UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 2008
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 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 such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
As of May 5, 2008, 4,317,956 shares of N-Viro International
Corporation $ .01 par value common stock were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
------------------------
2008 2007
----------- -----------
REVENUES $1,164,046 $1,132,260
COST OF REVENUES 933,347 887,113
----------- -----------
GROSS PROFIT 230,699 245,147
OPERATING EXPENSES
Selling, general and administrative 395,393 478,867
----------- -----------
OPERATING LOSS (164,694) (233,720)
OTHER INCOME (EXPENSE)
Interest income 1,020 1,733
Interest expense (13,446) (10,916)
Gain on legal debt forgiven 84,158 -
----------- -----------
71,732 (9,183)
----------- -----------
LOSS BEFORE INCOME TAXES (92,962) (242,903)
Federal and state income taxes - -
----------- -----------
NET LOSS $ (92,962) $ (242,903)
=========== ===========
Basic and diluted loss per share $ (0.02) $ (0.06)
=========== ===========
Weighted average common shares outstanding - basic and diluted 4,127,191 3,840,748
=========== ===========
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 2008 (Unaudited) December 31, 2007
--------------------------- -------------------
ASSETS
------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted $ 85,433 $ 62,321
Restricted 136,526 135,506
Trade Receivables, net 582,208 440,958
Prepaid expenses and other current assets 289,776 185,330
--------------------------- -------------------
Total current assets 1,093,943 824,115
Property and Equipment, Net 1,332,057 1,300,428
Intangible and Other Assets, Net 393,265 318,523
--------------------------- -------------------
$ 2,819,265 $ 2,443,066
=========================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 186,663 $ 174,253
Line-of-credit 356,000 364,000
Accounts payable 947,399 1,055,268
Accrued liabilities 222,560 236,175
--------------------------- -------------------
Total current liabilities 1,712,622 1,829,696
Long-term debt, less current maturities 800,456 772,374
--------------------------- -------------------
Total liabilities 2,513,078 2,602,070
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value; authorized 7,000,000 shares; issued
4,341,009 in 2008 and 4,145,359 in 2007 43,410 41,454
Additional paid-in capital 17,518,331 16,962,134
Accumulated deficit (16,570,664) (16,477,702)
--------------------------- -------------------
991,077 525,886
Less treasury stock, at cost, 123,500 shares 684,890 684,890
--------------------------- -------------------
Total stockholders' equity (deficit) 306,187 (159,004)
--------------------------- -------------------
$ 2,819,265 $ 2,443,066
=========================== ===================
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31
2008 2007
---------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $(152,459) $ 27,798
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (113,055) (225,535)
Expenditures for intangible assets - (3,000)
Reductions to restricted cash and cash equivalents (1,020) (883)
---------- ----------
Net cash used in investing activities (114,075) (229,418)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under long-term obligations 108,485 128,405
Principal payments on long-term obligations (67,993) (36,198)
Stock warrants exercised 122,000 -
Stock options exercised 135,154 53,571
Net borrowings (payments) on line-of credit (8,000) 30,000
---------- ----------
Net cash provided by financing activities 289,646 175,778
---------- ----------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 23,112 (25,842)
CASH AND CASH EQUIVALENTS - BEGINNING 62,321 162,633
---------- ----------
CASH AND CASH EQUIVALENTS - ENDING $ 85,433 $ 136,791
========== ==========
Supplemental disclosure of cash flows information:
Cash paid during the three months ended for interest $ 24,853 $ 18,520
========== ==========
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 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, 2008 may not be indicative of
the results of operations for the year ending December 31, 2008. 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, 2007.
The financial statements are consolidated as of March 31, 2008 and December
31, 2007 for the Company. All intercompany transactions were eliminated.
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:
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. The
balance of the allowance at March 31, 2008 and December 31, 2007 is $40,000.
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.
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.
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 is
used to estimate the fair value of existing debt.
Income Taxes - Income taxes are provided at the applicable rates on the
basis of items included in the determination of income for income tax purposes
for the Company. The Company adopted the provisions of Financial Accounting
Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement 109" on January 1, 2007.
Deferred Income Taxes - Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income, under the provision
of SFAS No. 109 which requires deferred income taxes be computed on the
liability method and deferred tax assets are recognized only when realization in
certain. The tax effect of such differences are zero at the end of each period
presented.
NOTE 2. RELATED PARTY TRANSACTIONS
During the quarter ended March 31, 2008, the Company paid R. Francis
DiPrete, a member of the Board, fees for consulting services. These fees were
exclusive of director fees and expenses paid for with cash and stock options.
The following table summarizes these payments and the balance to each of any
monies owed as of March 31, 2008:
Payee Trucking, repairs and services Consulting fees Accounts payable balance at 3/31/2008
------------------ ------------------------------- ---------------- --------------------------------------
R. Francis DiPrete $ - $ 2,500 $ 2,500
NOTE 3. LONG-TERM DEBT
Through the first quarter of 2008, the Company had a line of credit up to
$400,000 at the prime rate (5.25% at March 31, 2008) plus 1.5% and secured by a
first lien on all assets of the Company, with Monroe Bank + Trust, or the Bank.
Two certificates of deposit totaling $136,526 from the Bank are held as a
condition of maintaining the line of credit. As announced in a Form 8-K filing
on November 7, 2007, we renewed the line of credit through October 2008. At
March 31, 2008, the Company had $44,000 of borrowing capacity under the credit
facility.
During the first quarter 2008, the Company's wholly-owned subsidiary,
Bio-Mineral Transportation LLC ("BMT"), borrowed a total of $108,485 from a
lender to purchase two trailers that were placed into service during the
quarter. A term note was issued at 7.5% interest for five years, monthly
payments of $2,173 and secured by the trailers. The total amount owed on all
notes by BMT as of March 31, 2008 was approximately $550,000 and all notes are
expected to be paid in full on the applicable maturity date, the last of which
is February 2013.
During the first quarter 2008, the Company's wholly-owned subsidiary,
Florida N-Viro LP ("Florida"), did not borrow any additional funds. The total
amount owed on all notes by Florida as of March 31, 2008 was approximately
$55,000 and all notes are expected to be paid in full on the applicable maturity
date, the last of which is May 2012.
On December 28, 2006, the Company purchased the remaining ownership
interest in Florida N-Viro for $500,000 and financed $400,000 of it by
delivering a note to the seller, VFL Technology Corporation. The note is at 8%
interest for 10 years, to be paid in annual installments, including interest, of
$59,612, subject to an offset for royalties due us under a patent license
agreement from the same party. The amount owed on the note as of March 31, 2008
was approximately $373,000 and the first installment of $27,338 was paid on time
in early 2008. The second installment is expected to be paid on time in early
2009, accounting for expected royalty offsets through 2008.
NOTE 4. CONTINGENCIES AND OTHER OBLIGATIONS TO RELATED PARTIES
In June 2007, the Company executed an Employment Agreement with Robert W.
Bohmer as Vice-President of Business Development and General Counsel, which
commenced July 1, 2007. The Company and Mr. Bohmer agreed primarily to enter
into an employment arrangement for a two-year term at $150,000 per year plus a
stock option grant of 100,000 shares. In addition, Mr. Bohmer is eligible for
an annual cash bonus. Generally, the Agreement may be terminated by the Company
with or without cause or by the Employee for any reason.
In March 2007, the Company and Mr. Timothy R. Kasmoch, the President and
Chief Executive Officer, entered into an Employment Agreement dated and
commencing February 13, 2007, for a two-year term. Mr. Kasmoch is to receive an
annual base salary of $150,000, subject to an annual discretionary increase. In
addition, Mr. Kasmoch is eligible for an annual cash bonus. Generally, the
Agreement may be terminated by the Company with or without cause or by the
Employee for any reason. In April 2008, the Company amended the Agreement and
extended the employment term an additional two years, ending on February 12,
2011. Except for the extension of the term, there were no other changes to the
Agreement. Details of this event were announced in a Form 8-K filed April 7,
2008.
The Company maintains an office in Daytona Beach under a lease with the
County of Volusia, Florida which was renewed in April, 2005 for five years. The
total minimum rental commitment for the years ending December 31, 2008 through
2009 is $48,000 each year, and for 2010 is $12,000. The total rental expense
included in the statements of operations for the three months ended March 31,
2008 and 2007 is $12,000. We also lease various equipment on a month-to-month
basis at our Florida operation.
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.
The Company is involved in these legal proceedings and subject to claims
which have arisen in the ordinary course of business. These actions, when
concluded and determined, will not, in the opinion of management, have a
material adverse effect upon the financial position, results of operations or
cash flows of the Company.
NOTE 5. NEW ACCOUNTING STANDARDS
In February 2008, the Financial Accounting Standards Board issued FASB
Staff Position No. 157-2, Effective Date of FASB Statement No. 157 ("FSP
157-2"), which delays the effective date of SFAS 157 for nonfinancial assets and
nonfinancial liabilities. Therefore, the Company has delayed application of
SFAS 157 to its nonfinancial assets and nonfinancial liabilities, which include
assets and liabilities acquired in connection with a business combination,
goodwill, intangible assets and asset retirement obligations recognized in
connection with final capping, closure and post-closure landfill obligations,
until January 1, 2009. The Company is currently evaluating the impact of SFAS
157 for nonfinancial assets and liabilities on the Company's financial position
and results of operations.
In March 2008, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 161, "Disclosures about Derivative Instruments and
Hedging Activities - an amendment of FASB Statement No. 133". This Statement
requires enhanced disclosures about an entity's derivative and hedging
activities and thereby improves the transparency of financial reporting. This
Statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. This Statement encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. Adoption of this Statement
is not expected to have a material impact on the Company's financial statements.
NOTE 6. SEGMENT INFORMATION
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 Ohio Wastewater Treatment Facility and the
Daytona/Volusia County Florida Treatment Facility.
Other Domestic Operations - Sales of alkaline admixtures, territory or
site licenses and royalty fees to use N-Viro technology in the United States.
Foreign Operations - Sale of alkaline admixtures, 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 specific locations 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 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 Company has not
recorded any revenue from this source since 2006.
For the first quarter of 2008, approximately 90% of the Company's revenue
was from management operations and 10% from other domestic operations. Since
the second quarter of 2006, the percentage of the Company's revenue from
management fee operations has grown from 45% to 90%, primarily the result of the
acquisition of the Florida operations at the end of 2006.
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, 2008 and 2007 (dollars in thousands):
Management Domestic Foreign Research &
Operations Operations Operations Development Total
---------------------------- ----------- ---------- ----------- -----
Quarter Ended March 31, 2008
-------------------------------------------------------------------------
Revenues 1,050 114 - - 1,164
Cost of revenues 806 127 - - 933
---------------------------- ----------- ---------- ----------- -----
Segment profits 244 (13) - - 231
============================ =========== ========== =========== =====
Identifiable assets 1,232 85 - - 1,317
Depreciation and Amortization 53 35 - - 88
Quarter Ended March 31, 2007
-------------------------------------------------------------------------
Revenues 713 419 - - 1,132
Cost of revenues 594 293 - - 887
---------------------------- ----------- ---------- ----------- -----
Segment profits 119 126 - - 245
============================ =========== ========== =========== =====
Identifiable assets 991 96 - - 1,087
Depreciation and Amortization 24 11 - - 35
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, 2008 and
2007 is as follows (dollars in thousands):
Qtr. Ended Mar. 31
-------------------
2008 2007
------- -------
Segment profits:
Segment profits for reportable segments $ 231 $ 245
Corporate selling, general and administrative expenses (396) (479)
Other income (expense) 72 (9)
------- -------
Consolidated loss before taxes $ (93) $ (243)
======= =======
Identifiable assets:
Identifiable assets for reportable segments $1,317 $1,087
Corporate property and equipment 15 17
Current assets not allocated to segments 1,094 1,088
Intangible and other assets not allocated to
segments 393 755
------- -------
Consolidated assets $2,819 $2,947
======= =======
Depreciation and amortization:
Depreciation and Amortization for reportable segments $ 88 $ 35
Corporate depreciation and amortization 10 47
------- -------
Consolidated depreciation and amortization $ 98 $ 82
======= =======
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. 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 and interest rates, as well as
other factors. In addition, operating results of some of our business segments
are influenced, along with other factors such as interest rates, by particular
business cycles and seasonality.
COMPETITION. The Company conducts business in a highly competitive market and
has fewer resources than most of its competitors. Principal competitors are
mainly from the waste management and disposal, water and alternative energy
industries. Businesses from these markets 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
This 10-Q 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 differ
materially from described in those statements. 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; (vi) our inability to
exploit existing or secure additional sources of revenues or capital to fund
operations; (vii) a failure to collect upon or otherwise secure the benefits of
existing contractual commitments with third parties, including our customers;
and (viii) other factors and risks identified in this Form 10-Q, or, as filed in
Form 10-KSB for the year ending December 31, 2007 under the caption "Risk
Factors." This list provides examples of factors that could affect the results
described by forward-looking statements contained in this Form 10-Q; however,
this list is not exhaustive and many other factors could impact our 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-Q 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-Q 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-Q. 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 were incorporated in Delaware in April, 1993, and became a public
company in October 1993. We own and sometimes license various N-Viro Processes,
patented technologies to treat and recycle wastewater and other bio-organic
wastes, utilizing certain alkaline and mineral by-products produced by the
cement, lime, electric utilities and other industries. The N-Viro Process is a
patented process for the treatment and recycling of bio-organic wastes,
utilizing certain alkaline by-products produced by the cement, lime, electric
utilities and other industries. To date, the N-Viro Process has been
commercially utilized for the recycling of wastewater sludge from municipal
wastewater treatment facilities. N-Viro SoilTM, produced according to the
N-Viro Process specifications, is an "exceptional quality" sludge product under
the 40 CFR Part 503 Sludge Regulations under the Clean Water Act of 1987 (the
"Part 503 Regs").
Our business strategy is to market our N-Viro Technologies which produces
an "exceptional quality" sludge product, as defined in the Part 503 Regs, with
multiple commercial uses. In this strategy, the primary focus is to identify
allies, public and private, who will allow the opportunity for N-Viro build own
and operate N-Viro facilities. Currently the company operates two biosolid
process facilities located in Toledo Ohio and Daytona Florida. Our goal is to
continue to operate these facilities and aggressively market our N-Viro BioDry
and N-Viro Fuel technologies. These patented processes are best suited for
current and future demands of both waste treatment as well as domestic and
international pressures for clean, renewable alternative fuel sources.
RESULTS OF OPERATIONS
Total revenues were $1,164,000 for the quarter ended March 31, 2008
compared to $1,132,000 for the same period of 2007. The net increase in revenue
is due primarily to an increase in facility management revenue. Our cost of
revenues increased to $933,000 in 2008 from $887,000 for the same period in
2007, and the gross profit percentage decreased to 20% from 22% for the quarters
ended March 31, 2008 and 2007, respectively. This decrease in gross profit
percentage is due primarily to the decrease in the percentage of revenue derived
from alkaline admixture and royalty revenue, which generate a higher gross
profit margin than other sources of revenue. Operating expenses decreased for
the comparative period. These changes collectively resulted in a net loss of
approximately $93,000 for the quarter ended March 31, 2008 compared to a net
loss of $243,000 for the same period in 2007, a decrease in the net loss of
approximately $150,000.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2008 WITH THREE MONTHS ENDED MARCH
31, 2007
Our overall revenue increased $32,000, or 3%, to $1,164,000 for the quarter
ended March 31, 2008 from $1,132,000 for the quarter ended March 31, 2007. The
net increase in revenue was due primarily to the following:
a) Sales of alkaline admixture decreased $191,000 from the same period
ended in 2007 - this decrease was primarily the result of the loss of revenue of
$138,000 from Raleigh and several smaller customers in the Midwest;
b) Revenue from the service fees for the management of alkaline admixture
decreased $14,000 from the same period ended in 2007 - this decrease was
contributed primarily by Toledo-area customers, which decreased $58,000 over the
same period in 2007, but was offset by an increase of $44,000 from the Florida
operation;
c) Our processing revenue, including facility management revenue, showed a
net increase of $237,000 over the same period ended in 2007. Of this gross
facility management revenue increase, $146,000 was contributed by the Florida
operation and $86,000 from the Toledo facility;
Our gross profit decreased $14,000, or 6%, to $231,000 for the quarter
ended March 31, 2008 from $245,000 for the quarter ended March 31, 2007, and the
gross profit margin decreased to 20% from 22% for the same periods. The
decrease in gross profit margin is primarily due to the decrease in percentage
of overall gross revenue from royalties, which operates at a higher profit
margin than our other types of revenue. The Toledo operation contributed
approximately $127,000 of gross profit on overall revenue of $425,000, which was
an increase of approximately $13,000 of gross profit over the same period in
2007. The Florida operation contributed approximately $87,000 of gross profit
on overall revenue of $624,000, which was an increase of approximately $72,000
of gross profit over the same period in 2007. The increases in gross profit
from these two locations were offset by approximately $99,000 by the loss of
several customers who primarily contributed royalty and alkaline admixture
sales, the largest of these from Raleigh, NC.
Our operating expenses decreased $84,000, or 17%, to $395,000 for the
quarter ended March 31, 2008 from $479,000 for the quarter ended March 31, 2007.
The decrease was primarily due to a decrease of approximately $81,000 in legal
and professional fees, $23,000 in director-related expenses and $12,000 in
amortization of intangible assets, partially offset by an increase of $25,000 in
employee payroll and related expenses and $7,000 in office-related and selling
expenses.
As a result of the foregoing factors, we recorded an operating loss of
$165,000 for the quarter ended March 31, 2008 compared to an operating loss of
$234,000 for the quarter ended March 31, 2007, a decrease in the loss of
approximately $69,000.
Our net nonoperating income increased by $81,000 to net nonoperating income
of $72,000 for the quarter ended March 31, 2008 from net nonoperating expense of
$9,000 for the quarter ended March 31, 2007. The increase in nonoperating
expense was primarily due to a write-off of $84,000 in legal expenses previously
charged, offset by an increase of $3,000 in interest expense on higher borrowing
on the line of credit for the period compared to 2007.
We recorded a net loss of approximately $93,000 for the quarter ended March
31, 2008 compared to a net loss of $243,000 for the same period ended in 2007, a
decrease in the loss of approximately $150,000. Total non-cash expenses for
depreciation, amortization, stock and stock options charges accounted for
approximately $183,000 of the loss for the quarter ended March 31, 2008,
resulting in cash operating income generated of approximately $90,000. Similar
non-cash expenses for the same period in 2007 totaled approximately $168,000.
For the quarter ended March 31, 2008 and 2007, 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 $619,000 at March 31,
2008, compared to a working capital deficit of $1,006,000 at December 31, 2007,
resulting in an increase in working capital of $387,000. Current assets at
March 31, 2008 included cash and investments of approximately $222,000
(including restricted cash of approximately $137,000), which is an increase of
$24,000 from December 31, 2007. The positive change in working capital from
December 31, 2007 was primarily an increase in cash received of $255,000 from
stock warrant and option exercises, and $90,000 of cash operating income
generated for the three months ended March 31, 2008.
Our cash flow used by operations for the first three months ended March 31,
2008 was approximately $152,000, a decrease in the net change of approximately
$180,000 from the period ended March 31, 2007. This decrease was principally
due to the decrease of $218,000 in the change in trade accounts receivable, a
decrease of $169,000 in the change in trade accounts payable, offset by the
positive change in the net loss of $150,000 and an increase of $57,000 in the
change in stock, warrants and stock options issued for fees and services.
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
processing, alkaline admixture or license contracts, type of customer and the
amount of time required to obtain the information to prepare the billing. The
normal payment period for accounts payable is approximately 45-75 days for the
majority of vendors. This is also a result of the customer contracts and the
related cost of goods sold associated with each customer. We have periodically
extended payments on certain vendors to assist us in our cash flow needs.
Principal vendor types are trucking, fuel, alkaline admixture (materials) and
outside professional fees.
Through the first quarter of 2008, the Company had a line of credit up to
$400,000 at the prime rate (5.25% at March 31, 2008) plus 1.5% and secured by a
first lien on all assets of the Company, with Monroe Bank + Trust, or the Bank.
Two certificates of deposit totaling $136,526 from the Bank are held as a
condition of maintaining the line of credit. As announced in a Form 8-K filing
on November 7, 2007, we renewed the line of credit through October 2008. At
March 31, 2008, the Company had $44,000 of borrowing capacity under the credit
facility.
During the first quarter 2008, the Company's wholly-owned subsidiary,
Bio-Mineral Transportation LLC ("BMT"), borrowed a total of $108,485 from a
lender to purchase two trailers that were placed into service during the
quarter. A term note was issued at 7.5% interest for five years, monthly
payments of $2,173 and secured by the trailers. The total amount owed on all
notes by BMT as of March 31, 2008 was approximately $550,000 and all notes are
expected to be paid in full on the applicable maturity date, the last of which
is February 2013.
During the first quarter 2008, the Company's wholly-owned subsidiary,
Florida N-Viro LP ("Florida"), did not borrow any additional funds. The total
amount owed on all notes by Florida as of March 31, 2008 was approximately
$55,000 and all notes are expected to be paid in full on the applicable maturity
date, the last of which is May 2012.
On December 28, 2006, the Company purchased the remaining ownership
interest in Florida N-Viro for $500,000 and financed $400,000 of it by
delivering a note to the seller, VFL Technology Corporation. The note is at 8%
interest for 10 years, to be paid in annual installments, including interest, of
$59,612, subject to an offset for royalties due us under a patent license
agreement from the same party. The amount owed on the note as of March 31, 2008
was approximately $373,000 and the first installment of $27,338 was paid on time
in early 2008. The second installment is expected to be paid on time in early
2009, accounting for expected royalty offsets through 2008.
For the remainder of 2008, we expect to continue improvements in operating
results by focusing on existing and expected new sources of revenue, especially
from our N-Viro Fuel technology, and cash from equity issuances and exercises of
outstanding warrants and options. We expect that market developments favoring
cleaner burning renewable energy sources and ongoing discussions with companies
in the fuel and wastewater industries could provide enhanced liquidity and have
a positive impact on future operations. We continue to pursue opportunities
with strategic partners for the development and commercialization of the
patented N-Viro Fuel technology. In addition, we are focusing on the
development of regional biosolids processing facilities, and are currently in
negotiations with potential partners to permit and develop independent, regional
facilities.
There can be no assurance these discussions will be successful or result in new
revenue sources for the company. Our failure to achieve improvements in
operating results, including through these potential sources of revenue, or in
our ability to adequately finance or secure additional sources of funds would
likely have a material adverse effect on our continuing operations.
OFF-BALANCE SHEET ARRANGEMENTS
At March 31, 2008, 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, 2008, and the effect these obligations are expected to have on liquidity and
cash flow in future periods:
Payments Due By Period
Note # Total Less than 1 year 2 - 4 years 5 - 6 years after 6 years
------- ---------- ----------------- ------------ ------------ --------------
Purchase obligations (1) $ 18,200 $ 18,200 $ - $ - $ -
Long-term debt obligations
and related interest (2) 1,230,553 258,913 653,630 139,175 178,835
Operating leases (3) 161,567 83,808 76,526 1,233 -
Capital lease obligations - - - - -
Line of Credit obligation 356,000 356,000 - - -
Other long-term debt obligations - - - - -
---------- ----------------- ------------ ------------ --------------
Total contractual cash obligations $1,766,320 $ 716,921 $ 730,156 $ 140,408 $ 178,835
========== ================= ============ ============ ==============
(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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4T. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) that are
designed to ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms, and that such information is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As stated in our Form 10-KSB for the year ended December 31, 2007, we
reported that, based on the assessment of our principal executive officer and
principal financial officer, our internal controls over financial reporting were
not effective as of December 31, 2007. In particular, we identified the
following material weakness:
We lacked personnel in accounting and financial staff to
sufficiently monitor and process financial transactions in an
efficient and timely manner. Our history of losses has severely
limited our budget to hire and train enough accounting and financial
personnel needed to adequately provide this function. Consequently, we
lacked sufficient technical expertise, reporting standards and written
policies and procedures. This has resulted in a significant number of
immaterial out-of-period adjustments to our consolidated financial
statements. Specifically, controls were not effective to ensure that
significant non-routine transactions, accounting estimates, and other
adjustments were appropriately reviewed, analyzed and monitored by
competent accounting staff on a timely basis.
We are still assessing the development of a remediation plan to address
this material weakness, and expect to develop a remediation plan in the current
fiscal year. Such remediation plan may involve the hiring of accounting
personnel or the outsourcing of accounting functions to assist with reviewing
and reporting transactions and the adoption of additional policies and
procedures to assist with the reporting of financial transactions. As part of
this process, in April 2008, our board reviewed an expense reimbursement policy
and we expect to approve a final policy in the second quarter 2008.
Other than the remedial measures described above, there were no other
changes in our internal control over financial reporting that have materially
affected, or are likely to materially affect our internal control over financial
reporting during the three months ended March 31, 2008.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no changes in the status of any material legal proceedings
against us during the quarter ended March 31, 2008.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 6, 2008, we issued 50,000 shares of unregistered Common Stock
to SLD Capital Corporation, as compensation for general business consulting
services to be provided by SLD to the Company under a Consulting Agreement,
dated as of January 31, 2008. The agreement is for a term of two years from the
effective date. The shares issued to SLD were issued in a transaction exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), which exemption was based in part on the
representations and warranties of SLD.
On February 7, 2008, we issued 30,000 unregistered shares of stock to Diane
Cooke upon the exercise for cash of warrants originally issued in 2004 at an
exercise price of $1.85 per share. The shares issued to Diane Cooke were issued
in a transaction exempt from registration pursuant to Section 4(1) of the
Securities Act and Rule 144 promulgated thereunder.
On February 11, 2008, we issued 50,000 shares of unregistered Common Stock
to Weil Consulting Corporation, as compensation for general business consulting
services to be provided by Weil to the Company under a Consulting Agreement,
dated as of January 31, 2008. The agreement is for a period of two years from
the effective date. The shares issued to Weil were issued in a transaction
exempt from registration pursuant to Section 4(2) of the Securities Act, which
exemption was based in part on the representations and warranties of Weil.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
(a) None
ITEM 6. EXHIBITS
Exhibits:
See Exhibit Index below.
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 15, 2008 /s/ Timothy R. Kasmoch
------------ ----------------------
Timothy R. Kasmoch
Chief Executive Officer and President
(Principal Executive Officer)
Date: May 15, 2008 /s/ James K. McHugh
------------ --------------------
James K. McHugh
Chief Financial Officer, Secretary and Treasurer
(Principal Financial & Accounting Officer)