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 THE SECURITIES 

    EXCHANGE ACT OF 1934

**                                       For the quarterly period ended March 31, 2002**
( ) 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 CORPORATEISSUERS

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

          As of April 30, 2002, 82,783,512shares 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 – March 31, 2002 and December 31, 2001    
4Condensed Consolidated    Statements of Operations and Comprehensive Income  for the Three Months    Ended March 31, 2002 and 2001.
6Condensed Consolidated    Statements of Cash Flows for the Three Months Ended  March 31, 2002 and    2001. 
7Notes to Condensed    Consolidated Financial Statements 
8Item 2. Management's    Discussion and Analysis or Plan of Operation
10PART II- OTHER INFORMATIONItem 2. Changes in    Securities and Use of Proceeds 
16Item 3. Defaults Upon    Senior Securities 
16Item 6. Exhibits and    Reports on Form 8-K 
16
3

PART I - FINANCIAL INFORMATIONON

Item 1. Financial Statements

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2002 AND DECEMBER 31, 2001

(UNAUDITED)

 

ASSETS
 
MARCH 31,
DECEMBER    31, 
2002
2001CURRENT ASSETS   Cash 
$ 262,958
$ 14,675Accounts receivable, less    allowance for    doubtful accounts,    2002, $7,400; 2001, $7,400
246,718
166,976Account receivable, other 
2,168
-Marketable securities
116,755
-Inventories
348,360
318,595Prepaid expenses
203,427
100,797Current portion of deferred    loan fees
46,225
46,225Total Current Assets
1,226,611
647,268   PROPERTY AND EQUIPMENT   Land 
215,000
215,000Building and improvements
1,046,298
1,046,298Design and construction in    progress, manufacturing facility
91,301
86,884Leasehold improvements
900
900Equipment and furniture 
1,618,578
1,585,995Vehicles 
133,028
133,028Equipment under capital    lease 
1,074,548
971,888 
4,179,653
4,039,993Less: Accumulated    depreciation and amortization
861,066
794,750 
3,318,587
3,245,243OTHER ASSETS   Intangibles, net of    amortization 
154,118
166,082Marketable securities,    available for sale 
406,076
313,849Deferred loan fees, less    current portion, net of    amortization 
126,612
138,171Investment in American Gold    & Silver Ltd. 
9,250
9,250Deposits
39,938
38,397 
735,994
665,749 
$5,281,192
$4,558,260
4

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
MARCH 31,
DECEMBER    31, 
2002
2001CURRENT LIABILITIES   Accounts payable 
$ 494,395
$ 516,312Accrued management salaries    
159,831
83,329Accrued expenses 
376,478
319,691Insurance contracts payable    
39,011
30,799Interest payable 
78,309
74,097Current maturities of    long-term debt 
38,500
38,255Current maturities of    capital lease obligations 
730,236
426,744Current maturities of    advances from stockholders
224,322
25,222Current maturities of    convertible notes and accrued interest
3,188,646
25,438Other 
18,463
18,463Total Current Liabilities 
5,348,191
1,558,350   LONG-TERM LIABILITIES  Long-term debt, less    current maturities 
591,569
599,472Convertible promissory    notes 
1,856,529
3,890,029Accrued interest,    convertible notes
104,275
540,444Capital lease obligations,    less current maturities
593,524
882,485Accrued salary due    stockholder
13,254
15,054Deferred gain, less current    maturities
10,965
13,548Total Long-Term Liabilities    
3,170,116
5,941,032 
8,518,307
7,499,382   STOCKHOLDERS' EQUITY    (DEFICIT)  Preferred stock, par value    $0.001 per share;    authorized 999,500    shares, issued and outstanding    2002, 0 shares;    2001, 0 shares 
-
-Common stock, par value    $0.001 per share;    authorized    250,000,000 shares, issued and outstanding,    82,337,727 at March    31, 2002; 80,999,392 at     December 31, 2001
82,338
80,999Additional paid-in capital 
11,143,649
10,829,459Accumulated deficit 
(14,960,125)
(14,062,234)Common stock to be issued 
192,193
152,960Accumulated other    comprehensive income (loss) 
207,673
(27,403)Common stock options    outstanding, net 
97,157
85,097 
(3,237,115)
(2,941,122) 
$5,281,192
$4,558,260   
See Notes to Condensed Consolidated Financial Statements

5

 

ITRONICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001

(UNAUDITED)
 
2002
2001REVENUES  Fertilizer 
$ 111,910
$ 23,249Photobyproduct recycling 
57,220
48,246Silver and gold 
30,642
136,093Mining technical services 
68,863
150,631   Total Revenues    
268,635
358,219COST OF SALES 
338,549
411,674   Gross Profit    (Loss) 
(69,914)
(53,455)   OPERATING EXPENSES  Depreciation and    amortization 
91,291
79,794Research and development 
14,922
13,150Sales and marketing 
260,078
395,850Delivery and warehousing
8,781
1,699General and administrative 
258,652
278,775   Total    Operating Expenses 
633,724
769,268   Operating    (Loss) 
(703,638)
(822,723)OTHER INCOME (EXPENSE)  Interest expense 
(195,720)
(126,662)Interest income 
3
641Other
1,463
-   Total Other    Income (Expense) 
(194,254)
(126,021)(Loss) before provision for    income tax 
(897,892)
(948,744)Provision for income tax 
-
-   Net    Income(Loss) 
(897,892)
(948,744)Other comprehensive income    (loss)  Unrealized gains (losses)    on securities, net 
235,076
(10,202)Comprehensive Income (Loss)    
$(662,816)
$(958,946)   Weighted average number of    shares     Outstanding    (1,000’s)
81,697
76,246Earnings (Loss) per share 
$(0.0110)
$(0.0124)   
See Notes to Condensed Consolidated Financial Statements

6

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001

(UNAUDITED)
 
2002
2001Cash flows from operating    activities   Net income (loss) 
$    (897,892)
$    (948,744)Adjustments to reconcile    net loss to 
cash used by operating activities:    Depreciation and    amortization 
91,291
79,794  Interest on    convertible notes
113,890
63,930  Marketable    securities received for services
(14,164)
(15,000)  (Gain) Loss on    investments
(1,463)
-  Stock option    compensation 
12,060
15,276  Expenses paid with    issuance of common stock:          Consulting expenses 
117,113
121,875       Directors fees 
2,400
2,130    Salaries    
67,009
26,019    Interest
2,700
-  (Increase) decrease    in:      Trade    accounts receivable 
(79,742)
26,910       Inventories 
(29,765)
43,830    Prepaid    expenses 
(17,098)
(10,029)    Deposits
(1,541)
(3,435)  Increase (decrease)    in:      Accounts    payable 
16,023
77,403    Accrued    expenses and contracts payable 
139,701
98,220    Accrued    interest
4,212
20,885         Net cash used by operating activities 
(475,266)
(400,936)   Cash flows from investing    activities:    Acquisition of    property and equipment 
(46,627)
(43,602)  Acquisition of    intangibles and investments 
-
(575)  Proceeds from sale    of investments
32,214
-    Net cash    used by investing activities 
(14,413)
(44,177)   Cash flows from financing    activities:    Proceeds from sale    of stock 
10,000
194,700  Proceeds from    long-term debt, stockholders
212,545
-  Proceeds from    long-term debt, unrelated
614,500
302,282  Payments on    long-term debt, stockholders 
(400)
-  Payments on    long-term debt, unrelated
(98,683)
(50,618)Net cash provided by    financing activities 
737,962
446,364    Net    increase (decrease) in cash 
248,283
1,251Cash, beginning of period 
14,675
17,990Cash, end of period 
$ 262,958
$ 19,241
See Notes to Condensed Consolidated Financial Statements

7

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2002

(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 generally accepted accountingprinciples. Therefore, these financial statements should be read in conjunction with theconsolidated financial statements and related footnotes included in the Company's Form10-KSB for the year ended December 31, 2001. 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 months ended March 31, 2002are not necessarily indicative of the results to be expected for the full year.

3.A Private Placement of 12% Convertible Notes is ongoing and$614,500 was raised during the quarter. The notes are due in three years. Interest iscompounded annually and payable at maturity, or, at the option of the note holder, can bepaid annually in stock. The notes and accrued interest are convertible, at any time duringthe three year period, into the Company’s restricted Common Stock, at $0.15 to $0.25per share. The Company may call the notes prior to the due date and, in that event, thenote holder has 30 days to decide whether to convert the note and accrued interest intostock. Subsequent to March 31, 2002 an additional $161,100 has been raised from thePrivate Placement. 
New lease financing on equipment during the first quarter amounted toapproximately $112,000. 

An officer/stockholder loaned Whitney & Whitney, Inc. (WWI)$125,000, and in addition loaned WWI 600,000 shares of Golden Phoenix Minerals, Inc.(GPXM) stock which were sold for $83,045. Subsequently, WWI repaid 416,463 of the GPXMshares out of shares owned by it. 

4. As of March 31, 2002 lease payments totaling $108,591 were inarrears. Of this amount, $43,010 remains unpaid as of the date of this report. As requiredby Generally Accepted Accounting Principles, the principal balance of the leases that arenot paid through March 31, 2002, a total of $270,831, has been classified as a currentliability. This amount would otherwise be classified as long term debt. As of the date ofthis report, lease payments totaling $110,162 are in arrears. The Company is in regularcommunication with the lessors to avoid action that may be adverse to the Company.

5. Following are the components of Other Comprehensive Income:

Three Months Ended
March 31, 2002
March 31, 2001
Unrealized holding gains (losses) arising during the        period
$ 237,133
$ (10,202)
Less: reclassification adjustment
(2,057)
-
Other Comprehensive Income
$ 235,076
$ (10,202)
 

6. Following is financial information for each of the Company’ssegments. No changes have occurred in the basis of segmentation since December 31, 2001.

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

8

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2002

(UNAUDITED)
 
Three    Months Ended
Three    Months Ended 
March    31, 2002
March    31, 2001Revenues:  Photobyproduct Fertilizer 
$ 199,772
$ 207,588Mining Technical Services 
68,863
150,631  Consolidated    Revenues 
$268,635
$ 358,219   Operating Income (Loss):  Photobyproduct Fertilizer 
$(615,169)
$(770,233)Mining Technical Services 
(88,469)
(52,490)  Consolidated    Operating Income (Loss)
(703,638)
(822,723)Other Income (Expense)
(194,254)
(126,021)Consolidated Net Income    (Loss) before taxes$(897,892)$(948,744) 
 
 
Identifiable assets by business segment for the major assetclassifications and reconciliation to total consolidated assets:
 
March 31,
December    31, 
2002
2001Current Assets:  Photobyproduct Fertilizer 
$ 505,884
$ 449,996Mining Technical Services 
401,241
145,474 
907,125
595,470Property and Equipment,    net:  Photobyproduct Fertilizer 
3,040,777
2,948,854Mining Technical Services 
272,237
290,387 
3,313,014
3,239,241Other Assets, net:  Photobyproduct Fertilizer 
142,356
150,139Mining Technical Services 
2,110,960
2,095,916 
2,253,316
2,246,055Total Assets:   Photobyproduct Fertilizer 
3,689,017
3,548,989Mining Technical Services 
2,784,438
2,531,777  Total Segment Assets    
6,473,455
6,080,766Itronics Inc. assets 
17,044,513
16,278,194Less: inter-company    elimination 
(18,236,776)
(17,800,700)  Consolidated Assets 
$5,281,192
$4,558,260
9

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

I. Results of Operations

The Company reported consolidated revenues of $268,635 for the quarterended March 31, 2002, compared to $358,219 for the prior year quarter, a decrease of 25%.The decline was due to a decline in mining technical services revenue. This declinereflects the ongoing revenue shift from the technical services segment to thephotobyproduct fertilizer segment. The consolidated net loss was $897,892, or $0.0110 pershare, for the quarter ended March 31, 2002, compared to a net loss of $948,744 or $0.0124per share for the comparable 2001 period. The primary factor contributing to the reducedloss for the quarter was reduced operating expenses of $135,544, which was partiallyoffset by increased interest expense of $69,058 due to increased borrowing on theConvertible Note Private Placement.

To provide a more complete understanding of the factors contributing tothe changes in sales, operating expenses and the resultant operating loss, the discussionpresented 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 under the Gold’n Gro trademark which are being introduced into the marketsin California, Nevada, Oregon, and Hawaii. Revenues are generated from fertilizer sales,silver sales, and photobyproduct management services (transportation and processing fees).

 

Three Months Ended March 31,
2002
2001Sales revenue 
$      199,772
$      207,588Operating income (loss)
$(615,169)
$(770,233)
 

Total segment sales for the first quarter of 2002 were $199,800,compared to $207,600 for the prior year quarter, a decrease of 4%. Fertilizer sales forthe quarter were $111,900, compared to $23,200 for the 2001 first quarter, an increase of381%. The fertilizer sales increase is due to bulk sales of the Gold’n Gro Zincmicro-nutrient product that was introduced in the third quarter of 2001. Sales to the turfand ornamental market are also increasing. Photobyproduct recycling revenue for thequarter increased by $9,000, or 19%, on an increased volume of 9%, compared to the firstquarter of 2001. Silver/gold sales decreased $105,500 from the first quarter of 2001, adecrease of 77%. The decrease reflects the prior year sale of $56,600 in gold under theprocessing agreement with GPXM and $65,100 in silver sales from melting down blemished"Silver Nevada Miner" bars. Such sales did not occur in the current quarter.GPXM, with the assistance of WWI, has made arrangements to sell its gold directly to alarge refiner at a lower net cost of refining and transportation than the Company canprovide. Consequently, future gold sales under the agreement with GPXM are expected to belimited to circumstances where the Company’s specialized refining technology can beused to enhance the purity of GPXM’s gold bearing material. Cost of sales decreased$28,100 due to a decrease in direct materials costs of $48,800 related to decreasedsilver/gold sales, which was partially offset by increases of $11,400 in payroll andrelated costs and $6,900 in utilities. These factors resulted in a gross loss of $76,000for the first quarter of 2002, compared to a gross loss of $96,300 for the first quarterof 2001, an improvement of $20,300. Delivery and warehousing costs will becomeincreasingly significant cost items as fertilizer sales expand. Consequently, the Company,in accordance with standard industry practice, has begun to report these costs as aseparate line item in operating expenses. Previously, such costs were included in cost ofsales. For the current quarter, delivery costs were $8,800, compared to $1,700 for theprior year first quarter.

10

Segment operating expenses decreased approximately $134,800 from thefirst quarter of 2001, due to decreases of $131,400 in sales and marketing and $22,800 ingeneral and administration, which were partially offset by increases of $10,500 indepreciation and $7,100 in delivery costs. The reduction in sales and marketing expensesreflects a shift in marketing focus to a heavier emphasis on fertilizer marketing and areduction in corporate marketing. 

These factors resulted in a 2002 first quarter segment operating lossof $615,200, compared to a loss of $770,200 for the first quarter of 2001, a decreasedoperating loss of $155,100.

 

  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 March 31,
2002
2001Sales revenue
$ 68,863
$ 150,631Operating income (loss)
$(88,469)
$(52,490)
 

Mining technical services revenue was $68,900 for the quarter endedMarch 31, 2002, compared to $150,600 for the comparable quarter of 2001, a decrease of$81,800, or 54%. The revenue decrease reflects the decision by one of the Company’sprimary clients to focus on selling, rather than developing, its Nevada mining property.Services to the client are limited primarily to locating a buyer for the property. Inprior years, the Company actively managed the property for the purpose of accumulating theinformation necessary to present the property to major mining companies. Such work is nowsubstantially complete. Cost of sales decreased by $45,000, due primarily to a decrease of$41,200 in payroll and outside consulting costs due to the decreased work load. Thesefactors resulted in a gross profit for the segment of $6,100 compared to $42,900 for theprior year first quarter, a decrease of $36,700.

Segment operating expenses decreased nominally.

The combination of these factors resulted in a 2002 first quartersegment operating loss of $88,500, compared to a loss of $52,500 for the first quarter of2001, an increased operating loss of $36,000. 

In recent weeks the gold price has climbed above $300 per ounce and has remained there.It appears that the bottom of the gold market may have been reached in 2001. The industryhas recently seen a number of gold project financings, which signals increasing activityin the industry. This may translate into additional technical service projects in thelatter half of this year and going forward to next year. Also, the improved gold price isimportant to the Company’s investment in GPXM as both its prospects for financing theMineral Ridge Mine and the profitability of the Mine are enhanced with an improved goldmarket. The Company recently reached agreement on a three year extension of its technicalservices contract with GPXM. 

11

SUMMARY

On a consolidated basis, the various changes in revenues and operatingexpenses resulted in a first quarter decreased operating loss of $119,100.

 

II. Changes in Financial Condition; Capitalization

Cash amounted to $262,958 as of March 31, 2002, compared to $19,241 asof March 31, 2001. Net cash used for operating activities was approximately $475,300 forthe first three months of 2002. The cash used for operating activities during the periodwas financed by a combination of $10,000 in warrant exercises, $212,600 in loans from anofficer/stockholder, and $614,500 from the Private Placement of 12% convertible promissorynotes. A total of $46,600 was invested in property and equipment during the period,primarily for manufacturing equipment. 

Total assets increased during the three months ended March 31, 2002 byapproximately $722,900 to $5,281,200. Current assets increased approximately $579,300 dueto increases in cash of $248,300, accounts receivable of $79,700, marketable securities of$116,800, inventory of $29,800, and prepaid expenses of $102,600. Total property andequipment increased $139,700, which includes lease financed equipment of $112,000. Otherassets increased by $70,200 due to a $209,000 increase in the value of the Company’sinvestment in GPXM stock, of which $116,800 is classified in current assets. The netincrease in value of GPXM stock was partially offset by amortization of various intangibleassets. At March 31, 2002 the Company owned 2.752 million shares of GPXM with a value of$522,800. During the quarter the Company sold 803,000 GPXM shares, with total net proceedsof $117,400, to assist with the Company’s cash operating requirements.

Current liabilities increased by approximately $3,789,800 and totalliabilities increased by $1,018,900. Total liabilities increased due to new privateplacements of $614,500 in Convertible Promissory Notes, $199,100 in advances fromstockholders, $107,000 in accrued interest on the Convertible Promissory Notes, and$145,700 in various other current liabilities. Current liabilities increased due toreclassification of convertible notes and accrued interest totaling $3,163,200,reclassification of $270,800 of capital lease obligations, net advances of $199,100 fromofficer/stockholders, $76,500 in accrued management salaries, and $56,800 in accruedexpenses. 

 

III. Working Capital/Liquidity

During the three months ended March 31, 2002, working capital decreasedby approximately $3,210,500 to a deficit balance of $4,121,600. $3,163,200 of the reducedworking capital is due to the reclassification of convertible notes payable and accruedinterest that became due within twelve months of March 31, 2002 during the currentquarter. Notes maturing in early 2003 have conversion prices ranging from $.50 to $1.18,and there is a possibility that the market price at the time the note matures will be alesser amount. In order to conserve cash, note holders may be offered a lower conversionprice and/or a higher interest rate, as an inducement to extend the term of their Note.The Company has hadlimited cash liquidity since the third quarter of 2000, which is reflected in the increasein current liabilities.The Company has sought and obtained the funding describedabove, which has not been sufficient to maintain all obligations on a current basis.However, cash liquidity is being managed and the Company has been able to make sufficientpayments to keep all significant creditors working with it.The cash shortage is a result of twofactors. First, fertilizer sales in 2001 did not expand to the extent anticipated, sooperating losses were not reduced as much as expected. Second, the $15 million equity lineof credit agreement with Swartz Private Equities, LLC (Swartz) has not been availablesince October 2001 due to a Securities and Exchange Commission rule change thatnecessitated renegotiating the contract with Swartz and filing a new registrationstatement which has been filed and became effective on April 30, 2002. Significant termsto the amended contract include the elimination of future warrants to be granted Swartzupon the exercise of the Company’s put rights, extending
12

the term of the agreement to February 27, 2004, eliminating the sixmonth minimum commitment fee and the right of first refusal on capital raisingtransactions, and the easing of restrictive covenants on such transactions. With therebound in the stock price since the first of the year, it is anticipated that much moresignificant funding will be received under this agreement than was received in 2001.However, the Swartz equity funding may not be sufficient to meet the Company’sworking capital needs, so it is anticipated that the private placement of convertiblepromissory notes will continue. 

As noted above, current assets increased approximately $462,600 duringthe quarter. The increase in two components, accounts receivable and inventory, is adirect result of increasing fertilizer sales. As the late spring and early summer seasonapproaches, it is anticipated that fertilizer sales will continue to expand rapidly, whichwill result in increasing receivables and inventory. As can be seen in the CondensedConsolidated Statements of Cash Flows, when current assets such as receivables andinventory increase, cash is reduced. Consequently, the Company’s cash needs tosupport sales growth will be increased in the coming months. 

 

IV. New Developments

The Company’s expansionof its Gold’n Gro fertilizer manufacturing and sales continued during the quarter,with consistent sales in tank truck quantities of the new chelated micronutrientGold’n Gro zinc now occurring. The Company is completing the installation of a bulkliquid fertilizer tank truck load out facility, which has the capability to load a 5,000gallon tank truck in 30 minutes, providing the capacity to handle anticipated growth indemand during the next two years. Ongoing changes in the factory process, arising as aresult of specific sales opportunities such as the zinc fertilizer product, includeinstallation of heater/cooler equipment, expected to be operational in mid June, whichwill increase capacity of the batch mixing system to well in excess of 20,000 gallons(about 100 tons) per 24 hour day. 
The Company presently sells its commercial GOLD’n GRO products in2.5 gallon, 55 gallon and 250 gallon containers. The 250 gallon capacity mini-bulk totesare the most popular size and are used for interim storage and for shipping of GOLD'n GROproducts. The bulk totes are approved for highway transportation and are a convenient unitfor use by GOLD'n GRO customers. The Company now has an inventory of more than 1000 ofthese totes and the number of totes in use is continuing to increase.

Additional near term expansion projects that have been identifiedinclude installation of a truck scale, partial automation of the raw material feed system,and installation of additional bulk tankage both indoors and outdoors. Installation of arail siding will be required further in the future. The plant will then be able to produceand ship about 36,000 tons of finished products per year; this volume could then be morethan doubled in the future with some automation and installation of an additionalmanufacturing unit.

The capital cost of the truck load out and the heating/cooling systempresently being installed is budgeted at $280,000. The bulk tankage system is estimated tocost $2.5 million; technical requirements including a required secondary containment floorresult in a barrier to incremental installation to accommodate incremental sales growth. 

The Company is nearing completion of a project to upgrade and convertits GOLD'n GRO fertilizer products to a second generation of formulations. The purpose ofthe upgrade is to provide standardization of formulas and raw material content, which willreduce unit production costs and simplify raw material inventory requirements. The secondgeneration products are low chloride or chloride free, and are demonstrating improvednutritional effectiveness for the crops being fertilized. 

The second generation GOLD'n GRO fertilizer products are beingformulated to match potential new sources of secondary chelates. This will make itpossible to begin to use "non-photo" chelates and low cost, secondarynon-photographic sources of raw materials to supplement the Company's photographic rawmaterial sources.

13

California and several other states are in the process of revisingtheir regulations on fertilizers to require reporting by fertilizer distributors andmanufacturers of the toxic heavy metal content of their fertilizers. Also, in Californiaand some other states, the amount of toxic heavy metals allowed to be contained infertilizer products is being limited. This tightening of environmental regulations is asignificant development. All of the Company's GOLD'n GRO fertilizer products meet therevised standards, and thus are attractive to growers and the new toxic metal rules areincreasing grower awareness of the need to obtain and use environmentally sound products.The Company believes that the market will shift to the use of environmentally soundmaterials and while this shift is taking place the GOLD'n GRO products will have amarketing advantage.

The change in the state regulations required the redesign of thefertilizer packaging labels. The label is a formal document which provides the guaranteeof the contents of the fertilizer and provides suggestions for use. The cost of labelinghas now increased significantly as has the cost of documenting the contents of theproducts. Because of this a decision was made early in the first quarter to reduce thenumber of GOLD'n GRO products for sale to the professional markets from 18 to 9. TheGOLD'n GRO professional labels for these 9 products have been redesigned and are now beingintroduced. The redesign project was coordinated with the upgrade to second generationformulations discussed above, so no additional label design work will be needed. This workrepresents a major undertaking and is now complete. 

GOLD’n GRO products are currently registered for sale inCalifornia and Nevada; Hawaii accepts California registration. The Company will nowregister some of the GOLD'n GRO products for sale in Oregon, Idaho, and Utah. 

The Company's two "consumer" package products are being soldlocally in Reno and over the internet through the web page catalog and shopping cart. Thecost of entry into the consumer retail market is large and with the new product and labelregistration requirements, the cost has been substantially increased. The Company iscontinuing to explore opportunities for entering the consumer market, but believes that astrategic partner who is already in that market will be necessary before entry can be madeeffectively. 

The GOLD'n GRO fertilizer product line now has a good selection ofproducts for the turf and ornamental markets, with 3 products for the nursery andspecialty agriculture markets, and 3 high quality chelated micro-nutrient products whichcan be used in all of the markets. The GOLD'n GRO chelated multi-nutrient products areconsidered to be "Specialty Liquid Fertilizer" and fit into the SpecialtyFertilizers segment of the national and international fertilizer markets. The specialtyproducts are generally sold in smaller quantities and at higher prices than the primaryNitrogen (N), Phosphate (N), and Potassium(K), commonly referred to as NPK which aregenerally sold as single nutrient products in large tonnages at relatively low bulkcommodity prices.

The Company has the opportunity to become a large supplier of chelatedmulti-nutrient specialty products because the photographic byproduct materials used asbase components have a high chelate content and the cost of goods is lower than the costof purchasing new "unused" chelates. This natural advantage in raw materialsupply which is provided by the Company's proprietary "Beneficial Use PhotobyproductRecycling" technology is now beginning to display itself through the rapidlyexpanding sales of GOLD'n GRO Zinc. As other secondary raw material sources are developedusing the Company's proprietary technology, the cost of raw materials for producing theGOLD'n GRO products will become very stable and provide competitive longer term specialtyproduct pricing for GOLD'n GRO customers. 

Several field crop trials were successfully completed in 2001, severaltrials are continuing, and several new trials have been initiated. The trial on valenciaoranges in southern California is completing its first full year, and a trial on tablegrapes using the GOLD'n GRO Zinc and the GOLD'n GRO Iron is underway in southernCalifornia. Several nursery trials are also underway as are trials at several turf farms.A field trial using the micronutrient products on peaches in southwestern Colorado hasbeen initiated by a major University and a

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field trial on seed grass in Oregon is being initiated. Discussions areunderway to initiate some field trial work with the micronutrient products in southernTexas.

Now that the GOLD'n GRO product line has been established, theCompany's focus on expanding GOLD'n GRO sales will be increased. The Company has starteddiscussions with potential distributors in selected states not covered by its currentdistribution network.

The Company's photobyproduct services business has continued to expanddue to continued growth in the use of conventional photography in the markets beingserviced. The supply of these materials is more than adequate to support continuing growthin fertilizer demand. During the quarter the Company did enter into strategic discussionswith potential large suppliers of photobyproduct materials in anticipation of increases inthe rate of GOLD'n GRO fertilizer demand growth.

The Company has been awarded a contract by the Department of Defensefor five vacuum water recovery units, to be installed early in the third quarter oncertain military bases. After the equipment is installed and operational, the Company willbegin to receive the concentrated photobyproducts that are produced by these machines.This program is regarded as a pilot project, which may lead to providing "BeneficialUse Photobyproduct Recycling" services to all branches of the U.S. militarythroughout the United States and is being developed by the Department of Defense inconsultation with the Federal EPA.

A Department of Defense contractor has presented the company a wasteproduct for evaluation which contains both silver and materials that may be useable forfertilizer manufacturing. The Company is evaluating this product, which is currentlyavailable in relatively small amounts, but which is expected to grow in quantity overtime. Other similar materials are known to be treated as waste products for disposal, butwith use of the Company's proprietary technology some of these may be converted to useableproducts to support silver refining and fertilizer manufacturing. Due to the small size ofthe waste stream, the development of technology for processing these materials has beendelayed until the conversion of the GOLD'n GRO fertilizers to the second generationformulations is completed during the second quarter.

The Company's sales of 5 ounce "Silver Nevada Miner" barsover the internet continues to grow, although those sales are still relatively small. Thesales of finished silver bullion from internally recovered silver were up in the firstquarter compared to last year and are expected to grow more significantly in the third andfourth quarters of this year. Growth of silver output is driven to a large degree byphotobyproduct processing to support GOLD'n GRO fertilizer sales. There are someopportunities to expand silver output separate from photobyproduct recycling, but profitmargins for the refining services are very small when compared to the inventoryrequirements and the security risk. Because of these factors, gold and silver refiningservices will be limited to categories of materials where the Company's proprietarytechnology can be used and that offer better profit opportunities than conventionalprecious metal refining.

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 March 31, 2002. All securities were issued as restricted common shareswhich are subject to Rule 144 of the Securities and Exchange Commission. Generally, Rule144 requires shareholders to hold the shares for a minimum of one year before sale. Inaddition, 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 commissions or underwriting discounts have been paid.
 
Shares
Value 
Issued
ReceivedLabor services of    management, directors and consultants
32,500
$ 9,350Convertible note payable    and interest conversion
56,540
34,851Interest on management    salary in arrears
26,550
3,738 
115,590
$47,939
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 3. Defaults Upon Senior Securities

As of March 31, 2002 lease payments totaling $108,591 were in arrears. Of thisamount, $43,010 remains unpaid as of the date of this report. As required by GenerallyAccepted Accounting Principles, the principal balance of the leases that are not paidthrough March 31, 2002, a total of $270,831, has been classified as a current liability.This amount would otherwise be classified as long term debt. As of the date of thisreport, lease payments totaling $110,162 are in arrears. The Company is in regularcommunication with the lessors to avoid action that may be adverse to the Company.
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.

 

                                                           ITRONICS INC.

 

DATED: May 14, 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

 

DATED: May 14, 2002                                   By: /S/ JOHN W. WHITNEY

                                                          John W. Whitney

                                                          President, Treasurer and Director

                                                          (Principal Executive Officer)

 

DATED: May 14, 2002                                   By: /S/ MICHAEL C. HORSLEY

                                                          Michael C. Horsley

                                                          Controller

                                                          (Principal Accounting Officer)

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