UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM l0-QSB

 

(Mark One)

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

    EXCHANGE ACT OF 1934

**                                                         Forthe quarterly period ended June 30, 2002**
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

                                                         Forthe transition period from______ to_____ 

 

Commission File Number 33-18582

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

 

                         TEXAS                                   75-2198369
             (State orother jurisdiction of           (IRSEmployer 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, 2002, 84,873,324 shares of common stock were outstanding.

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

2

ITRONICS INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ITRONICS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2002 AND DECEMBER 31, 2001

(UNAUDITED)

 

ASSETS
 
JUNE 30,
DECEMBER    31, 
2002
2001CURRENT ASSETS   Cash 
$ 123,177
$ 14,675Accounts receivable, less    allowance for  doubtful accounts, 2002,    $5,700; 2001, $7,400
194,656
166,976Marketable securities
108,712
-Inventories
400,407
318,595Prepaid expenses
103,588
100,797Current portion of deferred    loan fees
46,225
46,225Total Current Assets
976,765
647,268   PROPERTY AND EQUIPMENT   Land 
215,000
215,000Building and improvements
1,067,739
1,046,298Design and construction in    progress,   manufacturing facility
175,305
86,884Leasehold improvements
900
900Equipment and furniture 
1,696,934
1,585,995Vehicles 
133,028
133,028Equipment under capital    lease 
1,074,526
971,888 
4,363,432
4,039,993Less: Accumulated    depreciation and amortization
932,717
794,750 
3,430,715
3,245,243OTHER ASSETS   Intangibles, net of    amortization 
161,879
166,082Marketable securities,    available for sale 
939,887
313,849Deferred loan fees, less    current portion, net of  amortization 
115,053
138,171Investment in American Gold    & Silver Ltd. 
9,250
9,250Deposits
39,938
38,397 
1,266,007
665,749 
$5,673,487
$4,558,260
4

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
JUNE 30,
DECEMBER    31, 
2002
2001CURRENT LIABILITIES   Accounts payable 
$ 651,012
$ 516,312Accrued management salaries    
238,169
83,329Accrued expenses 
345,528
319,691Insurance contracts payable    
43,002
30,799Interest payable 
79,210
74,097Current maturities of    long-term debt 
39,300
38,255Current maturities of    capital lease obligations 
975,516
426,744Current maturities of    advances from stockholders
204,219
25,222Current maturities of    convertible notes and accrued interest
3,258,796
25,438Other 
17,463
18,463Total Current Liabilities 
5,852,215
1,558,350   LONG-TERM LIABILITIES  Long-term debt, less    current maturities 
583,257
599,472Convertible promissory    notes 
2,066,129
3,890,029Accrued interest,    convertible notes
168,725
540,444Capital lease obligations,    less current maturities
258,262
882,485Accrued salary due    stockholder
13,254
15,054Deferred gain, less current    maturities
8,382
13,548Total Long-Term Liabilities    
3,098,009
5,941,032 
8,950,224
7,499,382   STOCKHOLDERS' EQUITY    (DEFICIT)  Preferred stock, par value    $0.001 per share;     authorized    999,500 shares, issued and outstanding     2002, 0    shares; 2001, 0 shares 
-
-Common stock, par value    $0.001 per share;     authorized    250,000,000 shares, issued and outstanding,     84,273,324 at    June 30, 2002; 80,999,392 at      December 31,    2001
84,273
80,999Additional paid-in capital 
11,465,523
10,829,459Accumulated deficit 
(15,902,748)
(14,062,234)Common stock to be issued 
206,535
152,960Accumulated other    comprehensive income (loss) 
760,448
(27,403)Common stock options    outstanding, net 
109,232
85,097 
(3,276,737)
(2,941,122) 
$ 5,673,487
$ 4,558,260 
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, 2002 AND 2001

(UNAUDITED)
 
Three Months Ended June 30,
Six Months Ended June 30, 
2002
2001
2002
2001REVENUES    Fertilizer 
$ 187,030
$ 43,439
$ 298,940
$ 66,688Photobyproduct recycling 
63,197
54,583
120,417
102,829Silver and gold 
38,164
56,316
68,806
192,409Mining technical services 
85,922
119,101
154,785
269,732Total Revenues 
374,313
273,439
642,948
631,658COST OF SALES 
429,981
330,476
768,530
742,150Gross Profit (Loss) 
(55,668)
(57,037)
(125,582)
(110,492)     OPERATING EXPENSES    Depreciation and    amortization 
92,866
85,078
184,157
164,872Research and development 
19,137
10,688
34,059
23,838Sales and marketing 
342,056
337,444
602,134
733,294Delivery and warehousing
14,233
4,846
23,014
6,545General and administrative 
266,438
285,222
525,090
563,997Total Operating Expenses 
734,730
723,278
1,368,454
1,492,546Operating (Loss) 
(790,398)
(780,315)
(1,494,036)
(1,603,038)     OTHER INCOME (EXPENSE)    Interest expense 
(218,532)
(147,465)
(414,252)
(274,127)Interest income 
-
1,759
3
2,400Gain (loss) on investments
66,307
-
67,770
-Total Other Income    (Expense) 
(152,225)
(145,706)
(346,479)
(271,727)     Income (Loss) before    provision 
for income tax
(942,623)
(926,021)
(1,840,515)
(1,874,765)Provision for income tax 
-
-
-
-Net Income(Loss) 
(942,623)
(926,021)
(1,840,515)
(1,874,765)     Other comprehensive income    (loss)    Unrealized gains (losses)    on 
securities 
552,775
104,524
787,851
94,322Comprehensive Income (Loss)    
$ (389,848)
$(821,497)
$(1,052,664)
$(1,780,443)     Weighted average number of    shares     Outstanding (1,000’s)
83,344
77,612
82,525
76,941     Earnings (Loss) per share 
$(0.0113)
$(0.0119)
$(0.0223)
$(0.0244)
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, 2002 AND 2001

(UNAUDITED)
 
Six Months Ended June 30, 
2002
2001Cash flows from operating    activities   Net income (loss) 
$(1,840,515)
$(1,874,765)Adjustments to reconcile    net loss to 
  cash used by operating activities:     Depreciation    and amortization 
184,157
164,872   Interest on    convertible notes
248,490
140,464   Marketable    securities received for services
(87,089)
(51,658)   (Gain) Loss on    investments
(67,770)
-   Stock option    compensation 
24,135
30,552   Bad debts
4,670
-   Expenses paid    with issuance of common stock/debt 
494,079
316,865(Increase) decrease in:     Trade accounts    receivable 
(32,350)
10,667   Inventories 
(81,812)
15,000   Prepaid    expenses 
(11,464)
9,957   Deposits
(1,541)
(3,435)   Increase    (decrease) in:     Accounts    payable 
172,640
(80,207)   Accrued    expenses and contracts payable 
190,080
27,634   Accrued    interest
5,113
22,229Net cash used by operating    activities 
(799,177)
(1,271,825)   Cash flows from investing    activities:  Acquisition of property and    equipment 
(230,406)
(57,563)Acquisition of intangibles    and investments 
-
(725)Proceeds from sale of    investments/equipment
162,739
415Net cash used by investing    activities 
(67,667)
(57,873)   Cash flows from financing    activities:  Proceeds from sale of stock    
117,500
267,200Proceeds from debt,    stockholders
232,545
-Proceeds from long-term    debt, unrelated 
824,100
1,267,704Payments on long-term debt 
(198,799)
(170,527)Net cash provided by    financing activities 
975,346
1,364,377Net increase (decrease) in    cash 
108,502
34,679Cash, beginning of period 
14,675
17,990Cash, end of period 
$ 123,177
$ 52,669
See Notes to Condensed Consolidated Financial Statements

7

 

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2002

(UNAUDITED)

 

1. The unaudited condensed consolidated financial statements printedherein have been prepared in accordance with the instructions to Form 10-QSB and do notinclude all of the information and disclosures required by 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, 2001. These financial statements reflect alladjustments that are, in the opinion of management, necessary to fairly state the resultsfor the interim periods reported.

2. The results of operations for the three and six months ended June30, 2002 are not necessarily indicative of the results to be expected for the full year.

3.A Private Placement of 12% Convertible Notes is ongoing and$824,100 was raised during the six months ended June 30, 2002. The notes are due in threeyears. Interest is compounded annually and payable at maturity, or, at the option of thenote holder, can be paid annually in stock. The notes and accrued interest areconvertible, at any time during the three year period, into the Company’s restrictedCommon Stock, at $0.15 to $0.25 per share. The Company may call the notes prior to the duedate and, in that event, the note holder has 30 days to decide whether to convert the noteand accrued interest into stock. Subsequent to June 30, 2002 an additional $10,000 hasbeen raised from the Private Placement. 
New lease financing on equipment during the six months ended June 30,2002 amounted to approximately $112,000. 

During the six months ended June 30, 2002 an officer/stockholder loanedWhitney & Whitney, Inc. (WWI) $145,000, and in addition loaned WWI 600,000 shares ofGolden Phoenix Minerals, Inc. (GPXM) stock which were sold for $83,045. During the sametime period, WWI repaid 416,463 of the GPXM shares out of shares owned by it. Subsequentto June 30, 2002 the officer/stockholder has loaned WWI $50,000.

4. As of June 30, 2002 lease payments totaling $103,403 were inarrears. Of this amount, $58,354 remains unpaid as of the date of this report. As requiredby Generally Accepted Accounting Principles, the principal balance of the leases that arenot paid through June 30, 2002, a total of $498,922, has been classified as a currentliability. This amount would otherwise be classified as long term debt. As of the date ofthis report, lease payments totaling $134,761 are in arrears. The Company is in regularcommunication with the lessors to avoid action that may be adverse to the Company.

5. Following are the components of Other Comprehensive Income:

Three Months Ended June 30,
Six Months Ended June 30,
2002
2001
2002
2001
Unrealized holding gains (losses) 
arising during the period
$ 589,832
$ 104,524
$ 765,681
$ 94,322
Reclassification adjustment
(37,057)
-
22,170
-
Other Comprehensive Income
$552,775
$ 104,524
$ 787,851
$ 94,322
 

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

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

8

ITRONICS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2002

(UNAUDITED)
 
Three Months Ended June 30,
Six Months Ended June 30, 
2002
2001
2002
2001     Revenues:    Photobyproduct Fertilizer 
$ 288,391
$ 154,338
$ 488,163
$ 361,926Mining Technical Services 
85,922
119,101
154,785
269,732Consolidated Revenues 
$ 374,313
$ 273,439
$ 642,948
$ 631,658     Operating Income (Loss):    Photobyproduct Fertilizer 
$(692,613)
$(717,463)
$(1,307,782)
$(1,487,696)Mining Technical Services 
(97,785)
(62,852)
(186,254)
(115,342)Consolidated Operating    Income (Loss)
(790,398)
(780,315)
(1,494,036)
(1,603,038)Other Income (Expense)
(152,225)
(145,706)
(346,479)
(271,727)Consolidated Net Income     (Loss) before taxes 
$(942,623)
$(926,021)
$(1,840,515)
$(1,874,765)
 

Identifiable assets by business segment for the major assetclassifications and reconciliation to total consolidated assets are as follows:

June 30,
December 31,
2002
2001Current Assets:Photobyproduct    Fertilizer 
$ 559,011
$ 449,996Mining    Technical Services 
353,802
145,474
912,813
595,470Property and    Equipment, net:Photobyproduct    Fertilizer 
3,171,120
2,948,854Mining    Technical Services 
254,451
290,387
3,425,571
3,239,241Other Assets,    net:Photobyproduct    Fertilizer 
133,032
150,139Mining    Technical Services 
2,596,182
2,095,916
2,729,214
2,246,055Total Assets: Photobyproduct    Fertilizer 
3,863,163
3,548,989Mining    Technical Services 
3,204,435
2,531,777Total Segment    Assets 
7,067,598
6,080,766Itronics Inc.    assets 
17,301,097
16,278,194Less:    inter-company elimination 
(18,695,208)
(17,800,700)Consolidated    Assets 
$ 5,673,487
$ 4,558,260 
9
 

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

I. Results of Operations

The Company reported consolidated revenues of $374,313 for the quarterended June 30, 2002, compared to $273,439 for the prior year quarter, an increase of 37%.The increase was due to an increase of fertilizer sales of $143,600. Sales for the firstsix months of 2002 were $642,948 compared to $631,658 for the prior year period, anincrease of 2%. Sales for the photobyproduct fertilizer segment increased by $126,200,which was partially offset by a decrease in revenues from the Mining Technical Servicessegment of $114,900. The consolidated net loss was $942,623, or $0.0113 per share, for thequarter ended June 30, 2002, compared to a net loss of $926,021 or $0.0119 per share forthe comparable 2001 period. The primary factor contributing to the increased loss for thequarter was increased interest expense of $71,100 related to increased borrowing on theConvertible Note Private Placement, which was partially offset by a gain on sale ofinvestments of $66,300. The consolidated net loss was $1,840,515, or $0.0223 per share,for the six months ended June 30, 2002, compared to a net loss of $1,874,765 or $0.0244per share for the comparable 2001 period. The primary factor contributing to the reducedloss for the six months was reduced sales and marketing expenses and general andadministrative expenses.

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,
2002
2001
2002
2001Sales revenue 
$ 288,391
$ 154,338
$ 488,163
$ 361,926Operating income (loss) 
$    (692,613)
$(717,463)
$(1,307,782)
$(1,487,696)
 

Total segment sales for the second quarter of 2002 were approximately$288,400, an increase of 87% over the prior year second quarter. Fertilizer sales for thequarter were $187,000, compared to $43,400 for the 2001 second quarter, an increase of331%. The fertilizer sales increase is attributable to bulk sales of the GOLD’n GROZinc micro-nutrient product that was introduced in the third quarter of 2001.Photobyproduct recycling revenue for the quarter increased by 16% on an increased volumeof 6%, compared to the second quarter of 2001. Silver/gold sales decreased $18,200 fromthe second quarter of 2001, a decrease of 32%. This decrease reflects $27,900 in goldsales under the processing agreement with Golden Phoenix Minerals, Inc. during the prioryear quarter. Cost of sales increased $101,800 due primarily to increases in directmaterials costs of $87,700 related to increased sales and $14,300 in payroll and relatedcosts due to increased production. These factors resulted in a gross loss of $58,600 forthe second quarter of 2002, compared to $90,800 for the prior year quarter, a reduced lossof 35%. 

Segment operating expenses increased $7,400 from the second quarter of2001, due to increases in delivery and warehousing costs of $9,400 related to increasedfertilizer sales, $8,400 in research and development costs,

10

and $6,900 in depreciation and amortization which were partially offsetby a decrease in general and administration costs of $16,700.

These factors resulted in a 2002 second quarter segment operating lossof $692,600 compared to a loss of $717,500 for the second quarter of 2001, a decreasedoperating loss of $24,900, or 3%.

For the first six months of 2002 sales were $488,200, compared to$361,900 for the comparable 2001 period, an increase of 35%. Operating loss for the firstsix months of 2002 was approximately $1,307,800 compared to $1,487,700 for the first sixmonths of 2001, a reduced loss of 12%. The primary factors contributing to the reducedloss were increased sales resulting in a reduced gross loss of $52,500 and reducedoperating costs of $127,400.

 

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,
2002
2001
2002
2001Sales revenue 
$ 85,922
$ 119,101
$ 154,785
$ 269,732Operating income (loss) 
$(97,785)
$(62,852)
$(186,254)
$(115,342)
 

Mining technical services revenue was $85,900 for the quarter endedJune 30, 2002, compared to $119,100 for the comparable quarter of 2001, a decrease of 28%.The revenue decrease reflects the decision by one of the Company’s primary clients tofocus on selling, rather than developing, its Nevada mining property. Services to theclient are limited primarily to locating a buyer for the property. In prior years, theCompany actively managed the property for the purpose of accumulating the informationnecessary to present the property to major mining companies. Such work is nowsubstantially complete. Cost of sales decreased by $2,300, due to a decrease of $5,000 inpass-through costs. These factors resulted in a gross profit for the segment of $3,000compared to $33,800 for the prior year second quarter, a decrease of 91%.

Segment operating expenses increased nominally by $4,100. 

The combination of these factors resulted in a 2002 second quartersegment operating loss of $97,800, compared to a loss of $62,900 for the second quarter of2001, an increased operating loss of $34,900, or 56%. 

For the first six months of 2002, segment revenue totaled $154,800compared to $269,700 for the first six months of 2001, a decrease of 43%. Operating lossfor the period was $186,300 compared to an operating loss of $115,300 for the comparable2001 period, an increased operating loss of 61%. The primary factor contributing to thedecline was decreased professional fees on technical services projects.

11

SUMMARY

On a consolidated basis, the various changes in revenues and operatingexpenses resulted in a second quarter 2002 operating loss of $790,400, compared to$780,300 for the second quarter of 2001, an increased loss of $10,100, or 1%. For the sixmonth period ended June 30, 2002 the operating loss was $1,494,000 compared to $1,603,000for the prior year comparable period, a reduced loss of 7%.

 

II. Changes in Financial Condition; Capitalization

Cash amounted to $123,177 as of June 30, 2002, compared to $52,669 asof June 30, 2001. Net cash used for operating activities was approximately $799,200 forthe first six months of 2002. The cash used for operating activities during the period wasfinanced by a combination of sales of common stock of $100,000 under the Swartz PrivateEquity, LLC. (Swartz) agreement, $17,500 in warrant exercises, $232,500 in loans fromofficer/stockholders, and $824,100 from the Private Placement of 12% convertiblepromissory notes. A total of $230,400 was invested in property and equipment during theperiod, primarily for equipment costs for the bulk fertilizer truck loading facility andfor a heating/cooling unit. $87,100 of Golden Phoenix Minerals, Inc. (GPXM) restrictedcommon stock was received for services during the period. The market value of the GPXMinvestment was increased by $787,900 during the six months ended June 30, 2002, based onGPXM’s stock price as of June 30, 2002. 

Total assets increased during the six months ended June 30, 2002 by$1,115,200 to $5,673,500. Current assets increased $329,500 due to increases in cash of$108,500, accounts receivable of $27,700, marketable securities of $108,700, and inventoryof $81,800. Total property and equipment increased $323,400, which includes lease financedequipment of $112,000. Other assets increased by $600,300 due to a $734,800 net increasein the value of the Company’s investment in GPXM stock, of which $108,700 isclassified in current assets. The net increase in value of GPXM stock was partially offsetby amortization of various intangible assets. At June 30, 2002 the Company owned 2.72million shares of GPXM with a value of $1,048,600. During the six months ended June 30,2002 the Company sold 1,307,500 GPXM shares, with total net proceeds of $245,784, toassist with the Company’s cash operating requirements.

Current liabilities increased by $4,293,900 and total liabilitiesincreased by $1,450,800. Total liabilities increased due to new private placements of$824,100 in Convertible Promissory Notes, $134,700 in accounts payable, $179,000 inadvances from stockholders, $248,500 in accrued interest on the Convertible PromissoryNotes, and $198,000 in various other current liabilities. Current liabilities increaseddue to reclassification of convertible notes and accrued interest totaling $3,233,400,reclassification of $498,900 of capital lease obligations, accounts payable of $134,700,net advances of $179,000 from officer/stockholders, $154,800 in accrued managementsalaries, and $25,800 in accrued expenses. The increase in accounts payable reflects$168,900 in payables for the bulk fertilizer truck loading facility and heating/coolingequipment which were incurred in June 2002.

 

III. Working Capital/Liquidity

During the six months ended June 30, 2002, working capital decreased byapproximately $3,964,400 to a deficit balance of $4,875,500. $3,233,400 of the reducedworking capital is due to the reclassification of convertible notes payable and accruedinterest that became due within twelve months of June 30, 2002 during the period. Notesmaturing in early 2003 have conversion prices ranging from $.50 to $1.18, and there is apossibility that the market price at the time the notes mature will be a lesser amount. Inorder to conserve cash, note holders may be offered a lower conversion price and/or ahigher interest rate, as an inducement to extend the term of their Note.The Company has hadlimited cash liquidity since the third quarter of 2000, which is reflected in the increasein current liabilities.The Company has sought and obtained the funding
12

described above, which has not been sufficient to maintain allobligations on a current basis. However, cash liquidity is being managed and the Companyhas been able to make sufficient payments to keep all significant creditors working withit.The cash shortage is a result of two factors.First, fertilizer sales in 2002 did not expand to the extent anticipated, so operatinglosses were not reduced as much as expected. Second, the $15 million equity line of creditagreement with Swartz Private Equities, LLC (Swartz) was not available between October2001 and May 2002 due to a Securities and Exchange Commission rule change thatnecessitated renegotiating the contract with Swartz and filing a new registrationstatement which has been filed and became effective on April 30, 2002. Significant termsto the amended contract include the elimination of future warrants to be granted Swartzupon the exercise of the Company’s put rights, extending the term of the agreement toFebruary 27, 2004, eliminating the six month minimum commitment fee and the right of firstrefusal on capital raising transactions, and the easing of restrictive covenants on suchtransactions. Through the date of this report $190,000 has been received under the Swartzagreement during 2002. However, the Swartz equity funding may not be sufficient to meetthe Company’s future working capital needs, so it is anticipated that a privateplacement of stock with attached warrants will be started in the third quarter of 2002. 

 

IV. New Developments

The Company’s expansion of its GOLD’n GRO fertilizermanufacturing and sales continued during the quarter, with consistent sales in tank truckquantities of the new chelated micronutrient GOLD’n GRO zinc now occurring. Ourdistributor network is also receiving truck load orders for GOLD’n GRO 20-1-7,GOLD’n GRO 6-12-9, and GOLD’n GRO 8-8-8.

The Company has completed the installation of a bulk liquid fertilizertank truck load out facility, which has the capability to load a 5,000 gallon tank truckin 30 minutes, providing the capacity to handle anticipated growth in demand during thenext two years. Ongoing changes in the factory process, arising as a result of specificsales opportunities such as the zinc fertilizer product, include installation ofheater/cooler equipment, expected to be operational in the fourth quarter, which willincrease capacity of the batch mixing system to well in excess of 20,000 gallons (about100 tons) per 24 hour day. 

The Company presently sells its commercial GOLD’n GRO products in2.5 gallon, 55 gallon, and 250 gallon containers and full or partial truck loadquantities. The 250 gallon capacity mini-bulk totes are the most popular size and are usedfor interim storage and for shipping of GOLD'n GRO products. The bulk totes are approvedfor highway transportation and are a convenient unit for use by GOLD'n GRO customers. TheCompany now has an inventory of more than 1,000 of these totes and the number of totes inuse is continuing to increase.

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

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

The Company is completing a project to upgrade and convert its GOLD'nGRO fertilizer products to a second generation of formulations. The purpose of the upgradeis to provide standardization of formulas and raw material content, which will reduce unitproduction costs and simplify raw material inventory requirements. The second generationproducts are low chloride or chloride free, and are demonstrating improved nutritionaleffectiveness for the crops being fertilized. 

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

The Company believes that the fertilizer market is shifting to the useof environmentally sound materials and now that this shift is taking place the GOLD'n GROproducts will have a marketing advantage. New toxic metal rules are increasing growerawareness of the need to obtain and use environmentally sound products. California andseveral other states are revising their regulations on fertilizers to require reporting byfertilizer distributors and manufacturers of the toxic heavy metal content of theirfertilizers. Also, in California and some other states, the amount of toxic heavy metalsallowed to be contained in fertilizer products is being limited. This tightening ofenvironmental regulations is a significant development. All of the Company's GOLD'n GROfertilizer products meet the revised standards, and thus are attractive to growers. 

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

GOLD’n GRO products are currently registered for sale in Arizona,California, Hawaii, and Nevada. GOLD’n GRO Zinc was registered in Idaho during thecurrent quarter. The Company may now register additional GOLD'n GRO products for sale inOregon, Idaho, and Utah. 

The Company's two "consumer" package products are being soldlocally in Reno, Nevada and over the internet through the Itronics web page"e-store" catalog and shopping cart. The cost of entry into the consumer retailmarket is large and with the new product and label registration requirements, the cost hasbeen substantially increased. The Company is continuing to explore opportunities forentering the consumer market, but believes that a strategic partner who is already in thatmarket will be necessary before entry can be made effectively. 

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

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

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

In July 2002 the Company received results from a field fertilizationtrial of GOLD’n GRO Zinc on table grape vines in Southern California. The applicationwas a comparison with the grower’s normal fertilization program and produced anincrease in berry weight, the grape clusters proved to be more uniform, and there was afive percent increase in yield. The value of the increase in yield to the grower was $325per acre at an additional cost of $7.50 per acre, a more than 40 times increase in valueover the cost of the GOLD’n GRO fertilizer used to produce the increase. Using ahypothetical 1,000 acre farm, this would mean an increase in value of $325,000 at a costof $7,500 compared to the normal fertilization program. 

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

The Company's photobyproduct services business has continued to expanddue to continued growth in the use of conventional photography in the markets beingserviced. The supply of these materials is more than adequate to support continuing growthin fertilizer demand. During the first six months of 2002 the Company did enter intostrategic discussions with potential large suppliers of photobyproduct materials inanticipation of increases in the rate of GOLD'n GRO fertilizer demand growth.

The Company has been awarded a contract by the Department of Defensefor five photochemical concentrators. The photochemical concentrators have been deliveredand are presently being installed and tested at certain military bases. After theequipment is installed and operational, the Company will begin to receive the concentratedphotobyproducts that are produced by these machines. This program is regarded as a pilotproject, which may lead to providing "Beneficial Use Photobyproduct Recycling"services to all branches of the U.S. military throughout the United States and is beingdeveloped by the Department of Defense in consultation with the Federal EPA.

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

The Company's sales of 5 ounce "Silver Nevada Miner" barsthrough the Itronics "e-store" continue to grow, although those sales are stillrelatively small. The sales of finished silver bullion from internally recovered silverwere up in the first half compared to last year and are expected to grow moresignificantly in the third and fourth quarters of this year. 

Growth of silver output is driven to a large degree by photobyproductprocessing to support GOLD'n GRO fertilizer sales. There are some opportunities to expandsilver output separate from photobyproduct recycling, but profit margins for the refiningservices are very small when compared to the inventory requirements and the security risk.Because of these factors, gold and silver refining services will be

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limited to categories of materials where the Company's proprietarytechnology can be used and that offer better profit opportunities than conventionalprecious metal refining.

 

V. Forward-Looking Statements

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

 

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, 2002. All securities were issued as restricted common shareswhich are subject to Rule 144 of the Securities and Exchange Commission. Generally, Rule144 requires shareholders to hold the shares for a minimum of one year before sale. Inaddition, officers, directors and more than 10% shareholders are further restricted intheir ability to sell such shares. There have been no underwriters of these securities andno underwriting commissions or discounts have been paid.
 
Shares
Value 
Issued
ReceivedExercise of warrants for    cash 
175,000
$    17,500Labor services of    management, directors and consultants
2,500
800Interest on management    salary in arrears
10,754
2,700Operating expenses
3,700
1,000 
191,954
$ 22,000
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, 2002 lease payments totaling $103,403 were in arrears. Of this amount,$58,354 remains unpaid as of the date of this report. As required by Generally AcceptedAccounting Principles, the principal balance of the leases that are not paid through June30, 2002, a total of $498,922, has been classified as a current liability. This amountwould otherwise be classified as long term debt. As of the date of this report, leasepayments totaling $134,761 are in arrears. The Company is in regular communication withthe lessors to avoid action that may be adverse to the Company.

 

Item 6. Exhibits and Reports on Form 8-K

None

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SIGNATURES

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

 

                                                     ITRONICSINC.

 

DATED: August 14, 2002                               By:JOHN W. WHITNEY
                                                         JohnW. Whitney 

                                                         President,Treasurer and Director

                                                         (PrincipalExecutive Officer)

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

 

 

DATED: August 14, 2002                                By:JOHN W. WHITNEY

                                                          JohnW. Whitney

                                                          President,Treasurer and Director

                                                          (PrincipalExecutive Officer)

 

DATED: August 14, 2002                                By:MICHAEL C. HORSLEY

                                                          MichaelC. Horsley

                                                          Controller

                                                          (PrincipalAccounting Officer)

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