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 June 30, 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 August 11, 2008, 4,332,256 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 June 30 Six Months Ended June 30
-------------------------- ------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
REVENUES $1,156,544 $1,022,014 $2,320,590 $2,154,274
COST OF REVENUES 1,034,279 856,543 1,967,626 1,743,657
----------- ----------- ----------- -----------
GROSS PROFIT 122,265 165,471 352,964 410,617
OPERATING EXPENSES
Selling, general and administrative 553,009 530,444 948,402 1,009,311
----------- ----------- ----------- -----------
OPERATING LOSS (430,744) (364,973) (595,438) (598,694)
OTHER INCOME (EXPENSE)
Interest income 809 1,565 1,829 3,297
Interest expense (17,180) (17,938) (30,625) (28,854)
Gain on legal debt forgiven 0 - 84,158 -
----------- -----------
(16,371) (16,373) 55,362 (25,557)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (447,115) (381,346) (540,076) (624,251)
Federal and state income taxes - - - -
----------- ----------- ----------- -----------
NET LOSS $ (447,115) $ (381,346) $ (540,076) $ (624,251)
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.10) $ (0.10) $ (0.13) $ (0.16)
=========== =========== =========== ===========
Weighted average common shares outstanding - basic and diluted 4,297,125 3,965,706 4,211,720 3,903,573
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2008 (Unaudited) December 31, 2007
-------------------------- -------------------
ASSETS
-------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted $ 81,749 $ 62,321
Restricted 137,336 135,506
Trade Receivables, net 642,509 440,958
Prepaid expenses and other current assets 371,712 185,330
-------------------------- -------------------
Total current assets 1,233,306 824,115
Property and Equipment, Net 2,030,412 1,300,428
Intangible and Other Assets, Net 307,452 318,523
-------------------------- -------------------
$ 3,571,170 $ 2,443,066
========================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 332,333 $ 174,253
Line-of-credit 350,000 364,000
Accounts payable 1,528,951 1,055,268
Accrued liabilities 222,236 236,175
-------------------------- -------------------
Total current liabilities 2,433,520 1,829,696
Long-term debt, less current maturities 1,018,341 772,374
-------------------------- -------------------
Total liabilities 3,451,861 2,602,070
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value; authorized 15,000,000 shares; issued
4,446,456 in 2008 and 4,145,359 in 2007 44,465 41,454
Additional paid-in capital 17,777,512 16,962,134
Accumulated deficit (17,017,778) (16,477,702)
-------------------------- -------------------
804,199 525,886
Less treasury stock, at cost, 123,500 shares 684,890 684,890
-------------------------- -------------------
Total stockholders' equity (deficit) 119,309 (159,004)
-------------------------- -------------------
$ 3,571,170 $ 2,443,066
========================== ===================
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30
2008 2007
---------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 147,897 $(213,392)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (911,171) (428,834)
Reductions to restricted cash and cash equivalents (1,829) (1,906)
---------- ----------
Net cash used in investing activities (913,000) (430,740)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under long-term obligations 521,519 267,917
Principal payments on long-term obligations (117,472) (60,650)
Stock warrants exercised 223,552 -
Stock options exercised 170,932 206,206
Net borrowings (payments) on line-of credit (14,000) 166,000
---------- ----------
Net cash provided by financing activities 784,531 579,473
---------- ----------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 19,428 (64,659)
CASH AND CASH EQUIVALENTS - BEGINNING 62,321 162,633
---------- ----------
CASH AND CASH EQUIVALENTS - ENDING $ 81,749 $ 97,974
========== ==========
Supplemental disclosure of cash flows information:
Cash paid during the six months ended for interest $ 52,539 $ 43,873
========== ==========
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 six months ended June 30, 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 June 30, 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 June 30, 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 June 30, 2008, the Company did not have any
related party transactions.
NOTE 3. LONG-TERM DEBT
Through the second quarter of 2008, the Company had a line of credit up to
$400,000 at the prime rate (5% at June 30, 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 $137,336 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, the line of credit was renewed through October 2008. At
June 30, 2008, the Company had $50,000 of borrowing capacity under the credit
facility.
During the second quarter of 2008, the Company's wholly-owned subsidiary,
Bio-Mineral Transportation LLC ("BMT"), borrowed a total of $308,900 from a
lender to purchase four trailers and a truck that were placed into service
during the quarter. A term note was issued at 7.1% interest for five years,
monthly payments of $6,125 and secured by the truck and trailers. The total
amount owed on all notes by BMT as of June 30, 2008 was approximately $820,000
and all notes are expected to be paid in full on the applicable maturity date,
the last of which is May 2013.
During the second quarter of 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 June 30, 2008 was approximately
$52,000 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 June 30, 2008
was approximately $372,000 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 June 2008, the
Company amended the Agreement and extended the employment term an additional two
years, ending on July 1, 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 June 20, 2008.
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 six months ended June 30, 2008
and 2007 is $24,000. 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 May 2008, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 162, "The Hierarchy of Generally Accepted Accounting
Principles". This Statement identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (GAAP) in the United
States (the GAAP hierarchy). This Statement is effective 60 days following the
SEC's approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, "The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles". Adoption of this Statement is not expected to
have a material impact on the Company's financial statements.
In May 2008, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 163, "Accounting for Financial Guarantee Insurance
Contracts - an interpretation of FASB Statement No. 60". This Statement
requires that an insurance enterprise recognize a claim liability prior to an
event of default (insured event) when there is evidence that credit
deterioration has occurred in an insured financial obligation. This Statement
also clarifies how Statement No. 60 applies to financial guarantee insurance
contracts, including the recognition and measurement to be used to account for
premium revenue and claim liabilities. Those clarifications will increase
comparability in financial reporting of financial guarantee insurance contracts
by insurance enterprises. This Statement is effective for financial statements
issued for fiscal years and interim periods beginning after December 15, 2008.
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 second quarter of 2008, approximately 94% of the Company's revenue
was from management operations and 6% 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 June 30, 2008 and 2007 (dollars in thousands):
Management Domestic Foreign Research &
Operations Operations Operations Development Total
------------------------------ ----------- ---------- ----------- -----
Quarter Ended June 30, 2008
---------------------------------------------------------------------------
Revenues 1,090 66 - - 1,156
Cost of revenues 966 68 - - 1,034
------------------------------ ----------- ---------- ----------- -----
Segment profits 124 (2) - - 122
============================== =========== ========== =========== =====
Identifiable assets 1,934 82 - - 2,016
Depreciation and Amortization 72 32 - - 104
Quarter Ended June 30, 2007
---------------------------------------------------------------------------
Revenues 714 308 - - 1,022
Cost of revenues 641 216 - - 857
------------------------------ ----------- ---------- ----------- -----
Segment profits 73 92 - - 165
============================== =========== ========== =========== =====
Identifiable assets 1,126 93 - - 1,219
Depreciation and Amortization 48 25 - - 73
Six Months Ended June 30, 2008
---------------------------------------------------------------------------
Revenues 2,140 181 - - 2,321
Cost of revenues 1,773 195 - - 1,968
------------------------------ ----------- ---------- ----------- -----
Segment profits 367 (14) - - 353
============================== =========== ========== =========== =====
Identifiable assets 1,934 82 - - 2,016
Depreciation and Amortization 125 67 - - 192
Six Months Ended June 30, 2007
---------------------------------------------------------------------------
Revenues 1,427 727 - - 2,154
Cost of revenues 1,235 509 - - 1,744
------------------------------ ----------- ---------- ----------- -----
Segment profits 192 218 - - 410
============================== =========== ========== =========== =====
Identifiable assets 1,126 93 - - 1,219
Depreciation and Amortization 82 50 - 132
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 June 30, 2008 and
2007 is as follows (dollars in thousands):
Qtr. Ended Six Months Ended
June 30 June 30
---------------- -----------------
2008 2007 2008 2007
------- ------- ------- --------
Segment profits:
Segment profits for reportable segments $ 122 $ 165 $ 353 $ 410
Corporate selling, general and administrative expenses (553) (530) (948) (1,009)
Other income (expense) (16) (16) 55 (25)
------- ------- ------- --------
Consolidated loss before taxes $ (447) $ (381) $ (540) $ (624)
======= ======= ======= ========
Identifiable assets:
Identifiable assets for reportable segments $2,016 $1,219 $2,016 $ 1,219
Corporate property and equipment 14 17 14 17
Current assets not allocated to segments 1,239 1,190 1,239 1,190
Intangible and other assets not allocated to
segments 302 723 302 723
-------
Consolidated assets $3,571 $3,149 $3,571 $ 3,149
======= ======= ======= ========
Depreciation and amortization:
Depreciation and Amortization for reportable segments $ 104 $ 73 $ 192 $ 132
Corporate depreciation and amortization 10 22 20 45
------- ------- ------- --------
Consolidated depreciation and amortization $ 114 $ 95 $ 212 $ 177
======= ======= ======= ========
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 Form10-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 Form10-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
Form10-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 Form10-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 $1,157,000 for the quarter ended June 30, 2008 compared
to $1,022,000 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 $1,034,000 in 2008 from $857,000 for the same period in 2007, and
the gross profit percentage decreased to 11% from 16% for the quarters ended
June 30, 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 increased for the
comparative period. These changes collectively resulted in a net loss of
approximately $447,000 for the quarter ended June 30, 2008 compared to a net
loss of $381,000 for the same period in 2007, an increase in the net loss of
approximately $66,000.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2008 WITH THREE MONTHS ENDED JUNE 30,
2007
Our overall revenue increased $135,000, or 13%, to $1,157,000 for the
quarter ended June 30, 2008 from $1,022,000 for the quarter ended June 30, 2007.
The net increase in revenue was due primarily to the following:
a) Sales of alkaline admixture decreased $118,000 from the same period
ended in 2007 - this decrease was primarily the result of the loss of revenue of
$63,000 from the City of Raleigh, NC and several smaller customers in the
Midwest;
b) Revenue from the service fees for the management of alkaline admixture
increased $6,000 from the same period ended in 2007 - this increase was
contributed primarily by the Florida operation, which increased $54,000 over the
same period in 2007, but was offset by a decrease of $48,000 from Toledo-area
customers;
c) Our processing revenue, including facility management revenue, showed a
net increase of $247,000 over the same period ended in 2007. Of this gross
facility management revenue increase, $129,000 was contributed by the Florida
operation and $118,000 from the Toledo facility;
Our gross profit decreased $43,000, or 26%, to $122,000 for the quarter
ended June 30, 2008 from $165,000 for the quarter ended June 30, 2007, and the
gross profit margin decreased to 11% from 16% for the same periods. The
decrease in gross profit margin is primarily due to the decrease in percentage
of overall gross revenue from alkaline admixture and royalties, which operate at
a higher profit margin than our other types of revenue. The Toledo operation
contributed approximately $134,000 of gross profit on overall revenue of
$450,000, which was an increase of approximately $40,000 of gross profit over
the same period in 2007. The Florida operation impacted gross profit negatively
by approximately $10,000 on overall revenue of $640,000, which was a decrease of
approximately $26,000 of gross profit over the same period in 2007. The net
increase in gross profit from these two locations were offset by approximately
$160,000 by the loss of several customers who primarily contributed royalty and
alkaline admixture sales, the largest of these from Raleigh, NC.
Our operating expenses increased $23,000, or 4%, to $553,000 for the
quarter ended June 30, 2008 from $530,000 for the quarter ended June 30, 2007.
The increase was primarily due to an increase of approximately $44,000 in
director-related expenses, $28,000 in employee payroll and related expenses and
$11,000 in consulting fees and expenses, partially offset be a decrease of
$39,000 in legal and professional fees, $12,000 in amortization of intangible
assets and $9,000 in office-related and selling expenses.
As a result of the foregoing factors, we recorded an operating loss of
$431,000 for the quarter ended June 30, 2008 compared to an operating loss of
$365,000 for the quarter ended June 30, 2007, an increase in the loss of
approximately $66,000.
Our net nonoperating income (expense) didn't change from the comparative
quarter in 2007.
We recorded a net loss of approximately $447,000 for the quarter ended June
30, 2008 compared to a net loss of $381,000 for the same period ended in 2007,
an increase in the loss of approximately $66,000. Total non-cash expenses for
depreciation, amortization, stock and stock options charges, reduced by cash out
on capitalized assets and debt repayments, resulted in a cash operating loss
incurred of approximately $238,000. Similar non-cash expenses, cash out and
debt repayments for the same period in 2007 resulted in a cash operating loss
incurred of approximately $245,000, a decrease in the cash operating loss
incurred of approximately $7,000.
For the quarter ended June 30, 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.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2008 WITH SIX MONTHS ENDED JUNE 30, 2007
Our overall revenue increased $166,000, or 8%, to $2,321,000 for the six
months ended June 30, 2008 from $2,154,000 for the six months ended June 30,
2007. The net increase in revenue was due primarily to the following:
a) Sales of alkaline admixture decreased $309,000 from the same period
ended in 2007 - this decrease was primarily the result of the loss of revenue of
approximately $200,000 from the City of Raleigh, NC and several smaller
customers in the Midwest;
b) Revenue from the service fees for the management of alkaline admixture
decreased $9,000 from the same period ended in 2007 - this decrease was
contributed primarily by Toledo-area customers, which decreased $107,000 over
the same period in 2007, but was partially offset by an increase of $98,000 from
the Florida operation;
c) Our processing revenue, including facility management revenue, showed a
net increase of $484,000 over the same period ended in 2007. Of this gross
facility management revenue increase, $362,000 was contributed by the Florida
operation and $122,000 from the Toledo facility;
Our gross profit decreased $58,000, or 14%, to $353,000 for the six months
ended June 30, 2008 from $411,000 for the six months ended June 30, 2007, and
the gross profit margin decreased to 15% from 19% for the same periods. The
decrease in gross profit margin is primarily due to the decrease in percentage
of overall gross revenue from royalties and sales of alkaline admixture, which
operate at higher profit margins than our other types of revenue. The Toledo
operation contributed approximately $260,000 of gross profit on overall revenue
of $846,000, which was an increase of approximately $112,000 of gross profit
over the same period in 2007. The Florida operation contributed approximately
$78,000 of gross profit on overall revenue of $1,264,000, which was an increase
of approximately $46,000 of gross profit over the same period in 2007. The net
increase of $158,000 in gross profit from these two locations were offset by
approximately $216,000 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 $61,000, or 6%, to $948,000 for the six
months ended June 30, 2008 from $1,009,000 for the six months ended June 30,
2007. The decrease was primarily due to a decrease of approximately $119,000 in
legal and professional fees, $24,000 in amortization of intangible assets and
$16,000 in office and related expenses, partially offset by an increase of
$53,000 in employee payroll and related expenses, $21,000 in director-related
expenses, $15,000 in consulting fees and expenses and $9,000 in sales expenses.
As a result of the foregoing factors, we recorded an operating loss of
$596,000 for the six months ended June 30, 2008 compared to an operating loss of
$599,000 for the six months ended June 30, 2007, a decrease in the loss of
approximately $3,000.
Our net nonoperating income increased by $81,000 to net nonoperating income
of $55,000 for the six months ended June 30, 2008 from net nonoperating expense
of $26,000 for the six months ended June 30, 2007. The increase in nonoperating
income was primarily due to a write-off of $84,000 in legal expenses previously
charged, offset by an increase of $2,000 in interest expense on higher borrowing
on the line of credit for the period compared to 2007.
We recorded a net loss of approximately $540,000 for the six months ended
June 30, 2008 compared to a net loss of $624,000 for the same period ended in
2007, a decrease in the loss of approximately $84,000. Total non-cash expenses
for depreciation, amortization, stock and stock options charges, reduced by cash
out on capitalized assets and debt repayments, resulted in a cash operating loss
incurred of approximately $217,000. Similar non-cash expenses, cash out and
debt repayments for the same period in 2007 resulted in a cash operating loss
incurred of approximately $454,000, a decrease in the cash operating loss
incurred of approximately $237,000.
For the six months ended June 30, 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 $1,200,000 at June 30,
2008, compared to a working capital deficit of $1,006,000 at December 31, 2007,
resulting in a decrease in working capital of $195,000. Current assets at June
30, 2008 included cash and investments of approximately $219,000 (including
restricted cash of approximately $137,000), which is an increase of $21,000 from
December 31, 2007. The negative change in working capital from December 31,
2007 was primarily a large increase in trade accounts payable compared to other
working capital items, the result of approximately $480,000 of equipment
purchased in the second quarter not having secured long-term financing as of the
balance sheet date.
Our cash flow provided by operations for the first six months ended June
30, 2008 was approximately $148,000, an increase in the net change of
approximately $361,000 from the period ended June 30, 2007. This increase was
principally due to the increase of $144,000 in the change in trade accounts
receivable, offset by an increase of $367,000 in the change in trade accounts
payable, a decrease in the net loss of $84,000 and an increase of $70,000 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 second quarter of 2008, we had a line of credit up to $400,000
at the prime rate (5% at June 30, 2008) plus 1.5% and secured by a first lien on
all of our assets, with Monroe Bank + Trust, or the Bank. Two certificates of
deposit totaling $137,336 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, the
line of credit was renewed through October 2008. At June 30, 2008, we had
$50,000 of borrowing capacity under the credit facility.
During the second quarter of 2008, out wholly-owned subsidiary, Bio-Mineral
Transportation LLC ("BMT"), borrowed a total of $308,900 from a lender to
purchase four trailers and a truck that were placed into service during the
quarter. A term note was issued at 7.1% interest for five years, monthly
payments of $6,125 and secured by the truck and trailers. The total amount owed
on all notes by BMT as of June 30, 2008 was approximately $820,000 and all notes
are expected to be paid in full on the applicable maturity date, the last of
which is May 2013.
During the second quarter of 2008, our 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 June 30, 2008 was approximately $52,000 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, we 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 June 30, 2008 was
approximately $372,000 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 June 30, 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 June 30,
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) 1,640,393 423,982 847,888 189,688 178,835
Operating leases (3) 140,615 83,808 56,807 - -
Capital lease obligations - - - - -
Line of Credit obligation 350,000 350,000 - - -
Other long-term debt obligations - - - - -
---------- ----------------- ------------ ------------ --------------
Total contractual cash obligations $2,149,208 $ 875,990 $ 904,695 $ 189,688 $ 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 approved the final policy in the second quarter 2008. In June 2008, we
hired a part-time employee to assist in the financial area of our business.
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 six months ended June 30, 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 June 30, 2008.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On April 23, 2008, we issued 55,001 unregistered shares of stock to the
Cooke Family Trust upon the exercise for cash of warrants originally issued in
2004 at an exercise price of $1.85 per share. The shares issued to the Cooke
Family Trust were issued in a transaction exempt from registration pursuant to
Section 4(1) of the Securities Act and Rule 144 promulgated thereunder.
On April 23, 2008, we issued 35,946 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 17, 2008, we held our Annual Meeting of Stockholders. The matters
on which the stockholders voted, in person or by proxy, were:
1. the election of four Class I directors to our board of directors;
2. the adoption of an amendment to our 2004 Stock Option Plan to
increase the number of shares available under the plan;
3. the approval of an amendment to our Amended and Restated
Certificate of Incorporation to increase the authorized shares of Common
Stock;
4. the approval of an amendment to our Amended and Restated
Certificate of Incorporation to authorize the Directors to make, alter and
repeal By-laws of the Company;
5. the approval of amendments to our Amended and Restated By-laws
regarding plurality voting in contested elections of Directors and to add
advance notice requirements for stockholder nominees;
6. the approval of amendments to our Amended and Restated By-laws
regarding supermajority voting requirements for changes to the Board of
Directors;
7. the approval of an amendment to our Amended and Restated By-laws to
add a constituency clause;
8. the approval of amendments to our Amended and Restated By-laws
regarding requirements for calling special meetings of our Board and quorum
requirements for all meetings of our Board; and
9. the ratification of UHY LLP as our independent outside auditors for
the fiscal year ending December 31, 2008.
PROPOSAL #1, ELECTION OF THE BOARD OF DIRECTORS:
DIRECTOR VOTES FOR VOTES WITHHELD APPROVED / NOT APPROVED
--------------- --------- -------------- -----------------------
James Hartung 3,274,798 539,037 A
Timothy Kasmoch 3,650,085 163,751 A
Thomas Kovacik 3,290,240 523,595 A
PROPOSALS #2 VOTES VOTES APPROVED / NOT
THROUGH #9: VOTES FOR AGAINST ABSTAIN APPROVED
------------- --------- --------- ---------- --------
2 1,989,094 120,354 25,775 A
3 3,531,743 233,194 48,899 A
4 3,326,046 446,722 41,068 A
5 3,490,694 186,500 136,642 A
6 1,970,883 121,197 43,143 N*
7 3,468,533 292,163 53,140 A
8 3,579,673 193,571 40,593 A
9 3,760,676 29,268 23,894 A
* Proposal number 6, the approval of amendments to our Amended and Restated
By-laws regarding supermajority voting requirements for changes to the Board of
Directors, was not approved as it did not receive a majority of "for" votes of
all stockholders eligible to vote.
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: August 14, 2008 /s/ Timothy R. Kasmoch
--------------- ----------------------
Timothy R. Kasmoch
Chief Executive Officer and President
(Principal Executive Officer)
Date: August 14, 2008 /s/ James K. McHugh
--------------- --------------------
James K. McHugh
Chief Financial Officer, Secretary and Treasurer
(Principal Financial & Accounting Officer)
EXHIBIT INDEX
=============
Exhibit No. Document
----------= --------
10.1 Second Amended and Restated Certificate of Incorporation of N-Viro
International Corporation, dated August 14, 2008.
10.2 Amended and Restated By-Laws of N-Viro International Corporation,
effective June 17, 2008.
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 - OxleyAct
of 2002.
32.1 Certification of CEO Pursuant to Section 906 of the Sarbanes - OxleyAct
of 2002.
32.2 Certification of CFO Pursuant to Section 906 of the Sarbanes - Oxley
Actof 2002.