UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM l0-QSB

 

(Mark One)

(X)     QUARTERLY REPORT UNDER SECTlON 13 OR 15(d) OF THESECURITIES 

        EXCHANGE ACT OF 1934

                                  For the quarterly period ended September 30, 2001

( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

                                  For the transition period from______ to_____ 

 

Commission File Number 33-18582

 

ITRONICS INC.

(Exact name of small business issuer as specified in its charter)

 

 

 

                        TEXAS                                        75-2198369
            (State or otherjurisdiction of               (IRSEmployer Identification Number)

             incorporationor organization) 

 

6490 S. McCarran Blvd., Bldg C-23, Reno, Nevada 89509

(Address of principal executive offices)

 

 

Issuer's telephone number, including area code: (775)689-7696
NO CHANGE

Former name, former address and former fiscal, if changes since lastreport.

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has been subject tosuch filing requirements during the past 90 days. Yes (x) No ( ).

 

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of commonequity, as of the latest practicable date:

           As ofOctober 31, 2001, 80,008,342 shares of common stock were outstanding.

Transitional Small Business Disclosure Format (Check one): Yes ( ) No (X)

2

ITRONICS INC. AND SUBSIDIARIES

TABLE OF CONTENTS
PART I - FINANCIAL    INFORMATION
PAGEItem 1. Financial    StatementsCondensed Consolidated    Balance Sheets – September 30, 2001and December 31, 2000 
4Condensed Consolidated    Statements of Operations and ComprehensiveIncome for the Three and    Nine Months Ended September 30, 2001 
and 2000.
6Condensed Consolidated    Statements of Cash Flows for theNine Months Ended September    30, 2001 and 2000. 
7Notes to Condensed    Consolidated Financial Statements 
8Item 2. Management's    Discussion and Analysis or Plan ofOperation 
10PART II- OTHER INFORMATIONItem 2. Changes in    Securities and Use of Proceeds 
17Item 6. Exhibits and    Reports on Form 8-K 
17
3

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2001 AND DECEMBER 31, 2000

(UNAUDITED)

 

ASSETS

SEPTEMBER 30,
DECEMBER 31,
2001
2000CURRENT ASSETS Cash 
$ 4,624
$ 17,990Accounts    receivable, less allowance fordoubtful    accounts, 2001, $7,400; 2000, $7,400
221,567
217,719Account    receivable, lease equipment financing 
2,809
2,809 Stock    subscription receivable 
         -
82,000Inventories
264,815
268,719Prepaid    expenses
84,822
154,191Current portion    of deferred loan fees
32,925
25,910Total Current    Assets
611,562
769,338PROPERTY AND    EQUIPMENT Land 
215,000
215,000Building and    improvements
1,046,298
1,046,298Design and    construction in progress, manufacturing    facility
86,884
48,506Leasehold    improvements
900
900Equipment and    furniture 
1,543,238
1,546,477Vehicles 
133,028
133,028Equipment under    capital lease 
967,981
896,562
3,993,329
3,886,771Less:    Accumulated depreciation and amortization
730,208
521,076
3,263,121
3,365,695OTHER ASSETS Intangibles,    net of amortization 
124,826
89,039Marketable    securities, available for sale 
300,947
228,782Investment in    non-public company
30,000
30,000Deferred loan    fees, less current portion, net ofamortization 
142,619
86,335Investment in    American Gold & Silver Ltd. 
9,250
9,250Deposits
34,502
31,067
642,144
474,473
$ 4,516,827
$ 4,609,506
4

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
SEPTEMBER    30,
DECEMBER    31, 
2001
2000CURRENT LIABILITIES   Accounts payable 
$ 525,383
$ 538,333Accrued management salaries    
113,053
27,942Accrued expenses 
261,903
126,632Insurance contracts payable    
29,827
24,943Interest payable 
98,083
18,064Current maturities of    long-term debt 
30,410
16,077Current maturities of    capital lease obligations 
405,720
263,145Advances from stockholders
60,722
5,222Other 
18,456
14,331Total Current Liabilities 
1,543,557
1,034,689   LONG-TERM LIABILITIES  Long-term debt, less    current maturities 
585,681
59,498Convertible promissory    notes 
3,320,029
2,668,000Accrued interest,    convertible notes
446,322
221,855Capital lease obligations,    less current maturities
938,273
1,000,529Accrued salary due    stockholder
16,854
22,254Deferred gain, less current    maturities
16,133
23,882Total Long-Term Liabilities    
5,323,292
3,996,018 
6,866,849
5,030,707   STOCKHOLDERS' 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,  79,537,697 at September 30,    2001; 75,017,412 at   December 31, 2000
79,538
75,017Additional paid-in capital 
10,552,361
9,761,976Accumulated deficit 
(13,123,572)
(10,408,484)Common stock to be issued 
66,223
117,151Accumulated other    comprehensive income (loss) 
5,602
9,141Common stock options    outstanding, net 
69,826
23,998 
(2,350,022)
(421,201) 
$ 4,516,827
$ 4,609,506   
See Notes to Condensed Consolidated Financial Statements

5

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

(UNAUDITED)
 
Three Months Ended Sept 30,
Nine Months Ended Sept 30, 
2001
2000
2001
2000REVENUES    Fertilizer 
$ 34,070
$ 47,638
$ 100,758
$ 108,918Photobyproduct recycling 
66,489
51,923
169,318
144,777Silver and gold 
39,458
27,675
231,867
78,171Mining technical services 
148,418
205,178
418,150
532,962Total Revenues 
288,435
332,414
920,093
864,828COST OF SALES 
352,700
376,690
1,101,395
995,568Gross Profit (Loss) 
(64,265)
(44,276)
(181,302)
(130,740)     OPERATING EXPENSES    Depreciation and    amortization 
88,175
67,449
253,047
140,332Research and development 
9,884
9,192
33,722
33,919Sales and marketing 
276,114
481,166
1,009,408
1,450,557Plant start-up costs 
             -
53,488
           -
174,979General and administrative 
237,742
270,157
801,739
702,169Total Operating Expenses 
611,915
881,452
2,097,916
2,501,956Operating (Loss) 
(676,180)
(925,728)
(2,279,218)
(2,632,696)     OTHER INCOME (EXPENSE)    Interest expense 
(164,291)
(108,742)
(438,418)
(262,888)Interest income 
148
9,518
2,548
55,740Total Other Income    (Expense) 
(164,143)
(99,224)
(435,870)
(207,148)     Income (Loss) before    provision 
for income tax
(840,323)
(1,024,952)
(2,715,088)
(2,839,844)Provision for income tax 
       -
      -
      - 
     -Net Income(Loss) 
(840,323)
(1,024,952)
(2,715,088)
(2,839,844)Other comprehensive income    (loss)    Unrealized gains (losses)    on 
securities 
(97,861)
(41,669)
(3,539)
(171,830)Comprehensive Income (Loss)    
$(938,184)
$(1,066,621)
$(2,718,627)
$(3,011,674)     Weighted average number of    shares Outstanding (1,000’s)
78,82373,68277,57972,925Earnings (Loss) per share 
$(0.0107)
$(0.0139)
$(0.0350)
$(0.0389)
See Notes to Condensed Consolidated Financial Statements

6

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

(UNAUDITED)
 
Nine Months Ended Sept. 30, 
2001
2000Cash flows from operating    activities     Net income (loss) 
$(2,715,088)
$(2,839,844)  Adjustments to    reconcile net loss to cash used by     operating activities:          Depreciation and amortization 
253,047
140,332    Interest    on convertible notes
224,467
161,189        Marketable securities received for services
(75,705)
(77,164)    Stock    option compensation 
45,828
27,612    Bad    debts
         -
4,750    Other
         -
4,516    Expenses    paid with issuance of common stock/debt 
452,200
711,524  (Increase) decrease    in:      Trade    accounts receivable 
(3,848)
(5,380)        Inventories 
3,904
(244,502)    Prepaid    expenses 
32,813
(75,123)    Deposits
(3,435)
(15,354)  Increase (decrease)    in:      Accounts    payable 
46,345
(74,477)    Accrued    expenses and contracts payable 
223,991
26,569    Accrued    interest
80,019
(1,559)Net cash used by operating    activities 
(1,435,462)
(2,256,911)   Cash flows from investing    activities:    Acquisition of    property and equipment 
(66,765)
(739,520)  Acquisition of    marketable securities 
       -
(198,432)  Acquisition of    intangibles and investments 
(725)
(2,838)  Proceeds from sale    of equipment
415
      -Net cash used by investing    activities 
(67,075)
(940,790)   Cash flows from financing    activities:    Proceeds from sale    of stock 
292,006
714,781  Proceeds from debt,    stockholders
58,500
-  Proceeds from    long-term debt, unrelated 
1,348,513
2,883,000  Payments on debt 
(209,848)
(201,233)Net cash provided by    financing activities 
1,489,171
3,396,548Net increase (decrease) in    cash 
(13,366)
198,847Cash, beginning of period 
17,990
142,287Cash, end of period 
$ 4,624
$ 341,134
See Notes to Condensed Consolidated Financial Statements

7

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2001

(UNAUDITED)

 

1. The unaudited condensed consolidated financial statements printedherein have been prepared in accordance with the instructions to Form 10-QSB and do notinclude all of the information and disclosures required by U.S. generally acceptedaccounting principles. Therefore, these financial statements should be read in conjunctionwith the consolidated financial statements and related footnotes included in the Company'sForm 10-KSB for the year ended December 31, 2000. These financial statements reflect alladjustments that are, in the opinion of management, necessary to fairly state the resultsfor the interim periods reported.

2. The results of operations for the three and nine months endedSeptember 30, 2001 are not necessarily indicative of the results to be expected for thefull year.

3.A Private Placement of 12% Convertible Notes was begun inMarch 2001 and $642,000 was raised during the period ended September 30, 2001. The notesare due in three years with dates beginning in March 2004. Interest is compounded annuallyand payable at maturity, or, at the option of the note holder, can be paid annually instock. The notes and accrued interest are convertible, at any time during the three yearperiod, into the Company’s restricted Common Stock, at $0.10 to $0.15 per share. TheCompany may call the notes prior to the due date and, in that event, the note holder has30 days to decide whether to convert the note and accrued interest into stock. Subsequentto September 30, 2001 an additional $580,000 has been raised under the 12% convertiblenote private placement.
New lease financing on equipment during the first nine months amountedto approximately $287,300, of which $192,300 was received in cash. 

In May 2001, the Company placed a first deed of trust on the Steadmanufacturing facility. The mortgage is for $550,000, carries an interest rate of 12%, andis amortized over 15 years. 

4. During the nine months ended September 30, 2001 the Company receivedequity financing of $242,000 from the Swartz equity line and $50,000 from warrantexercises. Subsequent to September 30, 2001, $54,900 has been received from the Swartzequity line.

5. Following is financial information for each of the Company’ssegments. No changes have occurred in the basis of segmentation since December 31, 2000. 

Reconciliation of segment revenues and operating income (loss) to therespective consolidated amounts and to consolidated net income (loss) before taxesfollows:

8

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2001

(UNAUDITED)
 
Three Months Ended Sept 30,
Nine Months Ended Sept 30, 
2001
2000
2001
2000     Revenues:    Photobyproduct Fertilizer 
$140,017
$127,236
$501,943
$331,866Mining Technical Services 
148,418
205,178
418,150
532,962Consolidated Revenues 
$288,435
$332,414
$920,093
$864,828     Operating Income (Loss):    Photobyproduct Fertilizer 
$(609,059)
$(831,948)
$(2,096,755)
$(2,336,784)Mining Technical Services 
(67,121)
(93,780)
(182,463)
(295,912)Consolidated Operating    Income (Loss)
(676,180)
(925,728)
(2,279,218)
(2,632,696)Other Income (Expense)
(164,143)
(99,224)
(435,870)
(207,148)Consolidated Net Income     (Loss) before taxes 
$(840,323)
$(1,024,952)
$(2,715,088)
$(2,839,844)
Identifiable assets by business segment for the major assetclassifications and reconciliation to total consolidated assets are as follows:
 
Sept 30,
December    31, 
2001
2000Current Assets:  Photobyproduct Fertilizer 
$ 383,970
$ 396,429Mining Technical Services 
173,985
189,607 
557,955
586,036Property and Equipment,    net:  Photobyproduct Fertilizer 
2,948,055
2,996,308Mining Technical Services 
308,636
361,670 
3,256,691
3,357,978Other Assets, net:  Photobyproduct Fertilizer 
155,293
92,307Mining Technical Services 
1,703,303
1,700,611 
1,858,596
1,792,918Total Assets:   Photobyproduct Fertilizer 
3,487,318
3,485,044Mining Technical Services 
2,185,924
2,251,888Total Segment Assets 
5,673,242
5,736,932Itronics Inc. assets 
14,145,494
12,622,324Less: inter-company    elimination 
(15,301,909)
(13,749,750)Consolidated Assets 
$4,516,827
$4,609,506
  
  
9

Item 2. Management's Discussion and Analysis or Plan of Operations

I. Results of Operations

The Company reported sales of $288,435 for the third quarter of 2001,compared to $332,414 for the prior year quarter, a decrease of 13%. Sales for the ninemonths ended September 30, 2001 were $920,093, compared to $864,828 for the prior yearcomparable period, an increase of 6%. The net loss for the third quarter of 2001 was$840,323 or $0.0107 per share, compared to a net loss of $1,024,952 or $0.0139 per sharefor the comparable 2000 period. For the first nine months of 2001 the loss was $2,715,088or $0.0350 per share, compared to a loss of $2,839,844 or $0.0389 per share for the 2000comparable period. The primary factor contributing to the decreased loss for the currentquarter was reduced operating expenses of $269,500, which was partially offset by anincrease in interest expense, net of interest income, of $64,900 and an increased grossloss of $20,000. The increase in interest expense reflects the cost of additionalconvertible note and lease 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

This segment, managed by Itronics Metallurgical, Inc., operates aphotobyproduct recycling plant, which includes related silver recovery. As part of therecycling process, the Company manufactures and markets a line of liquid fertilizerproducts which are being introduced into the markets in Arizona, California, Nevada,Oregon, and Hawaii. Revenues are generated from photobyproduct management services, silversales, and fertilizer sales.

Three Months Ended Sept 30,
Nine Months Ended Sept 30,
2001
2000
2001
2000Sales revenue 
$ 140,017
$ 127,236
$ 501,943
$ 331,866Operating income (loss) 
$(609,059)
$(831,948)
$(2,096,755)
$(2,336,784)
Total segment sales for the third quarter of 2001 were approximately$140,000, an increase of 10% over the prior year third quarter. Fertilizer sales for thequarter were approximately $34,100, compared to $47,600 for the 2000 third quarter, adecrease of 28%. Fertilizer sales dollars declined due to a shift in fertilizer salesgallons from sales primarily to Northern Nevada customers in the third quarter of 2000 tosales in California through our distribution network in the 2001 third quarter, due tofocusing the majority of the Company’s marketing effort in the California market. Theresult of this effort is that the manufacturing portion of the distribution agreement withour primary distributor is now being utilized, wherein the Company sells concentratedGold’n Gro "syrup" products to its primary distributor, which in turnproduces finished products for sale to its customers. On a per gallon basis, the saleprices of the Gold’n Gro "syrup" products are less than that of thefinished Gold’n Gro products. Consequently, while sales dollars declined compared tothe prior year quarter, sales gallons increased by 23% for the Company and 121% forcombined Company and distributor sales gallons. This strategy is intended to create abroad customer base, which is now producing accelerated growth in sales dollars.Photobyproduct recycling revenue for the quarter increased by 28% on an increased volumeof 47%, compared to the third quarter of 2000. Growth rates in photobyproduct servicerevenue are limited by the growth rate of fertilizer sales. Silver/gold sales increased$11,800 from the third quarter of 2000, an increase of 43%. This increase reflects $23,400in gold sales under the processing agreement with Golden Phoenix Minerals, Inc. Cost ofsales increased $34,000 due primarily to increases in direct materials costs of $31,900related to increased sales. These factors resulted in a gross loss of $87,200 for thethird quarter of 2001, compared to a gross loss of $66,000 for the third quarter of 2000,an increased loss of 32%. 

10

Segment operating expenses decreased approximately $244,100 from thethird quarter of 2000, due to decreases of $179,800 in sales and marketing, $53,500 inplant start-up costs, and $27,700 in general and administrative costs, which werepartially offset by an increase in depreciation of $16,200. The decrease in sales andmarketing expenses reflects reduced corporate marketing and reduced costs for developmentof Gold’n Gro fertilizer product labels and advertising campaigns for Gold’n Grofertilizer products and the "Silver Nevada Miner" silver bars. 

These factors resulted in a 2001 third quarter segment operating lossof $609,100, compared to a loss of $831,900 for the third quarter of 2000, a decreasedoperating loss of $222,900, or 27%.

For the first nine months of 2001 sales were $501,900 compared to$331,900 for the prior year nine months, an increase of 51%. Operating loss for the ninemonth period was $2,096,800, compared to $2,336,800 for the comparable 2000 period, areduced loss of 10%. The primary factor contributing to the reduced loss was decreasedsales and marketing costs as discussed above.

 

    MINING TECHNICAL SERVICES

This segment, known as Whitney & Whitney, Inc., provides mining andmaterials management, geology, engineering and economics consulting, and publishesspecialized mineral economics and materials financial reports. It employs technicalspecialists with expertise in the areas of mining, geology, mining engineering, mineraleconomics, materials processing and technology development. Technical services have beenprovided to many of the leading U.S. and foreign mining companies, several publicutilities with mineral interests, to various state agencies, the U.S. and foreigngovernments, and the United Nations and the World Bank.

Three Months Ended Sept 30,
Nine Months Ended Sept 30,
2001
2000
2001
2000Sales revenue 
$ 148,418
$ 205,178
$ 418,150
$ 532,962Operating income (loss) 
$(67,121)
$(93,780)
$(182,463)
$(295,912)
Mining technical services revenue was approximately $148,400 for thequarter ended September 30, 2001, compared to $205,200 for the comparable quarter of 2000,a decrease of 28%. The sales decrease includes decreased pass-through revenues of $46,000from ongoing technical services projects. Cost of sales decreased by $58,000, due todecreases of $46,000 in pass-through costs and $9,600 in payroll and outside consultantfees. These factors resulted in a gross profit for the segment of $23,000, compared to$21,700 for the prior year quarter, an increase of 6%.

Segment operating expenses decreased by $25,400 due primarily to adecrease of $25,300 in sales and marketing costs, which reflects the segment’sallocable portion of reduced corporate marketing costs.

The combination of these factors resulted in a 2001 third quartersegment operating loss of $67,100, compared to a loss of $93,800 for the third quarter of2000, a decreased operating loss of $26,700, or 28%. 

For the first nine months of 2001, segment revenue totaled $418,200compared to $533,000 for the first nine months of 2000, a decrease of 22%. Operating lossfor the period was $182,500 compared to an operating loss of $295,900 for the comparable2000 period, a reduction of 38%. The primary factors contributing to the improvement wereincreased technical service fees as a percentage of total revenue and reduced expendituresfor sales and marketing costs.

11

    SUMMARY

On a consolidated basis, the various changes in revenues and operatingexpenses resulted in a third quarter 2001 operating loss of $676,200, compared to $925,700for the third quarter of 2000, a decreased loss of $249,500, or 27%. For the nine monthperiod ended September 30, 2001 the operating loss was $2,279,200 compared to $2,632,700for the prior year comparable period, a reduction of 13%.

 

II. Changes in Financial Condition; Capitalization

Cash amounted to $4,624 as of September 30, 2001, compared to $341,134as of September 30, 2000. Net cash used for operating activities was approximately$1,435,500 for the first nine months of 2001. The cash used for operating activitiesduring the nine month period was financed by a combination of sales of common stock of$242,000 under the Swartz Private Equity, LLC. (Swartz) agreement, $50,000 in warrantexercises, $192,300 in lease financing, $514,200 from mortgage financing on the Reno/Steadmanufacturing facility, $642,000 from the Private Placement of 12% convertible promissorynotes, and $55,500 in short term advances from stockholders. A total of $66,800 wasinvested in property and equipment during the period, primarily for design costs forexpansion of the manufacturing facility. During the nine months ended September 30, 2001,the Company’s subsidiary, Whitney & Whitney, Inc., accepted restricted commonstock from Golden Phoenix Minerals, Inc. (GPXM) in the amount of $75,700 in payment forprofessional services. During the third quarter 2001 the market value of all GPXM sharesheld was decreased by $97,900. At September 30, 2001 the Company owned approximately 2.6million GPXM shares which are valued at $5,600 over the Company’s cost.

Total assets decreased during the nine months ended September 30, 2001by approximately $92,700 to $4,516,800. Current assets decreased approximately $157,800due to decreases in stock subscription receivable of $82,000 and prepaid expenses of$69,400. 

Current liabilities increased by approximately $508,900 and totalliabilities increased by $1,836,100. The increase in total liabilities is due to a netincrease of $80,300 in capital lease obligations due to lease financing of equipment,$652,000 in 12% Convertible Promissory Notes, $224,500 in accrued interest on theConvertible Promissory Notes, $550,000 in financing on the manufacturing facility, accruedmanagement salaries of $79,700, and accrued expenses and interest of $215,300, which waspartially offset by a decrease in accounts payable of $13,000. The primary components ofthe increase in current liabilities are an increase of $236,900 in current maturities oflong-term debt and capital lease obligations and related accrued interest, $85,100 inaccrued management salaries, $135,300 in accrued expenses, and $55,500 in short termadvances from stockholders.

 

III. Working Capital/Liquidity

During the nine months ended September 30, 2001, working capitaldecreased by approximately $666,600 to a deficit balance of $932,000. Management hascontinued the Company's ongoing program of reducing cash outlays through payment ofconsulting and other labor services with common shares, and during the nine months endedSeptember 30, 2001, approximately $452,200 in various expenses were paid in this manner.In addition, a private placement of 12% convertible promissory notes was begun during thefirst quarter, with a total of $642,000 received through September 30, 2001. Also,$242,000 was received under the Swartz agreement, $50,000 was received from the exerciseof warrants, $706,500 was received from the building and equipment financing, and $55,500was received from short-term advances from stockholders.

12

As noted, there is presently a working capital deficit of $932,000. Dueto the decline of the Company’s share price, much of the funding anticipated underthe Swartz agreement has not been available, and some warrants have not been exercised.The Company has had limited cash liquidity since the third quarter of 2000 and hasmaintained its operating obligations through the financing described above. The privateplacement of convertible notes has continued, with $580,000 received since September 30 todate, and $54,900 has been received under the Swartz equity line.

The Company’s present cash operating requirements areapproximately $600,000 per quarter. This is expected to continue through the first quarterof 2002 when increased fertilizer sales will begin to produce substantial cash flow. TheCompany is now working on completion of its Phase I funding program to raise $2.2 millionfrom 12% Convertible Promissory Notes, of which just under $600,000 has been receivedsubsequent to September 30, 2001. Phase I funding includes $2.2 million for operatingloss/working capital needs and $600,000 for material handling and truck loading equipment.It is anticipated that the majority of the Phase I equipment will be lease financed. Theprivate placement of convertible notes is in tranches of $500,000, with the conversionprice of the notes to be reviewed after each tranche is funded. Deteriorating financialmarket and economic conditions have made this financing more difficult, and therefore thescope of the financing effort has been expanded.

In addition, Phase II funding, which includes installation of bulktankage, upgrading the tank truck loading and unloading facility, and inventory/receivablefinancing will be required at a future date, at an estimated cost of $2.5 million.

Actions being taken to accelerate Gold’n Gro fertilizer sales are explained in theNew Developments section below.

 

IV. New Developments

During the second quarter of 2001, the Company’s Gold’n Grofertilizer marketing effort was focused on the Company’s two new salesrepresentatives teaming with our distribution network to present product demonstrations tofertilizer customers and to assist in field trials on various crops. On-going field trialsof Gold’n Gro fertilizer products continue to show significant improvements in cropproduction and quality. The trials are providing agronomic data that is being used todevelop Gold’n Gro nutrition programs for the crops being tested. This year fieldtrials have been 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 productswill provide both agronomic and economic benefits in the "specialtyagricultural" markets. Specialty agriculture includes vegetables, cut flowers, herbsand spices, and fruits and nuts of all types. These crops are relatively high valuecompared to field grains such as corn, wheat, and soybeans. Alfalfa is typicallyconsidered as a "hay" or "forage" crop and is generally of low tointermediate value when compared to specialty agricultural crops, however, high nutrientcontent alfalfa for the dairy market often commands a significant price premium which putsit at the low end of specialty agricultural crop values.

Most of the field trials in the alfalfa market have now been completed.Measured increases in production have ranged from 17 percent to 100 percent. TheGold’n Gro fertilizer increases both output and quality on alfalfa that is alreadybeing fertilized by the grower, with greater increases on fields that are not fertilizedor sparingly fertilized. Although this market is very large, the value of the product inrelation to the increase in output is lower than on most of the other crops beingevaluated. Because of mixed fertilizer usage habits by the various alfalfa farmers, andbecause of relatively low crop value, the Company is concentrating its sales efforts andon-going customer development efforts on the higher value crops that have been identified.

The fertilizer industry is in a contraction which appears to beaccelerating. The specialty agriculture markets which had held up well are now decliningrapidly. A significant contributing factor is believed to be the more than 30 percentappreciation of the dollar against most other currencies which has occurred since

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the first of this year. Currency valuations are now grossly distortedwhen compared to intrinsic values of goods being traded. For example, oranges are beingshipped into the western United States from Australia and are being sold in Californiastores at prices that are lower than locally grown oranges. The prices are lower than thelocal growers’ cost of production. Based on transportation distances alone, thisshould not be possible. This reversal in the distribution of agricultural food products isaffecting all segments of the California specialty agriculture markets. Californiaaccounts for more than 51 percent of the specialty agriculture for the United States andso it can be assumed that these factors are affecting the rest of the United States aswell. 

The California markets are also being impacted by greatly increasedenergy costs which are now being passed through to the consumers. While this impact issignificant, it is much smaller than the impact of inequitable currency valuations. OnlyCongress and the Federal Government through the U.S. Treasury Department can address theissue of inequitable currency valuations. It is clear that the problems facing basic U.S.industry will not be remedied until this issue is properly addressed and corrections made.

The Company is working with its distributors on an on-going basis toidentify and implement sales development programs that will increase the rate of marketpenetration with the Gold’n Gro products. A much greater understanding of the detailsof the market 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. 

Field trials performed in association with our distributors have led tothe development of applications that are expected to be profitable for the growercustomers. In addition, potential for making some special blends with thedistributor’s highest volume products has been identified. These blends will enhanceexisting fertilization programs to provide the agronomic benefits of the Gold’n Groproducts without significantly changing standard grower fertilization practices. Work isproceeding with the development and introduction of these blends to the distributionnetwork. Use of these blends will further expand the sales of Gold’n Gro products andis expected to accelerate the acceptance of the Gold’n Gro products in the market.

During the first quarter, the need for two "chloride free"products was identified as a result of suggestions from WFS and from prospectivecustomers. Development was initiated in the first quarter, with a new chloride free"plant starter" product for the nursery, greenhouse, and vegetable markets, anda new chloride free "general purpose" product for the nursery, greenhouse, andgolf course markets being readied for introduction during the second quarter of 2001.During the second quarter field trials were initiated with two nursery operations.Positive results are being obtained and commercial use began late in the third quarter.

In the second quarter a need for two additional micro-nutrient productswas identified by our distributor network. Product development was initiated and in earlyAugust prototype formulations were delivered to our distributors for evaluation. Thisproject produced 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 18 Gold’n Gro products that are either being used orbeing evaluated for use. Additional to this are 36 special blends that have been developedand which are now being introduced to the distribution network.

Field test results using Gold’n Gro products have been publishedfor Alfalfa, Fresh Plums, Oranges, Sweet Corn, and Watermelons. The field test results andcrop value statistics are summarized in the following table. On a national basis, theGold’n Gro products appear to have the potential to add 10’s of millions ofdollars in increased value and output for the indicated crops.

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**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
In the first quarter report we stated that we would have some resultsto publish for the first few months of a 3 year field trial on valencia orange trees beingcarried out with oversight from a major university in southern California. The trial iscontinuing and it appears that the 35 year old trees are responding positively to thefertilization. 

The field trials have now demonstrated two major and very importantpoints: (1) the Gold’n Gro fertilizer products can be used on a wide range of fieldand tree crops(at the outset of these trials this was not known), and (2) relatively smalland economical amounts of Gold’n Gro products can be used as a supplement to thegrowers standard fertilizer program to achieve improvements in output and quality of thefield or tree crop. 

The Gold’n Gro chelated liquid fertilizer products are uniquehybrid products when compared to standard fertilizers. They are a hybrid because theycombine the major nutrients, Nitrogen(N) Phosphate(P) and Potassium(K), with Calcium(Ca),Magnesium(Mg), and Sulfur (S) and micro-nutrients including Boron(B), Iron(Fe),Manganese(Mn), and Zinc(Zn). The products are unique because all of these nutrientelements are in stable liquid solution in the Gold’n Gro mixes. Plants require 20essential elements for their nutrition. Carbon and Oxygen are supplied by the air. TheGold’n Gro products supply 10 of the 20 essential elements. In addition, theGold’n Gro products have a relatively high level of chelation due to their derivationfrom used photoliquids. The chelation facilitates the transportation of the nutrients inthe soil to the plant roots. Because of the method of processing the base photo liquidsused in the Gold’n Gro formulas, they are essentially toxic metal free when comparedto standard fertilizer blends. Distilled water is used to prepare all of the Gold’nGro formulations. The absence of toxic metals and the cleanliness of the formulations isbelieved to be an important contributor to the positive growth responses being observed.Itronics believes that these are reasons why the Gold’n Gro products work better thanthe simple NPK formulations in standard use.

Because the Gold’n Gro fertilizers are more effective, it has beennecessary to determine through the use of field trials how much to put on a given crop toobtain a satisfactory growth response. This is a primary reason for the extensive fieldtrials which have been on-going for a number of years. The field trials are demonstratingthat quantities of Gold’n Gro as small as a pint per acre are producing a positivegrowth response on certain field crops. If this "effectiveness" continues to bedemonstrated, then it will become possible to economically fertilize virtually any type offield and tree crop with Gold’n Gro products.

Fall crop fertilization is now underway and we are shipping Gold’nGro products for use in these programs. Due to December/January holidays and typicalstormy winter weather, it is expected that a sharp drop in sales will occur frommid-December until mid-January. Gold’n Gro sales are expected to continue to increaseat relatively high rates through 2002.

Late in the third quarter of 2000 Whitney & Whitney, Inc. (WWI)signed a Pilot Program Contract (Contract) with a major generator of a material that maybe usable as a raw material for the recycling program operated

15

by Itronics Metallurgical, Inc. (IMI). The purpose of the Contract wasto evaluate whether the material is suitable for use in Gold’n Gro fertilizerproducts. Both parties have agreed that if the work is successful they will work togetherto develop and implement a plan for marketing the fertilizer products. WWI completed theContract early in the second quarter and recommended that the evaluation program becontinued for another year. The generator is still evaluating WWI’s proposal. WWI isalso evaluating the results and is investigating the potential for speeding up thedevelopment program.

During the third quarter the Company continued to be offered theopportunity to explore the feasibility of recycling other non-photographic materials intofertilizer. Four waste streams are currently being considered for future recycling and oneof these is a high silver content waste stream. 

The Company has concluded that certain acid waste streams generated byaerospace and electronics manufacturers may be able to be converted to a form that willfit "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. It is anticipated that an order for one or more distillation machines could bereceived prior to year end if the program is implemented. This program would be continuedand expanded in 2002. 

Early in the third quarter the Company was informed by a "SociallyResponsible Investing" mutual fund manager that Itronics had been given a"B" rating and that Itronics would be recommended to the mutual fundmanager’s investors and to other "Socially Responsible Investing" forumsand groups. This represents one of the first independent recommendations of the Company bya mutual fund manager. 

Also, early in the fourth quarter a public hedge fund made aninvestment in Itronics’ private placement of convertible notes. This is the secondknown investment by a public hedge fund in Itronics. The fact that Itronics is showing upon the radar screens of some of the mutual funds and hedge funds is a positive indicationthat Itronics is beginning to be recognized as a viable investment by fund managers. 
V. Forward-Looking Statements

The statements in this Form 10-QSB that are not historical facts orstatements of current status are forward-looking statements (as defined in the PrivateSecurities Litigation Reform Act of 1995) that involve risks and uncertainties. Actualresults may differ materially.

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PART II- OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

(c) Recent Sales of Unregistered Securities:

Following is a summary of sales of unregistered securities for thethree months ended September 30, 2001. All securities were issued as restricted commonshares which are subject to Rule 144 of the Securities and Exchange Commission. Generally,Rule 144 requires shareholders to hold the shares for a minimum of one year before sale.In addition, officers, directors and more than 10% shareholders are further restricted intheir ability to sell such shares. There have been no underwriters of these securities andno underwriting commissions or discounts have been paid.
 
Shares
Value 
Issued
ReceivedLabor services of    management, directors and consultants
12,500
$ 12,066
The above transactions qualified for exemption from registration underSections 3(b) or 4(2) of the Securities Act of 1933. Private placements for cash werenon-public transactions. The Company believes that all such investors are eitheraccredited or, either alone or with their purchaser representative, have such knowledgeand experience in financial and business matters that they are capable of evaluating themerits and risks of the prospective investment.

 

Item 6. Exhibits and Reports on Form 8-K

None

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

                                                        ITRONICSINC.

 

DATED: November 12, 2001                               By:/S/JOHN W. WHITNEY
                                                           JohnW. Whitney 

                                                           President,Treasurer and Director

                                                           (PrincipalExecutive Officer)

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

 

DATED: November 12, 2001                               By:/S/JOHN W. WHITNEY

                                                           JohnW. Whitney

                                                           President,Treasurer and Director

                                                           (PrincipalExecutive Officer)

 

DATED: November 12, 2001                               By:/S/MICHAEL C. HORSLEY

                                                           MichaelC. Horsley

                                                           Controller

                                                           (PrincipalAccounting Officer)

 

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