UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM l0-QSB

 

(Mark One)

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

EXCHANGE ACT OF 1934**                                                                                                     **

**                        For the quarterly period ended September 30, 2002**

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

For the transition period from______ to_____ 

 

Commission File Number 33-18582

 

ITRONICS INC.

(Exact name of small business issueras specified in its charter)

 

                      TEXAS                               75-2198369
        (State orother jurisdiction of         (IRS EmployerIdentification Number)

        incorporation or organization) 

 

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

(Address of principal executiveoffices)

 

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

Former name, former address and formerfiscal, if changes since last report.

 

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of the Exchange Act during thepast 12 months (or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements during the past 90 days.Yes (x) No ( ).

 

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of theissuer's classes of common equity, as of the latest practicable date:

      As of October 31,2002, 86,685,555 shares of common stock were outstanding.

Transitional Small Business Disclosure Format (Checkone): Yes ( ) No (X)

2

ITRONICS INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 
PART I - FINANCIAL INFORMATION
PAGEItem 1. Financial    StatementsCondensed Consolidated    Balance Sheets – September 30, 2002  and December 31,    2001 
4Condensed Consolidated    Statements of Operations and Comprehensive Incomefor the Three and Nine    Months Ended September 30, 2002 and 2001.
6Condensed Consolidated    Statements of Cash Flows for the  Nine Months Ended    September 30, 2002 and 2001. 
7Notes to Condensed    Consolidated Financial Statements 
8Item 2. Management's    Discussion and Analysis or Plan of Operation
10Item 3. Controls and    Procedures
16PART II- OTHER INFORMATIONItem 1. Legal Proceedings
16Item 2. Changes in    Securities and Use of Proceeds 
17Item 3 Defaults upon Senior    Securities
17Item 6. Exhibits and    Reports on Form 8-K 
17Certification
19
3

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2002 AND DECEMBER 31,2001

(UNAUDITED)
 

ASSETS
 
SEPTEMBER    30,
DECEMBER    31, 
2002
2001CURRENT ASSETS   Cash 
$ -
$ 14,675Accounts receivable, less    allowance for    doubtful accounts,    2002, $5,700; 2001, $7,400
114,207
166,976Stock subscription and    other receivables
41,985
-Marketable securities
459,024
-Inventories
336,365
318,595Prepaid expenses
73,633
100,797Current portion of deferred    loan fees
46,225
46,225Total Current Assets
1,071,439
647,268   PROPERTY AND EQUIPMENT   Land 
215,000
215,000Building and improvements
1,068,639
1,047,198Design and construction in    progress,     manufacturing    facility
175,305
86,884Equipment and furniture 
1,703,335
1,585,995Vehicles 
133,028
133,028Equipment under capital    lease 
1,077,152
971,888 
4,372,459
4,039,993Less: Accumulated    depreciation and amortization
1,007,318
794,750 
3,365,141
3,245,243OTHER ASSETS   Intangibles, net of    amortization 
184,715
166,082Marketable securities,    available for sale 
545,885
313,849Deferred loan fees, less    current portion, net of    amortization 
103,494
138,171Investment in American Gold    & Silver Ltd. 
9,250
9,250Deposits
39,938
38,397 
883,282
665,749 
$5,319,862
$4,558,260
4

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
SEPTEMBER    30,
DECEMBER    31, 
2002
2001CURRENT LIABILITIES   Bank overdraft
$ 27,184 
$ -Accounts payable 
616,706
516,312Accrued management salaries    
328,358
83,329Accrued expenses 
232,370
319,691Insurance contracts payable    
38,812
30,799Interest payable 
125,430
74,097Current maturities of    long-term debt 
42,200
38,255Current maturities of    capital lease obligations 
1,164,879
426,744Current maturities of    advances from stockholders
289,719
25,222Current maturities of    convertible notes and accrued interest
3,328,946
25,438Other 
17,463
18,463Total Current Liabilities 
6,212,067
1,558,350   LONG-TERM LIABILITIES  Long-term debt, less    current maturities 
572,528
599,472Convertible promissory    notes, less current maturities 
2,086,129
3,890,029Accrued interest,    convertible notes, less current maturities
234,985
540,444Capital lease obligations,    less current maturities
37,626
882,485Accrued salary due    stockholder
13,254
15,054Deferred gain, less current    maturities
5,799
13,548Total Long-Term Liabilities    
2,950,321
5,941,032 
9,162,388
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,    85,974,040 at    September 30, 2002; 80,999,392 at     December 31, 2001
85,999
80,999Additional paid-in capital 
11,782,881
10,829,459Accumulated deficit 
(16,741,350)
(14,062,234)Common stock to be issued 
343,177
152,960Accumulated other    comprehensive income (loss) 
565,430
(27,403)Common stock options    outstanding, net 
121,337
85,097 
(3,842,526)
(2,941,122) 
$5,319,862
$ 4,558,260   
See Notes to CondensedConsolidated Financial Statements

5
ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

(UNAUDITED)
 
Three Months Ended Sept 30,
Nine Months Ended Sept 30, 
2002
2001
2002
2001REVENUES    Fertilizer 
$ 82,224
$ 34,070
$ 381,164
$ 100,758Photobyproduct recycling 
139,450
66,489
259,867
169,318Silver and gold 
42,343
39,458
111,149
231,867Mining technical services 
127,451
148,418
282,236
418,150Total Revenues 
391,468
288,435
1,034,416
920,093COST OF SALES 
465,625
344,899
1,234,155
1,087,049Gross Profit (Loss) 
(74,157)
(56,464)
(199,739)
(166,956)     OPERATING EXPENSES    Depreciation and    amortization 
97,790
88,175
281,947
253,047Research and development 
23,697
9,884
57,756
33,722Sales and marketing 
204,172
276,114
806,306
1,009,408Delivery and warehousing
8,152
7,801
31,166
14,346General and administrative 
239,005
237,742
764,095
801,739Total Operating Expenses 
572,816
619,716
1,941,270
2,112,262Operating (Loss) 
(646,973)
(676,180)
(2,141,009)
(2,279,218)     OTHER INCOME (EXPENSE)    Interest expense 
(224,116)
(164,291)
(638,368)
(438,418)Interest income 
-
148
3
2,548Gain on sale of investments
32,487
-
100,257
-Total Other Income    (Expense) 
(191,629)
(164,143)
(538,108)
(435,870)     Income (Loss) before    provision 
for income tax
(838,602)
(840,323)
(2,679,117)
(2,715,088)Provision for income tax 
-
-
-
-     Net Income(Loss) 
(838,602)
(840,323)
(2,679,117)
(2,715,088)Other comprehensive income         (loss)    Unrealized gains (losses)    on 
  securities 
(195,018)
(97,861)
592,833
(3,539)     Comprehensive Income (Loss)    
$(1,033,620)
$(938,184)
$(2,086,284)
$(2,718,627)     Weighted average number of    shares     Outstanding (1,000’s)
85,151
78,823
83,410
77,579     Earnings (Loss) per share 
$(0.0098)
$(0.0107)
$(0.0321)
$(0.0350)
See Notes to CondensedConsolidated Financial Statements
6

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER30, 2002 AND 2001

(UNAUDITED) 
Nine Months Ended Sept 30, 
2002
2001Cash flows from operating    activities   Net income (loss) 
$(2,679,117)
$(2,715,088)Adjustments to reconcile    net loss to 
cash used by operating activities:     Depreciation    and amortization 
281,947
253,047   Interest on    convertible notes
384,900
224,467   Marketable    securities received for services
(197,089)
(75,705)   (Gain) Loss on    investments
(100,257)
-   Stock option    compensation 
36,242
45,828   Bad debts
4,823
-   Expenses paid    with issuance of common stock/debt 
666,817
452,200(Increase) decrease in:     Trade accounts    receivable 
47,946
(3,848)   Other    receivables
(3,985)
-   Inventories 
(17,770)
3,904   Prepaid    expenses 
8,491
32,813   Deposits
(1,541)
(3,435)Increase (decrease) in:     Accounts    payable 
154,928
46,345   Accrued    expenses and contracts payable 
162,921
223,991   Accrued    interest
51,333
80,019Net cash used by operating    activities 
(1,199,411)
(1,435,462)   Cash flows from investing    activities:  Acquisition of property and    equipment 
(236,733)
(66,765)Acquisition of intangibles    and investments 
-
(725)Proceeds from sale of    investments/equipment
222,523
415Net cash used by investing    activities 
(14,210)
(67,075)   Cash flows from financing    activities:  Proceeds from sale of stock    
247,518
292,006Proceeds from debt,    stockholders
318,545
58,500Proceeds from long-term    debt, unrelated 
844,100
1,348,513Payments on long-term debt 
(238,401)
(209,848)Net cash provided by    financing activities 
1,171,762
1,489,171Net increase (decrease) in    cash 
(41,859)
(13,366)Cash, beginning of period 
14,675
17,990Cash (overdraft), end of    period 
$ (27,184)
$ 4,624
See Notes to CondensedConsolidated Financial Statements

7
ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2002

(UNAUDITED)

 

1. The unaudited condensedconsolidated financial statements printed herein have been prepared in accordance with theinstructions to Form 10-QSB and do not include all of the information and disclosuresrequired by U.S. Generally Accepted Accounting Principles. Therefore, these financialstatements should be read in conjunction with the consolidated financial statements andrelated footnotes included in the Company's Form 10-KSB for the year ended December 31,2001. These financial statements reflect all adjustments that are, in the opinion ofmanagement, necessary to fairly state the results for the interim periods reported.

2. The results of operations for thethree and nine months ended September 30, 2002 are not necessarily indicative of theresults to be expected for the full year.

3. A Private Placement of 12%Convertible Notes is completed and $844,100 was raised during the nine months endedSeptember 30, 2002. The notes are due in three years. Interest is compounded annually andpayable at maturity, or, at the option of the note holder, can be paid annually in stock.The notes and accrued interest are convertible, at any time during the three year period,into the Company’s restricted Common Stock, at $0.15 to $0.25 per share. The Companymay call the notes prior to the due date and, in that event, the note holder has 30 daysto decide whether to convert the note and accrued interest into stock.

New lease financing on equipmentduring the nine months ended September 30, 2002 amounted to approximately $115,000. 

During the nine months endedSeptember 30, 2002 an officer/stockholder loaned Whitney & Whitney, Inc. (WWI)$230,000, and in addition loaned WWI 600,000 shares of Golden Phoenix Minerals, Inc.(GPXM) stock which were sold for $83,045. During the same time period, WWI repaid 416,463of the GPXM shares out of shares owned by it. Subsequent to September 30, 2002 theofficer/stockholder has loaned WWI $5,000.

4. As of September 30, 2002 note andlease payments totaling $205,602 were in arrears. Of this amount, $193,619 remains unpaidas of the date of this report. As required by U.S. Generally Accepted AccountingPrinciples, the principal balance of the leases that are not paid through September 30,2002, a total of $611,499, has been classified as a current liability. This amount wouldotherwise be classified as long term debt. As of the date of this report, lease paymentstotaling $269,683 are in arrears. The Company is in regular communication with the lessorsto avoid action that may be adverse to the Company.

5. Following are the components ofOther Comprehensive Income:
 
Three Months Ended Sept 30,
Nine Months Ended Sept 30, 
2002
2001
2002
2001
Unrealized    holding gains (losses) arising during the period$(145,242)$    (97,861)$564,386$    (3,539)
Reclassification    adjustment
(49,776)
-
28,447
-
Other    Comprehensive Income
$(195,018)
$ (97,861)
$592,833
$ (3,539)
 

6. Following is financial informationfor each of the Company’s segments. No changes have occurred in the basis ofsegmentation since December 31, 2001.

Reconciliation of segment revenuesand operating income (loss) to the respective consolidated amounts and to consolidated netincome (loss) before taxes follows:

8

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2002

(UNAUDITED)
 
Three Months Ended Sept 30,
Nine Months Ended Sept 30, 
2002
2001
2002
2001Revenues:    Photobyproduct Fertilizer 
$ 264,017
$ 140,017
$ 752,180
$ 501,943Mining Technical Services 
127,451
148,418
282,236
418,150Consolidated Revenues 
$ 391,468
$ 288,435
$1,034,416
$ 920,093     Operating Income (Loss):    Photobyproduct Fertilizer 
$(566,237)
$(609,059)
$(1,874,019)
$(2,096,755)Mining Technical Services 
(80,736)
(67,121)
(266,990)
(182,463)Consolidated Operating    Income (Loss)
(646,973)
(676,180)
(2,141,009)
(2,279,218)Other Income (Expense)
(191,629)
(164,143)
(538,108)
(435,870)Consolidated Net Income       (Loss) before taxes 
$(838,602)
$(840,323)
$(2,679,117)
$(2,715,088)
 

Identifiable assets by businesssegment for the major asset classifications and reconciliation to total consolidatedassets are as follows:
 
September    30,
December    31, 
2002
2001Current Assets:  Photobyproduct Fertilizer 
$ 445,026
$ 449,996Mining Technical Services 
550,451
145,474 
995,477
595,470Property and Equipment,    net:  Photobyproduct Fertilizer 
3,121,875
2,948,854Mining Technical Services 
238,551
290,387 
3,360,426
3,239,241Other Assets, net:  Photobyproduct Fertilizer 
123,708
150,139Mining Technical Services 
2,156,080
2,095,916 
2,279,788
2,246,055Total Assets:   Photobyproduct Fertilizer 
3,690,609
3,548,989Mining Technical Services 
2,945,082
2,531,777Total Segment Assets 
6,635,691
6,080,766Itronics Inc. assets 
17,650,429
16,278,194Less: inter-company    elimination 
(18,966,258)
(17,800,700)Consolidated Assets 
$ 5,319,862
$ 4,558,260
   
9
 

Item 2. Management's Discussion and Analysis orPlan of Operations

I. Results of Operations

The Company reported consolidatedrevenues of $391,468 for the quarter ended September 30, 2002, compared to $288,435 forthe prior year quarter, an increase of 36%. The increase was due to an increase of$124,000 in Photobyproduct Fertilizer segment revenues, which was partially offset by adecrease of $21,000 in Mining Technical Services segment revenues. Consolidated revenuesfor the first nine months of 2002 were $1,034,416 compared to $920,093 for the prior yearperiod, an increase of 12%. Revenues for the Photobyproduct Fertilizer segment increasedby $250,200, which was partially offset by a decrease in revenues from the MiningTechnical Services segment of $135,900. The consolidated net loss was $838,602, or $0.0098per share, for the quarter ended September 30, 2002, compared to a net loss of $840,323 or$0.0107 per share for the comparable 2001 period. The primary factors contributing to thenominally decreased loss for the quarter was decreased operating costs of $46,900 and gainon sale of investments of $32,500 which were partially offset by increased interestexpense of $59,800 related to increased borrowing on the Convertible Note PrivatePlacement and increased gross loss of $17,700. The consolidated net loss was $2,679,117,or $0.0321 per share, for the nine months ended September 30, 2002, compared to a net lossof $2,715,088 or $0.0350 per share for the comparable 2001 period. The primary factorcontributing to the reduced loss for the nine months was reduced sales and marketingexpenses and general and administrative expenses.

To provide a more completeunderstanding of the factors contributing to the changes in revenues, operating expensesand the resultant operating loss, the discussion presented below is separated into theCompany's two operating segments.

PHOTOBYPRODUCT FERTILIZER

This segment, managed by ItronicsMetallurgical, Inc., operates a photobyproduct recycling plant, which includes relatedsilver recovery. As part of the recycling process, the Company manufactures and markets aline of liquid fertilizer products which are being introduced under the GOLD’n GROtrademark into the markets in Arizona, California, Nevada, Oregon, and Hawaii. Revenuesare generated from photobyproduct management services, silver sales, and GOLD’n GROfertilizer sales.

 

Three Months Ended Sept 30,
Nine Months Ended Sept 30,
2002
2001
2002
2001Sales revenue 
$      264,017
$      140,017
$        752,180
$        501,943Operating income (loss) 
$(566,237)
$(609,059)
$(1,874,019)
$(2,096,755)
 

Total segment revenues for the thirdquarter of 2002 were approximately $264,000, an increase of 89% over the prior year thirdquarter. Fertilizer sales for the quarter were $82,200, compared to $34,100 for the 2001third quarter, an increase of 141%. The fertilizer sales increase is attributable to bulksales of the GOLD’n GRO Zinc micro-nutrient product that was introduced in the thirdquarter of 2001. Photobyproduct recycling revenue for the quarter increased by 110% on adecreased volume of 25%, compared to the third quarter of 2001. The increase in revenue isattributable to $92,200 in revenue from the sale of five photochemical concentrators tothe U.S. Navy under a contract with the Department of Defense, which was partially offsetby a decrease in photowaste recycling fees of $19,200. The decrease in recycling fees andvolume is due to the decision by a customer we were serving on a regional basis to combinetheir regional photowaste services to one national contract. Silver/gold sales increased$2,900 from the third quarter of 2001, an increase of 7%. Cost of sales increased $126,300due primarily to increases in direct materials costs of $110,300 related to increasedsales, $7,100 in payroll and related costs, and $7,100 in insurance costs. These factors 

10

resulted in a gross loss of $81,700for the third quarter of 2002, compared to $79,400 for the prior year quarter, anincreased loss of 3%. 

Segment operating expenses decreased$45,100 from the third quarter of 2001, due to a decrease in sales and marketing expenseof $69,100 related to decreased marketing for photo waste services, which was partiallyoffset by increases of $13,800 in research and development costs and $8,400 indepreciation and amortization. 

These factors resulted in a 2002second quarter segment operating loss of $566,200 compared to a loss of $609,100 for thethird quarter of 2001, a decreased operating loss of $42,800, or 7%.

For the first nine months of 2002revenues were $752,200, compared to $501,900 for the comparable 2001 period, an increaseof 50%. Operating loss for the first nine months of 2002 was approximately $1,874,000compared to $2,096,800 for the first nine months of 2001, a reduced loss of 11%. Theprimary factors contributing to the reduced loss were increased sales resulting in areduced gross loss of $50,200 and reduced operating costs of $172,500.

 

MINING TECHNICAL SERVICES

This segment, known as Whitney &Whitney, Inc., provides mining and materials management, geology, engineering andeconomics consulting, and publishes specialized mineral economics and materials financialreports. It employs technical specialists with expertise in the areas of mining, geology,mining engineering, mineral economics, materials processing and technology development.Technical services have been provided to many of the leading U.S. and foreign miningcompanies, several public utilities with mineral interests, to various state agencies, theU.S. and foreign governments, and the United Nations and the World Bank.

 

Three Months Ended Sept 30,
Nine Months Ended Sept 30,
2002
2001
2002
2001Sales revenue 
$      127,451
$ 148,418
$ 282,236
$      418,150Operating income (loss) 
$ (80,736)
$(67,121)
$(266,990)
$(182,463)
 

Mining technical services revenue was$127,500 for the quarter ended September 30, 2002, compared to $148,400 for the comparablequarter of 2001, a decrease of 14%. The revenue decrease reflects the decision by one ofthe Company’s primary clients to focus on selling, rather than developing, its Nevadamining property. Services to the client are limited primarily to locating a buyer for theproperty. In prior years, the Company actively managed the property for the purpose ofaccumulating the information necessary to present the property to major mining companies.Such work is now substantially complete. Cost of sales decreased by $5,500, due to adecrease of $4,600 in pass-through costs. These factors resulted in a gross profit for thesegment of $7,500 compared to $23,000 for the prior year third quarter, a decrease of 67%.

Segment operating expenses decreasednominally by $1,800. 

The combination of these factorsresulted in a 2002 third quarter segment operating loss of $80,700, compared to a loss of$67,100 for the third quarter of 2001, an increased operating loss of $13,600, or 20%. 

For the first nine months of 2002,segment revenue totaled $282,200 compared to $418,200 for the first nine months of 2001, adecrease of 33%. Operating loss for the period was $267,000 compared to an operating lossof $182,500 for the comparable 2001 period, an increased operating loss of 46%. Theprimary factor contributing to the decline was decreased professional fees on technicalservices projects.

11

SUMMARY

On a consolidated basis, the variouschanges in revenues and operating expenses resulted in a third quarter 2002 operating lossof $647,000, compared to $676,200 for the third quarter of 2001, a decreased loss of$29,200, or 4%. For the nine month period ended September 30, 2002 the operating loss was$2,141,000 compared to $2,279,200 for the prior year comparable period, a reduced loss of6%.

 

II. Changes in Financial Condition; Capitalization

Cash amounted to $(27,184) as ofSeptember 30, 2002, compared to $4,624 as of September 30, 2001. Net cash used foroperating activities was approximately $1,199,400 for the first nine months of 2002. Thecash used for operating activities during the period was financed by a combination ofsales of common stock of $230,000 under the Swartz Private Equity, LLC. (Swartz)agreement, $17,500 in warrant exercises, $318,500 in loans from officer/stockholders, and$844,100 from the Private Placement of 12% convertible promissory notes. A total of$236,700 was invested in property and equipment during the period, primarily for equipmentcosts for the bulk fertilizer truck loading facility and for a heating/cooling unit.$197,100 of Golden Phoenix Minerals, Inc. (GPXM) restricted common stock was received forservices during the period. The market value of the GPXM investment was increased by$592,800 during the nine months ended September 30, 2002, based on GPXM’s stock priceas of September 30, 2002. 

Total assets increased during thenine months ended September 30, 2002 by $761,600 to $5,319,900. Current assets increased$424,200 due to increases in other accounts receivable of $42,000, marketable securitiesof $459,000 (GPXM-see below), and inventory of $17,800. These increases in current assetswere partially offset by decreases in cash of $14,700 and accounts receivable of $52,800.Total property and equipment increased $332,500, which includes lease financed equipmentof $115,000. Other assets increased by $217,500 due to a $691,100 net increase in thevalue of the Company’s investment in GPXM stock, of which $459,000 is classified incurrent assets. The net increase in value of GPXM stock was partially offset byamortization of various intangible assets. At September 30, 2002 the Company owned 3.2million shares of GPXM with a value of $1,004,900. During the nine months ended September30, 2002 the Company sold 1,507,700 GPXM shares, including the 600,000 shares loaned toWWI by an officer/stockholder, with total net proceeds of $305,600, to assist with theCompany’s cash operating requirements. During the nine months ended September 30,2002 an officer/stockholder has assigned WWI options to purchase 750,000 GPXM shares at$0.10 per share. WWI exercised these options by offsetting accounts receivable due it fromGPXM. In exchange for assigning these options, the officer/stockholder will receive$68,625 in Company restricted stock from an upcoming private placement. 

Current liabilities increased by$4,653,700 and total liabilities increased by $1,663,000. Total liabilities increased dueto new private placements of $844,100 in Convertible Promissory Notes, $100,400 inaccounts payable, $264,500 in advances from stockholders, $384,900 in accrued interest onthe Convertible Promissory Notes, and $243,200 in accrued management salaries. Currentliabilities increased due to reclassification of convertible notes and accrued interesttotaling $3,303,500, reclassification of $611,499 of capital lease obligations, accountspayable of $100,400, net advances of $264,500 from officer/stockholders, $245,000 inaccrued management salaries, and $51,300 in accrued interest. The increase in accountspayable reflects $168,900 in payables for the bulk fertilizer truck loading facility andheating/cooling equipment which were incurred in June 2002.

 

III. Working Capital/Liquidity

During the nine months endedSeptember 30, 2002, working capital decreased by approximately $4,229,500 to a deficitbalance of $5,140,600. $3,303,500 of the reduced working capital is due to thereclassification of convertible notes payable and accrued interest that became due withintwelve months of September 30, 2002. Notes maturing in early 2003 have conversion prices 

12

ranging from $.50 to $1.18, and thereis a possibility that the market price at the time the notes mature will be a lesseramount. In order to conserve cash, note holders may be offered a lower conversion priceand/or a higher interest rate, as an inducement to extend the term of their Note. TheCompany has had limited cash liquidity since the third quarter of 2000, which is reflectedin the increase in current liabilities. The Company has sought and obtained the fundingdescribed above, which has not been sufficient to maintain all obligations on a currentbasis. However, cash liquidity is being managed and the Company has been able to makesufficient payments to keep most significant creditors working with it. The cash shortageis a result of two factors. First, fertilizer sales in 2002 did not expand to the extentanticipated, so operating losses were not reduced as much as expected. Second, the $15million equity line of credit agreement with Swartz Private Equities, LLC (Swartz) was notavailable between October 2001 and May 2002 due to a Securities and Exchange Commissionrule change that necessitated renegotiating the contract with Swartz and filing a newregistration statement which has been filed and became effective on April 30, 2002.Significant terms to the amended contract include the elimination of future warrants to begranted Swartz upon the exercise of the Company’s put rights, extending the term ofthe agreement to February 27, 2004, eliminating the six month minimum commitment fee andthe right of first refusal on capital raising transactions, and the easing of restrictivecovenants on such transactions. Through the date of this report $309,500 has been receivedunder the Swartz agreement during 2002. However, the Swartz equity funding may not besufficient to meet the Company’s future working capital needs, so it is anticipatedthat a private placement of stock with attached warrants will be started in the fourthquarter of 2002. 

IV. New Developments

The Company’s expansion of itsGOLD’n GRO fertilizer manufacturing and sales continued during the quarter, withconsistent sales in tank truck quantities of the new chelated micronutrient GOLD’nGRO zinc now occurring. Our distributor network is also receiving truck load orders forGOLD’n GRO 20-1-7, GOLD’n GRO 6-12-9, and GOLD’n GRO 8-8-8.

Now that the GOLD'n GRO product linehas been established and the project to upgrade the GOLD’n GRO fertilizer products toa second generation of formulations is complete, the Company and its distribution networkwill be able to put greater emphasis on expanding GOLD'n GRO sales. One of the primarymethods of accomplishing this is through ongoing field trials, such as those describedbelow, which identify new markets for use of the GOLD’n GRO fertilizer products. TheGOLD’n GRO sales growth that has been established with the distribution network isexpected to continue. The Company has started discussions with potential distributors inselected states not covered by its current distribution network, but actual expansion intonew territories is dependent on acquisition of additional financing.

The Company has completed theinstallation of a bulk liquid fertilizer tank truck load out facility, which has thecapability to load a 5,000 gallon tank truck in 30 minutes, providing the capacity tohandle anticipated growth in demand during the next two years. Ongoing changes in thefactory process, arising as a result of specific sales opportunities such as the zincfertilizer product, include installation of heater/cooler equipment, expected to beoperational in the first quarter of 2003, which will increase capacity of the batch mixingsystem to well in excess of 20,000 gallons (about 100 tons) per 24 hour day. 

The Company presently sells itscommercial GOLD’n GRO products in 2.5 gallon, 55 gallon, and 250 gallon containersand full or partial truck load quantities. The 250 gallon capacity mini-bulk totes are themost 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 1,000 ofthese totes and the number of totes in use is continuing to increase.

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Additional near term expansionprojects that have been identified include installation of a truck scale, partialautomation of the raw material feed system, and installation of additional bulk tankageboth indoors and outdoors. Installation of a rail siding will be required further in thefuture. The plant will then be able to produce and ship about 36,000 tons of finishedproducts per year; this volume could then be more than doubled in the future with someautomation and installation of an additional manufacturing unit.

The capital cost of the truck loadout and the heating/cooling system presently being installed is budgeted at $280,000. Thebulk tankage system is estimated to cost $2.5 million; technical requirements including arequired secondary containment floor result in a barrier to incremental installation toaccommodate incremental sales growth. 

The Company has completed a projectto upgrade and convert its GOLD'n GRO fertilizer products to a second generation offormulations. The purpose of the upgrade is to provide standardization of formulas and rawmaterial content, which will reduce unit production costs and simplify raw materialinventory requirements. The second generation products are low chloride or chloride free,and are demonstrating improved nutritional effectiveness for the crops being fertilized. 

The second generation GOLD'n GROfertilizer products are formulated to match potential new sources of secondary chelates.This will make it possible to begin to use "non-photo" chelates and low cost,secondary non-photographic sources of raw materials to supplement the Company’sphotographic raw material sources.

The fertilizer market is shifting tothe use of environmentally sound materials and now that this shift is taking place theGOLD'n GRO products will have a marketing advantage. New toxic metal rules are increasinggrower awareness of the need to obtain and use environmentally sound products. Californiaand several other states are revising their regulations on fertilizers to requirereporting by fertilizer distributors and manufacturers of the toxic heavy metal content oftheir fertilizers. Also, in California and some other states, the amount of toxic heavymetals allowed to be contained in fertilizer products is being limited. This rapidtightening of environmental regulations is a significant development. All of the Company'sGOLD'n GRO fertilizer products meet the revised standards, and thus are positioned to meetthe new market requirements. 

The change in the state regulationsrequired the redesign of the fertilizer packaging labels. The label is a formal documentwhich provides the guarantee of the contents of the fertilizer and provides suggestionsfor use. The cost of labeling has increased significantly as has the cost of documentingthe contents of the products. Because of this, a decision was made early in the firstquarter to reduce the number of GOLD'n GRO products for sale to the professional marketsfrom 18 to 10. The GOLD'n GRO professional labels for these 10 products have beenredesigned and are now being introduced. The redesign project was coordinated with theupgrade to second generation formulations discussed above, so no additional label designwork will be needed. This work represents a major undertaking and is now complete. 

GOLD’n GRO products arecurrently registered for sale in Arizona, California, Hawaii, and Nevada. GOLD’n GROZinc was registered in Idaho during the second quarter. The Company may now registeradditional GOLD'n GRO products for sale in Oregon, Idaho, and Utah. 

The Company's two"consumer" package products are being sold locally in Reno, Nevada and over theinternet through the Itronics web page "e-store" 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 productline now has a good selection of products for the turf and ornamental markets, with 3products for the nursery and specialty agriculture markets, and 3 high quality chelatedmicro-nutrient products which can be used in all of the markets. The 

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GOLD'n GRO chelated multi-nutrientproducts are considered to be "Specialty Liquid Fertilizer" and fit into theSpecialty Fertilizers segment of the national and international fertilizer markets. Thespecialty products are generally sold in smaller quantities and at higher prices than theprimary Nitrogen (N), Phosphate(P), and Potassium(K), commonly referred to as NPK whichare generally sold as single nutrient products in large tonnages at relatively low bulkcommodity prices.

The Company has the opportunity tobecome a large supplier of chelated multi-nutrient specialty products because thephotographic byproduct materials used as base components have a high chelate content andthe cost of goods is lower than the cost of purchasing new "unused" chelates.This natural advantage in raw material supply which is provided by the Company'sproprietary "Beneficial Use Photobyproduct Recycling" technology is beginning todisplay itself through the rapidly expanding sales of GOLD'n GRO Zinc. As other secondaryraw material sources are developed using the Company's proprietary technology, the cost ofraw materials for producing the GOLD'n GRO products is expected to become very stable andprovide competitive longer term specialty product pricing for GOLD'n GRO customers. 

Several field crop trials weresuccessfully completed in 2001, several trials are continuing, and several new trials havebeen initiated. The trial on valencia oranges in southern California is completing itsfirst full year, and a trial on table grapes using the GOLD'n GRO Zinc and the GOLD'n GROIron was completed in southern California. Several nursery trials are underway as aretrials at several turf farms. A field trial using the micronutrient products on peaches insouthwestern Colorado was successfully completed by a major University and a field trialon seed grass in Oregon was completed. Discussions are underway to initiate some fieldtrial work with the micronutrient products in southern Texas.

In July 2002 the Company receivedresults from a field fertilization trial of GOLD’n GRO Zinc on table grape vines inSouthern California. The application was a comparison with the grower’s normalfertilization program and produced an increase in berry weight, the grape clusters provedto be more uniform, and there was a five percent increase in yield. The value of theincrease in yield to the grower was $325 per acre at an additional cost of $7.50 per acre,a more than 40 times increase in value over the cost of the GOLD’n GRO fertilizerused to produce the increase. Using a hypothetical 1,000 acre farm, this would mean anincrease in value of $325,000 at a cost of $7,500 compared to the normal fertilizationprogram. 

In September 2002 the Companyreceived results from a field fertilization trial of GOLD’n GRO fertilizer on cotton.The application was made by foliar spray and was compared with the grower’s standardpractice. The application resulted in a 10% increase in mature cotton bolls, which wouldbe expected to increase sale value to the grower about 30 times the cost of theGOLD’n GRO fertilizer used.

Demand for the Company'sphotobyproduct services business continues to increase due to growth in the use ofconventional photography in the markets being serviced. The supply of these materials ismore than adequate to support continuing growth in fertilizer demand. During the firstnine months of 2002 the Company did enter into strategic discussions with potential largesuppliers of photobyproduct materials in anticipation of increases in the rate of GOLD'nGRO fertilizer demand growth.

The Company was awarded a contract bythe Department of Defense for five photochemical concentrators, which were delivered.Installation and testing at certain military bases will be completed over the next severalmonths under a separate contract. After the equipment is installed and operational, theCompany will begin to receive the concentrated photobyproducts that are produced by thesemachines. This program is regarded as a pilot project, which may lead to providing"Beneficial Use Photobyproduct Recycling" services to all branches of the U.S.military throughout the United States and is being developed by the Department of Defensein consultation with the Federal EPA.

A Department of Defense contractorhas presented the company a waste product for evaluation which contains both silver andmaterials that may be useable for fertilizer manufacturing. The 

15

Company is evaluating this product,which is currently available in relatively small amounts, but which is expected to grow inquantity over time. Other similar materials are known to be treated as waste products fordisposal, but with use of the Company's proprietary technology some of these may beconverted to useable products to support silver refining and fertilizer manufacturing. Dueto the small size of the waste stream, the development of technology for processing thesematerials was delayed until the conversion of the GOLD'n GRO fertilizers to the secondgeneration formulations was completed.

The Company's sales of 5 ounce"Silver Nevada Miner" bars through the Itronics "e-store" continue togrow, although those sales are still relatively small. The sales of finished silverbullion from internally recovered silver were up in the first nine months compared to lastyear and are expected to grow more significantly in the fourth quarter of this year. 

Growth of silver output is driven toa large degree by photobyproduct processing to support GOLD'n GRO fertilizer sales. Thereare some opportunities to expand silver output separate from photobyproduct recycling, butprofit margins 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.

During the third quarter theCompany’s mining technical services segment acquired a new client and has beenengaged to perform technical services that could lead to a significant contract that wouldlast into the second quarter of 2003.

 

V. Forward-Looking Statements

The statements in this Form 10-QSBthat are not historical facts or statements of current status are forward-lookingstatements (as defined in the Private Securities Litigation Reform Act of 1995) thatinvolve risks and uncertainties. Actual results may differ materially.

 

Item 3. Controls and Procedures

Itronics’ management, including the ChiefExecutive and Financial Officer, have conducted an evaluation of the effectiveness ofdisclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on thatevaluation, the Chief Executive and Financial Officer concluded that the disclosurecontrols and procedures are effective in ensuring that all material information requiredto be filed in this quarterly report has been made known to him in a timely fashion. Therehave been no significant changes in internal controls, or in factors that couldsignificantly affect internal controls, subsequent to the date the Chief Executive andFinancial Officer completed his evaluation.

 

PART II- OTHER INFORMATION

Item 1. Legal Proceedings 

In August 2002 the supplier of equipment to beutilized in the Stead manufacturing plant filed suit against the Company’ssubsidiary, Itronics Metallurgical, Inc. (IMI) in Johnson County, Indiana for the unpaidamount of $64,234 plus attorney’s fees and court costs. On October 1, 2002 theplaintiff received a default judgment awarding the $64,234 plus $1,500 attorney’sfees plus 8% interest. On November 5, 2002 the plaintiff filed a "Notice of Filing ofForeign Judgment" in Washoe County, Nevada. IMI has 30 days from that date to respondto the complaint. IMI intends to negotiate a settlement for a reduced amount due todelivery delays and defects in the equipment. 

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In September 2002 one of IMI’s equipment lessorsfiled suit against it in Los Angeles County, California due to delinquent payment ofmonthly lease payments. The suit seeks $45,878 plus late charges, interest, and courtcosts/attorney fees. A case management conference is scheduled for February 24, 2003. IMIintends to negotiate a settlement of this suit.

In September and October 2002 a general contractorand two subcontractors have filed mechanics liens on IMI’s Stead manufacturingfacility due to non payment for work performed on the property. The amounts due total$104,708. IMI intends to negotiate settlement of these claims. 

Successful settlement of the above claims isdependent on future financing.

 

Item 2. Changes in Securities and Use of Proceeds

(c) Recent Sales of Unregistered Securities:

Following is a summary of sales ofunregistered securities for the three months ended September 30, 2002. All securities wereissued as restricted common shares which are subject to Rule 144 of the Securities andExchange Commission. Generally, Rule 144 requires shareholders to hold the shares for aminimum of one year before sale. In addition, officers, directors and more than 10%shareholders are further restricted in their ability to sell such shares. There have beenno underwriters of these securities and no underwriting commissions or discounts have beenpaid.
 
Shares
Value 
Issued
ReceivedLabor services of    management, directors and consultants
2,500
$ 750Interest on management    salary in arrears
15,180
4,512Operating expenses
5,350
750 
23,030
$ 6,012
The above transactions qualified forexemption from registration under Sections 3(b) or 4(2) of the Securities Act of 1933.Private placements for cash were non-public transactions. The Company believes that allsuch investors are either accredited or, either alone or with their purchaserrepresentative, have such knowledge and experience in financial and business matters thatthey are capable of evaluating the merits and risks of the prospective investment.

 

Item 3. Defaults Upon Senior Securities

As of September 30, 2002 lease payments totaling$205,602 were in arrears. Of this amount, $193,619 remains unpaid as of the date of thisreport. As required by U.S. Generally Accepted Accounting Principles, the principalbalance of the leases that are not paid through September 30, 2002, a total of $611,499,has been classified as a current liability. This amount would otherwise be classified aslong term debt. As of the date of this report, lease payments totaling $269,683 are inarrears. The Company is in regular communication with the lessors to avoid action that maybe 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 SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

                                             ITRONICS INC.

 

DATED: November 13, 2002                    By: /S/JOHN W. WHITNEY
                                                John W. Whitney 

                                                President, Treasurer and Director

                                                (Principal Executive Officer)

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Report has been signed below by the following persons on behalfof the Company and in the capacities and on the dates indicated.

 

 

DATED: November 13, 2002                    By: /S/JOHN W. WHITNEY

                                                John W. Whitney

                                                President, Treasurer and Director

                                                (Principal Executive Officer)

 

DATED: November 13, 2002                    By: /S/MICHAEL C. HORSLEY

                                                Michael C. Horsley

                                                Controller

                                                (Principal Accounting Officer)

18

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 Form10-QSB of Itronics Inc.;

2. Based on my knowledge, this quarterly report doesnot contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by this quarterlyreport;

3. Based on my knowledge, the financial statements,and other financial information included in this quarterly report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act 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 officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming 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 officersand I have indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantly affect internalcontrols subsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses. 

Date: November 13, 2002                      /S/ JOHN W. WHITNEY
                                             John W. Whitney

                                             Chief Executive Officer

                                             Chief Financial Officer

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