UNITED STATES

SECURlTIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-KSB

(Mark One)

(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES 

     EXCHANGE ACT OF 1934

                                  For the fiscal year ended December 31, 2002
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES 

    EXCHANGE ACT OF 1934 (No Fee Required)

                                  For the Transition period from______ to_______

Commission file number 33-18582

 

ITRONICS INC.

(Name of small business issuer in its charter)

 

                      Texas                                 75-2198369
        (State or other jurisdiction of          (I.R.S. Employer IdentificationNumber)

          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 (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.           Yes (x) No ( )

Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B isnot contained in this form, and no disclosure will be contained, to the best ofregistrant's knowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. (x)

 

State issuer's revenues for its most recent fiscal year: $1,285,685. 

The aggregate market value of the voting stock held by non-affiliates, computed byreference to the average of the bid and asked prices for such stock as of March 31, 2003,was $6,877,462.

As of March 31, 2003 there were issued and outstanding 94,864,635 shares of theRegistrant's Common Stock.

2

 

ITRONICS INC. AND SUBSIDIARIES

2002 FORM 10-KSB ANNUAL REPORT

TABLE OF CONTENTS
PART I 
PAGEItem 1. Description of Business 
4Item 2. Description of Property 
22Item 3. Legal Proceedings
22Item 4. Submission of Matters to a    Vote of Security Holders 
23PART IIItem 5.Market for Common Equity    and Related Stockholder Matters
24Item 6.Management's Discussion and    Analysis or Plan of Operation
25Item 7. Financial Statements
29Item 8. Changes in and    Disagreements with Accountants on 
Accounting and Financial Disclosure
29PART IIIItem 9.Directors, Executive    Officers, Promoters and Control 
Persons; Compliance with Section 16(a) of the Exchange    Act
29Item 10. Executive Compensation
31Item 11. Security Ownership of    Certain Beneficial Owners and 
Management
33Item 12. Certain Relationships and    Related Transactions
35Item 13. Financial Statements,    Exhibits and Reports on Form 8K
36Item 14.Controls and Procedures
37
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ITEM 1.DESCRIPTION OF BUSINESS.
 

Itronics Inc. (the Company), is a Texas corporation formed in 1987 and is based inReno, Nevada. The Company is one of Nevada's leading process technology companies and aworld leader in photochemical recycling. Through its subsidiaries, the Company specializesin photochemical recycling and GOLD'n GRO fertilizer manufacturing, precious metalsrecovery and refining, and provides project planning and technical services to the miningindustry. Dr. John Whitney, Itronics' President, was selected as Nevada's Inventor of theYear for 2000 and has become a member of the Inventor's Hall of Fame at the University ofNevada, Reno. Itronics was one of five finalists for the 2001 Kirkpatrick ChemicalEngineering Award, the most prestigious worldwide award in chemical engineeringtechnologies. The Company currently operates the following two business segments underseparate wholly owned subsidiaries:

1. Photochemical/GOLD'n GRO Fertilizer: * This segment, known as ItronicsMetallurgical, Inc., operates a photochemical recycling plant and is developing newsilver-gold refining technology. Revenues are generated by photochemical managementservices, sales of photochemical concentrators, sale of silver, and sale of GOLD’nGRO liquid fertilizer products. Construction of a commercial scale photochemicalprocessing and fertilizer manufacturing plant was completed in February 2000. The plantwas started up in 2001 and began to make meaningful commercial sales of GOLD'n GROfertilizers in 2002. 

*In 1995 Itronics initiated a legal review of various segments of RCRA (ResourceRecovery and Conservation Act)law that might pertain to Itronics and its customers.Itronics reached the conclusion that certain of its large scale customers are exempt fromRCRA since the value of the customer's portion of the recovered silver exceeds theprocessing costs charged. Itronics also concluded that once the various photo solutionsare 100% utilized in fertilizer or other products, then all Itronics customers will beexempt from RCRA requirements. Itronics believes it is the only organization in the U.S.with the ability to achieve this distinction. Consequently, when referring to theoperations of other organizations, or to the general market, the term photowaste is used,and when referring to Itronics' operations the term photochemical is used.
2. Mining Technical Services: This segment, known as Whitney &

Whitney, Inc., provides mineral project planning and technical services to the miningindustry. It has specialized knowledge in all aspects of mineral project development andhas been deeply involved in gold mine development for more than 20 years. It employstechnical specialists with expertise in the areas of mining, geology, mining engineering,mineral economics, material processing, and technology development. Technical serviceshave been provided to many of the leading U.S. and foreign mining companies, severalpublic utilities with mineral interests, to various state agencies, the U.S. and foreigngovernments, and the United Nations and the World Bank.

The Company has three wholly owned subsidiaries, Whitney & Whitney, Inc.("WWI"), Itronics Metallurgical, Inc. ("IMI"), and ItronicsCalifornia, Inc. (ICI), a 92.5% owned partnership, Nevada Hydrometallurgical Project("NHP"), and an 81.63% owned joint venture, American Hydromet. A briefdescription of each organization follows:

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1. Itronics Metallurgical, Inc.:

IMI is a wholly owned subsidiary of the Company. IMI was established in 1981 to managethe metallurgical and materials processing operations being developed under WWI andAmerican Hydromet research and development programs. IMI has been the main provider ofmanagement services to American Hydromet since 1986. IMI is now managing thephotochemical/GOLD'n GRO fertilizer segment as discussed below. IMI is responsible forprecious metal and other material product sales, and markets a five ounce silver barbearing a unique hallmark, "Silver Nevada Miner".

2. Nevada Hydrometallurgical Project:

Nevada Hydrometallurgical Project ("NHP") is a research and developmentpartnership formed in 1981 to fund research into potential commercial applications forcertain hydrometallurgical process techniques developed by the U.S. Bureau of MinesResearch Center in Reno, Nevada between 1970 and 1979. A number of potential commercialapplications were defined by NHP, one of which is the American Hydromet silver/goldrefining technique. In late 1985, NHP assigned its interest in the silver/gold refiningtechnique to American Hydromet. NHP retained its proprietary interest in the otherpotential commercial applications for future developments. NHP continues as a financingand technology owning partnership. The Company owns 92.5% of NHP.

3. American Hydromet:

American Hydromet is a Nevada joint venture that was formed in 1985 to develop certainsilver and gold refining/recovery technology and to create business based upon suchtechnology. The photochemical fertilizer segment now being managed by IMI is owned byAmerican Hydromet. The ownership interests in American Hydromet are: NHP for 76.5%, IMIfor 1%, and American Gold & Silver Limited Partnership ("AG&S") for22.5%. AG&S is a Nevada limited partnership, for which WWI serves as the generalpartner and owns a general and limited partnership interest totaling 10.907%. The Companyowns a 32.99% limited partnership interest in AG&S. In total, the Company ownsapproximately 81.63% of American Hydromet.

4. 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 recyclingtechnology. ICI had no business operations in 1999, but plans for the company are toutilize the phosphoric acid technology and it may eventually operate IMI's photochemicalservices and GOLD'n GRO fertilizer business in California.

 

5. Whitney & Whitney, Inc.:

WWI was incorporated in 1977 and is a wholly owned subsidiary of the Company. WWI isprimarily a mineral consulting firm that provides planning and technical services to themining industry. The broad range of services provided by WWI includes mineral economics,geological studies, mining and cost engineering, and project management services. WWI hasextensive experience with base metals, precious metals, such as gold and silver, specialtyminerals, such as molybdenum and tungsten, coal, and industrial minerals. WWI hasperformed substantial services for small, medium, and large mining projects. WWI hasperformed services for many leading U.S. and foreign

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mining companies, various state agencies, for the United States and several foreigngovernments and the United Nations. WWI was under contract with the Country of Boliviafrom 1986 through early 1992 to assist it in developing its mining industry. 

 

SUMMARY HISTORY OF OPERATIONS

Whitney & Whitney, Inc. was incorporated in Nevada in 1977 to provide a wide rangeof technical services to the mining industry. During the 1980's, WWI completed severalmulti-client fertilizer marketing studies. Also during this time period, WWI was contactedby 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, closelyfollowing 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 theCompany's business into new industries. When considering the fertilizer marketing studiespreviously performed, along with the growing national issue of sewer system contaminationwith toxic photowastes and silver toxicity to fish, it seemed to be a natural extension ofWWI's existing expertise to expand into the photowaste recycling business. In 1987 thedecision was made to move forward with research and development of a process to extractsilver from photographic liquid wastes and the necessary permits to establish an R&Dfacility under RCRA were obtained. In 1988 a patent and literature research projectregarding the use of photowastes in fertilizer was begun. In 1989 experimentation withprocessed run of plant liquids as fertilizer was begun. It took until 1997 to develop anddemonstrate a satisfactory product and to complete university testing to demonstrate itstechnical viability. A licensing and sales agreement was signed with a major fertilizercompany in 1998, but it took another two years to obtain financing, complete permitting,install an operational plant and to demonstrate that the new technology would work on acommercial scale. By the first quarter of 2001 the Company was finally positioned todevelop sales for more than a dozen liquid fertilizer products with the objective ofbecoming profitable.

A description of some of the obstacles encountered and overcome over the interveningyears, follows:

A. In 1988 the Company acquired WWI. The acquisition was structured to obtainapproximately $1.7 million in equity financing to support the photo- byproduct fertilizerR&D project. Due to a number of factors, including a change in federal and state lawsregarding trading in penny stocks, only a small portion of this funding was received.Consequently, the Company was undercapitalized from the time of acquisition of WWI in1988.

B. In the initial stages of the R&D project, it was believed that: (1) the primaryresearch on the integrated system for recycling photowaste into fertilizer would takethrough 1992 to complete, and (2) the R&D effort would be self-supported by increasingphotowaste volume at the established service pricing. The basic research for demetallizingphotowaste solutions and for refining the silver were substantially complete by the end of1992. The research on the third segment of the integrated system, converting thedemetallized solutions to fertilizer, took

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four more years. Initially, it was believed that "run of plant" solution,with minimal major nutrient supplementation, would produce a quality fertilizer product.The early stages of research determined that the product was too dilute and would need tobe concentrated by supplementation with the major nutrients, nitrogen, phosphate, andpotassium, in order to produce the desired quality product. This factor, combined with theseasonal nature of field testing the products, resulted in the additional years requiredto perfect and field test the mix formulas in the quantities needed for large scalemanufacturing.

Initially, it was believed that the R&D effort would be fully supported byphotowaste service revenue. Two major factors prevented this. First, during 1992 and 1993,there was reduced enforcement of applicable regulations by various environmental agencies,and, second, during the same period, a competitor entered the Northern Nevada market byoffering free service in exchange for the contained silver in photowaste solutions. Toprevent loss of customers and to increase volume, the Company instituted three pricereductions of approximately 40% each during the period of 1992 to 1994. The result is that1997 volume was 159% greater than 1992 volume, but service revenue remained essentiallythe same throughout this time period, producing on-going losses. 

During this same time period, the Company worked with environmental officials to obtainstrengthened enforcement activity. Enforcement strengthened in 1996 and 1997, not only inNorthern Nevada, but in California and most of the other 48 states in the U.S. In 1996 theNevada regulatory authorities made changes in the Company's permit status that increasedthe number of used chemical solutions that the Company can process for utilization infertilizer and other chemical concentrates. Tightening of regulatory enforcement alsoreduced competitive price pressures by making it more difficult for service companies withminimal compliance capability to continue to offer low cost services. The result was thatbeginning in 1996 selective increases in service pricing became feasible.

The second and probably the most important factor preventing the R&D project frombeing self-supporting was that in 1991, photowaste volume limitations were placed on theCompany by state and local environmental agencies to prevent large quantities ofphotowaste being brought from out-of-state to be disposed at Nevada solid waste sites.Unlimited volumes of waste may be brought in as long as they are converted to commercialproducts and are sold into consumer markets. Photowaste volume reached the threshold ofthe limitations in 1994. The Company was unable to increase photowaste volume to offsetthe price reductions dictated by market conditions and the Company’s fertilizerproducts were not yet completed, so the Company’s losses continued.

In 1995, 1996, and 1997 the Company placed two of its fertilizer products in afertilizer comparison program at University of California at Riverside. One product,GOLD’n GRO 20-1-8 (precursor to GOLD’n GRO 20-1-7) was rated number one at theend of two years. Since then the Company has developed more than 30 products and ismarketing 11 of them. In 1999 the Company purchased a 3.5 acre site with 35,000 squarefoot of commercial buildings suited for conversion to a commercial fertilizermanufacturing plant. In 1999 and 2000 funding was acquired to make the conversion, thenecessary permits were acquired, and the new plant was demonstrated to operate at thenecessary commercial scale while completely meeting the environmental standards by the endof the third quarter of 2000. In 2001 for the first time the Company had an operationalplant with the capacity to produce commercial quantities of high quality chelated liquidfertilizer products that are formulated using the demetallized photoliquids. 

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The Company introduced a chelated GOLD'n GRO zinc micronutrient product in 2001 thatproduced truck load quantities of sales in 2002 and produced meaningful growth incommercial sales. The Company’s goal was to expand sales during 2002 to a profitablelevel, but this was not achieved. During 2002 the Company worked with its licenseddistributors to develop a plan for a GOLD'n GRO base liquid that could be used as asupplement in the distributors proprietary liquid fertilizer field blend programs. Theplan is to use the base liquid in the amount of 5 to 15 percent of the distributors fieldblend mixes sold to their farm customers. This presents the opportunity for the Company toparticipate in the distributors sales programs in a meaningful way. The base liquid isbeing sold in truck load quantities and usage is expected to be several times greater thanthe usage of GOLD'n GRO Zinc. Successfully implementing the sales of the GOLD'n GRO baseliquid is expected to drive sales growth for the foreseeable future. The market for thisproduct is large enough to produce sales levels needed for the Company to becomeprofitable within 2003 or 2004.

The Company’s GOLD’n GRO fertilizers are producing very positive growthresponses in the field and the Company has a strong fertilizer marketing partner tointroduce the products into the western regional markets. However the fertilizer marketsare mature, and have been declining for the past 5 years due to depressed economicconditions. The Company's product introduction has been slowed by these depressed marketconditions. There are indications that 2003 will be stable or experience growth in some ofthe fertilizer segments being targeted by the Company's distributors. The Company believesthat market penetration is being maximized within the constraints of the targeted markets.The Company is continuing to work with its distributors to increase the rate of marketpenetration by introducing new products that are developed specifically to fill identifiedmarket needs not being satisfied by existing products. **A more detailed discussion of the business of the Company contained in Item 1 ofthis report, based on the Company's two business segments which were briefly describedabove, follows. The operating results of the two segments are discussed in Note 12 to theConsolidated Financial Statements.

PHOTOCHEMICAL FERTILIZER

1. Research and Development

The photochemical fertilizer (the American Hydromet Project) segment of the Company isnow operating commercially, but prior to 2002 was primarily involved in research anddevelopment, with the objective of developing integrated technology that can be used torecycle photochemical materials, that recovers all of the silver and all other toxicmetals from those materials, and which utilizes "heavy-metal-free" liquidphotochemicals in a chelated liquid multi-nutrient fertilizer product line for turf,ornamentals, and specialty agricultural applications. The status of development of thethree integrated components is more fully described below:

The technology was developed in a semi-works plant in Reno. Development of theintegrated technology is a technical innovation with global potential. There are threeseparate but integrated functions for handling the spent photoliquids. The first is thephotoliquid demetallization and conditioning process. This process is used to demetallizeand recondition

8

the metal-bearing photofixers and photodevelopers that are picked up from photousingbusinesses. This portion of the process is very efficient, recovering over 99.998% of allthe contained toxic metals, and a very large percentage of contained iron. There are fourproducts from this part of the operation: (1) a metal-bearing sludge, and (2) distilledwater, (3) a concentrated photofixer sourced base liquid for fertilizer manufacturing, and(4) a demetallized concentrated photodeveloper sourced base liquid for fertilizermanufacturing. 

The metal-bearing sludge is dried and passed to the refining operation for separationof the contained silver. More than 99.5% of the silver contained in the sludge isrecovered for sale. The refining was developed specifically to handle the sludges from theliquid demetallization and conditioning process. As such, the other heavy metals and ironcontained in the sludge end up in a glass byproduct and are rendered completely inert. TheCompany has formulated the glass so that with minor additions of other compounds, it canbe converted into usable products, such as wall and floor tile. The Company is nowbeginning to develop a tile product.

The reconditioned photoliquids are used as a component of turf and other fertilizers.The fertilizers are chelated liquid multi-nutrient NPK(Nitrogen–Phosphorous-Potassium) products containing micronutrients and produceexcellent results in application. Development of the fertilizer took more than 12 yearsand involved a number of stages of development. Important steps in the development of thefertilizer were: (1) patent and applications literature research to determine if similarmaterials were being used in fertilizer products, (2) initial plot testing, and chemicalanalysis of "run of plant liquid" to determine the response of turf anddifferent plants to the non-supplemented liquid, (3) an extended period of mix testing andthen large-scale field testing of the mixes to determine the suitability for use on turf,(4) development of manufacturing procedures for the chosen mix, and (5) large scale fieldtesting by different types of users to determine acceptability and to identify problemsprior to implementing a commercial manufacturing and marketing program. A problem inherentin fertilizer product development is the seasonal nature of the business. Each series ofplot tests requires essentially one year because of the seasonal nature of plant growth.This lengthy product development cycle will continue to apply to new fertilizer products. 

After having made the commitment to this long-term development, Itronics believes it isthe only company in the world that has successfully demonstrated the ability tomanufacture an environmentally compatible fertilizer product line from liquidphotochemicals. As such, Itronics now has unique proprietary technology for completelyrecovering the silver and for converting the waste liquids into usable"heavy-metal-free" products, thereby achieving "Beneficial UseRecycling" of the waste stream.

In 1995 the Company participated in a fertilizer product application comparison programsponsored by the University of California at Riverside. For the second consecutive year,in 1996, GOLD'n GRO 20-1-7 was rated Number 1 in the program, which compared "top ofthe line" multinutrient nitrogen fertilizers produced by leading U.S. fertilizermanufacturers. GOLD'n GRO 20-1-7 is registered in California and Nevada. In early 1997,GOLD'n GRO 10-0-0 Iron, a fully chelated liquid iron supplement fertilizer, was registeredin California and Nevada. In mid 1997, development of GOLD'n GRO 10-0-1 Manganese wascompleted. The manganese, iron and zinc included in this product are in a citrate chelatedform supplemented with EDTA chelate, which makes the micro-nutrients readily available toplants. In August 1997, the Company

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received a national trademark for the name "GOLD’n GRO". In 2001 GOLD'nGRO 9-0-1 Zinc was developed. This product was introduced into the market place as areplacement product and achieved very rapid commercial sales growth.

Between 1998 and 2002 several multinutrient GOLD'n GRO formulations were introduced fordifferent market segments. In 2001 a decision was made to eliminate potassium chloridebase products and to just focus on chloride free products. These products are especiallysuited for foliar application and for use in specialty markets such as the nursery andgreenhouse market, golf course tees, greens, and fairways, and many tree and vine crops.The Company believes that the product line will continue to evolve as new products arerequested to fill specific market needs. The overall product focus is on identifying anddeveloping large volume applications.

The Company conducts field trials to gather agronomic data and to develop knowledge ofhow the GOLD'n GRO products work on different crops. This field testing will continue asit is the most effective method for developing the field data needed to support claims ofproduct effectiveness for specific crops. 

During 2001 and 2002, the Company’s GOLD’n GRO fertilizer marketing effortwas focused with the Company’s two agronomists teaming with our distribution networkto present product demonstrations to fertilizer customers and to assist in field trials onvarious crops. On-going field trials of GOLD’n GRO fertilizer products continue toshow significant improvements in crop production and quality. The trials are providingagronomic data that is being used to develop GOLD’n GRO nutrition programs for thecrops being tested. 

The field trials are demonstrating that the GOLD’n GRO products provide bothagronomic and economic benefits in the "specialty agricultural" markets.Specialty agriculture includes vegetables, cut flowers, herbs and spices, and fruits andnuts of all types. These crops are relatively high value compared to field grains such ascorn, wheat, and soybeans. Field trials in 2002 on cotton and on silage corn producedpositive results, opening two new large acreage crops for GOLD'n GRO applicationdevelopment. Alfalfa is typically considered as a "hay" or "forage"crop and is generally of low to intermediate value when compared to specialty agriculturalcrops, however, high nutrient content alfalfa for the dairy market often commands asignificant price premium which puts it at the low end of specialty agricultural cropvalues.

Field test results using GOLD’n GRO products have been published for Alfalfa,Fresh Plums, Oranges, Sweet Corn, and Watermelons. The field test results and crop valuestatistics are summarized in the following table. On a national basis, the GOLD’n GROproducts appear to have the potential to add 10’s of millions of dollars in increasedvalue and output for the indicated crops:
**Crop**Crop    Increase**Return    on GOLD’n GRO**Fertilizer Cost to Grower****Gross    Value of the Crop Per Acre**Total    USA Crop AcresAlfalfa+33%
3 times
$ 351
23,000,000Fresh PlumsLarger, Earlier
15 times
$2,500 
140,000Sweet Corn +11.5%
30 times
$1,788
222,800Oranges+40% 
3 times
$2,300
842,000Watermelon+10.4%
160 times
$1,670
184,600
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A 3 year field trial on valencia orange trees being carried out with oversight from amajor university in southern California is continuing and it appears that the 35 year oldtrees are responding positively to the fertilization. Two year cumulative results havebeen analyzed and positive significant results are being obtained. Both output per treeand quality have been increased. This trial is being continued. 

During 2002 the Company continued to be offered the opportunity to explore thefeasibility of recycling other non-photographic materials into fertilizer. Four wastestreams are currently being considered for future recycling. One of these is a high silvercontent waste stream. 

The Company has concluded that certain acid waste streams generated by aerospace andelectronics manufacturers may be able to be converted to a form that will fit"Beneficial Use" recycling into fertilizer in association with the processedphotochemical materials. Discussions are underway with an aerospace manufacturer that maylead to development of a prototype program that will demonstrate the "BeneficialUse" concept. The Company’s concentrator technology will be a component of theprogram. 

2. Operations

The Company now operates a commercial scale plant to receive used photochemicalliquids, recover the silver and other metals, and convert the demetallized solutions tothe line of liquid GOLD'n GRO fertilizer products. Revenues are generated by photochemicalmanagement services, sale of photochemical concentrators, sale of silver, and sale ofGOLD’n GRO liquid fertilizer products. A critical component of this system is tomatch, within a reasonable range, the incoming volume of photochemical liquids with thevolume of utilization of those liquids in fertilizer or other manufactured products. Atthe outset of the technology development program, regulatory constraints were imposed tolimit the amount of photochemical materials that the Company could handle until acommercial fertilizer was perfected, or some other commercial use for the material wasdeveloped. Now that testing of the basic products is complete, and a new recyclingfacility is in operation, the Company is actively seeking new photochemical liquidbusiness.

Photochemical management services is operating as a regional business with northernNevada as the center of its activities. The Company is serving more than 200 customers inthe northern Nevada market and believes that it has the dominant position in this market.A satellite service operation has been established in the San Francisco Bay Area. 

The San Francisco Bay Area is large, but there are at least three strong competitors inthe market. Market conditions have changed over the past several years and pricing hasadjusted upwards from the lows seen in late 1994. The Company is now able to competeeffectively based upon pricing and service quality. 

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In late 1995, the Company sold a prototype installation of a photochemical concentrator(low temperature vacuum distillation equipment) to a large manufacturing company innorthern Nevada. This equipment separates the water from the photochemistry withoutdestroying the basic chemical components, and produces a high value concentrate. Theseparated water is further purified and is usable in manufacturing operations. Nearly 100%water reuse is achieved.

The photochemical concentrating equipment began operations in March of 1996, andproduces concentrate to meet Company standards and produces pure water for re-use inmanufacturing. This same manufacturing company bought a second concentrator in early 1997and a third concentrator in 2002. 

In 2002 the Company successfully bid for and completed a Department of Defense contractfor the manufacture of 5 photochemical concentrators that utilize low temperature vacuumdistillation as the water removal method. The machines are a "second generation"design and remove about 70 percent of the water in the spent photochemicals producing aconcentrate that is suitable for commercial shipment to the Company's recycling plant inReno, Nevada for silver recovery and fertilizer manufacturing.

In early 2003 the Company initiated a program to market the photochemical concentratorsto large consumer photography and medical x-ray facilities throughout the United States.This is a cost effective method for the Company to expand its photochemical supply for usein GOLD'n GRO fertilizer manufacturing. Photochemical concentrators will be a source ofrevenue growth in 2003 and future years as the company continues to expand nationally. Thephotochemical concentrate has a high silver content and is dominantly composed of ammoniumthiosulfate (ATS) and EDTA chelates, the basic chemicals used in photo fixer solutions.Itronics' fertilizer blending technology is designed to utilize the concentrate infertilizer.

Itronics' plan is to seek companies that handle sufficient volumes of photographicliquids to justify purchase of the concentrating equipment. The concentrate can be shippedin interstate commerce as a commercial product, resulting in the opportunity to serve thenational market. Successful introduction of this technology will increase the value pergallon of material handled by a factor of five to ten, and will increase the amount ofsilver handled per gallon of photoliquids received. As the supply of the ATS concentrategrows, so too will the silver refining operation. The transition from low silver contentliquids to high silver content liquids will increase the importance of the silver refiningoperations and silver sales. 

Achieving profitability for the photochemical/GOLD'n GRO fertilizer segment requiredexpansion of the plant from the semi-works scale facility in Reno to a commercial scale. 

A 35,000 square foot manufacturing plant in Reno/Stead, Nevada was purchased in 1999.Originally, it was planned to move the pilot plant equipment to the new facility in muchthe same configuration as the existing plant, with some additional equipment for increasedproduction capacity. However, due to tightening regulations, the basic concept for theplant configuration was redesigned and significantly expanded.

In late 1999, final building permits were received and regulatory approval was obtainedto start up operations. Construction of the liquid processing area was completed in early2000 and the City of Reno issued the certificate of occupancy at that time. A"shake-out" period was

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begun in which small batches of photochemicals were processed and small batches offertilizer were manufactured. The purpose of this period was to test all of the equipmentto ensure it meets operating specifications and to train the appropriate personnel inplant operation. Minimal problems were encountered and the "shake-out" periodwas completed in 2000. 

By late 2000 the new facility had demonstrated the ability to "demetallize"the received photo liquids to required EPA levels, thereby proving the technical viabilityof the new technology on a commercial scale. 

The spent liquid photochemicals are transported to the Company's recycling facility.All customer materials are logged and recorded. All photoliquids are tested for silvercontent and for contaminants, such as chrome and contaminated wastes are rejected. It hasbeen the experience of the Company that new customers, with limited knowledge of the rulesand procedures, may submit materials containing foreign substances. The Company achieveshigh contaminant control standards by working proactively with its regular customers.

Once testing is completed, the photographic solutions are processed.

The photochemicals presently being handled by the Company are:

   Ammonium Thiosulfate Concentrate

   Aqueous Ammonia 

   Developer

   E1ectro-flake

   Film

   Fixer

   Sodium meta-bisulfite concentrate

   Stabilizer

   Steel Wool/Metallic Ion Exchange Cartridges

   Scrap paper that accompanies film

The Company is evaluating the potential for use of acetic acid in fertilizer. If thisproves to be technically feasible, then the Company will begin to accept used acetic acidsolutions as well.

3. Markets and Competition

I. Photochemical Recycling and Silver Refining There are estimated to be more than1,500 generators of photographic hazardous waste in the State of Nevada and more than500,000 throughout the United States. This includes printed circuit board manufacturers,photo off-set printers, photographic developers, lithographers, photographers,microfilming (banks, companies, etc.) and x-ray users (dentists, doctors, hospitals,podiatrists, orthopedic surgeons, veterinarians, radiologists and industrial x-ray users).The Company estimates the total market for recycling this category of waste to be in therange of $400 to $500 million.

Nationally, more than 80 million ounces of silver are consumed in photomaterialsannually. Approximately 30% of this is lost through disposal in sanitary sewersnationwide. Itronics' technology recovers 99.975% of the silver contained in these wastesolutions. The Silver

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Institute indicates that silver usage in photography is increasing, and will continueto do so over the next several years.

The photowaste management industry is not systematically organized, but is fragmentedwith many small operators, or large waste haulers. The small operators typicallyspecialize in one or more types of photowaste, but usually prefer film. The large wastehaulers pick up all categories of waste, and may also handle film and paper. Photowastemanagement as a systematic business is not yet organized by any large company in theUnited States. This is a niche that the Company seeks to fill.

Silver recovery from black and white and x-ray chemistry is an established industry.Silver recovery is typically accomplished at a user's site by specialized recoveryequipment. The equipment is normally installed and maintained by way of a serviceagreement with the vendor, or vendor representative. The service of silver recovery isparticularly entrenched in the medical field where the service business supplies a silverrecovery unit and also picks up film waste for sale to a waste film processor. Black andwhite and x-ray chemistry is typically monometallic with silver being the main EP-Toxicmetal. The recovery units are only about 90% efficient in routine operation, sosignificant amounts of the silver are discharged into sanitary sewer systems. Thiscompares to the Company's technology which routinely recovers 99.975% of the silvercontent.

Metal recovery from color and paper processor chemistry is not as well established,although the silver recovery units used in the medical sector are also used by colorprocessors. A characteristic of color chemistry and paper processing chemistry is that itis polymetallic, and contains from four to seven of the metals listed as EP-Toxic. Thereare stringent EPA discharge limits for these metals. This sector has the normalcompetitive factors found in the medical sector, except that most of the companies in thebusiness are only focusing their recovery efforts on silver, while ignoring the otherthree to six toxic metals commonly known to occur in this chemistry.

Waste film processing is an established competitive industry in the United States. Itis highly segmented and characterized by many small processors, most of which are locatedin the eastern part of the United States. The number of processors in the West Coast islimited. There are believed to be three companies of consequence, one in California, onein Washington State and one in Utah. Some waste film is exported to Korea, Japan andChina. Eastman Kodak is now the largest and dominant waste film processor in the easternU.S. and may be the largest silver recycler in the United States. Kodak purchases scrapfilm from its large film processing customers.

The Company is aware of digital imaging and its potential impact on usage ofconventional photography. The potential impact is different for each of the majorsegments; medical, color photography, and printing/microfiche. Digital imaging has madesignificant inroads into printing/microfiche processing with an almost 85% reduction involume of photographic liquids over the past ten years. After several years of experiencewith digital imaging, it has been observed that after three or four years, there issignificant degradation of the quality of digital images, requiring copying onto newdisks, which is time consuming and costly. Consequently, microfiche is making a comeback.There has been little visible impact on color photography, although the new digitalcameras are getting wider usage. In 2001 it became clear

14

that contrary to popular belief, digital photography is creating a new source ofphotowastes from internet companies that combine digital imaging services with the abilityto print high quality photographs for their customers. The Company had two such customersduring 2001 and 2002, and these customers’ photochemical volume has been increasingdramatically on a monthly basis, although the growth rate slowed in 2002. Digital methodsare being adopted in the medical industry, and although the medical sector is relativelyhigh growth with the aging U.S. population, digital imaging has had the effect of slowingthe growth of waste photo liquids being generated.

A larger impact on photo waste generation has been the pressure for companies to reducethe amount of waste generated at the operating sites. In photography, water was used incopious quantities for film rinsing and large quantities of low chemical content wasteliquids were generated. With the tightening of regulation of discharge of contaminatedwaters to sanitary sewers, the equipment manufacturers have focused on reducing waterusage. This attention to reduction of waste water has also contributed to a reduction inthe quantities of waste liquids being generated. It is expected that efficiency of use andassociated waste reduction will continue, driven by increasing waste disposal costs.

The photochemical concentrators now being sold by the Company will contribute to thereduction of water usage in the photographic industry. When the photochemical concentratoris used, all the recovered water can be re-used. The concentrated liquid chemical productis purchased by the Company, and so photographic waste generation at the user site iscompletely eliminated. This technology represents an end point for the elimination ofwater waste in the photographic industry, and is expected to gain wider acceptance as theindustry recognizes the benefits inherent in the technology when combined with theCompany's service capabilities.

The Company believes that it has the following competitive advantages:

   * Leading position in developing "total" photochemical recyclingtechnology and waste management procedures. 

   * Proprietary solution conditioning process and equipment with thepossibility of patent rights and licensing agreements.

   * Patented low cost silver refining process using wet chemistry(hydrometallurgy) to quantitatively separate silver from photochemical materials.

* Proprietary "heavy-metal-free" liquid products that eliminate the need todispose of treated photographic liquid waste in sewage treatment systems, or solid wastesites (dumps).

* Systematic pick up services for photochemical generators.

* Quantitative material control procedures meeting all EPA reporting guidelines.

* Regulated as a precious metals recycler and a hazardous waste transporter, therefore,low cost and proven track record and commitment.

* Skilled in converting technical concepts to commercial products and production.

* Line of proprietary chelated liquid fertilizer products that are formulated using the"heavy-metal-free" photoliquids. 

Environmental restrictions on disposal of chemicals to sewer plants are continuing totighten throughout the United States so that now the rate of growth for the photochemicalrecycling business is dependent upon the rate and vigor of fertilizer sales growth.

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II. Photochemical Fertilizer

The urbanization of the United States has led to the development of an "UrbanFertilizer Market". The total fertilizer market consists of the "AgriculturalMarket" and the "Urban Market". The Urban Market accounts for at least $9billion in annual sales in the United States. The "Specialty Ag" segment of theAgricultural Market is a $1 billion segment making the total a $10 billion market.

The Urban market is divided into the "Home Lawn and Garden" segment, the"Landscape Maintenance" segment, and the "Nursery and Greenhouse"segment. These markets are not statistically well defined, since they are relatively newas large commercial markets, and are highly fragmented with many small regional suppliersand are growing rapidly. One well known operator in the Home Lawn and Garden and theLandscape Maintenance segments is Scotts/Stern's Miracle-Gro. Several other largecompanies are also active in this market.

The Company's photochemical fertilizer GOLD'n GRO 20-1-7 was developed for the Urbanmarket as a "turf" product. Its principal customers are home owners,professional lawn service companies, golf courses, turf farms, and large municipal andcommercial facilities. Since early 1997, IMI has completed development of numerousadditional fertilizer products covering most of the applications being targeted in each ofthe referenced markets. 

The Company estimates that more than 100 million gallons of photowaste liquids aregenerated annually in the United States. The ratio for converting one gallon ofphotochemical to GOLD'n GRO 20-1-7 fertilizer is approximately 1 gallon of photochemicalto 4 gallons of fertilizer. This means that there is enough supply of photochemical tosupport the manufacture of 400 million gallons of GOLD'n GRO 20-1-7 fertilizer annually,equivalent to approximately two million tons. 

The conversion rate of the chelated micronutrient products and the GOLD'n GRO baseliquid is lower. An estimate of the market for the GOLD'n GRO base liquid indicated amarket potential for 200 million gallons in the United States and would equate to about 1million tons of fertilizer.

The Company estimates that on a commercial scale, the combined revenue of photochemicalservices, silver and fertilizer will approach $10.00 per gallon of photochemicalsreceived. Consequently, the potential market for these products and services is in the $1billion range.

In March 1998 IMI signed a definitive manufacturing and distribution agreement withWestern Farm Services (WFS), one of the largest liquid fertilizer bulk retailers in thewestern United States. The five year agreement, with optional five year renewal periods,grants WFS an exclusive license and right to manufacture and market IMI’s GOLD’nGRO line of fertilizer products in the Turf & Ornamental, and Specialty Ag markets inthe states of Arizona, California, Hawaii, Idaho, Oregon and Washington. In March 2003 thecompanies entered the second five year term of the agreement. IMI will manufacture itsbase products for shipment to various WFS manufacturing and distribution facilities inthose six states. In April 1998 IMI began the introduction of the GOLD’n GRO line offertilizer products to WFS store managers and sales staff. WFS has 45 stores inCalifornia, with one to three sales people each. 

16

WFS has a manufacturing plant in south central California. The other activity relatedto implementing the manufacturing and sales agreement with WFS was establishing thelogistics for movement of materials between Reno and the WFS manufacturing plant. Thelogistics and warehousing locations for delivery of manufactured goods from both the IMIReno manufacturing plant and the WFS manufacturing plant are established. The WFS Alpaughplant is now set up to manufacture the multi-nutrient products that are being offered. Thechelated micro-nutrient products, GOLD’n GRO 10-0-0 Iron and GOLD’n GRO 10-0-1Manganese, a new product, GOLD’n GRO 9-0-1 zinc, and the base liquid are manufacturedonly in Reno. 

The fertilizer industry is in a contraction which appears to be ending. The specialtyagriculture markets which had held up well declined rapidly in 2001. A significantcontributing factor is believed to be the more than 30 percent appreciation of the dollaragainst most other currencies which has occurred since the first of 2001. Currencyvaluations are grossly distorted when compared to intrinsic values of goods being traded.For example, oranges were being shipped into the western United States from Australia andin 2001 were being sold in California stores at prices lower than locally grown oranges.The prices are lower than the local growers’ cost of production. Based ontransportation distances alone, this should not be possible. This reversal in thedistribution of agricultural food products is affecting all segments of the Californiaspecialty agriculture markets. California accounts for more than 51 percent of thespecialty agriculture for the United States and so it can be assumed that these factorsare affecting the rest of the United States as well. This problem continued in 2002. 

The California markets are also impacted by greatly increased energy costs which arenow being passed through to the consumers. While this impact is significant, it is muchsmaller than the impact of inequitable currency valuations. Only Congress and the FederalGovernment through the U.S. Treasury Department can address the issue of inequitablecurrency valuations. It is clear that the problems facing basic U.S. industry will not beremedied until this issue is properly addressed and corrections made.

The Company is working with its distributors on an on-going basis to identify andimplement sales development programs that will increase the rate of market penetrationwith the GOLD’n GRO products. A much greater understanding of the details of themarket has been obtained directly from this process. This improved understanding isstrengthening the working relationship that has been developed with our distributors andis producing continuing increases in sales in a market that was in a state of rapiddecline. 

The Company is developing branded products that have the GOLD'n GRO trademark. TheCompany is implementing and expanding a plan for Home Lawn and Garden sales through itsweb page. Significant capital, in the form of advertising budgets and the ability to carrylarge inventories of finished goods, is required to achieve meaningful sales in the UrbanMarket segments. The Company plans to expand its internet sales program over the nextseveral years. The methods and costs of retail distribution are changing making theinternet sales platform more economically feasible as a method of large scale retailselling. 

 

4. Seasonality and Working Capital

In analyzing the market and industry competitors, it is apparent that two factorssignificantly

17

impact the Company's ability to penetrate these markets in a meaningful way. First, theseasonal aspect of photochemical and fertilizer sales, which directly results in thesecond factor, the need for a much higher level of working capital when compared to otherindustries.

Based on experience, the Company's photochemical hauling volume starts each year atcomparatively low levels in the first quarter, steadily increases during the secondquarter, peaking in June or July, declining during the third quarter, and reaching levelssimilar to that of the first quarter by year end. Consequently, revenues from bothphotochemical liquid services and silver sales are significantly reduced during six monthsof each year. The cause of this cyclical pattern is the tourism based economy in NorthernNevada, which has a comparable seasonal pattern. The number of visitors directly affectsphotochemcial volume from consumer photoprocessing companies. To mitigate the seasonaleffect on this segment of operations, the Company is focusing its marketing efforts onlarger volume customers in the medical, military, printing and industrial photo fields.The seasonality factor for photochemical and silver revenues should be reduced as theCompany expands into California and other regional markets that are not as heavilydependent on tourism. The acquisition of photochemical concentrate supplies fromphotochemical concentrator customers is also expected to moderate this seasonal factor. 

The Company expects fertilizer sales to have a strong seasonal component, with theprimary sales season running from April through November each year, with an in-season lowin July and August. In addition to the general seasonal nature of sales caused by normalweather patterns, unusual weather can further affect fertilizer sales, especially in thewintertime. For example, unusually cold or wet spring seasons may delay the growth cycleof various crops for which the Company's fertilizer products are utilized. To overcomeweather related effects on fertilizer sales, the Company is evaluating markets in thesouthern areas of the United States where growing seasons are longer and, in some cases,year round.

Due to the seasonal nature of both photochemical services and GOLD'n GRO fertilizersales, the Company must increase its net working capital to a level higher than that ofnon-seasonal industries. For example, some of the Company's competitors have workingcapital equal to their annual sales. Consequently, ongoing debt and equity funding will berequired for the Company to grow, even after a profitable level of operations is achieved.

 

5. Environment and Regulation

I. Liability

All chemistry has a "cradle to grave" regulatory life span. This term meansunder Federal law, the prime generator has the ultimate liability for all generated wasteas long as it exists. Conventional services, through storing and hauling, relocate thewaste to a legal landfill in the West. Liability then remains for the cost of cleanup ifthe landfill has to be reclaimed or the contamination of groundwater develops.

However, once the spent chemistry reaches the Company's facility and has beenprocessed, the generator's hazardous waste liability has been removed. Using the Company'sprocess, virtually

18

all metals, including most of the iron, are removed. The end result leaves the Companywith a non-hazardous "toxic-metal-free" liquid which is legal for discharge intothe environment. As discussed above, the demetallized liquids are being used in commercialfertilizer products, entirely safe for the environment.

II. Increased Regulation

While in general the Company's business has benefited substantially from increasedgovernmental regulation of hazardous disposal by private industry, the waste managementand recycling industry itself has become subject to extensive, costly and evolvingregulation by federal, state and local authorities. The Company makes a continuing effortto anticipate regulatory, political and legal developments that might affect itsoperations, but may not always be able to do so. The Company cannot predict the extent towhich any legislation or regulation may affect future operations.

In particular, the regulatory process requires firms in the Company's industry toobtain and retain numerous governmental permits to conduct various aspects of theiroperations, any of which permits may be subject to revocation, modification or denial. TheCompany is not in a position at the present time to assess the extent of the impact ofsuch potential changes in governmental policies and attitudes on the permitting process.

 

III. Permits and Inspections

To the best of the Company's knowledge, it has obtained permits from governmentalagencies having jurisdiction over it, such as the EPA, Nevada Department of EnvironmentalProtection, Washoe County Health Department and the City of Reno, Nevada. The Company isnot required to obtain federal permits, but is required to have, and has obtained, localpermits for its photochemical recycling facility under the provisions of the Federal EPA.Similar permits will be required of all facilities that the Company may construct. TheCompany's recycling facility is subject to frequent inspections and to regulations(including certain requirements pursuant to federal statutes) which may govern operatingprocedures for land, water and air pollution, among other matters. In particular, theCompany's operations are subject to the Safe Drinking Water Act, TSCA (Toxic SubstancesControl Act-pursuant to which the EPA has promulgated regulations concerning the disposalof PCBs), the Clean Water Act (which regulates the discharge of pollutants into surfacewaters and sewers by municipal, industrial and other sources) and the Clean Air Act (whichregulates emissions into the air of certain potentially harmful substances). Employeesafety and health standards under the Occupational Safety and Health Act are alsoapplicable to employees of the Company.

 

IV. Regulatory Direction

For several years the Company has been studying the various regulatory requirementsunder RCRA and has been working with state and local environmental officials regarding theextent to which hazardous waste regulations apply to the Company's operations. Throughthis process, the Company reached the conclusion that due to use of photochemicals as abeneficial ingredient in its fertilizer products, the photochemicals are not"hazardous waste" as defined in the regulations, and therefore, beneficialmaterials that are otherwise regulated as hazardous waste, are exempt from most of suchregulations. In early 1996 the Company received concurrence from State of Nevadaenvironmental officials that the Company's photochemical fertilizer

19

process meets the existing RCRA requirements for exemption from all environmentalregulation with the exception that certain presently conducted lab analyses of thephotochemicals will continue to be required. Certain of the Company's large scalecustomers presently meet the exemption requirements. Present levels of fertilizer salesutilize all the photochemicals received. Once sales of all the photochemical materials arewell established in the fertilizer or other commercial products, all the Company's Nevadacustomers will be exempt from the regulations, including hazardous materialtransport/manifest rules. The Company believes that this exemption applies nationwide.Therefore, the Company intends to pursue similar concurrence from environmental officialsin all applicable states, so that all its customers will be recognized as exempt from theRCRA regulations.

Environmental regulation of photowaste generators has strengthened over the lastseveral years, and that trend is expected to continue. In the past year, heavy metalcontamination of fertilizers has become a significant issue in California and other partsof the country. Public concern over this issue is expected to intensify. Managementbelieves that the GOLD’n GRO line of fertilizer products is uniquely suited toalleviating this environmental concern and that the Company is well positioned to meetfuture environmental needs.

 

MINING TECHNICAL SERVICES

1. Services offered

The Mining Technical Services segment of the Company offers a wide range of technicalservices to the mining industry. These include the following:

    Management Support:

- Assistance in assembling mineral project development agreements and ongoing technicalsupport during project development and after operations begin.

- Advice on mineral development strategy, economic aspects of tax policy, long terminvestment strategy and infrastructure development related to large and small scalemineral development.

- Complete project development plans.

- Expert assistance in contract disputes pertaining to various technical aspects ofmineral projects and the development of the technical aspects for contracts.

- Ore reserve audits, metallurgical audits and material balance reviews, and operationsreviews on producing mines for senior management, outside investors, or underlying landowners.

- Mineral property appraisals for sale, acquisition, merger or financing.

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    Other Specialized Technical Services:

- Mineral economics and cost studies.

- Metallurgical process development.

- Open pit and underground mine planning. 

- Ore reserve development.

2. Operations

The Mining Technical Services segment accounted for 27% of the Company's 2002consolidated revenue. Two major clients produced 99+% of this revenue. At present one ofthese clients has one ongoing project, involving project management of a Nevada mineproperty, including sampling, mapping and data compilation and property acquisitionservices. The purpose of these services is to acquire and organize the land andinformation necessary to prepare the property for presentation to major mining companiesfor potential investment for exploration and development activities. This client hasdecided to accelerate the process of locating a buyer for the property. Consequently, thelevel of work done by WWI is expected to be reduced in future years. 

The second client is a junior mining company with three mineral properties in Nevada.WWI is providing technical assistance in moving these properties into the development andoperating stages. WWI is also providing administrative support. 

In the fourth quarter of 2000, WWI signed a Pilot Program Contract to evaluate apotential new raw material source for the Company’s photochemical fertilizer segment.WWI completed the Contract early in the second quarter of 2001 and is evaluating theresults and investigating the potential for implementing a development program.

The primary source of new business for the Mining Technical Services segment is thereputation of WWI and its key employees. In addition, WWI expands its network of contactsby attendance at various mining association conventions.

In the past WWI has published specialized mineral economics and materials financialreports. WWI is evaluating re-entry into this market, with a goal of producing miningpublications targeted for general investors interested in mining.

 

Expansion Plans

Prior to 1991, the Company had plans to directly invest or joint venture in miningprojects and had formed a subsidiary to enter that market. Those plans were put on holduntil completion of the photochemical fertilizer R&D program. Now that the R&Dprogram is being converted to commercial operations, the Company has recently taken stepsto expand the mining technical services presence in the mining industry, both from aservices perspective and from a mining operations perspective.

First, in January 1999 WWI initiated a long term R&D project to replace the use ofcyanide in the extraction of metals from silver/gold and gold/copper ores. The newthiosulfate leaching

21

technology being developed under this program utilizes the same technology as theCompany’s proprietary photochemical recycling process. The project, called ItronicsThiomet, is seeking to establish operating joint ventures at specific mine sites to applythe thiosulfate leaching technology. Second, in March 1999 WWI signed a consultingagreement with Golden Phoenix Minerals, Inc. (GPXM). Under the agreement, WWI will providemanagement, merger and property acquisition, and technical services to GPXM. It appearslikely that GPXM will put its Mineral Ridge Mine into gold production in 2003. In thatevent, WWI’s workload for GPXM is expected to expand. Third, in 2001 WWI successfullycompleted a water location and drilling project, using advanced geologic technology, forone of its long term clients. WWI is now marketing its experience in this field topotential clients in Nevada.

 

 

ITEM 2.DESCRIPTION OF PROPERTY.
I. FACILITIES.
Itronics leases approximately 3,000 square feet of office space at 6490 South McCarranBlvd., Building C-23, Reno, Nevada. IMI leases approximately 2,000 square feet ofwarehouse space in Reno, Nevada. This space is being used for supply storage. 

IMI owns a 35,000 square foot manufacturing facility in Reno-Stead, Nevada. Thebuilding contains all the equipment used for treating the used photochemicals, preparingthe recovered silver for sale, and manufacturing the GOLD’n GRO fertilizer products. 

W&W leases approximately 2,500 square feet of office space in Reno, Nevada. TheW&W technical services group was relocated to this space in April 1999.

II. EQUIPMENT.
The actual equipment being used in the recycling process is proprietary information.However, the plant for processing liquid photochemicals is a fairly typical chemicalprocess facility consisting of appropriate arrangement of tanks and pumps. Solids producedby processing are recovered by filtration. 

The refining operation consists of a material handling section, solids roasting, and amelting section. The actual equipment arrangements are proprietary, but the main items arepumps, tanks, filtration equipment, drying ovens, and the melting furnaces. 

Capacity at the new facility is now capable of processing up to 100,000 gallons of usedphotochemicals per month and to manufacture up to 200,000 gallons per month of liquidfertilizer. Refinery capacity is being expanded to produce up to 50,000 ounces of silverper month. 

 

ITEM 3.LEGAL PROCEEDINGS.
In August 2002 a supplier of equipment to be utilized in the Stead manufacturing plantfiled suit against the Company and its subsidiary, Itronics Metallurgical, Inc. (IMI) inJohnson County, Indiana for the unpaid amount of $64,234 plus attorney’s fees andcourt costs. On

22

October 1, 2002 the plaintiff received a default judgment awarding the $64,234 plus$1,500 attorney’s fees plus 8% interest. On November 5, 2002 the plaintiff filed a"Notice of Filing of Foreign Judgment" in Washoe County, Nevada and has receivedthe judgment. Plaintiff’s attorney is actively seeking to collect the amount due. 

In September 2002 one of IMI’s equipment lessors filed suit against it in LosAngeles County, California due to delinquent payment of monthly lease payments. The suitseeks $45,878 plus late charges, interest, and court costs/attorney fees. Subsequent toDecember 31, 2002 IMI restructured the lease and signed a stipulated judgment. Therestructured lease requires 30 monthly payments of $1,500 plus one payment of $1,000, fora total of $46,000. If IMI defaults the new lease, a judgment can be entered for theremaining amount due, plus interest, attorney fees, and other costs.

In September and October 2002 a general contractor and two subcontractors filedmechanics liens on IMI’s Stead manufacturing facility due to non payment for workperformed on the property. The amounts due total $104,708. In November 2002 the generalcontractor filed suit for its portion of the above amount, a total of $81,233. In December2002 IMI worked out a payment arrangement calling for monthly payments of $15,000 to bepaid in the Company’s common stock. The general contractor is applying the paymentsto the balance due it and the subcontractors.

In November and December 2002 two lawsuits were filed by three of IMI’s equipmentlessors, one in Oakland County, Michigan and one in Cook County, Illinois, seeking a totalof $142,955 plus costs and attorney fees. IMI has retained a debt restructuring firm basedin Texas to negotiate a settlement of these suits. 

In December 2002 a trade payable creditor filed suit against the Company and WWI inWashoe County, Nevada seeking a total of $12,100. The Company has signed a stipulatedjudgment and began making monthly payments of $3,000 in March 2003. 

Subsequent to December 31, 2002, a total of seven suits have been filed against theCompany or its subsidiaries seeking a total of $379,200 plus attorney fees and costs. Fiveof the suits are from equipment lessors, one is from a trade payable creditor, and one isfrom a 2000 Convertible Promissory Note holder. These suits have been or most likely willbe assigned to the debt restructuring company the Company has retained to assist innegotiating settlement or other payment arrangements. 

Successful settlement of the above claims is dependent on future financing.

 

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF ITS SECURITY HOLDERS.
None.

23

 

PART II

ITEM 5.MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a). Market Information. The securities of the Company are traded on theover-the-counter market, and quoted in the National Quotation Bureau, Inc.'s "pinksheets" and on the NASD Electronic Bulletin Board.

The following table sets forth the high and low bid prices for the Company's commonstock for each quarter for 2001, 2002, and the first quarter of 2003. 
High BidLow Bid3/31/01$0.37$0.176/30/01$0.28$0.169/30/01$0.17$0.0812/31/01$0.19$0.113/31/02 $0.57$0.116/30/02$0.39$0.219/30/02$0.26$0.1612/31/02$0.15$0.083/31/03$0.16$0.09
These quotations reflect inter-dealer prices without retail markup, markdown, orcommissions, and may not represent actual transactions.

(b) On December 31, 2002 the number of record holders of the Common Shares wasapproximately 980.

(c) Dividends.
The Company has paid no dividends. 

Recent Sales of Unregistered Securities:

Following is a summary of sales of unregistered securities for the fourth quarter of2002. These securities were issued as restricted common shares which are subject to Rule144 of the Securities and Exchange Commission. Generally, Rule 144 requires shareholdersto hold the shares for a minimum of one year before sale. In addition, officers, directorsand more than 10% shareholders are further restricted in their ability to sell suchshares. There have been no underwriters of these securities and no underwritingcommissions or discounts have been paid.
 SharesValueTransaction DescriptionIssuedReceivedPrivate placement of    restricted stock for cash
531,250
$42,500Interest on employee salary    in arrears
56,982
12,394Operating expenses
15,000
1,500Director fees
2,500
525 
605,732
$56,919   
The above transactions qualified for exemption from registration under Sections 3(b) or4(2) of the Securities Act of 1933. Private placements for cash were non-publictransactions. The

24

Company believes that all such investors are either accredited or, either alone or withtheir purchaser representative, have such knowledge and experience in financial andbusiness matters that they are capable of evaluating the merits and risks of theprospective investment. 

ITEM 6.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
I. Results of Operations

The Company reported consolidated revenues of $1,285,700 for the year ended December31, 2002, compared to $1,143,300 for the prior year, an increase of 12%. Revenues for thePhotochemical Fertilizer segment increased by $273,000 or 41%. This increase was offset bya decline in revenues from the Mining Technical Services segment of $130,500, or 27%. Theconsolidated net loss for 2002 was $3,290,562 or $0.0390 per share compared to a 2001 lossof $3,653,750 or $0.0466 per share. The primary reasons for the decreased loss are reducedoperating costs combined with a reduced gross loss due to increased sales. 

Consolidated cost of sales and operating expenses decreased

approximately $259,900, or 6%, in 2002 compared to 2001. Other income (expense)increased from a net expense of $661,900 in 2001 to a net expense of $701,100 in 2002. Theprimary reasons for the increased other expenses are an increase of $219,500 in interestexpense, which was partially offset by an increase in gain on sale of investments of$183,200. The increased interest expense is due to the borrowing during 2002 of a combined$1.3 million in 12% convertible notes, advances from an officer/stockholder, and equipmentlease financing. The increase in gain on sale of investments is due to the sale of GoldenPhoenix Minerals, Inc. stock. To provide a more complete understanding of the factorscontributing to the changes in revenues, operating expenses and the resultant operatingloss, the discussion presented below is separated into the Company's two operatingsegments. 

 

PHOTOCHEMICAL/GOLD’n GRO FERTILIZER
Year Ended    December 31,
2002
2001Sales revenue 
$938,653
$ 665,676Operating income (loss) 
(2,251,024)
(2,703,760)
 

Revenues for the Photochemical/GOLD’n GRO Fertilizer segment totaled $938,700 in2002, compared to $665,700 in 2001, an increase of 41%. Fertilizer sales were $502,300 and$180,400 for 2002 and 2001, respectively, an increase of 178%. The fertilizer salesincrease is attributable to bulk sales of the GOLD’n GRO Zinc micro-nutrient productthat was introduced in the third quarter of 2001. 

Photochemical volume for photochemical recycling services in 2002 decreased 12% from2001 and photochemical recycling revenue increased 29%. The decrease in volume is due tothe loss of one customer with multiple service locations. The customer decided to contractwith a service provider with a nationwide service capability. The revenue increase is dueto $95,400 in sales of photochemical concentrators under a contract with the Department ofDefense. The 48% sales

25

decrease in silver/gold sales reflects the decision of Golden Phoenix Minerals, Inc.(Golden) to discontinue a purchase and refining agreement to process and resellGolden’s gold production from its mining operations. IMI processed the gold and soldit to an independent third party. Gold sales under this agreement were $-0- and $107,800for 2002 and 2001, respectively. 

Combined cost of sales and operating expenses for the segment amounted to $3,189,700 in2002, compared to $3,369,400 in 2001, a 5% decrease. Cost of sales increased approximately$173,500, which includes an increase of $157,100 in materials and direct costs due toincreased sales. Operating costs decreased by $353,300. Depreciation and amortizationdecreased $78,400 due to the reclassification of stock placement costs as an offset toproceeds from the related stock offering. Sales and marketing decreased $247,200,reflecting a reduction of sales personnel for photochemical recycling marketing. Generaland administrative expenses decreased $68,800 due to reduced outside services related toprior year training costs for maximizing the utilization of the accounting software andthe establishment of business processes.

These changes in revenues and operating expenses resulted in a segment operating lossof $2,251,000 in 2002, compared to $2,703,800 in 2001, an improvement of $452,700.

 

MINING TECHNICAL SERVICES
Year Ended    December 31,
2002
2001Sales revenue 
$347,032
$ 477,577Operating income (Loss) 
(338,483)
(288,115)
 

Mining technical services revenue totaled $347,000 for 2002 compared to $477,600 for2001, a decrease of 27%. Included in these revenue figures are pass-through expenses of$117,700 and $134,700 for 2002 and 2001, respectively. Excluding these amounts, revenuesamounted to $229,300 and $342,900 for 2002 and 2001, respectively, a decrease of 33%. Therevenue decrease reflects the decision by one of the Company’s primary clients tofocus on selling, rather than developing, its Nevada mining property. Services to theclient are limited primarily to locating a buyer for the property. In prior years, theCompany actively managed the property for the purpose of accumulating the informationnecessary to present the property to major mining companies. Such work is nowsubstantially complete. The Company’s plans to expand the technical services segmentare more fully discussed on page 21 of this report.

Combined cost of sales and operating expenses totaled $685,500 for 2002 compared to$765,700 for 2001, a decrease of 10%. Included in these operating expense figures arepass-through expenses of $117,700 and $134,700 for 2002 and 2001, respectively. Excludingthese amounts, combined cost of sales and operating expenses amounted to $567,800 and$631,000 for 2002 and 2001, respectively, a decrease of 10%. The decreased costs areattributable primarily to reduced direct costs resulting from a reduced technical servicesworkload. 

The above changes in revenues and operating expenses resulted in a segment operatingloss of $338,500 for 2002, compared to $288,100 for 2001, an increased loss of $50,400. 

26

SUMMARY

On a consolidated basis, the various changes in revenues and operating expensesresulted in gross loss of $220,000 for 2002 compared to $250,300 for 2001 and an operatingloss of $2,589,500 for 2002 compared to $2,991,900 for 2001, an improvement of $402,400. 

 

II. Changes in Financial Condition; Capitalization

Cash amounted to $57,200 as of December 31, 2002 compared to $14,700 as of December 31,2001. Net cash used by operations was $1,439,100 in 2002 compared to $1,927,700 in 2001.Operating resources utilized to finance the 2002 loss of $3,290,600 include approximately$905,600 in expenses paid with the Company's common stock and a net increase in accountspayable and accrued expenses of approximately $459,500. Cash amounting to approximately$241,300 was invested in property and equipment in 2002, primarily for equipment in themanufacturing plant. Sales of Golden Phoenix Minerals, Inc. stock provided $349,500 incash from investing activities. Financing sources of cash in 2002 included $844,100 inconvertible promissory notes, $339,900 in equity from the Swartz agreement, $318,000 inloans from an officer/stockholder, $117,500 from a private placement of restricted commonstock, and $17,500 in warrant exercises.

Total assets increased from $4,558,300 at December 31, 2001 to $4,814,800 at December31, 2002. Current assets increased $409,900, net property and equipment increased$146,900, and other assets decreased $300,200. The primary change in current assets wasthe classification of $484,000 of the value of Golden stock as a current asset. TheCompany is actively selling its Golden shares to assist with its working capital needs.The Company’s investment in Golden stock increased by $390,200 to a total value of$704,100 at December 31, 2002, of which $484,000 is classified in current assets. Thisresults in a decrease in other assets of $93,800. Other assets also decreased by $155,900due to reclassifying stock placement costs as a reduction of proceeds from the relatedstock offering.

Total liabilities increased from $7,499,400 at December 31, 2001 to $9,402,700 atDecember 31, 2002, an increase of $1,903,300. Of this amount, current liabilitiesincreased $5,275,000 and long-term liabilities decreased $3,371,700. The increase inliabilities reflects the Private Placement of $844,100 in convertible promissory notes,$503,200 in accrued interest on convertible notes, a net increase of $259,500 in advancesfrom stockholders, property and equipment financing of $209,500 and an increase inaccounts payable and various accrued expenses of $412,500. These increases in liabilitieswere partially offset by $268,100 in debt payments. Current liabilities increasedprimarily due to the reclassification from long-term debt of $3,349,400 in convertiblepromissory notes and to increases in current maturities of capital lease obligations of$736,000, $518,000 in current maturities of long-term debt, $258,000 in accrued salariesdue management, and $154,500 in accounts payable and other accrued expenses. 

III. Working Capital/Liquidity

During the year ended December 31, 2002, working capital decreased by approximately$4,865,200 to a deficit balance of $5,776,200. $3,349,400 of the reduced working capitalis due to the

27

reclassification of convertible notes payable and accrued interest that became duewithin twelve months of December 31, 2002. Notes maturing in early 2003 have conversionprices ranging from $.50 to $1.18, and the market price at the time the notes matured wasa lesser amount. Subsequent to December 31, 2002 note holders of the 2000 9% ConvertiblePromissory Notes were offered a lower conversion price of $0.20 per share and a higherinterest rate of 12% per annum as an inducement to extend the term of their Notes forthree years. As of April 8, 2003 $1,381,000 in principal plus accrued interest of $407,400have been extended. Of those amounts, a total of $251,500 of principal and accruedinterest has been converted into restricted common stock at $0.20 per share. The Companyhas had limited cash liquidity since the third quarter of 2000, which is reflected in theincrease in current liabilities. The Company has sought and obtained the funding describedabove, which has not been sufficient to maintain all obligations on a current basis.However, cash liquidity is being managed and the Company has been able to make sufficientpayments to keep most significant creditors working with it. The cash shortage is a resultof two factors. First, fertilizer sales in 2002 did not expand to the extent anticipated,so operating losses were not reduced as much as expected. Second, the $15 million equityline of credit agreement with Swartz Private Equities, LLC (Swartz) was not availablebetween October 2001 and May 2002 due to a Securities and Exchange Commission rule changethat necessitated renegotiating the contract with Swartz and filing a new registrationstatement which was filed and became effective on April 30, 2002. Significant terms to theamended contract include the elimination of future warrants to be granted Swartz upon theexercise of the Company’s put rights, extending the term of the agreement to February27, 2004, eliminating the six month minimum commitment fee and the right of first refusalon capital raising transactions, and the easing of restrictive covenants on suchtransactions. During the year ended December 31, 2002 $339,900 was received under theSwartz agreement. The Swartz equity funding has not been sufficient to meet theCompany’s ongoing working capital needs, so a private placement of stock withattached three year warrants was begun in the fourth quarter of 2002. The initial offeringprice is $0.08 per share and the attached three year warrant for an equal number of sharesis exercisable at prices of $0.08 for the first year, $0.16 for the second year, and $0.24for the third year. The Company also sold Golden shares during the year ended December 31,2002 and raised a total of $349,500. Subsequent to December 31, 2002 $91,600 has beenreceived from the Swartz agreement, $80,000 has been received from the private placement,and $152,100 has been received from selling Golden stock.

Forward-Looking Statements

Statements in this Form 10-KSB may constitute forward-looking statements and aresubject to numerous risks and uncertainties, including the failure to completesuccessfully the development of new or enhanced products, the Company’s futurecapital needs, the lack of market demand for any new or enhanced products the Company maydevelop, any actions by the Company’s partners that may be adverse to the Company,the success of competitive products, other economic factors affecting the Company and itsmarkets, and other risks detailed from time to time in the Company’s filings with theSecurities and Exchange Commission. The actual results may differ materially from thosecontained in this Form 10-KSB. 

28

ITEM 7.FINANCIAL STATEMENTS
The response to this Item is submitted under Item 13.

 

ITEM 8.CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
No change was made in the Company's auditors from the prior year.

To the Company's and its management's knowledge, there is no accounting or financialdisclosure dispute involving any present or former accountant.

 

PART III

ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS: Compliance with Section 16(a) of the Exchange Act
I. Summary Information.
The following are the directors and executive officers of the Company:

Age as ofName
12/31/02PositionPosition Held SinceDr. John W. Whitney
56President/Treasurer May 1988DirectorPaul H. Durckel 
85DirectorSeptember 1995Alan C. Lewin 
56DirectorSeptember 1997Gregory S. Skinner 
48SecretaryDecember 1990Duane H. Rasmussen
72Vice President; November 1997Vice President and May 1994General 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 ofDirectors, presently scheduled to be held immediately following the annual meeting of theshareholders.

II. Narrative Information Concerning the Directors and Executive Officers of theCompany. 
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, ItronicsMetallurgical, Inc. and Whitney & Whitney, Inc. Dr. Whitney also serves as the GeneralManager 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 Geologyfrom the University of Nebraska in 1970. Dr. Whitney has served as President of Whitney& Whitney, Inc.

29

since its formation in 1977.

Prior to his serving as W&W full-time president, Dr. Whitney worked as a consultantfor the Office of Technology Assessment, U.S. Congress, doing analysis of various Alaskanmineral issues (1977-1978), a consultant for various government agencies, including theoffice of Mineral Policy Analysis in the U.S. Department of Interior, and the Washingtonoffice of the U.S. Bureau of Mines, consulting firms, law firms and mining companies on avariety of mineral planning issues (1976-1977), as a consultant for BKW Associates, Inc.evaluating mining investment opportunities in Mexico and the Philippines (1973-1975), andas a geologist-mineralogist for Humble Oil & Refining Company and GeoTerrex Ltd.(1971-1972).

Dr. Whitney is an internationally recognized consultant in the field of Metal andMaterial Resource Economics. Dr. Whitney has presented seminars for various clients onMining Economics, and has taught a three-credit graduate course on International MetalEconomics for the University of Arizona's College of Mines. Dr. Whitney is an HonoraryFaculty Member of the Academy for Metals and Materials under the seal of the AmericanSociety for Metals. Dr. Whitney has made numerous presentations and written a number ofpublications on various technical subjects within his broad area of expertise. Dr. Whitneyis coinventor of the American Hydromet process technology and holds four patents. DrWhitney was selected as Nevada’s Inventor of the Year for 2000 and became a member ofthe Inventor’s Hall of Fame at the University of Nevada, Reno.

Paul H. Durckel:

Mr. Durckel has served as a director of the Company since September

1995. He received a pre-legal degree from Stanford University in 1940. He has servedvarious companies involved in fertilizer manufacturing and sales for approximately 30years. He is presently an Independent Real Estate Salesman for Verus Realty. He servedMyers Realty, Inc. in varying capacities, including Broker-Salesman, Consultant, Manager,Vice President of Operations, and Director, from 1987 to 2001. His experience in thefertilizer industry includes Vice President and General Manager and Vice President-Operations for American Plant Food Corp., Executive Assistant to the Chairman for BestFertilizers Co., Vice President and General Manager for Best Fertilizer of Texas, and VicePresident and General Manager for Farm Services Co.

Alan C. Lewin:

Mr. Lewin has served as a Director since September 1997. He had previously served as aDirector from September 1995 through June 1996.He received a B.A. in Psychology from SanDiego State University in 1967. He has extensive operations management experience,primarily in the x-ray film processing chemical industry. His positions include Founder,President and Chief Executive Officer of Guardian X-Ray Equipment Service, Inc. from 1976to 1992, General Manager of Douglas Roesch Communications, Inc. from 1992 to 1994,Technical Sales Representative of Commerce Chemical Company from 1994 to 1996, VicePresident of Commodity Resource & Environmental, Inc. from August 1996 to July 1997,and General Manager for a Merry X-Ray branch operation in Los Angeles, California sinceNovember 1997. 

30

Gregory S. Skinner, Esq.

Mr. Skinner has served as secretary and general counsel of the Company and itssubsidiaries since December 1990. He obtained his B.A. degree in Economics from theUniversity of California at Berkeley in 1976. He obtained his J.D. degree from HastingsCollege of the Law, University of California at San Francisco in 1979. He is licensed topractice law in the states of California and Nevada. He retired from the practice of lawon January 1, 2003 and is "of counsel" to the law office of Skinner, Watson& Rounds, a Professional Corporation (SWR). Prior to December 31, 2002 he was ashareholder in SWR, which has offices located in Reno, Las Vegas, and Incline Village,Nevada. Prior to becoming Secretary of Itronics Inc., Mr. Skinner has provided legalservices 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 Companyin 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. inIndustrial Management in 1955 from the same University. He served as President of ScreenPrinting Systems, Inc. from 1987 to 1990 and from 1995 to October 1998. Other businessexperience includes approximately 20 years with Jacobs Engineering Group, Inc. in varyingcapacities, including Project Manager, Regional Sales Manager, Regional Vice President,and Group Vice President.

ITEM 10.EXECUTIVE COMPENSATION.
Summary of Cash and Certain Other Compensation

The following table sets forth information as to the compensation of the ChiefExecutive Officer and the four most highly compensated officers whose compensation for theyear ended December 31, 2002 exceeded $100,000:

Long Term
CompensationName and
SecuritiesPrincipalCalendarAnnual    Compensation
UnderlyingPositionYear
Salary
Bonus
Options    (#)Dr. John W. Whitney:
2002
$127,350
$-0-
3,250,000President, Treasurer 
2001
$127,001
$-0-
-0-and Director (1) (2) 
2000
$133,300
$-0-
-0-Duane H. Rasmussen
2002
$132,000
$-0-
-0-Vice President, VP
2001
$132,000
$-0-
-0-and General Manager 
2000
$104,000
$-0-
-0-IMI (3)
(1) The 2002 and 2001 salary amounts include $125,000 and $70,000, respectively inunpaid salary, of which Dr. Whitney converted $67,500 into 675,000 restricted commonshares in 2002 and $60,750 into 675,000 restricted common shares in 2001. These sharesremain unissued,

31

pending receipt of sufficient cash to pay the withheld payroll taxes. Effective January1, 1999, Dr. Whitney was granted an option for 1,000,000 restricted common shares at $0.25per share and effective July 1, 2002 he was granted on option for 3,000,000 restrictedcommon shares at $0.30 per share. These options are exercisable at any time until one yearafter Dr. Whitney leaves the employment of the Company. Effective October 2, 2002 Dr.Whitney was granted a five year option for 250,000 restricted common shares at $0.20 pershare.

(2) The salary amounts listed above include $2,350, $2,001, and $8,300 for 2002, 2001,and 2000, respectively, that represent compensationpaid in common stock for service as adirector of the Company. The compensation plan for all directors was 2,500 shares perquarter for 2002.

(3) The 2002 and 2001 salary amounts include $108,000 and $40,500, respectively, inunpaid salary. In addition, Mr. Rasmussen accepts $2,000 per month of his salary in commonstock, of which $24,000 and $12,000, respectively, for 2002 and 2001 remain unissuedpending receipt of sufficient cash to pay the withheld payroll taxes.

Option Grants in Last Fiscal Year:

Number of
% of    Total
Securities
Options    to
Underlying
Employees
Exercise
Options
in Fiscal
or BaseExpirationName
Granted
Year
PriceDateJohn W. Whitney
3,000,000
91%
$0.301 year after employment    term.John W. Whitney
250,000
7%
$0.20October 2, 2007
 

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option

Values

 

Options Exercised:
Shares Acquired onNameExercise (#)Value RealizedNone
 

Options Unexercised:

Number of Securities
Value of Unexercised
Underlying Unexercised
In-the-Money Options
Options at 12/31/02
At 12/31/02Name 
Exercisable
Unexerciseable
Exercisable
UnexerciseableDr. John W. Whitney Compensatory
4,250,000
-0-
$ -0- (1)
$ -0-Non-compensatory 
1,365,938
-0-
$ -0- (1)
$ -0-
(1) If value realized was based on the average of the closing bid and ask prices onDecember 31, 2002, the value realized would have been $-0-. The securities under option,common stock of

32

the Company, are restricted under Rule 144 and thus are not tradable within one year ofexercise. In addition, as a greater than 10% shareholder of the Company, Dr. Whitney isfurther restricted by SEC regulations as to the sale of the Company’s securities. Theactual value realized, if and when the securities are sold, may be more or less than thevalue listed above. Consequently, the value of the unexercised options is reported at$-0-.

 

 

ITEM 11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
a) Security Ownership of Certain Beneficial Owners.
The following table sets forth certain data with respect to those persons known to theCompany, as of March 31, 2003, to be the beneficial owners of more than 5% of theoutstanding shares of common stock of the Company:

Amount and Nature of Beneficial Ownership
Common    SharesName and
Which May    Be
PercentAddress of
Common    Shares
Acquired    Within
ofBeneficial Owner
Presently    Held
60    days
Total
ClassJohn W. WhitneyP.O. Box 10725Reno, NV 89510(1)(2)
16,669,511    (3)
5,615,938(4)
22,285,449
21.15Richard J. Cavell1013 No. Marshall Dr.Camano Island, WA
5,101,457    (5)
125,000(4)
5,226,457
5.23
(1) Director

(2) Officer

(3) Includes 100,136 shares owned by John B. Whitney, Dr. John W. Whitney's minor son,and 72,768 shares owned by Maureen E. Whitney, Dr. Whitney's wife. 

(4) Dr. Whitney’s options include compensatory options of 1,000,000 shares at$0.25 per share, 3,000,000 shares at $0.30 per share, and 250,000 shares at $0.20 pershare. Dr. Whitney also has a non-compensatory three year option for 1,365,938 shares at$0.08, $0.16, and $0.24 per share for the first through third years of the option period.He received this option as part of the assignment of Golden options to WWI. Thetransaction is more fully discussed in Item 12 below. Dr. Cavell’s option resultedfrom his investment in the current private placement and has the same terms as describedabove.

(4) Includes 21,375 shares owned by Bonnie Cavell, Richard Cavell's wife.

33

b) Security Ownership of Management.
The following table sets forth as of March 31, 2003, certain

information, with respect to director and executive officer ownership of

common stock in the Company:

Amount and Nature of Beneficial Ownership
Common    Shares
PercentName and 
Which May    Be
ofAddress of 
Common    Shares
Acquired    Within
ClassBeneficial    Owner 
Presently Held
60 days(1)
Total
(2)Dr. John W. WhitneyP.O. Box 10725Reno, NV 89510 (3)(4) 
16,669,511(5)
5,615,938
22,285,449
21.15Paul H. Durckel1655 Highway 395Minden, NV 89423 (3)
316,900
117,485
434,385
.43Alan C. Lewin P.O. Box 10725Reno, NV 89510 (3)
260,000
-
260,000
.26Duane H. RasmussenP.O. Box 10725Reno, NV 89510 (4)
1,405,594
-
1,405,594
1.41All directors andexecutive officers asa group (5 persons) 
19,489,207
5,733,423
25,222,630
23.91
 

(1) Dr. Whitney’s options include compensatory options of 1,000,000 shares at$0.25 per share, 3,000,000 shares at $0.30 per share, and 250,000 shares at $0.20 pershare. Dr. Whitney also has a non-compensatory three year option for 1,365,938 shares at$0.08, $0.16, and $0.24 per share for the first through third years of the option period.He received this option as part of the assignment of Golden options to WWI. Thetransaction is more fully discussed in Item 12 below.Mr. Durckel’s options include41,585 shares at $0.15 related to his investment in the 2001 Convertible Promissory Notesand 75,900 shares related to his investment in the 2002 Equity Private Placement, whichare convertible at $0.08, $0.16, and $0.24 per share for the first through third years ofthe option period. 

(2) The percent of class is based on the sum of 99,773,627 sharesoutstanding or to beissued as of March 31, 2003 plus, for each individual, the number of common shares as towhich the named individual has the right to acquire beneficial ownership within 60 days ofMarch 31, 2003.

(3) Director

(4) Officer

(5) Includes 100,136 shares owned by John B. Whitney, Dr. John W. Whitney's minor son,and

34

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 changesin control of the Company.

 

ITEM 12.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
After approval from the Company's Board of Directors, in March 1999 the Company'ssubsidiary, WWI, agreed to provide technical services to Golden Phoenix Minerals, Inc.(Golden), a junior mine exploration and development company whose common shares trade onthe OTC Bulletin Board. Services are billed monthly and WWI receives a combination ofGolden common stock, SEC Rule 144 restricted common stock, and cash. Separately, Dr.Whitney personally agreed to acquire up to 10,000,000 common shares of Golden at $0.10 pershare, making him beneficial owner of more than ten percent of Golden. Any unexercisedoptions under this arrangement can be assigned to WWI. Dr.'s Whitney and Cavell areprincipals in a group that controls the mining claims underlying one of Golden's twoprincipal exploration and development properties. At December 31, 2002 WWI owned 3,061,212restricted Golden shares. At December 31, 2001 WWI owned 200,000 unrestricted Goldenshares and 2,789,042 restricted Golden shares. The initial Rule 144 one year period forresale began in April 2000, and continues monthly thereafter. Total amount billed for 2002and 2001 was $191,672 and $194,688, respectively. A total of $37,822 and $123,757 isincluded in accounts receivable at December 31, 2002 and 2001, respectively. At December31, 2002, the average bid/asked price for Golden common was $0.23, resulting in a value ofshares held on that date of $704,079. Included in the Golden shares held at December 31,2002 are 1,050,000 restricted common shares that were acquired by WWI purchasing $0.10options from Dr. Whitney and subsequently exercising the options by offsetting accountsreceivable due it from Golden. The purchase price of the options was $109,275, which wasdetermined at 85% of fair market value of the then current trading price of Golden, lessthe $0.10 option price. This valuation method is under the same terms that WWI uses toaccept Golden restricted common shares for its monthly services. Dr. Whitney acceptedCompany restricted common shares in the 2002 Equity Private Placement as payment for theoptions, which amounted to 1,365,938 shares plus an equal number of warrants withconversion prices ranging from $0.08 to $0.24 per share. The total cost to WWI of theseGolden shares is $214,275 and the market value at December 31, 2002 was $241,500.

In the fourth quarter of 2000, the Company’s subsidiary, IMI, entered into apurchase and refining agreement with Golden to process and resell Golden’s goldproduction from its mining operations. IMI processes the gold and sells it to anindependent third party. Gold sales under this agreement were $-0- and $107,813 for 2002and 2001, respectively.

During the first quarter of 2002 Dr. Whitney loaned WWI 600,000 shares of Golden stockat a value of $105,000 The loaned shares were sold by WWI for $83,045, for a realized lossof $21,955. Subsequently, WWI repaid 416,463 of the Golden shares out of shares owned byit at a value of $72,881 and a realized gain of $35,587. Also during 2002 Dr. Whitneyloaned WWI a

35

total of $235,000. Interest accrues at 12% per annum on the unpaid balance.

 

ITEM 13.FINANCIAL STATEMENTS, EXHIBITS AND REPORTS ON FORM 8-K.
I. List of Financial Statements and Exhibits
1. List of Financial Statements:
(a) Consolidated Balance Sheets as of December 31, 2002 and 2001.

(b) Consolidated Statements of Operations and Comprehensive Income for the Years endedDecember 31, 2002 and 2001.

(c) Consolidated Statements of Stockholders' Equity (Deficit)for the Years endedDecember 31, 2002 and 2001.

(d) Consolidated Statements of Cash Flows for the Years ended December 31, 2002 and2001.

(e) Notes to Consolidated Financial Statements.

 

2. List of Exhibits:
    21 List of significant subsidiaries. 

II. Reports on Form 8-K.

    None

 

INDEX TO FINANCIAL STATEMENTS

AND SUPPLEMENTAL DATA

DECEMBER 31, 2002
INDEPENDENT AUDITOR'S    REPORT ONPAGETHE FlNANCIAL STATEMENTS 
38FINANCIAL STATEMENTSConsolidated Balance Sheets    
39Consolidated Statements of    Operations and Comprehensive Income
41Consolidated Statements of    Stockholders' Equity (Deficit) 
42Consolidated Statements of    Cash Flows 
43Notes to Consolidated    Financial Statements 
45EXHIBITS:21 Significant subsidiaries    
68
STATEMENTS AND SCHEDULES

Schedules not included are omitted for the reason that they are not applicable or notrequired.

36

Item 14. Controls and Procedures

Itronics’ management, including the Chief Executive and Financial Officer, haveconducted an evaluation of the effectiveness of disclosure controls and procedurespursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive andFinancial Officer concluded that the disclosure controls and procedures are effective inensuring that all material information required to be filed in this annual report has beenmade known to him in a timely fashion. There have been no significant changes in internalcontrols, or in factors that could significantly affect internal controls, subsequent tothe date the Chief Executive and Financial Officer completed his evaluation.
37

 

KAFOURY, ARMSTRONG & CO.

A PROFESSIONAL CORPORATION

CERTIFIED PUBLIC ACCOUNTANTS

 

 

To the Board of Directors and Stockholders of Itronics Inc.

 

We have audited the accompanying consolidated balance sheets of Itronics Inc. (a Texascorporation) and subsidiaries as of December 31, 2002 and 2001, and the relatedconsolidated statements of operations and comprehensive income, stockholders' equity(deficit), and cash flows for the years then ended. These consolidated financialstatements are the responsibility of the Company's management. Our responsibility is toexpress an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with U.S. generally accepted auditing standards.Those standards require that we plan and perform the audit to obtain reasonable assuranceabout whether the consolidated financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosuresin the consolidated financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.

In our opinion, the consolidated financial statements referred to in the firstparagraph present fairly, in all material respects, the consolidated financial position ofItronics Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of theiroperations and their cash flows for the years then ended in conformity with U.S. generallyaccepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that theCompany will continue as a going concern. As shown in the financial statements, theCompany and its subsidiaries have reported recurring losses from operations, including anet loss of $3,290,562 during the year ended December 31, 2002, a negative working capitalof $5,776,237, and a stockholders’ deficit balance of $4,587,859 as of December 31,2002. The ability to continue as a going concern is contingent primarily upon (a) futureprofitable operations, and (b) the ability to generate sufficient cash from operations andadditional operating capital raised from other sources to meet obligations as they becomedue. This condition raises substantial doubt about the ability to continue as a goingconcern. Management's plans regarding this matter are described in Note 13. The financialstatements do not include any adjustments that might result from the outcome of thisuncertainty.

 

/S/ KAFOURY, ARMSTRONG & CO.

 

Reno, Nevada

April 8, 2003

38

ITRONICS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2002 AND 2001

ASSETS
 
2002
2001CURRENT ASSETS   Cash 
$ 57,201
$ 14,675Accounts receivable, less    allowance for  doubtful accounts, 2002,    $5,700;  2001, $7,400
88,239
166,976Marketable securities
483,983
-Inventories
337,153
318,595Prepaid expenses
44,331
100,797Current portion of deferred    loan fees
46,225
46,225Total Current Assets
1,057,132
647,268   PROPERTY AND EQUIPMENT   Land 
215,000
215,000Building and improvements
1,167,315
1,047,198Design and construction in    progress,   manufacturing facility
86,884
86,884Equipment and furniture 
1,797,926
1,585,995Vehicles 
133,028
133,028Equipment under capital    lease 
1,077,152
971,888 
4,477,305
4,039,993Less: Accumulated    depreciation and amortization
1,085,175
794,750 
3,392,130
3,245,243OTHER ASSETS   Patents, trademarks, and    other, less accumulated   amortization 2002, $25,331;    2001, $24,275 
9,115
10,171Stock placement costs, less    accumulated amortization   2001, $93,128 
-
155,911Marketable securities,    available for sale 
220,096
313,849Deferred loan fees, less    current portion, less accumulated  amortization 2002,    $113,771; 2001, $67,546 
91,946
138,171Investment in American Gold    & Silver Ltd. 
9,250
9,250Deposits
35,131
38,397 
365,538
665,749 
$4,814,800
$4,558,260
 

   
39

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

2002
2001CURRENT    LIABILITIES Accounts    payable 
$    610,772
$    516,312Accrued    management salaries 
341,278
83,329Accrued    expenses 
300,204
319,691Insurance    contracts payable 
15,962
30,799Interest    payable 
168,473
74,097Current    maturities of long-term debt 
556,301
38,255Current    maturities of capital lease obligations 
1,162,723
426,744Current    maturities of advances from stockholders
284,687
25,222Current    maturities of convertible notes and accrued interest
3,374,838
25,438Other 
18,131
18,463Total Current    Liabilities 
6,833,369
1,558,350LONG-TERM    LIABILITIESLong-term debt,    less current maturities 
146,610
599,472Convertible    promissory notes 
2,086,129
3,890,029Accrued    interest, convertible notes
294,262
540,444Capital lease    obligations, less current maturities
31,214
882,485Accrued salary    due stockholder
7,854
15,054Deferred gain,    less current maturities
3,221
13,548Total Long-Term    Liabilities 
2,569,290
5,941,032Contingency 
-
-
9,402,659
7,499,382STOCKHOLDERS'    EQUITY (DEFICIT)Preferred    stock, par value $0.001 per share;authorized    999,500 shares; issued and outstanding2002, 0 shares;    2001, 0 shares 
-
-Common stock,    par value $0.001 per share;authorized    250,000,000 shares; issued andoutstanding    2002, 88,690,170; 2001, 80,999,392 
88,690
80,999Additional    paid-in capital 
11,748,423
10,829,459Accumulated    deficit 
(17,352,796)
(14,062,234)Common stock to    be issued 
576,998
152,960Accumulated    other comprehensive income (loss) 
241,653
(27,403)Common stock    options outstanding, net 
109,173
85,097
(4,587,859)
(2,941,122)
$ 4,814,800
$ 4,558,260
 

The accompanying notes are an integral part of these financialstatements.

40

ITRONICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

2002
2001REVENUESFertilizer 
$502,290
$ 180,435Photochemical    recycling 
309,271
239,126Silver and gold    
127,092
246,115Mining    technical services 
347,032
477,577Total Revenues 
1,285,685
1,143,253COST OF SALES 
1,505,637
1,393,522Gross Profit    (Loss) 
(219,952)
(250,269)OPERATING    EXPENSESDepreciation    and amortization 
257,966
351,416Research and    development 
73,742
50,142Sales and    marketing 
1,010,755
1,252,931Delivery and    warehousing 
39,866
22,357General and    administrative 
987,226
1,064,760
2,369,555
2,741,606Operating    (Loss) 
(2,589,507)
(2,991,875)OTHER INCOME    (EXPENSE)Interest    expense 
(854,551)
(635,058)Interest income    
307
3,183Gain (loss) on    sale of investments/equipment
153,189
(30,000)Total Other    Income (Expense) 
(701,055)
(661,875)(Loss) before    provision for income tax 
(3,290,562)
(3,653,750)Provision for    income tax 
-
-Net    Income(Loss) 
(3,290,562)
(3,653,750)Other    comprehensive income (loss)Unrealized    gains (losses) on securities 
269,056
(36,544)Comprehensive    Income (Loss) 
$(3,021,506)
$(3,690,294)Weighted    average number of shares outstanding 
84,341,784
78,349,197Earnings (Loss)    per share 
$ (0.0390)
$ (0.0466)
The accompanying notes are an integral part of these financialstatements.

41

ITRONICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

 
 COMMON STOCKADDITIONAL     NUMBER OF PAID-INACCUMULATEDCOMMON STOCK   SHARESAMOUNTCAPITALDEFICITTO BE ISSUEDOTHERTOTALBalance, December 31, 2000 
75,017,412
$ 75,017
$ 9,761,976
$(10,408,484)
$ 117,151
$ 33,139
$ (421,201)Sale/issue of common stock 
5,981,980
5,982
1,067,483
-
35,809
-
1,109,274Net (loss) for the year    ended        December 31, 2001 
-
-
-
(3,653,750)
-
-
(3,653,750)Other comprehensive (loss)    for        the year ended December 31,    2001 
-
-
-
-
-
(36,544)
(36,544)Common stock options    outstanding 
-
-
-
-
-
61,099
61,099Balance, December 31, 2001 
80,999,392
80,999
10,829,459
(14,062,234)
152,960
57,694
(2,941,122)Sale/issue of common stock 
7,690,778
7,691
918,964
-
424,038
-
1,350,693Net (loss) for the year    ended        December 31, 2002 
-
-
-
(3,290,562)
-
-
(3,290,562)Other comprehensive income    for        the year ended December 31,    2002 
-
-
-
-
-
269,056
269,056Common stock options    outstanding 
-
-
-
-
-
24,076
24,076Balance, December 31, 2002 
88,690,170
$88,690
$11,748,423
$(17,352,796)
$576,998
$350,826
$(4,587,859)        
The accompanying notes are an integral part of these financialstatements.

42

ITRONICS INC, AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
 
2002
2001Cash flows from operating    activities   Net income (loss) 
$(3,290,562)
$(3,653,750)Adjustments to reconcile    net loss to 
cash used by operating activities:    Depreciation and    amortization 
257,966
351,416  Interest on    convertible notes
515,969
324,027  Marketable    securities received for services
(254,783)
(121,612)  (Gains) loss on    investments
(153,189)
30,000  Bad debts 
4,823
-  Stock option    compensation 
24,076
61,099  Expenses paid with    issuance of common stock/debt:       Interest    expense 
32,954
3,738        Consulting expenses 
510,251
411,109        Directors fees 
7,050
6,003    Salaries    
352,059
251,159        Operating expenses 
3,250
8,978  (Increase) decrease    in:      Trade    accounts receivable 
73,914
50,743        Inventories 
(18,558)
(49,876)    Prepaid    expenses, deposits and other 
36,240
20,173  Increase (decrease)    in:      Accounts    payable 
148,993
71,849    Accrued    expenses and contracts payable 
310,469
307,267         Net cash used by operating activities 
(1,439,078)
(1,927,677)   Cash flows from investing    activities:    Acquisition of    property and equipment 
(241,250)
(73,315)  Acquisition of    intangibles and investments 
-
(47,777)  Sale of investments
349,506
-  Sale of equipment
-
415         Net cash provided (used) by investing activities 
108,256
(120,677)   Cash flows from financing    activities:    Proceeds from sale    of stock 
474,850
346,921  Proceeds from    stockholders/long-term debt
1,166,645
1,997,013  Payments on debt
(268,147)
(298,895)         Net cash provided by financing activities 
1,373,348
2,045,039Net increase (decrease) in    cash 
42,526
(3,315)Cash, beginning of year 
14,675
17,990Cash, end of year 
$ 57,201
$ 14,675
The accompanying notes are an integral part of these financialstatements.

43

ITRONICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

(continued)

 

2002
2001Supplemental Disclosures of    Cash FlowInformation:Cash paid during the period    for interest 
$211,252
$ 254,260Schedule of non-cash    financing transactions:Settlement of debt/accruals    byissuance of common    stock/debt:Accounts payable 
54,534
93,870Convertible notes and    accrued interest
60,751
-Property and equipment    financed with long-term debt 
97,703
39,844Equipment financed with    capital leases 
111,799
40,597Deferred loan fees on    debt/capital leases 
-
77,008Acquisition of assets by    issuance ofcommon stock:Stock/debt placement costs 
-
85,865Golden Phoenix Minerals,    Inc.(Golden) options
109,275
-Deferred loan fees on debt
-
16,500Equipment
2,700
-Acquisition of assets by    issuance of debt:Stock/debt placements costs    
-
10,000Payment of debt with GPXM    stock
72,881
-
The accompanying notes are an integral part of these financialstatements.

44

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

NOTE 1 - Summary of Significant Accounting Policies:

Company's Activities:

The Company, a Texas corporation, was incorporated on October 29, 1987. The Company wasto seek out and obtain through an acquisition and/or merger transactions, assets whichcould benefit its shareholders. In May of 1988, the Company acquired Whitney &Whitney, Inc. and its related entities through the issuance of its common stock. Thisacquisition was accounted for using the pooling of interests method. The Company, throughits subsidiaries, is involved in mining technical services, photochemical recycling andrelated silver recovery, and liquid fertilizer manufacturing.

Financial Statement Estimates and Assumptions:

The preparation of financial statements in conformity with accounting principlesgenerally accepted in the U.S. requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and reported amounts of revenuesand expenses during the reporting period. Actual results could differ from thoseestimates.

Principles of Consolidation:

The consolidated financial statements include the accounts of Itronics Inc. and itssubsidiaries owned and/or controlled by the Company as follows:

2002
2001
PERCENTAGE
PERCENTAGEWhitney & Whitney, Inc.    
100.00
100.00Itronics Metallurgical,    Inc. 
100.00
100.00Itronics California, Inc. 
100.00
100.00Nevada Hydrometallurgical    Project (A Partnership)
92.50
92.50American Hydromet (A Joint    Venture) 
81.63
81.63American Gold & Silver    (A Limited Partnership) 
43.84
43.84
Whitney & Whitney, Inc. is the general partner for American Gold & Silver. Assuch, the Company has control over American Gold & Silver and has included it in itsconsolidation.

American Gold & Silver and Nevada Hydrometallurgical Project possess no materialtangible assets or liabilities.

45

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

No amount for minority interests is reflected in the consolidated balance sheets as theequity of minority interests in the net losses exceed the carrying value of the minorityinterests.

No amount for minority interests is reflected in the consolidated statement ofoperations since losses applicable to the minority interest in each subsidiary exceed theminority interest in the equity capital of each subsidiary. As a result, losses applicableto the minority interest are charged against the majority interest. When future earningsmaterialize, the majority interest will be credited to the extent of such lossespreviously absorbed.

All significant intercompany accounts and transactions have been eliminated in theconsolidation.

Revenue Accounting for Contracts:

When the mining technical services segment of the Company is responsible for theprocurement of materials and equipment, property, or subcontracts in its consultingbusiness, it includes such amounts in both revenues and cost of sales. The amount of suchpass-through costs included in both mining consulting revenues and cost of sales for theyear ended December 31, 2002 and 2001 were $117,740 and $134,676, respectively.

Accounts Receivable Allowance Account:

The Company uses the allowance method to account for uncollectible accounts receivable.

Inventories:

Inventory is determined utilizing the lower of cost or market value determined on theaverage cost valuation method and consists primarily of unprocessed silver bearingphotochemicals, fertilizer raw materials and saleable fertilizer.

Following is a summary of finished goods and raw materials inventories as of December31, 2002 and 2001:
 
2002
2001Finished goods
$ 76,609
$ 59,741Raw materials
260,544
258,854 
$337,153
$318,595
Cost of the silver in solution inventory is either the actual cost, or 80% of the fairmarket value of the silver content of the photochemicals as determined by laboratoryassays (See Note 14).

46

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

Property and Equipment:

Property and equipment are stated at cost. Depreciation is computed by accelerated andstraight-line methods over five to forty years. Capital lease equipment is amortized usingaccelerated and straight-line methods over five to twenty years. Accumulated amortizationon capital lease equipment is $300,419 and $201,784 at December 31, 2002 and 2001,respectively.

Repairs and maintenance are charged to operations as incurred.

Intangible Assets:

Intangible assets are amortized by the straight-line method over the following lives:

YEARSPatents 
17Deferred loan fees
3-5
Research and Development:

The Company's fertilizer production process was previously in the research anddevelopment stage. Wages, benefits, rent, and other costs associated with ongoing researchare expensed as research and development expenses when incurred. 

Advertising:

The Company advertises its products in various trade publications and general newspapersupplements. It also promotes the Company in various business publications, television,and internet media. Such advertising costs include the creative process, costs ofproduction, and placement costs of the ads themselves. All advertising costs are expensedas incurred. Total advertising expense was $4,665 and $72,030 for the years ended December31, 2002 and 2001, respectively. 

Income Taxes:

The Company has accounted for income taxes to conform to the requirements of Statementsof Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under theprovisions of SFAS 109, an entity recognizes deferred tax assets and liabilities forfuture tax consequences of events that have already been recognized in the Company'sfinancial statements or tax returns. The measurement of deferred tax assets andliabilities is based on provisions of the enacted tax law. The effects of future changesin tax laws or rates are not anticipated. Valuation allowances are established whennecessary 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

47

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

loss for the period divided by the weighted average number of common shares outstandingduring 2002 and 2001. Common stock equivalents are not included, as their effect would beantidilutive.

Common Stock:

The Company’s common shares have, subject to the provisions of any series ofPreferred 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. TheCompany may from time to time issue common shares that are restricted under Rule 144 ofthe Securities and Exchange Commission. Such restrictions require the shareholder to holdthe shares for a minimum of one year before sale. In addition, officers, directors andmore than 10% shareholders are further restricted in their ability to sell such shares.

NOTE 2 - Reclassification:

The prior year's financial statements have been reclassified, where necessary, toconform with the current year presentation.

NOTE 3 - Long-Term Debt:

Long-term debt at December 31, 2002 and 2001 is comprised of the following (all debtpayments are applied to outstanding interest owed at date of payment prior to beingapplied to the principal balance). The carrying amount approximates fair value. The fairvalue of long-term debt is based on current rates at which the Company could borrow fundswith similar remaining maturities.
 
DECEMBER 31, 
2002
2001Notes due to unrelated    parties:  Notes payable secured by    vehicles due at varying dates   through 2006. The monthly    payments total $1,920,  including interest at 10.5%    to 11.0% per annum.
$ 53,078
$ 65,581   Note payable secured by    real property due May 2016.  Monthly payment is $6,601,    including interest   at 12% per annum.
527,087
542,058   Financing contract secured    by equipment due May 2006.   Monthly payment is $806,    including interest at 17.99%
25,043
30,088   City of Reno Special    Assessment District for road  and access improvements.    Payable in 40 equal semi-   annual payments plus    interest not to exceed 1%   over the related bond rate.    
97,703
-   Less current portion due    within one year 
(556,301)
(38,255)Total long-term liabilities    due to unrelated parties
$146,610
$599,472
48

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001
 
DECEMBER 31, 
2002
2001Convertible Promissory    Notes:  Three year convertible    promissory notes due   November 2002 through    February 2003, including  interest at 12% per annum.    The notes and accrued  interest are convertible    into the  Company's restricted common    stock at $0.50 per  share at any time through    November 18, 2002   and February 16, 2003.
$ 47,000
$ 47,000   Three year convertible    promissory notes due at  varying dates through    February 2003, including  interest at 9% per annum.    The notes and accrued   interest are convertible    into the Company’s  restricted common stock at    prices ranging from   $0.65 to $1.18 per share at    any time through  dates ranging from January    to February 2003.   (See Note 16)
2,573,000
2,621,000   Three year convertible    promissory notes due at  varying dates through    December 2004, including  interest at 12% per annum.    The notes and accrued   interest are convertible    into the Company’s  restricted common stock at    prices ranging from   $0.10 to $0.15 per share at    any time through  dates ranging from March to    December 2004. 
1,242,029
1,242,029   Three year convertible    promissory notes due at  varying dates through    September 2005, including  interest at 12% per annum.    The notes and accrued   interest are convertible    into the Company’s  restricted common stock at    prices ranging from   $0.10 to $0.25 per share at    any time through  dates ranging from January    to September 2005. 
844,100
-   Accrued interest on    convertible promissory notes
1,049,100
545,882   Less current portion due    within one year
(3,374,838)
(25,438)Total Long Term Convertible    Promissory Notes  and Accrued Interest
$2,380,391
$4,430,473
49

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 
Loans from    Stockholders/Related Transactions:   Advances from    officer/stockholder. Due on demand,  with interest accruing at    12% per annum.
$ 280,287
$ 20,000   Unsecured note payable to    an employee/stockholder  for $4,500. Due on demand.    Interest on a reim-  bursement basis based on    the employee’s line of   credit, presently at 7.25%    per annum.
1,400
-   Unsecured note payable to a    stockholder in the  amount of $10,000, dated    December 28, 1994.  Monthly payments of $220,    including interest at   11.5%, began January 1998    and continued to   December 2000. No demand    has been made for   payment.
3,000
5,222 
284,687
25,222Less current portion due    within one year 
(284,687)
(25,222)Total long-term liabilities    due to stockholders
$ -
$ -
 

 

                                             
 Long-term debt    matures as follows:   UNRELATEDCONVERTIBLE 
YEARPARTIESNOTESSTOCKHOLDERS
2003
$ 556,301
$3,374,838
$284,687
2004
28,202
1,459,737
-
2005
26,299
920,654
-
2006
13,946
-
-
2007
4,885
-
-
2008-2022
73,278
-
- 
$702,911
$5,755,229
$284,687    
As discussed in Note 15 mechanics liens have been filed for work done at theCompany’s manufacturing facility. Such liens not cleared after 60 days from the dateof filing become defaults under terms of the deed of trust securing the mortgage on theproperty and the lender can demand payment in full and institute foreclosure proceedings.As required by U.S. Generally Accepted Accounting Principles, the entire principal balanceof the note is included in current liabilities. $510,218 of the principal balance wouldotherwise be classified as long term debt. The lender is aware of the situation and hasnot made a demand or taken any other action.

As of December 31, 2002 a $20,000 12% convertible promissory note from 1999 was indefault. The note has subsequently been extended for three years.

50

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

NOTE 4 - Major Customers:

Fertilizer sales for the years ended December 31, 2002 and 2001 include $498,116 and$146,824, respectively, from one major customer, which represents 99% and 81%,respectively, for the years ended December 31, 2002 and 2001. The customer is one of thelargest fertilizer distribution companies in the country.

Photochemical recycling revenue for the year ended December 31, 2002 includes $95,350from one major customer under a Department of Defense contract.

Silver and gold sales for the year ended December 31, 2002 includes $52,606 from onemajor customer. Silver and gold sales for the year ended December 31, 2001 includes$154,800 and $51,708 from two major customers. 

Technical services revenue (including pass through funds described in Note 1) for theyear ended December 31, 2002 includes $191,672 and $132,890 from two major customers whichrepresents 55% and 38%, respectively, of technical services revenues. Technical servicesrevenue (including pass through funds described in Note 1) for the year ended December 31,2001 includes $281,042 and $194,688 from two major customers which represents 59% and 41%,respectively, of technical services revenues. Receivables from these major customers as ofDecember 31, 2002 and 2001 amount to $47,370 and $126,607, which represents 66% and 98%,respectively, of consulting accounts receivable.

The Company's major technical services customers operate within the mining industry,both nationally and internationally. Due to the nature of the Company's operations, themajor sources of sales revenues may change from year to year.

 

NOTE 5 - Income Taxes:

The following is a reconciliation of the federal statutory tax and tax rate to theCompany's provision for taxes and its effective tax rate.
 
2002
2001  
PERCENT 
PERCENT  
OF    PRE-TAX 
OF    PRE-TAX 
AMOUNT
INCOME
AMOUNT
INCOMEFederal 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%     
51

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

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
2003
$ 14,737
2005
65,113
2006
430,403
2007
188,146
2008
113,253
2012
322,525
2018
377,944
2019
1,605,954
2020
3,254,375
2021
2,933,607
2022
2,427,547 
$11,733,604  
The Company's total deferred tax assets, and deferred tax asset valuation allowances atDecember 31, 2002 and 2001 are as follows:
 
2002
2001   Total deferred tax assets 
$4,103,389
$    3,265,475Less valuation allowance 
(4,103,389)
(3,265,475)Net deferred tax asset 
$     -
$      -   
 

NOTE 6 - Stock Option and Purchase Plans:

In January 2000 the Company began a private placement of three year convertible notesto raise $2.5 million. The placement was completed in February 2000 and raised a total of$2,668,000. The notes and accrued interest are convertible to restricted Common Shares atvarying dates through February 2003, with conversion prices ranging from $0.50 to $1.18. 

In October 2000 the Company completed the registration of 10,000,000 common shares inconnection with its agreement with Swartz Private Equity, LLC. (Swartz) to raise $15million over three years. As part of the agreement, Swartz received a five year warrantfor 2,400,000 shares at $0.55 per share and it received five year warrants for 331,033shares based on the exercise of the Company’s put rights during 2001. The exerciseprice of these warrants range from $0.0825 to $0.308, but are subject to downward resetprovisions. In February 2002 the agreement with Swartz was renegotiated and as part of thenew 

52

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

agreement, Swartz was granted a five year warrant for 360,000 shares at an exerciseprice of $0.238.

In March 2001 the Company began a private placement of three year convertible notes. Atotal of $1,242,029 was raised in 2001. The notes and accrued interest are convertible torestricted common shares at varying dates through December 2004, with conversion pricesranging from $0.10 to $0.15. 

In January 2002 the Company began a private placement of three year convertible notes.A total of $844,100 was raised in 2002. The notes and accrued interest are convertible torestricted common shares at varying dates through September 2005, with conversion pricesranging from $0.10 to $0.25. In November 2002 the Company began a private placement ofrestricted common stock with an equal number of attached warrants. A total of $117,500 at$0.08 per share was raised in 2002. The warrants are for three years and are convertibleinto restricted common stock at $0.08 for the first year, $0.16 for the second year, and$0.24 for the third year. 

In addition, the Company has granted options and warrants to acquire common shares tocertain officers, directors, employees, and consultants of the Company. The options areexercisable at varying dates through October 2007, except for the 4,000,000 optionsgranted to an officer/stockholder, which expire one year after the end of his employment.The number of outstanding options and warrants was 4,749,491 and 1,542,865 shares atDecember 31, 2002 and 2001, respectively.

Following is a summary of all warrant and option activity for the years ended December31, 2002 and 2001.
 
NUMBER OF SHARES 
2002
2001Under option, beginning of    year 
19,908,809
10,157,683Granted 
16,714,871
11,624,567Exercised 
(554,040)
(500,000)Expired 
(450,846)
(1,373,441)Under option, end of year 
35,618,794
19,908,809Average price for all    options granted and exercised
$0.16
$0.14
Compensatory Stock Options:

Included in the above options and warrants are compensatory options to acquire3,307,626 and 87,965 common shares at December 31, 2002 and 2001, respectively. Theseoptions were granted to various employees and consultants at varying dates during 2002 and2001. The options for 2002 are exercisable at any time over three years from the date ofgrant, with the exception of 3,000,000 shares that are exercisable until one year afterthe termination of employment of one officer/stockholder and 250,000 shares that areexercisable for five years beginning October 2, 2002. The exercise prices are 250,000shares at $0.20, 1,626 shares at $0.25, 3,000,000 shares at $0.30, 32,000 shares at $0.50,and 24,000 shares at $0.90. The options for 2001 are 

53

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

exercisable at any time over three years from the date of grant, with exercise pricesof 1,065 shares at $0.25, 15,000 shares at $0.35, 15,900 shares at $0.40, 32,000 shares at$0.50, and 24,000 shares at $0.90. The Company applies APB Opinion 25 in accounting forthese stock options. Total compensation, based on the fair market values of the stock onthe grant dates is $341 and $-0- for December 31, 2002 and 2001, respectively. Theseamounts are being amortized over the three year lives of the options, which resulted incompensation expense of $24,076 and $61,099 for December 31, 2002 and 2001, respectively,and deferred compensation as of December 31, 2002 and 2001 of $15,159 and $63,147,respectively. 67,000 shares of prior year options expired during 2002. 

If the Company were to apply the provisions of FASB Statement No. 123 to these options,using the fair value method, compensation expense would have been $232,075 and $678 forDecember 31, 2002 and 2001, respectively. Net loss and loss per share would have beenimpacted as follows:
 
2002
2001Net Income (Loss):  As reported 
$(3,290,562)
$(3,653,750)Pro forma
$(3,498,561)
$(3,593,329)Earnings (Loss) per share:  As reported 
$ (0.0390)
$ (0.0466)Pro forma 
$ (0.0415)
$ (0.0459)
The pro forma amounts were estimated using the Black-Scholes option pricing model withthe following assumptions for 2002 and 2001:

 

2002
2001Dividend yield
0%
0%Risk-free interest rate
2.69%
5.02%Expected life
3-12    years
3 yearsExpected volatility
33.03%
21.64%
54

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

NOTE 7 - Common Stock to be Issued:

The following summarizes stock transactions commencing prior to December 31, with stockissued or to be issued subsequent to that date:
 
2002
2001Payment of salaries 
$345,950
$114,790Payment of consulting and    operating fees 
6,700
33,232Payment of director fees 
825
1,200Payment of interest 
13,348
3,738Conversion of notes payable    and accrued interest
25,900
-Private placement for cash
75,000
-Private placement for GPXM    option purchase
109,275
- 
$576,998
$152,960
 

NOTE 8 - Accrued Expenses:

The following is the composition of accrued expenses as of December 31:
 
2002
2001   Accrued salaries and    vacation 
$ 60,469
$ 59,118Federal and state payroll    taxes 
132,877
170,391Sales tax 
33,858
34,182Audit and annual meeting    costs 
73,000
56,000 
$300,204
$319,691
 

NOTE 9 – Other Comprehensive Income

Following are the components of Other Comprehensive Income:
 
Year Ended December 31, 
2002
2001Unrealized holding gains    (losses)   arising during the period
$229,927
$(36,544)Reclassification adjustment
39,129
-Other Comprehensive Income
$269,056
$(36,544)
55

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

NOTE 10 - Related Party Transactions:

Several promissory notes are held by stockholders at December 31, 2002 and 2001 (seeNote 3 for terms).

$349,132 and $98,383 of the accrued management salaries as of December 31, 2002 and2001, respectively, is for salary in arrears due to several officer/stockholders andemployee/stockholders. Interest accrued at 12% per annum on salaries due officer andemployee/ stockholders amounted to $37,263 and $8,373, respectively, in 2002 and 2001. Ofthese amounts, $32,954 and $3,738 for 2002 and 2001, respectively, was paid by issuance of196,184 and 26,550 shares of restricted common stock. In addition to the above, salaryexpense of $341,000 and $94,350 for 2002 and 2001, respectively, are included in stock tobe issued at the respective year ends. These amounts represent the portion of salariesearned that the officers/employees/stockholders have agreed to accept in theCompany’s common stock. The number of shares to be issued are 3,215,189 and 956,997for 2002 and 2001, respectively. Issuance of the stock is pending sufficient cashavailable to pay the related federal withholding taxes.

Combined consulting and salary expenses amounting to $838,818 and $636,377 for 2002 and2001, respectively, were paid by issuance of 5,319,902 and 3,948,381 shares, respectively,of common stock. The shares were or are to be issued at varying dates in 2001, 2002 and2003.

After approval from the Company's Board of Directors, in March 1999 the Company'ssubsidiary, WWI, agreed to provide technical services to Golden Phoenix Minerals, Inc.(Golden), a junior mine exploration and development company whose common shares trade onthe OTC Bulletin Board. Services are billed monthly and WWI receives a combination ofGolden common stock, SEC Rule 144 restricted common stock, and cash. Separately, Dr.Whitney personally agreed to acquire up to 10,000,000 common shares of Golden at $0.10 pershare, making him beneficial owner of more than ten percent of Golden. Any unexercisedoptions under this arrangement can be assigned to WWI. Dr.'s Whitney and Cavell areprincipals in a group that controls the mining claims underlying one of Golden's twoprincipal exploration and development properties. At December 31, 2002 WWI owned 3,061,212restricted Golden shares. At December 31, 2001 WWI owned 200,000 unrestricted Goldenshares and 2,789,042 restricted Golden shares. The initial Rule 144 one year period forresale began in April 2000, and continues monthly thereafter. Total amount billed for 2002and 2001 was $191,672 and $194,688, respectively. A total of $37,822 and $123,757 isincluded in accounts receivable at December 31, 2002 and 2001, respectively. At December31, 2002, the average bid/asked price for Golden common was $0.23, resulting in a value ofshares held on that date of $704,079. Included in the Golden shares held at December 31,2002 are 1,050,000 restricted common shares that were acquired by WWI purchasing $0.10options from Dr. Whitney and subsequently exercising the options by offsetting accountsreceivable due it from Golden. The purchase price of the options was $109,275, which wasdetermined at 85% of fair market value of the then current trading price of Golden, lessthe $0.10 option price. This valuation method is under the same terms that WWI uses toaccept Golden restricted common shares for its monthly services. Dr. Whitney acceptedCompany restricted common shares 

56

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

in the 2002 Equity Private Placement as payment for the options, which amounted to1,365,938 shares plus an equal number of warrants with conversion prices ranging from$0.08 to $0.24 per share. The total cost to WWI of these Golden shares is $214,275 and themarket value at December 31, 2002 was $241,500.

In the fourth quarter of 2000, the Company’s subsidiary, IMI, entered into apurchase and refining agreement with Golden to process and resell Golden’s goldproduction from its mining operations. IMI processes the gold and sells it to anindependent third party. Gold sales under this agreement were $-0- and $107,813 for 2002and 2001, respectively.

During the first quarter of 2002 Dr. Whitney loaned WWI 600,000 shares of Golden stockat a value of $105,000 The loaned shares were sold by WWI for $83,045, for a realized lossof $21,955. Subsequently, WWI repaid 416,463 of the Golden shares out of shares owned byit at a value of $72,881 and a realized gain of $35,587. 

For related party transactions subsequent to December 31, 2002, see Note 16.

 

NOTE 11 - Lease Commitments and Rent Expense:

0perating Leases
The Company leases its corporate office facility under a non-cancelable agreement whichexpires June 30, 2003. Monthly payments are $4,815.

A wholly owned subsidiary of the Company, IMI, leases storage facilities on amonth-to-month basis and, therefore, no long-term binding contractual obligation existswith regards to minimum lease payments. The monthly rent payment is $1,000. 

A wholly owned subsidiary of the Company, WWI, is committed under non-cancelableoperating leases for the use of office space, a vehicle and office equipment. The monthlylease payments total $3,475, with an increase to $3,516  in August 2003, and expireon various dates through the year ending December 31, 2006. 

Future minimum rental commitments at December 31, 2002, under these operating leaseagreements are due as follows:

2003
$68,759
2004
24,271
2005
7,261
2006
4,235
2007
- 
$104,526
57

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

Total rental expense included in the statements of operations for the above leases forthe years ended December 31, 2002 and 2001 are $113,066 and $108,940, respectively.

 

Capital Leases

At varying dates in 1999 the Company's subsidiaries, WWI and IMI, entered into leasesto finance the equipment for the manufacturing facility in Reno/Stead, Nevada and forcomputer equipment. The leases totaled $987,315. Of this amount $408,788 was received incash, of which $65,033 was in connection with two sale/leaseback transactions of computerand office equipment. The lease periods range from three to five years, and the totalmonthly lease payments are $24,192. With the exception of two leases, all have buyoutoptions for $1 at the end of the lease. The remaining two leases have buyout provisionstotaling $9,667.

At varying dates in 2000 the Company and its subsidiaries entered into leases primarilyfor financing purposes. The leases totaled $543,832, of which $437,636 was received incash. The lease periods range from three to five years, and the total monthly leasepayments are $13,737. All the leases have buyout options for $1 at the end of the lease. 

At varying dates in 2001 the Company and its subsidiaries entered into leases both fornew plant equipment and for financing purposes. The leases totaled $288,881, of which$192,282 was received in cash. The lease periods range from four to five years, and thetotal monthly lease payments are $7,413. All the leases have buyout options for $1 at theend of the lease, with the exception of one lease which has a fair market value purchaseoption at the end of the lease, which is anticipated to be a nominal amount.

At varying dates in 2002 the Company and its subsidiaries entered into leases for newplant and office equipment. The leases totaled $209,502. The lease periods range fromthree to five years, and the total monthly lease payments are $2,914. All the leases havebuyout options for $1 at the end of the lease.

As of December 31, 2002 lease payments totaling $330,982 were in arrears. Of thisamount, $299,905 remains unpaid as of the date of this report. As required by U.S.Generally Accepted Accounting Principles, the principal balance of the leases that are notpaid through December 31, 2002, a total of $500,598, has been classified as a currentliability. This amount would otherwise be classified as long term debt. As of March 31,2003 lease payments totaling $428,745 are in arrears. Some of the lessors have filed suitto recover the amounts due under the leases. The present status of these actions isdiscussed in Note 15. The Company is making ongoing payment arrangements with these andthe other lessors to avoid action that may be adverse to the Company.

All of the above described leases are secured by the equipment acquired or financedunder the lease.

58

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

Future minimum lease commitments at December 31, 2002 are due as follows:

2003
$1,468,474
2004
23,265
2005
2,960
1,494,699Less: amounts representing interest 
(300,762)
$1,193,937
 

NOTE 12 - Business Segments:

The Company and its subsidiaries operate primarily in two business segments asidentified in Note 1. The following defines business segment activities:

Photochemical Fertilizer:                              Photochemicalrecycling,

                                                       Silverrecovery,

                                                       Fertilizerproduction and

                                                       Sales

Mining Technical Services:                             Miningindustry services

The photochemical fertilizer segment operates principally in Northern Nevada andSouthern California and, to a lesser extent, Northern California. The primary source ofrevenue for this segment is from the pick-up and processing of photochemicals, recovery ofsilver therefrom, and sales of GOLD’n GRO fertilizer products. The customer base isdiverse and includes organizations in the photo-processing, printing, x-ray and medicalfields. Fertilizer sales are concentrated in the same geographic markets and the customerbase is principally in commercial markets, including golf courses, turf farms, andspecialty agriculture which includes vegetables, fruit and nut trees, and wine and tablegrapes.

The mining technical services segment performs its services primarily out of theCompany's Reno, Nevada offices, but its source of clients is not limited to organizationsbased locally. It has served both national and international clients in the past. Asdiscussed in Note 4, at present the segment is serving primarily two clients in the goldmining industry, who have several operations in different areas of the United States.

The Company measures segment performance based on operating income or loss. At presentthere are no intercompany revenues. Costs benefiting both segments are incurred by boththe Company and by Whitney & Whitney, Inc. Such costs are allocated to each segmentbased on the estimated benefits to the segment. General and administrative costs incurredby the Company that have no other rational basis for allocation are divided evenly betweenthe segments. Cost allocation percentages are reviewed annually and are adjusted based onexpected business conditions for the year.

59

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 
Operating income (loss) by    business segment:   
2002
2001Photochemical Fertilizer:   Revenues:  Fertilizer sales 
$502,290
$ 180,435Photochemical recycling 
309,271
239,126Silver and gold sales 
127,092
246,115 
938,653
665,676Cost of sales and operating    expenses 
3,115,935
3,319,294Research and development 
73,742
50,142 
3,189,677
3,369,436Operating (Loss) 
$(2,251,024)
$(2,703,760)Mining Technical Services:   Technical services revenues    
$347,032
$ 477,577Cost of sales and operating    expenses 
685,515
765,692Operating (Loss) 
$(338,483)
$(288,115)
General and administrative expenses of $160,079 and $159,527 incurred by Itronics Inc.were equally divided between the two segments for 2002 and 2001, respectively.

Reconciliation of segment revenues, cost of sales, gross profit (loss), and operatingincome (loss) to the respective consolidated amounts:

60

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001
 
2002
2001Revenues  Photochemical Fertilizer 
$938,653
$ 665,676Mining Technical Services 
347,032
477,577Consolidated Revenues 
$1,285,685
$ 1,143,253   Photochemical Fertilizer 
$1,190,447
$    1,016,943Mining Technical Services 
315,190
376,579Consolidated Cost of Sales 
$1,505,637
$ 1,393,522   Gross Profit (Loss)  Photochemical Fertilizer 
$(251,794)
$    (351,267)Mining Technical Services 
31,842
100,998Consolidated Gross Profit    (Loss)
$(219,952)
$ (250,269)   Operating Income (Loss)  Photochemical Fertilizer 
$(2,251,024)
$(2,703,760)Mining Technical Services 
(338,483)
(288,115)Consolidated Operating    Income (Loss) 
(2,589,507)
(2,991,875)Other Income (Expense) 
(701,055)
(661,875)Consolidated Net Income    (Loss) before taxes
$3,290,562)
$(3,653,750)
 
Other segment information:
2002
2001Capital expenditures by    business segment:  Photochemical Fertilizer 
$449,398
$ 151,763Mining Technical Services 
4,054
1,459Consolidated Capital    Expenditures 
$453,452
$ 153,222   Depreciation and    amortization expense by business segment:  Photochemical Fertilizer  Depreciation 
$173,685
$ 160,845Amortization 
53,612
144,862 
227,297
305,707Mining Technical Services  Depreciation 
18,106
18,083Amortization 
12,563
27,626 
30,669
45,709Consolidated Depreciation    and Amortization
$257,966
$ 351,416
61

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

Identifiable assets by business segment (net of accumulated

depreciation, accumulated amortization, and allowance for doubtful accounts):
 
2002
2001 
PHOTO-
MINING
PHOTO-
MINING 
CHEMICAL
TECHNICAL
CHEMICAL
TECHNICAL 
FERTILIZER
SERVICES
FERTILIZER
SERVICESASSET DESCRIPTION     Current Assets     Cash 
$ 27,178
$ 29,496
$ 8,599
$ 4,066Accounts receivable, net 
20,072
68,167
40,782
126,194Marketable securities
-
483,983
-
-Inventories 
335,327
1,826
316,769
1,826Deferred loan fees, current    
36,234
9,991
36,234
9,991Prepaid expenses 
24,192
4,546
47,612
3,397 
443,003
598,009
449,996
145,474Property and Equipment, net    Land 
215,000
-
215,000
-Building and improvements 
1,091,240
-
999,351
-Construction in progress,     manufacturing facility 
86,884
-
86,884
-Equipment 
1,096,832
83,405
995,509
114,825Vehicles 
41,497
539
62,283
1,287Equipment under capital    lease
634,736
137,710
589,827
174,275 
3,166,189
221,654
2,948,854
290,387     Other Assets, net     Patents, trademarks, and    other
9,115
-
10,171
-Marketable securities 
-
220,096
-
313,849Inter-company    investments/loans 
-
1,405,559
-
1,745,665Deposits 
15,121
19,812
18,387
19,812Deferred loan fees 
85,347
6,599
121,581
16,590 
109,583
1,652,066
150,139
2,095,916 
$3,718,775
$2,471,729
$3,548,989
$2,531,777
 

62

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

Reconciliation of segment assets to consolidated assets:
 
2002
2001   Total Assets:  Photochemical Fertilizer
$    3,718,775
$    3,548,989Mining Technical Services
2,471,729
2,531,777Total Segment Assets
6,190,504
6,080,766Itronics Inc. assets
17,827,985
16,278,194Less: inter-company    elimination
(19,203,689)
(17,800,700)Consolidated Assets
$ 4,814,800
$ 4,558,260   
NOTE 13 - Going Concern:

The Company's consolidated financial statements have been presented on the basis thatit is a going concern, which contemplates the realization of assets and the satisfactionof liabilities in the normal course of business. The Company and its subsidiaries havereported recurring losses from operations, including a net loss of $3,290,562 during theyear ended December 31, 2002, a negative working capital of $5,776,237, and astockholders’ deficit balance of $4,587,859 as of December 31, 2002. These factorsindicate the Company and its subsidiaries' ability to continue in existence is dependentupon their ability to obtain additional long-term debt and/or equity financing and achieveprofitable operations. The consolidated financial statements do not include anyadjustments relating to the recoverability and classification of recorded asset amounts orthe amounts and classification of liabilities that might be necessary should the Companyand its subsidiaries be unable to continue in existence.

Prior to acquiring Whitney & Whitney, Inc. in 1988, the Company registered1,777,000 common shares for public offering. Due to security law changes immediatelysubsequent to the offering, the offering did not raise sufficient equity capital tocomplete the Company's business plan. In order to solve the Company's liquidity problems,management implemented a plan of obtaining equity through private placements of preferredand common shares, convertible debt, conversion of debt to common shares, and payment ofconsulting and other labor services with common shares.

In addition to continuing the above described efforts, development of the technologynecessary to manufacture fertilizer from photochemicals has been completed. In March 1998the Company’s subsidiary, Itronics Metallurgical, Inc., signed a definitivemanufacturing and distribution agreement with Western Farm Services, Inc. (WFS). Theagreement gives WFS the exclusive license and right to manufacture and market theGOLD’n GRO line of fertilizer products in the states of Arizona, California, Hawaii,Idaho, Oregon and Washington. The agreement is for five years, with five year renewaloptions. In March 2003 the companies entered the second five year term of the agreement. 

63

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

A summary of the results of efforts to raise funds through various private placementsover the last several years is presented in Note 6. 

 

NOTE 14 - Off-Balance Sheet Risks and Concentration of Credit Risk:

The Company occasionally maintains bank deposits in excess of federally insured limits.The Company’s risk is managed by maintaining its accounts in one of the top fivelargest banks in the country.

As of December 31, 2002, a significant portion of the Company's accounts receivable isconcentrated with one mining industry client. This concentration of credit risk issomewhat mitigated due to the fact that WWI is closely assisting the client with itscapital raising efforts and with development of its mining and exploration projects.

Increase or decrease in photochemical recycling service and silver extraction revenueshas a direct relationship with federal, state, and local regulations and enforcement ofsaid regulations. Fertilizer revenues could be impacted by crop cycles, seasonalvariations, and weather patterns.

The ability to recognize a net profit from silver recovery sales is based on the fairmarket value of silver (London five day average) at the time the photochemicals areobtained versus the fair market value of silver when recovered silver is sold. Mostcustomers are given an 80% silver credit against recycling services based on the contentof silver in the photochemicals. If the fair market value of silver declines, thepossibility exists that the 80% credit, plus operating costs associated with the silverextraction, could exceed the revenues generated at the time the silver is sold.

Management's plan to reduce the market risk of silver is to increase the volume ofphotochemicals and the resultant silver recovery, and then to implement a hedging programin which silver will be sold forward, thereby matching the price to be received to theprice paid to the Company's customers.

As a handler of photochemical materials, the Company is subject to various federal,state, and local environmental, safety, and hazardous waste regulations. The Companybelieves that its policies and procedures for handling hazardous wastes are in compliancewith the applicable laws and regulations and are consistent with industry standards. Costsfor these compliance activities are expensed as incurred. As the Company's photochemicalfertilizer business expands, the various laws and regulations that are applicable to theCompany's activities will change. During 1996, the Company received concurrence from theState of Nevada environmental officials that the Company's photochemical fertilizerprocess meets the existing requirements for exemption from all environmental regulations,except toxic metal content standards, and with the exception that certain presentlyconducted lab analyses of the photochemicals will continue to be required. Certain of theCompany's large scale customers presently meet the exemption requirements. Now that allthe photochemicals are utilized in the fertilizer or other commercial products, all theCompany's customers are arguably exempt. 

64

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

NOTE 15 – Legal Proceedings

In August 2002 a supplier of equipment to be utilized in the Stead manufacturing plantfiled suit against the Company and its subsidiary, Itronics Metallurgical, Inc. (IMI) inJohnson County, Indiana for the unpaid amount of $64,234 plus attorney’s fees andcourt costs. On October 1, 2002 the plaintiff received a default judgment awarding the$64,234 plus $1,500 attorney’s fees plus 8% interest. On November 5, 2002 theplaintiff filed a "Notice of Filing of Foreign Judgment" in Washoe County,Nevada and has received the judgment. Plaintiff’s attorney is actively seeking tocollect the amount due. The liability is secured by a UCC filing on the equipmentacquired. 

In September 2002 one of IMI’s equipment lessors filed suit against it in LosAngeles County, California due to delinquent payment of monthly lease payments. The suitseeks $45,878 plus late charges, interest, and court costs/attorney fees. Subsequent toDecember 31, 2002 IMI restructured the lease and signed a stipulated judgment. Therestructured lease requires 30 monthly payments of $1,500 plus one payment of $1,000, fora total of $46,000. If IMI defaults the new lease, a judgment can be entered for theremaining amount due, plus interest, attorney fees, and other costs.

In September and October 2002 a general contractor and two subcontractors have filedmechanics liens on IMI’s Stead manufacturing facility due to non payment for workperformed on the property. The amounts due total $104,708. In November 2002 the generalcontractor filed suit for its portion of the above amount, a total of $81,233. In December2002 IMI worked out a payment arrangement calling for monthly payments of $15,000 to bepaid in the Company’s common stock. The general contractor is applying the paymentsto the balance due it and the subcontractors.

In November and December 2002 two lawsuits were filed by three of IMI’s equipmentlessors, one in Oakland County, Michigan and one in Cook County, Illinois, seeking a totalof $142,955 plus costs and attorney fees. IMI has retained a debt restructuring firm basedin Texas to negotiate a settlement of these suits. 

In December 2002 a trade payable creditor filed suit against the Company and WWI inWashoe County, Nevada seeking a total of $12,100. The Company has signed a stipulatedjudgment and began making monthly payments of $3,000 in March 2003. 

From January 1, 2003 through April 8, 2003, a total of six suits have been filedagainst the Company or its subsidiaries seeking a total of $285,200 plus attorney fees andcosts. Five of the suits are from equipment lessors and one is from a trade payablecreditor. These suits have been or will be assigned to the debt restructuring company toassist in negotiating settlement or other payment arrangements.

Successful settlement of the above claims is dependent on future financing.

65

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

NOTE 16 - Subsequent Events:

The following summarizes common stock activity from January 1, 2003

through April 8, 2003: 
 
ISSUED
TO BE ISSUED 
SHARES
AMOUNT
SHARES
AMOUNTLabor and consulting    services
1,029,303
$104,075
3,376,387
$355,508Director fees
7,500
825
-
-Interest on deferred    salaries
115,741
13,348
-
-Account payable settlements
493,334
57,800
166,667
15,000Golden option assignment
-
-
1,365,938
109,2752002 conversion of notes    payable 
401,400
25,972
-
-2003 conversion of notes    payable
1,257,289
251,457
-
-Private placement for cash
1,937,500
155,000
-
-Swartz agreement
1,279,065
119,595
-
- 
6,521,132
$728,072
4,908,992
$479,783
 

In addition, approximately $23,080 in labor and consulting services has been incurredin the first quarter 2003 that will be paid in stock. 

Subsequent to December 31, 2002 the Company offered the holders of its 2000 9%Convertible Notes to extend the notes for three years in exchange for an increase in theinterest rate, effective as of each note maturity date, to 12% per annum and a reducedconversion price of $0.20 per share. As of the date of this report, out of a principalbalance of $2,573,000, holders of $1,381,000 in notes have agreed to extend their notes.In addition, $251,457 of the principal and accrued interest has been converted to Companycommon stock at $0.20 per share.

 

NOTE 17 – Earnings (Loss) Per Share:

Following is a reconciliation of Net Income (Loss) and Weighted average number ofshares outstanding, in the computation of earnings (loss) per share (EPS) for the yearsended December 31, 2002 and 2001. 
 
2002
2001Net Income (Loss)
$(3,290,562)
$(3,653,750)Less: Preferred stock    dividends
-
-Basic EPS income (loss)    available to  common stockholders 
$(3,290,562)
$(3,653,750)   Weighted average number of    shares outstanding
84,341,784
78,349,197Common equivalent shares 
-
- 
84,341,784
78,349,197Per share amount 
$ (0.0390)
$ (0.0466)
66

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002 AND 2001

 

 

Warrants, options, and shares to be issued, totaling 41,682,465 and 21,274,807 sharesas of December 31, 2002 and 2001, respectively, would dilute future EPS. No diluted EPS ispresented as the effect of including these shares is antidilutive.

67

 

ITRONICS INC. AND SUBSIDIARIES

SIGNIFICANT SUBSIDIARIES

EXHIBIT 21

 

 

                                       STATEOF                 NAMESUNDER WHICH

NAME                                INCORPORATION               THEYDO BUSINESS

Whitney & Whitney, Inc.                Nevada                          Same

Itronics Metallurgical, Inc            Nevada                          Same

Itronics California, Inc.              California                      Same

Nevada Hydrometallurgical Project

(A Partnership)                        Nevada                          Same

American Hydromet 

(A Joint Venture)                      Nevada                          Same

68

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

                                              ITRONICSINC.
Date: April 14, 2003                          By:/S/ JOHN W. WHITNEY

                                                  JohnW. Whitney

                                                  President,Treasurer and Director

                                                  (PrincipalExecutive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed below by the following persons on behalf of the Company and in the capacitiesand on the dates indicated.

Date: April 14, 2003                           By:/S/ JOHN W. WHITNEY
                                                  JohnW. Whitney

                                                  President,Treasurer and Director

                                                  (PrincipalExecutive and Financial 

                                                  Officer)

 

Date: April 14, 2003                              By:/S/ MICHAEL C. HORSLEY 
                                                     MichaelC. Horsley

                                                     Controller

                                                     (PrincipalAccounting Officer)

Date: April 14, 2003                              By:/S/ PAUL H. DURCKEL 
                                                     PaulH. Durckel

                                                     Director

Date: April 14, 2003                              By:/S/ALAN C. LEWIN
                                                     AlanC. Lewin

                                                     Director

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ITRONICS INC.

CERTIFICATION PURSUANT TO

SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

CERTIFICATION

I, John W. Whitney, certify that:

1.I have reviewed this annual report on Form 10-KSB of Itronics Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report;

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-14 and 15d-14) for the registrant and have:

(a)designed such disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this annualreport is being prepared;

(b)evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing of this annual report (the"Evaluation Date"); and

(c)presented in this annual report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on ourmost recent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalent functions):

(a)all significant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors any materialweaknesses in internal controls; and

(b)any fraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or in otherfactors that

70

could significantly affect internal controls subsequent to the date of our most recentevaluation, including any corrective actions with regard to significant deficiencies andmaterial weaknesses. 

Date: April 14, 2003                             /S/JOHN W. WHITNEY
                                                 JohnW. Whitney

                                                 ChiefExecutive Officer

                                                 ChiefFinancial Officer

 

 

ITRONICS INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of Itronics Inc. (the Company") on Form10-KSB for the period ended December 31, 2002 as filed with the Securities and ExchangeCommission on April 15, 2003 (the "Report") each of the undersigned, in thecapacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, thatto his knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects,the financial condition and results of operations of the Company.

 

Date: April 14, 2003                                /S/JOHN W. WHITNEY
                                                    JohnW. Whitney

                                                    ChiefExecutive Officer

                                                    ChiefFinancial Officer

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