UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A
Amendment No. 1
(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, 2007
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from______to_______
Commission file number 33-18582
ITRONICS INC.
(Name of small business issuer in its charter)
Texas
75-2198369
(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
(Address of Principal Executive Offices)
Zip Code
Issuer's telephone number:
(775) 689-7696
Securities registered under Section 12(b) of the Exchange Act:
Title of each class
Name of each exchange on
which registered
None
None
Securities registered under Section 12(g) of the Exchange Act:
None
(Title of class)
Check whether the issuer is not required to file reports pursuant
Section 13 or 15(d) of the Exchange Act. ( )
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)
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ( ) No (X)
State issuer's revenues for its most recent fiscal year: $2,342,296.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the average bid and asked price of such
common equity, as of March 31, 2008, was $6,439,679.
As of March 31, 2008 there were issued and outstanding 999,996,999
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (Check one): Yes ( ) No (X)
EXPLANATORY NOTE
This amendment on Form 10-KSB/A (Amendment No. 1) amends the Annual Report on
Form 10-KSB (the "Original Report") of Itronics Inc. (the
"Company") for the fiscal year ended December 31, 2007, which was filed with the
U.S. Securities and Exchange Commission (the "SEC") on April 15, 2008, and is
being filed to:
- remove table grid lines and provide underlining, page numbers and other formatting to
make the document more readable.
- correct the dates on the signature page and on the Sections 302 and 906
certifications that were inadvertently omitted and to change the word
"quarterly" to "annual" in Exhibit 32.1.
- correct a page number reference on page 44
The Company does not believe any such changes are material.
In accordance with the rules of the SEC, the Company has provided
updated certifications pursuant to Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002 which have been included as Exhibits 31.1, 31.2, 32.1 and 32.2
to this Amendment No. 1.
This Amendment No. 1 is limited to the items of the Original
Report set forth above and does not amend, update, or change any other items or
disclosures contained in the Original Report. Accordingly, all other items that remain
unaffected are omitted in this filing. The amendments to the Original Report reflected in
this Amendment No. 1 did not result in a change to, or restatement of, the financial
statements or other financial information included in the Original Report. The filing
of this Amendment No.1 shall not be deemed an admission that the Original Report, when
filed, included any untrue statement of a material fact or omitted to state a material
fact necessary to make a statement therein not misleading.
2
ITRONICS INC. AND SUBSIDIARIES
2007 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I
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PAGE
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Item 1.
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Description of Business
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4
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Item 2.
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Description of Property
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19
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Item 3.
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Legal Proceedings
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19
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Item 4.
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Submission of Matters to a
Vote of Security Holders
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20
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PART II
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Item 5.
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Market for Common Equity
and Related Stockholder Matters and
Small Business Issuer Purchases of Equity
Securities
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20
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Item 6.
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Management's Discussion and
Analysis or Plan of Operation
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24
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Item 7.
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Financial Statements
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35
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Item 8.
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Changes in and
Disagreements with Accountants on
Accounting and Financial Disclosure
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35
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Item 8A
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Controls and procedures
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35
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PART III
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Item 9.
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Directors, Executive
Officers, Control persons and Corporate
Governance; Compliance with Section 16(a) of
the Exchange
Act
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37
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Item 10.
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Executive Compensation
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39
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Item 11.
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Security Ownership of
Certain Beneficial Owners and
Management and Related Stockholder Matters
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41
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Item 12.
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Certain Relationships and
Related Transactions, and Director
Independence
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43
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Item 13.
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Financial Statements and
Exhibits
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44
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Item 14.
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Principal Accountant Fees
and Services
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82
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3
ITEM 1.
DESCRIPTION OF BUSINESS.
INTRODUCTION
We are the inventor and developer of the "Beneficial Use
Photochemical, Silver, and Water Recycling" technology that produces environmentally
beneficial GOLD'n GRO fertilizers and silver bullion.
We are an environmental process technology company that has developed
what we believe is a unique technology for photochemical recycling. We, through our
subsidiary, Itronics Metallurgical, Inc., extract more than 99% of the silver and
virtually all of the other toxic heavy metals from used photoliquids and use this
"Beneficial Use Photochemical, Silver and Water Recycling" technology to produce
environmentally beneficial chelated liquid fertilizer sold under the trademark GOLDn
GRO, deer repellant/fertilizer to be sold under the trademark GOLDn GRO Guardian,
and silver bullion. We also provide development planning and technical services to the
mining industry.
OUR PRODUCTS AND SERVICES
We currently operate the following two business segments under separate
wholly owned subsidiaries:
GOLDn GRO Fertilizer
: This segment, known as Itronics
Metallurgical, Inc., operates a fertilizer manufacturing, photochemical recycling, and
silver refining facility. Revenues are generated by photochemical management services,
sales of photochemical silver concentrators, sales of silver, and sales of GOLDn GRO
liquid fertilizers.
Mining Technical Services
: This segment, known as Whitney &
Whitney, Inc. (WWI), provides mineral project planning and technical services to the
mining industry. It has specialized knowledge in all aspects of mineral project
development and has been deeply involved in gold mine development for more than 25 years.
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. WWI was under contract
with the Country of Bolivia from 1986 through early 1992 to assist it in developing its
mining industry. In 2005 WWI launched an internet website to provide gold mining company
profiles to the interested public.
We have three wholly owned subsidiaries, Whitney & Whitney, Inc.
("WWI"), Itronics Metallurgical, Inc. ("IMI"), and Itronics
California, Inc. (ICI), a 92.5% owned partnership, Nevada Hydrometallurgical Project
("NHP"), and an 82.53% owned joint venture, American Hydromet. A brief
description of each organization follows:
Itronics Metallurgical, Inc.
:
IMI was established in 1981 to manage the metallurgical and materials
processing operations being developed under WWI 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 photochemical/GOLD'n GRO fertilizer segment
as discussed below.
4
Nevada Hydrometallurgical Project
:
Nevada Hydrometallurgical Project ("NHP") is a research and
development 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. We own 92.5% of NHP.
American Hydromet
:
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 GOLDn GRO 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 WWI
serves as the general partner and owns a general and limited partnership interest totaling
11%. We own a 37% limited partnership interest in AG&S. In total, we own approximately
83% of American Hydromet.
Itronics California, Inc.
:
Itronics California, Inc. (ICI) was acquired in March 1999 by Itronics
Metallurgical, Inc. ICI, originally named PD West, Inc., was acquired for its phosphoric
acid recycling technology. ICI has no business operations but plans are to utilize the
phosphoric acid technology and to eventually operate IMI's photochemical services and
GOLD'n GRO fertilizer business in California.
Whitney & Whitney, Inc.
:
WWI was incorporated in 1977. WWI was primarily a mineral consulting
firm that provided planning and technical services to the mining industry. WWI is now
further developing an internet website originally launched in 2005 to provide gold mining
industry data to the investing public, while maintaining a presence in the technical
consulting field.
SUMMARY HISTORY OF OPERATIONS
Whitney & Whitney, Inc. was established to provide a wide range of
technical services to the mining industry. During the 1980's, WWI completed several
multi-client fertilizer marketing studies. Also during this time period, WWI 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 our business into new industries. When considering the fertilizer marketing
studies previously performed, along with the growing national issue of sewer system
contamination from toxic photowastes and silver toxicity to fish, it seemed to be a
natural extension of WWI's existing expertise to expand
5
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 liquid wastes. It took until 1997 to develop and demonstrate a satisfactory
fertilizer and to complete university testing to demonstrate its agronomic viability.
In March 1998 IMI signed a five year definitive licensing,
manufacturing, and distribution agreement with Western Farm Service, Inc. (WFS), one of
the largest liquid fertilizer bulk retailers in the western United States. The agreement
was renewed in March 2003 for another five years and again in March 2008, subject to
annual cancellation provisions. The agreement grants WFS an exclusive license and right to
manufacture and market IMI's GOLD'n GRO line of bulk liquid fertilizer products for the
Turf & Ornamental and Specialty Agricultural markets in the states of Arizona,
California, Hawaii, Idaho, Oregon, and Washington. WFS has approximately 100 agricultural
retail outlets in these states. In the discussion below, and elsewhere in this report, we
refer to this group of retail outlets as our licensed distributor network.
A 35,000 square foot manufacturing plant in Reno/Stead, Nevada was
purchased in 1999. Construction of the liquid processing area was completed in early 2000,
and a "shake-out" period was completed in which small batches of photochemicals
were processed and small batches of fertilizer were manufactured. By late 2000 the new
facility had demonstrated the ability to "demetallize" the received photo
liquids to required EPA levels, thereby proving the technical viability of the new
technology on a commercial scale. By the first quarter of 2001 we were positioned to
develop sales for more than a dozen liquid fertilizer products.
By the end of 2003, we had developed 13 fertilizers covering two
categories: chelated liquid multinutrient fertilizers and chelated liquid micronutrient
fertilizers. The fertilizers are sold both to the general public and through licensed and
non-licensed distributors.
We are developing a deer repellent/fertilizer that will be sold under
the trademark GOLD'n GRO Guardian. This product will use one of the GOLD'n GRO
multi-nutrient liquid fertilizers as a base liquid, which has the property of being taken
into the plant as a fertilizer and imparting odor and taste characteristics that are
offensive to deer and other animals, such as rabbits, that eat plants. The GOLD'n GRO
Guardian product was field tested during 2003 and was subsequently approved for use by the
North American Deer Management Network. GOLD'n GRO Guardian is a repellent fertilizer and
must be registered under both the pesticide regulations and the fertilizer regulations for
each state in which it will be sold. The product must also be registered with the U.S.
Environmental Protection Agency (U.S EPA) as a biopesticide. Introduction of this product
for commercial sales will be delayed until the registrations are completed. In 2005 we
acquired the interest in the GOLDn GRO Guardian trademark, product rights, and the
repelling product formula owned by Mr. Howland Green. We now own 100% of all rights
related to GOLDn GRO Guardian. Mr. Green has become one of our directors and is
Northeast Manager for GOLDn GRO Sales Development. Substantial funding over the next
24 months will be required to complete the U.S. EPA and California registration process
and to begin manufacturing and sales.
During the period 1999 through 2003 we developed a "low
temperature vacuum distillation" machine that operates at room temperature and is
able to remove up to 80% of the water from photochemical solutions without damaging the
chemicals, producing a high silver content concentrate that can be shipped as a commercial
product in inter-state commerce. The distilled
6
water is clean enough for re-use on site and the reduction in volume of
material needing to be shipped produces an 80 percent reduction in transportation cost
making shipment possible anywhere in the United States. These machines are being sold
under the trademark "Itronics Metallurgical Photochemical Silver Concentrators".
After we began producing fertilizer, we noted that the by products of
the process were the main materials needed to manufacture glass and ceramic. Therefore we
began research and development of glass and tile formulations. During 2003, the first
pieces of glass/ceramic tile were produced. With the successful development of a
glass/ceramic tile product, we achieve the ability to recycle 100 percent of the materials
received from customers, including waste that is generated internally during processing.
The silver refining technology and the glass/ceramic tile products development efforts are
being expanded in parallel with expansion of GOLD'n GRO fertilizer sales.
A more detailed discussion of our business, based on our two business
segments described above, follows.
GOLDn GRO FERTILIZER
Operations
We operate a commercial scale plant to receive used photochemical
liquids, recover the silver and other metals, and convert the demetallized liquids to
liquid GOLD'n GRO fertilizer products. A critical component of this integrated
manufacturing system is to match, within a reasonable range, the incoming volume of
photochemical liquids with the utilization of those liquids in fertilizer or other
manufactured products.
Photochemical services operates as a regional business in northern
Nevada, serving more than 200 customers in the northern Nevada market. A satellite service
operation has been established in the San Francisco Bay Area which is a large market with
at least three strong competitors. We believe we are able to compete effectively based
upon pricing and service quality. In October 2006 we began servicing a large company in
northern Nevada and in November 2006 we began servicing a large company in the San
Francisco Bay Area.
Growth of silver bullion output is driven by photochemical processing
to support GOLD'n GRO fertilizer sales. There are some opportunities to expand silver
output separate from photochemical recycling, but profit margins for the refining services
are very small when compared to the inventory requirements and the security risk. Because
of these factors, gold and silver refining services are limited to categories of materials
where our proprietary technology can be used and that offer better profit margins than
conventional precious metal refining. We will be actively looking at opportunities to
expand this segment in future years.
Spent photochemical liquids received from customers are logged and
recorded, then tested for silver content and contaminants. We achieve high contaminant
control standards by working proactively with our regular customers. Once testing is
completed, the photographic solutions are available for processing.
7
Growth Plans and Implementation
With the successful completion of the initial pioneering development
work by the GOLDn GRO Fertilizer Division, we are implementing growth plans that are
expected to drive expansion well into the future. The status of these plans and their
implementation is described below.
Our manufacturing plant is presently configured to produce 1.2 million
gallons (on a single shift basis) of GOLDn GRO fertilizer annually (about 5,700
tons) and can be expanded to produce 7.2 million gallons of GOLD'n GRO per year, or about
36,000 tons. GOLD'n GRO fertilizer production in 2007 utilized about 5 percent of planned
capacity. Planned expansions to achieve the 36,000 ton volume include increasing both dry
raw material and liquid storage, increasing tank truck loading capacity, and automation of
certain manufacturing functions. Expansion is being done incrementally as fertilizer sales
continue to grow.
We have developed the following eight-part approach to growth:
1. Increase sales in the established market
segments.
2. Develop GOLD'n GRO fertilizer applications for
more crops.
3. Expand sales to new territories.
4. Expand the GOLD'n GRO specialty fertilizer
product line.
5. Complete development of and commercialize the new
glass/tile products.
6. Develop and commercialize environmentally
friendly metal leaching reagents for recovery of silver, gold, and
other metals.
7. Continue facilities expansion and technology
development.
8. Acquire established companies and/or their
technologies.
Plans and status of implementing each of the growth categories is
explained in more detail in the following sections.
1.
Increase sales in established market segments.
We are selling into or developing applications for the three major
segments. These are:
a. Specialty Agriculture which includes Avocados, Citrus, Grapes, Fruit
and Nut Trees, and Vegetables.
b. Bulk Field Crops which include alfalfa, cereal grains, corn, cotton,
and soybeans.
c. The Urban Market, which includes Home Lawn and Garden, Landscape
Construction and Maintenance, and Nursery and Greenhouse markets, and Golf Courses.
Our primary focus is to increase bulk GOLDn GRO liquid fertilizer
sales as rapidly as possible. This is being achieved by expanding sales in the Specialty
Agriculture segment and in the Bulk Field Crops segment. There are on-going small package
sales in the Urban Market, but these are small relative to the other two segments.
2.
Develop GOLD'n GRO fertilizer applications for more crops.
Based on our experience to date, it takes approximately two to five years to develop a
new fertilizer product, which includes regulatory approval. It typically takes another two
to four years to achieve market acceptance of successful products, which includes field
trials to demonstrate product effectiveness.
8
We are performing field trials in Idaho, Oregon, and Washington for
applications on onions, potatoes, and winter wheat. We also have begun field trials in
Rhode Island for lawn, landscape, and nursery application and have started several new
trials in California for silage corn applications.
A GOLD'n GRO base liquid nutrition program is being marketed. The
program is called the "Gallon and a Quart" or "4 to 1" program. It
calls for one gallon of GOLDn GRO base liquid for each quart of GOLD'n GRO chelated
micro-nutrient used in soil applications. Field demonstrations have shown improved
nutrition uptake and crop output under this cost effective program. Marketing of this
program is expected to produce substantial increases in the tonnage of GOLD'n GRO
fertilizer sales.
In 2006 we began contributing to an ongoing Zinc Nutrition Research
Program at Utah State University in Logan, Utah. To date, the research has demonstrated
the effectiveness of GOLDn GRO 9-0-1+7% Zinc as a chelated liquid zinc micronutrient
fertilizer for zinc deficient corn. Results include preventing visual symptoms of zinc
deficiency, significantly increased tissue concentration of zinc compared to untreated
plants, and doubled dry mass.
3.
Expand sales to new territories.
The GOLD'n GRO products are being sold in Arizona, California,
Colorado, Idaho, Nevada, Oregon, Rhode Island, Washington, and Utah, with the majority of
our sales in central California. We completed registration of select GOLDn GRO
fertilizers in Idaho, Oregon and Washington in 2005 and in Utah in 2006; sales development
is now underway. Two GOLD'n GRO products are registered in seven northeastern states and
all of the products are registered in New York and in New Jersey. Based on our experience,
commercial sales can be generated approximately one to three years after introductory
sales activities are initiated. We are in the process of identifying distributors for New
York and the other seven northeastern states. Each new geographic area developed will
require the same procedural approach.
The expansion into the Northwest states of Idaho, Oregon, Washington,
and Utah is being managed by one field agronomist. The cost of maintaining that position
ranges from $120,000 to $150,000 per year. The expansion into the Northeast states is
being managed by one part time person at an annual cost of approximately $30,000. That
person is also the lead person in seeking customers for our Photochemical Silver
Concentrators. We may increase these spending levels in 2008, depending on sales support
requirements.
In general, expansion to new regions of the country will require at
least one field agronomist for each new region at a cost similar to that for the Northwest
region. In addition, each state has varying registration requirements for product labels
and costs of registration. Development of product labels is done internally using existing
staff. Registration fees for each state vary widely, ranging from $25 to $600 per year,
largely depending on how many products are registered in the particular state. For the
near term, we anticipate utilizing present staff and management for corporate support of
the sales efforts for both existing regions and for the new regions. For the longer term,
as we expand we will need to add corporate support personnel. In 2006 we added a Ph.D.
agronomist, to support GOLDn GRO sales efforts.
Our plan to expand sales in Urban Markets requires the consumer to
utilize fertilizer injection equipment. This equipment provides economical, easy use of
liquid
9
fertilizers for consumer lawns and gardens. We added two types of
fertilizer injectors to our "e" store, which is the first step into this market.
Additionally, other fertilizer injectors are already available to consumers through
irrigation supply stores.
4.
Expand the GOLD'n GRO specialty fertilizer product line.
We are developing two new specialty products, a calcium plus magnesium
fertilizer named GOLDn GRO 11-0-0+5% Ca (Calcium) and a high magnesium content
fertilizer named GOLDn GRO 8-0-0+3% Mg (Magnesium), both targeting foliar and soil
application. We have registered GOLDn GRO 11-0-0+5% Ca in Nevada and California. The
registration of GOLDn GRO 8-0-0+3% Mg is planned for the second quarter of 2008 at
which time sales development will be started.
We are developing a new category of repellent fertilizers that are
expected to be sold at higher profit margins than our other products. The GOLDn GRO
Guardian deer repellent fertilizer is an example of this type of specialty fertilizer. The
U.S. market for deer repellents is believed to exceed $200 million in annual sales.
Products currently in the market have limited effectiveness so we believe that there is a
real opportunity for a line of systemic products that are effective for several weeks
after each application. GOLD'n GRO Guardian small plot tests have shown effectiveness for
8 to 12 weeks as well as excellent wintertime effectiveness.
We acquired ownership interest in the GOLDn GRO Guardian
trademark, product rights, and the repelling product in 2005. We now own 100% of all
rights related to GOLDn GRO Guardian. Results of the research of the GOLDn GRO
Guardian deer repellent fertilizer has provided a basis for a bird (goose) repellent
fertilizer that will be perfected for small plot field trials. Currently, this product
line is strictly for non-food plant applications. We have engaged consultants experienced
in the EPA registration process. We are presently working with them to plan the process
and lab work needed to complete a series of registrations. One registration was issued in
March 2008.
We believe the users of the GOLDn GRO deer repellent fertilizer
will be upscale homeowners, commercial landscapers, and municipal facilities, and
wholesale and retail nurseries. Initial sales development will be centered in Utah and
seven northeastern states.
5.
Complete development of and commercialize glass/tile products.
In 2003, we developed and produced glass /tile products proving that
the product concept is technically viable. When the development of the glass/ceramic tile
product is completed, we will achieve the ability to recycle 100 percent of the
photoliquid materials received from customers, including waste that is generated
internally during fertilizer production. We have completed preliminary market research for
the tile markets, but expect to do much more work to develop a plan to enter this market.
6.
Develop and commercialize metal leaching reagents for recovery of
silver, gold, and other metals.
We are developing applications of our technology to extract silver
from photoliquids to the mining sector. This work is being expanded and a small pilot
circuit is being established to chemically process certain categories of silver-bearing
solid wastes. The gold mining sector currently uses cyanide and other toxic chemicals in
their
10
leaching process. We believe it may be possible to create and adapt new
non-toxic leaching reagents and leaching procedures for processing other secondary
materials and certain types of mine generated products. The specific markets for leaching
reagents in gold and silver mining is large and world wide, but has not yet been studied
in detail for market development. Our Technical Services Division maintains an extensive
library and database of mines and mining activities worldwide, which provides us ready
access to market information as we need it. Much pilot plant work, including one or more
field pilot operations, must be completed before quantitative market studies can be
completed.
7.
Continue facilities expansion and technology development.
As fertilizer sales volume increases, we need to increase tank truck
loading capacity. With the introduction of additional bulk products and increased demand
for our products, load out capacity for shipment of three more bulk products is needed.
The first phase, construction of a containment area, was substantially completed in late
2006. While we believe that we can handle expected growth in 2008 with the existing
load-out module, we hope to complete construction on the new load out equipment during the
second half of 2008, subject to the availability of financing.
8.
Acquire established companies and/or their technologies.
To enhance our operations and market presence, we intend to acquire
small established companies or their technologies. In 2005, we completed our acquisition
of the GOLDn GRO Guardian technology. Further acquisitions will depend on the
potential benefits and suitable financing.
Competition
Our GOLDn GRO fertilizer products compete with well
established fertilizer companies that have significantly more capital with which to market
their products. Our competitors include large companies such as Scotts Miracle-GRO, Dow
AgroSciences Company, Uniroyal Chemical Corporation, and smaller companies such as Pursell
Technologies, Inc. We believe that our fertilizers compete primarily on the basis of
product quality and performance.
Our photochemical recycling fees are generated primarily from
processing used photochemicals from our customers sites. We are now providing
services to large national firms like Safety Kleen and Philips Environmental. We are also
providing these services to smaller regional firms. Our primary competition is small
regional firms.
We sell our silver bullion to a commercial refiner under standard
industry terms. We are a very small producer of silver; consequently the refiner will
purchase all the silver we can presently produce. For several years, there has been a
global shortage in the supply side of the silver market. Our ability to sell our silver
bullion could only be impacted if there were a dramatic contraction in the demand for
silver, and only then if we grow to be a much larger silver producer than we are now.
11
Markets
Fertilizer
The total fertilizer market consists of the "Agricultural
Market" and the "Urban Market". The Urban Market accounts for at least $9
billion in annual sales in the United States. The "Specialty Ag" segment of the
Agricultural Market is a $5 billion segment making the total a $14 billion market.
Substantially all of our present GOLDn GRO fertilizer sales are in the
"Specialty Ag" segment.
More than 50 million tons of fertilizer products are sold annually in
the United States. This includes almost 20 million tons of multi-nutrient fertilizers and
almost 3.5 million tons of secondary nutrient and micro-nutrient products. About 38
percent of the total usage is as fluid fertilizers. Our 2007 sales represent less than
0.05 percent of the specialty ag segment of the fertilizer market.
Our GOLD'n GRO fertilizers are all liquid. There are major differences
in manufacturing, distribution, and sale of liquid fertilizers as compared to dry
fertilizers. Basic differences are described here so that the investor can better
understand the technology, logistics, and application of liquid fertilizers and thereby
gain a better understanding for the market niche that we operate in.
Liquid fertilizer technology is more complex than dry technology.
Typically dry solids can be readily blended into dry mixtures that can then be bagged, or
transported as dry bulk powders. In contrast, liquid fertilizers are reacted products and
must be manufactured using precise recipes so that the final product will remain stable.
Dry products can be stored for years without degradation, whereas liquid products
typically have a limited storage life ranging from a few days for proprietary field
blends, up to 4 years or longer for certain types. Liquid fertilizers can also freeze over
a rather wide range of temperatures, a problem not encountered with dry fertilizers.
Because of these technical factors, bringing a line of liquid fertilizers to market is
much more complex than bringing a line of dry products to market.
Dry fertilizers are typically applied with dry spreaders. Liquids are
sprayed on with tank sprayers or aircraft, injected into the soil using special
applicators, or applied through irrigation systems using sprinklers, micro-sprinklers, or
drip irrigation. Liquid fertilizers can also be applied with ditch irrigation by running
the fertilizer into the water at controlled rates. The use of irrigation water to apply
the liquid fertilizers is called fertigation.
Dry fertilizer packaging and transport is typically simpler and less
costly than liquid fertilizer packaging and transport. Bulk liquids must be moved in tank
trucks or tank rail cars and stored in large bulk tanks at distribution points. The
distributors who sell the liquids to farmers must install and operate tank farms and
maintain a fleet of specialized applicators. Distribution and application of liquid
fertilizers typically requires specialized technical knowledge related to mixing and
handling as compared to the use of dry fertilizers. Liquid fertilizers are typically
easier and less costly to apply when irrigation is available, and availability of the
fertilizer nutrients in the soil for uptake by crops is greater when liquid fertilizers
are used. Use of fertigation to apply liquid fertilizers can reduce tractor trips through
the fields, reducing cost and also reducing soil compaction.
12
Because of less cost for application and improved availability of the
liquid nutrients to the plants, liquid fertilizers in the United States are continuing to
gain market share. Use of liquid starter mixes for dry land crops is also expanding,
especially for planting field crops such as cotton, corn, soybeans, and wheat.
Only certain fertilizer distribution companies are specialized in
marketing liquid fertilizers and have the facilities and equipment required to sell,
deliver, and apply the liquid fertilizers. Our licensed distributor is one of those
companies.
The GOLD'n GRO fertilizers are complex and represent a new category of
liquid nutrition technology. The GOLD'n GRO fertilizers contain bulk chelating agents that
conventional liquid fertilizers do not contain. The chelating agents, which are normally
quite costly, are supplied as components of the starting photographic liquids. The
chelating agents improve the availability of micronutrient metals such as zinc, iron,
manganese, and the secondary nutrients calcium, and magnesium, and are an advanced
nutrient delivery technology. The photoliquids also have a natural content of sulfur, the
other important secondary nutrient. These chelate enriched multinutrient fertilizers
distinguish the GOLD'n GRO liquids from other liquid fertilizers and are the main reason
why the GOLD'n GRO liquid fertilizers represent a new type of nutrient delivery
technology.
The deer repellent/fertilizer market is a new market for us. The users
of this product will be upscale homeowners, commercial and municipal facilities,
commercial nurseries, and landscape maintenance companies. The deer population is growing
rapidly in the northeastern U.S. and so the center of gravity for this product is the
northeastern seaboard states. The initial sales center will be in Rhode Island. The
markets being served are the Commercial Landscape and wholesale and retail Nursery
segments. The GOLD'n GRO Guardian line of products is strictly for non-food plant
applications so the distribution channels are different from the channels being developed
for GOLD'n GRO fertilizers.
The U.S. market for deer repellents is believed to be well in excess of
$200 million per year. Products currently in the market are believed to have limited
effectiveness so we believe that an opportunity exists for a line of systemic products
that are effective for several weeks after each application. The GOLD'n GRO Guardian is
demonstrating effectiveness for periods of 8 to 12 weeks, and may be able to provide
"year round" protection. We are pursuing development of this line of products as
rapidly as possible.
Photochemical Recycling
We estimate that there are 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). We estimate the total annual
market for recycling this category of waste to be in the range of $200 to $400 million.
We are aware of digital imaging and its impact on usage of conventional
photography. The impact is different for each of the major segments; medical, color
photography, and printing/microfiche. Digital imaging has made significant inroads into
printing/microfiche processing with an almost 85% reduction in volume of photographic
13
liquids over the past ten years. We are estimating that the volume of
color photography waste liquids has been reduced by up to 50%. Digital photography is
creating a new source of photowastes from Internet companies that combine digital imaging
services with the ability to print high quality photographs for their customers. Digital
methods are being adopted in the medical industry, and although the medical sector is
relatively high growth with the aging U.S. population, digital imaging has had the effect
of slowing the growth of waste photo liquids being generated and may lead to a decline in
future years.
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 the equipment manufacturers have focused on reducing water usage and
the volume of photochemicals that are used. This attention to reduction of waste water has
contributed to a reduction in 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. On-site photochemical recovery using a Photochemical
Silver Concentrator and re-using the recovered water is expected to continue to become
more and more attractive to large photochemical waste generators.
Environmental restrictions on disposal of chemicals are continuing to
tighten throughout the United States with the result that now the rate of growth for our
photochemical recycling business is dependent upon the rate and vigor of fertilizer sales
growth.
The Company believes that the volume of photochemical liquids being
generated in the United States continues to greatly exceed its needs for fertilizer
manufacturing.
Silver
Nationally, more than 40 million ounces of silver are consumed in
photomaterials annually. Approximately 30% of this is lost through disposal. The Silver
Institute indicates that silver usage in photography declined in 2006.
Seasonality and Working Capital
In analyzing the market and industry competitors, it is apparent
that two factors significantly impact our ability to penetrate these markets in a
meaningful way. First, the seasonal aspect of 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 experience, we expect fertilizer sales to continue to have a
strong seasonal component, with the primary sales season running from April through
November each year, with an in-season low in July and August. In addition to the general
seasonal nature of sales caused by normal weather patterns, unusual weather can further
affect fertilizer sales, especially in winter and spring. For example, unusually cold or
wet spring seasons may delay the growing cycle of various crops for which our fertilizers
are utilized. To overcome weather related effects on fertilizer sales, we are evaluating
markets in the southern areas of the United States where growing seasons are longer and,
in some cases, year round.
14
Due to the seasonal nature of GOLD'n GRO fertilizer sales, we must
increase our net working capital to a level higher than that of non-seasonal industries.
For example, some of our competitors have working capital equal to their annual sales.
Consequently, ongoing debt and equity funding will be required for us to grow, even after
a profitable level of operations is achieved.
Research, Development, and Technology
The majority of our research and technology is proprietary, which
means it has not been patented, but is protected with strict confidentiality agreements
and limited access to our research and production facilities. A U.S. patent on the silver
separation process was issued in 1987 and is now expired. We made a corporate decision to
not patent our research results as the cost of obtaining and defending patents is
prohibitive.
We conduct field trials to gather agronomic data and to develop
knowledge of how the GOLD'n GRO products work on different crops. This field testing will
continue as it is the most effective method for developing the field data needed to
support claims of product effectiveness for specific crops. On-going field trials of
GOLDn GRO fertilizer products continue to show significant improvements in crop
production and quality. The trials are providing agronomic data that is being used to
develop GOLDn GRO nutrition programs for the crops being tested.
The field trials are demonstrating that the GOLDn GRO products
provide both agronomic and economic benefits in the "specialty agricultural"
markets. Specialty agriculture includes vegetables, cut flowers, herbs and spices, and
fruits and nuts of all types. These crops are relatively high value compared to field
grains such as corn, wheat, and soybeans. Field trials in 2002 on cotton and on silage
corn produced positive results, opening two new large acreage crops for GOLD'n GRO
application development. Alfalfa is typically considered as a "hay" or
"forage" crop and is generally of low to intermediate value when compared to
specialty agricultural crops, however, high nutrient content alfalfa for the dairy market
often commands a significant price premium which puts it at the low end of specialty
agricultural crop values.
A 3 year field trial on Valencia orange trees was carried out with
oversight from a major university in southern California was completed in 2004. Three year
cumulative results were analyzed and positive results were obtained. Fruit output per tree
and fruit quality were both increased.
During 2003, we completed a key phase of the research project to
produce formulated glass products. The research identified three product categories: (1) a
glass ceramic mixture that can be used to produce tile and other shapes suitable for
glazing and commercial use; (2) glass formulations that can be used as "lead
free" low and intermediate temperature glazes for decorative tile and the craft
pottery trade; and (3) specialty boro-silicate glass formulations. The next phase of the
research will focus on production of small quantities of products for evaluation and
market studies and is expected to be completed over the next two to three years.
We continue to be offered the opportunity to explore the feasibility of
recycling other non-photographic materials into fertilizer. We have concluded that certain
acid waste streams generated by aerospace and electronics manufacturers may be able to be
converted to a form that will fit "Beneficial Use" recycling into fertilizer in
15
association with the processed photochemical materials.
Environment and Regulation
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. For example, conventional services, through
storing and hauling, relocate the waste to a legal landfill or dispose it to sewer.
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 our facility and has been
processed, the generator's hazardous waste liability is eliminated. Using our process,
virtually all metals, including most of the iron, are removed. The end result leaves us
with a non-hazardous "toxic-metal-free" liquid which is legal for use in high
quality GOLDn GRO liquid fertilizers.
While in general our 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. We make a continuing effort
to anticipate regulatory, political and legal developments that might affect our
operations, but may not always be able to do so. We cannot predict the extent to which any
legislation or regulation may affect future operations.
In particular, the regulatory process requires firms in our 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. We
are 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.
For several years we have been studying the various regulatory
requirements under RCRA and have been working with state and local environmental officials
regarding the extent to which hazardous waste regulations apply to our operations. Through
this process, we reached the conclusion that due to use of photochemicals as a beneficial
ingredient in our fertilizer products, the photochemicals 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 we received concurrence from State of Nevada environmental officials that our
photochemical fertilizer process meets the existing RCRA requirements for exemption from
all environmental regulation with the exception that certain presently conducted lab
analyses of the photochemicals will continue to be required. Certain of our large scale
customers presently meet the exemption requirements. Present levels of fertilizer sales
utilize all the photochemicals received.
Environmental regulation of photowaste generators has strengthened over
the last several years, and that trend is expected to continue. In the past year, heavy
metal contamination of fertilizers has become a significant issue in California and other
parts of the country. Public concern over this issue is expected to intensify. We believe
that the GOLDn GRO line of fertilizer products is uniquely suited to alleviating
this environmental concern and that we are well positioned to meet future environmental
needs.
16
Permits and Inspections
To the best of our knowledge, we have obtained permits from all
governmental agencies having jurisdiction, such as the U.S. EPA, Nevada Department of
Environmental Protection, Washoe County Health Department and the City of Reno, Nevada. We
are not required to obtain federal permits, but are required to have, and have obtained,
local permits for our photochemical recycling facility under the provisions of the U.S.
EPA. Similar permits will be required of all facilities that we may construct. Our
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, our operations are
subject to the Safe Drinking Water Act, TSCA (Toxic Substances Control Act-pursuant to
which the EPA has promulgated regulations concerning the disposal of PCBs), the Clean
Water Act (which regulates the discharge of pollutants into surface waters and sewers by
municipal, industrial and other sources) and the Clean Air Act (which regulates emissions
into the air of certain potentially harmful substances). Employee safety and health
standards under the Occupational Safety and Health Act are also applicable to our
employees.
MINING TECHNICAL SERVICES
Services offered
Our Mining Technical Services segment offers a wide range of
technical services to the mining industry, including management support, mineral project
development, ore reserve and material balance reviews, expert assistance in contract
dispute or litigation, and mineral economics and cost studies
Operations
The Mining Technical Services Division originally provided typical
consulting services to the mining industry which required high level technical personnel,
including our President, devoted to each project. To reduce our dependence on our
President to generate new consulting contracts, while better utilizing our core
professional staff, the division is being reconfigured to focus most of its efforts on a
global Internet Information Portal "insidemetals.com". The information
portal operates 24 hours per day 7 days per week anywhere in the world where computers and
the Internet are available. Anyone with access to the Internet anywhere in the world can
subscribe to the service at any time using their credit card to pay the subscription fee.
We launched the insidemetals.com website in 2005, targeting the
companies and individuals interested in the mining and precious metals industry. The
website is generating revenue by charging a subscription fee for monthly access to the
site. Currently, the site contains an array of information about gold mining and gold
mining stocks. We intend to add information on other mineral sectors gradually over time.
A program to solicit advertising customers is being developed and is being offered to gold
exploration companies. To assist with the sales development program of the website, we
hired a manager of marketing and sales in October 2006. He was responsible for marketing
efforts for both the insidemetals.com website and for technical consulting services to the
mining industry. As no revenue was generated
17
from this work, the position was eliminated in February 2008. We are
presently evaluating the steps we need to take to improve the revenue growth from the
website.
New technical consulting contracts are now being generated from this
effort.
Expansion Plans
In 1999 WWI 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 our proprietary photochemical recycling process. The project, called
Itronics Thiomet, may seek to establish operating joint ventures at specific mine sites to
apply the thiosulfate leaching technology. This project is on hold pending further
commercial development of fertilizer sales.
In 2004 a project to establish a subscription based gold industry and
gold company Internet publication was begun. The web publication, called
"insidemetals.com", provides the customer with gold industry and producing gold
company financial, production, and ore profiles. Initially, the companies to be profiled
are in the Gold Company sector, which includes gold, silver, platinum, and palladium
producers. The profiled companies are publicly traded on the New York and American Stock
Exchanges and on NASDAQ. The publication was launched in August 2005 and the target market
includes gold company employees, governmental agencies, both domestic and foreign, and
individual investors interested in the gold markets. In addition to providing subscription
revenue, it is anticipated that the publication will enhance our opportunity to obtain new
sources for technical consulting work. This subscription based Internet Information Portal
provides an opportunity for relatively unrestricted growth by being available to a diverse
global base of potential customers.
We anticipate that mining company professionals, all government
agencies with minerals related responsibilities, financial industry investment
professionals, and individual investors who have an interest in investing in mining
companies but who have limited mineral industry knowledge will benefit from this
Information Portal. The market scope for this service is global and is accessible with a
"click of a mouse" in all countries of the world through the Internet. Whitney
& Whitney, Inc. has contacts throughout the world and expects that the good will
generated over a period of more than 25 years will provide market support for this
service. The site is now receiving visits from more than 170 countries world wide.
Competition
Our consulting services are generally in the area of management
support and mineral economics. Management support projects include advice on mineral
development strategies, audits of ore reserves and appraisals on mineral properties
primarily to mining companies. Our projects tend to be short term, generally less than one
year, and are typically sole sourced to us based on the reputation of our president. Other
companies that provide similar services include local and regional mineral consulting
firms.
Our competition for the Internet Information Portal is other websites
that provide gold and other precious metal information to the interested public.
18
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. IMI leases approximately 2,000
square feet of warehouse space in Reno, Nevada. This space is being used for supply
storage and will be used for manufacturing GOLDn GRO Guardian.
IMI owns a 35,000 square foot manufacturing facility in Reno-Stead,
Nevada. The building contains all the equipment used for treating the used photochemicals,
preparing the recovered silver for sale, and manufacturing the GOLDn GRO fertilizer
products.
II.
EQUIPMENT.
The equipment being used in the recycling and fertilizer
manufacturing process is proprietary information. However, the plant for recycling liquid
photochemicals into fertilizer is a fairly typical chemical process facility consisting of
appropriate arrangement of tanks and pumps. Solids produced by processing are recovered by
filtration.
The refining operation consists of a material handling section, solids
drying, and a melting section. The equipment arrangements are proprietary, but the main
items are pumps, tanks, filtration equipment, drying ovens, and the melting furnaces.
ITEM 3.
LEGAL PROCEEDINGS.
As of December 31, 2007 we have accrued for liabilities, including
interest, of $544,965 which relate to various lawsuits and claims for the collection of
the funds due. These include 8 leases totaling $366,358 (reflected in Capital Lease
Obligations) plus $62,435 in additional interest (reflected in Accrued Interest) and one
trade payable totaling $85,801 (reflected in Accounts Payable) plus $30,371 in additional
interest (reflected
in Accrued Interest). The leases are individually secured by specified
equipment.
The accrued interest noted above was recorded based on our assessment
of three cases that are seeking $251,522, which we believe are probable. The creditors
have received judgments in these cases, but have taken no further collection action. We
will continue to accrue interest until these cases are settled or paid in full.
We have two cases, that originally sought $171,853, that we deem to
have a remote possibility of incurring an additional unrecorded loss. We have negotiated
payment agreements on these cases and, as of December 31, 2007, the recorded liability was
$163,128. We are delinquent in our payments under the respective settlement agreements,
but we are in contact with the lenders legal representative and no collection action
has been taken.
In addition to the above leases that are subject to litigation, there
are four leases, with a recorded liability of $189,110, that are in default. As required
by U.S. Generally Accepted Accounting Principles, the principal balance of the leases
19
that are in default have been classified as current liabilities.
Successful settlement of the above claims is dependent on future
financing.
We may become involved in a lawsuit or legal proceeding at any time in
the ordinary course of business. Litigation is subject to inherent uncertainties, and an
unexpected adverse result may arise that may adversely affect our business. Certain
lawsuits have been filed against us for collection of funds due that are delinquent, as
described above. Other than as described above, we are currently not aware of any
litigation pending or threatened for any reason other than collection of funds due and
already recorded nor are we aware of any additional legal proceeding or claims that the
Company believes will have, individually or in the aggregate, a material adverse affect on
our business, financial condition or operating results.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF ITS SECURITY HOLDERS.
None.
PART II
ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY
(a). Market Information. The Companys common shares are
traded on the over-the-counter market under the symbol ITRO.OB, and quoted in the National
Quotation Bureau, Inc.'s "pink sheets" and on the NASD Electronic Bulletin
Board. In 2003 the Companys stock began trading on the Frankfurt, Germany Stock
Exchange under the symbol ITG. In 2004 the Companys stock began trading on the
Berlin Bremen Stock Exchange (Germany) under the symbol ITG.
The following table sets forth the high and low bid prices for the
Company's common stock for each quarter for 2006, 2007, and through March 31, 2008.
|
High Bid
|
Low Bid
|
3/31/06
|
$0.08
|
$0.04
|
6/30/06
|
$0.05
|
$0.02
|
9/30/06
|
$0.04
|
$0.01
|
12/31/06
|
$0.02
|
$0.01
|
3/31/07
|
$0.03
|
$0.01
|
6/30/07
|
$0.03
|
$0.01
|
9/30/07
|
$0.02
|
$0.004
|
12/31/07
|
$0.005
|
$0.002
|
3/31/08
|
$0.02
|
$0.003
|
These quotations
reflect inter-dealer prices without retail markup, markdown, or commissions, and may not
represent actual transactions.
(b) On March 31, 2008 the number of record holders of the Common Shares
was approximately 1,052.
20
(c)
Dividends.
The Company has paid no dividends.
Recent Sales of Unregistered Securities
:
In October 2007 we issued an aggregate of 5,000,000 common shares John
W. Whitney, our President, upon conversion of $18,500 in short term loans.
In October 2007, we issued an aggregate of 214,286 shares of common
stock valued at $1,500 to John W. Whitney, our President, as compensation for services
performed on our behalf in his capacity as a director of our Company for the third quarter
of 2007.
In October 2007, we issued an aggregate of 30,000 shares of common
stock valued at $210 to two employees as compensation for services performed on our behalf
in their capacities as employees of our Company for the third quarter of 2007.
In November 2007 we issued an aggregate of 7,761,710 shares of common
stock valued at $15,523 to Wayne Baker as compensation for consulting services performed
on our behalf in 2007.
In November 2007 we issued an aggregate of 1,600,000 shares of common
stock valued at $200,000 to one accredited investor upon the conversion of the principal
portion of his Series 2000 Convertible Note.
During the fourth quarter of 2007 we issued an aggregate of 382,925,910
common shares to four accredited investors upon the
conversion of $387,545 in callable secured convertible notes.
On October 23, 2007, the Company entered into a Securities Purchase
Agreement with three accredited investors (the "Investors") for an aggregate
amount of (i) $275,000 in secured convertible notes, and (ii) warrants to purchase
15,000,000 shares of the Companys common stock (the "Financing"). The
Company anticipates that the proceeds of the Financing will be used to advance its eight
part business plan which was summarized in its press release issued by the Company on June
3, 2005. The Financing will provide working capital to expand GOLDn GRO fertilizer
sales, EPA registration of the GOLDn GRO Guardian deer repellant fertilizer, certain
capital improvements to expand production capacity, and payment of existing debt
obligations.
The Financing was completed in one closing. The closing consisted of
gross proceeds of $275,000, less financing costs of $15,000, for net proceeds of $260,000.
The Investors received three year convertible notes (the
"Notes") bearing simple interest at 8% per annum. The Notes are convertible into
the Companys common stock at a price equal to the lesser of (i) $0.10 or (ii) 55% of
the average of the lowest 3 trading prices during the 20 trading day period ending one
trading day before the conversion date. In addition, we granted the Investors a further
security interest in substantially all of our assets, including the assets of our wholly
owned subsidiaries, and intellectual property.
The parties entered into a Registration Rights Agreement whereby we are
required to
21
file a registration statement with the Securities and Exchange
Commission within 180 days of closing, registering the common stock underlying the secured
convertible notes and the warrants. If the registration statement is not declared
effective within 180 days from the date of closing, we are required to pay liquidated
damages to the investors. In the event that we breach any representation or warranty in
the Securities Purchase Agreement, we may be required to pay liquidated damages in shares
or cash, at our election, equal to two percent of the outstanding principal amount of the
secured convertible notes per month plus accrued and unpaid interest.
The Investors received seven year warrants to purchase a total of
15,000,000 common shares of the Company at a purchase price of $0.004 per share.
Other than under these Agreements and under certain specified
circumstances, should we issue shares of common stock below the market price, the exercise
price of the warrants will be reduced accordingly.
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay a stock
dividend, subdivide or combine outstanding shares of common stock into a greater or lesser
number of shares, or take such other actions as would otherwise result in dilution of the
selling stockholder's position.
The Investors have agreed to restrict their ability to convert their
secured convertible notes or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them in the aggregate and
their affiliates after such conversion or exercise does not exceed 4.9% of the then issued
and outstanding shares of common stock.
In addition to the above terms, the Company has agreed to restructure
the current and all previous unpaid Callable Secured Convertible Notes ("the
Notes") by increasing the discount on the conversion price from 50% to 60%, such that
the conversion price is 40% of the average of the lowest 3 trading prices during the 20
trading day period ending one trading day before the conversion date, instead of the 55%
as stated in the Notes and related Securities Purchase Agreements.
On December 27, 2007, the Company entered into a Securities Purchase
Agreement with three accredited investors (the "Investors") for an aggregate
amount of (i) $200,000 in secured convertible notes, and (ii) warrants to purchase
15,000,000 shares of the Companys common stock (the "Financing"). The
Company anticipates that the proceeds of the Financing will be used to advance its eight
part business plan which was summarized in its press release issued by the Company on June
3, 2005. The Financing will provide working capital to expand GOLDn GRO fertilizer
sales, EPA registration of the GOLDn GRO Guardian deer repellant fertilizer, certain
capital improvements to expand production capacity, and payment of existing debt
obligations.
The Financing was completed in one closing. The closing consisted of
gross proceeds of $200,000, less financing costs of $15,000, for net proceeds of $185,000.
The Investors received three year convertible notes (the
"Notes") bearing simple interest at 8% per annum. The Notes are convertible into
the Companys common stock at a price equal to the lesser of (i) $0.10 or (ii) 35% of
the average of the lowest 3 trading prices during the 20 trading day period ending one
trading day before the
22
conversion date. In addition, we granted the Investors a further
security interest in substantially all of our assets, including the assets of our wholly
owned subsidiaries, and intellectual property.
The parties entered into a Registration Rights Agreement whereby we are
required to file a registration statement with the Securities and Exchange Commission
within 180 days of closing, registering the common stock underlying the secured
convertible notes and the warrants. If the registration statement is not declared
effective within 180 days from the date of closing, we are required to pay liquidated
damages to the investors. In the event that we breach any representation or warranty in
the Securities Purchase Agreement, we may be required to pay liquidated damages in shares
or cash, at our election, equal to two percent of the outstanding principal amount of the
secured convertible notes per month plus accrued and unpaid interest.
The Investors received seven year warrants to purchase a total of
15,000,000 common shares of the Company at a purchase price of $0.001 per share.
Other than under these Agreements and under certain specified
circumstances, should we issue shares of common stock below the market price, the exercise
price of the warrants will be reduced accordingly.
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay a stock
dividend, subdivide or combine outstanding shares of common stock into a greater or lesser
number of shares, or take such other actions as would otherwise result in dilution of the
selling stockholder's position.
The Investors have agreed to restrict their ability to convert their
secured convertible notes or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them in the aggregate and
their affiliates after such conversion or exercise does not exceed 4.9% of the then issued
and outstanding shares of common stock.
In addition to the above terms, the Company has agreed to restructure
all previous unpaid Callable Secured Convertible Notes ("the Notes") by
increasing the discount on the conversion price from 60% to 65%, such that the conversion
price is 35% of the average of the lowest 3 trading prices during the 20 trading day
period ending one trading day before the conversion date, instead of the 55% as stated in
the Notes and related Securities Purchase Agreements.
We issued options to purchase an aggregate of 9,000 shares of common
stock to Michael C. Horsley, our Controller, on November 1, 2007. The options are
exercisable at $0.15 per share and expire three years after grant.
We issued options to purchase an aggregate of 62,000 shares of common
stock to four of our employees in October and November 2007. The options are exercisable
at $0.15 to $0.16 per share per share and expire in three years to ten years from grant.
All of the above offerings and sales were deemed to be exempt under
rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The offerings
and sales were made to a limited number of persons, all of whom were accredited investors,
business associates of Itronics Inc. or executive officers of
23
Itronics Inc., and transfer was restricted by Itronics Inc. in
accordance with the requirements of the Securities Act of 1933. In addition to
representations by the above-referenced persons, we have made independent determinations
that all of the above-referenced persons were accredited or sophisticated investors, and
that they were capable of analyzing the merits and risks of their investment, and that
they understood the speculative nature of their investment. Furthermore, all of the
above-referenced persons were provided with access to our Securities and Exchange
Commission filings.
Except as expressly set forth above, the individuals and entities to
whom we issued securities as indicated in this section of the registration statement are
unaffiliated with us.
ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Some of the information in this report contains forward-looking
statements that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "estimate" and
"continue," or similar words. You should read statements that contain these
words carefully because they:
- discuss our future expectations;
- contain projections of our future results of operations or of our
financial condition; and
- state other "forward-looking"
information.
We believe it is important to communicate our expectations. However,
there may be events in the future that we are not able to accurately predict or over which
we have no control. Our actual results and the timing of certain events could differ
materially from those anticipated in these forward-looking statements.
General Overview
We are the inventor and developer of the "Beneficial Use
Photochemical, Silver, and Water Recycling" technology that produces environmentally
beneficial GOLD'n GRO fertilizers and silver bullion.
We are a process technology company that has developed what we believe
is a unique technology for photochemical recycling. We, through our subsidiary, Itronics
Metallurgical, Inc., extract more than 99% of the silver and virtually all of the other
toxic heavy metals from used photoliquids and use this "Beneficial Use Photochemical,
Silver and Water Recycling" technology to produce environmentally beneficial chelated
multinutrient liquid fertilizer products sold under the trademark GOLDn GRO, deer
repellent/fertilizer products to be sold under the trademark GOLDn GRO Guardian, and
silver bullion. We also provide process planning and technical services to the mining
industry and are operating and continuing to develop an internet website to provide gold
mining company profiles to parties interested in the gold mining and precious metals
industry.
Our fertilizer is sold primarily through Western Farm Service, Inc.
(WFS), a wholly owned subsidiary of Agrium, Inc. (a NYSE company). Our distribution
agreement with WFS gives them exclusive rights to sell our fertilizer products in Arizona,
California, Hawaii, Idaho, Oregon, and Washington, which represented 99% of our
24
fertilizer sales in 2007 and 95% of such sales in 2006. This agreement
is discussed in more detail in the Business section. Our plans to increase GOLDn GRO
fertilizer sales, including plans to expand the product line, expand to more geographical
regions in the U.S., enter new market segments, and add new distributors, are also
discussed in more detail in the Business section.
We obtain a significant portion of our raw materials to manufacture
fertilizer from used photoliquids. A byproduct of our fertilizer manufacturing process is
silver. We sell three types of silver: silver bullion, 5 troy ounce 99.9% pure Silver
Nevada Miner numismatic bars, and recycled film containing silver. Our processed silver
bullion is sold to a commercial refiner under standard industry terms, which include
pricing the silver based on published market quotes and applicable service fees. The
Silver Nevada Miner bars sell to the consumer collectibles market. Recycled film is
primarily X-ray film from hospitals that we sort and sell to a commercial film recycler;
we are paid based on the value of contained silver, 30 to 45 days after shipment.
Our fertilizer manufacturing process uses several commodities. We
separate silver from photochemicals, then we add zinc and other raw materials to the
demetallized liquid to make our fertilizer formulations. Prices for fertilizer raw
materials are generally increasing over time. We maintain limited quantities of these
commodities and purchase them on a just in time basis. When prices of these commodities
rise, we pass this cost on to our customers, so commodity price fluctuations have not had
a significant impact on our results of operations.
The majority of our raw material inventory is comprised of silver in
photochemical solutions. The table below indicates that silver prices were relatively
stable in 2001 to 2003, then rose dramatically in 2004 through 2007. We regularly compare
our weighted average cost of silver per ounce to current market prices; historically we
have not had impairment losses. The average London spot price of silver per ounce is shown
as follows:
Year
Year
2001
2002
2003
2004
2005
2006
2007
Silver $4.36 $4.60 $4.88 $6.67 $7.32
$11.55 $13.38
We also provide consulting services to the mining industry. To
supplement this business line, we launched an internet website. Our plans with regard to
the website are discussed more fully in the Growth Plan and Implementation section below.
Critical Accounting Policies and Estimates.
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States requires that management
make a number of assumptions and estimates that affect the reported amounts of assets,
liabilities, revenues and expenses in our consolidated financial statements and
accompanying notes. Management bases its estimates on historical information and
assumptions believed to be reasonable. Although these estimates are based on
managements best knowledge of current events and circumstances that may impact the
Company in the future, actual results may differ from these estimates.
25
Our critical accounting policies are those that affect our financial
statements materially and involve a significant level of judgment by management.
Revenue Recognition
.
We operate two divisions: Photochemical Fertilizer and Technical
Services. Within the fertilizer division, revenue is derived from three sources (1) sales
of fertilizer, (2) photochemical recycling including pick up and transportation of
photochemical waste and sales of Photochemical Silver Concentrators, and (3) sales of
silver. Fertilizer and retail silver sales are recognized when goods are shipped to our
customers. We pay 1% of invoice amount to our primary fertilizer distributor in order to
receive accelerated payment terms. The fee is netted against fertilizer sales. Sales of
silver bullion and silver in film are recorded when the silver content and the sales price
are determined, which is approximately two weeks after shipment for silver bullion and 30
to 45 days after shipment for film. Returns since inception have been nominal; therefore,
the Company has not established a returns allowance. Photochemical recycling fees are
recognized in income after the used photochemical solution is removed from our customer
sites and transported to our manufacturing facility.
Within the technical services division, revenue is derived from
consulting services. Revenue is recognized in income as services are rendered. When the
Company is responsible for subcontractor services and related expenses, such pass-through
costs are included in both revenue and cost of revenues. Markups, if any, are included in
revenues.
Inventory.
Inventory is carried on the balance sheet at the lower of cost or
market value using the average cost valuation method. Because a large part of our
inventory is silver contained in used photochemical materials and the market value of
silver changes daily on the commodities market, we regularly monitor the carrying value of
our silver inventory to ensure it is carried at the lower of cost or its current market
value. If silver on the open market were less than our carrying value, we would write down
the carrying value of our inventory by reducing recorded inventory and increasing cost of
sales. If the amount of the write down were material, we would separately include the item
in our statement of operations.
Convertible Debt Derivative
The fair value of the conversion feature and the prepayment penalty are
estimated using the Black-Scholes option pricing model and taking a weighted average value
based on various probabilities that the debt would be paid off prior to maturity at
specified dates and therefore incurring the prepayment penalty. This model requires
management to use significant assumptions in applying the model to estimate the fair
value. As the Companys stock price is highly volatile, and the underlying debt
amounts are relatively large, the valuation of the derivatives is subject to material
gains and losses from period to period.
26
Recent Accounting Pronouncements
In December 2006 the FASB staff issued
FSP EITF 00-19-2
"
Accounting for Registration Payment Arrangements
" to specify the
accounting treatment of contingent obligations to make future payments or otherwise
transfer consideration under a registration payment arrangement. Our callable secured
convertible debt includes an obligation for us to file registration statements with the
Securities and Exchange Commission (SEC) to register sufficient common shares for the note
holders to convert the debt into common stock frames and also obligates us to have the
registration statements declared effective by the SEC. This new standard requires us to
evaluate the contingent future payments under the criteria of a probable loss under FAS 5.
The Company adopted this new standard effective for the first fiscal quarter of 2007. The
new standard has not had a significant impact on the Companys financial position or
results of operations.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157 (
"SFAS 157"
),
"Fair Value Measurements,"
which defines fair value, establishes guidelines for measuring fair value and expands
disclosures regarding fair value measurements. SFAS 157 does not require any new fair
value measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 with earlier adoption permitted. The Company is currently evaluating the
impact of SFAS 157, but does not expect the adoption of SFAS 157 to have a material impact
on our consolidated financial position, results of operations or cash flows.
In February 2006, the FASB issued Statement of Financial Accounting
Standards No. 155 (
"SFAS 155"
),
"Accounting for Certain Hybrid
Financial Instruments"
. SFAS 155 simplifies the accounting for certain
derivatives embedded in other financial instruments by allowing them to be accounted for
as a whole if the holder elects to account for the whole instrument on a fair value basis.
SFAS 155 is effective for all financial instruments acquired, issued or subject to a
re-measurement event occurring in fiscal years beginning after September 15, 2006. Earlier
adoption is permitted, provided the Company has not yet issued financial statements,
including for interim periods, for that fiscal year. The Company adopted SFAS 155 in the
first quarter of 2007 and it has not had a material impact on our consolidated financial
position, results of operations or cash
flows.
Results of Operations
The primary factors affecting our revenue fluctuation between
periods in fertilizer sales are seasonality and weather conditions. Sales are greater
during the growing season, and are negatively affected by cold winter weather and rainy
weather. In most of our markets there are two primary fertilization seasons, spring and
fall, with spring being the stronger of the two. The spring season generally starts in
March and goes through June and the fall season generally starts in September and runs
into December. Adverse weather conditions delay the start of, or can significantly
shorten, a growing season. Farmers do not fertilize their crops in rainy or cold weather;
therefore they do not buy fertilizer; consequently, our distributor does not buy
fertilizer from us. Additionally, we have experienced varying lengths of time for
acceptance in the market of our new fertilizer products; farmers are inherently very slow
to accept new products so market penetration time can be lengthy. Our short history in the
fertilizer market demonstrates that new products, if successful,
27
obtain meaningful sales typically between two and four years after
product launch.
The primary factors affecting the revenue fluctuation between periods
in photochemical recycling revenue are our need to acquire this material for use in
fertilizer production and our ability to store this material until it is needed. We have
an unusual business model in that we need to sell our photowaste management services in
order to acquire a raw material necessary for the production of our fertilizer products,
as opposed to purchasing it from suppliers as most businesses do. Our management goal is
to combine the incoming volume of photowastes with existing stored photowastes to meet the
peaks in demand for fertilizer products. In the liquid fertilizer industry, the practice
of both our distributor and the ultimate consumer, the farmer, is to purchase fertilizer
on a just in time basis, to minimize their storage requirements and related costs. For
this same reason, we process our photowastes as needed for fertilizer production. Because
of this, the need to seek new customers to expand the service side of our business is
driven by fertilizer sales. There is also a seasonal factor in the consumer photography
portion of our photowaste management services business, with the Christmas holiday season
being the busiest, followed by the early summer, school graduation period. At present
volumes of photowaste, this is not a significant factor, but it could become one as we
grow.
The primary factor affecting the revenue fluctuation between periods in
sales of silver bullion is our dependence on the timing of processing used photochemical
wastes, which is primarily dependent on fertilizer manufacturing and related sales. Our
silver in solution is separated from the photowaste materials during processing of the
photowastes for use in fertilizer manufacturing. As described above, the timing of
processing of photowastes is dependent on fertilizer sales, therefore sales of silver
bullion is also dependent on the level of fertilizer sales. Market price changes will also
contribute to silver revenue fluctuations by increasing or decreasing revenues depending
on whether the silver price increases or decreases.
Comparison of the Year Ended December 31, 2007 with the Year Ended
December 31, 2006
.
We reported consolidated revenues of $2,342,296 for the year ended
December 31, 2007, compared to $1,871,918 for the prior year, an increase of 25%. Revenues
for the GOLDn GRO Fertilizer segment increased by $471,600, or 26%. Revenues from
the Mining Technical Services segment declined $1,200, or 4%. We reported a gross profit
of $124,200 for the year ended December 31, 2007 compared to a gross profit of $75,200 for
the year ended December 31, 2006, an improvement of $49,000, or 65%. The consolidated net
loss for 2007 was $10,482,500 or $0.021 per share compared to a 2006 consolidated net loss
of $3,809,900 or $0.016 per share, an increased loss of $6,672,600, or 175%.
To provide a more complete understanding of the factors contributing to
the changes in revenues, operating expenses and the resultant operating loss and net loss,
the discussion presented below is separated into our two operating segments.
28
PHOTOCHEMICAL FERTILIZER
|
Year Ended December 31,
|
|
|
2007
|
2006
|
|
Revenue
|
|
|
|
Fertilizer
|
$
1,663,361
|
$
1,297,282
|
|
Photochemical
recycling
|
$ 334,965
|
$ 128,033
|
|
Silver
|
$ 316,815
|
$ 418,265
|
|
Total Segment
Revenue
|
$
2,315,141
|
$
1,843,580
|
|
Gross profit
(loss)
|
$ 130,998
|
$ 83,462
|
|
Operating
income (loss)
|
$(2,199,386)
|
$(1,682,464)
|
|
Net income
(loss) before taxes
|
$(9,881,206)
|
$(3,370,803)
|
|
Revenues for the
Photochemical Fertilizer segment totaled $2,315,100 in 2007, compared to $1,843,600 in
2006, an increase of $471,600, or 26%.
Fertilizer sales were $1,663,400 (1,958 tons) and $1,297,300 (1,746
tons) for 2007 and 2006, respectively. This represents an increase of 28% in dollars and
an increase in tonnage of 12%. Our fertilizer product sales are presently grouped into
three primary categories, Chelated Liquid Micro-nutrients, Chelated Liquid
Multi-nutrients, and Chelated Secondary Nutrients. The Micro-nutrient category includes
five products, which includes the two zinc products, GOLDn GRO 9-0-1+7% Zn and
GOLDn GRO 9-0-2+3% Zn. These zinc products were introduced in 2001 and 2004,
respectively. The Multi-nutrient category has a total of six products, which includes the
GOLDn GRO 4-0-9+6.6% S Base Liquid, which was introduced in 2003. The Secondary
Nutrient category includes GOLDn GRO 11-0-0+5% Ca which was introduced in 2006 and
GOLDn GRO 8-0-0+3% Mg which was registered in 2007. Sales of bulk Micro-nutrients
were $1,362,500 (1,438 tons) and $1,080,000 (1,259 tons) for 2007 and 2006, respectively,
an increase of 26% in dollars and 14% in tonnage. Sales of bulk Multi-nutrients were
$201,700 (483 tons) and $172,200 (479 tons) for 2007 and 2006, respectively, an increase
of 17% in dollars and an increase of 1% in tonnage. Sales of bulk Secondary Nutrients were
$49,300 (37 tons) and $10,800 (9 tons) for 2007 and 2006, respectively. The increase in
total sales dollars, was achieved by both volume and sales price increases during 2007.
Photochemical recycling revenue was $335,000 and $128,000 in 2007 and
2006, respectively, an increase of 162%. Excluding the current year sale of a
Photochemical Silver Concentrator for $163,500, photochemical recycling revenue increased
34% on increased volume of 186%. In October and November 2006 we obtained two new large
scale wholesale customers and in April 2007 we added a third wholesale customer. The
addition of these customers is expected to increase photochemical raw material (on an
unconcentrated basis) to a level about 50% greater than the volume at the end of 2004 when
our contract with Shutterfly was ended (Shutterfly supplied 65% of our 2004 photochemical
raw materials).
We previously developed statistical information that more than 50
million gallons of used liquid silver-bearing photochemicals are generated in the United
States annually. Using conversion ratios developed for the GOLD'n GRO fertilizers, this is
enough volume to support manufacture and sale of more than 100 million gallons of liquid
fertilizer products, or about 500,000 tons, so we believe the raw material is available in
the market to meet future manufacturing needs. Based on 2007 production usage, we estimate
that current supplies of photochemical raw material in storage at our manufacturing plant,
combined with ongoing receipts of material from other existing customers, is sufficient to
meet fertilizer production needs through 2008,
29
depending on fertilizer sales volumes. We anticipate that with
continuing sales growth, we will need to obtain new large scale photochemical recycling
customers to meet the demand.
We are in contact with both small and large photochemical generators,
and are actively marketing Photochemical Silver Concentrators. The concentrators allow us
to receive the raw materials needed to manufacture our fertilizer in much smaller volume,
resulting in a higher content of chemicals desirable for fertilizer manufacturing,
reducing the storage problems we were facing. The Photochemical Silver Concentrators are
manufactured under contract by a third party to meet the specifications of each customer.
Concentrators typically sell for $20,000 to $200,000. By using a third party manufacturer
to produce the Concentrators, we are outsourcing the fixed and variable costs that are
associated with assembling them. Primarily, these are the facilities space needed to
assemble the various parts and the specialized equipment and labor required for the
assembly. Generally, we have self financed the production of Concentrators sold in the
past. In the future, we anticipate that non-governmental customers will advance the funds
necessary to acquire the parts and labor needed to produce the Concentrators. For our most
recent governmental customer, we borrowed the funds needed to fulfill the contract from an
unrelated individual. We anticipate using similar arrangements for future Concentrators
sold to governmental customers.
Silver revenue was $316,800 and $418,300 for 2007 and 2006,
respectively, a decrease of $101,500, or 24%. Sales of all silver or silver bearing
products were $293,900 (21,818 ounces) for 2007, compared to $399,200 (33,690 ounces) for
2006. This is a decrease of 26% in dollars and 35% in ounces. The decrease is primarily
from decreased sales of processed silver bullion due to a combination of closing the
refinery during the first quarter for installation of a scrubber for air quality purposes
and to problems with our power supply in to the refinery. The power supply issue has been
reduced in recent months, but not eliminated. We are continuing to work with the local
power company to solve the problem.
Combined cost of sales and operating expenses for the segment amounted
to $4,514,500 in 2007, compared to $3,526,000 in 2006, an increase of 28%. Cost of sales
increased approximately $424,000, primarily due to an increase of raw material costs of
$267,000 from increased sales, $70,000 in increased payroll and related costs, and $27,700
in transportation costs related to increased travel for the new wholesale photowaste
customers. The changes in revenues and cost of sales resulted in a 2007 gross profit of
$131,000 compared to a gross profit of $83,500 in 2006, an improvement of $47,500, or 57%.
Operating costs increased $564,500 due primarily to increases of $379,900 in sales and
marketing, $59,800 in research and development, and $119,300 in general and administrative
costs. Sales and marketing expenses increased primarily due to increased corporate
marketing. The increase in research and development costs is related primarily to the EPA
registration of the GOLDn GRO Guardian deer repellant. General and administrative
expenses increased primarily due to $161,700 in consulting services for seeking
operational funding, which was partially offset by a reduction in payroll and related
costs of $54,200.
A significant portion of our silver inventory is contained in
byproducts from our refining process. We have developed new procedures to more cost
effectively obtain this silver and initial plans were to install the necessary equipment
in 2006 and recover the majority of it during 2006. The project was delayed by the
necessity of installing air purification equipment in the refinery. The air purification
system was substantially completed in March 2007. Plans were developed to determine the
30
specifications of the equipment needed to process the byproducts and
obtain the silver. We estimate there will be a two stage process of equipment
installation. The equipment for the first stage was received in early 2008 and a temporary
installation has been completed. Silver recovery is expected to begin during the second
quarter of 2008. Planning is underway for the second stage, and, subject to funding, is
expected to be completed in the third quarter of 2008. In order to determine the amount of
the silver contained in these materials, we developed an estimate of recoverable silver
ounces. Accordingly, we recorded a recoverability reserve of $70,200 based on our estimate
of recoverable silver at December 31, 2006. The portion of silver that we estimate will be
recovered in 2008 was deemed to be slow moving inventory, and accordingly, we recorded a
reserve of $34,000. Our review of these reserves determined that the reserves were
adequate as of December 31, 2007.
These changes in revenues and operating expenses resulted in a segment
operating loss of $2,199,400 in 2007, compared to $1,682,500 in 2006, an increased loss of
$516,900 or 31%.
Other income (expense) increased to a net expense of $7,681,800 for
2007, compared to a net expense of $1,688,300 in 2006, an increased net expense of
$5,993,500. The primary reason for the increased expense is an increase of the loss on
derivatives of $6,256,700, which is related to the callable secured convertible debt
financing obtained in July 2005 and subsequent dates. This increase was partially offset
by a decrease in interest expense of $87,100 related to the convertible debt financing and
other income of $205,900 from the sale of a membership interest in our workers
compensation mutual insurance company.
The changes in operating loss and other expenses resulted in a segment
net loss before taxes of $9,881,200 for 2007 compared to $3,370,800 for 2006, an increased
loss of $6,510,400 or
193%.
MINING TECHNICAL SERVICES
|
Year Ended
December 31,
|
|
|
2007
|
2006
|
|
Revenue
|
$27,155
|
$ 28,338
|
|
Gross profit (loss)
|
$(6,838)
|
$ (8,269)
|
|
Operating income (Loss)
|
$(744,042)
|
$(542,042)
|
|
Net income (loss) before
taxes
|
$(601,318)
|
$(439,082)
|
|
Mining technical
services revenue totaled $27,200 for 2007 compared to $28,300 for 2006, a decrease of 4%.
Included in these revenue figures are pass-through expenses of $1,500 and $2,500 for 2007
and 2006, respectively. Excluding these amounts, revenues amounted to $25,600 and $25,800
for 2007 and 2006, respectively, a nominal decrease. The number of clients we serve and
the amount of work needed by those clients varies from period to period.
Combined cost of sales and operating expenses totaled $771,200 for 2007
compared to $570,400 for 2006, an increase of 35%. Research and development expense
increased $41,700. Research and development expense is related to the development of the
insidemetals.com website. The majority of this expense is an allocation of personnel
costs. Sales and marketing increased $152,500 due to the addition of a marketing position
in October 2006 and to increased advertising related to the insidemetals.com
31
website.
The redirection of Whitney & Whitney, Inc. to reduce emphasis on
technical consulting services and to launch an internet information portal is brought
about by the fact that Dr. Whitney, our President, has often been the lead person in
generating new consulting contracts. Our Presidents increased responsibilities for
managing the expanding photochemical recycling segment and overall corporate activities
has reduced his time availability to actively participate in the consulting segment. Part
of our objective in shifting the focus of the technical services segment is to retain our
core professional staff that can provide assistance on possible future technical service
contracts as well as perform administrative duties for the photochemical recycling
segment, while at the same time adding a potential source of revenue that is not dependent
upon labor sales and which can be managed by a professional staff. The information portal
also better utilizes the Whitney & Whitney, Inc. library and information resources
that are already in existence. For the years ended December 31, 2006 and 2005 we allocated
costs of approximately $248,500 and $206,900, respectively, to the development of the web
site. The site was launched in mid-August 2005 and we are now fine-tuning the general
presentation and functionality of the site, as well as improving the profiled mining
company information. We expect this level of spending to decline beginning in the first
quarter of 2008. As improvements to the site are completed and information maintenance
becomes routine, we will adjust or redirect staff resources as needed. A program to
solicit advertising customers was developed and is being offered to gold exploration
companies beginning in the first quarter of 2007. We hired a manager of marketing and
sales in October 2006. He was responsible for marketing efforts for both the
insidemetals.com website and for technical consulting services to the mining industry.
As no revenue was generated
from this work, the position was eliminated in February 2008. We are presently evaluating
the steps we need to take to improve the revenue growth from the website.
The above changes in revenues and operating expenses resulted in a
segment operating loss of $744,000 for 2007, compared to $542,000 for 2006, an increased
operating loss of $202,000 or 37%.
Other income (expense) is a net gain of $142,700 for 2007, compared to
a net gain of $103,000 in 2006, an improvement of $39,800. The improvement is due to the
sale of a membership interest in our workers compensation mutual insurance company.
The changes in operating loss and other income resulted in a segment
net loss before taxes of $601,300 for 2007, compared to $439,100 for 2006, an increased
loss of $162,200, or 37%.
Changes in Financial Condition; Capitalization
We had a cash balance of $93,000 as of December 31, 2007 compared
to a cash overdraft of $13,800 as of December 31, 2006. Net cash used by operations was
$1,890,900 in 2007 compared to $1,698,200 in 2006. Operating resources utilized to finance
the 2007 operations include approximately $859,400 in expenses paid with our common stock,
$151,000 in increased accounts payable, and $225,900 in deferred management salaries. Cash
amounting to approximately $61,400 was invested in property and equipment in 2007,
primarily for equipment in the manufacturing plant. Sale of our interests in our
workers compensation mutual insurance company provided $348,000 in cash from
investing activities. The primary financing source of cash in 2007 was $1,960,000 in
32
proceeds from callable secured convertible debt, less $140,100 in debt
issuance costs.
Total assets increased from $4,265,500 at December 31, 2006 to
$4,355,900 at December 31, 2007. Current assets increased $193,700. The primary changes in
current assets were increases in cash of $93,000 and $341,600 in inventory, which were
partially offset by decreases in accounts receivable of $18,900 and $221,900 in prepaid
expenses. The increase in inventory is primarily from silver in our photowaste products
due to the refinery issues discussed above. The reduction in prepaid expenses was
primarily due to a $250,000 2007 corporate marketing program paid in common stock at the
end of 2006 that was not renewed for 2008.
Property and equipment decreased by $91,200 due to investment in
equipment totaling $118,200, which was offset by an increase in accumulated depreciation
and amortization of $209,500. Other assets decreased $12,200 due to in the amortization of
deferred loan fees related to the callable secured convertible debt financing.
Total liabilities increased from $11,695,000 at December 31, 2006 to
$20,019,800 at December 31, 2007, an increase of $8,324,800. Of this amount, current
liabilities increased $8,896,300 and long term liabilities decreased $571,500. The primary
increase in liabilities was due to the change in estimated fair value of our callable
secured convertible Notes. The Notes must be accounted for as derivative liabilities and
recorded at estimated fair value at each reporting date, which was $13,003,800 at December
31, 2007 and $4,876,200 at December 31, 2006. The increase in the estimated fair value of
convertible debt derivatives of $8,127,600 in 2007 was primarily due to the addition of
$2.06 million in Notes, offset by the conversion of $1.021 million in Notes, a reduction
in our stock market price as of December 31, 2007 compared to previous periods, and an
increase of the discount to market upon conversion of Notes from 45% at December 31, 2006
to 65% at December 31, 2007. In addition, all outstanding warrants and options are
required to be recorded as derivative liabilities at estimated fair value, which was
$231,200 at December 31, 2007 and $380,100 at December 31, 2006. The value of the warrants
and options decreased primarily due to the decrease in our stock market price compared to
previous periods. A more detailed discussion of the factors affecting the estimated fair
value of our derivatives follows:
In estimating the fair value of warrants and options and determining
the gain or loss on the derivative for each period, the most significant factor is the
stock price at the end of each period. As the stock price goes up, the value of warrants
and options goes up, and consequently there is a greater loss on derivatives. As the stock
price goes down, the value of the warrants and options goes down and consequently there is
a greater gain on derivatives. As of December 31, 2007, the stock price was $0.0026 and at
December 31, 2006 it was $0.013. This decrease in stock price resulted in a reduction in
the value of the warrants and options and consequently, there was a $156,200 gain on
warrant and option derivatives for the year ended December 31, 2007.
The factors affecting the valuation of the convertible debt derivatives
are more complex. As the stock price goes up, that would tend to increase the value of the
derivative and therefore increase the loss. However, an increased stock price also results
in fewer shares needed to convert the debt, which tends to lower the value and reduce the
loss. The reverse is true as the stock price goes down. Another factor that affects the
valuation model is the length of time it takes to convert the debt. We estimate that
length by first determining the number of shares it takes to convert
33
the debt based on the stock price on the balance sheet date. We then
estimate how many shares will be issued to convert debt on a monthly basis based on recent
conversion history from our investors. In general, the investors have increased the
frequency of conversions and the number of shares converted as the stock price has gone
down. Also affecting the conversion practice of the investors is recent changes in
interpretation of the securities laws by the SEC as to the frequency of filing
registration statements. It was originally contemplated under the general concept of this
type of financing that registration statements could be filed as frequently as needed and
with as many shares being registered as needed to meet the terms of the agreements. In
recent months, the SEC has determined to restrict registration filings for the same
investor group to once every six months and to restrict the number of shares being
registered to approximately one third of the outstanding shares held by non-affiliates.
This factor has tended to lengthen the estimated time it will take to convert the debt
which increases the value of the debt derivatives, and therefore increases the loss on
derivatives. However, beginning in the third quarter of 2007, some of our Notes have been
outstanding over two years. At that point the investors can convert the debt into stock
under Rule 144 without limitation, except for the 4.99% of outstanding shares under the
terms of the agreements. Consequently, there has been a substantial increase in the
frequency of conversions and in the number of shares being issued for each conversion.
This would tend to shorten the time period necessary to convert the Notes into common
stock. In the Black-Scholes option pricing model, this decreases the value of the
derivatives, and therefore, increases the gain on derivatives. Conversely, at December 31,
2007 the lowered market price, combined with the increase in the market price discount
from 45% to 65%, the number of shares needed to convert the debt is over 6 billion shares,
which has substantially increased the length of time needed to convert all of the debt. At
December 31, 2006 we had estimated a period of 16 months to convert the debt, while at
December 31, 2007 the estimated period was 35 months. These factors resulted in a loss on
convertible debt derivatives of $6,954,400 for the year ended December 31, 2007.
Current liabilities increased primarily due to the increase in
convertible debt derivatives of $8,127,600 discussed above. Current liabilities also
increased due to increases in accounts payable of $151,000, interest payable to management
of $70,000, current maturities of convertible notes and accrued interest of $193,800,
current maturities of long term debt of $391,500, and current maturities of capital lease
obligations of $75,000. The current portion of long term debt and capital lease
obligations increased due to the respective obligations being in default at December 31,,
2007, requiring the classification of all the debt as current liabilities.
In connection with the callable secured convertible debt discussed
above, we registered 50 million shares in February 2006 and increased the authorized
shares in March 2006 to 1 billion shares. We also completed registrations of 75 million
shares each in October 2006 and June 2007.
Working Capital/Liquidity
During the year ended December 31, 2007, the working capital
deficit was increased by $8,702,500 to a deficit balance of $18,842,100. The primary
changes in working capital are the increase in callable secured convertible debt financing
as discussed above. The Company has had limited cash liquidity since the third quarter of
2000. The Company has sought and obtained the funding described above, which has not been
sufficient to maintain all obligations on a current basis. The cash shortage is
34
primarily because fertilizer sales in 2007 and prior years did not
expand to the extent anticipated, so operating losses were not reduced as expected.
Second, the $15 million equity line of credit agreement with Swartz Private Equities, LLC
(Swartz) was not able to function to meet the Companys ongoing working capital needs
and was allowed to expire on February 27, 2004. As a result, various private placements of
stock with attached three year warrants were undertaken beginning in the fourth quarter of
2002 into 2005. In addition, the Company sold GPXM and other shares for net proceeds of
$229,400 during the year ended December 31, 2006. We obtained callable secured convertible
debt financing beginning in 2005 and received proceeds of $1,960,000, less debt issuance
costs of $140,100 in 2007 and proceeds of $1,941,200, less debt issuance costs of $247,600
in 2006. Subsequent to December 31, 2007, we received net proceeds of $300,000 in
additional callable secured convertible debt financing. We anticipate these proceeds will
provide for the Companys working capital needs to April 2008.
We are actively working to establish longer term financing that will
provide capital sources for the Companys financing needs over a three to five year
period. Once this plan is established, needs for financing will be adjusted and the plan
will be extended annually.
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
To our knowledge, there is no accounting or financial disclosure
dispute involving any present or former accountant.
ITEM 8A CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, our
management, including our Chief Executive Officer and our Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2007.
Disclosure controls and procedures refer to controls and other
procedures designed to ensure that information required to be disclosed in the reports we
file or submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC and that such
information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure controls and
procedures, management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its judgment in evaluating and
implementing possible controls and procedures.
35
Management conducted its evaluation of disclosure controls and
procedures under the supervision of our Principal Executive and Financial Officer and our
Principal Accounting Officer. Based on that evaluation, our Principal Executive and
Financial Officer and Principal Accounting Officer concluded that because of the material
weakness in internal control over financial reporting described below, our disclosure
controls and procedures were not effective as of December 31, 2007.
Managements Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act. Our management is also required to
assess and report on the effectiveness of our internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act of 2002 ("Section
404"). Management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2007. In making this assessment, we
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control Integrated Framework. During
our assessment of the effectiveness of internal control over financial reporting as of
December 31, 2007, management identified material weaknesses related to the
following:
Accounting and Reporting Oversight
Because
of our size, we have ineffective segregation of duties relative to key financial reporting
functions. However, one person in our company, our Principle Accounting Officer/Controller
has extensive US GAAP accounting and SEC reporting experience. However, we do not have
anyone else on staff with sufficient knowledge to review his work for completeness and
accuracy. We do not have anyone with financial expertise on our Board so we have been
unable to form an audit committee to perform oversight of this function.
In order to correct the foregoing weaknesses, we have taken the
following remediation measures:
We continue to search for independent directors; however, given our
current financial condition, we expect we will not be successful until we can become
profitable and/or adequately funded.
Changes in Internal Controls.
There was no change in our internal controls or in other factors that
could affect these controls during our last fiscal quarter or subsequent to our last
evaluation that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
36
PART III
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
A. I.
Directors and Executive Officers - Summary Information.
The following are the directors and executive officers of the Company:
|
Age as of
|
|
|
Name
|
12/31/07
|
Position
|
Position Held Since
|
|
|
|
|
Dr. John W. Whitney
|
61
|
President/Treasurer
|
May 1988
|
|
|
Director
|
|
Howland S. Green
|
54
|
Northeast Manager
|
April 2005
|
|
|
of GOLDn GRO sales
|
|
|
|
Director
|
|
Gregory S. Skinner
|
53
|
Secretary
|
December 1990
|
Duane H. Rasmussen
|
77
|
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, Itronics Metallurgical, Inc. and Whitney & Whitney, 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
37
Oil & Refining Company and GeoTerrex Ltd. (1971-1972).
Dr. Whitney is an internationally recognized consultant in the field of
Metal and Material Resource Economics. Dr. Whitney has presented seminars for various
clients on Mining Economics, and has taught a three-credit graduate course on
International Metal Economics for the University of Arizona's College of Mines. Dr.
Whitney is an Honorary Faculty Member of the Academy for Metals and Materials under the
seal of the American Society for Metals. Dr. Whitney has made numerous presentations and
written a number of publications on various technical subjects within his broad area of
expertise. Dr. Whitney is coinventor of the American Hydromet process technology and holds
four patents. Dr Whitney was selected as Nevadas Inventor of the Year for 2000 and
became a member of the Inventors Hall of Fame at the University of Nevada, Reno.
Howland S. Green
Mr. Green was appointed as our director and as the Northeast
Manager of GOLDn GRO Sales in April 2005. He received a B.Sc. degree in plant
science and landscape architecture from the University of Rhode Island in 1981. He founded
the Holly Ridge Nursery in Kingston, Rhode Island in 1989 and was its owner and President
until the business was sold in September 2005. He is the concept creator and a founder of
the North American Deer Management Network. Mr. Green researched and developed the
Mirrepel and subsequently co-developed the GOLDn GRO Guardian systemic deer and
rabbit repellents. Through his ownership of the Holly Ridge Nursery he has gained
extensive knowledge of the landscape construction and maintenance and wholesale and retail
nursery markets. He has also served as consultant to "Ask This Old House".
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 retired from the
practice of law on January 1, 2003 and is "of counsel" to the law office of
Watson & Rounds, a Professional Corporation (WR). Prior to December 31, 2002 he was a
shareholder in Skinner, Watson & Rounds, which had offices located in Reno, Las Vegas,
and Incline Village, Nevada. Prior to becoming Secretary of Itronics Inc., Mr. Skinner has
provided legal services and advice to Whitney & Whitney, Inc. since 1980.
Duane H. Rasmussen:
Mr. Rasmussen has served as Vice President and General Manager of
IMI since May 1994. 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
38
Engineering Group, Inc. in varying capacities, including Project
Manager, Regional Sales Manager, Regional Vice President, and Group Vice President.
B.
AUDIT COMMITTEE
At present the Company does not have an audit committee and
consequently the entire Board serves as the audit committee. The Board presently consists
of two members, none of whom are independent. The Company has interviewed several
qualified individuals for the position of Audit Committee Financial Expert on the Board of
Directors. All have declined to serve, with the primary reason being personal liability
issues, especially the perceived view that being the "financial expert"
increases the individuals personal exposure over that of being a regular Board
member.
C.
CODE OF ETHICS
The Board of Directors has adopted a Code of Business Conduct and
Ethics (Code) that is applicable to the Companys directors, principal executive and
financial officer, principal accounting officer or controller, and persons performing
similar functions. A copy of the Code is included in this report as Exhibit 14. A copy of
the Code may be obtained by anyone, without charge, by requesting a copy either by
telephoning (775) 689-7696 and asking for investor relations or by e-mailing the Company
at www.itronics.com. If requesting by e-mail, please indicate a preference of a reply by
e-mail or by physical mail.
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, 2007 exceeded $100,000:
Summary
Compensation Table:
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
Name and
|
|
|
Deferred
|
|
|
Principal
|
Calendar
|
|
Compensation
|
All Other
|
|
Position
|
Year
|
Salary
|
Earnings
|
Compensation
|
Total
|
Dr. John W.
Whitney:
|
|
|
|
|
|
President,
Treasurer
|
2007
|
$131,000
|
$33,006
|
$ 3,138
|
$167,144
|
and Director
(1) (2)
|
2006
|
$126,788
|
$28,310
|
$ 3,138
|
$158,236
|
|
|
|
|
|
|
Duane H.
Rasmussen
|
|
|
|
|
|
Vice President,
VP
|
|
|
|
|
|
and General
Manager
|
|
|
|
|
|
IMI (3)
|
2007
|
$132,000
|
$25,420
|
-
|
$157,420
|
|
2006
|
$132,000
|
$21,731
|
-
|
$153,731
|
(1) The 2007 and 2006
salary amounts include $98,566 and $74,600, respectively, that were not paid currently.
39
Dr Whitney has $709,566 in unpaid salary as of December 31, 2007, of
which $506,000 is committed to be converted into 15,250,000 common shares. The shares will
be issued when sufficient cash is available to pay required payroll tax withholdings. This
unpaid salary has accumulated since July 2001 and interest at 12% per annum accrues on the
unpaid balance. The interest rate is based on the rate accruing to investors on
convertible debt private placements in effect in 2001. Interest earned was $79,372 and
$68,080 for 2007 and 2006, respectively. Of the 2007 amount, $67,104 remained unpaid at
December 31, 2007. The Nonqualified Deferred Compensation Earnings amounts in the above
table represent accrued interest in excess of a defined interest rate using 120% of the
July 2001 federal long term applicable rate.
(2) The salary amounts listed above include $6,000 and $1,788 for 2007
and 2006, respectively, that represent compensation paid in common stock for service as a
director of the Company.
(3) The 2007 and 2006 salary amounts include $72,500 and $72,500,
respectively, that were not paid currently.
Mr. Rasmussen has $559,500 in unpaid salary as of December 31, 2007, of
which $154,000 is committed to be converted into 1,925,000 common shares. The shares will
be issued when sufficient cash is available to pay required payroll tax withholdings. This
unpaid salary has accumulated since July 2001 and interest at 12% per annum accrues on the
unpaid balance. The interest rate is based on the rate accruing to investors on
convertible debt private placements in effect in 2001. Interest earned was $61,130 and
$52,260 for 2007 and 2006, respectively. Of the 2006 and 2007 amounts, $63,845 remained
unpaid at December 31, 2007. An additional total of $37,430 in interest earned from July
2004 to June 2005 remains unpaid and will be paid by issuing 500,703 restricted common
shares. The Nonqualified Deferred Compensation Earnings amounts in the above table
represent accrued interest in excess of a defined interest rate using 120% of the July
2001 federal long term applicable rate.
Outstanding Equity Awards at Fiscal Year-End
:
|
Number of
Securities
Underlying Unexercised
|
|
|
|
Options
at
|
Option
|
Option
|
|
12/31/07
|
Exercise
|
Expiration
|
Name
|
Exercisable
|
Price
|
Date
|
Dr. John W. Whitney
|
1,000,000
|
$0.25
|
One year after employment
ends
|
|
3,000,000
|
$0.30
|
One year
after employment ends
|
|
550,000
|
$0.15
|
One year
after employment ends
|
Total
|
4,550,000
|
|
|
|
|
|
|
Duane H. Rasmussen
|
425,000
|
$0.15
|
One year
after employment ends
|
Director Compensation:
|
|
|
|
Stock
|
|
Name
|
Awards
|
Total
|
Dr. John W. Whitney
|
$ 6,000
|
$ 6,000
|
Howland S. Green
|
$ 6,000
|
$ 6,000
|
|
|
|
40
The compensation plan for all directors was $1,500 per quarter in
common stock beginning with the fourth quarter of 2006.
ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
a)
Equity Compensation Plan Information
|
Number
of securities to be issued upon exercise of outstanding options, warrants and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number of
securities remaining available for future issuance under equity compensation plans
(excluding securities reflected in column (a)
|
Plan
Category
|
(a)
|
(b)
|
(c)
|
Equity compensation plans
approved by security holders
|
-0-
|
$-0-
|
-0-
|
Equity compensation plans
not approved by security holders
|
6,264,000
|
$0.240
|
2,393,583
|
|
|
|
|
Total
|
6,264,000
|
$0.240
|
2,393,583
|
b)
Security Ownership of Certain Beneficial Owners.
The following table sets forth certain data with respect to those
persons known to the Company, as of March 31, 2008, 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
|
Total
|
Class
|
John W. Whitney
|
|
|
|
|
P.O. Box 10725
|
|
|
|
|
Reno, NV 89510
|
|
|
|
|
(1)(2)(3)(4)
|
33,081,313
|
20,300,000
|
53,381,313
|
5.2
|
(1) Director
(2) Officer
(3) Includes 72,768 shares owned by Maureen E. Whitney, Dr. Whitney's
wife.
(4) Dr. Whitneys options include compensatory options of
1,000,000 common shares at $0.25 per share, 3,000,000 common shares at $0.30 per share,
and 550,000 common shares at $0.15 per share. The options are exercisable at any time
until one year after Dr. Whitney leaves the employment of the Company. The Common Shares
Which May
41
Be Acquired Within 60 Days also includes 15,250,000 shares that are to
be issued to Dr. Whitney when sufficient cash is available to pay payroll tax withholdings
and 500,000 common shares to be issued in connection with his service on the Board of
Directors.
c)
Security Ownership of Management.
The following table sets forth as of March 31, 2008, certain
information, with respect to director and executive officer ownership of common stock in
the Company:
|
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 (3)(4)(5)
|
33,081,313
|
20,300,000
|
53,381,313
|
5.2
|
|
|
|
|
|
Howland S. Green
|
|
|
|
|
895 Liberty Lane
|
|
|
|
|
West Kingston, RI 02892
|
1,899,483
|
1,500,000
|
3,399,483
|
0.3
|
|
|
|
|
|
Duane H. Rasmussen
|
|
|
|
|
P.O. Box 10725
|
|
|
|
|
Reno, NV 89510 (4)
|
2,202,973
|
2,850,703
|
5,053,676
|
.5
|
|
|
|
|
|
All directors and
|
|
|
|
|
executive officers as
|
|
|
|
|
a group (4 persons)
|
37,836,088
|
24,650,703
|
62,486,791
|
6.1
|
(1) Dr. Whitneys options
include compensatory options of 1,000,000 common shares at $0.25 per share, 3,000,000
common shares at $0.30 per share, and 550,000 common shares at $0.15 per share. The
options are exercisable at any time until one year after Dr. Whitney leaves the employment
of the Company. The Common Shares Which May Be Acquired Within 60 Days also includes
15,250,000 shares that are to be issued to Dr. Whitney when sufficient cash is available
to pay payroll tax withholdings and 500,000 common shares to be issued in connection with
his service on the Board of Directors.
In April 2005 Mr. Green was granted a compensatory option to acquire
1,000,000 of the Companys restricted common shares at $0.10 per share. The first
500,000 shares subject to the option became exercisable when the Federal EPA accepted the
registration application for the GOLDn GRO Guardian and the second 500,000 shares
subject to the option became exercisable when the Federal EPA issued the registration for
the GOLDn GRO Guardian. The entire option is exercisable for two years after the EPA
registration was received in March 2008. The Common Shares Which May Be Acquired Within 60
Days includes 500,000 common shares to be issued in connection with his service on the
Board of Directors.
Mr. Rasmussen was granted a compensatory option to acquire 425,000
restricted common shares at $0.15 per share. This option is exercisable at any time until
one year after Mr. Rasmussen leaves the employment of the Company. The Common Shares Which
May Be Acquired Within 60 Days also includes 2,425,703 shares that are to be issued to Mr.
Rasmussen when sufficient cash is available to pay payroll tax withholdings.
42
(2) The percent of class is based on the sum of 999,996,999 shares
outstanding as of March 31, 2008 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 March 31, 2008
.
(3) Director
(4) Officer
(5) Includes 72,768 shares owned by Maureen E. 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.
ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE.
Advances from an
officer/stockholder totaled $143,025 and $161,525 at December 31, 2007 and 2006,
respectively.
$779,073 and $796,200 of the accrued management salaries as of December
31, 2007 and 2006, respectively, is for salary in arrears due to several
officer/stockholders and employee/stockholders. In addition, salary in arrears of $746,800
and $514,800 for 2007 and 2006, respectively, are included in stock to be issued at the
respective year ends. These amounts represent the portion of salaries earned but unpaid
that the officers/employees/stockholders have agreed to accept in the Companys
common stock and have relinquished their right to receive cash. When the stock is
eventually issued, it will be issued at the market price on the date of the respective
agreements. The number of shares to be issued is 18,173,958 and 6,348,958 for 2007 and
2006, respectively. Issuance of the stock is pending sufficient cash available to pay the
related federal withholding taxes. Interest expense at 12% per annum on salaries due
officer and employee/stockholders amounted to $168,146 and $143,478, respectively, in 2007
and 2006.
Interest expense on related party loans amounted to $18,851 and $19,383
for the years ended December 31, 2007 and 2006, respectively. Accrued interest on related
party loans and accrued salaries totaled $157,181 and $87,211 at December 31, 2007 and
2006, respectively.
During 2003, WWIs lease of a vehicle utilized by Dr. Whitney was
completed. Dr. Whitney purchased the vehicle by financing it through a commercial lender.
The purchase price was $21,741 and the monthly payment for four years is $531. WWI is
leasing the vehicle from Dr. Whitney by making the monthly payments to the commercial
lender and acquired ownership of the vehicle when the loan was paid off in 2007.
43
Director Independence
The Company had two directors who served on the Board during 2007.
Dr. John W. Whitney is the President and Treasurer, and as such he is not independent.
Howland S. Green serves as the Northeast Manager of GOLDn GRO sales, and as such he
is not independent.
ITEM 13.
FINANCIAL STATEMENTS AND EXHIBITS
I.
Index of Financial Statements and Exhibits
1.
Index of Financial
Statements:
|
Page
No.
|
|
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
|
45
|
Consolidated Balance Sheets
as of December 31, 2007 and 2006
|
47
|
Consolidated Statements of
Operations for the Years ended
|
|
December 31, 2007 and 2006
|
49
|
Consolidated Statements of
Stockholders' Equity (Deficit)
|
|
for the Years ended
December 31, 2007 and 2006
|
50
|
Consolidated Statements of
Cash Flows for the Years ended
|
|
December 31, 2007 and 2006
|
51
|
Notes to Consolidated
Financial Statements
|
53
|
|
|
2.
Index of Exhibits:
|
|
14 Code of Business Conduct
and Ethics
|
84
|
21 List of significant
subsidiaries
|
85
|
31 Rule 15d-14(a)
Certification
|
86
|
32 Section 1350
Certification
|
90
|
STATEMENTS AND SCHEDULES
Schedules not included are omitted for the reason that they are not applicable or not
required.
44
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Itronics, Inc
We have audited the accompanying consolidated balance sheet of Itronics
Inc. and subsidiaries (the "Company") as of December 31, 2007, and the related
consolidated statements of operations, stockholders equity (deficit) and cash flows
for the year then ended. These consolidated financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The consolidated financial
statements of the Company as of December 31, 2006, were audited by other auditors whose
report dated April 11, 2007, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards of the
Public Company Accounting Oversight Board (United States). 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. The Company has determined that it
is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Accordingly, we express no such opinion. 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 audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company as of
December 31, 2007, and the results of its operations and cash flows for the year then
ended in conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As of December 31, 2007, the Company has an
accumulated deficit of $42,143,980, a negative working capital of $18,842,148, and a
stockholders deficit balance of $15,663,973, and is in default on various leases and
loans. The Companys ability to continue as a going concern is contingent upon the
Companys ability to generate sufficient cash either through operations or through
capital injections from debt or equity offerings, to meet obligations as they become due.
These conditions raise substantial doubt about the Companys ability to continue as a
going concern. Managements plans regarding this matter are described in Note 14. The
financial statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Moore Stephens Wurth Frazer and Torbet, LLP
Walnut, California
April 14, 2008
45
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Itronics, Inc.
We have audited the accompanying consolidated balance sheets of
Itronics Inc. and subsidiaries (the "Company") as of December 31, 2006, and the
related consolidated statements of operations, stockholders' deficit and cash flows for
the year the ended. These 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 audit in accordance with standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company has determined that it is not
required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes, on a test basis, examination of evidence supporting
the amounts and disclosures in the financial statements, 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 above
present fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2006, and the results of its consolidated operations and cash
flows for the year then ended., in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As of December 31, 2006, the
Company has an accumulated deficit of $31,661,456, a negative working capital of
$10,139,616, and a stockholders deficit balance of $7,429,505, and is in default on
various leases and loans. The Companys ability to continue as a going concern is
contingent upon (a) future profitable operations and (b) the ability to generate
sufficient cash to meet obligations as they become due. These conditions raise substantial
doubt about the Companys ability to continue as a going concern. Management's plans
regarding this matter are described in Note 14. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/CACCIAMATTA ACCOUNTANCY CORPORATION
Irvine, California
April 11, 2007
46
ITRONICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
ASSETS
|
2007
|
2006
|
CURRENT ASSETS
|
|
|
Cash
|
$ 92,987
|
$ -
|
Accounts receivable, less
allowance for
|
|
|
doubtful accounts, 2007,
$4,600; 2006, $4,600
|
17,561
|
36,493
|
Inventories
|
889,996
|
548,399
|
Prepaid expenses
|
94,952
|
316,872
|
Total Current Assets
|
1,095,496
|
901,764
|
|
|
|
PROPERTY AND EQUIPMENT
|
|
|
Land
|
215,000
|
215,000
|
Building and improvements
|
1,312,409
|
1,167,315
|
Design and construction in
progress,
|
|
|
manufacturing facility
|
97,110
|
234,347
|
Equipment and furniture
|
2,879,938
|
2,543,682
|
Vehicles
|
222,298
|
200,557
|
Equipment under capital
lease-equipment and furniture
|
466,571
|
692,438
|
Equipment under capital
lease-vehicles
|
-
|
21,741
|
|
5,193,326
|
5,075,080
|
Less: Accumulated
depreciation and amortization
|
2,341,004
|
2,131,542
|
Total Property and
Equipment
|
2,852,322
|
2,943,538
|
|
|
|
OTHER ASSETS
|
|
|
Intangibles
|
76,500
|
76,500
|
Deferred loan fees, less
accumulated amortization 2007,
|
|
|
$580,849; 2006, $328,120
|
323,042
|
335,629
|
Deposits
|
8,508
|
8,108
|
Total Other Assets
|
408,050
|
420,237
|
|
$4,355,868
|
$4,265,539
|
The accompanying notes are an integral part of these financial
statements.
47
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
2007
|
2006
|
CURRENT LIABILITIES
|
|
|
Bank overdraft
|
$ -
|
$ 13,834
|
Accounts payable
|
672,163
|
521,188
|
Accrued management salaries
|
779,873
|
799,948
|
Accrued expenses
|
272,267
|
206,830
|
Insurance contracts payable
|
13,761
|
12,597
|
Interest payable to
officer/stockholders
|
157,181
|
87,211
|
Interest payable, long-term
debt and lease obligations
|
225,533
|
202,366
|
Current maturities of
long-term debt
|
436,523
|
45,065
|
Current maturities of
capital lease obligations
|
463,996
|
389,032
|
Advances from stockholder
|
143,025
|
161,525
|
Current maturities of
capital lease due stockholder
|
-
|
3,333
|
Current maturities of
convertible notes and accrued interest
|
3,497,838
|
3,304,027
|
Convertible debt
derivatives
|
13,003,762
|
4,876,175
|
Warrant and option
liability
|
231,224
|
380,083
|
Other
|
40,498
|
38,166
|
Total Current Liabilities
|
19,937,644
|
11,041,380
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
Long-term debt, less
current maturities
|
82,197
|
504,131
|
Capital lease obligations,
less current maturities
|
-
|
149,533
|
Total Long-Term Liabilities
|
82,197
|
653,664
|
Commitments and
Contingencies
|
-
|
-
|
Total Liabilities
|
20,019,841
|
11,695,044
|
|
|
|
STOCKHOLDERS' EQUITY
(DEFICIT)
|
|
|
Preferred stock, par value
$0.001 per share;
|
|
|
authorized 999,500 shares;
issued and outstanding
|
|
|
2006, 0 shares; 2005, 0
shares
|
|
-
|
Common stock, par value
$0.001 per share;
|
|
|
authorized 1,000,000,000
shares; issued and
|
|
|
outstanding 2007,
999,996,999; 2006, 337,581,957
|
999,997
|
337,582
|
Additional paid-in capital
|
24,692,645
|
23,305,788
|
Accumulated deficit
|
(42,143,980)
|
(31,661,456)
|
Common stock to be issued
|
787,365
|
583,868
|
Accumulated other
comprehensive income
|
-
|
-
|
Common stock options
outstanding, net
|
-
|
4,713
|
Total Stockholders
Equity (Deficit)
|
(15,663,973)
|
(7,429,505)
|
|
$4,355,868
|
$ 4,265,539
|
The accompanying notes are an integral part of these financial
statements.
48
ITRONICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
2007
|
2006
|
REVENUES
|
|
|
Photochemical fertilizer
|
$2,315,141
|
$1,843,580
|
Mining technical services
|
27,155
|
28,338
|
Total Revenues
|
2,342,296
|
1,871,918
|
|
|
|
COST OF REVENUES (exclusive
of depreciation and
|
|
|
amortization shown
separately below)
|
|
|
Photochemical fertilizer
|
2,184,143
|
1,760,118
|
Mining technical services
|
33,993
|
36,607
|
Total Cost of Revenues
|
2,218,136
|
1,796,725
|
|
|
|
Gross Profit (Loss)
(exclusive of
|
|
|
depreciation and
amortization shown
|
|
|
separately below)
|
124,160
|
75,193
|
|
|
|
OPERATING EXPENSES
|
|
|
Depreciation and
amortization
|
209,462
|
228,017
|
Research and development
|
395,369
|
293,934
|
Sales and marketing
|
1,257,506
|
725,165
|
Delivery and warehousing
|
132,440
|
108,116
|
General and administrative
|
1,072,811
|
944,467
|
Total Operating Expenses
|
3,067,588
|
2,299,699
|
Operating Loss
|
(2,943,428)
|
(2,224,506)
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
Interest
|
(1,089,554)
|
(1,176,607)
|
Loss on derivative
instruments
|
(6,798,204)
|
(541,474)
|
Gain (loss) on sale of
investments
|
348,026
|
97,728
|
Other
|
636
|
34,974
|
Total Other Income
(Expense)
|
(7,539,096)
|
(1,585,379)
|
(Loss) before provision for
income tax
|
(10,482,524)
|
(3,809,885)
|
Provision for income tax
|
-
|
-
|
|
|
|
Net Loss
|
(10,482,524)
|
(3,809,885)
|
Other comprehensive income
|
|
|
Unrealized gains (losses)
on securities
|
-
|
39,889
|
Comprehensive Loss
|
$(10,482,524)
|
$(3,769,996)
|
|
|
|
Weighted average number of
shares outstanding,
|
|
|
basic and diluted
|
496,301,587
|
235,294,220
|
Loss per share, basic and
diluted
|
$(0.021)
|
$(0.016)
|
The accompanying notes
are an integral part of these financial statements
49
ITRONICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
COMMON STOCK
|
|
|
|
ACCUMULATED
|
COMMON
|
|
NUMBER
OF
|
|
ADDITIONAL
|
|
COMMON
|
OTHER
|
STOCK
|
|
|
SHARES
|
|
PAID-IN
|
ACCUMULATED
|
STOCK TO
|
COMPREHENSIVE
|
OPTIONS,
|
|
|
(1,000s)
|
AMOUNT
|
CAPITAL
|
DEFICIT
|
BE
ISSUED
|
INCOME
|
NET
|
TOTAL
|
Balance, Dec. 31, 2005
|
197,148
|
$197,148
|
$21,646,307
|
$(27,851,571)
|
$573,993
|
$(39,889)
|
$ 413
|
$(5,473,599)
|
Issue of common stock:
|
|
|
|
|
|
|
|
|
For cash
|
100
|
100
|
7,400
|
-
|
|
-
|
-
|
7,500
|
For services
|
24,350
|
24,350
|
412,703
|
-
|
(3,725)
|
-
|
-
|
433,328
|
For debt conversion
|
108,723
|
108,723
|
1,114,839
|
-
|
13,600
|
-
|
-
|
1,237,162
|
For asset acquisition
|
7,261
|
7,261
|
124,539
|
-
|
-
|
-
|
-
|
131,800
|
Net (loss) for the year
|
|
|
|
|
|
|
|
|
ended Dec. 31, 2006
|
-
|
-
|
-
|
(3,809,885)
|
-
|
-
|
-
|
(3,809,885)
|
Other comprehensive
|
|
|
|
|
|
|
|
|
income for the year
|
|
|
|
|
|
|
|
|
ended Dec. 31, 2006
|
-
|
-
|
-
|
-
|
-
|
39,889
|
-
|
39,889
|
Common stock options
|
|
|
|
|
|
|
|
|
outstanding
|
-
|
-
|
-
|
-
|
-
|
-
|
4,300
|
4,300
|
|
|
|
|
|
|
|
|
|
Balance, Dec. 31, 2006
|
337,582
|
337,582
|
23,305,788
|
(31,661,456)
|
583,868
|
-
|
4,713
|
(7,429,505)
|
Issue of common stock
|
|
|
|
|
|
|
|
|
For cash
|
|
|
|
|
|
|
|
|
For services
|
99,274
|
99,274
|
588,713
|
-
|
217,097
|
-
|
-
|
905,084
|
For debt conversion
|
555,410
|
555,410
|
698,057
|
-
|
(13,600)
|
-
|
-
|
1,239,867
|
For asset acquisition
|
7,731
|
7,731
|
100,087
|
-
|
-
|
-
|
-
|
107,818
|
Net (loss) for the year
|
|
|
|
|
|
|
|
|
ended Dec. 31, 2007
|
-
|
-
|
-
|
(10,482,524)
|
-
|
-
|
-
|
(10,482,524)
|
Other comprehensive
|
|
|
|
|
|
|
|
|
income for the year
|
|
|
|
|
|
|
|
|
ended Dec. 31, 2007
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Common stock options
|
|
|
|
|
|
|
|
|
outstanding
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,713)
|
(4,713)
|
Balance, Dec. 31, 2007
|
999,997
|
$999,997
|
$24,692,645
|
$(42,143,980)
|
$787,365
|
$-
|
$-
|
$(15,663,973)
|
The accompanying notes are an integral
part of these financial statements
50
ITRONICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
2007
|
2006
|
Cash flows from operating
activities
|
|
|
Net loss
|
$(10,482,524)
|
$(3,809,885)
|
Adjustments to reconcile
net loss to
cash used by operating activities:
|
|
|
Depreciation
and amortization
|
462,191
|
498,947
|
Interest on
convertible notes
|
528,365
|
581,889
|
Loss on change
in derivative instruments
|
6,798,204
|
541,474
|
Inventory
reserve
|
-
|
104,161
|
(Gain) loss on
sale of marketable securities
|
(348,026)
|
(97,728)
|
Addition of
silver in solution inventory by
|
|
|
offsetting
photochemical processing fees
|
(320,232)
|
(198,841)
|
Gain on debt
forgiveness
|
-
|
(34,833)
|
Other
|
-
|
52
|
Stock and
option compensation
|
13,584
|
4,300
|
Expenses paid
with issuance of common stock:
|
|
|
Interest expense
|
-
|
7,483
|
Consulting expenses
|
552,887
|
27,840
|
Director fees
|
16,388
|
3,976
|
Salaries
|
290,142
|
145,992
|
Expenses paid
with issuance of debt
|
|
|
(Increase) decrease in:
|
|
|
Trade accounts receivable
|
18,932
|
(15,381)
|
Inventories
|
40,591
|
138,379
|
Prepaid expenses, deposits and other
|
(327)
|
8,112
|
Increase
(decrease) in:
|
|
|
Accounts payable
|
150,973
|
147,740
|
Accrued management salaries
|
225,925
|
200,048
|
Accrued expenses and contracts payable
|
162,070
|
48,084
|
Net cash used by operating
activities
|
(1,890,857)
|
(1,698,191)
|
|
|
|
Cash flows from investing
activities:
|
|
|
Acquisition of
property and equipment
|
(61,428)
|
(29,835)
|
Sale of
investments
|
348,026
|
229,374
|
Acquisition of
intangibles
|
(400)
|
-
|
Net cash provided (used) by
investing activities
|
286,198
|
199,539
|
|
|
|
Cash flows from financing
activities:
|
|
|
Proceeds from
sale of stock
|
-
|
7,500
|
Proceeds from
officer/stockholder advances
|
8,000
|
10,212
|
Proceeds from
debt
|
1,960,000
|
1,941,167
|
Debt issuance
costs
|
(140,142)
|
(247,602)
|
Bank overdraft
|
(13,834)
|
13,834
|
Payments on
debt
|
(116,378)
|
(250,719)
|
Net cash provided by
financing activities
|
1,697,646
|
1,474,392
|
|
|
|
Net increase (decrease) in
cash
|
92,987
|
(24,260)
|
Cash, beginning of year
|
-
|
24,260
|
Cash, end of year
|
$ 92,987
|
$ -
|
The accompanying notes are an integral
part of these financial statements.
51
ITRONICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(continued)
|
2007
|
2006
|
Supplemental Disclosures of
Cash Flow
|
|
|
Information:
|
|
|
Cash paid during the period
for interest
|
$ 205,917
|
$ 232,706
|
|
|
|
Schedule of non-cash
financing transactions:
|
|
|
Settlement of debt/accruals
by
|
|
|
issuance of common stock:
|
|
|
Convertible notes and
accrued interest
|
1,221,367
|
1,237,162
|
Short-term debt due an
officer/stockholder
|
18,500
|
-
|
Accrued management salaries
|
246,000
|
-
|
Marketable securities
received for sale of investment
|
138,353
|
-
|
Acquisition of assets by
issuance of common stock:
|
|
|
Equipment
|
56,818
|
131,800
|
Inventory
|
61,956
|
-
|
Warrants issued for debt
issuance costs
|
-
|
17,595
|
Amounts withheld from
proceeds of debt, unrelated:
|
|
|
Prepaid interest
|
-
|
-
|
Deferred loan costs
|
100,000
|
30,000
|
Accounts payable
|
-
|
28,833
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
52
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
NOTE 1 - Summary of Significant Accounting Policies:
Company's Activities:
Itronics Inc., through its subsidiaries, (the Company) is involved in
photochemical recycling and related silver recovery, liquid fertilizer manufacturing, and
mining technical services.
Financial Statement Estimates and Assumptions:
The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. 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. For example, the Company estimates the fair value of its derivative
instruments using the Black-Scholes option pricing model. As the Companys stock
price is highly volatile, and the underlying debt amounts are relatively large, the
valuation of the derivatives is subject to material swings from period to period. The
Company measures the silver received in photochemical liquids and estimates the amount,
recoverability, and ultimate realizable value of the silver in ending inventory.
Principles of Consolidation:
The consolidated financial statements include the accounts of
Itronics Inc. and its subsidiaries:
|
2007
|
2006
|
|
PERCENTAGE
|
PERCENTAGE
|
Whitney & Whitney, Inc.
|
100.00
|
100.00
|
Itronics Metallurgical,
Inc.
|
100.00
|
100.00
|
Itronics California, Inc.
|
100.00
|
100.00
|
Nevada Hydrometallurgical
Project (A Partnership)
|
92.50
|
92.50
|
American Hydromet (A Joint
Venture)
|
82.53
|
82.53
|
American Gold & Silver
(A Limited Partnership)
|
47.77
|
47.77
|
Itronics Goldn
Minerals, Inc.
|
100.00
|
N/A
|
Whitney & Whitney, Inc. is the
general partner for American Gold & Silver. As such, the Company has control over
American Gold & Silver and has included it in its consolidation.
American Gold & Silver and Nevada Hydrometallurgical Project
possess no material tangible assets or liabilities.
No amount for minority interests is reflected in the consolidated
balance sheets as the equity of minority interests in the net losses exceed the carrying
value of the minority interests.
53
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
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 recognition:
The Company manufactures fertilizer from used photochemical liquids.
Revenues are generated in three distinct areas: (1) fees associated with removing used
photochemical liquids from customer sites and sales of photochemical concentrators, (2)
sales of fertilizer and (3) sales of silver. Fertilizer and retail silver sales are
recognized when goods are shipped to our customers. We pay 1% of invoice amount to our
primary fertilizer distributor in order to receive accelerated payment terms. The fee is
netted against fertilizer sales. Sales of silver bullion and silver in film are recorded
when the silver content and the sales price are determined, which is approximately two
weeks after shipment for silver bullion and 30 to 45 days after shipment for film. Returns
and allowances have been nominal. Service fees from photochemical recycling are recorded
after the photochemical liquids have been picked up and transported from our customers to
our manufacturing facility.
The Company provides consulting services to various entities in the
mining industry. Revenue is recognized as services are delivered. 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 revenues for the years ended December 31,
2007 and 2006 were $1,541 and $2,547, respectively. In addition, the Company periodically
receives property or other payments on behalf of its clients and disburses the funds to a
designated third party. When the Company has little or no risk of loss in the process,
such payments are netted and not included in gross revenues or cost of revenues. Such
payments amounted to $-0- for the years ended December 31, 2007 and 2006, respectively.
The Company bills its customers for its approximate costs for
delivering merchandise sold to the customer. Such amounts are included in revenues. The
related shipping costs are included in Delivery and Warehousing expenses in the Operating
Expense section of the Consolidated Statements of Operations. Such costs were $132,440 and
$108,116 for the years ended December 31, 2007 and 2006, respectively.
Cash and Cash Equivalents:
At present, cash includes only deposits in checking and money market
accounts and does not include any cash equivalents.
54
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
Accounts Receivable Allowance Account:
The Company uses the allowance method to account for uncollectible
accounts receivable.
Marketable Securities:
The Company periodically has investments in marketable securities,
received as payment from technical services customers. All of these equity securities are
available for sale and are recorded at fair value. The change in fair value is recorded as
an unrealized gain or loss in other comprehensive income. Upon sale of the security, the
company recognizes a realized gain or loss, based on specific identification of security
sold. Unrealized losses are charged against net earnings when a decline in fair value is
determined to be other than temporary. The Company held no marketable securities as of
December 31, 2007 and 2006.
Inventories:
Inventory is carried on the balance sheet at the lower of cost or
market value using the average cost valuation method and consists primarily of silver
bearing materials, raw materials and fertilizer. Because a large part of our inventory is
silver and the market price of silver changes daily on the commodities market, we
regularly monitor the carrying value of our silver inventory to ensure it is carried at
the lower of cost or its current market value. If silver on the open market were less than
our carrying value, we would write down the carrying value of our inventory by reducing
recorded inventory and increasing cost of sales. If the amount of the write down were
material, we would separately include the item in our statement of operations. The raw
material and work in progress balances below include $640,484 and $405,631 in silver
bearing unprocessed photochemicals or partially processed materials as of December 31,
2007 and 2006, respectively. The Company also evaluates the recoverability of silver
contained in the various raw materials and refining byproducts and estimates how long it
will take to recover the estimated silver ounces contained in the materials. In 2006, the
Company recorded a recoverability reserve of $70,199 and a slow moving reserve of $33,962.
The $104,161 reserve expense is included in Cost of Revenues in the Consolidated Statement
of Operations for the year ended December 31, 2006. The Companys review of the
silver content and recoverability of our silver inventory determined that these reserves
are adequate as of December 31, 2007.
Following is a summary of finished goods, work in progress, and raw
materials inventories as of December 31, 2007 and 2006:
55
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
|
2007
|
2006
|
Finished goods
|
$46,211
|
$ 19,275
|
Work in progress
|
522,273
|
340,594
|
Raw materials
|
425,673
|
292,691
|
|
994,157
|
652,560
|
Less: Silver recoverability
|
|
|
and slow moving reserves
|
104,161
|
104,161
|
Net Inventory
|
$889,996
|
$548,399
|
Accounts Receivable and Inventory Factoring:
The Company factors some of its receivables and inventory with
unrelated third parties. A liability is recorded when cash is received; interest is
recorded over the period the liability is outstanding. The liability and accrued interest
is repaid within a day or two of when the Company is paid by the customer. Interest rates
range from 2 to 3% per month, or 24 to 36% annually. Additionally, while the Company does
not have any formal limits on the amounts it can factor, typically no more than $120,000
in assets is factored at any given time. As of December 31, 2007 and 2006 all factoring
arrangements were paid in full.
Property and Equipment:
Property and equipment are stated at cost. Costs associated with
creating website content and graphics are capitalized under EITF 00-2, "
Accounting
for Web Site Development Costs
." Depreciation is computed by accelerated and
straight-line methods. Depreciation expense was $177,785 and $182,001 for the years ended
December 31, 2007 and 2006, respectively. Capital lease equipment is amortized using
accelerated and straight-line methods. Amortization expense on capital lease equipment was
$31,677 and $46,016 for the years ended December 31, 2007 and 2006, respectively.
Accumulated amortization on capital lease equipment is $308,449 and $439,103 at December
31, 2007 and 2006, respectively. Property and equipment is depreciated or amortized over
the following periods. Capitalized interest on major capital projects was $-0- and $28,656
in 2007 and 2006, respectively.
Building and improvements
|
20 - 40
years
|
Equipment and furniture
|
3 - 20
years
|
|
Vehicles
|
5 years
|
|
Equipment under capital
lease-equipment and furniture
|
5 - 20
years
|
|
Equipment under capital
lease-vehicles
|
5 years
|
|
Repairs and
maintenance, including website maintenance and administration, are charged to operations
as incurred.
Intangible Assets:
Intangible assets are amortized as follows:
56
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
|
METHOD
|
YEARS
|
Deferred loan fees
|
Effective
Interest
|
3-15
|
Estimated aggregate amortization
expense for the succeeding five years is:
2008
|
$170,729
|
2009
|
93,022
|
2010
|
41,666
|
2011
|
3,255
|
2012
|
3,255
|
Convertible Debt Derivatives:
The Company has obtained
callable secured convertible debt financing (Notes) in 2006 and 2005. The Notes are
potentially convertible into an unlimited number of common shares. Accordingly, the
Company has accounted for the Notes in accordance with SFAS 133,
Accounting for
Derivative Instruments,
EITF 00-19,
Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Companys Own Stock
, and DIGs B38
and B39,
Embedded Derivatives: Evaluation of Net Settlement with Respect to the
Settlement of a Debt Instrument through Exercise of an Embedded Put Option or Call Option
and
Embedded Derivatives: Application of Paragraph 13(b) to Call Options That Are
Exercisable Only by the Debtor, respectively,
which require the beneficial conversion
features and the prepayment penalties to be treated as embedded derivatives and recorded
as a liability based on their relative estimated fair values. In addition, all warrants
and options that are exercisable during the period that the Notes are outstanding are
required to be recorded as liabilities at their fair value. The fair value of the
conversion feature and the prepayment penalty (when applicable) are estimated using the
Black-Scholes option pricing model and taking a weighted average value based on various
probabilities that the debt would be paid off prior to maturity at specified dates and
therefore incurring the prepayment penalty. In accordance with SFAS No. 133,
Accounting
for Derivative Instruments
, the Company is required to adjust the carrying value of
the derivative instruments to its fair value at each balance sheet date and recognize any
change since the prior balance sheet date as a component of Other Income (Expense). These
derivatives are more fully discussed in Note 4 below.
Research and Development:
Wages, benefits, rent, and other costs, including costs to plan and
populate databases and content on our web site development costs are expensed as incurred
as research and development in accordance with SFAS 2
Accounting for Research and
Development Costs
, and EITF 00-2
Accounting for Web Site Development Costs
.
57
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
Advertising:
The Company advertises its products in various trade publications and
general newspaper supplements. It also promotes the Company in various business
publications, television, and internet media. Such advertising costs include the creative
process, costs of production, and placement costs of the ads themselves. All advertising
costs are expensed as incurred. Total advertising expense was $309,014 and $143,760 for
the years ended December 31, 2007 and 2006, 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
for the period divided by the weighted average number of common shares outstanding during
2007 and 2006. Common stock equivalents are not included,
as their effect would be antidilutive.
Following is a reconciliation of Net Income (Loss) and Weighted average
number of shares outstanding, in the computation of earnings (loss) per share (EPS) for
the years ended December 31, 2007 and 2006.
|
2007
|
2006
|
Net Loss
|
$(10,482,524)
|
$(3,809,885)
|
Less: Preferred stock
dividends
|
-
|
-
|
Basic EPS loss available to
|
|
|
common stockholders
|
$(10,482,524)
|
$(3,809,885)
|
|
|
|
Weighted average number of
shares outstanding
|
496,301,587
|
235,294,220
|
Common equivalent shares
|
-
|
-
|
|
496,301,587
|
235,294,220
|
Per share amount
|
$(0.021)
|
$(0.016)
|
Warrants, options, and shares to be
issued, totaling 6,627,107,258 and 661,931,877 shares as of December 31, 2007 and 2006,
respectively, would dilute EPS, and accordingly are not included in the computation of
EPS.
58
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
Common Stock:
The Companys common shares have, subject to the provisions of any
series of Preferred Stock, 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 six months before sale. In addition,
officers, directors and more than 10% shareholders are further restricted in their ability
to sell such shares.
Stock Based Compensation:
The Company adopted the provisions of
SFAS 123(R),
Share-Based Payments,
on January 1, 2006. Accordingly, compensation
costs for all share-based awards to employees are measured based on the grant date fair
value of those awards and recognized over the period during which the employee is required
to perform service in exchange for the award (generally over the vesting period of the
award). We have no awards with market or performance conditions. Effective January 1, 2006
and for all periods subsequent to that date, SFAS 123(R) supersedes our previous
accounting under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees
"
("APB 25"). In March 2005, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 107 ("SAB 107")
relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption
of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective
transition method, which provides for certain changes to the method for valuing
share-based compensation. The valuation provisions of SFAS 123(R) apply to new awards and
to awards that are outstanding at the effective date and subsequently modified or
cancelled. Estimated compensation expense for awards outstanding at the effective date
will be recognized over the remaining service period using the compensation cost
calculated for pro forma disclosure purposes under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). Our
consolidated financial statements for the years ended December 31, 2007 and 2006 reflect
the impact of SFAS 123(R). In accordance with the modified prospective transition method,
our consolidated financial statements for prior periods were not restated to reflect, and
do not include, the impact of SFAS 123(R).
Stock-based compensation expense recognized during the period is based
on the value of the portion of share-based payment awards that is ultimately expected to
vest during the period. Share-based compensation expense recognized in our consolidated
statement of operations for the years ended December 31, 2007 and 2006 included
compensation expense for share-based payment awards granted prior to, but not yet vested
as of, December 31, 2005 based on the grant date fair value estimated in accordance with
the pro forma provisions of SFAS 123. For share awards granted prior to 2006, expenses are
amortized under the straight-line method prescribed by SFAS 123. As share-based
compensation expense recognized in the consolidated statements of operations for the years
ended December 31, 2007 and 2006 is based on awards ultimately expected to vest, it has
been reduced for estimated forfeitures. SFAS 123(R) requires
59
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. Based
on our evaluation of our present employees with unvested options, we estimated no
forfeitures.
Total share-based compensation expense recognized under SFAS 123R for
the years ended December 31, 2007 and 2006 was $13,584 and $4,300, respectively, and is
included in general and administrative expenses. In addition to this share-based
compensation for employees, the Company periodically issues options or warrants to
consultants for services provided. The amount of such compensation was $-0- and $17,595
for the years ended December 31, 2007 and 2006, respectively. The 2006 amount was
capitalized as debt issuance costs and is being amortized using the effective interest
method.
We have no formal stock option plan. Options granted to date have been
negotiated with individual employees and can be separated into three categories. Executive
officers have been granted options on a periodic basis. The majority of these options
expire one year after the officer leaves employment and they all vested on the grant date.
The last such grant for these individuals was in 2004. Members of the management team are
granted three year options for each quarter of continued employment. These options vest
upon grant. These individuals also received a one time grant of options in 2004 that
expire one year after the employee leaves employment. These options vested immediately.
The third category of option grant is for sales and marketing representatives. The options
to these employees are granted after each year of employment, have ten year exercise
periods, with a portion vesting upon grant and a portion vesting after three years of
service from the grant date. These employees also earn stock bonuses for each quarter of
continued employment. The maximum number of options and stock bonus shares that can be
earned by the management and sales representative employees was 3,286,000 and 3,430,000 as
of December 31, 2007 and 2006, respectively. The number of shares remaining to be issued
or granted was 2,393,583 and 2,864,917 as of December 31, 2007 and 2006, respectively.
In addition to the above option program, certain employees, directors
and various consultants receive the majority of their compensation in common shares.
Shares issued for consulting services include such services as transportation,
contracting, and corporate marketing and investor relations programs. Shares issues to
employees, directors, and consultants are valued at the closing market price of our common
stock on the transaction date. Total expense paid in common stock for employees,
directors, and consultants was $859,417 and $185,291 for the years ended December 31, 2007
and 2006, respectively. These expenses are allocated between the two segments and between
expense categories in the Consolidated Statements of Operations based on the type of
service provided.
The option compensation amounts for employees and consultants are
estimated for each quarter using the Black-Scholes option pricing model. Volatility is
calculated each reporting period and the calculation involves matching data points of our
common share market price to the length of the option period. The following assumptions
were used for 2007 and 2006 in estimating the fair value of the options:
60
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
|
2007
|
2006
|
Dividend yield
|
0%
|
0%
|
Risk-free interest rate
|
3.80% to
4.88%
|
4.50% to
4.875%
|
Expected life
|
3-10
years
|
3-10
years
|
Expected volatility
|
94.7 to
107.5
|
82.1% to
102.3%
|
Weighted average exercise
|
|
|
price granted during year
|
$0.163
|
$0.185
|
Additional information
about compensatory as well as non-compensatory options and warrants is presented in Note 7
below.
Asset Impairment:
The Company monitors conditions that may affect the carrying value of
its long-lived and intangible assets when events and circumstances indicate that the
carrying value of the assets may be impaired. The Company determines impairment based
on the assets ability to generate cash flow greater than the carrying value of the
asset. If projected undiscounted cash flows are less than the carrying value of the
asset, the asset is adjusted to its fair value.
Non-monetary Transactions:
The Company periodically enters into non-monetary
transactions. These transactions are recorded based on the fair value of the asset,
goods or services received or surrendered, whichever is more clearly evident and at such
time as the earnings process is complete. When material non-monetary transactions
occur, the Company discloses the transaction and basis for valuing the transaction in the
period the transaction occurs. Additionally, pursuant to SFAS No. 95, "
Statement
of Cash Flows
," the Company discloses non-cash investing and financing
activities.
Contingencies:
From time to time, the Company may become party to claims against it.
Management evaluates these claims as they arise as probable, reasonably possible and
remote. A liability is recorded when management estimates a loss is probable. Potential
costs that arise are disclosed when management believes a loss is reasonably possible and
that amount can be estimated.
Recent Accounting Pronouncements
In December 2006 the FASB staff issued
FSP EITF
00-19-2
"
Accounting for Registration Payment Arrangements
" to specify
the accounting treatment of contingent obligations to make future payments or otherwise
transfer consideration under a registration payment arrangement. Our callable secured
convertible debt includes an obligation for us to file registration statements with the
Securities and Exchange Commission (SEC) to register sufficient common shares for the note
holders to convert the debt into common stock frames and
61
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
also obligates us to have the registration statements declared
effective by the SEC. This new standard requires us to evaluate the contingent future
payments under the criteria of a probable loss under FAS 5. The Company adopted this new
standard effective for the first fiscal quarter of 2007. The new standard has not had a
significant impact on the Companys financial position or results of operations.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157 (
"SFAS 157"
),
"Fair Value Measurements,"
which defines fair value, establishes guidelines for measuring fair value and expands
disclosures regarding fair value measurements. SFAS 157 does not require any new fair
value measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 with earlier adoption permitted. The Company is currently evaluating the
impact of SFAS 157, but does not expect the adoption of SFAS 157 to have a material impact
on our consolidated financial position, results of operations or cash flows.
In February 2006, the FASB issued Statement of Financial Accounting
Standards No. 155 (
"SFAS 155"
),
"Accounting for Certain Hybrid
Financial Instruments"
. SFAS 155 simplifies the accounting for certain
derivatives embedded in other financial instruments by allowing them to be accounted for
as a whole if the holder elects to account for the whole instrument on a fair value basis.
SFAS 155 is effective for all financial instruments acquired, issued or subject to a
re-measurement event occurring in fiscal years beginning after September 15, 2006. Earlier
adoption is permitted, provided the Company has not yet issued financial statements,
including for interim periods, for that fiscal year. The Company adopted SFAS 155 in the
first quarter of 2007 and it has not had a material impact on our consolidated financial
position, results of operations or cash
flows.
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, 2007 and 2006 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, except for the
callable secured convertible notes which are accounted for as derivative instruments,
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.
62
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
|
DECEMBER 31,
|
|
2007
|
2006
|
Notes due to unrelated
parties:
|
|
|
|
|
|
Note payable secured by
real property due May 2016.
|
|
|
Monthly payment is $6,601,
including interest
|
|
|
at 12% per annum.
|
$418,456
|
$445,653
|
|
|
|
Financing contract secured
by equipment due May 2006.
|
|
|
Monthly payment is $806,
including interest at 17.99%
|
14,589
|
14,589
|
|
|
|
City of Reno Special
Assessment District for road
|
|
|
and access improvements.
Payable in 40 equal semi-
|
|
|
annual payments plus
interest at 6% percent per annum.
|
85,675
|
88,954
|
|
|
|
Less current portion due
within one year
|
(436,523)
|
(45,065)
|
Total long-term liabilities
due to unrelated parties
|
$ 82,197
|
$ 504,131
|
|
DECEMBER 31,
|
|
2007
|
2006
|
|
|
|
Convertible
Promissory Notes:
|
|
|
Three year
convertible promissory notes due at
|
|
|
varying dates
through February 2006, including
|
|
|
interest at 9%
to 12% per annum. The notes and
|
|
|
accrued
interest are convertible into the
|
|
|
Companys
restricted common stock at prices
|
|
|
ranging from
$0.10 to $1.18 per share at the
|
|
|
election of the
note holders.
|
$1,437,000
|
$ 1,637,000
|
Accrued
interest on convertible promissory notes
|
2,060,838
|
1,667,027
|
Less current
portion due within one year
|
(3,497,838)
|
(3,304,027)
|
Total Long Term
Convertible Promissory Notes
|
|
|
and Accrued
Interest
|
$ -
|
$ -
|
Callable Secured
Convertible Promissory Notes:
|
DECEMBER 31,
|
|
2007
|
2006
|
Callable secured
convertible promissory notes
|
|
|
(more fully described in
Note 4)
|
$4,364,420
|
$2,983,616
|
Less portion included in
convertible
|
|
|
debt derivatives
|
(4,364,420)
|
(2,983,616)
|
Long term portion of
callable secured
|
|
|
convertible promissory
notes
|
$ -
|
$ -
|
63
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
|
DECEMBER 31,
|
|
2007
|
2006
|
Loans from
Stockholders/Related Transactions:
|
|
|
Advances from
officer/stockholder. Due on demand,
|
|
|
with interest accruing at
12% per annum.
|
$143,025
|
$161,525
|
|
|
|
Long-term debt
matures as follows:
|
|
CALLABLE
|
|
|
|
|
SECURED
|
|
|
UNRELATED
|
CONVERTIBLE
|
CONVERTIBLE
|
|
YEAR
|
PARTIES
|
NOTES
|
NOTES
|
STOCKHOLDERS
|
2008
|
$436,523
|
$
3,497,838
|
$ 824,355
|
$ 143,025
|
2009
|
3,690
|
-
|
1,500,000
|
-
|
2010
|
3,915
|
-
|
2,040,065
|
-
|
2011
|
4,153
|
-
|
-
|
-
|
2012
|
4,406
|
-
|
-
|
-
|
2013-2023
|
66,033
|
-
|
-
|
-
|
|
$518,720
|
$ 3,497,838
|
$4,364,420
|
$ 143,025
|
|
|
|
|
|
All of the convertible
notes and accrued interest, totaling $3,497,838, are in default. The Company is
formulating a plan to seek extensions of these notes. No collection action has been taken
by the note holders. When these notes came due in 2006, they were convertible into
22,229,551 common shares. If the Company is successful in negotiating extensions of these
notes, the convertible options may be renewed and the eventual number of potential options
could be significantly higher than the amount that expired.
The Companys mortgage loan on the manufacturing facility is in
default due to delinquent property taxes totaling $13,535. The lender is aware of the
situation and has taken no collection action. As a result of the default, the entire
principal balance, in the amount of $418,456, is included in current liabilities.
A financing contract on equipment, with a balance of $14,589, is in
default and is included in current liabilities. The lender has referred the loan to an
attorney, but no further action has been taken.
NOTE 4 Callable Secured Convertible Debt
Beginning in July 2005, the
Company has arranged a series of callable secured convertible debt financings (Notes) with
an accredited investment group totaling $6,310,000. The Notes bear interest at rates
ranging from 6% to 8% and
are due three year from issuance. In connection with these financings,
the Company has issued warrants to acquire common stock in varying amounts and at varying
exercise prices. During 2007 the Company signed Notes that added accrued interest totaling
$342,170 to the outstanding principal balance. These Notes bear interest at 2% and have a
three year term. Following is a summary of the financings:
64
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
|
ORIGINAL
|
CONVERTED
|
PRINCIPAL
|
NUMBER OF
|
WARRANT
|
|
PRINCIPAL
|
TO
|
BALANCE
|
WARRANTS
|
EXERCISE
|
DATE
|
AMOUNT
|
STOCK
|
12/31/07
|
ISSUED
|
PRICE
|
July
2005
|
$1,250,000
|
$1,250,000
|
$ -
|
1,153,846
|
$0.15
|
August
2005
|
1,000,000
|
175,645
|
824,355
|
923,077
|
$0.15
|
January
2006
|
500,000
|
-
|
500,000
|
961,539
|
$0.15
|
February
2006
|
500,000
|
-
|
500,000
|
461,539
|
$0.15
|
July
2006
|
500,000
|
500,000
|
-
|
20,000,000
|
$0.05
|
November
2006
|
500,000
|
-
|
500,000
|
20,000,000
|
$0.04
|
January
2007
|
500,000
|
-
|
500,000
|
20,000,000
|
$0.01
|
March
2007
|
500,000
|
362,106
|
137,894
|
20,000,000
|
$0.01
|
June
2007
|
335,000
|
-
|
335,000
|
10,000,000
|
$0.01
|
August
2007
|
250,000
|
-
|
250,000
|
20,000,000
|
$0.0014
|
October
2007
|
275,000
|
-
|
275,000
|
15,000,000
|
$0.004
|
December
2007
|
200,000
|
-
|
200,000
|
15,000,000
|
$0.001
|
Totals
|
$6,310,000
|
$2,287,751
|
4,022,249
|
143,500,001
|
|
Accrued
interest
|
|
|
|
|
|
added to
principal
|
|
|
342,171
|
|
|
Balance
12/31/07
|
|
|
$4,364,420
|
|
|
|
|
|
|
|
|
The Notes are
convertible into common shares at the lesser of $0.10 or 35% of the market price of the
Companys common stock, as defined. The Company may prepay the Notes at 150% of the
outstanding principal and accrued interest balance, if sufficient authorized shares are
available to convert all of the outstanding principal and accrued interest. Additionally,
the Notes are secured by substantially all of the Companys assets. The Notes are
further secured by 14,550,558 Company common shares owned by an officer/stockholder.
The Notes are potentially convertible
into an unlimited number of common shares. Accordingly, the Company has accounted for the
Notes under SFAS 133, EITF 00-19 and DIGs B38 and B39 which require the beneficial
conversion features and the prepayment penalties of each of the Notes to be treated as
embedded derivatives, to be recorded as a collective liability equal to the estimated fair
value of the embedded derivatives. As of December 31, 2007 and 2006 the Notes were
convertible into 6,450,658,596 and 586,181,548 common shares, respectively, and the
conversion and prepayment (for 2006) features had estimated fair values of $13,003,762 and
$4,876,175, respectively. As of December 31, 2007, the Company did not have enough
authorized shares to allow conversion of all of the outstanding debt into stock.
Consequently, the prepayment option was not available and no value for the prepayment
feature was included in the computation of the estimated fair value of the derivative for
December 31, 2007.
In addition, all warrants and options that are exercisable during the
period that the Notes are outstanding are required to be recorded as liabilities at their
fair value. At December 31, 2007 and 2006 warrants and options to acquire a total of
156,729,001 and 58,599,501 common shares,
65
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
respectively, were outstanding and had estimated fair values of
$231,224 and $380,083, respectively.
The Company estimates the fair value of the embedded conversion and
prepayment options of the callable secured convertible debt in a single pricing model with
an embedded weighted average calculation. The assumptions used are to (1) determine the
number of shares it would take to convert the debt under the terms of the agreements as of
the balance sheet date; (2) estimate the future rate of debt conversions by the investors
based on recent conversion history; (3) estimate the debt balance at specified dates,
using 6 month intervals, based on the conversion rate determined in step 2; (4) value each
of the components, including the conversions and the prepayment balances determined in
step 3, using the Black-Scholes option pricing model; and (5) compute the estimated fair
value of the combined derivatives by taking a weighted average of the values of the debt
derivative and the prepayment options for the estimated prepayment dates based on
estimated probability of occurrence of each event. Based on the Companys operating
history and lack of cash, 90% of the weight was assigned to the option of not prepaying
the debt for 2006. Steps 2 and 5 were applicable only to 2006, as the prepayment feature
of the Notes was not available for 2007. Volatility rates ranged from 90% to 118% for 2007
and 87% to 109% for 2006. Risk free interest rates ranged from 2.76% to 5.07% for 2007 and
4.625% to 4.75% for 2006. Volatility is calculated each reporting period and the
calculation involves matching data points of our common share market price to the length
of the option period. Fluctuations in volatility between individual derivatives and
between periods are primarily due to the length of the option period.
The Company estimates the fair value of warrants and options using the
Black-Scholes option pricing model and assumes all warrants and options would be exercised
on their respective expiration dates. Volatility and risk free interest rate ranges are
included in the ranges listed above.
The following table is a summary of the transactions and adjustments
that comprised the calculation of the estimated fair value of the derivatives from January
1, 2006 to December 31, 2007:
66
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
|
Convertible
|
Warrant
|
|
Debt
|
And
Option
|
|
Derivative
|
Liability
|
Estimated fair value as of
|
|
|
December 31, 2005
|
$
3,621,220
|
$ 134,212
|
Additional borrowing in
2006
|
2,000,000
|
-
|
Accrued interest
|
208,142
|
-
|
Warrants issued for
services and
|
|
|
expensed or capitalized in
2006
|
-
|
17,594
|
Debt conversions into
common shares
|
(1,266,384)
|
-
|
Year to date adjustment to
Estimated
|
|
|
Fair Value at December 31,
2006
|
313,197
|
228,277
|
Estimated Fair Value at
December 31, 2006
|
4,876,175
|
380,083
|
|
|
|
Additional borrowing in
2007
|
2,060,000
|
-
|
Accrued interest
|
134,554
|
-
|
Options issued for services
and
|
|
|
expensed or capitalized in
2006
|
|
7,337
|
Debt conversions
|
(1,021,367)
|
-
|
Year to date adjustment to
Estimated
|
|
|
Fair Value at December 31,
2007
|
6,954,400
|
(156,196)
|
Estimated Fair Value at
December 31, 2006
|
$13,003,762
|
$ 231,224
|
The fair value of the beneficial conversion option, prepayment
penalties, warrants and options are estimated each reporting period with the change in
fair value recorded as gain or loss on derivative instruments. As the Companys
common stock is highly volatile, material gains or losses for the change in estimated fair
value are likely to occur in future periods.
Following is a summary of the gains and (losses) on derivative instruments by reporting
period for the years ended December 31, 2007 and 2006:
|
Year Ended
|
|
December 31,
|
|
2007
|
2006
|
Convertible debt derivative
|
$(6,954,400)
|
$ (313,197)
|
Warrant and option
liability
|
156,196
|
(228,277)
|
Combined derivative Loss
|
$(6,798,204)
|
$(541,474)
|
In connection with the
above described financings, the Company entered into Registration Rights Agreements with
the Noteholders that either require the Company to use its best efforts to file a
registration statement within 120 days of funding or to file a registration statement
within 10 days of written demand from the Noteholders. The 2005 Agreements required the
Company to increase the authorized shares by October 31, 2005 or use its best efforts to
do so. The Agreement specifies penalties of 2% per month for failing to register the
shares timely and 3% per month for failing to increase the authorized shares. The Company
registered 50 million shares in February 2006
67
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
and increased the authorized shares in March 2006. Because it used its
best efforts, the Company did not incur any penalties. The Company completed registrations
of 75 million shares each in October 2006 and June 2007. After converting their debt into
the 75 million common shares from the June 2007 registration, the Noteholders began
utilizing Rule 144 to convert their debt into common shares as several of the Notes
qualified for Rule 144 treatment since they were more than two years old. In February 2008
Rule 144 was revised to allow sale of shares after being held for six months. The holding
period for debt instruments begins on the date of the investment due to the shortened time
period, the Company anticipates that the Noteholders will utilize Rule 144 for future debt
conversions and that no future registrations will be necessary.
In December 2007 the Company had issued substantially all of its
authorized shares. A shareholder meeting to increase the authorized shares to 20 billion
from 1 billion shares was scheduled for March 27, 2008. We did not receive enough votes to
have a quorum, so the meeting was rescheduled to April 18, 2008. The Company anticipates
that sufficient votes will be received to pass the proposal. Consequently, the Company
believes it is using its best efforts to be in compliance with the terms of the various
Registration Rights Agreements as of December 31, 2007, and therefore believes the
probability of incurring any penalties is remote.
During 2007 the Noteholders converted a total of $1,021,367 of the
Notes into 546,758,396 common shares. During the period of February 15, 2006 to December
31, 2006, the Noteholders converted a total of $1,266,384 of the Notes into 111,222,642
common shares.
NOTE 5 - Major Customers:
Fertilizer sales for the years ended December 31, 2007 and 2006 include
$1,643,256 and $1,239,354, respectively, to one major customer, which represents 99% and
95%, respectively, of fertilizer sales for the years ended December 31, 2007 and 2006.
These sales represented 71% and 67% of total GOLDn GRO Fertilizer segment sales for
the years ended December 31, 2007 and 2006, respectively. Receivables from this major
customer as of December 31, 2007 and 2006 amounted to $1,809 and $19,442, which
represented 28% of GOLDn GRO fertilizer segment accounts receivable at December 31,
2007.
Silver sales for the years ended December 31, 2007 and 2006 include
$231,092 and $258,089, respectively, which represents 73% and 62%, respectively, of silver
sales for the years ended December 31, 2007 and 2006, to one major customer in the
precious metals refining industry. These sales represented 10% and 14% of the GOLDn
GRO Fertilizer segment sales, for the years ended December 31, 2007 and 2006,
respectively. Receivables from this major customer as of December 31, 2007 and 2006
amounted to $-0- and $11,387, respectively, which represented -0-% of GOLDn GRO
fertilizer accounts receivable at December 31, 2007.
Technical services revenues for the years ended December 31, 2007 and
2006 were spread among several customers with relatively small amounts. Revenue from the
largest single customer was $11,722 and $19,082 for 2007 and 2006,
68
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
respectively. 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 revenues may change from year to year.
NOTE 6 - Income Taxes:
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.
|
2007
|
2006
|
|
|
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:
|
Net
Operating
|
Year
Ending December 31:
|
Loss
|
2008
|
113,253
|
2012
|
322,525
|
2018
|
377,944
|
2019
|
1,605,954
|
2020
|
3,254,375
|
2021
|
2,947,351
|
2022
|
2,496,744
|
2023
|
2,286,436
|
2024
|
2,337,832
|
2025
|
2,841,914
|
2026
|
2,603,264
|
2027
|
2,909,883
|
|
$24,097,475
|
|
|
69
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
The Company's total deferred tax assets and related valuation
allowances at December 31, 2007 and 2006 are as follows:
|
2007
|
2006
|
|
|
|
Total deferred tax assets
|
$
8,667,571
|
$
7,650,008
|
Less valuation allowance
|
(8,667,571)
|
(7,650,008)
|
Net deferred tax asset
|
$ -
|
$ -
|
|
|
|
The estimated deferred tax assets and
the related 100% valuation allowance increased $1,017,563 between 2006 and 2007.
NOTE 7 - Stock Option and Purchase Plans:
The following table summarizes warrant and option activity for the
period January 1, 2006 through December 31, 2007:
|
|
Convertible
|
Employee
|
|
|
Warrants
|
Debt Options
|
Options
|
Total
|
Under option, December 31, 2005
|
27,313,260
|
134,823,379
|
6,108,000
|
168,244,639
|
Granted
|
41,496,924
|
584,810,362
|
226,000
|
626,533,286
|
Exercised
|
(100,000)
|
(111,222,642)
|
-
|
(111,322,642)
|
Expired
|
(10,110,683)
|
(22,229,551)
|
(12,000)
|
(32,352,234)
|
Under option, December 31, 2006
|
58,599,501
|
586,181,548
|
6,322,000
|
651,103,049
|
Granted
|
100,000,000
|
6,411,235,444
|
252,000
|
6,511,487,444
|
Exercised
|
-
|
(546,758,396)
|
-
|
(546,758,396)
|
Expired
|
(8,134,500)
|
-
|
(310,000)
|
(8,444,500)
|
Under option, December 31, 2007
|
150,465,001
|
6,450,658,596
|
6,264,000
|
6,607,387,597
|
The average price for all warrants and options granted and exercised
was $0.0009 for the year ended December 31, 2007 and $0.0146 for the year ended December
31, 2006.
70
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
The following table summarizes warrants and options outstanding as of
December 31, 2007:
|
|
|
Weighted
|
|
|
|
Average
|
|
No.
of
|
Exercise
|
Exercise
|
Expiration Dates
|
Shares
|
Price
|
Price
|
Warrants:
|
|
|
|
December 2014
|
15,000,000
|
$
0.001
|
|
August 2014
|
20,000,000
|
$0.0014
|
|
October 2014
|
15,000,000
|
$
0.004
|
|
January 2014 to June 2014
|
50,000,000
|
$
0.010
|
|
November 2013
|
20,000,000
|
$
0.040
|
|
July 2013
|
20,000,000
|
$
0.050
|
|
June 2010
|
1,000,000
|
$
0.100
|
|
July 2010 to February 2011
|
3,740,001
|
$0.150
|
|
January 2008 to June 2008
|
5,725,000
|
$0.225
|
|
Total Warrants
|
150,465,001
|
|
$ 0.0289
|
|
|
|
Weighted
|
|
|
|
Average
|
|
No. of
|
Exercise
|
Exercise
|
Convertible Debt Options:
|
Shares
|
Price
|
Price
|
August 2008 to
December 2010
|
6,450,658,596
|
$0.0007
|
$0.0007
|
Employee
Options:
|
|
|
|
February
2008 to February 2017
|
447,000
|
$0.0150
|
|
One year after employment ends
|
1,600,000
|
0.150
|
|
May 2017 to October 2017
|
75,000
|
0.160
|
|
January 2015 to August 2017
|
125,000
|
0.200
|
|
One year after employment ends
|
1,000,000
|
0.250
|
|
One year after employment ends
|
3,000,000
|
0.300
|
|
October 2012 to October 2013
|
17,000
|
0.500
|
|
Total Employee Options
|
6,264,000
|
|
$0.240
|
Total Warrants and Options
|
6,607,387,597
|
|
$ 0.0015
|
The 6,450,658,596 convertible debt options listed above are related to
the Notes discussed in Note 4. This debt is convertible into common stock at 35% of a
calculated market price. Consequently, the number of shares and the conversion price can
vary up or down materially, depending on the market price of the Companys stock.
71
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
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:
|
2007
|
2006
|
|
Amount
|
Shares
|
Amount
|
Shares
|
|
|
|
|
|
Payment of salaries
|
$746,935
|
18,218,958
|
$529,725
|
7,620,625
|
Payment of director fees
|
3,000
|
1,000,000
|
3,113
|
207,500
|
Payment of interest,
employees
|
37,430
|
500,703
|
37,430
|
500,703
|
Payment of debt conversion
|
-
|
-
|
13,600
|
2,500,000
|
|
$787,365
|
19,719,661
|
$583,868
|
10,828,828
|
The above salary amounts include both
management and non-management employees. The management portion is discussed in detail in
Note 11.
NOTE 9 - Accrued Expenses:
The following is the composition of accrued expenses as of December 31:
|
2007
|
2006
|
|
|
|
Accrued vacation
|
$103,445
|
$91,615
|
Federal and state payroll
taxes
|
47,889
|
19,699
|
Sales tax
|
1,423
|
516
|
Audit and annual meeting
costs
|
119,500
|
95,000
|
|
$272,267
|
$206,830
|
NOTE 10 Other Comprehensive Income
The Company held marketable securities that were available for sale,
which consisted solely of equity securities. The carrying amount on the balance sheets of
these securities is adjusted to fair value at each balance sheet date. The adjustment to
fair value is an unrealized holding gain or loss that is reported in Other Comprehensive
Income. At present, these unrealized gains or losses are the only component of Accumulated
and Other Comprehensive Income. The Company had an Accumulated Unrealized Holding Loss of
$-0- at December 31, 2007 and 2006. The Company realized gross gains of $7,718 on gross
proceeds of $106,218 and gross losses of $3,983 on gross proceeds of $35,870 during the
twelve months ended December 31, 2007, and no gains were reclassified out of accumulated
other comprehensive income into earnings. The Company realized no gross losses and gross
gains of $97,728 on gross proceeds of $229,374 during the twelve months ended December 31,
2006, and no gains were reclassified out of accumulated other comprehensive income into
earnings. The table below illustrates the amount of unrealized holding gains and losses
included in other comprehensive income, net of tax effects of $0. The
72
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
reclassification adjustment represents unrealized holding gains and
losses transferred into earnings as securities are sold. The Company held no marketable
securities as of December 31, 2007 and 2006.
Following are the components of Other Comprehensive Income:
|
Year Ended December 31,
|
|
2007
|
2006
|
|
|
|
Unrealized holding gains
(losses)
|
|
|
arising during the period
|
$ -
|
$ -
|
Reclassification adjustment
|
-
|
39,889
|
Other Comprehensive Income
|
$ -
|
$39,889
|
NOTE 11 - Related Party Transactions:
Promissory notes are held by an officer/stockholder at December 31,
2007 and 2006 (see Note 3 for terms).
$779,073 and $796,200 of the accrued management salaries as of December
31, 2007 and 2006, respectively, is for salary in arrears due to several
officer/stockholders and employee/stockholders. In addition, salary in arrears of $746,800
and $514,800 for 2007 and 2006, respectively, are included in stock to be issued at the
respective year ends. These amounts represent the portion of salaries earned but unpaid
that the officers/employees/stockholders have agreed to accept in the Companys
common stock and have relinquished their right to receive cash. When the stock is
eventually issued, it will be issued at the market price on the date of the respective
agreements. The number of shares to be issued is 18,173,958 and 6,348,958 for 2007 and
2006, respectively. Issuance of the stock is pending sufficient cash available to pay the
related federal withholding taxes. Interest expense at 12% per annum on salaries due
officer and employee/stockholders amounted to $168,146 and $143,478, respectively, in 2007
and 2006.
Interest expense on related party loans amounted to $18,851 and $19,383
for the years ended December 31, 2007 and 2006, respectively. Accrued interest on related
party loans and accrued salaries totaled $157,181 and $87,211 at December 31, 2007 and
2006, respectively.
During 2003, WWIs lease of a vehicle utilized by Dr. Whitney was
completed. Dr. Whitney purchased the vehicle by financing it through a commercial lender.
The purchase price was $21,741 and the monthly payment for four years is $531. WWI is
leasing the vehicle from Dr. Whitney by making the monthly payments to the commercial
lender and acquired ownership of the vehicle when the loan was paid off in 2007.
For related party transactions subsequent to December 31, 2007, see Note 17.
73
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
NOTE 12 - Lease Commitments and Rent Expense:
0perating Leases:
The Company leases its corporate office facility under a non-cancelable
agreement which expires June 30, 2010. Monthly payments begin at $5,324 and increase
annually with the final year monthly payment at $5,534.
A wholly owned subsidiary of the Company, IMI, leases storage
facilities 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
$1,100.
Future minimum rental commitments at December 31, 2007, under these
operating lease agreements are due as follows:
2008
|
$ 61,855
|
2009
|
63,062
|
2010
|
33,204
|
|
$158,121
|
Total rent expense
included in the statements of operations for the years ended December 31, 2007 and 2006 is
$73,521 and $74,370, respectively.
Capital Leases:
Prior to 2004 the Company had entered into numerous equipment leases,
primarily for equipment at the manufacturing facility. The leases were generally for five
years, had initial interest rates ranging from 6.7% to 26.3%, with the majority being in
the 18% to 21% range, and generally had $1 buyout options at the end of the lease terms.
Substantially all of these leases have been renegotiated or been subject to litigation, as
discussed in Note 16, such that the original payments terms are no longer applicable. The
renegotiated leases now carry interest rates ranging from 6% to 9.25%.
All of the above described leases are secured by the equipment acquired
or financed under the lease.
Future minimum lease commitments at December 31, 2007 are due as follows:
74
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
|
Unrelated
|
|
Parties
|
2008
|
$513,667
|
2009
|
54,000
|
2010
|
32,625
|
2011
|
27,000
|
2012
|
9,000
|
|
636,292
|
Less: amounts representing
interest
|
(172,296)
|
|
$463,996
|
NOTE 13 - Business Segments:
The Company and its subsidiaries operate two business segments as
identified in Note 1. The following defines business segment
activities:
GOLDn GRO Fertilizer:
Photochemical
recycling, Silver recovery,
GOLDn
GRO Fertilizer production and Sales
Mining Technical Services:
Mining
industry services
The GOLDn GRO fertilizer segment operates principally in Northern
Nevada and California. The primary source of revenue for this segment is from the pick-up
and processing of photochemicals, recovery of silver therefrom, and sales of GOLDn
GRO fertilizer products. 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 specialty agriculture which includes vegetables, fruit and nut trees, and wine
and table grapes, golf courses, and turf farms.
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.
The Company measures segment performance based on net 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.
75
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
Reconciliation of segment revenues, cost of sales, gross profit (loss),
operating income (loss), other income (loss) and net income (loss) to the respective
consolidated amounts follows:
|
2007
|
2006
|
Revenues
|
|
|
GOLDn GRO Fertilizer
|
$2,315,141
|
$1,843,580
|
Mining Technical Services
|
27,155
|
28,338
|
Consolidated Revenues
|
$2,342,296
|
$1,871,918
|
|
|
|
Cost of Revenues
|
|
|
GOLDn GRO Fertilizer
|
$2,184,143
|
$1,760,118
|
Mining Technical Services
|
33,993
|
36,607
|
Consolidated Cost of
Revenues
|
$2,218,136
|
$1,796,725
|
|
|
|
Gross Profit (Loss)
|
|
|
GOLDn GRO Fertilizer
|
$130,998
|
$83,462
|
Mining Technical Services
|
(6,838)
|
(8,269)
|
Consolidated Gross Profit
(Loss)
|
$124,160
|
$75,193
|
|
|
|
Operating Income (Loss)
|
|
|
GOLDn GRO Fertilizer
|
$(2,199,386)
|
$(1,682,464)
|
Mining Technical Services
|
(744,042)
|
(542,042)
|
Consolidated Operating
Income (Loss)
|
$(2,943,428)
|
$(2,224,506)
|
Other Income (Expense)
|
|
|
GOLDn GRO Fertilizer
|
$(7,681,820)
|
$(1,688,339)
|
Mining Technical Services
|
142,724
|
102,960
|
Consolidated Other Income
(Expense)
|
$(7,539,096)
|
$(1,585,379)
|
|
|
|
Net Income (Loss)
|
|
|
GOLDn GRO Fertilizer
|
$(9,881,206)
|
$(3,370,803)
|
Mining Technical Services
|
(601,318)
|
(439,082)
|
Consolidated Net Income
(Loss) before taxes
|
$(10,482,524)
|
$(3,809,885)
|
76
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
Other segment information:
|
2007
|
2006
|
Capital expenditures by
business segment:
|
|
|
GOLDn GRO Fertilizer
|
$ 14,913
|
$159,383
|
Mining Technical Services
|
103,333
|
2,252
|
Consolidated Capital
Expenditures
|
$118,246
|
$161,635
|
|
|
|
Depreciation and
amortization expense by business segment:
|
|
|
GOLDn GRO Fertilizer
|
|
|
Depreciation
|
$171,129
|
$177,754
|
Amortization
|
29,205
|
41,370
|
|
200,334
|
219,124
|
Mining Technical Services
|
|
|
Depreciation
|
6,656
|
4,247
|
Amortization
|
2,472
|
4,646
|
|
9,128
|
8,893
|
Consolidated Depreciation
and Amortization
|
$209,462
|
$228,017
|
General and administrative expenses of $282,134 and $293,191 incurred
by Itronics Inc. were equally divided between the two segments for 2007 and 2006,
respectively.
77
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
Identifiable assets by business segment (net of accumulated
depreciation, accumulated amortization, and allowance for doubtful accounts):
|
2007
|
2006
|
|
PHOTO-
|
MINING
|
PHOTO-
|
MINING
|
|
CHEMICAL
|
TECHNICAL
|
CHEMICAL
|
TECHNICAL
|
|
FERTILIZER
|
SERVICES
|
FERTILIZER
|
SERVICES
|
ASSET DESCRIPTION
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash
|
$95,930
|
$ 973
|
$ -
|
$ -
|
Accounts receivable, net
|
7,243
|
10,318
|
35,102
|
1,391
|
Inventories
|
889,996
|
-
|
548,399
|
-
|
Prepaid expenses
|
40,318
|
4,452
|
55,061
|
2,913
|
|
1,033,487
|
15,743
|
638,562
|
4,304
|
Property and Equipment, net
|
|
|
|
|
Land
|
215,000
|
-
|
215,000
|
-
|
Building and improvements
|
1,074,124
|
-
|
961,473
|
-
|
Construction in progress,
|
|
|
|
|
manufacturing facility
|
97,110
|
-
|
234,347
|
-
|
Equipment and furniture
|
1,280,083
|
20,403
|
1,232,796
|
14,455
|
Vehicles
|
5,305
|
2,175
|
10,391
|
-
|
Equipment under capital
lease-
equipment and furniture
|
97,557
|
60,565
|
203,044
|
65,509
|
Equipment under capital
lease-
Vehicles
|
-
|
-
|
-
|
6,523
|
|
2,769,179
|
83,143
|
2,857,051
|
86,487
|
|
|
|
|
|
Other Assets, net
|
|
|
|
|
Intangibles
|
76,500
|
-
|
76,500
|
|
Deposits
|
4,427
|
3,483
|
4,427
|
3,483
|
Deferred loan fees
|
27,391
|
-
|
30,646
|
-
|
|
108,318
|
3,483
|
111,573
|
3,483
|
|
$3,910,984
|
$102,369
|
$3,607,186
|
$94,274
|
78
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
Reconciliation of segment assets to consolidated assets:
|
2007
|
2006
|
|
|
|
Total Assets:
|
|
|
GOLDn GRO Fertilizer
|
$3,910,984
|
$3,607,186
|
Mining Technical Services
|
102,369
|
94,274
|
Total Segment Assets
|
4,013,353
|
3,701,460
|
Itronics Inc. assets
|
28,787,327
|
27,028,313
|
Less: inter-company
elimination
|
(28,444,812)
|
(26,464,234)
|
Consolidated Assets
|
$4,355,868
|
$4,265,539
|
NOTE 14 - 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
$10,482,524 during the year ended December 31, 2007, a negative working capital of
$18,842,148, and a stockholders deficit balance of $15,663,973 as of December 31,
2007. These factors indicate the Company and its subsidiaries' 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.
In order to solve the Company's liquidity problems, management has
implemented a plan of financing its operations through the private placements of common
shares, convertible debt, conversion of debt to common shares, and payment of consulting
and other labor services with common shares. The Company obtained financing of $2.06
million and $2 million in 2007 and 2006, respectively, through the issuance of callable
secured convertible debt. During the first quarter of 2008, the Company obtained $310,000
from the issuance of callable secured convertible debt. For the immediate future, the
Company plans to obtain additional debt financing from this investor group. For the longer
term, the Company is in discussions with several investment groups regarding debt and
equity financing. We must receive approval, which shall not be unreasonably withheld, from
the current investor group prior to receiving any funding from a new investor. The current
investor group also has the right of first refusal to provide funds under the same terms
as any proposed new funding.
In addition to continuing the above described efforts, development of the technology
necessary to manufacture fertilizer from photochemicals has been completed. In March 1998
the Companys subsidiary, Itronics Metallurgical, Inc., signed a definitive
manufacturing and distribution agreement with Western
79
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
Farm Services, Inc. (WFS). The agreement gives WFS the exclusive
license and right to manufacture and market the GOLDn 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. In March 2003, the companies
entered the second five year term of the agreement and in March 2008, the companies
entered into the third five year term.
Subsequent to December 31, 2007, the Company received its EPA
registration for the GOLDn GRO Guardian deer repellent fertilizer. The Company
believes this development will assist in the efforts to obtain the long term financing
discussed above.
NOTE 15 - Off-Balance Sheet Risks and Concentration of Credit Risk:
The Company occasionally maintains bank deposits in excess of federally
insured limits. The Companys risk is managed by maintaining its accounts in one of
the top five largest banks in the country.
As described in Note 5, substantially all the Companys fertilizer
sales are concentrated with one major fertilizer distribution customer. In addition,
substantially all of those sales are in California, primarily in the Central Valley.
Having the majority of such sales concentrated in one region makes the Companys
sales more vulnerable to variability caused by weather patterns or economic downturns than
if sales were geographically diversified. The Companys plan is to expand
geographically to mitigate such effects in the future. At any point in time, a significant
portion of the Company's accounts receivable is concentrated with this fertilizer
distribution company. This concentration of credit risk is somewhat mitigated due to the
fact that the distribution company is one of the largest fertilizer distribution companies
in the country.
Increase or decrease in photochemical recycling service and silver
extraction revenues has a direct relationship with federal, state, and local regulations
and enforcement of said regulations. Fertilizer revenues are impacted by 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
photochemicals 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 photochemicals. If the fair market value of silver declines,
our ability to recover our costs could be impacted.
NOTE 16 Legal Proceedings and Contingencies
As of December 31, 2007 we have accrued for liabilities, including
interest, of $544,965 which relate to various lawsuits and claims for the collection of
the funds due. These include 8 leases totaling $366,358 (reflected in Capital Lease
Obligations) plus $62,435 in additional interest
80
ITRONICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
(reflected in Accrued Interest) and one trade payable totaling $85,801
(reflected in Accounts Payable) plus $30,371 in additional interest (reflected in Accrued
Interest). The leases are individually secured by specified equipment.
The accrued interest noted above was recorded based on our assessment
of three cases that are seeking $251,522, which we believe are probable. The creditors
have received judgments in these cases, but have taken no further collection action. The
Company will continue to accrue interest until these cases are settled or paid in
full.
The Company has two cases, that originally sought $171,853, that we
deem to have a remote possibility of incurring an additional unrecorded loss. The Company
has negotiated payment agreements on these cases and, as of December 31, 2007, the
recorded liability was $163,128. We are delinquent in our payments under the respective
settlement agreements, but we are in contact with the lenders legal representative
and no collection action has been taken.
In addition to the above leases that are subject to litigation, there
are four leases, with a recorded liability of $189,110, that are in default. As required
by U.S. Generally Accepted Accounting Principles, the principal balance of the leases that
are in default have been classified as current liabilities.
Successful settlement of the above claims is dependent on future
financing.
We may become involved in a lawsuit or legal proceeding at any time in
the ordinary course of business. Litigation is subject to inherent uncertainties, and an
unexpected adverse result may arise that may adversely affect our business. Certain
lawsuits have been filed against us for collection of funds due that are delinquent, as
described above. Other than as described above, we are currently not aware of any
litigation pending or threatened for any reason other than collection of funds due and
already recorded nor are we aware of any additional legal proceeding or claims that the
Company believes will have, individually or in the aggregate, a material adverse affect on
our business, financial condition or operating results.
NOTE 17 - Subsequent Events:
In March 2008 the Company arranged additional callable secured convertible debt
financing in the amount of $310,000 each from the same investor group as discussed in Note
4 above. The notes have a three year term and have interest rates of 8% per annum. The
Company received net proceeds of $300,000 from the financing and issued a total of
10,000,000 seven year warrants at an exercise price of $0.0001 per share.
81
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Following is a summary of the aggregate fees billed for
professional service by the Companys principal accountant.
|
2007
|
2006
|
Audit fees
|
$102,253
|
$134,608
|
Audit related fees
|
-
|
-
|
Tax fees
|
-
|
-
|
All other fees
|
-
|
-
|
Total
|
$102,253
|
$134,608
|
The Company does not
have an audit committee and consequently the entire Board of Directors serves in that
capacity. The Boards pre-approval policy regarding professional services provided by
the Companys principal accountant is to pre-approve the engagement of the principal
accountant for the performance of all professional services. The policy does provide a
waiver of pre-approval in the event that such services, in the aggregate, will be less
than 5% of the audit fee, such services are not recognized as non-audit fees at the time
of the engagement, and pre-approval is obtained from a designated member of the Board
prior to the engagement. Until such time as an audit committee is appointed, the
designated individual is the Principal Executive Officer, currently the President of the
Company.
62
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:
April 16, 2008
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:
April 16, 2008
By:
/S/ JOHN W. WHITNEY
John
W. Whitney
President,
Treasurer and Director
(Principal
Executive and Financial
Officer)
Date:
April 16, 2008
By:
/S/ MICHAEL C. HORSLEY
Michael
C. Horsley
Controller
(Principal
Accounting Officer)
Date:
April 16, 2008
By:
/S/ HOWLAND S. GREEN
Howland
S. Green
Director
83
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