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

**                            Forthe quarterly period ended March 31, 2003**
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

                            Forthe 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 other jurisdiction of         (IRS Employer Identification Number)

          incorporation or 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 of April 30, 2003, 95,770,217 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    Statements  Condensed    Consolidated Balance Sheets – March 31, 2003    and    December 31, 2002 
4  Condensed    Consolidated Statements of Operations and       Comprehensive Income for the Three Months Ended March 31, 2003 
        and 2002 
6  Condensed    Consolidated Statements of Cash Flows for the    Three    Months Ended March 31, 2003 and 2002. 
7  Notes to Condensed    Consolidated Financial Statements 
8Item 2. Management's    Discussion and Analysis or Plan of Operation 
13Item 3. Controls and    Procedures
22PART II- OTHER INFORMATIONItem 1. Legal Proceedings
22Item 2. Changes in    Securities and Use of Proceeds 
23Item 3 Defaults upon Senior    Securities
24Item 6. Exhibits and    Reports on Form 8-K 
24Certifications
26
3

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2003 AND DECEMBER 31, 2002

(UNAUDITED)

 

ASSETS
 
MARCH 31,
DECEMBER    31, 
2003
2002CURRENT ASSETS   Cash 
$        -
$ 57,201Accounts receivable, less    allowance for  doubtful accounts, 2003,    $5,700; 2002, $5,700
114,220
88,239Marketable securities
446,309
483,983Inventories
367,234
337,153Prepaid expenses
70,973
44,331Current portion of deferred    loan fees
46,225
46,225    Total    Current Assets
1,044,961
1,057,132   PROPERTY AND EQUIPMENT   Land 
215,000
215,000Building and improvements
1,167,315
1,167,315Design and construction in    progress,     manufacturing    facility
86,884
86,884Equipment and furniture 
1,799,478
1,797,926Vehicles 
133,028
133,028Equipment under capital    lease 
1,077,152
1,077,152 
4,478,857
4,477,305Less: Accumulated    depreciation and amortization
1,158,417
1,085,175 
3,320,440
3,392,130OTHER ASSETS   Intangibles, net of    amortization 
8,956
9,115Marketable securities,    available for sale 
          -
220,096Deferred loan fees, less    current portion, net of    amortization 
80,387
91,946Investment in American Gold    & Silver Ltd. 
9,250
9,250Deposits
35,131
35,131 
133,724
365,538 
$ 4,499,125
$4,814,800
4

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
MARCH 31,
DECEMBER    31, 
2003
2002CURRENT LIABILITIES   Bank overdraft
$ 6,274
$ -Accounts payable 
544,419
610,772Accrued management salaries    
411,203
341,278Accrued expenses 
394,358
300,204Insurance contracts payable    
29,486
15,962Interest payable 
200,829
168,473Current maturities of    long-term debt 
556,854
556,301Current maturities of    capital lease obligations 
1,101,791
1,162,723Current maturities of    advances from stockholders
284,487
284,687Current maturities of    convertible notes and accrued interest
1,803,427
3,374,838Other 
17,602
18,131    Total    Current Liabilities 
5,350,730
6,833,369   LONG-TERM LIABILITIES  Long-term debt, less    current maturities 
136,123
146,610Convertible promissory    notes, less current maturities 
3,219,129
2,086,129Accrued interest,    convertible notes, less current maturities
678,434
294,262Capital lease obligations,    less current maturities
75,472
31,214Accrued salary due    stockholder
6,054
7,854Deferred gain, less current    maturities
1,167
3,221    Total    Long-Term Liabilities 
4,116,379
2,569,290 
9,467,109
9,402,659   STOCKHOLDERS' EQUITY    (DEFICIT)  Preferred stock, par value    $0.001 per share;    authorized 999,500    shares, issued and outstanding    2003, 0 shares;    2002, 0 shares 
         -
         -Common stock, par value    $0.001 per share;    authorized    250,000,000 shares, issued and outstanding,    94,864,635 at March    31, 2003; 88,690,170 at     December 31, 2002
94,865
88,690Additional paid-in capital 
12,383,620
11,748,423Accumulated deficit 
(18,040,964)
(17,352,796)Common stock to be issued 
498,333
576,998Accumulated other    comprehensive income (loss) 
39,986
241,653Common stock options    outstanding, net 
56,176
109,173 
(4,967,984)
(4,587,859) 
$ 4,499,125
$ 4,814,800
 

See Notes to Condensed Consolidated Financial Statements

5

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002

(UNAUDITED)
 
Three Months Ended March 31, 
2003
2002REVENUES     Fertilizer 
$100,945
$ 111,910   Photochemical    recycling 
42,373
57,220   Silver 
12,968
30,642   Mining    technical services 
75,323
68,863         Total Revenues 
231,609
268,635COST OF SALES 
277,806
338,549         Gross Profit (Loss) 
(46,197)
(69,914)   OPERATING EXPENSES     Depreciation    and amortization 
82,377
91,291   Research and    development 
16,342
14,922   Sales and    marketing 
203,299
260,078   Delivery and    warehousing
8,063
8,781   General and    administrative 
174,510
258,652         Total Operating Expenses 
484,591
633,724         Operating (Loss) 
(530,788)
(703,638)   OTHER INCOME (EXPENSE)     Interest    expense 
(229,703)
(195,720)   Interest    income 
        -
3   Gain on sale    of investments
64,161
1,463   Other
8,162
     -         Total Other Income (Expense) 
(157,380)
(194,254)   Income (Loss) before    provision 
for income tax
(688,168)
(897,892)Provision for income tax 
    -
    -         Net Income(Loss) 
(688,168)
(897,892)Other comprehensive income    (loss)    Unrealized gains    (losses) on 
    securities 
(201,667)
235,076         Comprehensive Income (Loss) 
$(889,835)
$(662,816)   Weighted average number of    shares   Outstanding (1,000’s)
92,240
81,697Earnings (Loss) per share 
$(0.0075)
$(0.0110)
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, 2003 AND 2002

(UNAUDITED)
 
Three Months Ended March 31, 
2003
2002Cash flows from operating    activities   Net income (loss) 
$(688,168)
$    (897,892)Adjustments to reconcile    net loss to 
cash used by operating activities:    Depreciation and    amortization 
82,377
91,291  Interest on    convertible notes
147,219
113,890  Marketable    securities received for services
-
(14,164)  (Gain) Loss on    investments
(64,161)
(1,463)  Stock option    compensation (credit) 
(52,997)
12,060  (Gain) on debt    restructuring
(20,564)
-  Expenses paid with    issuance of common stock/debt 
126,314
189,222  (Increase) decrease    in:      Trade    accounts receivable 
(25,981)
(79,742)        Inventories 
(30,081)
(29,765)    Prepaid    expenses 
(21,101)
(17,098)    Deposits
-
(1,541)  Increase (decrease)    in:      Accounts    payable 
(8,553)
16,023    Accrued    expenses and contracts payable 
175,803
139,701    Accrued    interest
43,990
4,212         Net cash used by operating activities 
(335,903)
(475,266)   Cash flows from investing    activities:    Acquisition of    property and equipment 
(1,552)
(46,627)  Acquisition of    intangibles and investments 
-
-  Proceeds from sale    of investments
120,263
32,214    Net cash    provided (used) by investing activities 
118,711
(14,413)   Cash flows from financing    activities:    Proceeds from sale    of stock 
171,595
10,000  Proceeds from debt,    stockholders
-
212,545  Proceeds from    long-term debt, unrelated 
-
614,500  Payments on    long-term debt 
(17,878)
(99,083)    Net cash    provided by financing activities 
153,717
737,962          Net increase (decrease) in cash 
(63,475)
248,283Cash, beginning of period 
57,201
14,675Cash (overdraft), end of    period 
$ (6,274)
$ 262,958
See Notes to Condensed Consolidated Financial Statements

7

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2003

(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, 2002. 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, 2003are not necessarily indicative of the results to be expected for the full year.

3. A Private Placement of restricted stock with attached three yearwarrants was begun in the fourth quarter of 2002. The initial offering price is $0.08 pershare and the attached three year warrant for an equal number of shares is exercisable atprices of $0.08 for the first year, $0.16 for the second year, and $0.24 for the thirdyear. $80,000 was received from this private placement during the three months ended March31, 2003 and an additional $10,000 was received subsequent to March 31, 2003. In addition,$91,595 was received under the Swartz Private Equities, LLC equity line of credit duringthe three months ended March 31, 2003 and $28,000 was received subsequent to March 31,2003.

4. In August 2002 a supplier of equipment to be utilized in the Steadmanufacturing plant filed suit against the Company and its subsidiary, ItronicsMetallurgical, Inc. (IMI) in Johnson County, Indiana for the unpaid amount of $64,234 plusattorney’s fees and court costs. On October 1, 2002 the plaintiff received a defaultjudgment awarding the $64,234 plus $1,500 attorney’s fees plus 8% interest. OnNovember 5, 2002 the plaintiff filed a "Notice of Filing of Foreign Judgment" inWashoe County, Nevada and has received the judgment. Plaintiff’s attorney is activelyseeking to collect the amount due. 

During the period of September 2002 through March 2003 a total of eightlawsuits have been filed against the Company’s subsidiaries, WWI and IMI, by variousequipment lessors. Four of the suits were filed in Washoe County, Nevada, two in CookCounty, Illinois, one in Los Angeles County, California, and one in Oakland County,Michigan. The suits seek a total of $460,227 plus attorneys fees and other costs. Three ofthese suits, seeking a total of $228,834 plus costs, were settled by signing stipulatedjudgments and agreeing to pay total payments of $150,000. Monthly payments on thesettlements total $8,833 and are paid over various periods ranging from 6 to 31 months. Ifthe restructured leases are defaulted, judgments for the original claimed amounts can beentered and further collection action, including repossession of the secured equipment,can be taken. Of the remaining unsettled suits, two have been assigned to a debtmanagement company who is attempting to negotiate settlements, subject to theCompany’s ability to provide additional funds for the debt management company to workwith. The other cases are pending assignment to the debt management company, pendingavailability of funds. In addition, of the five unsettled suits, two of the plaintiffshave received default judgments and one has submitted a motion for a default judgment.

8

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2003

(UNAUDITED)

In September and October 2002 a general contractor and twosubcontractors filed mechanics liens on IMI’s Stead manufacturing facility due to nonpayment for work performed on the property. The amounts due total $104,708. In November2002 the general contractor filed suit for its portion of the above amount, a total of$81,233. In December 2002 IMI worked out a payment arrangement calling for monthlypayments of $15,000 to be paid in the Company’s common stock. The general contractoris applying the payments to the balance due it and the subcontractors.

In December 2002 a trade payable creditor filed suit against theCompany and WWI in Washoe County, Nevada seeking a total of $12,100. The Company hassigned a stipulated judgment and made a payment of $3,000 in March 2003. Subsequentpayments have not been made and the Company is in periodic communication with theplaintiffs lawyer. No other action has been taken as of the date of this report.

In February 2003 a trade payable creditor filed suit against theCompany in Washoe County, Nevada seeking a total of $85,525 plus attorney fees and othercosts. A default judgment was entered in May 2003. The Company is attempting to negotiatea settlement. 

In April 2003 a suit was filed in Washoe County, Nevada against theCompany by one of the Convertible Promissory Note holders, seeking in excess of $94,000,plus attorney fees and other costs. The suit has been answered and the Company willattempt to negotiate a settlement.

Successful settlement of the above claims is dependent on additionalfinancing.

5. As of March 31, 2003 lease payments totaling $417,180 were inarrears. Of this amount, $410,981 remains unpaid as of the date of this report. Asrequired by U.S. Generally Accepted Accounting Principles, the principal balance of theleases that are not paid current through March 31, 2003 by the date of this report havebeen classified as current liabilities. The amount included in current liabilities thatwould otherwise be classified as long term debt is $370,710. As of the date of thisreport, lease payments due as of April 30, 2003 totaling $453,188 are in arrears. TheCompany is in ongoing communication with the lessors to avoid action that may be adverseto the Company.

During the three months ended March 31, 2003 four leases wererestructured. Two of those were settlements of lawsuits in which the Company agreed tosign stipulated judgments wherein the lessor will receive a default judgment if the futurepayment terms are not met. Negotiations on another of those leases also required thesigning of a stipulated judgment. The result of restructuring these leases was theelimination of all payments in arrears and future minimum lease payments of $122,922,compared to minimum lease payments of $133,389 prior to the restructuring. 

As discussed above, mechanics liens were filed in 2002 on IMI’sStead manufacturing facility due to non payment for work performed on the property. Suchliens not cleared after 60 days from the date of filing become defaults under terms of thedeed of trust securing the mortgage on the property and the 

9

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2003

(UNAUDITED)

lender can demand payment in full and institute foreclosureproceedings. As required by U.S. Generally Accepted Accounting Principles, the entireprincipal balance of the note is included in current liabilities. $505,676 of theprincipal balance would otherwise be classified as long term debt. Monthly payments incommon stock are being made to the general contractor. The lender is aware of thesituation and has not made a demand or taken any other action.

6. During the three months ended March 31, 2003 the Company offered theholders of its 2000 Series 9% Convertible Promissory Notes to extend the notes for anadditional three years in exchange for an increase in the interest rate, commencing as ofeach note maturity date, to 12% per annum and a reduced conversion price to $0.20 pershare. As of March 31, 2003, out of a principal balance of $2,573,000, holders of$1,306,000 in notes agreed to extend their notes. The remaining $1,267,000 in principal,plus accrued interest of $399,294, is in default as of March 31, 2003. Subsequent to March31, 2003, an additional note for $75,000, plus accrued interest of $23,103, was extended.As discussed in Note 4, one note-holder has filed suit to collect a principal amount of$72,000 plus accrued of interest $22,553. No other collection action has been taken by theother note-holders as of the date of this report. During the period of January 1, 2003through the date of this report, $170,000 in principal and $94,407 in accrued interest hasbeen converted to common stock.

7. Following are the components of Other Comprehensive Income:
 
Three Months Ended March 31, 
2003
2002   Unrealized holding gains    (losses)   
      arising during the period
$(123,975)
$ 237,133
Reclassification    adjustment
(77,692)
(2,057)
       Other Comprehensive Income (Loss)
$(201,667)
$ 235,076
 

8. Following is financial information for each of the Company’ssegments. No changes have occurred in the basis of segmentation since December 31, 2002.

Reconciliation of segment revenues, gross profit (loss), and operatingincome (loss) to the respective consolidated amounts and to consolidated net income (loss)before taxes follows:

10

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2003

(UNAUDITED)
 
Three Months Ended March 31, 
2003
2002Revenues:    Photochemical    Fertilizer 
$156,286
$ 199,772  Mining Technical    Services 
75,323
68,863   Consolidated    Revenues 
$231,609
$268,635   Gross Profit (Loss:    Photochemical    Fertilizer 
$(63,312)
$(76,045)  Mining Technical    Services 
17,115
6,131   Consolidated    Gross Profit (Loss)
$(46,197)
$(69,914)   Operating Income (Loss):    Photochemical    Fertilizer 
$(452,320)
$(615,169)  Mining Technical    Services 
(78,468)
(88,469) Consolidated Operating    Income (Loss)
(530,788)
(703,638) Other Income (Expense)
(157,380)
(194,254) Consolidated Net Income     (Loss) before taxes 
$(688,168)
$(897,892)
11

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2003

(UNAUDITED)

 

Identifiable assets by business segment for the major assetclassifications and reconciliation to total consolidated assets are as follows:
 
March 31,
December    31, 
2003
2002Current Assets:    Photochemical    Fertilizer 
$469,048
$443,003  Mining Technical    Services 
525,169
598,009 
994,217
1,041,012   Property and Equipment,    net:    Photochemical    Fertilizer 
3,112,832
3,166,189  Mining Technical    Services 
203,750
221,654 
3,316,582
3,387,843   Other Assets, net:    Photochemical    Fertilizer 
100,364
109,583  Mining Technical    Services 
1,476,349
1,652,066 
1,576,713
1,761,649   Total Assets:     Photochemical    Fertilizer 
3,682,244
3,718,775  Mining Technical    Services 
2,205,268
2,471,729   Total Segment    Assets 
5,887,512
6,190,504   Itronics Inc.    assets 
18,103,778
17,827,985   Less:    inter-company elimination 
(19,492,165)
(19,203,689)   Consolidated    Assets 
$4,499,125
$ 4,814,800
 
12
Item 2. Management's Discussion and Analysis or Plan of Operations

I. Results of Operations

The Company reported consolidated revenues of $231,609 for the quarterended March 31, 2003, compared to $268,635 for the prior year quarter, a decrease of 14%.The decrease was due to a decrease of $43,500 in Photochemical Fertilizer segmentrevenues, which was partially offset by an increase of $6,500 in Mining Technical Servicessegment revenues. The consolidated net loss was $688,168, or $0.0075 per share, for thequarter ended March 31, 2003, compared to a net loss of $897,892 or $0.0110 per share forthe comparable 2002 period, an improvement of 23%. The primary factors contributing to thedecreased loss for the quarter were a reduction of gross loss of $23,700, decreasedoperating costs of $149,100 and an increase in gain on sale of investments of $62,700which were partially offset by increased interest expense of $34,000 related to increasingthe interest rate from 9% to 12% on the extended 2000 Series Convertible Promissory Notes.

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.

PHOTOCHEMICAL FERTILIZER

This segment, managed by Itronics Metallurgical, Inc., operates aphotochemical 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 under the GOLD’n GRO trademark into the marketsin Arizona, California, Colorado, Hawaii, Nevada, and Oregon. Revenues are generated fromphotochemical management services, silver sales, and GOLD’n GRO liquid fertilizersales.

 

Three Months Ended March 31,
2003
2002Sales revenue 
$ 156,286
$ 199,772Gross profit (loss) 
$ (63,312)
$ (76,045)Operating income (loss)
$(452,320)
$(615,169)
 

Total segment revenues for the first quarter of 2003 were approximately$156,300, a decrease of 22% from the prior year first quarter. Fertilizer sales for thequarter were $100,900, compared to $111,900 for the 2002 first quarter, a decrease of 10%.The fertilizer sales decrease is attributable to a combination of a weather related delayin the start of the spring season and the effects of a weak economy on the turf andornamental market, which includes turf farms and golf courses. Photochemical recyclingrevenue for the quarter decreased by 26% on a decreased volume of 2%, compared to thefirst quarter of 2002. The revenue decrease is attributable to the prior year loss of onecustomer with multiple service locations. The customer decided to contract with a serviceprovider with a nationwide service capability. During the first quarter of 2003, thevolume lost from that customer was nearly made up with the addition of new customers andincreased volume from existing customers. The new customers have fewer locations than theone they are replacing, so they do not generate the same level of revenue. However, theyare also less costly to service. The overall result is that reduced service costs have

13

exceeded the reduced revenue, resulting in the reduced gross loss notedbelow. Silver sales decreased $17,700 from the first quarter of 2002, a decrease of 58%.The decrease is attributable to the prior year processing of raw photographic wastes inorder to build up an inventory of base liquids used in fertilizer manufacturing. The baseliquid inventory has filled the plant’s available storage capacity, resulting in acurrent period decrease in processing raw materials and a resultant decrease in silversales. Once spring fertilizer sales are fully under way, raw material processing andsilver sales are expected to resume. Cost of sales decreased $56,200 due primarily todecreases in direct materials costs of $19,600 related to decreased sales and $29,100 inpayroll and related costs, which is due primarily to a reduction of two plant positionsduring the quarter. These factors resulted in a gross loss of $63,300 for the firstquarter of 2003, compared to $76,000 for the prior year quarter, a decreased loss of 17%. 

Segment operating expenses decreased $150,100 from the first quarter of2002, due to a decrease in sales and marketing expense of $65,100 related to decreasedcorporate marketing and a decrease in general and administration costs of $78,100 dueprimarily to a decrease in allocable option compensation expense of $58,600. The decreaseresulted from the first quarter expiration of compensatory stock options. 

These factors resulted in a 2003 first quarter segment operating lossof $452,300 compared to a loss of $615,200 for the first quarter of 2002, a decreasedoperating loss of $162,800, or 26%.

As discussed above, a variety of factors resulted in decreased salesfor the current quarter compared to the prior year quarter. In spite of that, acombination of selective ongoing cost reductions and one time cost reductions has resultedin significant improvement in both the segment gross profit (loss) line and in the segmentoperating income (loss) line. Going forward, it is expected that the path to overallprofitability will be to first achieve profitability at the gross profit level, then atthe operating income level, and lastly, at the net income level. The Company believes thatthe foundation is in place and expansion plans are being implemented to achieve thosegoals over the next 12 to 24 months. There is a strong possibility that the Company mayachieve a positive segment gross profit in individual months during the remainder of 2003.

The actual rate of growth in fertilizer sales necessary to achieveprofitability, and the ability to predict that rate of growth, is subject to a number ofuncertainties, including the annual seasonal nature of fertilizer sales, short termweather patterns in specific markets such as was seen this year in the delay in the startof the spring season, and the availability of funding to support sales growth. 

 

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.

14

 

Three Months Ended March 31,
2003
2002Sales revenue 
$ 75,323
$ 68,863Gross profit (loss) 
$ 17,115
$ 6,131Operating income (loss)
$(78,468)
$(88,469)
Mining technical services revenue was $75,300 for the quarter endedMarch 31, 2003, compared to $68,900 for the comparable quarter of 2002, an increase of 9%.The revenue increase reflects billings on a new litigation support services project. Costof sales decreased by $4,500, due to small decreases in a variety of costs. These factorsresulted in a gross profit for the segment of $17,100 compared to $6,100 for the prioryear first quarter, an increase of 179%.

Segment operating expenses increased nominally by $1,000. 

The combination of these factors resulted in a 2003 first quartersegment operating loss of $78,500, compared to a loss of $88,500 for the first quarter of2002, a decreased operating loss of $10,000, or 11%. 

 

SUMMARY

On a consolidated basis, the various changes in revenues and operatingexpenses resulted in a first quarter 2003 operating loss of $530,800, compared to $703,600for the first quarter of 2002, a decreased loss of $172,900, or 25%. 

 

II. Changes in Financial Condition; Capitalization

Cash amounted to $(6,300) as of March 31, 2003, compared to $263,000 asof March 31, 2002. Net cash used for operating activities was approximately $335,900 forthe first three months of 2003. The cash used for operating activities during the periodwas financed by a combination of sales of common stock of $171,600 from a privateplacement of restricted common stock and attached warrants and the Swartz Private Equity,LLC. (Swartz) agreement, an increase in accrued expenses and interest of $219,800, andproceeds from the sale of Golden Phoenix Minerals, Inc. (GPXM) stock of $120,300. Themarket value of the GPXM investment was decreased by $201,700 during the three monthsended March 31, 2003, based on GPXM’s stock price as of that date. 

Total assets decreased during the three months ended March 31, 2003 by$315,700 to $4,499,100. Current assets decreased $12,200 due to decreases in cash of$57,200 and marketable securities of $37,700. These decreases in current assets werepartially offset by increases in accounts receivable of $26,000, inventory of $30,100, andprepaid expenses of $26,600. Total property and equipment decreased $71,700 due todepreciation and amortization of the assets. Other assets decreased by $231,800 due to a$220,100 decrease in the long term portion of the value of the Company’s investmentin GPXM stock. At March 31, 2003 the Company owned 2.48 million shares of GPXM with avalue of $446,300. During the three months ended March 31, 2003 the Company sold 581,700GPXM shares, with total net proceeds of $120,300, to assist with the Company’s cashoperating requirements. 

15

Current liabilities decreased by $1,482,600 and total liabilitiesincreased by $64,500. Total liabilities increased due to increases of $68,100 in accruedmanagement salaries, $94,200 in accrued expenses, including $77,000 in federal and statepayroll taxes, a net $55,800 in accrued interest on convertible promissory notes, and$32,400 in accrued interest on other debt. These increases in total liabilities werepartially offset by a decrease in convertible notes payable of $110,000 resulting from theconversion of that amount of principal into common stock during the three months endedMarch 31, 2003. Total liabilities were also reduced by a decrease in accounts payable of$66,400, which was primarily due to the settlement of $57,800 in payables with commonstock. Current liabilities decreased due to a net reclassification into long term debt ofconvertible notes and accrued interest totaling $1,571,400 due to the three year extensionof convertible promissory notes and related accrued interest. 

 

III. Working Capital/Liquidity

During the three months ended March 31, 2003, working capital improvedby approximately $1,470,500 to a deficit balance of $4,305,800 due to the reclassificationto long term debt of extended convertible promissory notes and accrued interest totaling$1,571,400. The Company has had limited cash liquidity since the third quarter of 2000,which is reflected in the increases in current liabilities discussed above. The Companyhas sought and obtained the funding described above, which has not been sufficient tomaintain all obligations on a current basis. However, cash liquidity is being managed andthe Company has been able to make sufficient payments to keep most significant creditorsworking with it. The cash shortage is a result of two factors. First, fertilizer sales in2002 did not expand to the extent anticipated, so operating losses were not reduced asmuch as expected. Second, the $15 million equity line of credit agreement with SwartzPrivate Equities, LLC (Swartz) was not available between October 2001 and May 2002 due toa Securities and Exchange Commission rule change that necessitated renegotiating thecontract with Swartz and filing a new registration statement which was filed and becameeffective on April 30, 2002. Through the date of this report $119,600 has been receivedunder the Swartz agreement during 2003 and $339,900 was received during 2002. Since theSwartz equity funding has not been sufficient to meet the Company’s present andfuture working capital needs, a private placement of stock with attached warrants wasstarted in the fourth quarter of 2002. Private placement proceeds totaling $90,000 havebeen received in 2003 through the date of this report, and $117,500 was received in 2002.The cost of exercising put rights under the Swartz Agreement has ranged between 28% to 38%of the total proceeds during 2003. Consequently, the Company is contemplating allowing theagreement to expire in early 2004 without exercising any further puts. Such funds willneed to be replaced by continuing the 2002 Private Placement. 

As discussed above, a combination of selective ongoing cost reductionsand one time cost reductions has resulted in significant improvement in both the grossprofit (loss) line and in the operating income (loss) line. Going forward, it is expectedthat the path to overall profitability will be to first achieve profitability at the grossprofit level, then at the operating income level, and lastly, at the net income level. TheCompany believes that the foundation is in place and expansion plans are being implementedto achieve those goals over the next 12 to 24 months. There is a strong possibility thatthe Company may achieve a positive gross profit in individual months during the remainderof 2003.

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Over the past several years the fundamental difficulty in achieving aprofitable level of sales has been finding the proper fit, or niche, in the marketplacefor the Company’s GOLD’n GRO line of fertilizer products. With the success ofthe chelated micronutrient GOLD’n GRO zinc, which was introduced in the fall of 2001,and as a result of that success the second quarter 2003 introduction of GOLD'n GRO BaseLiquid, it is believed that a profitable level of sales can be achieved over the next 12to 24 months. A significant factor in locating and entering these niches has been theadvice and recommendations from the Company’s distributor network.

The actual rate of growth in fertilizer and the related photochemicaland silver sales necessary to achieve profitability is subject to a number ofuncertainties, including the annual seasonal nature of fertilizer sales related to cropcycles, short term weather patterns in specific markets, and the availability of fundingto support sales growth. In the present economic climate, raising additional capital hasbeen exceedingly difficult. The Company believes that a combination of expected increasedsales, along with the easing of several economic uncertainties in the world, such as thewar in Iraq and oil prices, the Company’s ability to raise capital to support salesgrowth will be improved.

 

IV. New Developments 

Implementation of the Company’s "Beneficial Use Photochemicaland Water Recycling" technology is continuing with expansion of the number ofbranches within the licensed distributor network selling GOLD’n GRO fertilizer,consistent on-going sales in tank truck quantities of the chelated micronutrientGOLD’n GRO Zinc, and a new product, GOLD'n GRO Base Liquid. Our licensed distributornetwork is also continuing to generate orders for original chelated micronutrient andchelated multinutrient products including GOLD'n GRO 10-0-0 Iron, GOLD’n GRO 20-1-7,and GOLD’n GRO 8-8-8.

In March 1998 IMI signed a definitive licensing, manufacturing, anddistribution agreement with Western Farm Service (WFS), one of the largest liquidfertilizer bulk retailers in the western United States. The five year agreement, withoptional five year renewal periods, grants WFS an exclusive license and right tomanufacture and market IMI's GOLD'n GRO line of bulk liquid fertilizer products for theTurf & Ornamental and Specialty Agricultural markets in the states of Arizona,California, Hawaii, Idaho, Oregon, and Washington. In March 2003 the companies entered thesecond five year term of the agreement.

The Company has been working with its licensed distributor network forseveral years to identify market segments in which the GOLD'n GRO products will satisfyunfulfilled needs. GOLD'n GRO Zinc was developed as a direct result of this process, andnow another bulk product, GOLD'n GRO Base Liquid, has been developed and approved forsale. The Company is working with its licensed distributor network to develop a thirdproduct which will also be sold in bulk. This flexible approach to developing markets forthe GOLD'n GRO materials will continue and may require plant modifications to accommodatethe new products as their development is completed and they are cleared for sale.

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Using this flexible approach, the Company believes that it has nowidentified and established GOLD'n GRO bulk products that have large enough markets toprovide the sales volumes needed for the Company to achieve profitability within the next12 to 24 months. 

The GOLD'n GRO fertilizer product line provides several products forthe turf and ornamental markets, 3 products for the nursery and specialty agriculturemarkets, and 5 high quality chelated micronutrient products which can be used in all ofthe markets. The GOLD'n GRO chelated micronutrient and chelated multinutrient 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 NPKfertilizers (Nitrogen (N), Phosphate(P), and Potassium(K)) which are generally sold assingle nutrient products in large tonnages at relatively low bulk commodity prices. TheCompany presently sells its commercial GOLD’n GRO products in 2.5 gallon, 55 gallon,and 250 gallon containers and partial or full truck load quantities of up to 4,800gallons.

The Company is becoming a significant supplier of chelatedmicronutrient and chelated multinutrient specialty products for several reasons, one ofwhich is that improved nutrient uptake is being demonstrated in large scale fieldapplications of the GOLD'n GRO products when compared to applications that use establishedchelated micronutrient products. Improved crop nutrient uptake is reducing nutrient costsand increasing crop yields, generating a significant economic benefit for the growercustomers. A second reason is that the photographic byproduct materials used as basecomponents provide the chelates at a much lower cost compared to purchasing new"unused" chelates. A third reason is that the GOLD'n GRO liquid products arespecifically designed for fertigation application in micro-sprinkler and drip irrigation,which is a growing application method and requires liquid fertilizer products withsuperior stability in irrigation water under widely varying conditions. These demonstratedadvantages of the GOLD'N GRO liquid product line are provided by the Company's proprietary"Beneficial Use Photochemical and Water Recycling" technology.

The Company's current fertilizer emphasis is on developing bulk liquidproduct sales. The "Beneficial Use Photochemical and Water Recycling" technologyis fully integrated, and is being implemented with a cost structure that anticipates largevolume material throughput. This is based on previously developed information that morethan 100 million gallons of used liquid photochemicals are generated in the United Statesannually. Using conversion ratios developed for the GOLD'n GRO products, this is enoughvolume to support the manufacture and sale of more than 200 million gallons of liquidfertilizer products, or 1 million tons. Over 20 million tons of fertilizer products aresold annually in North America. The Company's current sales level is less than 0.005percent of the indicated market. 

During 2002 the Company worked with its licensed distributor network todevelop a GOLD'n GRO Base Liquid that could be used as a supplement in thedistributor’s proprietary liquid fertilizer field blend programs. The GOLD'n GRO baseliquid will be used at the rate of 5 to 15 percent of the distributor's field blend mixessold to their grower customers. This presents an opportunity for the Company toparticipate in the distributor's sales programs in a meaningful way. The base liquid isbeing sold in truckload quantities and usage is expected to be several times greater thanthe usage of GOLD'n GRO Zinc. Implementing sales of the GOLD'n GRO Base Liquid was startedearly in the second quarter 2003. In the near term, the Company believes that theCalifornia market for this product alone is large enough to produce sales levels needed tobecome profitable within the next 12 to 24 months.

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All of the GOLD’n GRO products are currently registered for salein Arizona, California, Colorado, Hawaii, and Nevada, and GOLD’n GRO Zinc isregistered in Idaho. GOLD'n GRO bulk product sales are now established in Arizona andCalifornia, with the majority of the sales being made in California. In April 2003 thefirst truckload sale of chelated micro-nutrient products was made to a peach grower inwestern Colorado. Planning is underway to implement sales in Hawaii, Idaho, Oregon, andWashington. The Company is developing bulk customers in northern Nevada and has starteddiscussions with potential distributors in selected states not covered by its licenseddistributor network. 

The Company recently announced that it has expanded the number ofGOLD'n GRO liquid fertilizer formulas being offered through its "e-store"catalog. Some formulas are now being offered in 2.5 gallon containers. This expandedproduct offering makes GOLD'n GRO available to two important Professional Market segments:the Landscape Maintenance Market and the Nursery and Greenhouse Market. In addition, anumber of homeowners with large lawn and garden areas have requested the 2.5 galloncontainer, which is similar in weight and formula analysis to many of the dry fertilizerproducts being offered in wholesale and large retail outlets. Internet sales are stillrelatively small as a percentage of total sales, but have grown in each of the past twoyears. The Company believes that this expanded product offering will significantlyincrease internet sales.

The Company is continuing to develop new sources of used photochemicalliquids, although it does presently have sufficient volume of in-coming photoliquids tosupport current and near term GOLD'n GRO fertilizer sales growth. The Company has beendeveloping photochemical concentrator technology to reduce the cost of transporting theused photochemical liquids to the Reno manufacturing plant. The Company has also beenidentifying and qualifying non-photochemical sources of used chelates and it has beenidentifying and qualifying non-photochemical waste streams that might be useable, afterprocessing with the Company's proprietary technology, as substitute materials for virginadditive raw materials that the Company presently purchases. 

GOLD'n GRO fertilizer products are formulated to match potential newsources of secondary chelates so that as GOLD'n GRO fertilizer sales continue to expandthe Company can begin to use "non-photo" chelates. The Company has alsoidentified and qualified industrial waste streams that will allow it to replace certainvirgin additive materials that it now purchases to make GOLD'n GRO fertilizers. Replacingthe virgin additive materials with materials from secondary sources will provide theCompany with equivalent materials at lower cost. Some manufacturing process changes willbe required, but this will be beneficial due to reductions in raw material costs and theimproved cost stability that will be achieved. 

Demand for the Company's photochemical services business continues toincrease due to growth in the use of conventional photography in the markets beingserviced. The Company believes the supply of these used photochemical liquids is more thanadequate to support continuing growth in fertilizer demand. However, customer services areprovided under renewable annual service agreements which must be negotiated in advance,and once established cannot readily be interrupted or cancelled. The Company'sphotochemical supply customers generate the liquids on

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an on-going basis, typically have limited on site storage, and must beprovided continuous reliable service by the Company. Due to this characteristic, theCompany must provide sufficient raw material storage capacity at its manufacturingfacility to accommodate seasonal fluctuations in both raw material supply and infertilizer sales, and the Company must establish and maintain a balance between usedphotochemical liquid supply and fertilizer sales. 

In 2001 the Company developed an advanced design for a photochemicalconcentrator that produces water pure enough to be used to make up new photochemicals,presenting the photoprocessor with the opportunity to reuse the water and thereby achieve100 percent recycle of the used photochemical waste stream. The concentrator also producesphotochemical concentrates suitable for processing for use in GOLD'n GRO fertilizermanufacturing. 

In 2002 the Company was awarded a contract by the Department of Defensefor five of these photochemical concentrators, which were delivered. Installation andtesting at certain military bases will be completed over the next several months under aseparate contract and then the Company will begin to receive the concentratedphotochemicals that are produced by these machines. Late in the first quarter of 2003, theCompany was awarded a contract for a sixth photochemical concentrator. This program isregarded as a pilot project, which may lead to providing "Beneficial UsePhotochemical and Water Recycling" services to all branches of the U.S. military andis being developed by the Department of Defense in consultation with the Federal EPA.

Early in the first quarter of 2003 the Company initiated aphotochemical concentrator sales program that is expected to generate sales to large photoand medical laboratories. The objective of these sales is to generate additional suppliesof photochemical concentrates nationally. During the first quarter of 2003 a servicesagreement was signed with the NASA Johnson Space Center in Texas which already has aninstalled photochemical concentrating system. During the year the Company will be activelymarketing its "Beneficial Use Photochemical and Water Recycling" service toother U.S. government agencies and private sector companies which already have installedphotochemical concentrating systems.

In 2002 a Department of Defense contractor presented a waste productfor evaluation which contains both silver and materials that may be useable for fertilizermanufacturing. The Company is evaluating this product, which is currently available inrelatively small amounts, but which is expected to grow in quantity over time. Othersimilar materials are known to be treated as waste products for disposal, but with use ofthe Company's proprietary technology some of these may be converted to useable products tosupport silver refining and fertilizer manufacturing. Due to the small size of the wastestream, the development of technology for processing these materials is being delayeduntil GOLD'n GRO fertilizer sales reach higher levels.

The Company's sales of 5 ounce "Silver Nevada Miner" barsthrough the Itronics "e-store" are continuing, although those sales are stillrelatively small. The sales of finished silver bullion from internally recovered silverwill continue to fluctuate until GOLD'n GRO sales reach larger volumes.

Growth of silver output is driven to a large degree by photochemicalprocessing to support GOLD'n GRO fertilizer sales. There are some opportunities to expandsilver output separate from photochemical recycling, but profit margins for the refiningservices are very small when

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compared to the inventory requirements and the security risk. Becauseof these factors, gold and silver refining services will be limited to categories ofmaterials where the Company's proprietary technology can be used and that offer betterprofit opportunities than conventional precious metal refining.

During the first quarter of 2003 the Company initiated development of atile product that will use the silver-bearing glass generated by the Company's gold andsilver refining process. Initial trial runs to develop procedural and manufacturinginformation have been successfully completed. As a result, the Company expects that itwill take about 2 years of elapsed time to develop an initial line of tile products. Thisdevelopment completes the conversion of the used photochemical recycling to 100 percentbeneficial use recycling, and opens up some new opportunities for the gold and silverrefining segment to generate sales and profits that are not tied directly to usedphotochemical recycling.

The Company's manufacturing plant is presently configured for aninitial manufacturing capacity of 7.2 million gallons per year or 36,000 tons of GOLD'nGRO products. Planned storage and truck loading capacity expansions, installation of aheat exchange system, and automation of some manufacturing functions, must be completedbefore this capacity can be achieved. Some of these requirements are discussed more fullybelow. Unexpected new market potentials have already required modification of certainexpansion plans. As the Company continues to identify and develop its GOLD'n GRO liquidfertilizer product markets, additional unforeseen changes could require additional planmodifications.

In 2002 the Company completed the construction of a bulk liquidfertilizer tank truck load out facility consisting of two 7,500 gallon load out tanks withthe capability to load a 5,000 gallon tank truck in 30 minutes. This load out facility wasexpected to handle anticipated growth in demand for the chelated micronutrient zincproduct during the next two years. With the introduction of additional bulk products,three more 7,500 gallon tanks will be needed.

Ongoing changes in the manufacturing process, arising as a result ofspecific sales opportunities such as the zinc fertilizer product, require installation ofa heat exchange system that was expected to be operational in the first quarter of 2003,but which was delayed due to lack of funding to complete the installation. The capitalcost of completing installation of the heat exchange system is budgeted at $200,000. Acapital budget is being developed for the expansion of the truck load out system.

During the first quarter the Company’s mining technical services division acquireda new client and has been engaged to perform technical services that are expected tocontinue until later in 2003.

V. Forward-Looking Statements

Statements in this Form 10-QSB may constitute forward-lookingstatements and are subject to numerous risks and uncertainties, including the failure tocomplete successfully the development of new or enhanced products, the Company’sfuture capital needs, the lack of market demand for any new or enhanced products theCompany may develop, any actions by the Company’s partners that may be adverse to theCompany, the success of competitive products, other economic factors affecting the Companyand its markets, and other risks detailed from time to time in the Company’s filingswith the Securities and Exchange Commission. The actual results may differ materially fromthose contained in this Form 10-QSB.

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Item 3. Controls and Procedures

Itronics’ management, including the Chief Executive and FinancialOfficer, have conducted an evaluation of the effectiveness of disclosure controls andprocedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the ChiefExecutive and Financial Officer concluded that the disclosure controls and procedures areeffective in ensuring that all material information required to be filed in this quarterlyreport has been made known to him in a timely fashion. There have been no significantchanges in internal controls, or in factors that could significantly affect internalcontrols, subsequent to the date the Chief Executive and Financial Officer completed hisevaluation.

 

PART II- OTHER INFORMATION

Item 1. Legal Proceedings 

In August 2002 a supplier of equipment to be utilized in the Steadmanufacturing plant filed suit against the Company and its subsidiary, ItronicsMetallurgical, Inc. (IMI) in Johnson County, Indiana for the unpaid amount of $64,234 plusattorney’s fees and court costs. On October 1, 2002 the plaintiff received a defaultjudgment awarding the $64,234 plus $1,500 attorney’s fees plus 8% interest. OnNovember 5, 2002 the plaintiff filed a "Notice of Filing of Foreign Judgment" inWashoe County, Nevada and has received the judgment. Plaintiff’s attorney is activelyseeking to collect the amount due. 

During the period of September 2002 through March 2003 a total of eightlawsuits have been filed against the Company’s subsidiaries, WWI and IMI, by variousequipment lessors. Four of the suits were filed in Washoe County, Nevada, two in CookCounty, Illinois, one in Los Angeles County, California, and one in Oakland County,Michigan. The suits seek a total of $460,227 plus attorneys fees and other costs. Three ofthese suits, seeking a total of $228,834 plus costs, were settled by signing stipulatedjudgments and agreeing to pay total payments of $150,000. Monthly payments on thesettlements total $8,833 and are paid over various periods ranging from 6 to 31 months. Ifthe restructured leases are defaulted, judgments for the original claimed amounts can beentered and further collection action, including repossession of the secured equipment,can be taken. Of the remaining unsettled suits, two have been assigned to a debtmanagement company who is attempting to negotiate settlements, subject to theCompany’s ability to provide additional funds for the debt management company to workwith. The other cases are pending assignment to the debt management company, pendingavailability of funds. In addition, of the five unsettled suits, two of the plaintiffshave received default judgments and one has submitted a motion for a default judgment.

In September and October 2002 a general contractor and twosubcontractors filed mechanics liens on IMI’s Stead manufacturing facility due to nonpayment for work performed on the property. The amounts due total $104,708. In November2002 the general contractor filed suit for its portion of the above amount, a total of$81,233. In December 2002 IMI worked out a payment arrangement calling for monthlypayments of $15,000 to be paid in the Company’s common stock. The general contractoris applying the payments to the balance due it and the subcontractors.

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In December 2002 a trade payable creditor filed suit against theCompany and WWI in Washoe County, Nevada seeking a total of $12,100. The Company hassigned a stipulated judgment and made a payment of $3,000 in March 2003. Subsequentpayments have not been made and the Company is in periodic communication with theplaintiffs lawyer. No other action has been taken as of the date of this report.

In February 2003 a trade payable creditor filed suit against theCompany in Washoe County, Nevada seeking a total of $85,525 plus attorney fees and othercosts. A default judgment was entered in May 2003. The Company is attempting to negotiatea settlement. 

In April 2003 a suit was filed in Washoe County, Nevada against theCompany by one of the Convertible Promissory Note holders, seeking in excess of $94,000,plus attorney fees and other costs. The suit has been answered and the Company willattempt to negotiate a settlement.

Successful settlement of the above claims is dependent on additionalfinancing.

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, 2003. 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 underwriting commissions or discounts have been paid.
 
Shares
Value 
Issued
Received
Private    placement for cash
1,937,500
$ 155,000
Private    placement for notes payable and interest
323,400
25,972
Labor    services of management and directors 
2,500
275
Interest    on management salary in arrears
115,741
13,348 
2,379,141
$194,595
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.

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Item 3. Defaults Upon Senior Securities

As of March 31, 2003 lease payments totaling $417,180 were in arrears.Of this amount, $410,981 remains unpaid as of the date of this report. As required by U.S.Generally Accepted Accounting Principles, the principal balance of the leases that are notpaid current through March 31, 2003 by the date of this report have been classified ascurrent liabilities. The amount included in current liabilities that would otherwise beclassified as long term debt is $370,710. As of the date of this report, lease paymentsdue as of April 30, 2003 totaling $453,188 are in arrears. The Company is in ongoingcommunication with the lessors to avoid action that may be adverse to the Company.

As discussed above in Legal Proceedings, mechanics liens were filed in2002 on IMI’s Stead manufacturing facility due to non payment for work performed onthe property. Such liens not cleared after 60 days from the date of filing become defaultsunder terms of the deed of trust securing the mortgage on the property and the lender candemand payment in full and institute foreclosure proceedings. As required by U.S.Generally Accepted Accounting Principles, the entire principal balance of the note isincluded in current liabilities. $505,676 of the principal balance would otherwise beclassified as long term debt. Monthly payments in common stock are being made to thegeneral contractor. The lender is aware of the situation and has not made a demand ortaken any other action.

During the three months ended March 31, 2003 the Company offered theholders of its 2000 Series 9% Convertible Notes to extend the notes for an additionalthree years in exchange for an increase in the interest rate, commencing as of each notematurity date, to 12% per annum and a reduced conversion price to $0.20 per share. As ofMarch 31, 2003, out of a principal balance of $2,573,000, holders of $1,306,000 in notesagreed to extend their notes. The remaining $1,267,000 in principal, plus accrued interestof $399,294, is in default as of March 31, 2003. Subsequent to March 31, 2003, anadditional note for $75,000, plus accrued interest of $23,103, was extended. As discussedin Legal Proceedings above, one note-holder has filed suit to collect a principal amountof $72,000 plus accrued of interest $22,553. No other collection action has been taken bythe other note-holders as of the date of this report. During the period of January 1, 2003through the date of this report, $170,000 in principal and $94,407 in accrued interest hasbeen converted to common stock.

 

 

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

                                               President,Treasurer and Director

                                               (PrincipalExecutive Officer)

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

 

DATED: May 14, 2003                        By:/S/JOHN W. WHITNEY

                                               JohnW. Whitney

                                               President,Treasurer and Director

                                               (PrincipalExecutive Officer)

 

DATED: May 14, 2003                        By:/S/MICHAEL C. HORSLEY

                                               MichaelC. Horsley

                                               Controller

                                               (PrincipalAccounting Officer)

 

25

 

ITRONICS INC.

CERTIFICATION PURSUANT TO

SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

CERTIFICATION

I, John W. Whitney, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of Itronics Inc.;

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

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

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-14 and 15d-14) for the registrant and have:designed such disclosure controls and procedures to ensure that material information      relating to the registrant, including its consolidated subsidiaries, is made known to us      by others within those entities, particularly during the period in which this quarterly      report is being prepared;
evaluated the effectiveness of the registrant’s disclosure controls and procedures      as of a date within 90 days prior to the filing of this quarterly report (the      "Evaluation Date"); and
presented in this quarterly report our conclusions about the effectiveness of the      disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on ourmost recent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalent functions):all significant deficiencies in the design or operation of internal controls which could      adversely affect the registrant’s ability to record, process, summarize and report      financial data and have identified for the registrant’s auditors any material      weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other employees who have      a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in thisquarterly report whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent to the date ofour most recent

26

evaluation, including any corrective actions with regard to significant deficienciesand material weaknesses. 

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

                                             ChiefExecutive Officer

                                             ChiefFinancial Officer

 

 

ITRONICS INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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

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

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

 

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

                                          ChiefExecutive Officer

                                          ChiefFinancial Officer

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