UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM l0-QSB

 

(Mark One)

(X) QUARTERLY REPORT UNDER SECTlON 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**                                        For the quarterly period ended June 30, 2003**
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

                                        For the transition period from______ to_____ 

 

Commission File Number 33-18582

 
**ITRONICS INC.**
(Exact name of small business issuer as specified in its charter)

 

                       TEXAS                                 75-2198369
           (State or otherjurisdiction of          (IRS EmployerIdentification Number)

            incorporation ororganization) 

 

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 July 31, 2003, 103,578,664 shares of common stock wereoutstanding.

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 – June 30, 2003    and    December 31, 2002 
4  Condensed    Consolidated Statements of Operations and        Comprehensive Income for the Three and Six Months Ended June 
    30,    2003 and 2002 
6  Condensed    Consolidated Statements of Cash Flows for the    Six    Months Ended June 30, 2003 and 2002. 
7  Notes to Condensed    Consolidated Financial Statements 
8Item 2. Management's    Discussion and Analysis or Plan of           Operation 
14Item 3. Controls and    Procedures
24PART II- OTHER INFORMATIONItem 1. Legal Proceedings
24Item 2. Changes in    Securities and Use of Proceeds 
26Item 3 Defaults upon Senior    Securities
26Item 6. Exhibits and    Reports on Form 8-K 
27Certifications
29
3

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2003 AND DECEMBER 31, 2002

(UNAUDITED)

 

ASSETS
 
JUNE 30,
DECEMBER    31, 
2003
2002CURRENT ASSETS   Cash 
$ 18,085
$ 57,201Accounts receivable, less    allowance for  doubtful accounts, 2003,    $5,700; 2002, $5,700
234,040
88,239Marketable securities
552,521
483,983Inventories
396,351
337,153Prepaid expenses
67,187
44,331Current portion of deferred    loan fees
46,225
46,225Total Current Assets
1,314,409
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 
1,802,248
1,797,926Vehicles 
133,028
133,028Equipment under capital    lease 
1,098,893
1,077,152 
4,503,368
4,477,305Less: Accumulated    depreciation and amortization
1,232,459
1,085,175 
3,270,909
3,392,130OTHER ASSETS   Intangibles, net of    amortization 
8,797
9,115Marketable securities,    available for sale 
-
220,096Deferred loan fees, less    current portion, net of  amortization 
68,828
91,946Investment in American Gold    & Silver Ltd. 
9,250
9,250Deposits
31,970
35,131 
118,845
365,538 
$4,704,163
$4,814,800
4

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
JUNE 30,
DECEMBER    31, 
2003
2002CURRENT LIABILITIES   Accounts payable 
$ 658,946
$ 610,772Accrued management salaries    
487,626
341,278Accrued expenses 
462,846
300,204Insurance contracts payable    
39,041
15,962Interest payable 
219,781
168,473Current maturities of    long-term debt 
552,960
556,301Current maturities of    capital lease obligations 
1,069,578
1,162,723Current maturities of    lease/advances from stockholders
286,356
284,687Current maturities of    convertible notes and accrued interest
2,058,709
3,374,838Other 
15,898
18,131Total Current Liabilities 
5,851,741
6,833,369   LONG-TERM LIABILITIES  Long-term debt, less    current maturities 
129,966
146,610Convertible promissory    notes, less current maturities 
2,899,129
2,086,129Accrued interest,    convertible notes, less current maturities
726,179
294,262Capital lease obligations,    less current maturities
80,395
31,214Capital lease obligation,    shareholder, less current 
maturities
16,483
-Accrued salary due    stockholder
4,254
7,854Deferred gain, less current    maturities
288
3,221Total Long-Term Liabilities    
3,856,694
2,569,290 
9,708,435
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,  99,402,837 at June 30,    2003; 88,690,170 at   December 31, 2002
99,403
88,690Additional paid-in capital 
12,906,711
11,748,423Accumulated deficit 
(18,660,329)
(17,352,796)Common stock to be issued 
424,129
576,998Accumulated other    comprehensive income (loss) 
210,460
241,653Common stock options    outstanding, net 
15,354
109,173 
(5,004,272)
(4,587,859) 
$ 4,704,163
$ 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 AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002

(UNAUDITED)

Three Months Ended June 30,
Six Months Ended June 30,
2003
2002
2003
2002REVENUESFertilizer 
$    269,904
$ 187,030
$    370,849
$    298,940Photochemical    recycling 
56,744
63,197
99,117
120,417Silver 
8,017
38,164
20,985
68,806Mining    technical services 
112,157
85,922
187,480
154,785Total Revenues 
446,822
374,313
678,431
642,948COST OF SALES 
419,690
429,981
697,496
768,530Gross Profit    (Loss) 
27,132
(55,668)
(19,065)
(125,582)OPERATING    EXPENSESDepreciation    and amortization 
83,177
92,866
165,554
184,157Research and    development 
14,544
19,137
30,886
34,059Sales and    marketing 
181,960
342,056
385,259
602,134Delivery and    warehousing
17,616
14,233
25,679
23,014General and    administrative 
197,211
266,438
371,721
525,090Total Operating    Expenses 
494,508
734,730
979,099
1,368,454Operating    (Loss) 
(467,376)
(790,398)
(998,164)
(1,494,036)OTHER INCOME    (EXPENSE)Interest    expense 
(241,403)
(218,532)
(471,106)
(414,252)Interest income    
-
-
-
3Gain on sale of    investments
90,720
66,307
154,881
67,770Other
(1,306)
-
6,856
-Total Other    Income (Expense) 
(151,989)
(152,225)
(309,369)
(346,479)Income (Loss)    before provision 
for income tax
(619,365)
(942,623)
(1,307,533)
(1,840,515)Provision for    income tax 
-
-
-
-Net    Income(Loss) 
(619,365)
(942,623)
(1,307,533)
(1,840,515)Other    comprehensive income (loss)Unrealized    gains (losses) on 
securities 
170,474
552,775
(31,193)
787,851Comprehensive    Income (Loss) 
$(448,891)
$ (389,848)
$(1,338,726)
$(1,052,664)Weighted    average number of shares Outstanding    (1,000’s)
96,992
83,344
94,629
82,525Earnings (Loss)    per share 
$(0.0064)
$(0.0113)
$(0.0138)
$(0.0223)
See Notes to Condensed Consolidated Financial Statements

6

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002

(UNAUDITED)
 
Six Months Ended June 30, 
2003
2002Cash flows from operating    activities   Net income (loss) 
$(1,307,533)
$(1,840,515)Adjustments to reconcile    net loss to 
cash used by operating activities:  Depreciation and    amortization 
165,554
184,157Interest on convertible    notes
306,921
248,490Marketable securities    received for services
(2,573)
(87,089)(Gain) Loss on investments
(154,881)
(67,770)Stock option compensation    (credit) 
(93,819)
24,135(Gain) on debt    restructuring
(29,370)
-Bad debts
15
4,670Expenses paid with issuance    of common stock 
280,562
494,079(Increase) decrease in:  Trade accounts receivable 
(145,817)
(32,350)Inventories 
(59,198)
(81,812)Prepaid expenses 
(27,994)
(11,464)Deposits
500
(1,541)Increase (decrease) in:  Accounts payable 
69,383
172,640Accrued management salaries
142,748
153,040Accrued expenses and    contracts payable 
185,721
37,040Accrued interest
74,182
5,113Net cash used by operating    activities 
(595,599)
(799,177)   Cash flows from investing    activities:  Acquisition of property and    equipment 
(4,322)
(230,406)Proceeds from sale of    investments
277,819
162,739Net cash provided (used) by    investing activities 
273,497
(67,667)   Cash flows from financing    activities:  Proceeds from sale of stock    
241,595
117,500Proceeds from debt,    stockholders
-
232,545Proceeds from long-term    debt, unrelated 
-
824,100Proceeds from account    receivable factoring, net
99,771
-Payments on long-term debt 
(58,380)
(198,799)Net cash provided by    financing activities 
282,986
975,346Net increase (decrease) in    cash 
(39,116)
108,502Cash, beginning of period 
57,201
14,675Cash, end of period 
$ 18,085
$123,177
See Notes to Condensed Consolidated Financial Statements

7

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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 and six months ended June30, 2003 are 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. $122,000 was received from this private placement during the six months ended June30, 2003 and an additional $47,000 was received subsequent to June 30, 2003 through August8, 2003. In addition, $119,595 was received under the Swartz Private Equities, LLC equityline of credit during the six months ended June 30, 2003. 

4. In August 2002 a supplier of equipment for the Stead manufacturingplant filed suit against the Company and its subsidiary, Itronics Metallurgical, Inc.(IMI) in Johnson County, Indiana for the unpaid amount of $64,234 plus attorney’sfees and court costs. On October 1, 2002 the plaintiff received a default judgmentawarding the $64,234 plus $1,500 attorney’s fees plus 8% interest. On November 5,2002 the plaintiff filed a "Notice of Filing of Foreign Judgment" in WashoeCounty, Nevada and has received the judgment. Plaintiff’s attorney is activelyseeking to collect the amount due. Subsequent to June 30, 2003 a proposed paymentagreement has been made. Opposing legal counsel is recommending that the plaintiff acceptthe proposal. 

During the period of September 2002 through June 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 are being actively negotiated and atentative payment arrangement has been agreed to, subject to completion of legalpaperwork, including stipulated judgments. Both payment arrangements call for thedelinquent payments to be added onto the 

8

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

 

end of the leases, with regular monthly payments at the original termsto begin in August 2003. The plaintiffs in the remaining three unsettled suits haveobtained judgments but no further collection action has been taken. The relevantinformation has been assigned to legal counsel who will contact opposing counsel and willattempt to work out payment arrangements. 

In September and October 2002 three mechanics liens totaling $104,708were filed on IMI’s Stead manufacturing facility due to non payment for workperformed on the property. In November 2002 the general contractor filed suit for itsportion of the above amount, a total of $81,233. Final payment on the $81,233 was madesubsequent to June 30, 2003 and two of the liens were released. Negotiations are ongoingto obtain a payment agreement on the remaining $23,475.

In December 2002 a trade creditor filed suit against the Company andWWI in Washoe County, Nevada seeking a total of $12,100. The Company has signed astipulated judgment and made a payment of $3,000 in March 2003. An additional $2,000 waspaid subsequent to June 30, 2003. The Company is in periodic communication with theplaintiffs lawyer regarding the past due payments. No other action has been taken as ofthe date of this report.

In February 2003 a trade creditor filed suit against the Company inWashoe County, Nevada seeking a total of $85,525 plus attorney fees and other costs. Adefault judgment was entered in May 2003. The Company is attempting to negotiate asettlement. 

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. Subsequent to June 30, 2003 the suit was settled bypayment of the Company’s common stock for the full amount due.

In June 2003 the Internal Revenue Service filed liens totaling $120,347for unpaid payroll taxes against the Company’s subsidiaries, WWI, IMI, and ICI. Theamount of delinquent federal payroll taxes due as of June 30, 2003 was approximately$260,000. Taxes incurred beginning in June 2003 are being paid timely and, subsequent toJune 30, 2003, $33,200 has been paid toward the past due amount. A payment arrangement isexpected to be obtained by the end of August 2003.

Subsequent to June 30, 2003 two suits were filed in Washoe County,Nevada against the Company’s subsidiaries, WWI and IMI, by equipment lessors. Thetotal amount of the claims is $128,479 plus attorney fees and other costs. The cases havebeen assigned to legal counsel for negotiation of payment arrangements.

Successful settlement of the above claims is dependent on additionalfinancing.

9

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

 

5. As of June 30, 2003 lease payments totaling $493,489 were inarrears. Of this amount, $482,005 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 June 30, 2003 by the date of this report havebeen classified as current liabilities. Lease payments due as of July 31, 2003 totaling$521,679 are in arrears. The Company is in ongoing communication with the lessors to avoidaction that may be adverse to the Company.

During the six months ended June 30, 2003 six leases were restructured.Three of those were settlements of lawsuits in which the Company agreed to sign stipulatedjudgments wherein the lessor will receive a default judgment if the future payment termsare not met. Negotiations on another of those leases also required the signing of astipulated judgment. The result of restructuring these leases was the elimination of allpayments in arrears and future minimum lease payments of $212,922, compared to minimumlease payments of $251,084 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 lender can demand payment infull and institute foreclosure proceedings. As required by U.S. Generally AcceptedAccounting Principles, the entire principal balance of the note is included in currentliabilities. $500,997 of the principal balance would otherwise be classified as long termdebt. Monthly payments in common stock are being made to the general contractor. Thelender is aware of the situation and has not made a demand or taken any other action.

6. During the six months ended June 30, 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 June 30, 2003, out of a principal balance of $2,573,000, holders of$1,581,000 in notes agreed to extend their notes. The remaining $992,000 in principal,plus accrued interest of $344,009, is in default as of June 30, 2003. Subsequent to June30, 2003, notes for an additional $102,000, plus accrued interest of $37,852, wereextended. During the period of January 1, 2003 through July 31, 2003, for all series ofconvertible notes, a total of $552,000 in principal and $177,985 in accrued interest hasbeen converted to common stock.

7. As discussed above, one Series 2000 Convertible Promissory Note wasthe subject of a lawsuit. A second convertible note was the subject of threatenedlitigation. Both claims were settled subsequent to June 30, 2003 with stock at aconversion price of $0.125 per share, based on the stock value at the time. Accordingly,the notes of those holders of Series 2000 Convertible Promissory Notes that have beenpreviously extended will be amended to reflect the new conversion price of $0.125 pershare and the note holders that have not extended will receive a revised offer to reflectthe new conversion price.

10

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

 

As of December 31, 2002 options and warrants representing a total of35,618,794 common shares were outstanding. This amount included 24,496,081 common sharesrelated to the conversion rights of the 2000 through 2002 Series Convertible PromissoryNotes. Based on the revised conversion price of $0.125 and the increase in interest rateto 12%, the outstanding options for all Convertible Promissory Notes are approximately40,375,000 common shares as of June 30, 2003, an increase of 14,577,000 over the amount itwould have been under the original terms. A total of $1,336,009 in principal and accruedinterest from the 2000 Series Convertible Promissory Notes have not been extended underthe revised terms. If they were to be extended, options as of June 30, 2003 amounting toan additional 8,869,000 common shares would be granted. 

8. Following are the components of Other Comprehensive Income:
 
Three months Ended June 30,
Six Months Ended June 30, 
2003
2002
2003
2002Unrealized holding gains    (losses)     
arising    during the period
$143,776
$589,832
$ 52,469
$765,681
Reclassification    adjustment
26,698
(37,057)
(83,662)
22,170Other Comprehensive Income    (Loss)
$170,474
$552,775
$(31,193)
$787,851
 

9. 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:

11

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)
 
Three Months Ended June 30,
Six Months Ended June 30, 
2003
2002
2003
2002     Revenues:    Photochemical Fertilizer 
$ 334,665
$ 288,391
$ 490,951
$ 488,163Mining Technical Services 
112,157
85,922
187,480
154,785Consolidated Revenues 
$ 446,822
$ 374,313
$ 678,431
$ 642,948     Gross Profit (Loss):    Photochemical Fertilizer 
$(6,924)
$ (58,619)
$ (70,236)
$    (134,664)Mining Technical Services 
34,056
2,951
51,171
9,082Consolidated Gross Profit 
(Loss)
$ 27,132
$ (55,668)
$ (19,065)
$ (125,582)     Operating Income (Loss):    Photochemical Fertilizer 
$    (410,067)
$    (692,613)
$    (862,387)
$(1,307,782)Mining Technical Services 
(57,309)
(97,785)
(135,777)
(186,254)Consolidated Operating 
Income    (Loss)
(467,376)
(790,398)
(998,164)
(1,494,036)Other Income (Expense)
(151,989)
(152,225)
(309,369)
(346,479)Consolidated Net Income     (Loss) before taxes 
$ (619,365)
$ (942,623)
$(1,307,533)
$(1,840,515)
12

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(UNAUDITED)

Identifiable assets by business segment for the major assetclassifications and reconciliation to total consolidated assets are as follows:
 
June 30,
December    31, 
2003
2002Current Assets:  Photochemical Fertilizer 
$ 571,019
$443,003Mining Technical Services 
711,662
598,009 
1,282,681
1,041,012   Property and Equipment,    net:  Photochemical Fertilizer 
3,060,693
3,166,189Mining Technical Services 
206,787
221,654 
3,267,480
3,387,843   Other Assets, net:  Photochemical Fertilizer 
89,790
109,583Mining Technical Services 
1,452,522
1,652,066 
1,542,312
1,761,649   Total Assets:   Photochemical Fertilizer 
3,721,502
3,718,775Mining Technical Services 
2,370,971
2,471,729Total Segment Assets 
6,092,473
6,190,504Itronics Inc. assets 
18,273,160
17,827,985Less: inter-company    elimination 
(19,661,470)
(19,203,689)Consolidated Assets 
$4,704,163
$ 4,814,800   
13
Item 2. Management's Discussion and Analysis or Plan of Operations

I. Results of Operations

The Company reported consolidated revenues of $446,822 for the quarterended June 30, 2003, compared to $374,313 for the prior year quarter, an increase of 19%.The increase was due to increases of $46,274 in Photochemical Fertilizer segment revenuesand $26,235 in Mining Technical Services segment revenues. Consolidated revenues for thefirst six months of 2003 were $678,431 compared to $642,948 for the prior year period, anincrease of 6%. The consolidated net loss was $619,365, or $0.0064 per share, for thequarter ended June 30, 2003, compared to a net loss of $942,623 or $0.0113 per share forthe comparable 2002 period, an improvement of 34%. The primary factors contributing to thedecreased loss for the quarter were an improvement in gross profit (loss) of $82,800,decreased operating costs of $240,200 and an increase in gain on sale of investments of$24,400 which were partially offset by increased interest expense of $22,900 related toincreasing the interest rate from 9% to 12% on the extended 2000 Series ConvertiblePromissory Notes. The consolidated net loss was $1,307,533, or $0.0138 per share, for thesix months ended June 30, 2003, compared to a net loss of $1,840,515 or $0.0223 per sharefor the comparable 2002 period, an improvement of 29%.

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 collection services, silver sales, and GOLD’n GRO liquid fertilizersales.

 

Three Months Ended June 30,
Six Months Ended June 30,
2003
2002
2003
2002Revenues 
$ 334,665
$ 288,391
$ 490,951
$ 488,163Gross profit (loss) 
$ (6,924)
$ (58,619)
$ (70,236)
$    (134,664)Operating income (loss)
$(410,067)
$    (692,613)
$(862,387)
$(1,307,782)
 

Total segment revenues for the second quarter of 2003 wereapproximately $334,700, an increase of 16% from the prior year second quarter. Fertilizersales for the quarter were $269,900, compared to $187,000 for the 2002 second quarter, anincrease of 44%. The fertilizer sales increase is attributable to improved sales ofGOLD’n GRO 9-0-1+7% Zinc. Photochemical recycling revenue for the quarter decreasedby 10% on increased volume of 12%, compared to the second quarter of 2002. The revenuedecrease is attributable to the prior year loss of one customer with multiple servicelocations. The customer decided to contract with a service provider with a nationwideservice capability. During the second quarter of 2003, the volume lost from that

14

customer was made up with the addition of new customers and increasedvolume from existing customers. The new customers have fewer locations than the one theyare replacing, so they do not generate the same level of revenue. However, they are alsoless costly to service. The overall result is that reduced service costs have exceeded thereduced revenue, resulting in the reduced gross loss noted below. Silver sales decreased$30,100 from the second quarter of 2002, a decrease of 79%. The decrease is attributableto the prior year processing of raw photographic wastes in order to build up an inventoryof base liquids used in fertilizer manufacturing. The base liquid inventory has filled theplant’s available storage capacity, resulting in a current period decrease inprocessing raw materials and a resultant decrease in silver sales. Cost of sales decreased$5,400 due primarily to decreases of $24,000 in payroll and related costs and $7,000 ininsurance, which were partially offset by an increase in direct material costs of $27,000due to increased fertilizer sales. The decrease in payroll costs is due primarily to areduction of two plant positions during the quarter. These factors resulted in a grossloss of $6,900 for the second quarter of 2003, compared to $58,600 for the prior yearquarter, a decreased loss of 88%. 

Segment operating expenses decreased $230,900 from the second quarterof 2002, due to a decrease in sales and marketing expense of $151,400 related to decreasedcorporate marketing and a decrease in general and administration costs of $69,500 dueprimarily to a decrease in allocable option compensation expense of $47,600. The decreaseresulted from the second quarter expiration of compensatory stock options. 

These factors resulted in a 2003 second quarter segment operating lossof $410,100 compared to a loss of $692,600 for the second quarter of 2002, a decreasedoperating loss of $282,500, or 41%.

For the first six months of 2003 revenues were $491,000, compared to$488,200 for the comparable 2002 period, a nominal increase. Gross loss for the first sixmonths of 2003 was $70,200, compared to $134,700 for the comparable prior year period, areduced loss of 48%. Operating loss for the first six months of 2003 was approximately$862,400 compared to $1,307,800 for the first six months of 2002, a reduced loss of 34%.The primary factor contributing to the reduced loss were reduced cost of sales andoperating expenses. 

As described above, a modest increase in sales, along with acombination of selective ongoing cost reductions and one time cost reductions, hasresulted in significant improvement in both the segment gross profit (loss) line and inthe segment operating income (loss) line. Going forward, it is expected that the path tooverall profitability will be to first achieve profitability at the gross profit level,then at the operating income level, and lastly, at the net income level. The Companybelieves that the sales foundation is in place and expansion plans are being implementedto achieve those goals over the next 12 to 24 months. The segment achieved a positivegross profit in April and June and nearly reached break even at the gross profit level forthe second quarter of 2003. There is a strong possibility that the segment will achieve apositive gross profit in additional 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. 

15

MINING TECHNICAL SERVICES

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

 

Three Months Ended June 30,
Six Months Ended June 30,
2003
2002
2003
2002Revenues 
$ 112,157
$ 85,922
$ 187,480
$ 154,785Gross profit (loss) 
$ 34,056
$ 2,951
$ 51,171
$ 9,082Operating income (loss)
$ (57,309)
$(97,785)
$(135,777)
$(186,254)
Mining technical services revenue was $112,200 for the quarter endedJune 30, 2003, compared to $85,900 for the comparable quarter of 2002, an increase of 31%.The revenue increase reflects billings on a new litigation support services project. Costof sales decreased by $4,900, due to a decrease of $10,400 in payroll and consultingcosts, which were partially offset by an increase of $6,500 in pass through costs. Thesefactors resulted in a second quarter gross profit for the segment of $34,100 compared to$3,000 for the prior year second quarter, an increase of 1,054%.

Segment operating expenses decreased by $9,400, due primarily to adecrease in allocable corporate marketing expenses. 

The combination of these factors resulted in a 2003 second quartersegment operating loss of $57,300, compared to a loss of $97,800 for the second quarter of2002, a decreased operating loss of $40,500, or 41%. 

For the first six months of 2003, segment revenue totaled $187,500compared to $154,800 for the first six months of 2002, an increase of 21%. Gross profitfor the first six months of 2003 was $51,200, compared to $9,100 for the comparable prioryear period, an increased gross profit of 463%. Operating loss for the period was $135,800compared to an operating loss of $186,300 for the comparable 2002 period, a decreasedoperating loss of 27%. The primary factor contributing to the improvement was increasedprofessional fees on technical services projects.

SUMMARY

On a consolidated basis, the various changes in revenues and operatingexpenses resulted in a second quarter 2003 operating loss of $467,400, compared to$790,400 for the second quarter of 2002, a decreased loss of $323,000, or 41%. For the sixmonth period ended June 30, 2003 the operating loss was $998,200 compared to $1,494,000for the prior year comparable period, a reduced operating loss of 33%.

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II. Changes in Financial Condition; Capitalization

Cash amounted to $18,100 as of June 30, 2003, compared to $123,200 asof June 30, 2002. Net cash used for operating activities was approximately $595,600 forthe first six months of 2003. The cash used for operating activities during the period wasfinanced by a combination of sales of common stock of $241,600 from a private placement ofrestricted common stock and attached warrants and the Swartz Private Equity, LLC. (Swartz)agreement, increases in account payable of $69,400, accrued expenses and interest of$402,700, proceeds from the sale of Golden Phoenix Minerals, Inc. (GPXM) stock of$277,800, and $99,800 in account receivable factoring. 

Total assets decreased during the six months ended June 30, 2003 by$110,600 to $4,704,200. Current assets increased $257,300 due to increases of $145,800 inaccounts receivable, $68,500 in marketable securities, $59,200 in inventory, and $22,900in prepaid expenses, which were partially offset by a decrease in cash of $39,100. Totalproperty and equipment decreased $121,200 due to depreciation and amortization of theassets. Other assets decreased by $246,700 due primarily to the reclassification tocurrent assets of $220,100 of the value of the Company’s investment in GPXM stock. AtJune 30, 2003 the Company owned 1.84 million shares of GPXM with a value of $552,500.During the six months ended June 30, 2003 the Company sold 1,235,100 GPXM shares, withtotal net proceeds of $277,800, to assist with the Company’s cash operatingrequirements. 

Current liabilities decreased during the six months ended June 30, 2003by $981,600 and total liabilities increased by $305,800. Total liabilities increased dueto increases of $48,200 in accounts payable, $142,700 in accrued management salaries,$162,600 in accrued expenses, including $133,500 in federal and state payroll taxes, a net$178,800 in accrued interest on convertible promissory notes, and $51,300 in accruedinterest on other debt. These increases in total liabilities were partially offset by adecrease in convertible notes payable of $250,000 resulting from the conversion of thatamount of principal into common stock during the six months ended June 30, 2003. Currentliabilities decreased due to a net reclassification into long term debt of convertiblenotes and accrued interest totaling $1,316,100 due to a combination of the three yearextension of convertible promissory notes and related accrued interest and the conversionof $250,000 in principal and $128,333 in accrued interest on convertible promissory notesinto common stock. 

 

III. Working Capital/Liquidity

During the six months ended June 30, 2003, working capital improved byapproximately $1,238,900 to a deficit balance of $4,537,300 due to the netreclassification to long term debt of extended convertible promissory notes and accruedinterest totaling $1,316,100. The Company has had limited cash liquidity since the thirdquarter of 2000, which is reflected in the increases in current liabilities discussedabove. The Company has sought and obtained the funding described above, which has not beensufficient to maintain all obligations on a current basis. However, cash liquidity isbeing managed and the Company has been able to make sufficient payments to keep mostsignificant creditors working with it. The cash shortage is a result of two factors.First, fertilizer sales in 2002 and the first six months of 2003 did not expand to theextent anticipated, so operating losses were not reduced as much as expected. Second, the$15 million equity line of credit agreement with Swartz Private Equities, LLC (Swartz) wasnot

17

available between October 2001 and May 2002 due to a Securities andExchange Commission rule change that necessitated renegotiating the contract with Swartzand filing a new registration statement which was filed and became effective on April 30,2002. Through the date of this report $119,595 has been received under the Swartzagreement during 2003 and $339,900 was received during 2002. Since the Swartz equityfunding has not been sufficient to meet the Company’s present and future workingcapital needs, a private placement of stock with attached warrants was started in thefourth quarter of 2002. Private placement proceeds totaling $242,000 have been received in2003 through the date of this report, and $117,500 was received in 2002. The cost ofexercising put rights under the Swartz Agreement has ranged between 28% to 38% of thetotal 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 sales foundation is in place and expansion plans are beingimplemented to achieve those goals over the next 12 to 24 months. The Company achievedsmall gross profits for the months of April and June, and also for the second quarter.There is a strong possibility that the Company may achieve additional positive grossprofits in individual months during the remainder of 2003.

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 9-0-1+7% Zinc, which was introduced in the fallof 2001, and as a result of that success the second quarter 2003 introduction of GOLD'nGRO Base Liquid and a new GOLD’n GRO chelated micronutrient product, it is believedthat a profitable level of sales can be achieved over the next 12 to 24 months. Asignificant factor in locating and entering these niches has been the advice andrecommendations 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 andconsistent on-going sales in tank truck quantities of the

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chelated micronutrient GOLD’n GRO 9-0-1+7% Zinc. Our licenseddistributor network is also continuing to generate orders for original chelatedmicronutrient and chelated 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 into which the GOLD'n GRO fertilizer productscan be successfully sold. This process has identified three fundamental uses, orfunctions, of the GOLD’n GRO products, which are (1) to replace existing productsthat do not fully satisfy existing needs, (2) develop new products which will satisfypresently unfulfilled needs, and (3) develop products that can be blended with existingproprietary products to improve their effectiveness. Replacement products are expected tohave higher sales growth rates than products developed to fulfill the other two functions,which are defined as development products. The GOLD’n GRO GUARDIAN product beingdeveloped as an animal repellant/fertilizer fits into the second category. The GOLD’nGRO Base Liquid fits into the third category of products. 

GOLD'n GRO 9-0-1+7% Zinc was developed to replace existing products asa direct result of this process. It has been successfully introduced into the Californiamarket to replace a product that was not fully satisfying customer needs. This product hasbeen primarily responsible for the Company’s sales growth over the last 24 months.This same process has led to the development of a second replacement product, which is aGOLD’n GRO chelated micronutrient product. This new product has now been approved forsale by the distributor network and is expected to have a growth rate similar to that ofthe GOLD’n GRO 9-0-1+7% Zinc.

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, with the purpose ofimproving the effectiveness of those blends. This product was approved for sale by theCompany’s distributor network during the second quarter of 2003 and is beingcarefully introduced into the market by the distributor network. The base liquid is beingsold in truckload quantities and usage is expected to be several times greater than theusage of the GOLD'n GRO Zinc product. The GOLD'n GRO Base Liquid is expected to eventuallybe used at the rate of 5 to 15 percent of the distributor's field blend mixes sold totheir grower customers. This presents an opportunity for the Company to participate in thedistributor's proprietary bulk liquid blend sales programs in a meaningful way. In thenear term, the Company believes that the California market for this product alone is largeenough to produce sales levels needed to become profitable within the next 12 to 24months.

In June 2003 the Company began a cooperative effort with North AmericanDeer Management Network, LLC to develop a single application fertilizer to be sold underthe trademark GOLD’n GRO GUARDIAN that also serves to repel animals such as deer andrabbits. Preliminary testing

19

has been completed and shows the products to be compatible, producing apositive growth response while at the same time repelling, but not harming, the unwantedanimals. Holly Ridge Nursery & Landscape Company is managing the project and iscurrently funding a detailed effectiveness study being conducted by the University ofRhode Island that will cover one full growing season. Results of the study will beutilized to support product registration applications and to complete patent applications.Holly Ridge is also funding the commercial trials which are underway in various locations.The Company sold the first bulk quantity of its GOLD’n GRO 8-8-8+4% Sulfur to HollyRidge in July 2003. This cooperative effort provides the Company with an introduction ofits GOLD’n GRO line of fertilizer products into the northeastern U.S. and it allowsdevelopment of the GOLD’n GRO GUARDIAN animal repellant/fertilizer market nationwide.

The above describes a flexible approach to developing markets for theGOLD’n GRO fertilizers which will continue and may require plant modifications toaccommodate the new products as their development is completed and they are cleared forsale. Using this flexible approach, the Company believes that it has now identified andestablished GOLD'n GRO bulk products that have large enough markets to provide the salesvolumes needed for the Company to achieve profitability within the next 12 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 reduces nutrient costs andincreases crop yields, generating a significant economic benefit for the grower customers.A second reason is that the photographic byproduct materials used as base componentsprovide the chelates at a much lower cost compared to purchasing new "unused"chelates. A third reason is that the GOLD'n GRO liquid products are specifically designedfor fertigation application in micro-sprinkler and drip irrigation, which is a growingapplication method and requires liquid fertilizer products with superior stability inirrigation water under widely varying conditions. These demonstrated advantages of theGOLD'N GRO liquid product line are provided by the Company's proprietary "BeneficialUse Photochemical and Water Recycling" technology.

Most of the GOLD’n GRO products are currently registered for salein Arizona, California, Colorado, Hawaii, and Nevada, and GOLD’n GRO 9-0-1+7% 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

20

micro-nutrient products was made to a peach grower in western Colorado.Planning is underway to implement sales in Hawaii, Idaho, Oregon, and Washington. TheCompany is developing bulk customers in northern Nevada and has started discussions withpotential distributors in selected states not covered by its licensed distributor network,including the northeastern states. 

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 project to develop and sell a line of animal repellant/fertilizerproducts under the trademark GOLD’n GRO GUARDIAN provides direct GOLD’n GROproduct marketing and distribution for the northeastern states into the LandscapeConstruction and Maintenance market, and into the wholesale and retail Nursery andGreenhouse markets. The new GOLD’n GRO GUARDIAN product line presents the opportunityto develop products for the animal repellant market, an emerging national market in whichproduct offerings are currently limited. Deer and other plant eating animals are becominga major urban problem because they are now doing tens of millions of dollars in damage tourban landscaping each year. 

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

21

agreements which must be negotiated in advance, and once establishedcannot readily be interrupted or cancelled. The Company's photochemical supply customersgenerate the liquids on an on-going basis, typically have limited on site storage, andmust be provided continuous reliable service by the Company. Due to this characteristic,the Company 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 and second quartersof 2003, the Company was awarded a contract for two more photochemical concentrators. Thisprogram is regarded 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. The Company is actively marketing its"Beneficial Use Photochemical and Water Recycling" service to other 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

22

photochemical recycling, but profit margins for the refining servicesare very small when 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 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.

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 chelated zinc fertilizer products, requireinstallation of a heat exchange system that was expected to be operational in the firstquarter of 2003, but which was delayed due to lack of funding to complete theinstallation. The capital cost of completing installation of the heat exchange system isbudgeted at $200,000. A capital budget is being developed for the expansion of the truckload out system.

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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.

 

Item 3. Controls and Procedures

Itronics’ management, including the Chief Executive and FinancialOfficer, have conducted an evaluation of the effectiveness of disclosure controls andprocedures as of the end of the quarter ending June 30, 2003 and have evaluated whetherany changes in internal controls over financial reporting have occurred during the quarterended June 30, 2003 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting. These evaluationswere conducted pursuant to Exchange Act Rule 13a-15. Based on these evaluations, 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. He also concluded that there wereno significant changes in internal controls over financial reporting, or in factors thatcould significantly affect internal controls over financial reporting, during the quarterended June 30, 2003. 

 

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. Subsequent to June 30, 2003 a proposed paymentagreement has been made. Opposing legal counsel is recommending that the plaintiff acceptthe proposal. 

During the period of September 2002 through June 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

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ranging from 6 to 31 months. If the restructured leases are defaulted,judgments for the original claimed amounts can be entered and further collection action,including repossession of the secured equipment, can be taken. Of the remaining unsettledsuits, two are being actively negotiated and a tentative payment arrangement has beenagreed to, subject to completion of legal paperwork, including stipulated judgments. Bothpayment arrangements call for the delinquent payments to be added onto the

end of the leases, with regular monthly payments at the original termsto begin in August 2003. The plaintiffs in the remaining three unsettled suits haveobtained judgments but no further collection action has been taken. The relevantinformation has been assigned to legal counsel who will contact opposing counsel and willattempt to work out payment arrangements. 

In September and October 2002 three mechanics liens totaling $104,708were filed on IMI’s Stead manufacturing facility due to non payment for workperformed on the property. In November 2002 the general contractor filed suit for itsportion of the above amount, a total of $81,233. Final payment on the $81,233 was madesubsequent to June 30, 2003 and two of the liens were released. Negotiations are ongoingto obtain a payment agreement on the remaining $23,475.

In December 2002 a trade creditor filed suit against the Company andWWI in Washoe County, Nevada seeking a total of $12,100. The Company has signed astipulated judgment and made a payment of $3,000 in March 2003. An additional $2,000 waspaid subsequent to June 30, 2003. The Company is in periodic communication with theplaintiffs lawyer regarding the past due payments. No other action has been taken as ofthe date of this report.

In February 2003 a trade creditor filed suit against the Company inWashoe County, Nevada seeking a total of $85,525 plus attorney fees and other costs. Adefault judgment was entered in May 2003. The Company is attempting to negotiate asettlement. 

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. Subsequent to June 30, 2003 the suit was settled bypayment of the Company’s common stock for the full amount due.

In June 2003 the Internal Revenue Service filed liens totaling $120,347for unpaid payroll taxes against the Company’s subsidiaries, WWI, IMI, and ICI. Theamount of delinquent federal payroll taxes due as of June 30, 2003 was approximately$260,000. Taxes incurred beginning in June 2003 are being paid timely and, subsequent toJune 30, 2003, $33,200 has been paid toward the past due amount. A payment arrangement isexpected to be obtained by the end of August 2003.

Subsequent to June 30, 2003 two suits were filed in Washoe County,Nevada against the Company’s subsidiaries, WWI and IMI, by equipment lessors. Thetotal amount of the claims is $128,479 plus attorney fees and other costs. The cases havebeen assigned to legal counsel for negotiation of payment arrangements.

Successful settlement of the above claims is dependent on additionalfinancing.

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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 June 30, 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
325,000
$ 26,000
Private    placement for GPXM option purchase
1,365,938
109,275
Conversion    of notes payable and accrued interest
987,833
176,676
Labor    services of management and directors 
2,500
300
Interest    on management salary in arrears
137,675
15,898 
2,818,946
$328,149
The above transactions qualified for exemption from registration underSections 3(b) or 4(2) of the Securities Act of 1933. Private placements for cash werenon-public transactions. The Company believes that all such investors are eitheraccredited or, either alone or with their purchaser representative, have such knowledgeand experience in financial and business matters that they are capable of evaluating themerits and risks of the prospective investment.

 

Item 3. Defaults Upon Senior Securities

As of June 30, 2003 lease payments totaling $493,489 were in arrears.Of this amount, $482,005 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 June 30, 2003 by the date of this report have been classified ascurrent liabilities. Lease payments due as of July 31, 2003 totaling $521,679 are inarrears. The Company is in ongoing communication with the lessors to avoid action that maybe adverse to the Company.

During the six months ended June 30, 2003 six leases were restructured.Three of those were settlements of lawsuits in which the Company agreed to sign stipulatedjudgments wherein the lessor will receive a default judgment if the future payment termsare not met. Negotiations on another of those leases also required the signing of astipulated judgment. The result of restructuring these leases was the elimination of allpayments in arrears and future minimum lease payments of $212,922, compared to minimumlease payments of $251,084 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

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on the property and the lender can demand payment in full and instituteforeclosure proceedings. As required by U.S. Generally Accepted Accounting Principles, theentire principal balance of the note is included in current liabilities. $500,997 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.

During the six months ended June 30, 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 June 30, 2003, out of a principal balance of $2,573,000, holders of$1,581,000 in notes agreed to extend their notes. The remaining $992,000 in principal,plus accrued interest of $344,009, is in default as of June 30, 2003. Subsequent to June30, 2003, notes for an additional $102,000, plus accrued interest of $37,852, wereextended. During the period of January 1, 2003 through July 31, 2003, for all series ofconvertible notes, a total of $552,000 in principal and $177,985 in accrued interest hasbeen converted to common stock.

 

Item 6. Exhibits and Reports on Form 8-K

Exhibit 31      CERTIFICATION PURSUANT TO SECTION 302 OF THE 

               SARBANES-OXLEY ACT OF 2002                           29

Exhibit 32      CERTIFICATION PURSUANT TO 18 U.S.C. SECTION

               1350 AS ADOPTED PURSUANT SECTION 906 OF THE 

               SARBANES-OXLEY ACT OF 2002                           30

 

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SIGNATURES

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

 

                                         ITRONICS INC.

 

DATED: August 13, 2003                 By: /S/JOHN W. WHITNEY
                                           John W. Whitney 

                                           President, Treasurer and Director

                                           (Principal Executive Officer)

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

 

 

DATED: August 13, 2003                  By: /S/JOHN W. WHITNEY

                                            John W. Whitney

                                            President, Treasurer and Director

                                            (Principal Executive Officer)

 

DATED: August 13, 2003                  By: /S/MICHAEL C. HORSLEY

                                            Michael C. Horsley

                                            Controller

                                            (Principal Accounting Officer)

 

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