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, 2001

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

For the transition period from______ to_____ 

 

Commission File Number 33-18582

 

ITRONICS INC.

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

 

 

 

                      TEXAS                                             75-2198369
        (State or other jurisdiction of                    (IRS Employer Identification Number)

         incorporation or organization) 

 

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

(Address of principal executive offices)

 

 

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

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

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

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

          As of July 31, 2001, 78,198,277shares of common stock were outstanding.

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

2

ITRONICS INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 
PART I - FINANCIAL    INFORMATION
PAGE  Item 1. Financial    Statements Condensed Consolidated    Balance Sheets – June 30, 2001   and December 31,    2000 
4Condensed Consolidated    Statements of Operations and Comprehensive   Income for the Three    and Six Months Ended June 30, 2001 and 2000.
6Condensed Consolidated    Statements of Cash Flows for the   Six Months Ended    June 30, 2001 and 2000. 
7Notes to Condensed    Consolidated Financial Statements 
8  Item 2. Management's    Discussion and Analysis or Plan of Operation
10  PART II- OTHER INFORMATION Item 2. Changes in    Securities and Use of Proceeds 
17Item 6. Exhibits and    Reports on Form 8-K 
17  
3

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2001 AND DECEMBER 31, 2000

(UNAUDITED)

 

ASSETS

JUNE 30,
DECEMBER 31,
2001
2000CURRENT ASSETS Cash 
$ 52,669
$ 17,990Accounts    receivable, less allowance for  doubtful    accounts, 2001, $7,400; 2000, $7,400
207,052
217,719Account    receivable, lease equipment financing 
2,809
2,809 Stock    subscription receivable 
-
82,000Inventories
253,719
268,719Prepaid    expenses
120,059
154,191Current portion    of deferred loan fees
32,925
25,910Total Current    Assets
669,233
769,338PROPERTY AND    EQUIPMENT Land 
215,000
215,000Building and    improvements
1,046,298
1,046,298 Design and    construction in progress,      manufacturing facility
82,404
48,506Leasehold    improvements
900
900Equipment and    furniture 
1,538,516
1,546,477Vehicles 
133,028
133,028Equipment under    capital lease 
967,981
896,562
3,984,127
3,886,771Less:    Accumulated depreciation and amortization
658,326
521,076
3,325,801
3,365,695OTHER ASSETS Intangibles,    net of amortization 
133,946
89,039Marketable    securities, available for sale 
374,761
228,782Investment in    non-public company
30,000
30,000Deferred loan    fees, less current portion, net of     amortization 
156,155
86,335Investment in    American Gold & Silver Ltd. 
9,250
9,250Deposits
34,502
31,067
738,614
474,473
$4,733,648
$4,609,506
4

 

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
JUNE 30,
DECEMBER    31, 
2001
2000CURRENT LIABILITIES   Accounts payable 
$ 438,569
$ 538,333Accrued management salaries    
14,702
27,942Accrued expenses 
153,474
126,632Insurance contracts payable    
38,450
24,943Interest payable 
40,293
18,064Current maturities of    long-term debt 
30,414
16,077Current maturities of    capital lease obligations 
336,285
263,145Advances from stockholders
5,222
5,222Other 
18,456
14,331Total Current Liabilities 
1,075,865
1,034,689   LONG-TERM LIABILITIES  Long-term debt, less    current maturities 
586,971
59,498Convertible promissory    notes 
3,243,000
2,668,000Accrued interest,    convertible notes
362,319
221,855Capital lease obligations,    less current maturities
1,042,735
1,000,529Accrued salary due    stockholder
18,654
22,254Deferred gain, less current    maturities
18,716
23,882Total Long-Term Liabilities    
5,272,395
3,996,018 
6,348,260
5,030,707   STOCKHOLDERS' EQUITY    (DEFICIT)  Preferred stock, par value    $0.001 per share;    authorized 999,500    shares, issued and outstanding    2001, 0 shares;    2000, 0 shares 
-
-Common stock, par value    $0.001 per share;    authorized    250,000,000 shares, issued and outstanding,    77,933,829 at June    30, 2001; 75,017,412 at     December 31, 2000
77,934
75,017Additional paid-in capital 
10,366,033
9,761,976Accumulated deficit 
(12,283,249)
(10,408,484)Common stock to be issued 
66,657
117,151Accumulated other    comprehensive income (loss) 
103,463
9,141Common stock options    outstanding, net 
54,550
23,998 
(1,614,612)
(421,201) 
$4,733,648
$4,609,506   
See Notes to Condensed Consolidated Financial Statements

 

5

 

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000

(UNAUDITED)
 
Three Months Ended June 30,
Six Months Ended June 30, 
2001
2000
2001
2000REVENUES    Fertilizer 
$ 43,439
$ 49,905
$ 66,688
$ 61,280Photobyproduct recycling 
54,583
46,011
102,829
92,854Silver and gold 
56,316
15,904
192,409
50,496Mining technical services 
119,101
138,956
269,732
327,784Total Revenues 
273,439
250,776
631,658
532,414COST OF SALES 
335,322
287,225
748,695
618,878Gross Profit (Loss) 
(61,883)
(36,449)
(117,037)
(86,464)     OPERATING EXPENSES    Depreciation and    amortization 
85,078
44,668
164,872
72,883Research and development 
10,688
11,668
23,838
24,727Sales and marketing 
337,444
531,824
733,294
969,391Plant start-up costs 
-
64,009
-
121,491General and administrative 
285,222
236,804
563,997
432,012Total Operating Expenses 
718,432
888,973
1,486,001
1,620,504Operating (Loss) 
(780,315)
(925,422)
(1,603,038)
(1,706,968)     OTHER INCOME (EXPENSE)    Interest expense 
(147,465)
(109,586)
(274,127)
(154,146)Interest income 
1,759
24,866
2,400
46,222Total Other Income    (Expense) 
(145,706)
(84,720)
(271,727)
(107,924)     Income (Loss) before    provision 
for income tax
(926,021)
(1,010,142)
(1,874,765)
(1,814,892)Provision for income tax 
-
-
-
-Net Income(Loss) 
(926,021)
(1,010,142)
(1,874,765)
(1,814,892)Other comprehensive    income(loss)     Unrealized gains (losses)    on 
   securities 
104,524
(133,033)
94,322
(130,161)Comprehensive Income (Loss)    
$(821,497)
$(1,143,175)
$(1,780,443)
$(1,945,053)     Weighted average number of    shares Outstanding (1,000’s)77,61273,27776,94172,543Earnings (Loss) per share 
$(0.0119)
$(0.0138)
$(0.0244)
$(0.0250)
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, 2001 AND 2000

(UNAUDITED)
 
Six Months Ended June 30, 
2001
2000Cash flows from operating    activities   Net income (loss) 
$(1,874,765)
$(1,814,892)Adjustments to reconcile    net loss to cash used by operating activities:    Depreciation and    amortization 
164,872
72,883  Interest on    convertible notes
140,464
100,805  Stock option    compensation 
30,552
14,928  Bad debts
-
2,073  Other
-
4,516Expenses paid with issuance    of common stock/debt 
316,865
488,251(Increase) decrease in:    Trade accounts    receivable 
10,667
25,339  Inventories 
15,000
(223,752)  Prepaid expenses 
9,957
(31,428)  Deposits
(3,435)
(15,354)Increase (decrease) in:    Accounts payable 
(80,207)
41,962  Accrued expenses and    contracts payable 
27,634
32,877  Accrued interest
22,229
(3,283)Net cash used by operating    activities 
(1,220,167)
(1,305,075)   Cash flows from investing    activities:  Acquisition of property and    equipment 
(57,563)
(609,974)Acquisition of marketable    securities 
(51,658)
(204,353)Acquisition of intangibles    and investments 
(725)
(1,518)Proceeds from sale of    equipment
415
-Net cash used by investing    activities 
(109,531)
(815,845)   Cash flows from financing    activities:  Proceeds from sale of stock    
267,200
553,281Proceeds from long-term    debt, unrelated 
1,267,704
2,883,000Payments on long-term debt 
(170,527)
(131,005)Net cash provided by    financing activities 
1,364,377
3,305,276Net increase (decrease) in    cash 
34,679
1,184,356Cash, beginning of period 
17,990
142,287Cash, end of period 
$ 52,669
$ 1,326,643
See Notes to Condensed Consolidated Financial Statements

7

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2001

(UNAUDITED)

 

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

2. The results of operations for the three and six months ended June30, 2001 are not necessarily indicative of the results to be expected for the full year.

3.A Private Placement of 12% Convertible Notes was begun inMarch 2001 and $565,000 was raised during the period ended June 30, 2001. The notes aredue in three years with dates beginning in March 2004. 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 per share. The Company may callthe notes prior to the due date and, in that event, the note holder has 30 days to decidewhether to convert the note and accrued interest into stock. 
New lease financing on equipment during the first six months amountedto approximately $287,300, of which $192,300 was received in cash. 

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

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

Reconciliation of segment revenues and operating income (loss) to therespective consolidated amounts and to consolidated net income (loss) before taxesfollows:
 
Three Months Ended June 30,
Six Months Ended June 30, 
2001
2000
2001
2000Revenues:    Photobyproduct Fertilizer 
$ 154,338
$ 111,820
$ 361,926
$ 204,630Mining Technical Services 
119,101
138,956
269,732
327,784Consolidated Revenues 
$ 273,439
$ 250,776
$ 631,658
$ 532,414     Operating Income (Loss):    Photobyproduct Fertilizer 
$(717,463)
$    (816,329)
$(1,487,696)
$(1,504,836)Mining Technical Services 
(62,852)
(109,093)
(115,342)
(202,132)Consolidated Operating    Income (Loss)
(780,315)
(925,422)
(1,603,038)
(1,706,968)Other Income (Expense)
(145,706)
(84,720)
(271,727)
(107,924)Consolidated Net Income       (Loss) before taxes 
$(926,021)
$(1,010,142)
$(1,874,765)
$(1,814,892)
8

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2001

(UNAUDITED)

Identifiable assets by business segment for the major assetclassifications and reconciliation to total consolidated assets are as follows:
 
June 30,
December    31, 
2001
2000Current Assets:  Photobyproduct Fertilizer 
$ 398,712
$ 396,429Mining Technical Services 
188,816
189,607 
587,528
586,036Property and Equipment,    net:  Photobyproduct Fertilizer 
2,992,821
2,996,308Mining Technical Services 
326,121
361,670 
3,318,942
3,357,978Other Assets, net:  Photobyproduct Fertilizer 
167,740
92,307Mining Technical Services 
1,776,724
1,700,611 
1,944,464
1,792,918Total Assets:   Photobyproduct Fertilizer 
3,559,273
3,485,044Mining Technical Services 
2,291,661
2,251,888  Total Segment Assets    
5,850,934
5,736,932  Itronics Inc. assets    
14,027,246
12,622,324  Less: inter-company    elimination 
(15,144,532)
(13,749,750)  Consolidated Assets 
$4,733,648
$4,609,506   
9

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

I. Results of Operations

The Company reported a net loss of $926,021 or $0.0119 per share forthe quarter ended June 30, 2001, compared to a net loss of $1,010,142 or $0.0138 per sharefor the comparable 2000 period. For the first six months of 2001 the loss was $1,874,765or $0.0244 per share, compared to a loss of $1,814,892 or $0.0250 per share for the 2000comparable period. The primary factor contributing to the decreased loss for the currentquarter was reduced operating expenses of $170,500, which was partially offset by anincrease in interest expense, net of interest income, of $61,000 and an increased grossloss of $25,400. The increase in interest expense reflects the cost of additionalconvertible note and lease financing.

To provide a more complete understanding of the factors contributing tothe changes in revenues, operating expenses and the resultant operating loss, thediscussion presented below is separated into the Company's two operating segments.

PHOTOBYPRODUCT FERTILIZER

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

 
 
Three Months Ended June 30,
Six Months Ended June 30, 
2001
2000
2001
2000Sales revenue 
$      154,338
$      111,820
$        361,926
$        204,630Operating income (loss) 
$(717,463)
$(816,329)
$(1,487,696)
$(1,504,836)     
Total segment sales for the second quarter of 2001 were approximately$154,300, an increase of 38% over the prior year second quarter. Fertilizer sales for thequarter were approximately $43,400, compared to $49,900 for the 2000 second quarter, adecrease of 13%. Fertilizer sales dollars declined as a result of two factors. First,prior year fertilizer sales included $7,500 in injector sales, while the current quarterincluded $600 in such sales. Consequently, sales dollars of Gold’n Gro fertilizerproducts increased nominally over the prior year quarter. Second, fertilizer sales gallonshave shifted from sales primarily to Northern Nevada customers in the second quarter of2000 to sales in California through Western Farm Service, Inc. (WFS) in the 2001 secondquarter, due to focusing the majority of the Company’s marketing effort in theCalifornia market through WFS. The result of this effort is that the manufacturing portionof the distribution agreement with WFS is now being utilized, wherein the Company sellsconcentrated Gold’n Gro "syrup" products to WFS, which in turn producesfinished products for sale to its customers. On a per gallon basis, the sale price of theGold’n Gro "syrup" products are less than that of the finished Gold’nGro products the Company sells to WFS and other customers. Consequently, while salesdollars were flat compared to the prior year quarter, sales gallons increased by 109% forthe Company and 163% for combined Company and WFS sales gallons. This strategy is intendedto create a broad customer base, which will produce accelerated growth in sales dollars.Photobyproduct recycling revenue for the quarter increased by 19% on an increased volumeof 29%, compared to the second quarter of 2000. Growth rates in photobyproduct servicerevenue are limited by the growth rate of fertilizer sales. Silver/gold sales increased$40,400 from the second quarter of 2000, an increase of 254%. This increase reflects$27,900 in gold sales under the processing agreement with Golden Phoenix Minerals, Inc.Cost of sales increased $79,200 due primarily to increases in direct materials costs of$36,400 related to increased sales and $34,300 in payroll and related costs due to acombination of the prior year classification of $23,400 in wages as plant start-up costsand increased production. These factors resulted in a gross loss of $95,700 for the secondquarter of 2001, compared to a gross loss of $59,000 for the second quarter of 2000, anincreased loss of 62%. 

10

Segment operating expenses decreased approximately $135,600 from thesecond quarter of 2000, due to decreases of $163,500 in sales and marketing and $64,000 inplant start-up costs, which were partially offset by increases in depreciation of $35,800and general and administration of $57,200. The decrease in sales and marketing expensesreflects reduced corporate marketing and no costs in the current period for development ofGold’n Gro fertilizer product labels and advertising campaigns for Gold’n Grofertilizer products and the "Silver Nevada Miner" silver bars. Approximately$24,100 of the increase in general and administration is due to a consulting agreement foracquisition services that began in the third quarter of 2000. The agreement was closed atthe end of the second quarter of 2001.

These factors resulted in a 2001 second quarter segment operating lossof $717,500, compared to a loss of $816,300 for the second quarter of 2000, a decreasedoperating loss of $98,900, or 12%.

For the first six months of 2001 sales were $361,900, compared to$204,600 for the comparable 2000 period, an increase of 77%. Operating loss for the firstsix months of 2001 was approximately $1,487,700 compared to $1,504,800 for the first sixmonths of 2000, a reduced loss of 1%. The primary factor contributing to the reduced losswas decreased sales and marketing costs as discussed above.

 

 

MINING TECHNICAL SERVICES

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

 
 
Three Months Ended June 30,
Six Months Ended June 30, 
2001
2000
2001
2000Sales revenue 
$ 119,101
$ 138,956
$ 269,732
$ 327,784Operating income (loss) 
$(62,852)
$(109,093)
$(115,342)
$(202,132)     
Mining technical services revenue was approximately $119,100 for thequarter ended June 30, 2001, compared to $139,000 for the comparable quarter of 2000, adecrease of 14%. The sales decrease includes an increase of $21,300 in professionalservice revenue, which was offset by decreased pass-through revenues of $39,800 fromongoing technical services projects. Cost of sales decreased by $31,100, due to a decreaseof $39,800 in pass-through costs, which was partially offset by an increase of $7,500 inpayroll and outside consultant fees. These factors resulted in a gross profit for thesegment of $33,800 compared to $22,500 for the prior year second quarter, an increase of50%.

Segment operating expenses decreased by $35,000 due primarily to adecrease of $30,800 in sales and marketing costs, which reflects the segment’sallocable portion of reduced corporate marketing costs.

11

The combination of these factors resulted in a 2001 second quartersegment operating loss of $62,900, compared to a loss of $109,100 for the second quarterof 2000, a decreased operating loss of $46,200, or 42%. 

For the first six months of 2001, segment revenue totaled $269,700compared to $327,800 for the first six months of 2000, a decrease of 18%. Operating lossfor the period was $115,300 compared to an operating loss of $202,100 for the comparable2000 period, a reduction of 43%. The primary factors contributing to the improvement wereincreased professional fees as a percentage of total revenue and reduced expenditures forsales and marketing costs.

SUMMARY

On a consolidated basis, the various changes in revenues and operatingexpenses resulted in a second quarter 2001 operating loss of $780,300, compared to$925,400 for the second quarter of 2000, a decreased loss of $145,100, or 16%. For the sixmonth period ended June 30, 2001 the operating loss was $1,603,000 compared to $1,707,000for the prior year comparable period, a reduction of 6%.

 

II. Changes in Financial Condition; Capitalization

Cash amounted to $52,669 as of June 30, 2001, compared to $1,326,643 asof June 30, 2000. Net cash used for operating activities was approximately $1,220,200 forthe first six months of 2001. The cash used for operating activities during the period wasfinanced by a combination of sales of common stock of $217,200 under the Swartz PrivateEquity, LLC. (Swartz) agreement, $50,000 in warrant exercises, $192,300 in leasefinancing, $510,400 from mortgage financing on the Reno/Stead manufacturing facility, and$565,000 from the Private Placement of 12% convertible promissory notes. A total of$57,600 was invested in property and equipment during the period, primarily for designcosts for expansion of the manufacturing facility. $51,700 was invested in an ongoinginvestment in Golden Phoenix Minerals, Inc. (GPXM). The market value of the GPXMinvestment was increased by $104,500 during the quarter, based on GPXM’s stock priceas of June 30, 2001. 

Total assets increased during the six months ended June 30, 2001 byapproximately $124,100 to $4,733,600. Current assets decreased approximately $100,100 dueto decreases in accounts receivable of $10,700, stock subscription receivable of $82,000,and inventory of $15,000. The decrease in inventory is due to a reduction in "SilverNevada Miner" bars. 

Current liabilities increased by approximately $41,200 and totalliabilities increased by $1,317,600. The increase in total liabilities is due tocombination of a net increase of $115,300 in capital lease obligations due to leasefinancing of equipment, $575,000 in 12% Convertible Promissory Notes, $140,500 in accruedinterest on the Convertible Promissory Notes, $550,000 in financing on the manufacturingfacility, which was partially offset by a decrease in accounts payable of $99,800. Theprimary component of the increase in current liabilities is an increase of $109,700 incurrent maturities of long-term debt and capital lease obligations and related accruedinterest.

 

III. Working Capital/Liquidity

During the six months ended June 30, 2001, working capital decreased byapproximately $141,300 to a deficit balance of $406,600. Management has continued theCompany's ongoing program of managing cash liquidity through exercise of warrants andpayment of consulting and other labor services with common shares. In addition, a privateplacement of 12% convertible promissory notes was begun during the first quarter, with atotal of $565,000 received during the period. Also, $217,200 was received under the Swartzagreement, $50,000 was received from the exercise of warrants and $702,700 was receivedfrom the building and equipment financing. Approximately $309,900 in various expenses werepaid with common shares.

12

As noted, there is presently a working capital deficit of $406,600, animprovement from the deficit balance of $691,300 at the end of the first quarter. Due tothe decline of the Company’s share price, much of the funding anticipated under theSwartz agreement has not been available, and some warrants have not been exercised. TheCompany has had limited cash liquidity since the third quarter of 2000 and has sought andobtained the funding described above, which has allowed the Company to maintain themajority of its operating obligations through the second quarter of 2001. Subsequent toJune 30, 2001 cash liquidity has again become limited, resulting in difficulty in meetingcurrent obligations, including equipment leases and some trade payable obligations.

The Company’s present cash operating requirements areapproximately $650,000 per quarter. This is expected to continue through the first quarterof 2002 when increased fertilizer sales will begin to produce substantial cash revenue.The Company estimates that approximately $2.5 million will be required to carry operationsto a break even level of sales. In addition, a Phase 2 plant expansion, which includesinstallation of bulk tankage, a tank truck loading and unloading facility, and a packagingline will be required at a future date, at an estimated cost of $2.5 million.

Accordingly, the Private Placement of convertible notes has beenexpanded to raise an additional $2.5 million. The placement is in tranches of $500,000,with the price of the convertible note to be reviewed after each tranche is funded.Deteriorating financial market and economic conditions have made this financing moredifficult, and therefore the scope of the financing effort is being expanded.
Actions being taken to accelerate Gold’n Gro fertilizer sales areexplained in the New Developments section below.

IV. New Developments

During the second quarter of 2001, the Company’s Gold’n Grofertilizer marketing effort was focused on the Company’s two new salesrepresentatives teaming with Western Farm Service, Inc. (WFS) sales personnel to presentproduct demonstrations to WFS customers and to assist in field trials on various crops.On-going field trials of Gold’n Gro fertilizer products continue to show significantimprovements in crop production and quality. The trials are providing agronomic data thatis being used to develop Gold’n Gro nutrition programs for the crops being tested.Field trials have been expanded into the cut flower, herbs, watermelon, plum, and sweetcorn markets. 

The field trials being conducted are demonstrating that the Gold’nGro products will provide both agronomic and economic benefits in the "specialtyagricultural" markets. Specialty agriculture includes vegetables, cut flowers, herbsand spices, and fruits and nuts of all types. These crops are relatively high valuecompared to field grains such as corn, wheat, and soybeans. Alfalfa is typicallyconsidered as a "hay" or "forage" crop and is generally of low tointermediate value when compared to specialty agricultural crops, however, high nutrientcontent alfalfa for the dairy market often commands a significant price premium which putsit at the low end of specialty agricultural crop values.

Most of the field trials in the alfalfa market have now been completed.Measured increases in production have ranged from 17 percent to 100 percent. TheGold’n Gro fertilizer produces increases in both output and quality on alfalfa thatis already being well fertilized by the grower, with greater increases on fields that arenot fertilized or sparingly fertilized. Although this market is very large, the value ofthe product in relation to the increase in output is lower than on most of the other cropsbeing evaluated. Because of mixed fertilizer usage habits by the various alfalfa farmers,and because of relatively low crop value, the Company is concentrating its sales effortsand on-going customer development efforts on the higher value crops that have beenidentified.

The fertilizer industry is in a contraction which appears to beaccelerating. The specialty agriculture markets which had held up well are now decliningrapidly. A significant contributing factor is believed to be the more than 30 percentappreciation of the dollar against most other currencies which has occurred since thefirst of this year. Currency valuations are now grossly distorted when compared tointrinsic values of goods being traded. For example, oranges are being shipped into thewestern United States from Australia and are being sold in California stores at pricesthat are lower than locally grown oranges. The prices are lower than the localgrowers’ cost of production. Based on transportation distances alone, this should notbe possible. This reversal in the distribution of agricultural food products is affectingall segments of the California specialty agriculture markets. California accounts for morethan 51 percent of the specialty agriculture for the United States and so it can beassumed that these factors are affecting the rest of the United States as well. 

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

The Company is working with WFS on an on-going basis to identify andimplement sales development programs that will increase the rate of market penetrationwith the Gold’n Gro products. A much greater understanding of the details of themarket has been obtained directly from this process. This improved understanding isstrengthening the working relationship that has been developed with WFS and is producingcontinuing increases in sales in a market that is in a state of rapid decline. Forexample, July 2001 combined Company and WFS Gold’n Gro fertilizer gallons soldincreased by 85% over the prior year July and WFS gallons sold for July almost equaled WFSsales gallons for the second quarter 2001. These increased sales are in the golf courseand turf farm markets.

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

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

In the second quarter a need for two additional micro-nutrient productswas identified by WFS. Product development was initiated and in early August prototypeformulations were delivered to WFS for evaluation. It is expected that this project willproduce two products that will be used in large volume in the California specialtyagriculture market and that bulk sales could be started before the end of the thirdquarter. This new development represents an increasing commitment by WFS to speed up theintroduction of Gold’n Gro products into the California market. After completion ofthese two new products, Itronics will have 18 Gold’n Gro products that are eitherbeing used or being evaluated for use. Additional to this are 12 special blends that havebeen developed specifically for use by WFS, and which are now being introduced to thestore managers and field sales people.

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Field test results using Gold’n Gro products have now beenpublished for Alfalfa, Fresh Plums, Oranges, Sweet Corn, and Watermelons. The field testresults and crop value statistics are summarized in the following table. On a nationalbasis, the Gold’n Gro products appear to have the potential to add 10’s ofmillions of dollars in increased value and output for the indicated crops.

**Crop****Crop    Increase**Return    on Gold’n Gro**Fertilizer Cost to Grower****Gross    Value of the Crop Per Acre**Total    USA Crop AcresAlfalfa+33%
3 times
$       351
23,000,000Fresh PlumsLarger, Earlier
15 times
$2,500
140,000Sweet Corn +11.5%
30 times
$1,788
222,800Oranges+40% 
3 times
$2,300
842,000Watermelon+10.4%
160 times
$1,670
184,600
In the first quarter report we stated that we would have some resultsto publish for the first few months of a 3 year field trial on valencia orange trees beingcarried out with oversight from a major university in southern California. The trial iscontinuing and it appears that the 35 year old trees are responding positively to thefertilization. The fruit was harvested from the trial trees in mid-June. The statisticalmeasurements which have been taken and the harvest records have not yet been analyzed. Thefruit which was harvested was set last year before the Gold’n Gro fertilizationprogram started and when the trial was started, no growth response was expected for thisfruit, but it now appears that positive changes are occurring. The results of this firstset of measurements will be reported when available.

Additional field trials are underway on several crops and are producingpositive results. These will be reported as the results become available. The field trialshave now demonstrated two major and very important points: (1) the Gold’n Grofertilizer products can be used on a wide range of field and tree crops(at the outset ofthese trials this was not known), and (2) relatively small and economical amounts ofGold’n Gro products can be used as a supplement to the  growers standardfertilizer program to achieve improvements in output and quality of the field or treecrop. These results broaden the potential scope for use of the Gold’n Gro productsand in the longer term will generate demand for large volumes of Gold’n Grofertilizer products.

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

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

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Planning for fall crop fertilization is now underway and we areanticipating that some Gold’n Gro products will be used by WFS in these programs. Itis expected that commercial use of the nursery products will commence late in the thirdquarter, and commercial use of the two new micro-nutrient products is also expected tostart late in the third quarter. It is for these reasons that the Gold’n Gro salesgrowth that is now underway is expected to continue into late fall. Due toDecember/January holidays and typical stormy winter weather, it is expected that a sharpdrop in sales will occur from mid-December until mid-January. Gold’n Gro sales areexpected to continue to increase at relatively high rates through 2002.

Late in the third quarter of 2000 Whitney & Whitney, Inc. (WWI)signed a Pilot Program Contract (Contract) with a major generator of a material that maybe usable as a raw material for the recycling program operated by Itronics Metallurgical,Inc. (IMI). The purpose of the Contract was to evaluate whether the material is suitablefor use in Gold’n Gro fertilizer products. Both parties have agreed that if the workis successful they will work together to develop and implement a plan for marketing thefertilizer products. WWI completed the Contract early in the second quarter and isrecommending that the evaluation program be continued for another year as initial resultsindicate that there is potential for the material to be used in IMI’s Gold’n Grofertilizer products. The generator is now evaluating WWI’s proposal. WWI is alsoevaluating the results and is investigating the potential for speeding up the developmentprogram.

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

The Company has concluded that certain acid waste streams generated byaerospace and electronics manufacturers may be able to be converted to a form that willfit "Beneficial Use" recycling into fertilizer in association with the processedphotochemical materials. Discussions are underway with an aerospace manufacturer that maylead to development of a prototype program that will demonstrate the "BeneficialUse" concept. The Company’s distillation technology will be a component of theprogram. It is anticipated that an order for one or more distillation machines could bereceived prior to year end if the program is implemented. This program would be continuedand expanded in 2002. 

Also during the quarter the Company added a second large"dot.com" customer which develops digital photographs on high qualityphotographic paper for individuals who have digital cameras and want to obtain highquality photo prints. This company is growing rapidly as is our other dot.com customer andso the supply of photographic liquids for recycling into fertilizer is continuing toincrease. A waiting list of potential new photographic liquid supplying customers that useconventional photographic methods is now developing so that current and near term suppliesof used photo chemicals are more than adequate to meet the needs of anticipatedGold’n Gro fertilizer sales growth.

Late in the second quarter IMI had the opportunity to refine some goldbearing sludge generated by one of the smaller Nevada gold mines. The gold recovery wasexcellent and the dore bullion was quite pure. This represents an extension of use for thenew silver refining process which was developed in 2000 and which is now being used by IMIto produce pure silver bullion for sale. Application of this technology for gold refiningis expected to expand and it represents an opportunity for growth that is independent ofthe photographic and agricultural markets. This development also represents the beginningof introducing the IMI thiomet technology to the gold/silver mining industry in Nevada.

During the quarter the Company continued to be contacted by companieswith a potential interest in licensing the technology or in making a strategic investmentin Itronics. Exploratory discussions are underway with two companies. 

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

Also, during the second quarter a public hedge fund made an investmentin Itronics’ private placement of convertible notes. This is the first knowninvestment by a public hedge fund in Itronics. The fact that Itronics is showing up on theradar screens of some of the mutual funds and hedge funds is a positive indication thatItronics is beginning to be recognized as a viable investment by fund managers. 

V. Forward-Looking Statements

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

 

PART II- OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

(c) Recent Sales of Unregistered Securities:

Following is a summary of sales of unregistered securities for thethree months ended June 30, 2001. 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
ReceivedExercise of warrants for    cash 
100,000
$    10,000Labor services of    management, directors and consultants
12,500
12,810 
112,500
$ 22,810
The above transactions qualified for exemption from registration underSections 3(b) or 4(2) of the Securities Act of 1933. Private placements for cash werenon-public transactions. The Company believes that all such investors are eitheraccredited or, either alone or with their purchaser representative, have such knowledgeand experience in financial and business matters that they are capable of evaluating themerits and risks of the prospective investment.

 

Item 6. Exhibits and Reports on Form 8-K

None

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SIGNATURES

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

 

                                               ITRONICS INC.

 

DATED: August 13, 2001                      By: 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, 2001                     By: JOHN W. WHITNEY

                                               John W. Whitney

                                               President, Treasurer and Director

                                               (Principal Executive Officer)

 

DATED: August 13, 2001                     By: MICHAEL C. HORSLEY

                                               Michael C. Horsley

                                               Controller

                                               (Principal Accounting Officer)

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