UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 0-21802
N-VIRO INTERNATIONAL CORPORATION
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1741211
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3450 W. CENTRAL AVENUE, SUITE 328
TOLEDO, OHIO 43606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 535-6374
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. Yes X No.
---
As of May 2, 2005, 3,508,559 shares of N-Viro International
Corporation $ .01 par value common stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
---
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31
2005 2004
----------- -----------
Revenues . . . . . . . . . . . . . . . . . . $1,136,446 $1,458,369
Cost of revenues . . . . . . . . . . . . . . 789,296 1,040,213
----------- -----------
Gross Profit . . . . . . . . . . . . . . . . 347,150 418,156
Operating expenses:
Selling, general and administrative. . . . . 349,162 509,451
----------- -----------
349,162 509,451
----------- -----------
Operating loss . . . . . . . . . . . . . . . (2,012) (91,295)
Nonoperating income (expense):
Interest and dividend income . . . . . . . . 1,119 4,751
Interest expense . . . . . . . . . . . . . . (7,186) (26,147)
Loss from equity investment in joint venture (55,703) (43,823)
----------- -----------
(61,770) (65,219)
----------- -----------
Loss before income taxes . . . . . . . . . . (63,782) (156,514)
Federal and state income taxes . . . . . . . - -
----------- -----------
Net loss . . . . . . . . . . . . . . . . . . $ (63,782) $ (156,514)
=========== ===========
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
Mar. 31, 2005 (Unaudited) December 31, 2004
-------------------------- -------------------
ASSETS
----------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 247,147 $ 147,549
Restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,914 75,600
Receivables:
Trade, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 743,732 578,070
Stock subscription . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,500 42,500
Notes receivable - current . . . . . . . . . . . . . . . . . . . . . . . . . 54,892 112,802
Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . . . . . 149,167 108,732
-------------------------- -------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,408,352 1,065,253
Property and Equipment, Net. . . . . . . . . . . . . . . . . . . . . . . . . 340,715 360,952
Investment in and Advances to Florida N-Viro, L.P. . . . . . . . . . . . . . 130,772 186,475
Notes Receivable, net of current portion . . . . . . . . . . . . . . . . . . - 338
Intangible and Other Assets, Net . . . . . . . . . . . . . . . . . . . . . . 1,044,409 1,078,771
-------------------------- -------------------
$ 2,924,248 $ 2,691,789
========================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . $ 92,919 $ 91,072
Line-of-credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 200,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,092,570 864,580
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336,466 293,201
-------------------------- -------------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 1,671,955 1,448,853
Long-term debt, less current maturities. . . . . . . . . . . . . . . . . . . 90,213 114,263
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 7,000,000 shares; issued
3,642,059 in 2005 and 3,569,693 in 2004. . . . . . . . . . . . . . . . . . . 36,421 35,697
Preferred stock, $.01 par value; authorized 2,000,000 shares; issued 1 share - -
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 14,887,811 14,791,346
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,077,262) (13,013,480)
-------------------------- -------------------
1,846,970 1,813,563
Less treasury stock, at cost, 123,500 shares . . . . . . . . . . . . . . . . 684,890 684,890
-------------------------- -------------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 1,162,080 1,128,673
-------------------------- -------------------
$ 2,924,248 $ 2,691,789
========================== ===================
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31
2005 2004
--------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . $140,292 $(262,544)
CASH FLOWS FROM INVESTING ACTIVITIES
Collections on notes receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,768 8,000
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (2,004)
Expenditures for intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,829) (12,765)
Reductions to restricted cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . (50,314) (75,000)
--------- ----------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,375) (81,769)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of stock - options, warrants and private placement. . . . . . . . . . . . . . . . . . . 42,500 543,180
Borrowings under long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 74,386
Private placement expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,616) (10,751)
Principal payments on long-term obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . (22,203) (70,646)
Net payments on line-of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50,000) (198,223)
--------- ----------
Net cash provided (used) by financing activities . . . . . . . . . . . . . . . . . . . . . . . . (32,319) 337,946
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . 99,598 (6,367)
CASH AND CASH EQUIVALENTS - BEGINNING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,549 123,547
--------- ----------
CASH AND CASH EQUIVALENTS - ENDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $247,147 $ 117,180
========= ==========
Supplemental disclosure of cash flows information:
Cash paid during the three months ended for interest . . . . . . . . . . . . . . . . . . . . $ 17,174 $ 20,039
========= ==========
During the three months ended March 31, 2005, the Company issued unregistered
common stock with a fair market value of $4,864 to current directors for past services rendered.
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements of N-Viro International
Corporation (the "Company") are unaudited but, in management's opinion, reflect
all adjustments (including normal recurring accruals) necessary to present
fairly such information for the period and at the dates indicated. The results
of operations for the three months ended March 31, 2005 may not be indicative of
the results of operations for the year ended December 31, 2005. Since the
accompanying consolidated financial statements have been prepared in accordance
with Item 310 of Regulation S-B, they do not contain all information and
footnotes normally contained in annual consolidated financial statements;
accordingly, they should be read in conjunction with the consolidated financial
statements and notes thereto appearing in the Company's Form 10-KSB for the
period ending December 31, 2004.
The financial statements are consolidated as of March 31, 2005 and December
31, 2004 for the Company. There were no intercompany transactions.
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
following are certain significant estimates and assumptions made in preparation
of the financial statements:
Non-domestic license and territory fees - The Company does not recognize
revenue on any non-domestic (excluding Canada) license or territory fee
contracts until the cash is received, assuming all other tests of revenue
recognition are met.
Allowance for Doubtful Accounts - The Company estimates losses for
uncollectible accounts based on the aging of the accounts receivable and the
evaluation of the likelihood of success in collecting the receivable.
Property and Equipment/Long-Lived Assets - Property and equipment is
reviewed for impairment pursuant to the provisions of Statement of Financial
Accounting Standards (or SFAS) No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The carrying amount of an asset (group) is
considered impaired if it exceeds the sum of the Company's estimate of the
undiscounted future cash flows expected to result from the use and eventual
disposition of the asset (group), excluding interest charges. Property,
machinery and equipment are stated at cost less accumulated depreciation.
Management believes the carrying amount is not impaired based upon estimated
future cash flows.
Equity Method Investment - The Company accounts for its investments in
joint ventures under the equity method. The Company periodically evaluates the
recoverability of its equity investments in accordance with Accounting
Principals Board Opinion (or APB) No. 18, "The Equity Method of Accounting for
Investments in Common Stock." If circumstances were to arise where a loss would
be considered other than temporary, the Company would record a write-down of
excess investment cost. Management has determined that no write-down was
required at March 31, 2005.
Intangible Assets - Intangible assets deemed to have indefinite lives are
tested for impairment by comparing the fair value with its carrying value.
Significant estimates used in the determination of fair value include estimates
of future cash flows. As required under current accounting standards, the
Company tests for impairment when events and circumstances indicate that the
assets might be impaired and the carrying value of those assets may not be
recoverable. The Company is also amortizing the capitalized cost of obtaining
its credit facility, for the additional collateral required and evidenced by a
warrant to purchase 50,000 shares of the Company's common stock. The Company
estimated this cost at February 26, 2003 to be $30,000, and is amortizing this
over 4 years by the straight-line method.
Fair Value of Financial Instruments - The fair values of cash, accounts
receivable, accounts payable and other short-term obligations approximate their
carrying values because of the short maturity of these financial instruments.
The carrying values of the Company's long-term obligations approximate their
fair value. In accordance with SFAS No. 107, "Disclosure About Fair Value of
Financial Instruments," rates available at balance sheet dates to the Company
are used to estimate the fair value of existing debt.
Income Taxes - The Company assumes the deductibility of certain costs in
income tax filings and estimates the recovery of deferred income tax assets.
Preferred Stock - The Company has authorized two million (2,000,000) shares
of preferred stock, of which one share of Series A Redeemable Preferred Stock
(the "Preferred Stock") has been issued. The Preferred Stock is
non-transferable, has a term of ten years from August 27, 2003 and is subject to
redemption by the Company for a nominal sum. The Preferred Stock has no voting
rights, but has the special right, voting separately as a single class, to
nominate and elect one member of the Board of Directors of the Corporation at
the annual meeting of the stockholders of the Corporation at which such member
is to be elected. The Preferred Stock is not convertible or exchangeable for any
other securities or property of the Company and has no liquidation preference.
The Preferred Stock is redeemable upon the occurrence of certain events,
including the reduction in the initial holder's holdings of the Company's common
stock to less than 17.5% of the outstanding shares of common stock as reflected
on reports filed with the Securities and Exchange Commission under Section 16 of
the Securities and Exchange Act of 1934, as amended, through transfers or sales
of the Company's common stock by the initial holder, his family members or
entities controlled by him.
Stock Options - The Company accounts for stock-based compensation issued to
its employees and directors in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, no compensation cost has been
recognized for the stock option plans, as all options granted under the plans
have an exercise price equal to the market value of the underlying common stock
on the date of the grant, except for the options granted in May, 2004 to Michael
Nicholson, which is explained further in "Related Party Transactions". The fair
value of options granted was determined using the Black-Scholes option pricing
model. SFAS No. 123, "Accounting for Stock-Based Compensation", was revised in
December 2004, which revision changes the accounting for transactions in which
an entity obtains employee services in a share-based payment transaction. For
Small Business issuers, the Statement is effective as of the beginning of the
first interim period or annual reporting period that begins after December 15,
2005. The adoption of this standard had no effect on our financial condition or
results of operations for the three months ended March 31, 2005, but it expected
to affect our financial condition and results of operations starting with the
first quarter of 2006.
The following table illustrates the effect on net income (loss) and net
income (loss) per share if the Company had applied the fair value recognition
provisions of Financial Accounting Standards Board (or FASB) Statement No. 123,
"Accounting for Stock-based Compensation" to stock-based employee compensation:
Three Months Ended March 31
----------------------------
2005 2004
--------- ----------
Net loss, as reported. . . . . . . . . . . $(63,782) $(156,514)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects. . . . . . . (26,774) (18,621)
--------- ----------
Pro forma net loss . . . . . . . . . . . . $(90,556) $(175,135)
========= ==========
Loss per share:
Basic and diluted - as reported. . . . . . $ (0.02) $ (0.06)
========= ==========
Basic and diluted - pro-forma. . . . . . . $ (0.03) $ (0.06)
========= ==========
NOTE 2. RELATED PARTY TRANSACTIONS
During the first quarter of 2005, the Company issued 958 and 1,358 shares
of unregistered common stock to Phillip Levin and Daniel Haslinger,
respectively, both members of the Board of Directors, in exchange for management
consulting work performed outside their duties as directors from January to
April 2004, for $3,000 and $4,000, respectively, or a total of $7,000.
During the first quarter of 2005, 10,000 restricted shares of unregistered
common stock of the Company were subscribed to by Carl Richard, a director, in a
private placement. These shares were issued in May 2005 at $1.25 per share,
with associated warrants to purchase additional shares at $1.85 per share.
NOTE 3. LONG-TERM DEBT
In February 2003 the Company closed on an $845,000 credit facility with
Monroe Bank + Trust, or the Bank. This senior debt credit facility was
comprised of a $295,000 four year term note at 7.5% and a line of credit up to
$550,000 at Prime (5.25% at March 31, 2005) plus 1.5% and secured by a first
lien on all assets of the Company. The Company used the funds to refinance
prior debt and to provide working capital. The Company was in violation of
financial covenants governing the credit facility at December 31, 2003, but the
Bank waived this violation but required additional consideration in exchange for
this waiver. In January 2004, the Company purchased a certificate of deposit in
the amount of $75,000 from the Bank, and transferred custodianship of all
treasury stock of the Company to the Bank. At the first anniversary of the
initial credit facility, the Bank decreased the maximum amount available to
borrow on the line to $400,000, but also reduced the financial covenants to make
it easier for the Company to maintain the facility. The Company has currently
renewed the line of credit through October 2005, and is not in violation of any
financial covenants. In February 2005, the Bank amended the facility and
released certain additional collateral but required the Company to provide an
additional $50,000 certificate of deposit. At March 31, 2005, the Company had
$250,000 of borrowing capacity under the credit facility.
NOTE 4. CONTINGENCIES
The Company leases its executive and administrative office in Toledo, Ohio,
under a lease that was renewed in January 2003 and amended in November 2004.
The Company believes its relationship with its lessor is satisfactory. The
total minimum rental commitment for the years ending December 31, 2005 and 2006
is approximately $37,200 each year. The total rental expense included in the
statements of operations for the three months ended March 31, 2005 and 2004 is
approximately $9,600 and $14,000, respectively. The Company also leases various
equipment on a month-to-month basis.
On July 1, 2004, the Company completed negotiations and engaged its former
Chief Executive Officer and a member of the Board of Directors, Terry J. Logan,
as an outside consultant. The consulting agreement extends through June 2006
and requires Dr. Logan to provide a minimum of 104 business days annually, to be
paid at a rate of $700 per day and 1,000 stock options per month.
In August 2003, the Company entered into a Settlement Agreement with Mr. J.
Patrick Nicholson and negotiated a new consulting agreement. The consulting
agreement will expire in August 2008, and Mr. Nicholson is required to provide
future services to be eligible for compensation. Mr. Nicholson is also entitled
to payments of $48,000 per year for non-competition and $6,000 per year for
office space reimbursement, in addition to life and health insurance coverage
similar to the provision contained in his 1999 employment and consulting
agreements.
In June 2003, the Company entered into an Employment Agreement (the
"Agreement") with Michael G. Nicholson, the Chief Development Officer and a
member of the Board. The employment agreement will expire in June 2007, and
future compensation amounts are to be determined annually by the Board. The
agreement was disclosed in a filing on June 10, 2003 on Form 8-K. In the third
quarter of 2004, the Company and Mr. Nicholson renegotiated primarily the stock
option portion of the Agreement, and amended the Agreement. Because these
options were priced lower than the fair market value as of that date, the
Company is required to take a charge to earnings totaling approximately $68,400
ratably through June, 2007, the ending date of his employment agreement
On September 27, 2004, the Company executed both a memorandum of employment
and storage site agreement with a member of the Board of Directors, Daniel J.
Haslinger, effective August 16, 2004. Mr. Haslinger was subsequently appointed
Chief Executive Officer effective January 1, 2005. Under these agreements, Mr.
Haslinger is paid $1,500 per month as an employee, and, a company co-owned by
him is paid $5,000 per month for the rental of land owned by him. Both of these
agreements are terminable "at-will".
The Company operates in an environment with many financial risks,
including, but not limited to, major customer concentrations, customer contract
termination provisions, competing technologies, infringement and/or
misappropriation of intellectual property rights, the highly competitive and, at
times, seasonal nature of the industry and worldwide economic conditions.
Various federal, state and governmental agencies are considering, and some have
adopted, laws and regulations regarding environmental protection which could
adversely affect the business activities of the Company. The Company cannot
predict what effect, if any, current and future regulations may have on the
operations of the Company.
NOTE 5. NEW ACCOUNTING STANDARDS
In March 2005, FASB Interpretation No. 47 (or FIN 47), "Accounting for
Conditional Asset Retirement Obligations-an interpretation of FASB Statement No.
143", was issued. The primary objective of FIN 47 is to provide guidance with
respect to the timing of liability recognition for legal obligations associated
with the retirement of a tangible long-lived asset when the timing and (or)
method of settlement of the obligation are conditional on a future event. This
Interpretation also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. The
Company does not expect the application of the provisions of FIN 47 to have a
material impact on its financial position, results of operations or cash flows.
NOTE 6. SEGMENT INFORMATION
EARNINGS VARIATION DUE TO BUSINESS CYCLES AND SEASONAL FACTORS. The
Company's operating results can experience quarterly or annual variations due to
business cycles, seasonality and other factors. The market price for its common
stock may decrease if its operating results do not meet the expectations of the
market.
For the first quarter of 2005, approximately 30% of the Company's revenue
is from management operations, 67% from other domestic operations, 2% from
research and development grants and the remaining 1% from foreign operations.
Sales of the N-Viro technology are affected by general fluctuations in the
business cycles in the United States and worldwide, instability of economic
conditions (such as the current conditions in the Asia Pacific region and Latin
America) and interest rates, as well as other factors. In addition, operating
results of some of the Company's business segments are influenced by particular
business cycles and seasonality, as well as other factors such as interest
rates.
COMPETITION. The Company does business in a highly competitive market and
has fewer resources than most of its competitors. Businesses in this market
compete within and outside the United States principally on the basis of price,
product quality, custom design, technical support, reputation, equipment
financing assistance and reliability. Competitive pressures and other factors
could cause the Company to lose market share or could result in decreases in
prices, either of which could have a material adverse effect on its financial
position and results of operations.
RISKS OF DOING BUSINESS IN OTHER COUNTRIES. The Company conducts business
in markets outside the United States, and expects to continue to do so. In
addition to the risk of currency fluctuations, the risks associated with
conducting business outside the United States include: social, political and
economic instability; slower payment of invoices; underdeveloped infrastructure;
underdeveloped legal systems; and nationalization. The Company has not entered
into any currency swap agreements which may reduce these risks. The Company may
enter into such agreements in the future if it is deemed necessary to do so.
Current economic and political conditions in the Asia Pacific and Middle East
regions have affected the Company outlook for potential revenue there. The
Company cannot predict the full impact of this economic instability, but it
could have a material adverse effect on revenues and profits.
The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting, which segregates its
business by product category and service lines. The Company's reportable
segments are as follows:
Management Operations - The Company provides employee and management
services to operate the Toledo Wastewater Treatment Facility.
Other Domestic Operations - Sales of territory or site licenses and
royalty fees to use N-Viro technology in the United States.
Foreign Operations - Sale of territory or site licenses and royalty
fees to use N-Viro technology in foreign operations.
Research and Development - The Company contracts with Federal and
State agencies to perform or assist in research and development on the Company's
technology.
The accounting policies of the segments are the same as the Company's
significant accounting policies. Fixed assets generating specific revenue are
identified with their respective segments and are accounted for as such in the
internal accounting records. All other assets, including cash and other current
assets and all long-term assets, other than fixed assets, are not identified
with any segments, but rather the Company's administrative functions. All of
the net nonoperating income (expense) are non-apportionable and not allocated to
a specific segment. The Company accounts for and analyzes the operating data
for its segments generally by geographic location, with the exception of the
Management Operations and Research and Development segments. The Management
Operations segment represents both a significant amount of business generated as
well as a specific location and unique type of revenue.
The domestic and foreign operations segments differ in terms of
environmental and municipal legal issues, nature of the waste disposal
infrastructure, political climate and availability of funds for investing in the
Company's technology. These factors have not changed significantly over the past
several years and are not expected to change in the near term.
The Research and Development segment accounts for approximately 2% of the
total year-to-date revenue of the Company, and is unlike any other revenue in
that it is generated as a result of a specific project to conduct initial or
additional ongoing research into the Company's emerging technologies.
The table below presents information about the segment profits and segment
identifiable assets used by the chief operating decision makers of the Company
for the periods ended March 31, 2005 and 2004 (dollars in thousands):
Management Domestic Foreign Research &
Operations Operations Operations Development Total
---------------------------------- ----------- ----------- ------------ ------
Three Months Ended March 31, 2005
----------------------------------------------------------------------------------
Revenues. . . . . . $ 342 $ 758 $ 13 $ 23 $1,136
Cost of revenues. . 222 548 - 19 789
Segment profits . . 120 210 13 4 347
Identifiable assets 272 59 - - 331
Depreciation. . . . 15 4 - - 19
Three Months Ended March 31, 2004
----------------------------------------------------------------------------------
Revenues. . . . . . $ 500 $ 922 $ 13 $ 23 $1,458
Cost of revenues. . 356 665 - 19 1,040
Segment profits . . 144 257 13 4 418
Identifiable assets 338 82 - - 420
Depreciation. . . . 16 5 - - 21
A reconciliation of total segment revenues, cost of revenues, and segment
profits to consolidated revenues, cost of revenues, and segment information to
the consolidated financial statements for the periods ended March 31, 2005 and
2004 is as follows (dollars in thousands):
Three Months Ended March 31
----------------------------
2005 2004
------- -------
Segment profits:
Segment profits for reportable segments. . . . $ 347 $ 418
Corporate selling, general and administrative
expenses and research + development costs. (349) (509)
Other income (expense) . . . . . . . . . . . . (62) (65)
------- -------
Consolidated loss before taxes . . . . . . . . $ (64) $ (156)
======= =======
Identifiable assets:
Identifiable assets for reportable segments. . $ 331 $ 420
Corporate property and equipment . . . . . . . 10 26
Current assets not allocated to segments . . . 1,408 1,855
Intangible and other assets not allocated to
segments . . . . . . . . . . . . . . . . . 1,175 1,479
Consolidated assets. . . . . . . . . . . . . . $2,924 $3,780
======= =======
Depreciation and amortization:
Depreciation for reportable segments . . . . . $ 19 $ 21
Corporate depreciation and amortization. . . . 37 39
------- -------
Consolidated depreciation and amortization . . $ 56 $ 60
======= =======
NOTE 7. INVESTMENT IN FLORIDA N-VIRO, L. P.
Florida N-Viro, L.P. was formed in January 1996 pursuant to a joint venture
agreement between the Company and VFL Technology Corporation (VFL). The Company
owns a 47.5% interest in the joint venture and accounts for its investment under
the equity method. The Company has recognized its share of the joint venture's
losses to the extent of its investment. Any additional losses passed through
from the joint venture are recorded as an increase to the allowance against the
Note Receivable.
Condensed financial information of the partnership for the quarters ended
March 31, 2005 and 2004 is as follows:
For the Quarter Ended March 31
------------------------------
2005 2004
---------- ---------
Net sales. . . . . . . . . . . . $ 299,682 $596,147
Gross profit (loss). . . . . . . (62,602) (6,148)
Loss from continuing operations. (117,268) (92,259)
Net loss . . . . . . . . . . . . (117,268) (92,259)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
This 10-QSB contains statements that are forward-looking. We caution that
words used in this document such as "expects," "anticipates," "believes," "may,"
and "optimistic," as well as similar words and expressions used herein, identify
and refer to statements describing events that may or may not occur in the
future. These forward-looking statements and the matters to which they refer
are subject to considerable uncertainty that may cause actual results to be
materially different from those described herein. There are numerous factors
that could cause actual results to be different than those anticipated or
predicted by us, including: (i) a deterioration in economic conditions in
general; (ii) a decrease in demand for our products or services in particular;
(iii) our loss of a key employee or employees; (iv) regulatory changes,
including changes in environmental regulations, that may have an adverse affect
on the demand for our products or services; (v) increases in our operating
expenses resulting from increased costs of labor and/or consulting services; and
(vi) a failure to collect upon or otherwise secure the benefits of existing
contractual commitments with third parties, including our customers. This list
provides examples of factors that could affect the results described by
forward-looking statements contained in this Form 10-QSB; however, this list is
not exhaustive and many other factors could impact the Company's business and it
is impossible to predict with any accuracy which factors could result in
negative impacts. Although we believe that the forward-looking statements
contained in this Form 10-QSB are reasonable, we cannot provide you with any
guarantee that the anticipated results will not be adverse and that the
anticipated results will be achieved. All forward-looking statements in this
Form 10-QSB are expressly qualified in their entirety by the cautionary
statements contained in this section and you are cautioned not to place undue
reliance on the forward-looking statements contained in this Form 10-QSB. In
addition to the risks listed above, other risks may arise in the future, and we
disclaim any obligation to update information contained in any forward-looking
statement.
OVERVIEW
We incorporated in April, 1993, and became a public company on October 12,
1993. Our business strategy is to market the N-Viro Process, which produces a
sludge product with multiple commercial uses having an "exceptional quality" as
defined in the Section 503 Sludge Regulations under the Clean Water Act of 1987.
To date, our revenues have been derived primarily from the licensing of the
N-Viro Process to treat and recycle wastewater sludge generated by municipal
wastewater treatment plants and from the sale to licensees of the alkaline
admixture used in the N-Viro Process. We also operate N-Viro facilities for
third parties on a start-up basis and currently operate one N-Viro facility on a
contract management basis.
RESULTS OF OPERATIONS
Total revenues were $1,136,000 for the quarter ended March 31, 2005
compared to $1,458,000 for the same period of 2004. The net decrease in revenue
is due primarily to a decrease in facility management fees and one-time license
revenue. Our cost of revenues decreased to $789,000 in 2005 from $1,040,000 for
the same period in 2004, but the gross profit percentage increased to 31% from
29% for the quarters ended March 31, 2005 and 2004, respectively. This increase
in gross profit percentage is primarily due to the decrease in costs of
processing at privatized facilities, reducing the cost of transporting our
products and reductions in our payroll and related costs. Operating expenses
decreased for the comparative period, while our share of the loss of a joint
venture, our interest in Florida N-Viro, L.P., decreased for the same period of
2005. These changes collectively resulted in a net loss of approximately
$64,000 for the quarter ended March 31, 2005 compared to a net loss of $157,000
for the same period in 2004.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2005 WITH THREE MONTHS ENDED MARCH
31, 2004
Our overall revenue decreased $322,000, or 22%, to $1,136,000 for the
quarter ended March 31, 2005 from $1,458,000 for the quarter ended March 31,
2004. The net decrease in revenue was due primarily to the following:
a) Sales of alkaline admixture decreased $24,000 from the same period
ended in 2004;
b) Revenue from the service fees for the management of alkaline admixture
decreased $61,000 from the same period ended in 2004;
c) Our processing revenue, including facility management revenue, showed a
net decrease of $175,000 over the same period ended in 2004;
d) Licensing of the N-Viro Process, which had $-0- license sales in the
first quarter of 2005, showed a net decrease of $72,000 over the same period in
2004;
e) Miscellaneous revenues increased $10,000 from the same period ended in
2004; and
f) Research and development revenue did not change from the same period
ended in 2004.
Our gross profit decreased $71,000, or 17%, to $347,000 for the three
months ended March 31, 2005 from $418,000 for the three months ended March 31,
2004, but the gross profit margin increased to 31% from 29% for the same
periods. The increase in gross profit margin is primarily due to the decrease in
costs of processing at privatized facilities, reducing the cost of transporting
our products and reductions in our payroll and related costs.
Our operating expenses decreased $160,000, or 31%, to $349,000 for the
three months ended March 31, 2005 from $509,000 for the three months ended March
31, 2004. The decrease was primarily due to a decrease of approximately $78,000
in directors' fees paid in unregistered stock, $50,000 in employee payroll and
related expenses, $34,000 in employee travel expenses and $42,000 in insurance
and office/administrative costs, partially offset by an increase of
approximately $37,000 in consulting fees and expenses and $14,000 in legal fees.
As a result of the foregoing factors, we recorded an operating loss of
$2,000 for the three months ended March 31, 2005 compared to an operating loss
of $91,000 for the three months ended March 31, 2004, a decrease in the loss of
approximately $89,000.
Our net nonoperating income (expense) increased by $3,000 to net
nonoperating expense of $62,000 for the three months ended March 31, 2005 from
net nonoperating expense of $65,000 for the three months ended March 31, 2004.
The increase in nonoperating expense was primarily due to a decrease in interest
expense of $19,000 from 2004, partially offset by an increase in the loss of
approximately $12,000 in the equity of a joint venture, from a loss of $44,000
in 2004 to a loss of $56,000 in 2005.
We recorded net loss of approximately $64,000 for the three months ended
March 31, 2005 compared to a net loss of $157,000 for the same period ended in
2004, a decrease in the loss of approximately $93,000.
For the three months ended March 31, 2005 and 2004, we have not fully
recognized the tax benefit of the losses incurred in prior periods. Accordingly,
our effective tax rate for each period was zero.
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital deficit of approximately $264,000 at March 31,
2005, compared to a working capital deficit of $384,000 at December 31, 2004,
resulting in an increase in working capital of $120,000. Current assets at March
31, 2005 included cash and investments of approximately $373,000 (including
restricted cash of approximately $126,000), which is an increase of $150,000
from December 31, 2004. The increase in working capital was principally due to
the private placement of unregistered common stock with three stock subscribers
totaling $87,500.
Compared to March 31, 2004, in the first three months of 2005 our cash flow
provided by operations was approximately $140,000, an increase of approximately
$403,000 from the same period in 2004. This increase was principally due to a
decrease in the net loss of approximately $93,000 and a decrease in cash
received from the issuance of stock for services of approximately $247,000,
increased by the change in working capital of approximately $746,000.
Our $845,000 credit facility with Monroe Bank + Trust, or the Bank is
comprised of a $295,000 four year term note at 7.5% and a line of credit up to
$550,000 at Prime plus 1.5% and secured by a first lien on all our assets . In
January 2004, we purchased a certificate of deposit in the amount of $75,000
from the Bank, and transferred custodianship of all of our treasury stock to the
Bank. In February 2004, the Bank decreased the maximum amount available to
borrow on the line to $400,000, but also reduced the financial covenants to make
it easier for us to maintain the facility. We currently have renewed the line of
credit through October 2005, and are not in violation of any financial
covenants. In February 2005, the Bank amended the facility and released certain
additional collateral but required us to provide an additional $50,000
certificate of deposit. At March 31, 2005, we had $250,000 of borrowing capacity
under the Credit Facility.
The normal collection period for accounts receivable is approximately 30-60
days for the majority of customers. This is a result of the nature of the
license contracts, type of customer and the amount of time required to obtain
the information to prepare the billing. We did not change our reserve for bad
debts during the first three months of 2005.
During the first three months of 2005, our investment in a 47.5% owned
partnership, Florida N-Viro, L.P., recorded a net loss to us of approximately
$56,000. Cash flow from operations of Florida N-Viro, L.P. was negative,
partially due to the planned closing of one of its operating facilities, but we
believe Florida N-Viro, L.P. will have sufficient cash flow to fund its
operations for the rest of 2005.
We are currently in discussions with several companies in the cement and
fuel industries for the development and commercialization of the patented N-Viro
fuel technology. There can be no assurance that these discussions will be
successful.
We continue to focus on the development of regional biosolids processing
facilities. Currently we are in negotiations with several privatization firms
to permit and develop independent, regional facilities.
We expect continued improvements in operating results for 2005 primarily
due to realized and expected new sources of revenue. Additionally, market
developments and ongoing discussions with companies in the fuel and wastewater
industries could provide enhanced liquidity and positively impact 2005
operations.
We believe that current market trends and increased and more focused
emphasis on our business development efforts provide a basis for an optimistic
outlook for 2005 and beyond. The national public attack on Class B levels of
sludge treatment is rapidly moving the market to Class A technologies, of which
the Company's patented N-Viro processes are very cost competitive, and well
established in the market place. There are currently over 40 facilities
worldwide using the N-Viro Process, most of which have been using the N-Viro
process for over 10 years. Five new facilities are expected to come on-line in
the next twelve to eighteen months. The development and patenting of new
technologies for animal manure treatment, bio-fuel and nematode control have the
potential to expand our revenue base over the next five years and beyond. We
believe we have sufficient liquidity to continue operations over the next twelve
months.
OFF-BALANCE SHEET ARRANGEMENTS
At March 31, 2005, we did not have any material commercial commitments,
including guarantees or standby repurchase obligations, or any relationships
with unconsolidated entities or financial partnerships, including entities often
referred to as structured finance or special purpose entities or variable
interest entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
From time to time, during the normal course of business, we may make
certain indemnities, commitments and guarantees under which we may be required
to make payments in relation to certain transactions. These include: (i)
indemnities to vendors and service providers pertaining to claims based on our
negligence or willful misconduct and (ii) indemnities involving the accuracy of
representations and warranties in certain contracts. Pursuant to Delaware law,
we may indemnify certain officers and directors for certain events or
occurrences while the officer or director is, or was, serving at our request in
such capacity. We also have director and officer insurance coverage that limits
our exposure and enables us to recover a portion of any future amounts that we
may pay for indemnification purposes. We believe the applicable insurance
coverage is generally adequate to cover any estimated potential liability for
which we may provide indemnification. The majority of these indemnities,
commitments and guarantees do not provide for any limitation of the maximum
potential for future payments we could be obligated to make. We have not
recorded any liability for these indemnities, commitments and other guarantees
in the accompanying Consolidated Balance Sheets.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual cash obligations at March
31, 2005, and the effect these obligations are expected to have on liquidity and
cash flow in future periods:
Payments Due By Period
---------------------------------------------------------------------------
Total Less than 1 year 1 - 3 years 4 - 5 years after 5 years
-------- ----------------- ------------ ------------ --------------
Purchase obligations . . . . . . . (1) $691,500 $ 150,800 $ 252,200 $ 156,000 $ 132,500
Long-term debt obligations . . . . (2) 183,132 92,919 90,213 - -
Operating leases . . . . . . . . . (3) 98,895 48,042 50,853 - -
Capital lease obligations - - - - -
Other long-term debt obligations - - - - -
-------- ----------------- ------------ ------------ --------------
Total contractual cash obligations $973,527 $ 291,761 $ 393,266 $ 156,000 $ 132,500
======== ================= ============ ============ ==============
(1) Purchase obligations include agreements to purchase services that are enforceable and legally
binding on the Company and that specify all significant terms and the approximate timing of the
transaction. Purchase obligations exclude agreements that are cancelable without penalty.
(2) Amounts represent the expected cash payments of our long-term obligations.
(3) Amounts represent the expected cash payments of our operating lease obligations.
ITEM 3. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
As of March 31, 2005, under the direction of our Chief Executive Officer
and Chief Financial Officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.
We concluded that our disclosure controls and procedures were effective as of
March 31, 2005, such that the information required to be disclosed in our SEC
reports is recorded, processed, summarized and reported within the time periods
specified by the SEC's rules and forms, and is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
INTERNAL CONTROLS
There were no changes in our internal controls over financial reporting
during the quarter ended March 31, 2005 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A final order has been issued in the stockholder derivative action, or the
Lawsuit filed by Strategic Asset Management, Inc., or SAMI, in the Court of
Chancery of the State of Delaware for New Castle County, or the Court. On April
21, 2005, the Court issued an order, or the Order, that the Settlement Agreement
and Release, or the Agreement, between us, certain directors and SAMI, filed
June 30, 2004 in response to the Lawsuit, a copy of which was attached to the
Form 10-QSB filed August 16, 2004, has been confirmed and approved, with one
change to the Agreement. The Court awarded the sum of $150,000 for fees and
expenses. The Order was attached to the Form 8-K filed April 29, 2005.
We were notified on April 22, 2005 that SAMI, the Plaintiff, and Mark
Behringer, Intervening Plaintiff, jointly filed a Notice of Motion of Dismissal
Pursuant to Rule 41(a) on April 22, 2005, dismissing the derivative action by
SAMI. The Notice of Motion of Dismissal Pursuant to Rule 41(a) was attached to
the Form 8-K filed April 29, 2005. This concludes the Lawsuit.
From time to time we are involved in legal actions arising in the ordinary
course of business. With respect to these matters, we believe we have adequate
legal defenses and/or provided adequate accruals for related costs such that the
ultimate outcome will not have a material adverse effect on our future financial
position or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the first quarter of 2005, we issued 958 and 1,358 shares of
unregistered common stock to Phillip Levin and Daniel Haslinger, respectively,
both members of the Board of Directors, in exchange for management consulting
work performed outside their duties as directors from January to April 2004, for
$3,000 and $4,000, respectively, or a total of $7,000.
During the first quarter of 2005, Carl Richard, a director, subscribed for
10,000 shares of our restricted unregistered common stock in a private
placement. These shares were issued in May 2005 at $1.25 per share, with
associated warrants to purchase additional shares at $1.85 per share.
We are currently completing a private placement of up to $835,188 in
unregistered shares of our common stock. We hope to sell up to 668,151 shares
of common stock at a price per share of $1.25. As announced in a Form 8-K on
June 18, 2004, this price was lowered from $2.25 per share, the total amount of
the private placement increased from $750,000 and the price of the associated
warrants decreased to $1.85 from $2.85. During February and early March, 2004,
we issued 193,417 shares for total proceeds of $435,188. To reflect the
re-pricing, in June, 2004 we issued an additional 154,734 shares for no
additional proceeds. During December, 2004, we issued an additional 125,200
shares for total proceeds of $156,500. During the first quarter of 2005, a
director and two non-affiliated stockholders signed subscription agreements for
an additional 70,000 shares, which we recorded as a receivable of $87,500 at
March 31, 2005. We issued all 70,000 shares in the second quarter of 2005.
All of the foregoing issuances were exempt from registration pursuant to
Section 4(2) of the Securities and Exchange Act of 1933, and no underwriters or
placement agents were involved.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
(a) Our Board of Directors has postponed the Annual Meeting of our
stockholders originally scheduled for Thursday, May 19, 2005, until June 30,
2005. The location of our Annual Meeting has not changed and will be in the
Garden Room of the Toledo Club, 235 14th Street, Toledo, Ohio at 10:00 a.m. We
filed a Notice of Postponement on May 11, 2005 with the SEC in a Schedule 14A,
Definitive Additional Materials, and was sent to all stockholders on May 13,
2005. We will file a revised definitive proxy statement on an Amended Schedule
14A, which will be sent to all stockholders subsequent to the filing of this
Form 10-QSB.
(b) None
ITEM 6. EXHIBITS
(a) Exhibits:
See Exhibit Index below.
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
N-VIRO INTERNATIONAL CORPORATION
Date: May 16, 2005 /s/Daniel J. Haslinger
-------------- ------------------------
Daniel J. Haslinger
Chief Executive Officer and President
(Principal Executive Officer)
Date: May 16, 2005 /s/ James K. McHugh
-------------- ----------------------
James K. McHugh
Chief Financial Officer, Secretary and Treasurer
(Principal Financial & Accounting Officer)
EXHIBIT INDEX
=============
EXHIBIT NO. DOCUMENT
----------- --------
3.1 Amended and Restated Certificate of Incorporation, dated June 17, 1998
(incorporated by reference to Exhibit 3.2 to Form 10-K filed April 14, 2004).
3.2 Amendment to the Certificate of Incorporation of the Company, dated
November 13, 2003 (incorporated by reference to Exhibit 3.4 to Form 10-K filed
April 14, 2004).
3.3 Amended and Restated By-Laws of the Company, dated May 13, 2005.
4.1 Certificate of Designation of Series A Redeemable Preferred Stock, dated
August 27, 2003 (incorporated by reference to Exhibit 3.3 to Form 10-K filed
April 14, 2004).
4.2 The N-Viro International Corporation 2004 Stock Option Plan
(incorporated by reference to Form S-8 filed December 20, 2004).*
4.3 The Amended and Restated N-Viro International Corporation Stock Option
Plan (incorporated by reference to Form S-8 filed May 9, 2000).*
10.1 Employment Agreement, dated June 14, 1999, between N-Viro International
Corporation and Terry J. Logan (incorporated by reference to Exhibit 1 to the
Form 8-K filed June 30, 1999).*
10.2 Amended and Restated Employment Agreement, dated June 6, 2003, between
N-Viro International Corporation and Michael G. Nicholson (incorporated by
reference to Exhibit 99.1 to the Form 8-K filed June 9, 2003).*
10.3 Business Loan Agreement dated February 26, 2003, between N-Viro
International Corporation and Monroe Bank + Trust; letter of credit enhancement
dated February 25, 2003 between N-Viro International Corporation and Messrs. J.
Patrick Nicholson, Michael G. Nicholson, Robert P. Nicholson and Timothy J.
Nicholson (all incorporated by reference to Exhibits 99.1 through 99.3 to the
Form 8-K filed March 3, 2003).
10.4 Settlement Agreement and Release dated August 29, 2003 between N-Viro
International Corporation and Strategic Asset Management, Inc.; Consulting
Agreement dated August 28, 2003 between N-Viro International Corporation and J.
Patrick Nicholson (all incorporated by reference to Item 5 of the Form 8-K filed
August 29, 2003).
10.5 Security Units Purchase Agreement dated January 30, 2004 between N-Viro
International Corporation and Ophir Holdings, Inc. (incorporated by reference to
Exhibit 99.1 to the Form 8-K filed February 5, 2004).
10.6 Memorandum of Employment Agreement and Storage Site Agreement,
respectively, both dated September 27, 2004, between N-Viro International
Corporation and, Daniel J. Haslinger and Micro Macro Integrated Technologies,
Inc., respectively (incorporated by reference to Exhibit 10.1 of Form 8-K dated
October 1, 2004).*
31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes - Oxley
Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes - Oxley Act
of 2002.
32.1 Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
* Indicates a management contract or compensatory plan or arrangement.