) and warm season. In early 1999 a decision was made to focus
on just eight products in order to simplify and speed up the introduction of
the products into the marketplace.
IMI was developing a fertilizer injector system for use by golf
courses and professional growers to inject the Gold'n Gro fertilizers into
drip and sprinkler irrigation systems. Completion of this product was
deferred after IMI was introduced to a company that had developed a prototype
injector system that was almost identical to the IMI system that was under
development.
All Gold'n Gro products are carefully engineered to provide micro-
nutrient content adequate for plant nutrition, while also being completely
"heavy-metal-free" and safe for the environment.
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The Company has identified potential applications for the specially
conditioned liquids in the mining industry, and has begun to seek joint
venture partners to invest in the needed research and development. This
project is more fully discussed on page 9 of this report.
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 has begun 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 200 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 line of commercial fertilizer products
has been perfected, the Company plans to expand its San Francisco Bay Area
and Northern California 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 several years 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.
In late 1995, the Company sold a prototype installation of low
temperature vacuum distillation equipment to a large manufacturing company
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
manufacturing operations. 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. This same
manufacturing company bought a second distillation unit in early 1997.
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 (ATS) and EDTA chelates, the
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basic chemicals used in photo fixer solutions. Itronics' fertilizer blending
technology is designed 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
introduction 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. During the
fourth quarter of 1997, a sales department was established to concentrate on
expanding the customer base for such distillation equipment and
photobyproduct services.
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 January 1998 IMI entered into a lease/option agreement
to acquire a 35,000 square foot manufacturing facility on three acres of land
in the Reno-Stead, Nevada area.
The purchase option price is $1,000,000 including a $300,000 down
payment. The owner has agreed to finance $700,000 of the purchase price and
has the alternative to carry it over 25 years at commercial rates with a 5
year balloon or by taking 2,491,103 shares of the Company's restricted common
stock. In March 1999 IMI exercised the option to purchase the facility and
the seller agreed to take the $700,000 in the Company's restricted common
stock. The purchase is targeted to be completed prior to March 31, 1999.
An application for a Special Use Permit was filed with the City of
Reno on January 15, 1998. On March 4, 1998 the Reno Planning Commission
approved the Special Use Permit Application, and the Permit became effective
on March 14, 1998. The lease and occupancy are now dependent on obtaining
the necessary Environmental Control Permit, which will require completion of
engineering drawings for specified improvements, receipt of necessary
building permits, inspection/approval by the City of Reno Environmental
Control Department, and obtaining of funding to support the move. A concrete
flooring and containment berm is complete. Engineering drawings for the
plumbing and electrical components are now being prepared. Application for
the building permit to complete the equipment installation is expected to be
made in April 1999, and the move to the facility is being planned for May
1999.
The new facility will make it possible for IMI to expand fertilizer
manufacturing and silver refining to commercial operations.
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
pursuant to an exclusive one year service agreement that obligates the
Company to accept from the customer photobyproducts conforming to the
13
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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
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
fertilizer. 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
experience of the Company that new customers, with limited knowledge of the
rules and procedures, may submit materials containing foreign substances.
The Company achieves high contaminant 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 for sale.
Presently, the recovered silver is processed in the Company's
prototype refining operation. This operation is small scale and will be
scaled up to a commercial level once the move to the new facility is
completed.
The final stage of the photobyproduct fertilizer process is to blend
the demetallized solution with other nutrients to create liquid turf
fertilizer and other "heavy-metal-free" Gold'n Gro products. Through 1995,
14
<PAGE>
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 initiated
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 capacity
is expanded. In March 1998 a manufacturing and marketing agreement was
entered into with one of these companies. A more detailed discussion of the
progress of the marketing program is on page 19 of this report.
The fertilizer manufacturing operation is also at a small scale. In
1997 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 at the new Reno-Stead plant facility. In
early 1999 the new plant configuration was complete and acquisition of
additional tankage and mixing equipment was begun. The majority of the new
equipment is being financed with capital leases. The initial investment in
equipment is estimated to be approximately $350,000.
In 1998, the photobyproduct fertilizer segment produced 44.8% 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.
Consequently a major shift in the Company's operations toward the
photobyproduct fertilizer segment is being implemented. 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 $400 to $500 million.
Nationally, about 79 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 several 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
15
<PAGE>
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
established industry. Silver recovery is typically accomplished at a user's
site by specialized recovery equipment. The equipment is normally installed
and maintained by way of a service agreement with the vendor, or vendor
representative. 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.
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
processors, 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 China. 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 85% 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 U.S. 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
16
<PAGE>
the quantities of waste liquids being generated. It is expected that
efficiency of use and associated waste reduction will continue, driven by
increasing waste disposal costs.
In April 1998 IMI entered into an exclusive sales agreement with
Calfran International of Springfield, Massachusetts. The contract grants IMI
the exclusive right to sell "Cold Vaporization" Vacuum Distillation equipment
to its photowaste customers. The sales territory is the United States, Canada
and Mexico, with an option to expand to other territories as demand justifies.
This equipment is designed to remove the water from used liquid
photochemicals, producing two products: a commercial chemical concentrate,
and clean distilled water. Removal of the water from the photochemicals
produces a relatively high value concentrate product that can be shipped
cost effectively over long distances. The photochemical recycling sales
department is concentrating on developing customer contacts for potential
distiller sales. Sale of distillers is an integral part of expanding the
supply of photochemicals needed to support expanding fertilizer sales.
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.
* Patented low cost silver refining process using wet chemistry
(hydrometallurgy) to quantitatively separate silver from photoby-
product materials.
* Proprietary "heavy-metal-free" liquid multinutrient fertilizer
product line 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.
* Skilled in converting technical concepts to commercial products and
production.
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, Safety Kleen 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,
17
<PAGE>
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
manufacturing 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
"Agricultural 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. One well known operator in the Home Lawn and Garden and the
Professional Care segments is Scotts/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. Since early 1997, IMI has
completed development of an additional 14 fertilizer products. These products
cover most of the applications being targeted in the Turf, Ornamental and
Professional Grower markets in the western U.S. In early 1999 the decision
was made to focus marketing efforts on eight of these products.
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 approximately
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.
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<PAGE>
Initially, small volume sales were 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 allowed
the Company to learn the specific requirements for each market. It 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
distribution companies will be a more efficient method of achieving large
scale sales in a reasonable period of time.
The Company's plan was to initially focus on regional fertilizer
sales. Options for distribution were reviewed, and discussions were initiated
with fertilizer distribution companies and with potential large users such
as golf courses. These activities were conducted as part of an ongoing market
development plan 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 were completed with
Western Farm Services, 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 Gro Iron
fertilizer and purchased a bulk quantity of the product. The WFS customer
field tests were successful. WFS has committed to marketing all of the Gold'n
Gro products. Another Agrium subsidiary, Source 1, has also committed to
marketing all of the Company's commercial products.
In March 1998 IMI signed a definitive manufacturing and distribution
agreement with WFS. The five year agreement, with optional five year renewal
periods, grants WFS an exclusive license and right to manufacture and market
IMI's Gold'n Gro line of fertilizer products in the states of Arizona,
California, Hawaii, Idaho, Oregon and Washington. IMI will manufacture its
base products for shipment to various WFS manufacturing and distribution
facilities in those six states. In April 1998 IMI began the introduction of
the Gold'n Gro line of fertilizer products to WFS store managers and sales
staff. WFS has 45 stores in California, with one to three sales people each.
Most of these people are being briefed about the product line. Substantial
company resources were devoted to this process during 1998, and the process
continued into 1999. The result of these efforts is that now more than 70
golf courses are using or testing the Gold'n Gro fertilizer products.
WFS has a manufacturing plant in south central California. The other
activity related to implementing the manufacturing and sales agreement with
WFS is establishing the logistics for movement of materials between Reno and
the WFS manufacturing plant. The logistics and warehousing locations for
delivery of manufactured goods from both the IMI Reno manufacturing plant and
the WFS manufacturing plant are also being established. WFS is in the process
of designating locations that will be used to make customer deliveries. Once
these arrangements are in place, it will be possible for product to flow
from the two manufacturing plants to customer locations as customer demand
requires. In July 1998 WFS began manufacturing Gold'n Gro 8-12-9, a plant
starter product, and Gold'n Gro 20-1-7, the number one ranked fertilizer in a
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<PAGE>
two year University of California Riverside study. A third product, Gold'n
Gro 9-3-9, was also manufactured successfully.
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 several large chain stores. 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.
4. Seasonality and Working Capital
In analyzing the market and industry competitors, it is apparent that
two factors 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 seasonality factor for
photobyproduct and silver revenues should also be reduced as the Company
expands into California and other regional markets that are not as heavily
dependent on tourism.
The Company expects fertilizer sales to have a seasonal component,
with the primary sales season running from February 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 fertilizer 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.
20
<PAGE>
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
has 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
"heavy-metal-free" 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.
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 Protection, 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
21
<PAGE>
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 a
beneficial ingredient in its fertilizer products, the photobyproducts are
not "hazardous waste" as defined in the regulations, and therefore,
beneficial 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 TCLP 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 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 8,400 square feet of warehouse space in Reno, Nevada. This
space contains the plant for the photobyproduct recycling business,
laboratory and research facilities, fertilizer manufacturing and inventory,
and the Company's prototype silver refining operation.
As previously discussed on page 13 of this report, IMI has entered
into a lease/purchase agreement to acquire a 35,000 square foot manufacturing
facility in Reno-Stead, Nevada. IMI exercised the purchase option in March
1999, and expects to complete the purchase prior to March 31, 1999.
In March 1999 W&W leased approximately 2,500 square feet of office
space in Reno, Nevada. The W&W technical services group will be relocated to
this space in April 1999.
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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 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 15,000 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
ultimately 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.
A unique aspect of work place environmental management in the pilot
plant 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 is now substantially expanding its investment in
equipment in preparation for the move to the Reno/Stead facility. Originally,
it was planned to move the pilot plant equipment to the 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. Capacity at the new
facility is now planned to process 20,000 to 60,000 gallons of used
photchemicals per month and to manufacture 30,000 to 70,000 gallons per month
of liquid fertilizer. Refinery capacity is now planned to produce 5,000 to
10,000 ounces of silver per month.
ITEM 3. LEGAL PROCEEDINGS.
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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.
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
23
<PAGE>
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 25 months from July 31, 1998. As of the date of this
report, a hearing date has not been set.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF ITS SECURITY HOLDERS.
- ------- --------------------------------------------------------
The Company held its annual meeting on November 19, 1999. At that
time, the shareholders elected the present directors as a group. Following is
a summary of the voting:
Directors as a Group:
John W. Whitney
Paul H. Durckel
Alan C. Lewin
Votes: For 36,228,799
Against 42
Abstain 30,000
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 1997, 1998, and the first
quarter of 1999, through February 26, 1999.
High Bid Low Bid
-------- --------
3/31/97 $0.31 $0.03
6/30/97 $0.27 $0.14
9/30/97 $0.28 $0.13
12/31/97 $0.38 $0.25
3/31/98 $0.29 $0.20
6/30/98 $0.25 $0.13
9/30/98 $0.23 $0.14
12/31/98 $0.27 $0.19
2/26/99 $0.94 $0.17
These quotations reflect inter-dealer prices without retail markup,
markdown, or commissions, and may not represent actual transactions.
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(b) The number of record holders of the Common Shares on December
31, 1998 was approximately 867.
(c) Dividends.
----------
The Company has paid no dividends.
Recent Sales of Unregistered Securities:
---------------------------------------
Following is a summary of sales of unregistered securities for the
fourth quarter of 1998. 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
Transaction Description Issued Received
---------------------------- ----------- ---------
Private placement for cash (includes
notes receivable totaling $25,000 at
December 31, 1998) 6,750,000 $ 843,750
Exercise of options 1,407,620 140,762
Labor services of management and directors 729,473 91,543
Interest on accrued management
salaries 78,692 9,874
Consulting and operating expenses 44,085 9,500
Purchase of equipment 7,500 938
--------- ---------
9,017,370 $1,096,367
========= =========
In connection with the above cash private placement, two year
warrants representing options to acquire 4,870,000 restricted common shares
at $0.25 and $0.40 per share for the first and second years, respectively,
were issued. In addition, two year warrants representing options to acquire
3,720,000 restricted common shares at $0.15, $0.20, $0.30, and $0.40 per
share for the respective six month intervals were issued.
The above transactions qualified for exemption from registration
under Sections 3(b) or 4(2) of the Securities Act of 1933. Private placements
25
<PAGE>
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. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------- ---------------------------------------------------------
I. Results of Operations
The Company reported a 1998 consolidated net loss of $1,024,863 or
$0.0223 per share compared to a 1997 loss of $530,921 or $0.0170 per share.
The primary causes for the increased loss are (1) a decline in technical
services gross profit due to the completion of one of the major technical
services projects early in the fourth quarter of 1997 and to management
concentration of effort on fertilizer product development; and (2) increased
operating costs associated with research and development on the Gold'n Gro
line of fertilizer products, corporate marketing, establishment of sales and
marketing departments for photobyproduct services and fertilizer sales,
start-up costs associated with the new manufacturing facility, and the
addition of management personnel in the finance function. 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 has been on raising the capital required to
complete the move to the new facility and on making both the investing public
and potential customers aware of the Company and its products and services.
Consolidated sales increased approximately $88,100, or 13.0%, in 1998
compared to 1997. Consolidated cost of sales and operating expenses increased
approximately $606,500, or 53.0%, in 1998 compared to 1997. 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
- -----------------------------------------------------------------------------
Year Ended December 31,
---------------------------
1998 1997
--------- ----------
Sales revenue $ 422,848 $442,190
Operating income (Loss) (201,136) (74,910)
- -----------------------------------------------------------------------------
Mining technical services revenue totaled $422,848 for 1998, compared
to $442,190 in 1997, a decrease of 4.4%. Included in these revenue figures
are pass-through expenses of $221,856 and $140,123 for 1998 and 1997,
respectively. Excluding these amounts, revenues amounted to $200,992 and
$302,067 for 1998 and 1997, respectively, a decrease of 33.5%. This decline
in revenue is attributable to a combination of reduced work level and 1997
completion of one of the Company's major projects and to management
concentration of effort on the photobyproduct fertilizer segment of the
26
<PAGE>
Company. Continuing depressed gold prices have reduced the mining industry's
need for the Company's services. However, there is also a business
opportunity in that many mining companies have reduced their technical
staffs, but have ongoing technical needs. The Company's plans to expand the
technical services segment are more fully discussed on page 9 of this report.
Combined cost of sales and operating expenses totaled $623,984,
compared to $517,100 for 1997, an increase of 20.7%. Included in these
operating expense figures are pass-through expenses of $221,856 and $140,123
for 1998 and 1997, respectively. Excluding these amounts, combined cost of
sales and operating expenses amounted to $402,128 and $376,977 for 1998 and
1997, respectively, an increase of 6.7%. The increased costs are attributable
to increased professional salaries and corporate marketing efforts.
The above changes in revenues and operating expenses resulted in a
segment operating loss of $201,136 for 1998, compared to an operating loss of
$74,910 for 1997.
PHOTOBYPRODUCT FERTILIZER
- -----------------------------------------------------------------------------
Year Ended December 31,
--------------------------
1998 1997
--------- ---------
Sales revenue $ 343,872 $ 236,432
Operating income (loss) (783,201) (391,041)
- -----------------------------------------------------------------------------
Revenues for the photobyproduct fertilizer segment totaled $343,872 in
1998, compared to $236,432 in 1997, an increase of 45.4%. Volume for photoby-
product recycling services in 1998 decreased 1.2% from 1997, while
photobyproduct recycling revenue increased by 2.1%. Silver sales were
$163,799 and $102,572 for 1998 and 1997, respectively. The 59.7% sales
increase reflects a combination of a 50.6% increase in sales volume and a
13.2% increase in the average silver price in 1998, compared to 1997.
Fertilizer sales were $53,750 and $10,077 for 1998 and 1997, respectively,
an increase of 433%. During the current year, the majority of the sales have
been to Western Farm Services, Inc. (WFS). Progress of the marketing effort
with WFS is discussed on page 19 of this report.
Combined cost of sales and operating expenses for the segment amounted
to $1,127,073 in 1998, compared to $627,473 in 1997, a 79.6% increase. Cost
of sales increased approximately $183,000, which includes increases of
$64,100 in direct costs from increased sales, $85,000 in payroll costs
related to increased production, additional production personnel, and higher
hourly rates caused by the tight labor market, and $14,800 in increased rent
due to additional warehouse space and increased rental rates on existing
facilities. Operating costs increased by $316,700. R&D costs increased
$30,600 due to the management effort in developing commercial products
appropriate for marketing through WFS. Sales and marketing increased
$154,500, reflecting the establishment of sales departments for
photobyproduct services and fertilizer sales and the costs associated with
implementing the WFS fertilizer sales and manufacturing agreement. Plant
start-up costs of $42,600 include rent and utilities on the new plant prior
27
<PAGE>
to commencing commercial production. The increase in general and
administrative costs of $75,200 includes an increase of $53,300 in payroll
and consulting costs related to establishing a full time finance position.
These changes in revenues and operating expenses resulted in a segment
operating loss of $783,201 in 1998, compared to $391,041 in 1997.
SUMMARY
On a consolidated basis, the various changes in revenues and
operating expenses resulted in a 1998 operating loss of $984,337, compared to
an operating loss of $465,951 for 1997.
II. Changes in Financial Condition; Capitalization
Cash amounted to $348,829 as of December 31, 1998, compared to $29,213
as of December 31, 1997. Net cash used by operations was $689,177 in 1998,
compared to $423,971 in 1997. Operating resources utilized to finance the 1998
loss of $1,024,863 include approximately $210,200 in expenses paid with the
Company's common stock and increases in accounts payable and accrued expenses
of approximately $70,000 and $86,400, respectively. The cash provided by the
increase in accrued expenses includes approximately $32,800 in unpaid salary
to management and professional employees and $38,900 in current payroll tax
withholdings related primarily to the issuance of common stock for conversion
of unpaid salaries. These sources of cash were partially utilized by an
increase in accounts receivable of $65,100 due primarily to increased mining
technical services revenue during the fourth quarter of 1998, compared to
the fourth quarter of 1997. Cash amounting to approximately $169,400 was
invested in property and equipment in 1998, including $94,800 in design and
construction of improvements to the new manufacturing plant. Approximately
$1.2 million was raised in the 1998 Private Placement, at a cost of $52,900.
Financing sources of cash in 1998 also included $69,300 in stockholder
advances.
Total assets increased from $445,054 at December 31, 1997 to
$1,062,529 at December 31, 1998. Current assets increased $431,300, net
property and equipment increased $166,200, and other assets increased $20,000.
Total liabilities increased from $605,080 at December 31, 1997 to
$632,947 at December 31, 1998, an increase of approximately $27,900. Of this
amount, current liabilities increased $133,000 and long-term liabilities
decreased $105,100. During 1998, $161,750 in accrued management salaries and
an account payable due an officer/stockholder were converted into the
Company's restricted common stock.
The result of the above financing and debt conversions was to
change the stockholders' deficit from $160,026 at December 31, 1997 to a
stockholders' equity of $429,582 at December 31, 1998.
III. Working Capital/Liquidity
As discussed in Note 15 to the Consolidated Financial Statements on
page 64 of this report, the Company has implemented a plan to improve its
working capital and liquidity through private placements of common 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, 1998:
28
<PAGE>
1. A total of $1,202,000 was received from the sale of common stock
through private placements and option exercises.
2. Accrued salaries, accounts payable, and debt totaling $181,800
were converted into common stock.
3. Various expenses including salaries, interest, director fees, and
legal and outside services, totaling $230,100, were paid with common stock.
4. A total of $69,300 was received in stockholder loans.
5. Notes receivable with balances of $25,000 on December 31, 1998
were received in subscription of the 1998 Private Placement.
The result of these steps was to change from a working capital
deficit of $182,447 at December 31,1997 to positive working capital of
$115,949 at December 31, 1998, an improvement of approximately of $298,400.
The current asset component of working capital increased from approximately
$189,300 at December 31,1997 to approximately $620,600 at December 31, 1998.
The primary changes in the components of current assets were an increase in
cash of $319,600, an increase in accounts receivable of $65,100, an increase
of $29,000 in notes receivable from stockholders, and an increase of $24,500
in prepaid expenses. The current liability component of working capital
increased from $371,704 at December 31, 1997 to $504,654 at December 31,
1998. Significant increases in the components of current liabilities include
$60,000 in accounts payable, $53,600 in accrued expenses and contracts
payable, and $53,200 in the current portion of advances from stockholders.
Significant decreases in the components of current liabilities include
$16,200 in accrued management salaries and $15,500 in the current portion of
capital lease obligations due stockholders.
For details of steps to improve the Company's working capital and
liquidity taken subsequent to December 31, 1998, see the discussion in Notes
15 and 17 to the Consolidated Financial Statements on pages 64 and 67 of this
report.
IV. Year 2000 Assessment
The Company has begun its assessment of 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
29
<PAGE>
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 one major customer in the Company's
mining technical services segment. The Year 2000 assessment process involves
discussing the issue with these customers and evaluating the impact their
operations could have on the Company's operations. All three customers are
substantially larger and financially stronger than the Company, so 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.
V. Forward-Looking Statements
The statements in this Form 10-KSB 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.
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.
30
<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:
Age as of
Name 12/31/98 Position Position Held Since
---- ------- -------- -------------------
Dr. John W. Whitney 52 President/Treasurer May 1988
Director
Paul H. Durckel 81 Director September 1995
Alan C. Lewin 52 Director September 1997
Gregory S. Skinner 44 Secretary December 1990
Duane H. Rasmussen 68 Vice President; November 1997
Vice President and May 1994
General Manager-IMI
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
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).
31
<PAGE>
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.
Alan C. Lewin:
--------------
Mr. Lewin has served as a Director since September 1997. He had
previously served as a Director from September 1995 through June 1996.He
received a B.A. in Psychology from San Diego State University in 1967. He
has extensive operations management experience, primarily in the x-ray film
processing chemical industry. His positions include Founder, President and
Chief Executive Officer of Guardian X-Ray Equipment Service, Inc. from 1976
to 1992, General Manager of Douglas Roesch Communications, Inc. from 1992 to
1994, Technical Sales Representative of Commerce Chemical Company from 1994
to 1996, Vice President of Commodity Resource & Environmental, Inc. from
August 1996 to July 1997, and General Manager for a Merry X-Ray branch
operation in Los Angeles, California since November 1997.
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 B.A. degree
in Economics from the University of California at Berkeley in 1976. He
obtained his J.D. 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.
32
<PAGE>
Duane H. Rasmussen:
-------------------
Mr. Rasmussen has served as Vice President and General Manager of IMI
since May 1994. He became Vice President of the Company in November 1997. He
initially joined the Company in 1991 as Assistant Manager and Business
Consultant for W&W. He received his B.S. degree in Chemical Engineering from
the University of Wisconsin in 1953 and his M.B.A. 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 October 1998. Other business
experience includes approximately 20 years with Jacobs Engineering Group,
Inc. in varying capacities, including Project Manager, Regional Sales
Manager, Regional Vice President, and Group Vice President.
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, 1998 exceeded $100,000:
Name and Annual Compensation
Principal Calendar ----------------------
Position Year Salary Bonus
-------- ---- -------- ------
Dr. John W. Whitney: 1998 $111,709 $-0-
President, Treasurer 1997 $ 97,000 $-0-
and Director 1996 $ 96,547 $-0-
1) As of December 31, 1997, Dr. Whitney had accumulated deferred
salary totaling $141,750. Of this amount, $32,000 was accrued in
1997, $49,750 was accrued in 1996, and $60,000 was accrued in
prior years. Dr. Whitney was granted options to convert up to
$250,000 in unpaid salary at $0.10 per share, for a total of
2,500,000 shares of common stock. Dr. Whitney was also granted
options for 1,200,000 shares of common stock at $0.10 for his
personal guarantee of certain obligations of the Company and its
subsidiaries. The options were to expire in February 1997, but
were extended to six months after all the Company and
subsidiaries' debts owed to, or guaranteed by, Dr. Whitney were
paid in full. In May 1996, Dr. Whitney received warrants for
100,000 shares. The warrants were exercisable for five
years at $0.10 per share. The warrants were issued in conjunction
with Dr. Whitney's acquisition of 100,000 shares for cash. The
combined total of options and warrants for Dr. Whitney was for
3,800,000 shares of common stock. Of these options and warrants, Dr.
Whitney exercised 500,000 shares in December 1996, 2,092,380 in
1997, and the remaining 1,207,620 in January 1998. In September
1998 Dr. Whitney converted an additional $50,000 of unpaid salary by
acquiring five units of the Company's 1998 Private Placement,
Tranche One. As of December 31, 1998 Dr. Whitney has $11,750 in
unpaid salary and warrants, expiring September 30, 2000, for 200,000
shares of common stock at $0.25 per share for the first year and
$0.40 per share for the second year, after September 30, 1998,
33
<PAGE>
respectively. Effective January 1, 1999, Dr. Whitney was granted an
option for 1,000,000 common shares at $0.25 per share. The option is
exercisable at any time until one year after Dr. Whitney leaves the
employment of the Company.
2) The salary amounts listed above include $1,709, $1,000, and $547,
for 1998, 1997, and 1996, 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 1998.
Option Grants in Last Fiscal Year
None.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
Options Exercised:
Shares Acquired on
Name Exercise (#) Value Realized(1)
- -------------------- ------------------- ----------------
Dr. John W. Whitney 1,207,620 $-0-
(1) The options were at $0.10 per share and the offering price of
restricted stock to non-employees on the exercise date was $0.10.
Consequently, no value was realized. If value realized was based on the
high bid on the exercise date, the value realized would have been
$132,838. The securities received, common stock of the Company, are
restricted under Rule 144 and thus are not tradable within one year of
exercise. In addition, as a greater than 10% shareholder of the Company,
Dr. Whitney is further restricted by SEC regulations as to the sale of
the Company's securities. The actual value realized, if and when the
securities are sold, may be more or less than the value listed above.
Options Unexercised:
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at 12/31/98 At 12/31/98
---------------------- --------------------
Name Exercisable Unexercise. Exercisable Unexer.
- -------------------- ----------- ---------- ----------- -------
Dr. John W. Whitney 200,000 - $ -0- (1) $ -0-
(1) The warrants are at $0.25 per share and the offering price of restricted
stock to non-employees in 1998 was $0.125. Consequently, no value would be
realized. If value realized was based on the high bid as of December 31,
1998, the value realized would have been $-0-. The securities under
option, common stock of the Company, are restricted under Rule 144 and thus
are not tradable within one year of exercise. In addition, as a greater
than 10% shareholder of the Company, Dr. Whitney is further restricted by
SEC regulations as to the sale of the Company's securities. The actual value
realized, if and when the securities are sold, may be more or less than the
value listed above.
34
<PAGE>
ITEM 11. 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 February 28, 1999, to be the beneficial
owners of more than 5% of the outstanding shares of common stock of the
Company:
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
- ---------------------- -------------- ------------- ---------- ---------
John W. Whitney
P.O. Box 10725
Reno, NV 89510 14,361,823(3) 1,200,000 15,561,823 25.68
(1)(2)
Richard J. Cavell
1013 No. Marshall Dr.
Camano Island, WA 5,094,377 50,000 5,144,377 8.65
(1) Director
(2) Officer
(3) Includes 87,636 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. Warrants, expiring
September 30, 2000, for 200,000 shares of common stock are at
$0.25 per share for the first year at $0.40 per share for the
second year, after September 30, 1998, respectively. Options
for 1,000,000 shares are at $0.25 per share.
(4) All warrants of Dr. Cavell are priced at $0.10 per share.
b) Security Ownership of Management.
---------------------------------
The following table sets forth as of February 28, 1999, certain
information, with respect to director and executive officer ownership of
common stock in the Company:
35
<PAGE>
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)
- -------------------- -------------- -------------- ----------- --------
Dr. John W. Whitney
P.O. Box 10725
Reno, NV 89510 14,361,823(5) 1,200,000 15,561,823 25.68
(3)(4)
Paul H. Durckel
1511 Main St.
Gardnerville, NV. 89410 201,000 - 201,000 0.34
(3)
Alan C. Lewin
P.O. Box 10725
Reno, Nv 89510 170,000 50,000 220,000 0.37
(3)
All directors and
executive officers as
a group (5 persons) 17,148,712 1,290,000 18,438,712 30.38
(1) Of the above options and warrants, 50,000 are at $0.10 per
share, 240,000 are at $0.25 per share for the first year and $0.40 per
share for the second year, from the date of grant, respectively, and
1,000,000 are at $0.25 per share.
(2) The percent of class is based on the sum of 59,404,144 shares
outstanding or to be issued as of February 28, 1999 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 February 28, 1999.
(3) Director
(4) Officer
(5) Includes 87,636 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.
c) Changes in Control
-------------------
The Company is not aware of any arrangement which at some later date
results in changes in control of the Company.
36
<PAGE>
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, 1997, Dr. Whitney has accumulated deferred
salary totaling $141,750. The entire balance was converted into the Company's
common stock in 1998.
2. 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 $0.10
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, the above
options were extended to six months after all debts owed to, or guaranteed by,
Drs. Whitney and Cavell by Itronics Inc. and its subsidiaries and
partnerships are paid in full. Of the above options, Dr Whitney exercised
500,000 shares in 1996, 1,992,380 in 1997, and 1,207,620 in 1998. Dr Cavell
exercised all 200,000 of his options in 1998.
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, 1998 and
1997.
(b) Consolidated Statements of Operations for the Years ended
December 31, 1998 and 1997.
(c) Consolidated Statements of Stockholders' Equity
(Deficit) for the Years ended December 31, 1998 and 1997.
(d) Consolidated Statements of Cash Flows for the Years ended
December 31, l998 and 1997.
(e) Notes to Consolidated Financial Statements.
2. List of Exhibits:
-----------------
11 Statement re computation of loss per share
21 List of significant subsidiaries.
II. Reports on Form 8-K.
--------------------
None
37
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND SUPPLEMENTAL DATA
DECEMBER 31, 1998
PAGE
----
INDEPENDENT AUDITOR'S REPORT ON
THE FlNANCIAL STATEMENTS 39
FINANCIAL STATEMENTS
Consolidated Balance Sheets 40
Consolidated Statements of Operations 42
Consolidated Statements of Stockholders' Equity
(Deficit) 44
Consolidated Statements of Cash Flows 46
Notes to Consolidated Financial Statements 48
EXHIBITS:
11 Computation of loss per share 69
21 Significant subsidiaries 70
27 Financial Data Schedule 72
STATEMENTS AND SCHEDULES
Schedules not included are omitted for the reason that they are not
applicable or not required.
38
<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,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended.
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 consolidated 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 position of Itronics Inc. and subsidiaries as of December 31, 1998
and 1997, and the results of their operations and their cash flows for the
years then ended 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 $1,024,863 during the year
ended December 31, 1998. The ability to continue as a going concern is
contingent primarily upon (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.
This condition raises substantial doubt about the ability to continue as a
going concern. Management's plans regarding this matter are described in Note
15. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/S/ KAFOURY, ARMSTRONG & CO.
Reno, Nevada
March 5, 1999
39
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
CURRENT ASSETS 1998 1997
---------- ----------
Cash $ 348,829 $ 29,213
Accounts receivable, less allowance for
doubtful accounts, 1998, $1,406;
1997, $1,406 - Notes 4 and 16 117,397 52,272
Notes receivable, shareholders - Note 15 66,325 37,337
Inventories 41,107 47,973
Prepaid expenses 46,945 22,462
--------- ---------
Total Current Assets 620,603 189,257
--------- ---------
PROPERTY AND EQUIPMENT
Design and construction in progress,
leasehold improvements 98,358 3,546
Leasehold improvements 14,212 14,212
Equipment and furniture 394,746 327,635
Vehicles 68,273 32,858
Equipment under capital lease - Note 11 35,189 32,012
--------- ---------
610,778 410,263
Less: Accumulated depreciation and
amortization 281,433 247,073
--------- ---------
329,345 163,190
--------- ---------
OTHER ASSETS
Patents, trademarks, and other, less accumulated
amortization 1998, $12,857; 1997, $11,801 8,339 6,895
Stock placement and organization costs, less
accumulated amortization 1998, $26,360;
1997, $18,319 45,040 226
Note receivable, shareholder - Note 15 42,340 82,663
Investment in American Gold & Silver Ltd. 9,250 -
Deposits 7,612 2,823
--------- ---------
112,581 92,607
--------- ---------
$1,062,529 $ 445,054
========= =========
40
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1998 1997
CURRENT LIABILITIES ---------- ----------
Accounts payable $ 152,682 $ 92,654
Accrued management salaries - Note 10 80,914 97,088
Accrued expenses - Note 9 103,136 53,424
Insurance contracts payable 19,279 15,394
Interest payable 15,084 17,314
Current maturities of long-term debt - Note 3 4,251 5,000
Current maturities of capital lease obligations -
Note 11 700 -
Current maturities of advances from
stockholders - Note 3 113,318 60,085
Current maturities of capital lease obligations
due stockholders - Note 11 8,964 24,419
Other 6,326 6,326
--------- ---------
Total Current Liabilities 504,654 371,704
--------- ---------
LONG-TERM LIABILITIES
Long-term debt, less current maturities -
Note 3 21,769 -
Capital lease obligations, less current
maturities - Note 11 3,017 -
Advances from stockholders, less current
maturities - Note 3 43,154 70,946
Capital lease obligations due stockholder,
less current maturities - Note 11 7,042 2,803
Accrued salary due officer/stockholder - Note 10 37,200 140,000
Deferred gain, less current maturities -
Note 11 16,111 19,627
--------- ---------
Total Long-Term Liabilities 128,293 233,376
Contingency - Note 14 - -
--------- ---------
632,947 605,080
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, par value $0.001 per share;
authorized 999,500 shares, issued and outstand-
ing 1998, 0 shares; 1997, 0 shares - Note 6 - -
Common stock, par value $0.001 per share;
authorized 250,000,000 shares, issued and
outstanding 1998, 56,059,727; 1997, 43,050,532; 56,060 43,051
Additional paid-in capital 4,625,194 3,039,980
Accumulated deficit (4,375,283) (3,350,420)
Common stock to be issued - Note 8 123,611 107,363
--------- ---------
429,582 (160,026)
--------- ---------
$1,062,529 $ 445,054
========= =========
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
---------- ----------
REVENUES
Mining technical services - Note 4 $ 422,848 $ 442,190
Photobyproduct recycling 126,323 123,783
Silver 163,799 102,572
Fertilizer 53,750 10,077
----------- ---------
Total Revenues 766,720 678,622
COST OF SALES 923,115 730,679
----------- ---------
Gross Profit (Loss) (156,395) (52,057)
----------- ---------
OPERATING EXPENSES
Depreciation and amortization 39,941 23,708
Research and development 90,104 59,479
Sales and marketing 278,817 87,767
Plant start-up costs 42,620 -
General and administrative 376,460 242,940
---------- ---------
827,942 413,894
----------- ---------
Operating (Loss) (984,337) (465,951)
----------- ---------
OTHER INCOME (EXPENSE)
Forgiveness of debt - Note 12 - 22,458
Interest expense (46,511) (58,543)
Other, net 5,985 2,615
----------- ---------
Total Other Income (Expense) (40,526) (33,470)
----------- ---------
(Loss) before provision for income tax (1,024,863) (499,421)
Provision for income tax - Note 5 - -
----------- ---------
Net Income(Loss) before cumulative effect of a
change in accounting principle (1,024,863) (499,421)
Cumulative effect on prior years (to
December 31, 1996) of changing the accrual of
audit and annual meeting costs - Note 18 - (31,500)
----------- ---------
Net Income (Loss) $ (1,024,863) $ (530,921)
=========== =========
Weighted average number of shares outstanding 45,993,944 32,718,152
========== ==========
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(continued)
1998 1997
---------- ----------
Earnings (loss) per share before cumulative
effect of a change in accounting principle -
Note 19 $ (0.0223) $ (0.0160)
Cumulative effect on prior years (to December
31, 1996) of changing the accrual of audit
and annual meeting costs - Note 18 - (0.0010)
--------- ---------
Earnings (Loss) per share $ (0.0223) $ (0.0170)
========== ==========
Pro forma amounts assuming the new method of
accruing audit and annual meeting costs is
applied retroactively
Net Income (Loss) $(1,024,863) $(499,421)
Earnings (Loss) per share $ (0.0223) $ (0.0160)
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
PREFERRED STOCK
----------------
NUMBER OF
SHARES AMOUNT
--------- --------
Balance, December 31, 1996 247 $ -
Sale/issue of preferred/common stock - -
Net (loss) for the year ended - -
December 31, 1997
Exchange of preferred for common stock (247) -
------- -------
Balance, December 31, 1997 - -
Sale/issue of preferred/common stock - -
Net (loss) for the year ended
December 31, 1998 - -
------- -------
Balance, December 31, 1998 - $ -
======= =======
44
<PAGE>
COMMON STOCK
---------------- ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED COMMON STOCK
SHARES AMOUNT CAPITAL DEFICIT TO BE ISSUED TOTAL
--------- -------- ---------- ------------ ------------ -----------
29,748,046 $ 29,748 $1,444,912 $(2,819,499) $ 114,591 $(1,230,248)
10,118,772 10,119 1,001,384 - (7,228) 1,004,275
- - - (530,921) - (530,921)
3,183,714 3,184 593,684 - - 596,868
---------- -------- ---------- ------------ -------- -----------
43,050,532 43,051 3,039,980 (3,350,420) 107,363 (160,026)
13,009,195 13,009 1,585,214 - 16,248 1,614,471
- - - (1,024,863) - (1,024,863)
---------- -------- ---------- ------------ -------- -----------
56,059,727 $ 56,060 $4,625,194 $(4,375,283) $123,611 $ 429,582
========== ======== ========== =========== ======== ===========
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
ITRONICS INC, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- ----------
Cash flows from operating activities
Net income (loss) $(1,024,863) $ (530,921)
Adjustments to reconcile net loss to cash
used by operating activities:
Depreciation and amortization 39,941 23,708
Forgiveness of debt - (22,458)
Expenses paid with issuance of common stock:
Interest expense 18,143 29,085
Legal and consulting expenses 57,850 17,658
Directors fees 5,127 3,844
Operating expenses 9,500 1,477
Salaries 119,591 12,806
(Increase) decrease in:
Accounts receivable (65,125) 8,354
Interest receivable-stock subscription (1,003) -
Inventories 6,866 (19,970)
Prepaid expenses and deposits (9,375) (3,423)
Increase (decrease) in:
Accounts payable and other liabilities 70,028 (17,461)
Accrued expenses and contracts payable 86,373 67,502
Interest payable (2,230) 5,828
--------- ---------
Net cash used by operating activities (689,177) (423,971)
--------- ---------
Cash flows from investing activities:
Acquisition of fixed assets (169,401) (61,491)
Acquisition of intangibles (52,855) -
--------- ---------
Net cash used by investing activities (222,256) (61,491)
--------- ---------
Cash flows from financing activities:
Proceeds from sale of stock 1,202,263 508,850
Proceeds from long-term debt, stockholders 69,327 96,500
Payments on long-term debt, stockholders (35,102) (85,651)
Payments on long-term debt, unrelated parties (5,439) (6,115)
--------- ---------
Net cash provided by financing
activities 1,231,049 513,584
--------- ---------
Net increase in cash 319,616 28,122
Cash, beginning of year 29,213 1,091
--------- ---------
Cash, end of year $ 348,829 $ 29,213
========= =========
The accompanying notes are an integral part of these financial statements.
46
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(continued)
1998 1997
---------- ----------
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period for interest $ 30,598 $ 23,630
Schedule of non-cash financing transactions:
Settlement of debt/accruals for
issuance of common stock:
Accounts payable 10,000 1,952
Accrued liabilities 151,750 187,640
Notes payable 20,000 89,526
Capital lease payments - 20,076
Accrued interest payable - 16,584
Payment of expenses with issuance of common
stock:
Interest expense 18,143 29,085
Legal and consulting fees 57,850 17,658
Director fees 5,127 3,844
Operating expenses 9,500 1,477
Salaries 119,591 12,806
Prepaid expenses 19,897 -
Notes receivable received in subscription of
common stock 42,000 120,000
Equipment financed with long-term debt 26,459 -
Equipment financed with capital lease 3,717 -
Purchase of fixed assets by issuance of
common stock 938 2,798
The accompanying notes are an integral part of these financial statements.
47
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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. The process of converting to a commercial
level of operations for the photobyproduct recycling and fertilizer
manufacturing segment was commenced during 1998.
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:
1998 1997
PERCENTAGE PERCENTAGE
---------- ----------
Whitney & Whitney, Inc. 100.00 100.00
Itronics Metallurgical, Inc. 100.00 100.00
Nevada Hydrometallurgical Project
(A Partnership) 92.50 92.50
American Hydromet (A Joint Venture) 81.63 81.40
American Gold & Silver
(A Limited Partnership) 43.84 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.
48
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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.
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, 1998 and 1997 were $221,854 and $140,123, 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 silver bearing photobyproducts, fertilizer raw materials and
saleable fertilizer.
Cost of silver inventory 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
49
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
by accelerated and straight-line methods over five to forty years.
Repairs and maintenance are charged to operations as incurred.
Amortization:
Intangible assets are amortized by the straight-line method over the
following lives:
YEARS
-----
Patents 17
Stock placement and organization
costs 5
Non-compete agreement 10
Research and Development:
The Company's fertilizer production process is in the research and
development stage. Accordingly, 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:
The Company has accounted for income taxes to conform to the
requirements of Statements of Financial Accounting Standards (SFAS) 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 1998 and 1997.
Common stock equivalents are not included, as their effect would be
antidilutive.
Loss per common share for the period is $0.0223 and $0.0170 for 1998
and 1997, respectively. Loss per common share, excluding the effects of
cumulative preferred dividends for the period is $0.0223 and $0.0162 for
1998 and 1997, respectively. Loss per common share assuming all shares
issued for the settlement of services and liabilities during 1998 and 1997
50
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
were outstanding as of the beginning of each year (or issuance/accrual
date, if later) is $0.0213 and $0.0139, respectively, excluding the effects
of cumulative preferred dividends for the period which is antidilutive.
Common Stock:
The Company's common shares have, subject to the provisions of any
series of Preferred Stock (see Note 6), certain rights, including one vote
per share, on a non-cumulative basis, and a ratable portion of any
dividends that may be declared by the Board of Directors. The Company
may from time to time issue common shares that are restricted under Rule
144 of the Securities and Exchange Commission. Such restrictions require the
shareholder 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.
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, 1998 and 1997 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.
DECEMBER 31,
--------------------
1998 1997
-------- --------
Notes due to unrelated outside parties:
---------------------------------------
Unsecured note payable for loan made as part
of the Company's acquisition of Whitney &
Whitney, Inc., 10.5% interest. In September
1997 this note and accrued interest was
settled for $10,000 cash down, $20,000 in
common stock and $5,000 cash due on
January 15, 1998. (see Note 12) $ - $ 5,000
Note payable secured by a vehicle. The note is
payable at $575 per month, including interest
at 11.0% per annum, for 60 months beginning
December 30, 1998. 26,020 -
------ ------
26,020 5,000
51
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Less current portion due within one year (4,251) (5,000)
------- -------
Total long-term liabilities due to unrelated
parties $21,769 $ -
======= =======
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.) $ - $ 8,201
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. 44,255 12,428
Unsecured note payable to a stockholder dated
March 1, 1996, with a fixed interest rate of 12%
per annum. Payments are interest only at $500 per
month through March 1997 and $1,500 in principal
and interest per month to March 2000, at which
time the unpaid balance will be due and payable.
On November 10, 1998 the note was amended to
increase monthly payments to $2,500, with the
balance due on September 1, 2000. 46,983 49,000
Unsecured note payable to stockholder in the
amount of $10,000, dated December 28, 1994.
Interest only at 11.5% is payable quarterly.
In December 1997 this note was restructured.
Monthly payments of $220 begin January 1998
and are to continue to December 2000, at
which time the unpaid balance will be due and
payable. 8,456 10,000
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, contingent on the Company's cash flow,
including variable interest at 6% over prime
(15% as of December 31, 1998). 14,278 14,402
52
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
DECEMBER 31,
---------------------
1998 1997
--------- ---------
Unwritten, unsecured advance payable to an
officer/stockholder. Variable interest (10.5%
to 19.8% as of December 31, 1998) is payable
monthly. The advance is due on demand. $ 10,500 $ 5,000
Unsecured note payable owed to a family member
of an officer/stockholder dated March 1997.
Interest accrues at 10% per annum. The balance
of principal and interest is payable in March
2002. An option has been granted to convert the
note and accrued interest into the Company's
common stock. 10,000 10,000
Unsecured note payable due an officer/stock-
holder, dated December 1997. Payments are interest
only at prime plus 6%(15% at December 31, 1998)
through 1998, monthly payments of $476 through 1999,
with the balance due on December 31, 1999. 22,000 22,000
-------- --------
156,472 131,031
Less current portion due within one year (113,318) (60,085)
-------- --------
Total long-term liabilities due to stock-
holders $ 43,154 $ 70,946
======== ========
Long-term debt matures as follows:
YEAR UNRELATED PARTIES STOCKHOLDERS
-------- ----------------- ------------
1999 $ 4,251 $113,318
2000 4,743 33,154
2001 5,293 -
2002 5,904 10,000
2003 5,829 -
------ -------
$ 26,020 $156,472
====== ========
NOTE 4 - Major Customers:
Technical services revenue (including pass through funds described in
Note 1) for the year ended December 31, 1998 includes $391,807 from one
major customer which represents 92.7% of technical services revenues.
Technical services revenue (including pass through funds described
53
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
in Note 1) for the year ended December 31, 1997 includes $268,877 and
$123,858 from two major customers which represents 88.8% of technical
services revenues. Receivables from these major customers as of December
31, 1998 and 1997, amount to $79,883 and $33,838, which represents
89.2% and 98.0%, respectively, of consulting accounts receivable.
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.
Silver sales for the years ended December 31, 1998 and 1997 includes
$116,430 and $69,342, respectively, from one major customer. The customer
is one of the largest silver refiners in the country.
NOTE 5 - Income Taxes:
Although the Company has incurred net losses for 1998 and 1997, the
majority of the loss from the photobyproduct fertilizer segment is
attributed to American Hydromet, which is a joint venture. Net
income (loss) before taxes, after application of the above, amount to
$(201,342) and $(160,505) for 1998 and 1997, respectively. The following is
a reconciliation of the federal statutory tax and tax rate to the Company's
provision for taxes and its effective tax rate.
1998 1997
------------------- -------------------
PERCENT PERCENT
OF PRE-TAX OF PRE-TAX
AMOUNT INCOME AMOUNT INCOME
-------- ---------- -------- ----------
Federal tax at statutory rate $ - - % $ - - %
Temporary differences,
primarily bad debt and
compensation related
expenses - - % - - %
Non-deductible expenses - - % - - %
Utilization of NOL - - % - - %
------- ------- ------- -------
Total Income Tax Expense $ - 0.0% $ - 0.0%
======= ======= ======= =======
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:
Year Ending December 31: Net 0perating Loss
----------------------- ------------------
1999 $ 12,260
2001 33,828
2002 26,089
2003 14,737
54
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
2005 $ 65,113
2006 430,403
2007 188,146
2008 113,253
2012 322,525
2018 371,905
---------
$1,578,259
=========
The Company's total deferred tax assets, and deferred tax asset
valuation allowances at December 31, 1998 and 1997 are as follows:
1998 1997
--------- ---------
Total deferred tax assets $ 572,240 $ 464,006
Less valuation allowance (572,240) (464,006)
-------- --------
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 $0.001 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, 1998 and 1997, there were -0- and -0- shares,
respectively, of Series "A" Preferred Shares issued and outstanding. 247
shares were issued prior to 1997 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, 1998 and 1997, cumulative
unpaid dividends on Series "A" Preferred Shares were $-0- and $-0-.
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 agreed to forego all cumulative
and future dividends related to the Preferred Shares. On September 5, 1997
the exchange offer was amended to include conversion of the cumulative
dividends through the redemption date of October 31, 1998 at the rate of
$0.33 1/3 per common share, which was the equivalent to the conversion rate
under the terms of the Preferred Shares. As of December 31, 1997, 100% of
the Preferred Shares have been exchanged, resulting in a reduction of the
Stockholders' Deficit of $596,868 from December 31, 1996.
55
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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 $0.l0 per share. The warrants issued under this plan are
exercisable at varying dates through November 2, 2002.
On March 31, 1998 the Company began a private placement offering to
raise $2 million in equity funds. Included in the offering is one two year
warrant for each two common shares acquired. A total of 4,870,000 warrants
were issued in Tranche 1 and 2 of the offering, with an exercise price of
$0.25 and $0.40 per share for years one and two of the exercise period,
respectively. The warrants are exercisable at varying dates through November
30, 2000. A bonus warrant was granted for each common share acquired in
Tranche 2 of the Offering. The bonus warrants are exercisable in four six
month intervals at prices of $0.15, $0.20, $0.30, and $0.40 per share,
respectively. A total of 3,720,000 bonus warrants were issued, with varying
exercise dates through November 12, 2000.
In addition to the above private placement warrants, the Company has
granted options for Common Shares to certain officers, directors, employees
and creditors of the Company. The options are exercisable at varying
dates through March 17, 2002. The number of outstanding options was 218,710
and 1,615,538 shares at December 31, 1998 and 1007, respectively.
Following is a summary of all the above described warrants and options
granted for the years ended December 31, 1998 and 1997.
NUMBER OF SHARES
----------------------
1998 1997
--------- ---------
Under option, beginning of year 5,317,590 6,106,078
Granted 8,600,792 1,876,978
Exercised (1,482,620) (2,630,466)
Expired - (35,000)
---------- ---------
Under option, end of year 12,435,762 5,317,590
---------- ---------
Average price for all options
granted and exercised $0.19 $0.l0
---------- ---------
NOTE 8 - Common Stock to be Issued:
The following summarizes stock transactions commencing prior to
December 31, with stock issued or to be issued subsequent to that date:
56
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1998 1997
---------- ---------
Payment of legal and consulting fees $ 15,020 $ 15,000
Payment of director fees 1,377 1,000
Payment of salaries 103,318 58,541
Payment of interest 3,896 7,092
Payment of notes payable - 25,000
Purchase of equipment - 730
------- -------
$123,611 $107,363
======= =======
NOTE 9 - Accrued Expenses:
The following is the composition of accrued expenses as of
December 31:
1998 1997
-------- --------
Accrued vacation $ 19,709 $ 9,703
Payroll taxes* - 1,880
Federal and State payroll taxes 47,236 8,288
Sales tax 1,191 1,053
Audit & annual meeting costs 35,000 32,500
------- -------
$103,136 $ 53,424
======= =======
* One subsidiary was on a payment schedule with the Internal Revenue
Service of $1,184 per month until the balance was paid in February 1998.
NOTE 10 - Related Party Transactions:
Several promissory notes are held by stockholders at December 31, 1998
and 1997 (see Note 3 for terms).
Interest expense includes $42,088 and $49,511 for December 31, 1998
and 1997, respectively, relating to the Company's notes payable and salary
in arrears due to stockholders. Accrued interest payable includes $14,973
and $17,314 for the notes and leases payable to stockholders as of December
31, 1998 and 1997, respectively.
An officer/stockholder of Whitney & Whitney, Inc. was owed $50,854
for salary in arrears as of December 31, 1998. The individual retired on
December 31, 1998 and desires to receive payment of the back salary over
several years. The individual has agreed not to make demand for
approximately $37,200 of the arrearages prior to January 1, 2000.
An officer/stockholder of the Company was owed $11,750 and $141,750
for salary in arrears as of December 31, 1998 and 1997, respectively. The
officer/stockholder made an agreement with the Company not to make demand
on these arrearages prior to March 1, 1999 (to a maximum of $140,000). The
57
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
$141,750 due at December 31, 1997 was converted into the Company's common
stock during 1998. The $11,750 due at December 31, 1998 is included in
accrued management salaries.
$110,204 and $223,438 of the accrued management salaries as of
December 31, 1998 and 1997, respectively, is for salary in arrears due to
several officer/stockholders and employee/stockholders. Interest amounting
to $18,143 was paid in 1998 and 1999 by issuance of 124,073 shares of
common stock. Interest amounting to $21,014 for 1997 was paid in 1997 and
1998 by issuance of 210,137 shares of common stock.
Accounts payable for legal fees of $10,000 and $15,000 were paid by
issuance of 80,000 and 150,000 shares of common stock for 1998 and 1997,
respectively, all of which were issued in 1998.
$20,000 and $111,186 of long-term debt, leases and related accrued
interest were paid by issuance of common stock in 1998 and 1997,
respectively. The transactions are detailed in Note 3.
Consulting and labor services amounting to $349,088 and $218,104 for
1998 and 1997, respectively, were paid by issuance of 2,738,418 and
2,181,040 shares, respectively, of common stock. The shares were or are to
be issued at varying dates in 1997, 1998 and 1999.
In 1998 and 1997 technical services were performed for a client, the
majority of which is owned by officer/director/shareholders of the Company.
Total technical services revenue from the project was $10,239 and $15,449
for 1998 and 1997, respectively. Accounts receivable includes $4,759 from
this project as of December 31, 1998.
For related party transactions subsequent to December 31, 1998, 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. - IMI) 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 $3,120. The subsidiary also leases storage space for the period of
October 1, 1998 through March 31, 1999 for $614 per month.
58
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
On January 15, 1998 IMI entered into a lease agreement, with option to
purchase, for a 35,000 square foot manufacturing facility in Reno/Stead,
Nevada. Occupancy of approximately 16,000 square feet occurred on June 1,
1998, with rental payments of $4,789 per month beginning on that date. The
lease expires on March 31, 2001. Occupancy of the remainder of the facility
occurred on October 15, 1998. The monthly rental amount increased by $2,500
beginning on that date. The additional rent is being paid by issuance of the
Company's restricted common stock. The option to purchase the facility is
for $1,000,000, payable with a $300,000 cash down payment, $100,000 in the
Company's restricted common stock, and a mortgage on the property for
$600,000. The mortgage is payable over 25 years at commercial interest
rates, with a balloon payment at the end of five years. The purchase option
expires on April 1, 1999.
Future minimum rental commitments at December 31, 1998, under these
operating lease agreements are due as follows:
1999 $ 86,846
2000 57,470
2001 14,368
-------
$158,684
=======
Total rental expense included in the statements of operations for the
above leases for the years ended December 31, 1998 and 1997 are $138,788
and $88,234, respectively.
Capital Leases
--------------
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.
On December 31, 1998, the August 5, 1995 and January 30, 1996 leases
were extended, with eighteen monthly lease payments at the existing rates
and the remaining balance due on July 25, 2000.
In December 1998 the Company entered into a lease agreement to
acquire two computers. The lease term is for three years, with monthly
payments of $154. There is a $1 purchase option at the end of the lease.
59
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
All of the above described leases are secured by the equipment
acquired under the lease.
Future minimum lease commitments at December 31, 1998 are due as
follows:
1999 $ 9,820
2000 8,889
2001 1,848
------
$20,557
======
NOTE 12 - Forgiveness of Debt:
Forgiveness of debt has the following components:
1998 1997
-------- --------
Write-off of various account
payable balances $ - $ 9,134
Settlement of note payable and
accrued interest - 13,324
------- -------
$ - $ 22,458
======= =======
Income of $13,324 in 1997 resulted from the settlement of a note and
accrued interest totaling $48,324 for $15,000 in cash payments and $20,000
in common stock.
NOTE 13 - Business Segments:
Effective for years beginning after December 15, 1997, Statement of
Financial Accounting Standards No. 131 has changed the disclosure
requirements regarding business segments. The focus of the new
pronouncement is to disclose segment information in a manner consistent
with the information used by management to evaluate segment performance
and to decide on allocation of resources. No significant changes were
required in the Company's methodology of determining segment information.
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
60
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
The mining technical services 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 one client in the gold mining industry, who has
several operations in different areas of the United States.
The photobyproduct fertilizer segment operates principally in the
Northern Nevada and Southern California areas and, to a lesser extent, the
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 golf courses, turf farms, and
professional lawn maintenance organizations.
The Company measures segment performance based on operating income or
loss. At present there are no intercompany revenues. Costs benefiting both
segments are incurred by both the Company and by Whitney & Whitney, Inc.
Such costs are allocated to each segment based on the estimated benefits to
the segment. General and administrative costs incurred by the Company that
have no other rational basis for allocation are divided evenly between the
segments. Cost allocation percentages are reviewed annually and are adjusted
based on expected business conditions for the year.
Operating income (loss) by business segment:
1998 1997
--------- ---------
Mining Technical Services:
Technical services
revenues (Note 1) $ 422,848 $ 442,190
Cost of sales and operating expenses 623,984 517,100
-------- --------
Operating (Loss) $(201,136) $( 74,910)
======== ========
Photobyproduct Fertilizer:
Revenues:
Photobyproduct recycling $ 126,323 $ 123,783
Silver recovery (Note 16) 163,799 102,572
Fertilizer sales (Note 15) 53,750 10,077
--------- --------
343,872 236,432
--------- --------
Cost of sales and operating expenses 1,036,969 567,994
Research and development 90,104 59,479
--------- --------
1,127,073 627,473
--------- --------
Operating (Loss) $ (783,201) $(391,041)
========= ========
61
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
General and administrative expenses of $87,873 and $105,921 incurred by
Itronics Inc. were equally divided between the two segments for 1998 and
1997, respectively.
Reconciliation of segment revenues, cost of sales, and operating income
(loss) to the respective consolidated amounts:
1998 1997
---------- ---------
Revenues
Mining Technical Services $ 422,848 $ 442,190
Photobyproduct Fertilizer 343,872 236,432
--------- -------
Consolidated Revenues $ 766,720 $ 678,622
========= =======
Cost of Sales
Mining Technical Services (Note 1) $ 375,789 $ 366,296
Photobyproduct Fertilizer 547,326 364,383
--------- -------
Consolidated Cost of Sales $ 923,115 $ 730,679
========= =======
Operating Income (Loss)
Mining Technical Services $ (201,136) $( 74,910)
Photobyproduct Fertilizer (783,201) (391,041)
----------- ---------
Consolidated Operating Income (Loss) (984,337) (465,951)
Other Income (Expense) ( 40,526) ( 33,470)
----------- ---------
Consolidated Net Income (Loss) before
taxes and cumulative effect of a
change in accounting principle $(1,024,863) $(499,421)
=========== =========
Other segment information:
Capital expenditures by business
segment:
Mining Technical Services $ 31,298 $ 23,574
Photobyproduct Fertilizer (Note 11) 169,217 40,715
------- -------
Consolidated Capital Expenditures $ 200,515 $ 64,289
======= =======
Depreciation and amortization expense
by business segment:
Mining Technical Services
Depreciation $ 5,094 $ 4,594
Amortization 2,075 -
------ ------
7,169 4,594
------ ------
62
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1998 1997
---------- ----------
Photobyproduct Fertilizer
Depreciation $ 25,820 $ 12,657
Amortization 6,952 6,457
------ ------
32,772 19,114
------ ------
Consolidated Depreciation and
Amortization $ 39,941 $ 23,708
====== ======
Identifiable assets by business segment (net of accumulated
depreciation, accumulated amortization, and allowance for doubtful
accounts):
1998 1997
--------------------- -------------------
MINING PHOTO- MINING PHOTO-
TECHNICAL BYPRODUCT TECHNICAL BYPRODUCT
ASSET DESCRIPTION SERVICES FERTILIZER SERVICES FERTILIZER
------------------------- ----------- ---------- -------- ----------
Current Assets
Cash $ 29,004 $ 17,637 $ 9,795 $ 15,154
Accounts receivable, net 89,539 27,858 34,525 17,747
Inventories 1,826 39,281 1,826 46,147
Prepaid expenses 802 18,916 795 17,467
--------- ------- --------- -------
121,171 103,692 46,941 96,515
--------- ------- --------- -------
Property and Equipment, net
Construction in progress,
leasehold improvements - 98,358 - 3,546
Leasehold improvements - 7,355 - 8,225
Equipment 43,818 118,795 29,253 90,742
Vehicles 4,983 32,532 2,249 4,233
Equipment under capital
lease 3,624 19,880 - 24,942
--------- ------- --------- -------
52,425 276,920 31,502 131,688
--------- ------- --------- -------
Other Assets, net
Patents, trademarks,
and other - 8,339 - 6,895
Organizational costs - 113 - 226
Intercompany investments
and loans 3,105,064 - 3,047,477 -
Deposits 2,121 5,491 2,121 702
--------- ------- --------- -------
3,107,185 13,943 3,049,598 7,823
--------- ------- --------- -------
$3,280,781 $394,555 $3,128,041 $236,026
========= ======= ========= =======
63
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Reconciliation of segment assets to consolidated assets:
1998 1997
---------- ----------
Total Assets:
Mining Technical Services $3,280,781 $3,128,041
Photobyproduct Fertilizer 394,555 236,026
--------- ---------
Total Segment Assets 3,675,336 3,364,067
Itronics Inc. assets 6,746,058 5,147,366
Less: intercompany elimination (9,358,865) (8,066,379)
--------- ---------
Consolidated Assets $1,062,529 $ 445,054
========= =========
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 counter-suit against the individual. In
March 1997 the June 1995 suit was dismissed by the Court. The individual
has subsequently 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 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 25 months from July 31,
1998. As of the date of this report, a hearing date has not been set.
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 $1,024,863 during the year ended
December 31, 1998. This factor indicates the Company and its subsidiaries'
64
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
ability to continue in existence is dependent upon their 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. in 1988, 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
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. In March 1998 the Company's subsidiary, Itronics
Metallurgical, Inc., signed a definitive manufacturing and distribution
agreement with Western Farm Services, Inc. (WFS). The agreement gives WFS
the exclusive license and right to manufacture and market the Gold'n Gro
line of fertilizer products in the states of Arizona, California, Hawaii,
Idaho, Oregon and Washington. The agreement is for five years, with five
year renewal options.
During 1997 the Company issued a Private Placement Memorandum to raise
$500,000 in equity funds and made an offer to exchange its Preferred Shares
for Restricted Common Shares. A total of $324,300 was received from the
Private Placement during 1997. Promissory notes, with balances of $82,663
and $120,000 at December 31, 1998 and 1997, respectively, have been accepted
in subscription of the Private Placement and an additional $81,175 was
received in 1998. The Preferred Exchange is more fully discussed at Note 6.
During 1998 the Company issued a Private Placement Memorandum to
raise $2 million in equity funds. A total of $1,078,750 was received from
the Private Placement in 1998. In addition, $37,500 was received subsequent
to December 31, 1998, $70,000 in accrued management salaries and an account
payable due to an officer/stockholder were converted into common stock in
the Private Placement, and promissory notes with balances of $25,000 at
December 31, 1998 have been accepted in subscription of the Private
Placement.
In February 1999 the Company opened the Final Tranche of the 1998
Private Placement to raise $780,000 in equity funds. Through March 5, 1999,
$115,000 has been received under the Final Tranche. In addition, through
March 5, 1999, $561,174 has been received in exercise of 1998 and prior
warrants.
65
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 16 - Off-Balance Sheet Risks and Concentration of Credit Risk:
The Company occasionally maintains bank deposits in excess of
federally insured limits. Statement of Financial Accounting Standards No.
105 identifies this as a concentration of credit risk requiring disclosure,
regardless of the degree of risk. The Company's risk is managed by
maintaining its accounts in one of the top five largest banks in the
country.
As of December 31, 1998, a significant portion of the Company's
accounts receivable is concentrated with one mining industry client. This
concentration of credit risk is somewhat mitigated due to the fact that the
Company has been providing services for this client for more than 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%
silver credit against recycling services based on the content of silver in
the photobyproducts. If the fair market value of silver declines, 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
66
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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 March 5, 1999, new capital leases in the amount of $150,701
(original principal amount) were incurred to finance equipment acquisitions
for the Reno/Stead manufacturing facility. An additional $200,000 in
equipment leases were pending on that date.
The following summarizes common stock activity from January 1, 1999
through March 5, 1999:
ISSUED TO BE ISSUED
------------------- ------------------
SHARES AMOUNT SHARES AMOUNT
---------- -------- -------- --------
Warrant exercise 1,095,240 $169,674 2,665,000 $391,500
Private placement 60,000 7,500 567,750 145,000
Labor & consulting services 249,125 37,881 696,574 84,157
Director fees 7,500 1,377 - -
Interest 27,889 3,896 - -
Purchase of equipment - - 1,429 500
Operating expenses 24,390 5,000 - -
Acquisition of subsidiary - - 7,409 1,667
--------- -------- --------- --------
1,464,144 $225,328 3,938,162 $622,824
========= ======== ========= ========
In addition, a total of $10,150 in labor services and $1,772 in
interest on accrued salaries has been incurred and will be paid in stock.
In February 1999 the Company opened the Final Tranche of the 1998
Private Placement Memorandum to raise $780,000 in equity funds by offering
common shares and warrants at varying rates, with an anticipated minimum of
$0.35 per share. Through March 5, 1999 $115,000 has been received from
the Final Tranche. In addition, through March 5, 1999 $561,174 has been
received in exercise of 1998 and prior warrants.
The Company's subsidiary, Itronics Metallurgical, Inc., intends to
exercise its option to purchase the Reno/Stead manufacturing facility prior
to April 1, 1999, the expiration date of the option. Terms of the option are
more fully described in Note 11.
NOTE 18 - Change in Accounting Principle:
During 1997 the Company changed its method of accounting for its
annual audit and shareholder meeting expenses. The change was made to
provide better quarter to quarter comparability of the Company's Statements
67
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
of Operations. Prior to the change, the entire expense would be incurred and
expensed within one or two quarters of the year. The Company believes it to
be more appropriate to allocate these costs over the entire year. The effect
of the change in 1997 was to increase net loss before cumulative effect of a
change in accounting principle by $1,000, or ($0.000) per share. The
adjustment of $31,500 included in the 1997 net loss is the cumulative effect
of applying the new accounting method retroactively. The pro forma amounts
shown on the Statements of Operations have been adjusted for the effect of
retroactively applying the new accounting method.
NOTE 19 - Earnings (Loss) Per Share:
Following is a reconciliation of the numerators, Net Income (Loss)
before cumulative effect of a change in accounting principle, and the
denominators, weighted average number of shares outstanding, in the
computation of earnings (loss) per share (EPS) before cumulative effect of a
change in accounting principle for the years ended December 31, 1998 and
1997.
1998 1997
-------- --------
Net Income (Loss) before cumulative
effect of a change in accounting
principle $(1,024,863) $(499,421)
Less: Preferred stock dividends - (26,000)
--------- ---------
Basic EPS income (loss) available to
common stockholders $(1,024,863) $(525,421)
============ ==========
Weighted average number of shares
outstanding 45,993,944 32,718,152
Common equivalent shares - -
---------- ----------
45,993,944 32,718,152
========== ==========
Per share amount $(0.0223) $(0.0160)
========= =========
Warrants, options, and shares to be issued, totaling 13,411,850 and
6,391,232 shares as of December 31, 1998 and 1997, respectively, could
potentially dilute future EPS. No diluted EPS is presented as the effect of
including these shares is antidilutive.
68
<PAGE>
ITRONICS INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER SHARE
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
EXHIBIT 11
1998 1997
------ ------
Common and common equivalent shares used
in determining net loss per share
Weighted average number of common
shares outstanding during the
period 45,993,944 32,718,152
Common equivalent shares - -
---------- ----------
45,993,944 32,718,152
========== ==========
Net Loss $1,024,863 $ 530,921
Cumulative preferred dividends for the
period - 26,000
--------- ---------
Net loss plus cumulative preferred dividends
for the period $1,024,863 $ 556,921
========= =========
Loss per share $ 0.0223 $ 0.0170
========= =========
69
<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
70
<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: March 30, 1999 By: /S/ 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: March 30, 1999 By: /S/ JOHN W. WHITNEY
--------------- ----------------------------------
John W. Whitney
President, Treasurer and Director
(Principal Executive and Financial
Officer)
Date: March 30, 1999 By: /S/ MICHAEL C. HORSLEY
--------------- ----------------------------------
Michael C. Horsley
Controller
(Principal Accounting Officer)
Date: March 30, 1999 By: /S/ PAUL H. DURCKEL
--------------- ----------------------------------
Paul H. Durckel
Director
Date: March 30, 1999 By: /S/ ALAN C. LEWIN
--------------- ----------------------------------
Alan C. Lewin
Director
71
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
FOR DECMEBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 348,829
<SECURITIES> 0
<RECEIVABLES> 118,803
<ALLOWANCES> 1,406
<INVENTORY> 41,107
<CURRENT-ASSETS> 620,603
<PP&E> 610,778
<DEPRECIATION> 281,433
<TOTAL-ASSETS> 1,062,529
<CURRENT-LIABILITIES> 504,654
<BONDS> 128,293
0
0
<COMMON> 56,060
<OTHER-SE> 373,522
<TOTAL-LIABILITY-AND-EQUITY> 1,062,529
<SALES> 343,872
<TOTAL-REVENUES> 766,720
<CGS> 547,326
<TOTAL-COSTS> 923,115
<OTHER-EXPENSES> 130,045
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,511
<INCOME-PRETAX> (1,024,863)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,024,863)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,024,863)
<EPS-PRIMARY> (.022)
<EPS-DILUTED> (.022)
</TABLE>
