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, 2001
( ) 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. EmployerIdentification Number)

      incorporation or organization)

6490 South McCarran Boulevard, Building C, Suite 23 Reno, Nevada     89509

(Address of Principal Executive Offices)                           Zip Code

Issuer's telephone number: (775) 689-7696
Securities registered under Section 12(b) of the Exchange Act:

    Title of each class                                Name of each exchange on

                                                           which registered

           None                                                 None
Securities registered under Section 12(g) of the Exchange Act:

None 
(Title of class)

Check whether the issuer (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: $1,143,253. 

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 1, 2002,was $23,583,938.

As of March 1, 2002 there were issued and outstanding 81,897,871 shares of theRegistrant's Common Stock.

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ITRONICS INC. AND SUBSIDIARIES

2001 FORM 10-KSB ANNUAL REPORT

TABLE OF CONTENTS
PART I 
PAGEItem 1. Description of Business 
4Item 2. Description of Property 
23Item 3. Legal Proceedings
24Item 4. Submission of Matters to a    Vote of Security Holders 
24PART IIItem 5.Market for Common Equity    and Related Stockholder Matters
24Item 6.Management's Discussion and    Analysis or Plan of Operation
26Item 7. Financial Statements
30Item 8. Changes in and    Disagreements with Accountants on 
Accounting and Financial Disclosure
30PART IIIItem 9.Directors, Executive    Officers, Promoters and Control 
Persons; Compliance with Section 16(a) of the Exchange    Act
30Item 10. Executive Compensation
32Item 11. Security Ownership of    Certain Beneficial Owners and 
Management
34Item 12. Certain Relationships and    Related Transactions
36Item 13. Financial Statements,    Exhibits and Reports on Form 8K
36
 

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ITEM 1.DESCRIPTION OF BUSINESS.
 

Itronics Inc. (the Company), is a Texas corporation formed in 1987 and is now based inReno, Nevada. Through its subsidiaries, the Company specializes in photobyproductrecycling and fertilizer manufacturing, precious metals recovery and refining, mineraleconomics, and mining technical services. The Company currently operates the following twobusiness segments under separate wholly owned subsidiaries: 

1. Photobyproduct Fertilizer: * This segment, known as Itronics Metallurgical,Inc., operates a photobyproduct recycling plant and is developing new silver-gold refiningtechnology. Revenues are generated by photobyproduct management services, sale of silver,and sale of Gold’n Gro liquid fertilizer products. Construction of a commercial scalephotobyproduct processing and fertilizer manufacturing plant was completed in February2000. 

           *In 1995 Itronics initiated a legal review of various segments of RCRA (Resource Recoveryand Conservation Act)law that might pertain to Itronics and its customers. Itronicsreached the conclusion that certain of its large scale customers are exempt from RCRAsince the value of the customer's portion of the recovered silver exceeds the processingcosts charged. Itronics also concluded that once the various photo solutions are 100%utilized in fertilizer or other products, then all Itronics customers will be exempt fromRCRA requirements. Itronics believes it is the only organization in the U.S.with theability to achieve this distinction. Consequently, when referring to the operations ofother organizations, or to the general market, the term photowaste is used, and whenreferring to Itronics' operations the term photobyproduct is used. 
2. Mining Technical Services: This segment, known as Whitney & Whitney,Inc., provides mining and materials management,geology, engineering and economicsconsulting, and publishes specialized mineral economics and materials financial reports.It employs technical specialists with expertise in the areas of mining, geology, miningengineering, mineral economics, material processing, and technology development. Technicalservices have been provided to many of the leading U.S. and foreign mining companies,several public utilities with mineral interests, to various state agencies, the U.S. andforeign governments, 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:

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 thephotobyproduct fertilizer segment as discussed below. IMI is responsible for preciousmetal and other material product

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sales, and markets a five ounce silver bar bearing a unique hallmark, "SilverNevada 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 photobyproduct 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 photobyproductand 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 technical services to the miningindustry. 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 mining companies, various stateagencies, for the United States and several foreign governments and the United Nations.WWI was under contract with the Country of Bolivia from 1986 through early 1992 to assistit in developing its mining industry. 

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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 wastes and the necessary permits to establish an R&D facilityunder RCRA were obtained. In 1988 a patent and literature research project regarding theuse of photowastes in fertilizer was begun. In 1989 experimentation with processed run ofplant liquids as fertilizer was begun. It took until 1997 to develop and demonstrate asatisfactory product and to complete university testing to demonstrate its technicalviability. A licensing and sales agreement was signed with a major fertilizer company in1998, but it took another two years to obtain financing, complete permitting, install anoperational plant and to demonstrate that the new technology would work on a commercialscale. By the first quarter of 2001 the Company was finally positioned to develop salesfor 13 liquid fertilizer products with the objective of becoming 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 photobyproduct 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 four more years. Initially, it was believedthat "run of plant" solution, with minimal major nutrient supplementation, wouldproduce a quality fertilizer product. The early stages of research determined that theproduct was too dilute and would need to be concentrated by supplementation with the majornutrients, nitrogen, phosphate, and potassium, in order to produce the desired qualityproduct. This factor, combined with the seasonal nature of field testing the products,resulted in the additional years required to perfect and field test the

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mix formulas in the quantities needed for large scale manufacturing.

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 continueto 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 is 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 18 products and is marketing 9 ofthem. In 1999 the Company purchased a 3.5 acre site with 35,000 square foot of commercialbuildings suited for conversion to a commercial fertilizer manufacturing plant. In 1999and 2000 funding was acquired to make the conversion, the necessary permits were acquired,and the new plant was demonstrated to operate at the necessary commercial scale whilecompletely meeting the environmental standards by the end of the third quarter of 2000. In2001 for the first time the Company had an operational plant with the capacity to producecommercial quantities of high quality chelated liquid fertilizer products that areformulated using the demetallized photoliquids. 

The Company is now focusing on expanding sales with the objective of achieving outputneeded for profitable operations. The Company’s goal is to expand sales during 2002to a profitable level. While the fertilizer market is large relative to the level of salesneeded by the Company to be profitable, the rate of growth during the 2002 growing seasonwill largely determine whether the Company will achieve sufficient sales volumes to beprofitable in the**7**following year. The Company’s Gold’n Gro fertilizers are producing verypositive growth responses in the field and the Company has a strong fertilizer marketingpartner to introduce the products into the western regional markets, so market penetrationwill be maximized within the constraints of a mature market. **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 11 to theConsolidated Financial Statements beginning on page 57 of this report.

PHOTOBYPRODUCT FERTILIZER

1. Research and Development

The photobyproduct fertilizer (the American Hydromet Project) segment of the Companyhas primarily been involved in research and development, with the objective of developingintegrated technology that can be used to recycle photobyproduct materials, that recoversall of the silver and all other toxic metals from those materials, and which utilizes"heavy-metal-free" liquid photobyproducts in a chelated liquid multi-nutrientfertilizer product line for turf, ornamentals, and specialty agricultural applications.The status of development of the three integrated components is more fully describedbelow:

The technology was developed in a semi-works plant in Reno. Development of theintegrated technology represents a major technical innovation with global potential. Thereare three separate but integrated functions for handling the waste photoliquids. The firstis the solution demetallization and conditioning process. This process is used todemetallize and recondition the metal-bearing photofixers and photodevelopers that arepicked up from photousing businesses. This portion of the process is very efficient,recovering over 99.998% of all the contained toxic metals, and a very large percentage ofcontained iron. There are two products from this part of the operation: (1) ametal-bearing sludge, and (2) the conditioned, demetallized, liquids.

The metal-bearing sludge is dried and passed to the refining operation for separationof the contained silver. This operation is also very efficient. More than 99.5% of thesilver contained in the sludge is recovered for sale. The refining was developedspecifically to handle the sludges from the liquid demetallization and conditioningprocess. As such, the other heavy metals and iron contained in the sludge end up in aglass byproduct and are rendered completely inert. The Company has formulated the glass sothat with minor additions of other compounds, it can be converted into usable products,such as wall and floor tile. The Company plans to pursue glass product development oncethe fertilizer is commercially operational.

The integrated process, known as the "American Hydromet Silver-Gold RefiningProcess" is a technological discovery that has the potential to significantly alterthe proprietary commercial gold-silver refining industry world-wide. This proprietarytechnology is presently being further developed with continuing research and development.

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The major innovation in the technology consists of using wet chemistry(hydrometallurgy) to quantitatively separate gold and silver in very pure form, and toentirely eliminate the need for electrolytic refining. The process is used to treat (1)electro-sludges and electro-chips derived from photobyproducts such as developer solutionsand scrap film, and (2) zinc precipitates and electrolytic sludges from gold and silvermines such as those found in Nevada and other locations. Based upon the technology,American Hydromet currently has two business activities which are being commerciallydeveloped:(1) photobyproduct recycling, and (2) silver/gold refining. The photobyproductrecycling is a spin-off concept and additional spin-off businesses are expected as theAmerican Hydromet process and other technology associated with it are further developed.

The American Hydromet process is proprietary information. The U.S. Patent Office hasissued a process patent on the gold/silver separation process (U.S. Patent No. 4,662,938,dated May 5, 1987). A patent on the same process was issued by South Africa in June, 1986and patents were issued by Canada and Australia in September, 1989. The patents are ownedby American Hydromet. Other portions of the American Hydromet process are believed to bepatentable.

A priority objective of American Hydromet is to establish the complete capability forrecovering all of the valuable components of photobyproducts for sale and reuse. As aresult of the technology American Hydromet has and is developing, it has the potential ofbecoming a major recoverer and refiner of silver and at the same time it has theopportunity to become a major recycler of photobyproducts.

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 9 years andinvolved 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 productsthat are being developed.

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 liquidphotobyproducts. 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 environmentally acceptable totalrecycle of the waste stream.

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In 1995 the Company began participating in a fertilizer product application comparisonprogram sponsored by the University of California at Riverside. For the second consecutiveyear, in 1996, Gold'n Gro 20-1-7 was rated Number 1 in the program, which compared"top of the line" multinutrient nitrogen fertilizers produced by leading U.S.fertilizer manufacturers. Gold'n Gro 20-1-7 is registered in California and Nevada. Inearly 1997, Gold'n Gro 10-0-0 Iron, a fully chelated liquid iron supplement fertilizer,was registered in California and Nevada. In mid 1997, development of Gold'n Gro 10-0-1Manganese was completed. The manganese, iron and zinc included in this product are in acitrate chelated form supplemented with EDTA chelate, which makes the micro-nutrientsreadily available to plants. In August 1997, the Company received a national trademark forthe name "Gold’n Gro".

In early 1998 development of several new Gold’n Gro fertilizer products wascompleted. These include Gold’n Gro 20-0-4 for use by nurseries and for vegetables,Gold’n Gro 8-12-9 for use as a plant starter for vegetables and field crops, andGold’n Gro 6-3-9 for use by nurseries and for house plants, garden vegetables,grapes, and citrus. In early 1999 a decision was made to focus on just eight products inorder to simplify and speed up the introduction into the marketplace. In 2000 this wasexpanded to 13 products.

In 2000, a small Gold’n Gro fertilizer application test began on citrus trees.Initial results were a 40% increase in weight and juice content and a 12% increase in sizein Valencia oranges compared to the oranges on check trees. Also, lemon trees fertilizedwith Gold’n Gro produced 54% more lemons than unfertilized trees. Both tests weredone by applying the fertilizer by foliar spray. Testing is now underway on a largerscale, and is being conducted in conjunction with a major university.

A test application of Gold’n Gro 4-2-10, a new product, on northern Nevada alfalfafields has yielded dramatic results. On a northern Nevada farm, a 192 acre field went froma best ever on a third cut of 150 tons up to the new record of 220 tons, or a 33% increaseover the second cut and a 48% increase over the best third cut to date. Also ofsignificance, the alfalfa was tested and found to be of "supreme" quality, thehighest grade. This is only one set of results from one set of fields under changingweather conditions, but it indicates that Gold’n Gro is effective in increasing yieldand quality of alfalfa. The Company is currently performing more tests to validate thecost-effectiveness of Gold’n Gro fertilizer on alfalfa.

In 2001 the field trials in the alfalfa market were completed. Measured increases inproduction have ranged from 17 percent to 100 percent. The Gold’n Gro fertilizerincreases both output and quality on alfalfa that is already being fertilized by thegrower, with greater increases on fields that are not fertilized or sparingly fertilized.Although this market is very large, the value of the product in relation to the increasein output is lower than on most of the other crops being evaluated. Because of mixedfertilizer usage habits by the various alfalfa farmers, and because of relatively low cropvalue, the Company is concentrating its sales efforts and on-going customer developmentefforts on the higher value crops that have been identified.

The grape nutrition study, initiated in 1999, was continued by the University ofCalifornia at Davis, but the 2000 work was started late due to the illness of theprofessor. In addition, at the end of the growing season the grower picked the grapes sothat U.C. Davis was not able to obtain measurements from the grapes. The grower’svintner had stated that the grape quality was excellent. The test will be continued foranother year. Both Gold’n Gro 10-0-0 Iron and Gold’n

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Gro 10-0-1 Manganese were used with good results on grapes on the California coastduring the 2000 growing season. One grower has been using Gold’n Gro 10-0-0 Iron forthree years with very acceptable results each year. This grower is a producer of very highquality wines.

During 2001, the Company’s Gold’n Gro fertilizer marketing effort was focusedon the Company’s two new sales representatives 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. In 2001 field trials were conducted on alfalfa, cut flowers, herbs,watermelons, plums, lemons, dates, sweet corn, green peppers, tomatoes, and cotton. 

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. Alfalfa is typically considered as a "hay" or"forage" crop and is generally of low to intermediate value when compared tospecialty agricultural crops, however, high nutrient content alfalfa for the dairy marketoften commands a significant price premium which puts it at the low end of specialtyagricultural crop values.

In the second quarter a need for two additional micro-nutrient products was identifiedby our distributor network. Product development was initiated and in early Augustprototype formulations were delivered to our distributors for evaluation. This projectproduced one product that will be used in large volume in the California specialtyagriculture market. Bulk sales started late in the third quarter. This new developmentrepresents an increasing commitment by the distribution network to speed up theintroduction of Gold’n Gro products into the California market. After completion ofthe new products, Itronics has developed 18 Gold’n Gro products that are either beingused or being evaluated for use. 

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 treesbeing carried out with oversight from a major university in southern California iscontinuing and it appears that the 35 year old trees are responding positively to thefertilization. 

During 2001 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 and one of these is a highsilver content 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 distillation technology will be a component of theprogram. 

The Company has identified potential applications for the specially conditioned liquidsin the mining industry, and has begun to seek joint venture partners to invest in theneeded research and development. This project is more fully discussed on page 23 of thisreport.

 

2. Operations

The Company now operates a commercial scale plant to receive photobyproduct materials,recover the silver and other metals, and convert the demetallized solutions to a line ofliquid fertilizer products. Revenues are generated by photobyproduct management services,sale of silver, and sale of 

Gold’n Gro liquid fertilizer products. A critical component of this system is tomatch, within a reasonable range, the incoming volume of photobyproduct solutions with thevolume of utilization of those solutions in fertilizer or other manufactured products. Atthe outset of the technology development program, regulatory constraints were imposed tolimit the amount of photobyproduct 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 photobyproduct solutionbusiness.

Photobyproduct 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. Now thata line of commercial fertilizer products has been perfected, and the Company's newrecycling plant is operational, the Company is expanding its San Francisco Bay Area andNorthern California service operations.

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 low temperature vacuumdistillation equipment to a large manufacturing company in northern Nevada. This equipmentseparates the water from the photochemistry without destroying the basic chemicalcomponents, and produces a high value concentrate. The separated water is further purifiedand is usable in manufacturing operations. Nearly 100% water reuse is achieved.

The distillation equipment began operations in March of 1996, and produces concentrateto meet Company standards and produces pure water for re-use in manufacturing. This samemanufacturing company bought a second distillation unit in early 1997. 

The distillation concentrate has a high silver content and is dominantly composed ofammonium thiosulfate (ATS) and EDTA chelates, the basic chemicals used in photo fixersolutions. Itronics' fertilizer blending technology is designed to utilize the concentratein fertilizer.

Itronics' plan is to seek companies that handle sufficient volumes of photographicliquids to justify purchase of the distillation equipment. The ATS concentrate can beshipped in interstate commerce as a commercial product, resulting in the opportunity toserve the national market. Successful introduction of this technology will increase thevalue per gallon of material handled by a factor of five to ten, and will increase theamount of silver handled per gallon of photoliquids received. As the supply of the ATSconcentrate grows, so too will the silver refining operation. The transition from lowsilver content liquids to high silver content liquids will increase the importance of thesilver refining operations and silver sales. 

Achieving profitability for the photobyproduct fertilizer segment required expansion ofthe plant from the semi-works scale facility in Reno to a commercial scale. In January1998 IMI entered into a lease/option agreement to acquire a 35,000 square footmanufacturing facility on three plus acres of land in the Reno-Stead, Nevada area.

The Reno/Stead manufacturing plant purchase was completed on March 31, 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, market acceptance of the Gold’n Gro fertilizer productsand regulatory changes in California and Oregon that are tightening liquid photochemicalwaste disposal requirements produced the demand for significantly expanded productioncapacity. Consequently, the basic concept for the plant configuration was redesigned andsignificantly expanded.

The building and fire codes and federal hazardous material regulations all changed in1999, delaying the permitting process while the regulatory agencies developed andimplemented guidelines for the new rules.

In late October 1999, the final necessary building permits were received and regulatoryapproval was obtained to start up operations in the photochemical receiving and processingand silver refining areas. Construction of piping systems and set-up of the tanks andrelated equipment was completed in February 2000 and the City of Reno issued thecertificate of occupancy at that time. A "shake-out" period was begun in whichsmall batches of photobyproducts were processed and small batches of fertilizer weremanufactured. The purpose of this period was to test all of the equipment to ensure itmeets operating specifications and to train the appropriate personnel in plant operation.Minimal problems were encountered and

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the "shake-out" period was completed at the end of the first quarter of 2000.

By the end of September 2000 the new facility had demonstrated the ability to"demetallize" the received photo liquids to required EPA levels, thereby provingthe technical viability of the new technology on a commercial scale. 

The photobyproduct management services are typically performed pursuant to an exclusiveone year service agreement. The annual contract and service fee provisions are necessaryfor the Company to recover its substantial investment in technology, and to protect itunder the regulatory and business framework in which it must operate.

The photobyproducts are transported to the Company's recycling facility at Reno/Stead,Nevada. All customer materials are logged and recorded. All liquid photobyproducts aretested for silver content and for contaminants, such as chrome.****High chrome contentwastes are specifically rejected. It has been the experience of the Company that newcustomers, with limited knowledge of the rules and procedures, may submit materialscontaining foreign substances. The Company achieves high contaminant control standards byworking proactively with its regular customers.

Once testing is completed, the photographic solutions are processed.

The photobyproducts presently being handled by the Company are:

     Ammonium Thiosulfate Concentrate

     Aqueous Ammonia 

     Developer

     E1ectro-flake

     Film

     Fixer

     Sodium meta-bisulfite concentrate

     Stabilizer

     Steel Wool/Metallic Ion Exchange Cartridges

     Scrap paper that accompanies film

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

In 2001, the photobyproduct fertilizer segment produced 58% of the Company's revenue.Over the next several years, this segment is expected to grow significantly in relation tothe mining technical services segment. Consequently a major shift in the Company'soperations toward the photobyproduct fertilizer segment is being implemented. 

 

3. Markets and Competition

I. Photobyproduct Recycling and Silver Refining

There are estimated to be more than 1,500 generators of photographic hazardous waste inthe State of Nevada and more than 500,000 throughout the United States. This includesprinted

14

circuit board manufacturers, photo off- set printers, photographic developers,lithographers, photographers, micro-filming (banks, companies, etc.) and x-ray users(dentists, doctors, hospitals, podiatrists, orthopedic surgeons, veterinarians,radiologists and industrial x-ray users). The Company estimates the total market forrecycling this category of waste to be in the range 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. Thus, as the photobyproduct re-cycling operation expands, silver refining willbecome more significant to the Company. The Silver Institute indicates that silver usagein photography is increasing, and will continue to 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

15

photography. The potential impact is different for each of the major segments; medical,color photography, and printing/microfiche. Digital imaging has made significant inroadsinto printing/microfiche processing with an almost 85% reduction in volume of photographicliquids over the past ten years. After several years of experience with digital imaging,it has been observed that after three or four years, there is significant degradation ofthe quality of digital images, requiring copying onto new disks, which is time consumingand costly. Consequently, microfiche is making a comeback. There has been little visibleimpact on color photography, although the new digital cameras are getting wider usage. In2001 it became clear that contrary to popular belief, digital photography is creating anew source of photowastes from internet companies that combine digital imaging serviceswith the ability to print high quality photographs for their customers. The Company hadtwo such customers during 2001, and these customers’ photobyproduct volume has beenincreasing dramatically on a monthly basis. Digital methods are being adopted in themedical industry. The medical sector is relatively high growth with the aging U.S.population and therefore digital imaging has had the effect of slowing the growth of wastephoto 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.

In April 1998 IMI entered into an exclusive sales agreement with Calfran Internationalof Springfield, Massachusetts. After the contract with Calfran was signed, other companiesdeveloped acceptable distillation machines, so the Calfran contract was cancelled at yearend 2000. Sale of distillers is an integral part of expanding the supply of photochemicalsneeded to support expanding fertilizer sales. 

The distillation equipment now being sold by the Company will contribute to thereduction of water usage in the photographic industry. When the distillation equipment isused, all the recovered water can be re-used. The chemical product is purchased byItronics, and so photographic waste generation at the user site is completely eliminated.This technology represents an end point for the elimination of water waste in thephotographic industry, and is expected to gain wider acceptance as the industry recognizesthe benefits inherent in the technology when combined with Itronics’ servicecapabilities.

The Company believes that it has the following competitive advantages:

     * Leading position in developing "total"photobyproduct recycling technology and waste management procedures. 

     * Proprietary solution conditioning process and equipment withthe possibility of patent rights and licensing agreements.

     * Patented low cost silver refining process using wetchemistry (hydrometallurgy) to quantitatively separate silver from photobyproductmaterials.

16

     * Proprietary "heavy-metal-free" liquid productsthat eliminate the  need to dispose of treated photographic liquid waste in sewagetreatment systems, or solid waste sites(dumps).

     * Systematic pick up services for photobyproduct generators.

     * Quantitative material control procedures meeting all EPAreporting guidelines.

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

     * Skilled in converting technical concepts to commercialproducts and production.

     * Line of proprietary chelated liquid fertilizer products thatare 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 photobyproductrecycling business is dependent upon the rate and vigor of fertilizer sales growth.

II. Photobyproduct 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 and the"Professional Care" segment. Neither of these markets is statistically welldefined, since both are relatively new as large commercial markets, both are highlyfragmented with many small regional suppliers and are growing rapidly. One well knownoperator in the Home Lawn and Garden and the Professional Care segments is Scotts/Stern'sMiracle-Gro. Several other large companies are also active in this market.

Itronics’ photobyproduct fertilizer Gold'n Gro 20-1-7 was developed for the Urbanmarket as a "turf" product. Its principle 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 an additional 17fertilizer products. These products cover most of the applications being targeted in theTurf, Ornamental and Professional Grower ("Specialty Ag") markets in the westernU.S. In early 1999 the decision was made to focus marketing efforts on eight of theseproducts. In 2000 this was expanded to 13 products. The number of products expanded to 18in 2001. In 2002 a decision was made to concentrate sales efforts on 9 of these products. 

Itronics estimates that more than 100 million gallons of photowaste liquids aregenerated annually in the United States. The ratio for converting one gallon ofphotobyproduct to Gold'n Gro 20-1-7 fertilizer is approximately 1 gallon of photobyproductto 4 gallons of fertilizer. This means that there is enough supply of photobyproduct tosupport the manufacture of 400 million gallons of photobyproduct fertilizer annually,equivalent to approximately two million tons.

Itronics estimates that on a commercial scale, the combined revenue of photobyproductservices,

17

silver and fertilizer will exceed $10.00 per gallon of photobyproducts received.Consequently, the potential market for these products and services exceeds $1 billion.

Initially, small volume sales were made intermittently to two turf farm operations, toa regional lawn service company, and to two golf courses in northern Nevada. Making thesesales and working with the customers allowed the Company to learn the specificrequirements for each market. It also made it possible to assess the feasibility of directmarketing the product as compared to selling to distribution companies who would do thedirect marketing. Selling to fertilizer distribution companies is a more efficient methodof achieving large scale sales in a reasonable period of time.

In March 1998 IMI signed a definitive manufacturing and distribution agreement withWFS. The five year agreement, with optional five year renewal periods, grants WFS anexclusive license and right to manufacture and market IMI’s Gold’n Gro line offertilizer products in the Turf & Ornamental, and Specialty Ag markets in the statesof Arizona, California, Hawaii, Idaho, Oregon and Washington. 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. 

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 also being established. TheWFS Alpaugh plant is now set up to manufacture the 15 multi-nutrient products beingoffered. The two other micro-nutrient products, Gold’n Gro 10-0-0 Iron andGold’n Gro 10-0-1 Manganese, and a new product, Gold’n Gro 9-0-1 zinc, aremanufactured 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 now grossly distorted when compared to intrinsic values of goods beingtraded. For example, oranges are being shipped into the western United States fromAustralia and in 2001 were being sold in California stores at prices lower than locallygrown oranges. The prices are lower than the local growers’ cost of production. Basedon transportation 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. 

The California markets are also being impacted by greatly increased energy costs whichare now being passed through to the consumers. While this impact is significant, it ismuch smaller than the impact of inequitable currency valuations. Only Congress and theFederal Government through the U.S. Treasury Department can address the issue ofinequitable currency valuations. It is clear that the problems facing basic U.S. industrywill not be remedied until this issue is properly addressed and corrections made.

18

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 is in a state of rapiddecline. 

The Company is developing branded products that have the Gold'n Gro trademark. TheCompany is implementing a plan for consumer sales through its web page and retail outlets.Significant capital, in the form of advertising budgets and the ability to carry largeinventories of finished goods, is required to achieve meaningful retail sales. However,the Company is presently providing photobyproduct recycling services to several largechain stores. Because of this, the Company believes it is positioned well to be able tosell branded fertilizer products through the chain store outlets. Implementing and growingthe retail sales program is expected to take several years.

 

4. Seasonality and Working Capital

In analyzing the market and industry competitors, it is apparent that two factorssignificantly impact the Company's ability to penetrate these markets in a meaningful way.First, the seasonal aspect of photobyproduct and fertilizer sales, which directly resultsin the second factor, the need for a much higher level of working capital when compared toother industries.

Based on experience, the Company's photobyproduct 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 bothphotobyproduct services and silver sales are significantly reduced during six months ofeach year. The cause of this cyclical pattern is the tourism based economy in NorthernNevada, which has a comparable seasonal pattern. The volume of visitors directly affectsphotobyproduct 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 photobyproduct and silver revenues should also be reduced asthe Company expands into California and other regional markets that are not as heavilydependent on tourism. 

The Company expects fertilizer sales to have a seasonal component, with the primarysales season running from April through October each year, with tapering off beginning inSeptember. In addition to the general seasonal nature of sales caused by normal weatherpatterns, unusual weather can further affect fertilizer sales. For example, unusually coldor wet spring seasons may delay the growth cycle of various crops for which the Company'sfertilizer products are utilized. To overcome weather related effects on fertilizer sales,the Company is evaluating opportunities for markets in the southern areas of the UnitedStates where growing seasons are longer and, in some cases, year round.

Due to the seasonal nature of both photobyproduct services and fertilizer sales, theCompany must increase its net working capital to a level higher than that of non-seasonalindustries. For example, some of the Company's competitors have working capital equal totheir annual

19

sales. Consequently, ongoing debt and equity funding will be required for the Companyto 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 all metals, including most of the iron, are removed. The end resultleaves the Company with a non-hazardous "heavy-metal-free" solution which islegal for discharge into the environment. As discussed above, the demetallized liquids arebeing used in commercial fertilizer 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 photobyproduct 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

20

discharge of pollutants into surface waters and sewers by municipal, industrial andother sources) and the Clean Air Act (which regulates emissions into the air of certainpotentially harmful substances). Employee safety and health standards under theOccupational Safety and Health Act are also applicable to employees of the Company.

 

IV. Regulatory Direction

For several years the Company has been studying the various regulatory 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 photobyproducts as abeneficial ingredient in its fertilizer products, the photobyproducts 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 photobyproduct fertilizer process meets theexisting RCRA requirements for exemption from all environmental regulation with theexception that certain presently conducted lab analyses of the photobyproducts willcontinue to be required. Certain of the Company's large scale customers presently meet theexemption requirements. Present levels of fertilizer sales utilize all the photobyproductsreceived. Once sales of all the photobyproduct materials are well established in thefertilizer or other commercial products, all the Company's Nevada customers will be exemptfrom the regulations, including hazardous material transport/manifest rules. The Companybelieves that this exemption applies nationwide. Therefore, the Company intends to pursuesimilar concurrence from environmental officials in all applicable states, so that all itscustomers will be recognized as exempt from the RCRA 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

21

strategy and infrastructure development related to large and small scale mineraldevelopment.

- 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.

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 42% of the Company's 2001consolidated revenue. Two major clients produced 99+% of this revenue. At present one ofthese clients has one ongoing project. The first involves project management of a Nevadamine property, 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. The 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 photobyproduct fertilizersegment. The Contract reimburses WWI for expenses, and if successful, the parties haveagreed to work together to market any resulting fertilizer products. WWI completed theContract early in the second quarter and recommended that the evaluation program becontinued for another year. WWI is also evaluating the results and is investigating thepotential for speeding up the 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.

22

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 photobyproduct 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 technology being developed under this program utilizes the sametechnology as the Company’s proprietary photochemical recycling process. The project,called Itronics Thiomet, is seeking to establish operating joint ventures at specific minesites to apply the thiosulfate leaching technology. Second, in March 1999 WWI signed aconsulting agreement with Golden Phoenix Minerals, Inc. (GPXM). Under the agreement, WWIwill provide management, merger and property acquisition, and technical services to GPXM.It appears likely that GPXM will put its Mineral Ridge Mine into gold production in 2002.In that event, WWI’s workload for GPXM is expected to expand. Third, in 2001 WWIsuccessfully completed a water location and drilling project, using advanced geologictechnology, for one of its long term clients. WWI is now marketing its experience in thisfield to potential 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. The Company shares offices with W&W and IMI.W&W has the office equipment and furniture and technical library typically found in aconsulting business. IMI leases approximately 2,000 square feet of warehouse space inReno, Nevada. This space is being used for supply storage. 

As previously discussed, IMI has acquired a 35,000 square foot manufacturing facilityin Reno-Stead, Nevada. Construction was completed in February 2000 and the Certificate ofOccupancy was received at that time. The plant is now in operation. 

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.

23

II. EQUIPMENT.
The actual equipment being used in the recycling process is proprietary information.However, the plant for processing liquid photobyproducts 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.
None

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF ITS SECURITY HOLDERS.
The Company held its annual meeting on December 5, 2001. At that time, the shareholderselected the present directors as a group. Following is a summary of the voting:

     Directors as a Group:

        John W. Whitney

        Paul H. Durckel

        Alan C. Lewin
Votes: For
59,984,983Against
1,660,314Abstain
100,584
 

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 2000, 2001, and the first quarter of 2002, through March 1,2002.

24

High    Bid
Low    Bid3/31/00
$2.00
$0.646/30/00
$1.45
$0.659/30/00 
$0.80
$0.4412/31/00 
$0.50
$0.283/31/01
$0.37
$0.176/30/01
$0.28
$0.169/30/01
$0.17
$0.0812/31/01
$0.19
$0.113/1/02 
$0.46
$0.11
These quotations reflect inter-dealer prices without retail markup, markdown, orcommissions, and may not represent actual transactions.

(b) On December 31, 2001 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 of2001. 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.
 
Shares
ValueTransaction Description
Issued
ReceivedExercise of warrants and    options 
100,000
$10,000Labor services of    management, directors and consultants
62,500
16,025 
162,500
$26,025
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 Company believes that all such investors are either accredited or,either alone or with their purchaser representative, have such knowledge and experience infinancial and business matters that they are capable of evaluating the merits and risks ofthe prospective investment. 

25
ITEM 6.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
I. Results of Operations

The Company reported consolidated revenues of $1,143,253 for the year ended December31, 2001, compared to $1,229,423 for the prior year, a decline of 7%. Revenues for thePhotobyproduct Fertilizer segment increased by $162,952 or 32%. This increase was offsetby a decline in revenues from the Mining Technical Services segment of $249,122, or 34%.The consolidated net loss for 2001 was $3,653,750 or $0.0466 per share compared to a 2000loss of $4,131,722 or $0.0563 per share. The primary reasons for the decreased loss arereduced sales and marketing costs and no plant start-up costs. 

Consolidated cost of sales and operating expenses decreased approximately $712,800, or15%, in 2001 compared to 2000. Other income (expense) increased from a net expense of$513,300 in 2000 to a net expense of $661,900 in 2001. The primary reasons for theincreased other expenses are an increase of $261,500 in interest expense and reducedinterest and other income of $55,600, which was partially offset by a reduced loss oninvestments of $168,400. The increased interest expense is due to the borrowing of acombined $2 million in 12% convertible notes, mortgage on the Stead plant, and equipmentlease financing. To provide a more complete understanding of the factors contributing tothe changes in revenues, operating expenses and the resultant operating loss, thediscussion presented below is separated into the Company's two operating segments.

PHOTOBYPRODUCT FERTILIZER

Year Ended December 31,
2001
2000Sales revenue 
$ 665,676
$ 502,724Operating income (loss) 
(2,703,760)
(3,247,002)
 

Revenues for the photobyproduct fertilizer segment totaled $665,676 in 2001, comparedto $502,724 in 2000, an increase of 32%. Fertilizer sales were $180,435 and $119,634 for2001 and 2000, respectively, an increase of 51%. Although the increase in fertilizer saleswas less than expected, a number of important developments did occur in 2001. First, aneed for two additional micro-nutrient products was identified by our distributor network.Product development was initiated and in early August prototype formulations weredelivered to our distributors for evaluation. This project resulted in one product thatwill be used in large volume in the California specialty agriculture market. Bulk salesstarted late in the third quarter. This product was the primary reason fertilizer salesincreased by 644% in the fourth quarter, compared to the prior year quarter. This newdevelopment represents an increasing commitment by the Company’s distribution networkto speed up the introduction of Gold’n Gro products into the California market.Second, during 2001 the Company’s Gold’n Gro fertilizer marketing effort wasfocused on the Company’s two new sales representatives teaming with our distributionnetwork to present product demonstrations to fertilizer customers and to assist in fieldtrials on various crops. On-going field trials of Gold’n Gro fertilizer productscontinue to show significant improvements in crop production and quality. The trials areproviding agronomic data that is being used to develop Gold’n Gro nutrition programsfor the crops being

26

tested. In 2001 field trials have been conducted on alfalfa, cut flowers, herbs,watermelons, plums, lemons, dates, sweet corn, green peppers, tomatoes, and cotton. Also,there is increasing pressure in California for fertilizer users to use environmentallysound products, both from a heavy metal standpoint and from using clean water, as opposedto sewer effluent, etc. Distilled water, heavy metal free reconditioned photoliquids, andthe cleanest raw materials available are utilized in the manufacture of all Gold’nGro fertilizers. As a result of these developments, there is increasing enthusiasm on thepart of the Company’s distribution network for the Gold’n Gro line offertilizers.

Photobyproduct volume for photobyproduct recycling services in 2001 increased 42% from2000 and photobyproduct recycling revenue increased 24%. The 29% sales increase insilver/gold sales reflects the implementation of a purchase and refining agreement withGolden Phoenix Minerals, Inc. (Golden) to process and resell Golden’s gold productionfrom its mining operations. IMI processes the gold and sells it to an independent thirdparty. Gold sales under this agreement were $107,800 and $49,100 for 2001 and 2000,respectively. 

Combined cost of sales and operating expenses for the segment amounted to $3,369,400 in2001, compared to $3,749,700 in 2000, a 10% decrease. Cost of sales increasedapproximately $211,000, which includes increases of $140,200 in materials and direct costsdue to increased sales and $101,000 in payroll costs, due in part to the prior yearclassification of $46,400 of plant payroll costs as start-up costs and to additionalproduction personnel to handle increased photobyproduct volume. Operating costs decreasedby $591,200. Depreciation and amortization increased $110,700 due to the full year ofdepreciation of the investment in the Reno/Stead manufacturing facility. Sales andmarketing decreased $560,300, reflecting the allocable share of decreased corporatemarketing. During 2001 marketing resources were shifted away from general corporatemarketing toward more specific fertilizer marketing, primarily by the addition of twofertilizer sales representatives who have focused on the California distribution network.Sales and marketing expenses for 2000 also included costs for Gold’n Gro brand andlabel development, including costs of creating an ad campaign and development of newproduct labels that were not incurred in 2001. 

These changes in revenues and operating expenses resulted in a segment operating lossof $2,703,760 in 2001, compared to $3,247,002 in 2000.

 

MINING TECHNICAL SERVICES
Year Ended    December 31,
2001
2000Sales revenue 
$ 477,577
$ 726,699Operating income (Loss) 
(288,115)
(371,457)
 

Mining technical services revenue totaled $477,577 for 2001 compared to $726,699 for2000, a decrease of 34%. Included in these revenue figures are pass-through expenses of$134,675 and $353,339 for 2001 and 2000, respectively. Excluding these amounts, revenuesamounted to $342,902 and $373,360 for 2001 and 2000, respectively, a decrease of 8%. TheCompany’s plans to expand the technical services segment are more fully discussed onpage 23 of this report.

27

Combined cost of sales and operating expenses totaled $765,692 for 2001 compared to$1,098,156 for 2000, a decrease of 30%. Included in these operating expense figures arepass-through expenses of $134,675 and $353,339 for 2001 and 2000, respectively. Excludingthese amounts, combined cost of sales and operating expenses amounted to $631,017 and$744,817 for 2001 and 2000, respectively, a decrease of 15%. The decreased costs areattributable primarily to reduced corporate marketing efforts. 

The above changes in revenues and operating expenses resulted in a segment operatingloss of $288,115 for 2001, compared to $371,457 for 2000. 

 

SUMMARY

On a consolidated basis, the various changes in revenues and operating expensesresulted in gross profit (loss) of $(272,626) for 2001 compared to $(206,022) for 2000 andan operating loss of $2,991,875 for 2001 compared to $3,618,459 for 2000. 

 

II. Changes in Financial Condition; Capitalization

Cash amounted to $14,675 as of December 31, 2001 compared to $17,990 as of December 31,2000. Net cash used by operations was $1,927,677 in 2001 compared to $2,742,056 in 2000.Operating resources utilized to finance the 2001 loss of $3,653,750 include approximately$672,000 in expenses paid with the Company's common stock and a net increase in accountspayable and accrued expenses of approximately $379,100. These sources of cash werepartially utilized by an increase in inventory of $49,900. The inventory was increased inpreparation for expanded sales. Cash amounting to approximately $73,300 was invested inproperty and equipment in 2001, primarily for the equipment in the manufacturing plant.Financing sources of cash in 2001 included $1,232,000 in convertible promissory notes,$514,200 from a mortgage on the Stead plant, $296,900 in equity from the Swartz agreement,$192,300 in equipment financing, $58,500 in loans from an officer/stockholder, and $50,000in warrant and option exercises.

Total assets decreased from $4,609,506 at December 31, 2000 to $4,558,260 at December31, 2001. Current assets decreased $122,100, net property and equipment decreased$120,500, and other assets increased $191,300. Other assets increased by $85,100 due toaccepting available for sale marketable securities as payment for services on a miningtechnical services contract. The stock had a market value of $313,800 at December 31,2001, with a cost of $341,300. In addition, other assets increased by $78,100 in stockplacement costs and by $51,800 in deferred lease costs from lease and mortgage financingcontracts.

Total liabilities increased from $5,030,707 at December 31, 2000 to $7,499,382 atDecember 31, 2001, an increase of approximately $2,468,700. Of this amount, currentliabilities increased $523,700 and long-term liabilities increased $1,945,000. Theincrease in liabilities reflects the Private Placement of $1.23 million in ConvertiblePromissory Notes, a $550,000 mortgage on the Stead plant, $324,000 in accrued interest onconvertible notes, a net increase of $45,600 in capital lease obligations, and an increasein accounts payable and various accrued expenses of $288,300.

28

III. Working Capital/Liquidity

As discussed in Note 12 to the Consolidated Financial Statements on page 61 of thisreport, the Company has implemented a plan to improve its working capital and liquiditythrough private placements of common shares, conversion of debt to common shares, andpayment of consulting and labor services with common shares. Following is a summary of thesteps taken to improve the Company's working capital and liquidity during the year endedDecember 31, 2001: 

     1. A total of $1,938,500 was received in convertiblepromissory notes, mortgage loan, and lease financing.

     2. A total of $346,900 was received from the sale of commonstock through the             Swartz agreement and from warrant and option exercises.

     3. Various expenses including salaries, director fees, andoutside services, totaling $672,000, were paid with common stock.

The result of these steps was to change from a working capital deficit Of $265,351 to aworking capital deficit of $911,082 at December 31, 2001, a decrease in working capital ofapproximately of $645,700. The current asset component of working capital decreased from$769,300 at December 31, 2000 to $647,300 at December 31, 2001. The primary changes in thecomponents of current assets were decreases in accounts receivable of $50,700, stocksubscription receivable of $82,000, and prepaid expenses of $53,400. These decreases werepartially offset by an increase in inventory of $49,900. The current liability componentof working capital increased from $1,034,700 at December 31, 2000 to $1,558,400 atDecember 31, 2001. Significant increases in the components of current liabilities include$193,100 in accrued expenses, and $163,600 in current maturities of capital leaseobligations, $55,400 in accrued management salaries, and $56,000 in accrued interest. 

The decreased working capital is primarily a result of two factors. First, fertilizersales did not expand to the extent anticipated, so operating losses were not reduced asmuch as expected. Second, since the stock price did not remain at 2000 levels, much of thefunding anticipated under the Swartz agreement has not been available. The Company has hadlimited cash liquidity since the third quarter of 2000. The Company has sought andobtained the funding described above, which has not been sufficient to maintain allobligations on a current basis. However, cash liquidity is being managed and the Companyhas been able to make sufficient payments to keep all significant creditors working withit. With the rebound in the stock price subsequent to December 31, 2001, significant fundshave been received from the Convertible Notes Private Placement, which has temporarilyimproved cash liquidity. The Company will continue to seek funding from the ConvertibleNotes Private Placement, and it is anticipated that with the improved stock price, theSwartz agreement will provide more significant funding than in 2001. 

For details of other steps to improve the Company's working capital and liquidity takensubsequent to December 31, 2001, see the discussion in Notes 12 and 14 to the ConsolidatedFinancial Statements on pages 61 and 63 of this report.

29

  IV.   Forward-Looking Statements 

The statements in this Form 10-KSB that are not historical facts or statements ofcurrent status are forward-looking statements (as defined in the Private SecuritiesLitigation Reform Act of 1995) that involve risks and uncertainties. Actual results maydiffer materially.

 

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

 

ITEM 8.CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.
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: Compliancewith Section 16(a) of the Exchange Act
I. Summary Information.
The following are the directors and executive officers of the Company:

Age as of
Name
12/31/01
Position
Position    Held SinceDr. John W. Whitney
55President/Treasurer May 1988DirectorPaul H. Durckel 
84DirectorSeptember 1995Alan C. Lewin 
55DirectorSeptember 1997Gregory S. Skinner 
47SecretaryDecember 1990Duane H. Rasmussen
71Vice 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

30

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. 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 apre-legal degree from Stanford University in 1940. He has served various companiesinvolved in fertilizer manufacturing and sales for approximately 30 years. He is presentlyan Independent Real Estate Salesman for Verus Realty. He served Myers Realty, Inc. invarying capacities, including Broker-Salesman, Consultant, Manager, Vice President ofOperations, and Director, from 1987 to 2001. His experience in the fertilizer industryincludes Vice President and General Manager and Vice President- Operations for AmericanPlant Food Corp., Executive Assistant to the Chairman for Best Fertilizers Co., VicePresident and General Manager for Best Fertilizer of Texas, and Vice President and GeneralManager 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

31

Officer of Guardian X-Ray Equipment Service, Inc. from 1976 to 1992, General Manager ofDouglas Roesch Communications, Inc. from 1992 to 1994, Technical Sales Representative ofCommerce Chemical Company from 1994 to 1996, Vice President of Commodity Resource &Environmental, Inc. from August 1996 to July 1997, and General Manager for a Merry X-Raybranch operation in Los Angeles, California since November 1997. 

Gregory S. Skinner, Esq.:

Mr. Skinner has served as secretary and general counsel of the Company and 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 is a shareholder in the LawOffices of Skinner, Sutton & Watson, a Professional Corporation, which has officeslocated in Reno and Incline Village, Nevada. Prior to becoming Secretary of Itronics Inc.,Mr. Skinner has provided legal services and advice to Whitney & Whitney, Inc. since1980.

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, 2001 exceeded $100,000:

Long Term
Compensation
Name and
Annual
Securities
Principal
Calendar
Compensation
Underlying
Position
Year
Salary
Bonus
Options    (#)Dr. John W. Whitney:
2001
$127,001
$-0-
-0-President, Treasurer 
2000
$133,300
$-0-
-0-and Director (1) (2) 
1999
$129,534
$-0-
1,000,000Duane H. Rasmussen
2001
$132,000
$-0-
-0-Vice President, VP
2000
$104,000
$-0-
-0-and General Manager 
1999
$84,000
$-0-
-0-
IMI (3)
32

(1) In September 1998 Dr. Whitney converted $50,000 of unpaid salary  by acquiringfive units of the Company’s 1998 Private Placement, Tranche One. Dr. Whitneyexercised 77,500 shares in 1999 and 2000.  The remaining 122,500 warrants wereassigned to other individuals  and were exercised in 2000. Effective January 1, 1999,Dr. Whitney was granted an option for 1,000,000 common shares at $0.25 per share. Theoption is exercisable at any time until one year after Dr. Whitney leaves the employmentof the Company. The 2001 salary amount includes $70,000 in unpaid salary, of which Dr.Whitney converted $60,750 into 675,000 restricted common shares, which were pendingissuance on December 31, 2001.

(2) The salary amounts listed above include $2,001, $8,300, and $4,534, for 2001, 2000,and 1999, respectively, that represent compensation paid in common stock for service as adirector of the Company. The compensation plan for all directors was 2,500 shares perquarter for 2001.

(3) The 2001 salary amount includes $40,500 in unpaid salary.

Option Grants in Last Fiscal Year:

Number of
% of    Total
Securities
Options    to
Underlying
Employees
Exercise
Options
in Fiscal
or Base
ExpirationName
Granted
Year
Price
DateNone 
None
-0-
 

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

Options Exercised:

Shares    Acquired onName
Exercise    (#)
Value    RealizedNone
Options Unexercised:

Number of Securities
Value of Unexercised
Underlying Unexercised
In-the-Money Options
Options at 12/31/01
At 12/31/01Name 
Exercisable
Unexerciseable
Exercisable
UnexerciseableDr. John W. Whitney 
1,000,000
-0-
$ -0- (1)
$ -0-
(1) If value realized was based on the average of the closing bid and ask prices onDecember 31, 2001, the value realized would have been $-0-. The securities under option,common stock of the Company, are restricted under Rule 144 and thus are not tradablewithin one year of exercise. In addition, as a greater than 10% shareholder of theCompany, Dr. Whitney is further

33

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 1, 2002, 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
14,590,009(3)
1,000,000
15,590,009
18.62(1)(2)Richard J. Cavell1013 No. Marshall Dr.Camano Island, WA
4,976,457(4)
-
4,976,457
6.02
(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. Options for 1,000,000shares are at $0.25 per share.

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

34

b) Security Ownership of Management.
The following table sets forth as of March 1, 2002, certain information, with respectto 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) 
14,590,009(5)
1,000,000
15,590,009
18.62Paul H. Durckel1655 Highway 395Minden, NV 89423 (3)
231,000
36,809
267,809
.32Alan C. Lewin P.O. Box 10725Reno, NV 89510 (3)
250,000
-
250,000
.30Duane H. RasmussenP.O. Box 10725Reno, NV 89510 (4)
1,155,516
-
1,155,516
1.40All directors andexecutive officers asa group (5 persons) 
17,327,157
1,036,809
18,363,966
21.92
  

(1) The above option for 1,000,000 shares is at $0.25 per share and the option for36,809 shares is related to the 12% Convertible Note Private Placement and is convertibleat $0.15 per share. 

(2) The percent of class is based on the sum of 82,722,923 shares outstanding or to beissued as of March 1, 2002 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 1, 2002.

(3) Director

(4) Officer

(5) 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. 

c) Changes in Control
The Company is not aware of any arrangement which at some later date results in changesin control of the Company.

35

ITEM 12.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the Company's two most recent fiscal years, including those of its subsidiariesand affiliates, the Company engaged in no transactions or series of transactions with anydirector, officer, security holder or family thereof in which the amount involved exceeded$60,000 except as follows:

1. 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, 2001 and 2000 WWI owned200,000 unrestricted Golden shares, and 2,789,042 and 1,594,366, respectively, of Rule 144restricted Golden shares. The initial Rule 144 one year period for resale began April,2000, and continues monthly thereafter. Total amount billed for 2001 and 2000 was $194,688and $301,483, respectively. A total of $123,757 and $101,163 is included in accountsreceivable at December 31, 2001 and 2000, respectively. At December 31, 2001, the averagebid/asked price for Golden common was $0.105, resulting in a value of shares held on thatdate of $313,849.

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 $107,813 for 2001 and$49,144 for 2000.

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, 2001 and 2000. 

(b) Consolidated Statements of Operations and Comprehensive Income for the Years endedDecember 31, 2001 and 2000.

(c) Consolidated Statements of Stockholders' Equity (Deficit)for the Years endedDecember 31, 2001 and 2000.

(d) Consolidated Statements of Cash Flows for the Years ended December 31, 2001 and2000.

(e) Notes to Consolidated Financial Statements.

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

II. Reports on Form 8-K.

    None

36

INDEX TO FINANCIAL STATEMENTS

AND SUPPLEMENTAL DATA

DECEMBER 31, 2001
INDEPENDENT AUDITOR'S    REPORT ON
PAGETHE 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    
65
       STATEMENTS AND SCHEDULES

       Schedules not included are omitted for the reasonthat they are not applicable or not required.

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, 2001 and 2000, 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, 2001 and 2000, 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 $3,653,750 during the year ended December 31, 2001, a negative working capitalof $911,082, and a stockholders’ deficit balance of $2,941,122 as of December 31,2001. 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 12. The financialstatements do not include any adjustments that might result from the outcome of thisuncertainty.

 

/S/ KAFOURY, ARMSTRONG & CO.

 

Reno, Nevada

March 29, 2002

38

ITRONICS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2001 AND 2000

 

ASSETS
 
2001
2000CURRENT ASSETS   Cash 
$ 14,675
$ 17,990Accounts receivable, less    allowance for  doubtful accounts, 2001,    $7,400;  2000, $7,400
166,976
217,719Account receivable, lease    equipment financing 
-
2,809 Stock subscription    receivable 
-
82,000Inventories
318,595
268,719Prepaid expenses
100,797
154,191Current portion of deferred    loan fees
46,225
25,910   Total Current    Assets
647,268
769,338PROPERTY AND EQUIPMENT   Land 
215,000
215,000Building and improvements
1,046,298
1,046,298 Design and construction in    progress,   manufacturing facility
86,884
48,506Leasehold improvements
900
900Equipment and furniture 
1,585,995
1,546,477Vehicles 
133,028
133,028Equipment under capital    lease 
971,888
896,562 
4,039,993
3,886,771  Less: Accumulated    depreciation and amortization
794,750
521,076 
3,245,243
3,365,695OTHER ASSETS   Patents, trademarks, and    other, less accumulated   amortization 2001, $24,275;    2000, $23,219 
10,171
11,227Stock placement and    organization costs, less   accumulated amortization    2001, $93,128; 2000, $57,638 
155,911
77,812Marketable securities,    available for sale 
313,849
228,782Investment in non-public    company
-
30,000Deferred loan fees, less    current portion, less accumulated  amortization 2001, $67,546;    2000, $16,137 
138,171
86,335Investment in American Gold    & Silver Ltd. 
9,250
9,250Deposits
38,397
31,067 
665,749
474,473 
$4,558,260
$4,609,506  
 
39

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
2001
2000CURRENT LIABILITIES   Accounts payable 
$ 516,312
$ 538,333Accrued management salaries    
83,329
27,942Accrued expenses 
319,691
126,632Insurance contracts payable    
30,799
24,943Interest payable 
74,097
18,064Current maturities of    long-term debt 
38,255
16,077Current maturities of    capital lease obligations 
426,744
263,145Current maturities of    advances from stockholders
25,222
5,222Current maturities of    convertible notes and accrued interest
25,438
-Other 
18,463
14,331   Total Current    Liabilities 
1,558,350
1,034,689   LONG-TERM LIABILITIES  Long-term debt, less    current maturities 
599,472
59,498Convertible promissory    notes 
3,890,029
2,668,000Accrued interest,    convertible notes
540,444
221,855Capital lease obligations,    less current maturities
882,485
1,000,529Accrued salary due    stockholder
15,054
22,254Deferred gain, less current    maturities
13,548
23,882Total Long-Term Liabilities    
5,941,032
3,996,018Contingency 
-
- 
7,499,382
5,030,707STOCKHOLDERS' EQUITY    (DEFICIT)  Preferred stock, par value    $0.001 per share;  authorized 999,500 shares;    issued and outstanding  2001, 0 shares; 2000, 0    shares 
- 
-Common stock, par value    $0.001 per share;  authorized 250,000,000    shares; issued and  outstanding 2001,    80,999,392; 2000, 75,017,412 
80,999
75,017Additional paid-in capital 
10,829,459
9,761,976Accumulated deficit 
(14,062,234)
(10,408,484)Common stock to be issued 
152,960
117,151Accumulated other    comprehensive income (loss) 
(27,403)
9,141Common stock options    outstanding, net 
85,097
23,998 
(2,941,122)
(421,201) 
$ 4,558,260
$ 4,609,506
 

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, 2001 AND 2000
 
2001
2000REVENUES  Fertilizer 
$ 180,435
$ 119,634Photobyproduct recycling 
239,126
192,768Silver and gold 
246,115
190,322Mining technical services 
477,577
726,699   Total Revenues    
1,143,253
1,229,423COST OF SALES 
1,415,879
1,435,445   Gross Profit    (Loss) 
(272,626)
(206,022)OPERATING EXPENSES  Depreciation and    amortization 
351,416
224,262Research and development 
50,142
41,496Sales and marketing 
1,252,931
1,897,013Plant start-up costs 
-
174,979General and administrative 
1,064,760
1,074,687 
2,719,249
3,412,437   Operating    (Loss) 
(2,991,875)
(3,618,459)OTHER INCOME (EXPENSE)  Interest expense 
(635,058)
(373,596)Interest income 
3,183
58,053Other
-
712Gain (loss) on investments
(30,000)
(198,432)   Total Other    Income (Expense) 
(661,875)
(513,263)(Loss) before provision for    income tax 
(3,653,750)
(4,131,722)Provision for income tax 
-
-   Net    Income(Loss) 
(3,653,750)
(4,131,722)Other comprehensive income    (loss)  Unrealized gains (losses)    on securities 
(36,544)
(83,658)   Comprehensive    Income (Loss) 
$(3,690,294)
$(4,215,380)   Weighted average number of    shares outstanding 
78,349,197
73,324,348Earnings (Loss) per share 
$ (0.0466)
$ (0.0563)   
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, 2001 AND 2000

 
 
COMMON STOCK
ADDITIONAL     
NUMBER OF 
PAID-IN
ACCUMULATED
COMMON    STOCK   
SHARES
AMOUNT
CAPITAL
DEFICIT
TO BE    ISSUED
OTHER
TOTALBalance, December 31, 1999 
70,828,231
$70,828
$    8,013,746
$    (6,276,762)
$104,061
$ 96,572
$    2,008,445Sale/issue of common stock 
4,189,181
4,189
1,748,230
-
13,090
-
1,765,509Net (loss) for the year    ended        December 31, 2000 
-
-
-
(4,131,722)
-
-
(4,131,722)Other comprehensive income    for        the year ended December 31,    2000 
-
-
-
-
-
(83,658)
(83,658)Common stock options    outstanding 
-
-
-
-
-
20,225
20,225Balance, 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)        
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, 2001 AND 2000
 
2001
2000Cash flows from operating    activities   Net income (loss) 
$(3,653,750)
$(4,131,722)Adjustments to reconcile    net loss to cash used by operating activities:  Depreciation and    amortization 
351,416
224,262Interest on convertible    notes
324,027
221,855Marketable securities    received for services
(121,612)
(146,780)Loss on investments
30,000
198,432Bad debts 
-
11,275Stock option compensation 
61,099
55,278Other
-
4,516Expenses paid with issuance    of common stock/debt:   Interest expense 
3,738
-Consulting expenses 
411,109
737,297Directors fees 
6,003
24,900Salaries 
251,159
124,934Operating expenses 
8,978
1,425(Increase) decrease in:  Trade accounts receivable 
50,743
(3,905)Inventories 
(49,876)
(213,738)Prepaid expenses, deposits    and other 
20,173
(64,958)Increase (decrease) in:  Accounts payable 
71,849
155,913Accrued expenses and    contracts payable 
307,267
58,960   Net cash used    by operating activities 
(1,927,677)
(2,742,056)Cash flows from investing    activities:  Acquisition of property and    equipment 
(73,315)
(818,565)Acquisition of marketable    securities 
-
(198,432)Acquisition of intangibles    and investments 
(47,777)
(3,413)Sale of equipment
415
-   Net cash used    by investing activities 
(120,677)
(1,020,410)Cash flows from financing    activities:  Proceeds from sale of stock    
346,921
739,748Proceeds from    stockholders/long-term debt
1,997,013
3,146,572Payments on debt
(298,895)
(248,151)   Net cash    provided by financing activities 
2,045,039
3,638,169Net increase (decrease) in    cash 
(3,315)
(124,297)Cash, beginning of year 
17,990
142,287Cash, end of year 
$ 14,675
$ 17,990
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, 2001 AND 2000

(continued)

 

2001
2000Supplemental Disclosures of    Cash FlowInformation:Cash paid during the period    for interest 
$ 254,260
$ 187,151Schedule of non-cash    financing transactions:Settlement of debt/accruals    byissuance of common stock:Accounts payable 
93,870
-Stock subscription    receivable 
-
82,000Equipment financed with    long-term debt 
39,844
62,190Equipment financed with    capital leases 
40,597
20,164Deferred loan fees on    debt/capital leases 
77,008
88,765Acquisition of assets by    issuance ofcommon stock:Stock/debt placement costs 
85,865
31,895 Deferred loan fees on debt
16,500
-Equipment
-
2,675Acquisition of assets by    issuance of debt:Stock/debt placements costs    
10,000
-
The accompanying notes are an integral part of these financialstatements.

44

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

 

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, photobyproduct 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:

2001
2000
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, 2001 AND 2000

 

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, 2001 and 2000 were $134,676 and $353,339, 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 bearingphotobyproducts, fertilizer raw materials and saleable fertilizer.

Following is a summary of finished goods and raw materials inventories as of December31, 2001 and 2000:
 
2001
2000Finished goods
$ 59,741
$118,460Raw materials
258,854
150,259 
$318,595
$268,719
Cost of the silver in solution inventory is either the actual cost, or 80% of the fairmarket value of the silver content of the photobyproducts as determined by laboratoryassays (See Note 13).

46

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

 

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 $201,784 and $105,966 at December 31, 2001 and 2000,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:

YEARS
Patents 
17
Stock/debt    placement and organization costs
5
Deferred    lease costs
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 $72,030 and $266,430 for the years endedDecember 31, 2001 and 2000, 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 netloss for the period 

47

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

 

divided by the weighted average number of common shares outstanding during 2001 and2000. Common stock equivalents are not included, as their effect would be antidilutive.

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, 2001 and 2000 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, 
2001
2000Notes 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.
$ 65,581
$75,575   Note payable secured by    real property due May 2016.  Monthly payment is $6,601,    including interest   at 12% per annum.
542,058
-   Financing contract secured    by equipment due May 2006.   Monthly payment is $806,    including interest at 17.99%
30,088
-   Less current portion due    within one year 
(38,255)
(16,077)Total long-term liabilities    due to unrelated parties
$599,472
$59,498   
48

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000
 
DECEMBER 31, 
2001
2000   Convertible 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. 
2,621,000
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
-   Accrued interest on    convertible promissory notes
545,882
221,855   Less current portion due    within one year
(25,438)
-Total Long Term Convertible    Promissory Notes
$4,430,473
$2,889,855   Loans from    Stockholders/Related Transactions:   Advances from    officer/stockholder. Due on demand,  with interest accruing at    12% per annum.
$20,000
$ -   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.
5,222
5,222 
25,222
5,222Less current portion due    within one year 
(25,222)
(5,222)Total long-term liabilities    due to stockholders
$ -
$ -
49

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

 
Long-term debt    matures as follows:   
UNRELATED
CONVERTIBLE 
YEAR
PARTIES
NOTES
STOCKHOLDERS
2002
$ 38,255
$ 25,438
$ 25,222
2003
41,312
3,125,954
-
2004
41,499
1,304,519
-
2005
40,898
-
-
2006
30,110
-
-
2007-2016
445,653
-
- 
$637,727
$4,455,911
$ 25,222
 

NOTE 4 - Major Customers:

Fertilizer sales for the years ended December 31, 2001 and 2000 include $146,824 and$40,740, respectively, from one major customer. The customer is one of the largestfertilizer distribution companies in the country.

Silver and gold sales for the year ended December 31, 2001 includes $154,800 and$51,708 from two major customers. Silver and gold sales for the year ended December 31,2000 includes $49,144 and $45,991 from two major customers. 

Technical services revenue (including pass through funds described in Note 1) for theyear ended December 31, 2001 includes $281,042 and $194,688 from two major customers whichrepresents 59% and 41%, respectively, of technical services revenues. Technical servicesrevenue (including pass through funds described in Note 1) for the year ended December 31,2000 includes $366,967 and $301,483 from two major customers which represents 50% and 41%,respectively, of technical services revenues. Receivables from these major customers as ofDecember 31, 2001 and 2000 amount to $126,607 and $137,632, which represents 97.5% and77.4%, 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.

50

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

  
2001
2000  
PERCENT 
PERCENT  
OF    PRE-TAX 
OF    PRE-TAX 
AMOUNT
INCOME
AMOUNT
INCOME     Federal tax at statutory    rate 
$-
- %
$-
- %Temporary differences,    primarily bad debt and    compensation related    expenses
-
- %
-
- %Non-deductible expenses 
-
- %
-
- %Utilization of NOL 
-
- %
-
- %Total Income Tax Expense 
$-
0.0%
$-
0.0%
The Company's consolidated net operating loss available for carryforward to offsetfuture taxable income and tax liabilities for income tax reporting purposes expire asfollows:
 
Net    Operating
Year    Ending December 31:
Loss
2002
$ 26,089
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
2,876,850 
$9,275,389
The Company's total deferred tax assets, and deferred tax asset valuation allowances atDecember 31, 2001 and 2000 are as follows:
 
2001
2000Total deferred tax assets 
$    3,265,475
$    2,298,877Less valuation allowance 
(3,265,475)
(2,298,877)Net deferred tax asset $      -$      -
51

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

 

NOTE 6 - Stock Option and Purchase Plans:

The Company adopted a debt restructuring plan which included the private placement ofits common shares and/or warrants to acquire common shares at a minimum of $0.l0 pershare. The warrants issued under this plan are exercisable at varying dates throughNovember 2, 2002.

On March 31, 1998 the Company began a private placement offering to raise $2 million inequity funds. Included in the offering was one two year warrant for each two common sharesacquired. A total of 5,000,000 warrants were issued in Tranche 1 and 2 of the offering,with an exercise price of $0.25 and $0.40 per share for years one and two of the exerciseperiod, respectively. The warrants were exercisable at varying dates through January 2001.

In February 1999 the Company began the final tranche of the 1998 Private Placement. Atotal of 1,172,063 two year warrants were issued in connection with the final tranche,with an exercise price of $0.75 and $1.00 for years one and two of the exercise period,respectively. The warrants were exercisable at varying dates through August 2001.

In November 1999 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 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 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 December 2004, except for the 1,000,000 optionsgranted to an officer/stockholder, which expire one year after the end of his employment.The number of outstanding options and warrants was 1,542,865 and 1,454,900 shares atDecember 31, 2001 and 2000, respectively.

52

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

 

Following is a summary of all warrant and option activity for the years ended December31, 2001 and 2000.
 
NUMBER OF SHARES 
2001
2000Under option, beginning of    year 
10,157,683
6,989,016Granted 
11,624,567
6,613,846Exercised 
(500,000)
(2,472,243)Expired 
(1,373,441)
(972,936)Under option, end of year 
19,908,809
10,157,683Average price for all    options granted and exercised
$0.14
$0.55
Compensatory Stock Options:

Included in the above options and warrants are compensatory options to acquire 87,965and 353,900 common shares for December 31, 2001 and 2000, respectively. These options weregranted to various employees and consultants at varying dates during 2001 and 2000. Theoptions for 2001 are exercisable at any time over three years from the date of grant, withexercise prices of 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 options for 2000 are exercisableat any time over three years from the date of grant, with exercise prices of 213,200shares at $0.25, 9,700 shares at $0.40, 24,000 shares at $0.50, 70,000 shares at $0.75,and 37,000 shares at $0.90. The Company applies APB Opinion 25 in accounting for thesestock options. Total compensation, based on the fair market values of the stock on thegrant dates is $-0- and $123,990 for December 31, 2001 and 2000, respectively. Theseamounts are being amortized over the three year lives of the options, which resulted incompensation expense of $61,099 and $55,278 for December 31, 2001 and 2000, respectively,and deferred compensation as of December 31, 2001 and 2000 of $63,147 and $124,246,respectively. 186,000 shares of prior year options were exercised during 2000. 

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 $678 and $173,686 forDecember 31, 2001 and 2000, respectively. Net loss and loss per share would have beenimpacted as follows:
 
2001
2000Net Income (Loss):  As reported 
$(3,653,750)
$(4,131,722)Pro forma
$(3,593,329)
$(4,250,130)   Earnings (Loss) per share:  As reported 
$ (0.0466)
$ (0.0563)Pro forma 
$ (0.0459)
$ (0.0580)
53

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

 

The pro forma amounts were estimated using the Black-Scholes option pricing model withthe following assumptions for 2001 and 2000:

2001
2000Dividend yield
0%
0%Risk-free interest rate
5.02%
5.13%Expected life
3 years
3 yearsExpected volatility
21.64%
60.86%
 

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:
 
2001
2000   Payment of consulting and    operating fees 
$ 33,232
$ 47,050Payment of director fees 
1,200
2,925Payment of salaries 
114,790
67,176Payment of interest 
3,738
- 
$152,960
$117,151
 

NOTE 8 - Accrued Expenses:

The following is the composition of accrued expenses as of December 31:
 
2001
2000   Accrued salaries and    vacation 
$ 59,118
$ 51,829Federal and state payroll    taxes 
170,391
21,239Sales tax 
34,182
564Audit and annual meeting    costs 
56,000
53,000 
$319,691
$126,632
 

NOTE 9 - Related Party Transactions:

Several promissory notes are held by stockholders at December 31, 2001 and 2000 (seeNote 3 for terms).

54

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

 

$98,383 and $46,654 of the accrued management salaries as of December 31, 2001 and2000, respectively, is for salary in arrears due to several officer/stockholders andemployee/stockholders. Of the above amount, $22,254 is due a former officer/stockholder ofWhitney & Whitney, Inc. for salary in arrears as of December 31, 2001. The individualretired on December 31, 1998 and will receive payment of the back salary over severalyears. The individual has agreed not to make demand for $15,054 of the arrearages prior toJanuary 1, 2003. Interest, compounded monthly at 12% per annum, amounted to $4,635 and$4,923 for 2001 and 2000, respectively. Total accrued interest due this individual is$14,953 at December 31, 2001. Interest accrued at 12% per annum on salary due otherofficer/ stockholders in 2001 amounted to $3,738, and was paid in 2002 by issuance of26,550 shares of restricted common stock. 

Consulting and labor services amounting to $636,377 and $860,642 for 2001 and 2000,respectively, were paid by issuance of 3,948,381 and 1,163,798 shares, respectively, ofcommon stock. The shares were or are to be issued at varying dates in 2000, 2001 and 2002.

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, 2001 and 2000 WWI owned200,000 unrestricted Golden shares, and 2,789,042 and 1,594,366, respectively, Rule 144restricted Golden shares. The initial Rule 144 one year period for resale began in April2000, and continues monthly thereafter. Total amount billed for 2001 and 2000 was $194,688and $301,483, respectively. A total of $123,757 and $101,163 is included in accountsreceivable at December 31, 2001 and 2000, respectively. At December 31, 2001, the averagebid/asked price for Golden common was $0.105, resulting in a value of shares held on thatdate of $313,849.

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 $107,813 and $49,144 for2001 and 2000, respectively.

For related party transactions subsequent to December 31, 2001, see Note 14.

55

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

 

NOTE 10 - Lease Commitments and Rent Expense:

0perating Leases
The Company leases its corporate office facility under a non-cancelable agreement whichexpires June 30, 2002. Monthly payments are $4,868.

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. 

The Company is committed under non-cancelable operating leases for the use of officespace, a vehicle and office equipment. The monthly lease payments total $3,475 and expireon various dates through the year ending December 31, 2006. 

Future minimum rental commitments at December 31, 2001, under these operating leaseagreements are due as follows:
2002 
$59,4392003 
9,1842004
7,2612005
7,2612006
4,235 
$87,380
Total rental expense included in the statements of operations for the above leases forthe years ended December 31, 2001 and 2000 are $108,940 and $115,710, respectively.

 

Capital Leases
In December 1998 the Company entered into a lease agreement to acquire two computers.The lease term is for three years, with monthly payments of $154. There is a $1 purchaseoption at the end of the lease. 

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.

56

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

 

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.

As of December 31, 2001 lease payments totaling $106,198 were in arrears but were paidsubsequent to December 31, 2001. As of March 29, 2002 lease payments totaling $105,381 arein arrears. The Company is making ongoing payment arrangements with the lessors to avoidaction that may be adverse to the Company.

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

Future minimum lease commitments at December 31, 2001 are due as follows:
2002 
$ 649,3082003 
531,8702004
379,0372005
114,6892006
11,321 
1,686,225Less: amounts representing    interest 
(376,996) 
$1,309,229
 

NOTE 11 - Business Segments:

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

Photobyproduct Fertilizer:                      Photobyproduct recycling,

                                                  Silver recovery,

                                                  Fertilizer production and Sales

Mining Technical Services:                      Mining industry services

The photobyproduct fertilizer segment operates principally in the Northern Nevada andSouthern California areas and, to a lesser extent, the Northern California area. Theprimary source of revenue for this segment is from the pick-up and processing ofphotobyproducts, recovery of 

57

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

 

silver therefrom, and sales of Gold’n Gro fertilizer products. The customer baseis diverse 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.

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.
Operating income (loss) by    business segment:   
2001
2000Photobyproduct Fertilizer:   Revenues:  Fertilizer sales 
$ 180,435
$ 119,634Photobyproduct recycling 
239,126
192,768Silver and gold sales 
246,115
190,322 
665,676
502,724   Cost of sales and operating    expenses 
3,319,294
3,533,251Research and development 
50,142
41,496Plant start-up costs
-
174,979 
3,369,436
3,749,726Operating (Loss) 
$(2,703,760)
$(3,247,002)
 

Mining    Technical Services:   Technical services revenues    
$ 477,577
$ 726,699Cost of sales and operating    expenses 
765,692
1,098,156Operating (Loss) 
$(288,115)
$(371,457)
General and administrative expenses of $159,527 and $235,054 incurred by Itronics Inc.were equally divided between the two segments for 2001 and 2000, respectively. 

58

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

Reconciliation of segment revenues, cost of sales, gross profit (loss), and operatingincome (loss) to the respective consolidated amounts:
 
2001
2000Revenues  Photobyproduct Fertilizer 
$ 665,676
$ 502,724Mining Technical Services 
477,577
726,699Consolidated Revenues 
$ 1,143,253
$ 1,229,423   Cost of Sales  Photobyproduct Fertilizer 
$    1,039,300
$ 828,349Mining Technical Services 
376,579
607,096Consolidated Cost of Sales 
$ 1,415,879
$ 1,435,445   Gross Profit (Loss)  Photobyproduct Fertilizer 
$    (373,624)
$    (325,625)Mining Technical Services 
100,998
119,603Consolidated Gross Profit    (Loss)
$ (272,626)
$ (206,022)   Operating Income (Loss)  Photobyproduct Fertilizer 
$(2,703,760)
$(3,247,002)Mining Technical Services 
(288,115)
(371,457)Consolidated Operating    Income (Loss) 
(2,991,875)
(3,618,459)Other Income (Expense) 
(661,875)
(513,263)Consolidated Net Income    (Loss) before taxes
$(3,653,750)
$(4,131,722)   Other segment information:
2001
2000Capital expenditures by    business segment:  Photobyproduct Fertilizer 
$ 151,763
$ 695,217Mining Technical Services 
1,459
187,565Consolidated Capital    Expenditures 
$ 153,222
$ 882,782   Depreciation and    amortization expense by business segment:  Photobyproduct Fertilizer  Depreciation 
$ 160,845
$ 118,155 Amortization 
144,862
76,889 
305,707
195,044Mining Technical Services  Depreciation 
18,083
13,752Amortization 
27,626
15,467 
45,709
29,218Consolidated Depreciation    and Amortization
$ 351,416
$ 224,262
59

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

 

Identifiable assets by business segment (net of accumulated depreciation, accumulatedamortization, and allowance for doubtful accounts):
 
2001
2000 
PHOTO-
MINING
PHOTO-
MINING 
BYPRODUCT
TECHNICAL
BYPRODUCT
TECHNICAL 
FERTILIZER
SERVICES
FERTILIZER
SERVICESASSET DESCRIPTION     Current Assets     Cash 
$ 8,599
$ 4,066
$ 11,892
$ 3,838Accounts receivable, net 
40,782
126,194
43,718
174,001Account receivable, lease    equipment financing 
-
-
2,809
-Inventories 
316,769
1,826
266,893
1,826Deferred loan fees, current    
36,234
9,991
20,500
5,410Prepaid expenses 
47,612
3,397
50,617
4,532 
449,996
145,474
396,429
189,607Property and Equipment, net    Land 
215,000
-
215,000
-Building and improvements 
998,573
-
1,025,532
-Construction in progress,     manufacturing facility 
86,884
-
48,506
-Leasehold improvements 
778
-
801
-Equipment 
995,509
114,825
1,051,341
148,505Vehicles 
62,283
1,287
83,089
2,325Equipment under capital    lease
589,827
174,275
572,039
210,840 
2,948,854
290,387
2,996,308
361,670Other Assets, net     Patents, trademarks, and    other
10,171
-
11,227
-Marketable securities 
-
313,849
-
228,782Inter-company    investments/loans 
-
1,745,665
-
1,435,705Deposits 
18,387
19,812
11,057
19,812Deferred loan fees 
121,581
16,590
70,023
16,312 
150,139
2,095,916
92,307
1,700,611 
$3,548,989
$2,531,777
$3,485,044
$2,251,888
60

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

Reconciliation of segment assets to consolidated assets:
 
2001
2000Total Assets:  Photobyproduct Fertilizer
$    3,548,989
$    3,485,044Mining Technical Services
2,531,777
2,251,888Total Segment Assets
6,080,766
5,736,932Itronics Inc. assets
16,278,194
12,622,324Less: inter-company    elimination
(17,800,700)
(13,749,750)Consolidated Assets
$ 4,558,260
$ 4,609,506
 

NOTE 12 - 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 $3,653,750 during theyear ended December 31, 2001, a negative working capital of $911,082, and astockholders’ deficit balance of $2,941,122 as of December 31, 2001. 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, conversion of debt to common shares, and payment of consulting andother labor services with common shares.

In addition to continuing the above described efforts, development of the technologynecessary to manufacture fertilizer from photobyproducts 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. 

61

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

In January 2000 the Company began a Private Placement of 9% Convertible PromissoryNotes to raise $2.5 million. A total of $2,631,000 was received. In addition, a total of$711,239 was received in 2000 from the exercise of warrants from the 1999 and earlierprivate placements.

In October 2000 the Company completed the registration of 10,000,000 common shares inconnection with its agreement with Swartz Private Equity, LLC. to raise $15 million overthree years. The Company received $296,922 under this agreement during the year endedDecember 31, 2001.

In March 2001 the Company began a Private Placement of 12% Convertible Promissory Notesand received a total of $1,232,029 during the year ended December 31, 2001. The PrivatePlacement has been extended into 2002, and through March 29, 2002, an additional $614,500has been raised.

 

NOTE 13 - 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, 2001, 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 photobyproduct 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 photobyproducts 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 photobyproducts. 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 ofphotobyproducts 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 photobyproduct 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

62

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

activities are expensed as incurred. As the Company's photobyproduct fertilizerbusiness expands, the various laws and regulations that are applicable to the Company'sactivities will change. During 1996, the Company received concurrence from the State ofNevada environmental officials that the Company's photobyproduct fertilizer process meetsthe existing requirements for exemption from all environmental regulations, except toxicmetal content standards, and with the exception that certain presently conducted labanalyses of the photobyproducts will continue to be required. Certain of the Company'slarge scale customers presently meet the exemption requirements. Once all thephotobyproducts are utilized in the fertilizer or other commercial products, all theCompany's customers will be exempt. 

NOTE 14 - Subsequent Events:

Subsequent to December 31, 2001, $614,500 was received from the private placement ofthree year 12% convertible notes. The notes are convertible into restricted common stockat prices of $0.15 to $0.25 per share. The Company may 

call the notes prior to the due date and, in that event, the note holder will havethirty days to decide whether to convert the note and interest to stock.

Subsequent to December 31, 2001, new capital leases in the amount of $111,956 (originalprincipal amount) were incurred primarily for acquisition of plant equipment. 

Subsequent to December 31, 2001 an officer/stockholder loaned WWI $125,000 and 600,000shares of GPXM stock, which was subsequently sold for $83,045. WWI subsequently repaid200,000 shares of the GPXM stock out of shares already held by it. 

On February 27, 2002 the Amended and Restated Investment Agreement was completed withSwartz Private Equity, LLC. (Swartz). The Agreement was amended to eliminate futurewarrants to be granted to Swartz related to the Company’s exercise of its put rights.In partial consideration for the execution of the Agreement, Swartz received an additionalcommitment warrant to purchase 360,000 shares of common stock at an exercise price of$0.238 per share. Other significant changes to the agreement include extending the term toFebruary 27, 2004, eliminating the six month minimum commitment fee, eliminating the rightof first refusal on capital raising transactions and easing restrictive covenants on suchtransactions.

The following summarizes common stock activity from January 1, 2002 through March 29,2002: 
 
       ISSUED                        TO BE ISSUED 
SHARES
AMOUNT
SHARES
AMOUNTLabor and consulting    services
1,247,745
$275,739
-$ -Director fees
7,500
1,200
-
-Conversion of notes payable    and    accrued interest
56,540
34,851
-
-Interest on deferred    salaries
26,550
3,738
-
-Warrant exercise
-
-
100,000
10,000 
1,338,335
$315,528
100,000
$10,000
63

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

 

In addition, approximately $69,000 in labor and consulting services has been incurredin the first quarter 2002 that will be paid in stock. 

 

NOTE 15 – 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, 2001 and 2000.
 
2001
2000   Net Income (Loss)
$(3,653,750)
$(4,131,722)    Less: Preferred stock    dividends
-
-Basic EPS income (loss)    available to  common stockholders 
$(3,653,750)
$(4,131,722)   Weighted average number of    shares outstanding
78,349,197
73,324,348Common equivalent shares 
-
- 
78,349,197
73,324,348Per share amount 
$ (0.0466)
$(0.0563)
 

Warrants, options, and shares to be issued, totaling 21,274,807 and 8,014,432 shares asof December 31, 2001 and 2000, respectively, could potentially dilute future EPS. Nodiluted EPS is presented as the effect of including these shares is antidilutive.

64

ITRONICS INC. AND SUBSIDIARIES

SIGNIFICANT SUBSIDIARIES

EXHIBIT 21

 
 STATE OFNAMES UNDER WHICHNAMEINCORPORATIONTHEY DO BUSINESSWhitney & Whitney, Inc.  NevadaSameItronics Metallurgical, Inc NevadaSameItronics California, Inc.  
CaliforniaSameNevada Hydrometallurgical Project(A Partnership) NevadaSameAmerican Hydromet(A Joint Venture)NevadaSame   
65

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.

                                           ITRONICS INC.
Date: April 11, 2002                       By: /S/ JOHN W. WHITNEY

                                               John W. Whitney

                                               President, Treasurer and Director

                                               (Principal Executive Officer)

 

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

Date: April 11, 2002                       By: /S/ JOHN W. WHITNEY
                                              John W. Whitney

                                              President, Treasurer and Director

                                              (Principal Executive and Financial 

                                              Officer)

 

Date: April 11, 2002                       By: /S/ MICHAEL C. HORSLEY 
                                              Michael C. Horsley

                                              Controller

                                              (Principal Accounting Officer)

 

Date: April 11, 2002                       By: /S/ PAUL H. DURCKEL 
                                               Paul H. Durckel

                                               Director

 

Date: April 11, 2002                       By /S/ ALAN C. LEWIN
                                              Alan C. Lewin

                                              Director

 

66****************