UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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
[GRAPHIC OMITTED]
N-VIRO INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 34-1741211
(STATE OR OTHER JURISDICTION OF (I.R.S. 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, par
value $.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No X
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. Yes No X
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
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
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter: $9,350,000.
The number of shares of Common Stock of the registrant outstanding as of March
20, 2009 was 4,344,775.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in Part III of this Form 10-K is incorporated by
reference from the registrant's Proxy Statement for the 2009 Annual Meeting of
Stockholders, which proxy statement will be filed with the Securities and
Exchange Commission on or before April 30, 2009.
INDEX
PAGE
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PART I
Item 1. Business 2
Item 1A. Risk Factors 10
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Equity, Related 15
Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial 16
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants 25
on Accounting and Financial Disclosure
Item 9A(T). Controls and Procedures 25
Item 9B. Other Information 26
PART III
Item 10. Directors, Executive Officers and Corporate Governance 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners 26
and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and 26
Director Independence
Item 14. Principal Accountant Fees and Services 27
PART IV
Item 15. Exhibits, Financial Statement Schedules 27
PART I
CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains statements that are
forward-looking. We caution that words used in this document such as "expects,"
"anticipates," "believes," "may," and "optimistic," as well as similar words and
expressions used herein, identify and refer to statements describing events that
may or may not occur in the future. These forward-looking statements and the
matters to which they refer are subject to considerable uncertainty that may
cause actual results to be materially different from those described herein.
There are numerous factors that could cause actual results to be different than
those anticipated or predicted by us, including: (i) a deterioration in economic
conditions in general; (ii) a decrease in demand for our products or services in
particular; (iii) our loss of a key employee or employees; (iv) regulatory
changes, including changes in environmental regulations, that may have an
adverse affect on the demand for our products or services; (v) increases in our
operating expenses resulting from increased costs of labor and/or consulting
services; (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-K, including 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-K; however, this list is
not exhaustive and many other factors could impactour 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-K 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-K 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-K. 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.
ITEM 1. BUSINESS
GENERAL
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"). See "The N-Viro Process," below.
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.
THE N-VIRO PROCESS
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 Part 503 Regs.
The N-Viro Process involves mixing the wastewater sludge with an alkaline
admixture and then subjecting the mixture to a controlled period of storage,
mechanical turning and accelerated drying in which a blending of the sludge and
the alkaline admixture occurs. The N-Viro Process stabilizes and pasteurizes
the wastewater sludge, reduces odors to acceptable levels, neutralizes or
immobilizes various toxic components and generates N-Viro SoilTM, a product
which has a granular appearance similar to soil and has multiple commercial
uses. These uses include agricultural lime, soil enrichment, top soil blend,
landfill cover and capping, and land reclamation.
The alkaline admixture used in the N-Viro Process consists of by-product
dusts from cement or lime kilns, certain fly ashes and other products of coal,
coke or petroleum combustion and by-product dusts from sulfuric acid "scrubbers"
used in acid rain remediation systems and from fluidized bed coal-fired systems
used in electric power generation. The particular admixture that is used
usually depends upon cost and availability in local markets. In certain cases,
commercial lime may also be added to the admixture.
We are a distributor of alkaline admixture. We also work with established
by-product marketers. We generally charge a mark-up over our cost for alkaline
admixture sold directly by us.
N-VIRO SOILTM
N-Viro SoilTM is sold for agricultural use as a bio-organic and mineral
fertilizer with agricultural liming and nutrient values, as landfill cover
material, as a topsoil blending ingredient and for land reclamation projects.
We estimate that approximately twenty percent of the N-Viro SoilTM produced is
utilized at landfills for cover material, small amounts are sold for land
reclamation and similar projects, and a substantial portion of the remainder is
sold for agricultural use or as a topsoil blend. Although the use of N-Viro
SoilTM is not subject to any federal regulations or restrictions, each N-Viro
facility is typically required to obtain a state and/or local permit for the
sale of N-Viro SoilTM. In addition, many states and/or local governments
require site-specific permits for the use of sludge products in bulk amounts.
N-VIRO FUELTM
N-Viro FuelTM is a relatively new and patented biomass alternative energy
fuel that has physical and chemical characteristics similar to coal and is
created from municipal biosolids and other organic wastes like manure and pulp
and paper sludge. N-Viro Fuel is manufactured from a variety of organic wastes
by blending the waste material with one or more mineral by-products and drying
the mixture. The resulting product is blended with coal or petroleum coke and
burned as a partial coal substitute in coal-fired power plants. An important
advantage of the waste biomass-derived fuel is the ammonia that is released from
the waste in the process. This ammonia is available to be used as a substitute
for ammonia or urea for NOx removal. We recently announced that N-Viro Fuel has
satisfied guidelines set forth by the U.S. Environmental Protection Agency (EPA)
to qualify as an alternative energy source that may be utilized in commercial
power generation. The N-Viro Fuel technology, utilizing an alkaline/heat
process to produce a fuel product, satisfies all requirements of the EPA 40 CFR
part 503 regulations and can be blended with coal for energy production or land
applied for agricultural use as N-Viro Soil . Our technologies can convert
waste products that traditionally are landfilled, into safe, beneficial and
renewable long-term energy solutions. Attaining this status means that N-Viro
Fuel technology is now eligible to qualify for certain economic incentives that
are granted alternative energy technologies, and it is also a catalyst for
attaining permits in each state in a more timely manner. We plan to accelerate
its development efforts as this designation is an important factor for its
potential energy partners.
N-VIRO PROCESS FACILITIES
Our earliest facility is in Toledo, Ohio and has been managed by us through
a Contract Management Agreement with the City of Toledo since our inception.
Revenue generated from and related to the Toledo operation accounts for about
39% of our total revenue. We process a majority of Toledo's wastewater sludge
and sell the resulting N-Viro SoilTM product. In 2004, the City exercised its
option to renew the contract for an additional five years through 2009.
Currently, the contract is in its twentieth year of operation. We consider our
relationship with the City of Toledo to be satisfactory.
In December 2006, we acquired Headwaters Inc.'s ownership interest in
Florida N-Viro L.P. (Florida N-Viro), which was the majority owner and operator
of a municipal biosolids processing plant located in Volusia County, Florida.
The plant had been jointly owned by us and Pennsylvania-based VFL Technology
Corporation (VFL) - a subsidiary of Headwaters - since 1995. The plant
currently processes regional biosolids for multiple communities and currently
maintains contracts with the City of Altamonte Springs, the City of Englewood,
Seminole County, the City of Palm Coast, the City of Port Orange, the
Tohopekaliga Water Authority and Volusia County. Headwaters Resources, Inc.
(HRI), an affiliate of VFL, under a contractual arrangement, is at this time the
sole source supplier of by-products to Florida N-Viro's operating facility,
unless HRI can not supply the full requirements of Florida N-Viro for such
by-products.
Including the facilities in Toledo, Ohio and Volusia County, Florida, we
estimate there are currently more than 25 wastewater treatment facilities
throughout the world treating sludge using the N-Viro Process. We estimate that
these facilities are treating and recycling sludge at an annualized rate of over
94,000 dry tons per year. In addition, there are several licensees not
currently operating, including both international and domestic contractors or
public generators, who are in the process of developing or designing
site-specific N-Viro facilities.
We have licensed four treatment facilities to use an earlier sludge
treatment process that is designed to produce a sludge product that meets only
Class B pathogen levels, and therefore does not produce an "exceptional quality"
sludge product under the Part 503 Regs. Royalty payments from sludge processed
at the four facilities using such earlier technology currently account for less
than two percent of total royalty payments to us and we do not actively market
the use of this process.
SALES AND MARKETING OF N-VIRO PROCESS
Currently, the company markets its technology via internal sales efforts.
All domestic sales and marketing is controlled by management. The primary focus
of our marketing efforts is toward the 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.
In certain countries outside the United States, we license the N-Viro
Process through agents. In their respective territories, the Agents market
licenses for the N-Viro Process, serve as distributors of alkaline admixture,
oversee quality control of the N-Viro Process and N-Viro SoilTM, enforce the
terms of the license agreements with licensees and market N-Viro SoilTM (or
assist licensees in marketing N-Viro SoilTM). In general, the Agents have paid
one-time, up-front fees to us for the rights to market or use the N-Viro Process
in their respective territories. Typically, the agreements with the agents
provide for us to receive a portion of the up-front license fees, ongoing
royalty fees paid by the licensees, a portion of the proceeds from the
distribution and resale of alkaline admixture, and the sale of N-Viro SoilTM.
Agents have total responsibility and control over the marketing and contracts
for N-Viro technology subject only to license models or minimum agreements with
us.
The following table sets forth our Agents and the territorial
rights of each Agent:
The Agents
----------
Agent Territory
-------------------------- ------------------------------------
Bio-Recycle Pty. Ltd. Australia, New Zealand and Singapore
CRM Technologies Israel, Greece and Eastern Europe
EIEC Spain
Itico Egypt, North Africa, The Middle East
N-Viro Filipino Philippines
South Africa N-Viro All Africa except North Africa
EARNINGS VARIATION DUE TO BUSINESS CYCLES AND SEASONAL FACTORS. Our operating
results can experience quarterly or annual variations due to business cycles,
seasonality and other factors. During the last fiscal quarter of 2008,
approximately 91% of our revenue was from management operations, 9% from other
domestic operations and nothing from foreign operations or research and
development grants. 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. See Notes to the Financial Statements contained in Item 8
hereof.
RISKS OF DOING BUSINESS IN OTHER COUNTRIES. We conduct a very small amount
of business in markets outside the United States, and expect 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. We have not entered into any
currency swap agreements which may reduce these risks. We may enter into such
agreements in the future if it is deemed necessary to do so. We cannot predict
the full impact of this economic instability, but it could have a material
adverse effect on revenues and profits.
RESEARCH AND DEVELOPMENT
Research and development on the N-Viro Technologies had been, through 2005,
performed primarily by BioCheck Laboratories, a former wholly-owned subsidiary
of ours, and Dr. Terry J. Logan. Dr. Logan, a long-time director who resigned
from our Board of Directors in November 2006, continues to direct our research
and patent development work under a consulting agreement that became effective
July 1, 2004 and currently runs through June 30, 2009, as extended by a one-year
agreement signed in April 2008. Our research and development expenses were
under $10,000 in 2008 and 2007.
We continue to investigate methods to shorten drying time, improve the
BioDryTM process, substitute various other materials for use as alkaline
admixture and improve the quality and attractiveness of N-Viro SoilTM to a
variety of end-users. Several developments are the subject of issued patents,
including the use of carbon dioxide in the N-Viro Process as a means to (i)
reduce by-product carbon dioxide emissions from industrial processes by
immobilizing carbon dioxide in N-Viro SoilTM and (ii) improve the quality and
value of N-Viro SoilTM. In addition, we have developed a dryer system which
reduces processing time while continuing to permit the survival of beneficial
microflora. Our BioBlend , which uses N-Viro SoilTM as a reagent to accelerate
and deodorize yard waste composting, is being utilized to produce topsoil at the
Englewood, Ohio N-Viro facility and at several other licensed facilities.
In early 2007 we performed a full scale test of the N-Viro FuelTM product
at the T.B. Simon Power Facility located on the campus of Michigan State
University in conjunction with them. The results of the test has encouraged us
to focus primarily on the development of the N-Viro Fuel technology. Our
efforts have been focused toward the development of what could be the first
N-Viro Fuel facility located on the campus of Michigan State University.
Further discussion of our patent development can be found in the section
"Patents and Proprietary Rights".
CURRENT DEVELOPMENTS
We are currently in discussions with several companies in the cement and
fuel/power generation industries for the development and commercialization of
the patented N-Viro Fuel technology. There can be no assurance that these
discussions will be successful. We continue to focus on the development of
regional biosolids processing facilities. Currently we are in negotiations with
several privatization firms to permit and develop independent, regional
facilities.
INDUSTRY OVERVIEW
Disposal. Landfilling, incineration and ocean dumping have traditionally
provided inexpensive, reliable methods of sludge disposal. Ocean dumping was
banned in the United States in December 1992. Under the Part 503 Regs,
landfilling and incineration remain permissible sludge management alternatives
but have become subject to more stringent regulatory standards. The vast
majority of states have some site restrictions or other management practices
governing the disposal of sludge in landfills. Amendments to the Clean Air Act
governing incineration and disposal of residual ash also impose stricter air
emission standards for incineration in general, and the Part 503 Regs impose
additional specific pollutant limits for sludge to be incinerated and for the
resulting air emissions.
Surface disposal of sludge involves the placement of sludge on the land at
a dedicated site for disposal purposes. The Part 503 Regs subject surface
disposal to increased regulation by requiring, among other things, run-off and
leachate collection systems, methane monitoring systems and monitoring of, and
limits on, pollutant levels. In addition, sludge placed in a surface disposal
site is required to meet certain standards with respect to pathogen levels
relating to coliform or salmonella bacteria counts ("Class B" pathogen levels),
levels of various pollutants, including metals, and elimination of
attractiveness to pests, such as insects and rodents.
Land Application for Beneficial Use. Land application for beneficial use
involves the application of sludge or sludge-based products, for non-disposal
purposes, including agricultural, silvicultural and horticultural uses and for
land reclamation. Under the Part 503 Regs, N-Viro Soil is a product that meets
certain stringent standards with respect to pathogen levels relating to
coliform, salmonella, enteric viruses and viable helminth ova counts ("Class A"
pathogen levels), levels of various pollutants, including metals, and
elimination of attractiveness to pests, such as insects and rodents, are
considered by the EPA to be "exceptional quality" products. The Class A
pathogen levels are significantly more stringent than the Class B pathogen
levels. Class A N-Viro Soil can be land applied as a fertilizer or lime agent
without regulation in most states.
"Exceptional quality" products are treated by the EPA as fertilizer
material, thereby exempting these products from federal restrictions on their
agricultural use or land application. N-Viro Soil that is produced according
to N-Viro Process specifications meets the pollutant concentration limits and
other standards set forth in the Part 503 Regs and, therefore, is an
"exceptional quality" product that exceeds the EPA's standards for unrestricted
agricultural use and land application. Lower quality sludge, including
sludge-based products that meet Class B pathogen levels and certain pollutant
control and pest attraction requirements, may also be applied to the land for
beneficial use but are subject to greater record keeping and reporting
requirements and restrictions governing, among other items, the type and
location of application, the volume of application and limits on cumulative
levels of metals. Sludge applied to the land for agricultural use in all cases
must meet Class B pathogen levels and, if applied in bulk, require an EPA
permit.
COMPETITION
We are in direct and indirect competition with other businesses, including
disposal and other wastewater sludge treatment businesses, some of which are
larger and more firmly established and may have greater marketing and
development budgets and capital resources than us. There can be no assurance
that we will be able to maintain a competitive position in the sludge treatment
industry.
We compete against companies in a highly competitive market and have fewer
resources than most of those companies. Our business competes within and
outside the United States principally on the basis of pricing, reliability of
our services provided, product quality and specifications and technical support.
Competitive pressures and other factors could cause us to lose market share or
could result in decreases in prices, either of which could have a material
adverse effect on our financial position and results of operations.
An EPA survey estimated that sludge generators in the United States
utilized landfilling, incineration, surface disposal and ocean dumping as sludge
management alternatives for approximately two-thirds of wastewater sludge
generated. Although ocean dumping has been banned, other methods of sludge
disposal remain permissible sludge management alternatives under the Part 503
Regs, and in many instances will be less expensive than treatment methods,
including the N-Viro Process.
Sludge treatment alternatives other than disposal include processes, such
as aerobic and anaerobic digestion and lime stabilization, that typically
produce lower quality sludge products, and other processes, such as
pelletization, composting, high heat lime sterilization and high heat en-vessel
lime pasteurization, that produce "exceptional quality" sludge products. Some
of these processes have established a significant market presence, and we cannot
predict whether any of such competing treatment processes will be more or less
successful than the N-Viro Process.
ENVIRONMENTAL REGULATION
Various environmental protection laws have been enacted and amended during
recent decades in response to public concern over the environment. Our
operations and those of our licensees are subject to these evolving laws and the
implementing regulations. The United States environmental laws which we believe
are, or may be, applicable to the N-Viro Process and the land application of
N-Viro SoilTM include Resource Conservation and Recovery Act, or RCRA, as
amended by the Hazardous and Solid Waste Amendments of 1984, or HSWA, the
Federal Water Pollution Control Act of 1972, or the Clean Water Act, the Clean
Air Act of 1970, as amended, or the Clean Air Act, the Comprehensive
Environmental Response, Compensation, and Liability Act, or CERCLA, the
Pollution Prevention Act of 1990 and the Federal Insecticide, Fungicide and
Rodenticide Act, or FIFRA. These laws regulate the management and disposal of
wastes, control the discharge of pollutants into the air and water, provide for
the investigation and remediation of contaminated land and groundwater resources
and establish a pollution prevention program. Many of these laws have
international counterparts, particularly in Europe and elsewhere in North
America. In addition, various states have implemented environmental protection
laws that are similar to the applicable federal laws and, in addition, states
may require, among other things, permits to construct N-Viro facilities and to
sell and/or use N-Viro SoilTM. There can be no assurance that any such permits
will be issued.
The Part 503 Regulations. Historically, sludge management has involved
either disposal, principally by landfilling, incineration, ocean dumping and
surface disposal, or land application for beneficial use. Sewage sludge and the
use and disposal thereof is regulated under the Clean Water Act. On February
19, 1993, the EPA published the Part 503 Regs under the Clean Water Act
implementing the EPA's "exceptional quality" program. These regulations
establish sludge use and disposal standards applicable to approximately 35,000
publicly and privately owned wastewater treatment plants in the United States,
including approximately 13,000 to 15,000 publicly owned treatment works, or
POTWs. Under the Part 503 Regs, sludge products that meet certain stringent
standards are considered to be "exceptional quality" products and are not
subject to any federal restrictions on agricultural use or land application.
N-Viro Soil produced according to N-Viro Process specifications is an
"exceptional quality" product. Lower quality sludge products are subject to
federal restrictions governing, among other items, the type and location of
application, the volume of application and the cumulative application levels for
certain pollutants. Agricultural application of these lower quality sludges in
bulk amounts also requires an EPA permit. Agricultural and land applications of
all sludge and sludge products, including N-Viro Soil and other "exceptional
quality" products, are typically subject to state and local regulation and, in
most cases, require a permit.
In order to ensure compliance with the Part 503 Regs, we review the results
of regular testing of sludge required by the EPA to be conducted by wastewater
treatment plants, and it tests N-Viro Soil produced at N-Viro facilities on a
regular basis. In general, we do not license or permit the ongoing use of the
N-Viro Process to treat any sludge that may not be processed into an
"exceptional quality" sludge product. In five N-Viro facilities, however, we
have permitted the use of the N-Viro Process to produce a product that is not an
"exceptional quality" sludge product due to the high pollutant levels of the
resulting product. This product is not considered to be N-Viro Soil and is
used solely for landfill cover at adjacent landfills. In addition, we have
previously licensed for use at five treatment facilities an earlier sludge
treatment process that is designed to produce a sludge product that meets only
Class B pathogen levels, and therefore does not produce an "exceptional quality"
product.
Although N-Viro Soil exceeds the current federal standards imposed by the
EPA for unrestricted agricultural use and land application, state and local
authorities are authorized under the Clean Water Act to impose more stringent
requirements than those promulgated by the EPA. Most states require permits for
land application of sludge and sludge based products and several states, such as
Rhode Island, Massachusetts and New Jersey, currently have regulations that
impose more stringent numerical concentration limits for certain pollutants than
the federal rules.
The Resource Conservation and Recovery Act. RCRA regulates all phases of
hazardous waste generation, management and disposal. Waste is subject to
regulation as a hazardous waste under RCRA if it is a solid waste specifically
listed as a hazardous waste by the EPA or exhibits a defined hazardous
characteristic. Although domestic sewage and mixtures of domestic sewage and
other wastes that pass through a sewer system to a POTW are specifically
exempted from the definition of solid waste, once treated by the POTW, the
sewage sludge is considered a solid waste. However, such sewage sludge is not
considered a hazardous waste unless it exhibits a hazardous characteristic.
While it is possible that sewage sludge could exhibit the toxicity
characteristic, we believe that regular tests for hazardous constituent levels
provide assurance that the sewage sludge used in the N-Viro Process does not
exhibit the toxicity characteristic. The alkaline admixtures used in the N-Viro
Process are specifically exempted from RCRA regulation by the so-called Bevill
Amendments to RCRA. Although the benefit of the exemption provided by the
Bevill Amendments can be lost if the alkaline admixture is derived from or mixed
with a hazardous waste, we have adopted and implemented policies and operational
controls, including review of operating permits held by alkaline admixture
suppliers and periodic testing of such admixtures, to ensure that the alkaline
admixtures used in the N-Viro Process by us and our licensees are not derived
from or mixed with hazardous wastes.
Although neither the alkaline admixture nor wastewater sludge used in the
N-Viro Process are regulated as hazardous waste under RCRA, states may impose
restrictions that are more stringent than federal regulations. Accordingly, the
raw materials used in the N-Viro Process may be regulated under some state
hazardous waste laws as "special wastes," in which case specific storage and
record keeping requirements may apply.
The Clean Air Act. The Clean Air Act empowers the EPA to establish and
enforce ambient air quality standards and limits of emissions of pollutants from
specific facilities. The Clean Air Act Amendments of 1990, or the Clean Air Act
Amendments, impose stringent requirements upon owners and operators of
facilities that discharge emissions into the air.
Existing N-Viro facilities generally have installed "baghouse" technology
for alkaline admixture storage and handling operations in order to collect
airborne dust. At present, we do not believe that any N-Viro facilities will be
required to undertake any further measures in order to comply with the Clean Air
Act or the existing Clean Air Act Amendments. Ammonia odors of varying strength
typically result from sludge treatment processes, including the N-Viro Process.
A number of N-Viro facilities have installed ammonia "scrubbers" to reduce
ammonia odors produced to varying degrees by the N-Viro Process. The
installation of ammonia "scrubbers" is not required by the Clean Air Act or the
existing Clean Air Act Amendments. However, we or our licensees may be required
under the Occupational Safety and Health Act and state laws regulating
nuisances, odors and air toxic emissions to install odor control technology to
limit ammonia emissions and odors produced during the N-Viro Process,
particularly at N-Viro facilities located near populated residential areas. The
amount of ammonia gas produced is dependent upon the type of sludge being
treated and the amount and type of alkaline admixture being used.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980. CERCLA imposes strict, joint and several liability upon owners and
operators of facilities where a release of hazardous substances has occurred,
upon parties who generated hazardous substances into the environment that were
released at such facilities and upon parties who arranged for the transportation
of hazardous substances to such facilities.
We believe that the N-Viro Process poses little risk of releasing hazardous
substances into the environment that presently could result in liability under
CERCLA. Although the sewage sludge and alkaline waste products could contain
hazardous substances (as defined under CERCLA), we have developed plans to
manage the risk of CERCLA liability, including training of operators, regular
testing of the sludge and the alkaline admixture to be used in the N-Viro
Process and reviewing incineration and other permits held by the entities from
whom alkaline admixtures are obtained.
Other Environmental Laws. The Pollution Prevention Act of 1990 establishes
pollution prevention as a national objective, naming it a primary goal wherever
feasible. The act states that where pollution cannot be prevented, materials
should be recycled in an environmentally safe manner. We believe that the
N-Viro Process contributes to pollution prevention by providing an alternative
to disposal.
The alkaline admixtures used in the N-Viro Process may be required to be
registered as pesticides under FIFRA because of their effect on pathogens in
sludge. The EPA does not currently regulate commercial lime or any alkaline
by-products under FIFRA and has not attempted to assert such jurisdiction to
date. In the event the alkaline by-products are required to be registered under
FIFRA, we would likely be required to submit certain data as part of the
registration process and might be subject to further federal regulation.
State Regulations. State regulations typically require an N-Viro facility
to obtain a permit for the sale of N-Viro Soil for agricultural use, and may
require a site-specific permit by the user of N-Viro Soil . In addition, in
some jurisdictions, state and/or local authorities have imposed permit
requirements for, or have prohibited, the land application or agricultural use
of sludge products, including "exceptional quality" sludge products. Certain of
our licensees operate in jurisdictions that require permits and have been able
to obtain them for the N-Viro product. There can be no assurance that any such
permits will be issued or that any further attempts to require permits for, or
to prohibit, the land application or agricultural use of sludge products will
not be successful.
In addition, many states enforce landfilling restrictions for non-hazardous
sludge. These regulations typically require a permit to sell or use sludge
products as landfill cover material. There can be no assurance that N-Viro
facilities or landfill operators will be able to obtain required permits.
Environmental impact studies may be required in connection with the
development of future N-Viro facilities. Such studies are generally time
consuming and may create delays in the construction process. In addition,
unfavorable conclusions reached in connection with such a study could result in
termination of, or expensive alterations to, the N-Viro facility being
developed.
The costs of compliance are typically borne by our licensees, except in the
case of direct sludge processing into a facility. Normally this cost is not
material to us in relation to the total contract revenue.
EMPLOYEES
As of December 31, 2008, we had 32 employees. Six of our employees were
engaged in sales and marketing; three were in finance and administration and
twenty-three were in operations. We consider our relationship with our
employees to be satisfactory.
We are a party to a collective bargaining agreement (the "Labor Agreement")
covering four employees of National N-Viro Tech, Inc., our wholly-owned
subsidiary. The employees that are covered by the Labor Agreement work at the
Toledo, Ohio N-Viro facility, which is operated by us for the City of Toledo on
a contract management basis. These employees are members of the International
Brotherhood of Teamsters, Chauffeurs, Warehouseman and Helpers Local Union No.
20, and we consider our relationship with the organization to be satisfactory.
In 2005, the Labor Agreement was extended through October 31, 2009.
PATENTS AND PROPRIETARY RIGHTS
We have several patents and licenses relating to the treatment and
processing of biosolids. While there is no single patent that is material to
our business, we believe that our aggregate patents are important to our
prospects for future success. However, we cannot be certain that future patent
applications will be issued as patents or that any issued patents will give us a
competitive advantage. It is also possible that our patents could be
successfully challenged or circumvented by competition or other parties. In
addition, we cannot assure that our treatment processes do not infringe patents
or other proprietary rights of other parties.
We applied for two patents that were approved in 2004 for the use of
mineral by-products to enhance heating, drying and disinfection of organic
wastes under non-alkaline conditions. N-Viro is actively marketing its manure
treatment technology, primarily to the large dairies and poultry operations, and
continues to develop and market the N-Viro FuelTM technology. The new federal
energy act may provide incentives for the use of renewable biomass fuels, such
as N-Viro FuelTM.
We also hold several patents relating to N-Viro Fuel . In the N-Viro Fuel
process, waste products, which can include domestic sewage sludge, manures and
other materials, are treated with mineral by-products, dried by a mechanical
dryer, and converted into a renewable fuel that can be used as a substitute for
coal in coal-fired boilers and kilns.
Some early N-Viro patents were developed jointly with the former Medical
College of Ohio, now under the name of the University of Toledo ("UT"). Because
of the joint development of early N-Viro patents with the UT, we agreed that the
rights of UT to any intellectual property that is being developed, patentable or
patented, would generate a royalty payable by us to UT. We also agreed with UT
that claims to the traditional N-Viro Soil process was one-quarter of one
percent ( %) of technical revenues until expiration of those patents. UT rights
to BioBlend and certain other N-Viro technologies range from 2% to 4% of
technical revenues derived from these newer technologies. Cumulative royalties
paid to UT through December 31, 2008 were approximately $65,000, and no amount
was expensed during 2008.
In addition, we make use of our trade secrets or "know-how" developed in
the course of our experience in the marketing of our services. To the extent
that we rely upon trade secrets, unpatented know-how and the development of
improvements in establishing and maintaining a competitive advantage in the
market for our services, we can provide no assurances that such proprietary
technology will remain a trade secret or that others will not develop
substantially equivalent or superior technologies to compete with our services.
SECURITIES AND EXCHANGE COMMISSION
As a public company, we are required to file periodic reports, as well as
other information, with the Securities and Exchange Commission (SEC) within
established deadlines. Any document we file with the SEC may be viewed or
copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington,
D.C. 20549. Additional information regarding the Public Reference Room can be
obtained by calling the SEC at (800) SEC-0330. Our SEC filings are also
available to the public through the SEC's web site located at www.sec.gov.
We maintain a corporate Web site at www.nviro.com, on which investors may
access free of charge our annual report on Form 10-K, quarterly reports on Form
10-Q and amendments to those reports as soon as is reasonably practicable after
furnishing such material with the SEC. In addition, we will voluntarily provide
electronic or paper copies of our filings free of charge upon request at (419)
535-6374 or c/o James K. McHugh, Chief Financial Officer at jmchugh@nviro.com.
ITEM 1A. RISK FACTORS
WE HAVE A HISTORY OF LOSSES AND THERE CAN BE NO ASSURANCES REGARDING IF AND WHEN
WE WILL ACHIEVE PROFITABILITY. IF WE OUR UNABLE TO ACHIEVE PROFITABLE
OPERATIONS, WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO CONTINUE OUR OPERATIONS,
WHICH MAY NOT BE AVAILABLE ON COMMERCIALLY REASONABLE TERMS OR AT ALL, AND WHICH
MAY DILUTE OUR STOCKHOLDERS.
Since 2000, we have experienced net losses and we have not been
consistently profitable on an annual basis. For the fiscal years ended December
31, 2008 and December 31, 2007, we incurred net losses of $1.2 million and $1.5
million, respectively. We believe our history of net losses is primarily due to
our inability to add enough new sources of revenue to replace decreasing
business from existing sources of revenue and, more recently, through a shift of
our business toward lower margin products and services. Further, through the
year ended December 31, 2007, we experienced much higher than expected
expenditures for stock-related fees and compensation, legal costs surrounding
litigation and the direct time of management, staff and our Board relating to
this litigation, and increases in our selling, general and administrative
expenses in excess of our increases in gross revenues. To achieve
profitability, we must accomplish numerous objectives, including growth in our
business, the development of new products and commercial relationships, and
decreasing our costs. We can not foresee with any certainty whether we will be
able to achieve these objectives in the future. Accordingly, we may not
generate sufficient net review to achieve profitability.
FAILURE TO MAINTAIN EFFECTIVE INTERNAL CONTROLS COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS, OPERATING RESULTS AND STOCK PRICE.
We have evaluated and will continue to evaluate our internal control
procedures in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act, which requires an annual management assessment of the design
and effectiveness of our internal controls over financial reporting. For the
year ended December 31, 2007, we identified a material weakness in our internal
controls over financial reporting due to a lack of personnel to sufficiently
monitor and process transactions. Due to our continuing lack of financial
resources to hire and train accounting and financial personnel, we have not yet
remedied this material weakness. While we are not aware of any material errors
to date, our inability to maintain the adequate internal controls may result in
a material error in our financial statements. Moreover, effective internal
controls, particularly those related to revenue recognition, are necessary for
us to produce reliable financial reports and are important to helping prevent
financial fraud. If we experience a material error in our financial statements
or if we cannot provide reliable financial reports or prevent fraud, our
business and operating results could be harmed, investors could lose confidence
in our reported financial information, and the trading price of our stock could
drop significantly.
COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS MAY REDUCE, DELAY OR PREVENT
OUR REALIZATION OF LICENSE REVENUES.
Our licensees and their operations are subject to increasingly strict
environmental laws and regulations, including laws and regulations governing the
emission, discharge, disposal and transportation of certain substances and
related odor. Wastewater treatment plants and other plants at which our
biosolids products or processes may be implemented are usually required to have
permits, registrations and/or approvals from state and/or local governments for
the operation of such facilities. Some of our licensee's facilities require
air, wastewater, storm water, biosolids processing, use or siting permits,
registrations or approvals. These licensees may not be able to maintain or
renew their current permits or registrations or to obtain new permits or
registrations. The process of obtaining a required permit or registration can
be lengthy and expensive. They may not be able to meet applicable regulatory or
permit requirements, and therefore may be subject to related legal or judicial
proceedings that could have a materially adverse effect on our income derived
from these licensees.
Any of the permits, registrations or approvals noted above, or related
applications may be subject to denial, revocation or modification, or challenge
by a third party, under various circumstances. In addition, if new
environmental legislation or regulations are enacted or existing legislation or
regulations are amended or are enforced differently, these licensees may be
required to obtain additional, or modify existing, operating permits,
registrations or approvals.
Maintaining, modifying or renewing current permits or registrations or
obtaining new permits or registrations after new environmental legislation or
regulations are enacted or existing legislation or regulations are amended or
enforced differently may be subject to public opposition or challenge. Much of
this public opposition and challenge, as well as related complaints, relates to
odor issues, even when our licensees are in compliance with odor requirements
and even though the licensees have worked hard to minimize odor from their
operations. Public misperceptions about the business and any related odor could
influence the governmental process for issuing such permits or registrations or
for responding to any such public opposition or challenge. Community groups
could pressure local municipalities or state governments to implement laws and
regulations which could increase our licensees' costs of their operations that
in turn could have a material and adverse effect on our business and financial
condition.
OUR ABILITY TO GROW OUR REVENUES AND OPERATIONS MAY BE LIMITED BY COMPETITION.
We provide a variety of technology and services relating to the treatment
of wastewater residuals. We are in direct and indirect competition with other
businesses that provide some or all of the same services including regional
residuals management companies and national and international water and
wastewater operations/privatization companies, technology suppliers, municipal
solid waste companies and farming operations. Many of these competitors are
larger and have significantly greater capital resources.
We derive a substantial portion of our revenue from services provided under
municipal contracts, and many of these are subject to competitive bidding. We
also intend to bid on additional municipal contracts, however, and may not be
the successful bidder. In addition, some of our contracts will expire in the
future and those contracts may not be renewed or may be renewed on less
attractive terms. If we are not able to replace revenues from contracts lost
through competitive bidding or from the renegotiation of existing contracts with
other revenues within a reasonable time period, the lost revenue could have a
material and adverse effect on our business, financial condition and results of
operation.
OUR CUSTOMER CONTRACTS MAY BE TERMINATED PRIOR TO THE EXPIRATION OF THEIR TERM.
A substantial portion of our revenue is derived from services provided
under contracts and agreements with existing licensees. Some of these
contracts, especially those contracts with large municipalities, provide for
termination of the contract by the customer after giving relative short notice
(in some cases as little as ten days). In addition, some of these contracts
contain liquidated damages clauses, which may or may not be enforceable in the
event of early termination of the contracts. If one or more of these contracts
are terminated prior to the expiration of its term, and we are not able to
replace revenues from the terminated contract or receive liquidated damages
pursuant to the terms of the contract, the lost revenue could have a material
and adverse effect on our business, financial condition and results of
operations.
A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF CUSTOMERS
AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST ONE OR MORE
OF THEM AS CUSTOMERS. FURTHER, THE AGREEMENT WITH OUR MOST SIGNIFICANT CUSTOMER
EXPIRES AT THE END OF 2009, AND OUR FAILURE TO RENEW THAT AGREEMENT ON FAVORABLE
TERMS WOULD LIKELY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
Our business depends on provision of services to a limited number of
customers. One or more of these customers may stop contracting for services
from us or may substantially reduce the amount of services we provide them. Any
cancellation, deferral or significant reduction in the services we provide these
principal customers or a significant number of smaller customers could seriously
harm our business and financial condition. For the years ended December 31,
2008 and 2007, our single largest customer accounted for approximately 39% and
38%, respectively, of our revenues and our top three customers accounted for
approximately 62% and 54%, respectively, of our revenues. Our agreement with
our largest customer - which represented approximately 39% of our revenues in
2008 - is due to expire at the end of 2009. We are attempting to negotiate a
renewal of that agreement, but we cannot assure you that we will be able to
secure such a renewal at all or on terms that are as favorable as the current
agreement. Our failure to renew that agreement on favorable terms would likely
have a material adverse effect on our business, financial conditions and results
of operations.
THE CURRENT ECONOMIC DOWNTURN MAY CAUSE US TO EXPERIENCE DELAYS OF PAYMENT FROM
OUR CUSTOMERS.
Our accounts receivable are derived primarily from municipal or local
governments. Although our collection history has been good, from time to time a
customer may not pay us on a timely basis because of adverse market conditions.
In light of the current economic downturn, we may experience larger than
expected delays in receiving payments on our accounts receivable. Given our
history of losses and our limited cash resource, any significant payment delay
by one of our customers, may force us to delay payment to our creditors, which
may have a material and adverse effect on our business, financial condition and
results of operations.
WE ARE AFFECTED BY UNUSUALLY ADVERSE WEATHER CONDITIONS.
Our business is adversely affected by unusual weather conditions and
unseasonably heavy rainfall which can temporarily reduce the availability of
land application sites in close proximity to our operations. In addition,
revenues and operational results are adversely affected during months of
inclement weather which limits the level of land application that can be
performed. Long periods of adverse weather could have a material negative
effect on our business and financial condition. For example, our Toledo, Ohio
operation is affected by unusually adverse weather conditions by lowering the
demand for N-Viro Soil distribution to the local agricultural community.
FUEL COST VARIATION COULD ADVERSELY AFFECT OUR OPERATING RESULTS AND EXPENSES.
The price and supply of fuel is unpredictable and fluctuates based on
events outside our control, including demand for oil and gas, actions by OPEC
and other oil and gas producers, and war in oil producing countries. Because
fuel is needed for the trucks that transport the processing materials and
supplies for our customers, price escalations or reductions in the supply of
fuel could increase operating expenses and have a negative impact on the results
of operations. We are not always able to pass through all or part of the
increased fuel costs due to the terms of certain customers' contracts and the
inability to negotiate such pass through costs in a timely manner.
WE ARE HIGHLY DEPENDENT ON THE SERVICES OF OUR MANAGEMENT TEAM, THE LOSS OF ANY
OF WHOM MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL
CONDITION.
We have entered into employment agreements with our Chief Executive
Officer, Timothy Kasmoch, and our V.P. of Development and Chief Counsel, Robert
Bohmer, each of which contains non-compete and other provisions. The laws of
each state differ concerning the enforceability of non-competition agreements.
We cannot predict with certainty whether or not a court will enforce a
non-compete covenant in any given situation based on the facts and circumstances
at that time. If one of our key executive officers were to leave our employ and
the courts refused to enforce the non-compete covenant, we might be subject to
increased competition, which could have a material and adverse effect on our
business and financial condition.
OUR INTELLECTUAL PROPERTY MAY BE MISAPPROPRIATED OR SUBJECT TO CLAIMS OF
INFRINGEMENT.
We attempt to protect our intellectual property rights through a
combination of patent, trademark, and trade secret laws, as well as licensing
agreements. Our failure to obtain or maintain adequate protection of our
intellectual property rights for any reason could have a material adverse effect
on our business and financial condition.
Our competitors, many of whom have substantially greater resources and have
made substantial investments in competing technologies, may have applied for or
obtained, or may in the future apply for and obtain, patents that will prevent,
limit or otherwise interfere with our ability to offer services.
We also rely on unpatented proprietary technology. It is possible that
others will independently develop the same or similar technology or otherwise
obtain access to our unpatented technology. If we are unable to maintain the
proprietary nature of our technologies, we could be materially adversely
affected.
VOLATILITY IN THE TRADING PRICE OF OUR COMMON STOCK COULD NEGATIVELY IMPACT THE
PRICE OF OUR COMMON STOCK, AND MAY ELIMINATE A SOURCE OF OUR POTENTIAL REVENUE
FROM EXERCISES OF STOCK OPTIONS AND STOCK PURCHASE WARRANTS.
During the period from January 1, 2007 through March 20, 2009, our common
stock closing price fluctuated between a high of $4.25 and a low of $1.25. The
trading price of our common stock could be subject to wide fluctuations in
response to many factors, some of which are beyond our control, including
general economic conditions, the thinly-traded nature of our common stock and
the outlook of analysts and investors on our industry. Further, significant
market fluctuations, such as over the past six months, may adversely affect the
trading price of our common stock. Over the past several years, we have relied
on, in part, exercises of stock options by current and former officers and
directors and stock purchase warrants by investors for operating cash. Wide
fluctuations in the price of our common stock or a stock price that is not
significantly above the exercise price of outstanding stock options or warrants,
would likely reduce future exercises of stock options or warrants, and which
would reduce or eliminate a historic source of cash for our operations.
ITEM 2. PROPERTIES
Our executive and administrative offices are located in Toledo, Ohio, under
a month to month lease. We believe our relationship with our lessor is
satisfactory. Our lease expired on February 28, 2007, and we have not renewed
it at this time. We have no minimum rental commitment for the year ending
December 31, 2009. The total rental expense for this location included in the
statements of operations for each of the years ended December 31, 2008 and 2007
is approximately $37,500. We also lease various equipment on a month-to-month
basis.
On December 28, 2006, we purchased the remaining ownership interest in
Florida N-Viro and operate its facility in Volusia County, Florida. We maintain
an office in Daytona Beach under a lease with the County of Volusia, Florida
renewed in April, 2004 for five years. The total minimum rental commitment for
the years ending December 31, 2009 through 2013 is $48,000 per year, and for
2014 is $12,000. The total rental expense included in the statements of
operations for each of the years ended December 31, 2008 and 2007 is $48,000.
We also lease processing equipment at the Florida location which began in
2006 under a four year contract. The total minimum rental commitment for the
years ended December 31, 2009 and 2010 is $31,000 and $3,000, respectively.
We also lease other processing equipment at the Florida location which
began in February 2008 under a three year lease. The total minimum rental
commitment for the following years ended December 31 are as follows: 2009 -
$46,200; 2010 - $46,200; 2011 - 4,000. We also lease various equipment on a
month-to-month basis at our Florida operation.
Management believes that all of our properties are adequately covered by
insurance.
ITEM 3. LEGAL PROCEEDINGS.
The Company's facility in Toledo, Ohio, utilizes patented technologies to
stabilize and disinfect municipal bio-solids pursuant to a permit to install
from the Ohio EPA that requires emissions be vented to a scrubber. In July of
2008, an inspection of the facility by local regulatory officials revealed that
the scrubber was not in operation. In February of 2009, the Company agreed to
enter into an administrative consent degree with the Ohio Environmental
Protection Agency ("Ohio EPA") that resolved, without any admission of fact,
violation, or liability, Ohio EPA's claims that the Company operated the
scrubber, an air contaminant source, in violation of its permit to install.
Pursuant to the terms of the consent degree, the Company agreed to pay a civil
penalty in the amount of $20,000. Payment of the penalty will be made in
installments of $4,000 over a 15-month period.
From time to time we are involved in legal actions arising in the ordinary
course of business. With respect to these matters, we believe we have adequate
legal defenses and/or provided adequate accruals for related costs such that the
ultimate outcome will not have a material adverse effect on our future financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ending December 31, 2008.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our shares of Common Stock are quoted on the OTC Bulletin Board under the
symbol "NVIC.OB". The prices quoted below reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions. The closing price range per share of the Common Stock since
January 1, 2007, was as follows:
Quarter High Low
----- -----
First 2007 $3.31 $2.30
Second 2007 $3.50 $2.35
Third 2007 $3.10 $2.45
Fourth 2007 $3.00 $2.40
First 2008 $4.25 $2.60
Second 2008 $3.99 $2.80
Third 2008 $3.75 $2.40
Fourth 2008 $3.50 $2.50
Our stock price closed at $2.20 per share on March 20, 2009.
HOLDERS
As of March 20, 2009, the number of holders of record of our Common Stock
was approximately 160.
DIVIDENDS
We have never paid dividends with respect to our Common Stock. Payment of
dividends is within the discretion of our Board of Directors and would depend,
among other factors, on our earnings, capital requirements and our operating and
financial condition.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
(a) (b) (c)
Number of securities
Number of securities remaining available for
to be issued Weighted-average future issuance under
upon exercise of exercise price of equity compensation
outstanding options, outstanding options, plans (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
--------------------------------------- -------------------- --------------------- ----------------------------
Equity compensation plans
approved by security holders . . . . 746,025 $ $2.28 793,375 2
Equity compensation plans not
approved by security holders 258,700 1 $ $1.93 -0-
---------------------- --------------------- ---------------------------
Total 1,004,725 $ $2.19 793,375
1. Represents 120,000 warrants to purchase our Common Stock, issued to
Strategic Asset Management, Inc., in 2005 as part of an agreement to
provide consulting services, issued at $1.84 per share. And, 138,700
warrants to purchase our Common Stock, issued to certain members of the
Board of Directors in December 2006 in payment for services rendered,
issued at $2.00 per share.
2. The available number of shares to issue under our Amended and
Restated 2004 Stock Option Plan was increased to 1,500,000 shares as
approved by the stockholders on June 17, 2008.
RECENT SALES OF UNREGISTERED SECURITIES
There were no sales of unregistered securities during the fiscal year ended
December 31, 2008 that have not been previously disclosed by the company in a
Quarterly Report on Form 10-Q.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company we are not required to provide this
information under Item 301 of Regulation S-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following is a discussion of our results of operations and financial
position for the periods described below, and should be read in conjunction with
our Financial Statements and Supplementary Data appearing elsewhere in this Form
10-K. The discussion includes various forward-looking statements about our
markets, products, services and our results. These statements are based on
certain assumptions that we consider reasonable. Our actual results may differ
materially from these indicated forward-looking statements. Please see
"Cautionary Statement with Respect to Forward-Looking Comments" and "Risk
Factors" elsewhere in this annual report on Form 10-K.
The following table sets forth, as a percentage of total revenues for the
periods presented, revenues related to each of (i) technology fees, (ii)
facility management, (iii) products and services:
For the Year Ended December 31,
2008 2007
------ ------
Technology fees 0.7% 5.5%
Facility management 63.8% 55.6%
Products and services 35.5% 38.9%
------ ------
Totals 100.0% 100.0%
====== ======
Technology fee revenue is defined as: royalty revenue, which represent
ongoing amounts received from licensees for continued use of the N-Viro Process
and are typically based on volumes of sludge processed; license and territory
fees, which represent non-recurring payments for the right to use the N-Viro
Process in a specified geographic area or at a particular N-Viro facility;
research & development revenue, which represent payments from federal and state
agencies awarded to us to fund ongoing site-specific research utilizing the
N-Viro technology.
Facility management revenues are recognized under contracts where we manage
the N-Viro Process ourselves to treat sludge, pursuant to a fixed price
contract.
Product and service revenue is defined as: alkaline admixture revenue,
which represent ongoing payments from licensees arising from the sale and
distribution of alkaline admixture by us and our Agents to N-Viro facilities;
service fee revenue for the management of alkaline admixture, which represent
fees charged by us to manage and sell the alkaline admixture on behalf of a
third party customer; N-Viro SoilTM sales, which represent either revenue
received from sales of N-Viro SoilTM sold by N-Viro facilities, or through sales
of N-Viro SoilTM sold directly by us; commissions earned on sales of equipment
to an N-Viro facility; rental of equipment to a licensee or agent; equipment
sales, which represent the price charged for equipment held for subsequent sale.
Our policy is to record the revenues payable to us pursuant to agency and
license agreements when we have fulfilled our obligations under the relevant
contract, except when it pertains to a foreign license agreement. In the case
of foreign licenses, revenue is recorded when cash is received and when we have
fulfilled our obligations under the relevant foreign license agreement.
RESULTS OF OPERATIONS
The following tables set forth, for the periods presented, (i) certain
items in the Combined Statement of Operations, (ii) the percentage change of
each such item from period to period and (iii) each such item as a percentage of
total revenues in each period presented.
Year Ended Period to Period Year Ended
December 31, Percentage December 31,
2008 Change 2007
---------- ------------- -----------
(Dollars in thousands)
-------------------------------------
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenues. . . . . . . . . . . . . . . $5,002 22.4% $4,085
Cost of revenues. . . . . . . . . . . 4,260 26.1% 3,380
------ --------
Gross profit. . . . . . . . . . . . . 742 5.1% 705
Operating expenses. . . . . . . . . . 1,930 (10.5%) 2,207
------ --------
(1,188) * (1,502)
Other income (expense). . . . . . . . 31 1,766.9% 2
------ --------
Loss before income tax expense. . . . (1,157) * (1,500)
Federal and state income tax expense. 0 * 0
------ --------
Net loss. . . . . . . . . . . . . . . $(1,157) * $(1,500)
======= =======
PERCENTAGE OF REVENUES:
Revenues. . . . . . . . . . . . . . . 100.0% 100.0%
Cost of revenues. . . . . . . . . . . 85.2 82.7
------ --------
Gross profit. . . . . . . . . . . . . 14.8 17.3
Operating expenses. . . . . . . . . . 38.5 54.0
------ --------
(23.7) (36.8)
Other income (expense). . . . . . . . 0.6) 0.1
------ --------
Loss before income tax expense. . . . (23.1) (36.7)
Federal and state income tax expense. 0.0 0.0
------ --------
Net loss. . . . . . . . . . . . . . . (23.1%) (36.7%)
======= ======
* Period to period percentage change comparisons have only been calculated
for positive numbers.
COMPARISON OF YEAR ENDED DECEMBER 31, 2008 WITH YEAR ENDED DECEMBER 31, 2007
Revenues increased $917,000, or approximately 22%, to $5,002,000 for the
year ended December 31, 2008 from $4,085,000 for the year ended December 31,
2007. The increase in revenue was due to a net increase in revenue from
existing on-line facilities, primarily due to the following factors:
a) Sales of alkaline admixture decreased $373,000 from the same period
ended in 2007;
b) Revenue from the service fees for the management of alkaline admixture
increased $156,000 from the same period ended in 2007, primarily from additional
sales generated on new municipal sources started in 2008 at the Florida N-Viro
location;
c) Our processing revenue, including facility management revenue, showed a
net increase of $1,153,000 over the same period ended in 2007, primarily from
new municipal sludge processing sources started in 2008 at the Florida N-Viro
location;
d) Territorial fees showed a net decrease of $16,000 from the same period
ended in 2007:
e) Miscellaneous revenues decreased $3,000 from the same period ended in
2007.
The decrease in the sales of alkaline admixture was primarily from
facilities no longer procuring their alkaline admixture through us. One
licensee that represented approximately $200,000, or 5% of our 2007 gross
revenue stopped contracting with us in early 2007.
The net increase in service fees for the management of alkaline admixture
was from the additional sources of municipal sludge treatment secured in 2008
and the resulting alkaline admixture marketed to supply these new sources. They
represented a total increase of $276,000 over 2007.
The increase in processing revenue of $1,153,000 was primarily from an
increase in processing volume of facility management revenue, representing over
$916,000 of the increase. This increase was also due to an increase in revenue
from sales of the N-Viro Soil product, an increase of $408,000 over 2007.
Offsetting the facility management and product revenue increase was a decrease
in royalties received as a result of a loss of tonnage at facilities no longer
using the N-Viro process as their primary disposal technology. This was a
decrease from 2007 to 2008 of approximately $171,000.
Our gross profit increased $37,000, or 5%, to $742,000 for the year ended
December 31, 2008 from $705,000 for the year ended December 31, 2007, and the
gross profit margin decreased to 15% from 17% for the same periods. The
decrease in gross profit margin is primarily due to the additional percentage of
gross revenue from facility management fee operations, discussed in the previous
paragraph. The percentage of our gross revenue from management fee operations
went from 56% in 2007 to 64% in 2008. Management fee operations have
historically operated at lower profit margin than other types of N-Viro revenue.
Also contributing to the gross profit margin decrease is the decrease in royalty
revenue of $171,000, which generally has marginal costs of revenue.
Our operating expenses decreased $277,000, or 13%, to $1,930,000 for the
year ended December 31, 2008 from $2,207,000 for the year ended December 31,
2007. The decrease was primarily due to a decrease of approximately $335,000 in
amortization of intangibles, $145,000 for legal fees and $30,000 in
director-related costs. Offsetting this decrease in operating expenses was an
increase in consulting fees of $262,000.
Included in the decrease of amortization of intangibles was a write-down in 2007
of approximately $331,000 of intangible assets deemed by management to be
impaired that did not recur for 2008.
Included in the decrease of legal fees was the disposition in 2007 of two
lawsuits with J. Patrick Nicholson that were both discharged in our favor. From
2006 to 2008, we decreased our legal fees by a total of approximately $286,000
primlarily as a result of the disposition of these claims.
Included in the increase of consulting fees was a write-off in 2008 of
approximately $222,000 that reflected the remaining stock value of three
consulting contracts that were teminated in December 2008. More details of this
are provided in our Form 8-K filed on February 10, 2009.
Of our total operating expenses in 2008 of $1,930,000, approximately $645,000
were non-cash expenses for stock options, warrants and stock issued during the
year and $447,000 in amortization and depreciation expense.
Our nonoperating income (expense) increased by $29,000 to income of $31,000
for the year ended December 31, 2008 from income of $2,000 for the year ended
December 31, 2007. The increase in nonoperating income was primarily due to an
increase in the gain on settlements of debt negotiated by us in both 2008 and
2007.
We recorded a net loss of approximately $1,157,000 for the year ended
December 31, 2008 compared to a net loss of approximately $1,500,000 for the
year ended December 31, 2007, a decrease in the loss of approximately $343,000.
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital deficit of approximately $1,287,000 at December
31, 2008, compared to a working capital deficit of $1,006,000 at December 31,
2007, resulting in a decrease in working capital of $282,000. Current assets at
December 31, 2008 included cash and investments of approximately $154,000
(including restricted cash of approximately $139,000), which is a decrease of
$44,000 from December 31, 2007. The net negative change in working capital from
December 31, 2007 was primarily from cash received of $423,000 from stock
warrant and option exercises, offset negatively by the cash loss from operations
of approximately $548,000 for the twelve months ended December 31, 2008.
In 2008 our cash flow used in operating activities was approximately
$206,000, a decrease of approximately $62,000 from same period in 2007. This
change from 2007 was principally due to the increase of $420,000 in trade
accounts receivable, a decrease of $87,000 in trade accounts payable and an
increase in bad debt allowance and other non-cash items of $127,000, offset by:
a $17,000 decrease in prepaid and other assets, a decrease in the net loss of
$344,000 and an increase of $211,000 in stock, warrants and stock options issued
for fees and services.
We have modified our business model and have been evolving away from sales
of alkaline admixture and royalty-based revenue agreements that typically
generate a higher gross profit margin, to long-term and sustainable revenue
based on integrated N-Viro technology and operations but typically generating a
lower gross profit margin. From 2006 to 2008, the percentage of combined
revenues from our owned and operated facilites in Toledo and Volusia County was:
2006 - 46%; 2007 - 77%; 2008 - 94%. We believe this shift will allow us to
enhance future revenue and profits through growth, efficiency and revenue
optimization.
During 2008, we had a line of credit up to $400,000 at the prime rate
(3.25% at December 31, 2008) plus 1.5% and secured by a first lien on all our
assets, with Monroe Bank + Trust, or the Bank, with a maturity date of October
15, 2009. Two certificates of deposit totaling $138,812 from the Bank are held
as a condition of maintaining the line of credit. As announced in a Form 8-K
filing on October 27, 2008, the line of credit was renewed through October 2009.
At December 31, 2008, we had $2,000 of borrowing capacity under the credit
facility. We expect to extend or restructure our credit facility prior to
maturity. While we expect to extend or restructure our credit facility prior to
maturity, there can be no assurance we will be able to extend or refinance our
credit facility upon commercially reasonable terms if at all.
During 2008, we borrowed a total of $124,252 from three lenders to purchase
insurance policies for various insurance coverages during the year. A total of
three term notes were issued, ranging from 5.5% to 10% interest for a term not
more than one year, monthly payments totalling $13,930 and each are unsecured.
The total amount owed on all notes as of December 31, 2008 was approximately
$50,000 and all notes are expected to be paid in full on the applicable maturity
date, the last of which is August 2009.
During 2008, our wholly-owned subsidiary, Bio-Mineral Transportation LLC
("BMT"), borrowed a total of $552,975 from three lenders to purchase automotive
equipment that were placed into service during the year. A total of four term
notes were issued, ranging from 7% to 8.8% interest for five years, monthly
payments totaling $11,085 and each are secured by the automotive equipment. The
total amount owed on all notes by BMT as of December 31, 2008 was approximately
$857,000 and all notes are expected to be paid in full on the applicable
maturity date, the last of which is October 2013.
Also during 2008, our wholly-owned subsidiary, Florida N-Viro LP
("Florida"), borrowed a total of $185,000 from a lender to purchase processing
equipment that was placed in service during the year. A term note was issued at
8.8% interest for three years, monthly payments of $5,867 and secured by the
equipment The total amount owed on all notes by Florida as of December 31, 2008
was approximately $216,000 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 December 31, 2008 was
approximately $372,000 and the first installment of $27,338 was paid on time in
early 2008. The second installment of approximately $31,000 is expected to be
paid on time in early 2009, subject to expected royalty offsets through 2008.
The normal collection period for accounts receivable is approximately 30-60
days for the majority of customers. This is a result of the nature of the
license contracts, type of customer and the amount of time required to obtain
the information to prepare the billing. For 2008, our customers slowed the
overall payment rate on our outstanding receivables, which in turn contibuted to
us extending payment times to our vendors on our payables. We make no
assurances that payments from our customer or payments to our vendors will
become shorter and this may have an adverse impact on our continuing operations.
For 2009, 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 have a material adverse effect on our continuing operations.
OFF-BALANCE SHEET ARRANGEMENTS
At December 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.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS
In preparing financial statements in conformity with accounting principles
generally accepted in the United States, 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 the significant estimates and assumptions made in preparation of
the financial statements:
Non-domestic license and territory fees - We do not recognize revenue on
any non-domestic license or territory fee contracts until the cash is received,
assuming all other tests of revenue recognition are met. Canada is excluded
from this definition of non-domestic.
Allowance for Doubtful Accounts - We estimate losses for uncollectible accounts
based on the aging of the accounts receivable and the evaluation and the
likelihood of success in collecting the receivable. The balance of the
allowance at December 31, 2008 and 2007 is $50,000 and $40,000, respectively.
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 our 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. We believe 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, we test for
impairment when events and circumstances indicate that the assets might be
impaired and the carrying value of those assets may not be recoverable. At
December 31, 2007, we determined that certain territory agreements and patents
had remaining lives shorter than currently recorded, and expensed additional
amortization of $290,000 in 2007.
Fair Value of Financial Instruments - The fair values of cash, accounts
receivable, accounts payable and other short-term obligations approximate their
carrying values because of the short maturity of these financial instruments.
The carrying values of the Company's long-term obligations approximate their
fair value. In accordance with SFAS No. 107, "Disclosure About Fair Value of
Financial Instruments," rates available at balance sheet dates to the Company
are used to estimate the fair value of existing debt.
Income Taxes - We assume the deductibility of certain costs in income tax
filings and estimate the recovery of deferred income tax assets, all of which is
fully reserved.
New Accounting Standards - The Financial Accounting Standards Board, or
FASB, has issued the following new accounting and interpretations, which may be
applicable in the future to us:
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.
Actual results could differ materially from the estimates and assumptions
that we use in the preparation of our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are not required to provide this
information under Item 305 of Regulation S-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS F-2 - F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 - F-22
F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of N-Viro
International Corporation (a Delaware entity), as of December 31, 2008 and 2007,
and the related consolidated statements of operations, stockholders' deficit,
and cash flows for each of the years in the two year period ended December 31,
2008. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of N-Viro International
Corporation as of December 31, 2008 and 2007, and the results of its operations
and its cash flows for each of the years in the two year period ended December
31, 2008, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes -
an Interpretation of FASB No. 109 as of January 1, 2007.
/s/ UHY LLP
------------
UHY LLP
Southfield, Michigan
March 31, 2009
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and 2007
--------------------------
2008 2007
---------- ----------
ASSETS
---------------------------------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted $ 14,869 $ 62,321
Restricted 138,812 135,506
Trade receivables, net 494,141 440,958
Prepaid expenses and other assets 64,331 185,330
---------- ----------
Total current assets 712,153 824,115
PROPERTY AND EQUIPMENT, NET 1,781,290 1,300,428
INTANGIBLE AND OTHER ASSETS, NET 189,328 318,523
---------- ----------
$2,682,771 $2,443,066
========== ==========
The accompanying notes are an integral part of these financial statements.
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and 2007
--------------------------
2008 2007
------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
--------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 360,501 $ 174,253
Line-of-credit 398,000 364,000
Accounts payable 1,047,364 1,055,268
Accrued liabilities 193,425 236,175
------------- -------------
Total current liabilities 1,999,290 1,829,696
LONG-TERM DEBT, LESS CURRENT MATURITIES 1,135,364 772,374
------------- -------------
Total liabilities 3,134,654 2,602,070
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value
Authorized - 15,000,000 shares in 2008 and 7,000,000 in 2007
Issued - 4,468,025 shares in 2008 and 4,145,359 shares in 2007 44,680 41,454
Preferred stock, $.01 par value
Authorized - 2,000,000 shares
Issued - -0- shares in 2008 and 2007 - -
Additional paid-in capital 17,822,744 16,962,134
Accumulated deficit (17,634,417) (16,477,702)
------------- -------------
233,007 525,886
Less treasury stock, at cost, 123,500 shares 684,890 684,890
------------- -------------
Total stockholders' deficit (451,883) (159,004)
------------- -------------
$ 2,682,771 $ 2,443,066
============ ============
The accompanying notes are an integral part of these financial statements.
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2008 and 2007
--------------------------------------
2008 2007
------------ ------------
REVENUES $ 5,001,774 $ 4,085,131
COST OF REVENUES 4,260,290 3,379,741
------------ ------------
GROSS PROFIT 741,484 705,390
OPERATING EXPENSES
Selling, general and administrative 1,929,777 2,207,545
------------ ------------
OPERATING LOSS (1,188,293) (1,502,155)
OTHER INCOME (EXPENSE)
Interest income 3,306 5,642
Gain on settlement of debt 88,785 61,635
Interest expense (60,513) (65,585)
------------ ------------
31,578 1,692
------------ ------------
LOSS BEFORE INCOME TAXES (1,156,715) (1,500,463)
Federal and state income taxes - -
------------ ------------
NET LOSS $(1,156,715) $(1,500,463)
============ ============
Basic and diluted loss per share $ (0.27) $ (0.38)
============ ============
Weighted average common shares outstanding - basic and diluted 4,274,877 3,958,475
============ ============
The accompanying notes are an integral part of these financial statements.
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Years Ended December 31, 2008 and 2007
Additional
Shares of Common Paid-in Accumulated Treasury
Common Stock Stock Capital Deficit Stock Total
------------ ------- ----------- ------------- ---------- ------------
BALANCE JANUARY 1, 2007 3,864,059 $38,641 $16,453,119 $(14,977,239) $(684,890) $ 829,631
Net loss - - - (1,500,463) - (1,500,463)
Issuance of stock options - - 186,700 - - 186,700
Exercise of stock options 146,300 1,463 251,182 - - 252,645
Issuance of common stock 135,000 1,350 71,133 - - 72,483
------------ ------- ----------- ------------- ---------- ------------
BALANCE DECEMBER 31, 2007 4,145,359 41,454 16,962,134 (16,477,702) (684,890) (159,004)
Net loss - - - (1,156,715) - (1,156,715)
Issuance of stock options - - 221,150 - - 221,150
Exercise of stock options 109,900 1,099 176,130 - - 177,229
Exercise of stock warrants 120,947 1,209 244,559 - - 245,768
Issuance of common stock 91,819 918 218,771 - - 219,689
------------ ------- ----------- ------------- ---------- ------------
BALANCE DECEMBER 31, 2008 4,468,025 $44,680 $17,822,744 $(17,634,417) $(684,890) $ (451,883)
========= ======= =========== ============= ========== ============
The accompanying notes are an integral part of these financial statements.
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2008 and 2007
--------------------------------------
2008 2007
------------ ------------
Cash Flows From Operating Activities
Net loss $(1,156,715) $(1,500,463)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 447,365 674,399
Provision (reduction) for bad debts 10,000 (130,000)
Issuance of stock for debt and services 470,628 124,828
Issuance of stock options and warrants for services 174,483 309,242
(Gain) Loss on the sale of fixed assets (32,890) 5,542
Changes in Operating Assets and Liabilities
Decrease (increase) in trade receivables (63,182) 356,658
Increase in prepaid expenses and other assets (5,112) (20,387)
Increase (decrease) in accounts payable and accrued liabilities (50,960) 36,159
------------ ------------
Net cash used in operating activities (206,383) (144,022)
Cash Flows From Investing Activities
Increases from restricted cash and cash equivalents (3,306) (4,008)
Purchases of property and equipment (923,673) (656,624)
Increase in investments (125) -
Proceeds from sale of property and equipment 79,773 7,181
------------ ------------
Net cash used in investing activities (847,331) (653,451)
Cash Flows From Financing Activities
Net borrowings on line-of-credit 34,000 159,000
Borrowings under long-term obligations 862,228 414,917
Principal payments on long-term obligations (312,990) (129,401)
Stock warrants exercised 245,912 -
Stock options exercised 177,112 252,645
------------ ------------
Net cash provided by financing activities 1,006,262 697,161
------------ ------------
Net Decrease in Cash and Cash Equivalents (47,452) (100,312)
Cash and Cash Equivalents - Beginning 62,321 162,633
------------ ------------
Cash and Cash Equivalents - Ending $ 14,869 $ 62,321
============ ============
Supplemental disclosure of cash flows information:
Cash paid during the year for interest $ 125,857 $ 101,648
============ ============
The accompanying notes are an integral part of these financial statements.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of certain accounting policies followed in the
preparation of these financial statements. The policies conform to generally
accepted accounting principles and have been consistently applied in the
preparation of the financial statements:
A. Nature of Business - The Company owns and licenses the N-Viro Process, a
patented technology to treat and recycle wastewater sledges and other
bio-organic wastes, utilizing certain alkaline by-products produced by the
cement, lime, electric utilities and other industries. Revenue and the related
accounts receivable are due from companies acting as independent agents or
licensees, principally municipalities
B. Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
C. Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
D. 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 Statement of Financial Accounting Standards
("SFAS") No. 107, "Disclosure About Fair Value of Financial Instruments," rates
available at balance sheet dates to the Company are used to estimate the fair
value of existing debt.
E. Cash and Cash Equivalents - The Company has cash on deposit in one
financial institution which, at times, may be in excess of FDIC insurance
limits.
For purposes of the statements of cash flows, the Company considers all
certificates of deposit with initial maturities of 90 days or less to be cash
equivalents.
Restricted cash consists of two certificates of deposit and corresponding
accrued interest which are held as collateral against the Company's
line-of-credit.
F. Accounts receivable - The Company extends unsecured credit to customers
under normal trade agreements, which require payment within 30 days. Accounts
greater than 90 days past due amounted to $50,940 and $32,343 of net receivables
for the years ended December 31, 2008 and 2007, respectively. The Company's
policy is not to accrue and record interest income on past due trade
receivables. The Company does bill the customer finance charges on past due
accounts and records the interest income when collected. Credit is generally
granted on an unsecured basis. Periodic credit evaluations of customers are
conducted and appropriate allowances are established.
Management estimates an allowance for doubtful accounts, which was $50,000
and $40,000 as of December 31, 2008 and 2007, respectively. The estimate is
based upon management's review of delinquent accounts and an assessment of the
Company's historical evidence of collections.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
G. Property and Equipment - Property, machinery and equipment are stated at
cost less accumulated depreciation. Depreciation has been computed primarily by
the straight-line method over the estimated useful lives of the assets.
Generally, useful lives are five to fifteen years. Leasehold improvements are
capitalized and amortized over the lesser of the life of the lease or the
estimated useful life of the asset. Depreciation expense amounted to $395,928
and $275,295 in 2008 and 2007, respectively. Management has reviewed property
and equipment for impairment when events and circumstances indicate that the
assets might be impaired and the carrying values of those assets may not be
recoverable. Management believes the carrying amount is not impaired based upon
estimated future cash flows.
H. Intangible Assets - Patent costs and territory rights are recorded at
cost and then amortized by the straight-line method over their estimated useful
lives (periods ranging from one and one-half to seventeen years;
weighted-average amortization periods for patents/related intangibles and
territory rights were 16.1 and 16.3 years at December 31, 2008 and 2007,
respectively). Amortization expense amounted to $51,437 and $372,166 in 2008
and 2007, respectively. Estimated amortization expense, based on these patent
costs and territory rights at December 31, 2008, for each of the ensuing five
years is as follows: 2009 - $29,000; 2010 - $26,000; 2011 - $23,000; 2012 -
$19,000; 2013 - $15,000. Management has reviewed intangible assets for
impairment when events and circumstances indicate that the assets might be
impaired and the carrying values of those assets may not be recoverable. At
December 31, 2007, management believed that certain territory agreements,
trademark agreements and patents had remaining lives shorter than currently
recorded. These represented intangible assets with a cost basis of $588,593 and
a carrying value of $298,814, based upon estimated future lives. Subsequently,
the Company wrote down those intangible assets to a zero carrying value and
recorded a charge to amortization expense, which is included in operating
expenses, for $289,779 at December 31, 2007. In accordance with SFAS No. 142,
the Company tests for impairment annually.
The Company was also amortizing the capitalized cost of obtaining its
credit facility, for the additional collateral required and evidenced by a
warrant to purchase 50,000 shares of the Company's common stock. The Company
estimated this cost at February 26, 2003 to be $30,000, and was amortizing this
over 4 years by the straight-line method. Amortization expense amounted to
$1,250 in 2007, the last year.
The Company has capitalized the cost of acquiring certain customer licenses
and contracts as part of the acquisition of Florida N-Viro on December 31, 2006.
Amortization expense amounted to $14,422 in 2008 and $26,940 in 2007. Estimated
amortization expense, based on these capitalized license and contracts at
December 31, 2008, for each of the ensuing five years is as follows: 2009 -
$7,000; 2010 - $6,000; 2011 - $2,000; 2012 - $2,000; 2013 - $2,000.
I. Revenue Recognition - Facility management revenue, sludge processing
revenue and royalty fees are recognized under contracts where the Company or
licensees utilize the N-Viro Process to treat sludge, either pursuant to a
fixed-price contract or based on volumes of sludge processed. Revenue is
recognized as services are performed.
Alkaline admixture sales, alkaline admixture management service
revenue, equipment sales and N-Viro SoilTM revenue are recognized upon shipment.
License and territory fees are generated by selling the right to
market or use the N-Viro Process in a specified territory. The Company's policy
is to record revenue for the license agreements when all material services
relating to the revenue have been substantially performed, conditions related to
the contract have been met and no material contingencies exist. Research and
development revenue is recognized as work is performed and billed to the
contracting entity in accordance with the contract.
The Company records the amount of shipping and handling costs billed
to customers as revenue. The cost incurred for shipping and handling has been
included in the cost of sales.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
J. Loss Per Common Share - Loss per common share has been computed on the
basis of the weighted-average number of common shares outstanding during each
period presented. For the years ended December 31, 2008 and 2007, the effects
of the stock options granted are excluded from the diluted per share calculation
because they would be antidilutive.
K. Stock Options - The Company follows the provisions of SFAS Statements No.
123R and No. 148 which prescribe a fair-value based method of measurement that
results in compensation costs for essentially all awards of stock-based
compensation to employees.
L. 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.
M. 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. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
current period plus or minus the change during the period in deferred tax assets
and liabilities.
In June 2006, the Financial Accounting Standards Board issued Interpretation No.
48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement 109" ("FIN 48"). This statement clarifies the criteria that an
individual tax position must satisfy for some or all of the tax benefits of that
position to be recognized in a company's financial statements. FIN 48
prescribes a recognition threshold of more-likely-than-not, and a measurement
attribute for all tax positions taken or expected to be taken on a tax return,
in order for those tax positions to be recognized in the financial statements.
The Company adopted the provisions of FIN 48 on January 1, 2007. There was no
material effect on the financial statements.
NOTE 2. BALANCE SHEET DATA
PROPERTY AND EQUIPMENT (AT COST):
2008 2007
---------- ----------
Leasehold improvements $ 116,458 $ 117,524
Equipment 2,779,103 1,957,568
Furniture, fixtures and computers 48,216 52,280
---------- ----------
2,943,777 2,127,372
Less accumulated depreciation 1,162,487 826,944
---------- ----------
$1,781,290 $1,300,428
========== ==========
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
INTANGIBLE AND OTHER ASSETS:
In September 2005, the Company executed a Financial Public Relations Agreement,
or the SAMI Agreement, with Strategic Asset Management, Inc., or SAMI. The
Company appointed SAMI as its non-exclusive financial public relations counsel
for a term of two years from the date of the SAMI Agreement. For its services,
the Company issued SAMI 120,000 shares of the Company's unregistered common
stock, and 120,000 common stock purchase warrants to purchase an equal number of
shares of the Company's common stock at an exercise price of $1.84 per share.
Total valuation of the services to be performed as part of the SAMI Agreement
was estimated to be $321,800, to be amortized over the two year period. The
Company recorded this amount as deferred costs, with the short-term portion in
current assets and the long-term portion in intangibles and other assets as
deferred costs.
In December 2006, the Company extended the SAMI Agreement for two years to
September 2009, and in consideration issued SAMI an additional 100,000 shares of
the Company's unregistered common stock. Total valuation of these additional
services to be performed was estimated to be $146,300, to be amortized from
January 2007 to September 2009. Total consideration for the SAMI Agreement for
the entire four year period was estimated to be $468,100.
In December, 2008, the Company cancelled the SAMI Agreement and recorded to
expense the balance of the unamortized costs on the remaining agreement, or a
total of $164,171 in 2008.
In December 2006, the Company executed an Investor Relations Agreement with
Institutional Analyst, or the IA Agreement. The Company engaged IA to provide
services as an investor relations consultant for the Company for a term of one
year from the date of the Agreement. For its services, the Company paid IA
$10,000 cash and issued 100,000 common stock purchase warrants to purchase an
equal number of shares of the Company's common stock at an exercise price of
$2.00 per share. Total valuation of the services to be performed as part of the
IA Agreement was estimated to be $113,700, and was fully amortized in 2007. The
Company recorded this amount as deferred costs in 2006, with the short-term
portion in current assets and the long-term portion in intangibles and other
assets as deferred costs.
In April 2007, the Company executed a Consulting Agreement with Weil Consulting
Corporation, or the Weil Agreement. The Company engaged Weil to provide
services as a consultant in general business affairs of the Company for a term
of two years from the date of the Weil Agreement. For its services, the Company
issued Weil 35,000 shares of the Company's unregistered common stock. Total
valuation of the services to be performed as part of the Weil Agreement was
estimated to be $61,000, to be amortized over the two year period. The Company
recorded this amount as deferred costs, with the short-term portion in current
assets and the long-term portion in intangibles and other assets as deferred
costs.
NOTE 2. BALANCE SHEET DATA (CONTINUED)
In December, 2008, the Company cancelled the Weil Agreement and recorded to
expense the balance of the unamortized costs on the remaining agreement, or a
total of $39,809 in 2008.
In January 2008, the Company executed a second Consulting Agreement with Weil
Consulting Corporation, or the Weil Agreement #2. The Company engaged Weil to
provide services as a consultant in general business affairs of the Company for
a term of two years from the date of the Weil Agreement #2. For its services,
the Company issued Weil 50,000 shares of the Company's unregistered common
stock. Total valuation of the services to be performed as part of the Weil
Agreement #2 was estimated to be $133,000, to be amortized over the two year
period. The Company recorded this amount as deferred costs, with the short-term
portion in current assets and the long-term portion in intangibles and other
assets as deferred costs.
In December, 2008, the Company cancelled the Weil Agreement #2 and recorded to
expense the balance of the unamortized costs on the remaining agreement, or a
total of $133,000 in 2008.
In January 2008, the Company executed a Consulting Agreement with SLD Capital
Corporation, or the SLD Agreement. The Company engaged SLD to provide services
as a consultant in general business affairs of the Company for a term of two
years from the date of the SLD Agreement. For its services, the Company issued
SLD 50,000 shares of the Company's unregistered common stock. Total valuation
of the services to be performed as part of the SLD Agreement was estimated to be
$133,000, to be amortized over the two year period. The Company recorded this
amount as deferred costs, with the short-term portion in current assets and the
long-term portion in intangibles and other assets as deferred costs.
In December, 2008, the Company cancelled the SLD Agreement and recorded to
expense the balance of the unamortized costs on the remaining agreement, or a
total of $133,000 in 2008.
The following is a summary of intangible and other assets, net as of December
31:
2008 2007
-------- --------
Patents and related intangibles, less accumulated
amortization (2008 - $376,150; 2007 - $500,557) $155,733 $192,173
Territory rights, less accumulated amortization
(2008 - $5,294; 2007 - $4,706) 4,706 5,294
Customer list, less accumulated amortization
(2008 - $41,362; 2007 - $26,940) 21,393 35,815
Deferred costs, less accumulated amortization
(2008 - $794,762; 2007 - $438,482) - 77,549
Other 7,496 7,692
-------- --------
$189,328 $318,523
======== ========
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE 2. BALANCE SHEET DATA (CONTINUED)
ACCRUED LIABILITIES:
2008 2007
-------- --------
Accrued payroll and employee benefits $ 14,386 $ 29,097
Sales tax payable 177,455 177,360
Deferred revenue - 28,000
Interest payable 1,584 1,718
-------- --------
$193,425 $236,175
======== ========
NOTE 3. PLEDGED ASSETS, LINE-OF-CREDIT AND LONG-TERM DEBT
During 2008, the Company had a line of credit up to $400,000 at the prime rate
(3.25% at December 31, 2008) plus 1.5% and secured by a first lien on all assets
of the Company, with Monroe Bank + Trust, or the Bank, with a maturity date of
October 15, 2009. Two certificates of deposit totaling $138,812 from the Bank
are held as a condition of maintaining the line of credit. At December 31,
2008, the Company had $2,000 of borrowing capacity under the credit facility.
Long-term debt at December 31, 2008 and 2007 is as follows:
2008 2007
---------- --------
Notes payable - banks $ 938,970 $300,313
Notes payable - equipment vendors 183,481 246,588
Note payable - VFL 373,414 399,726
---------- --------
1,495,865 946,627
Less current maturities 360,501 174,253
---------- --------
$1,135,364 $772,374
========== ========
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
During 2008, the Company borrowed a total of $124,252 from three lenders to
purchase insurance policies for general, property and directors & officers
insurance coverage during the year. A total of three term notes were issued,
ranging from 5.5% to 10% interest for a term not more than one year, monthly
payments totalling $13,930 and each are unsecured. The total amount owed on all
notes as of December 31, 2008 was approximately $50,000 and all notes are
expected to be paid in full on the applicable maturity date, the last of which
is August 2009.
During 2008, the Company's wholly-owned subsidiary, Bio-Mineral Transportation
LLC ("BMT"), borrowed a total of $552,975 from three lenders to purchase
automotive equipment that were placed into service during the year. A total of
four term notes were issued, ranging from 7% to 8.8% interest for five years,
monthly payments totaling $11,085 and each are secured by the automotive
equipment. The total amount owed on all notes by BMT as of December 31, 2008
was approximately $857,000 and all notes are expected to be paid in full on the
applicable maturity date, the last of which is October 2013.
NOTE 3. PLEDGED ASSETS, LINE-OF-CREDIT AND LONG-TERM DEBT (CONTINUED)
Also during 2008, the Company's wholly-owned subsidiary, Florida N-Viro LP
("Florida"), borrowed a total of $185,000 from a lender to purchase processing
equipment that was placed in service during the year. A term note was issued at
8.8% interest for three years, monthly payments of $5,867 and secured by the
equipment The total amount owed on all notes by Florida as of December 31, 2008
was approximately $216,000 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 December 31, 2008 was
approximately $373,000 and the first installment of $27,338 was paid on time in
early 2008. The second installment of approximately $31,000 is expected to be
paid on time in early 2009, subject to expected royalty offsets through 2008.
Approximate aggregate maturities of long-term debt, including interest, for the
years ending December 31 are as follows: 2009 - $466,000; 2010 - $409,000;
2011 - $362,000; 2012 - $226,000; 2013 and after - $338,000.
NOTE 4. RELATED PARTY TRANSACTIONS
During the year ended December 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.
During the year ended December 31, 2007, the Company contracted for trucking,
repair parts and labor for repair services with Tri-State Garden Supply dba
Gardenscape, a company that the Company's Chief Executive Officer, Timothy R.
Kasmoch, was also the former President and CEO. The Company also paid Carl
Richard, 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 Company also paid Nicholas Lynn, Mr. Kasmoch's son, consulting fees for the
development and redesign of the Company's web site.
The following table summarizes these payments for 2008 and 2007 and the balance
to each of any monies owed as of December 31, 2008 and 2007:
Payee Year Trucking, repairs and services Consulting fees Account payable balance at December 31
------------------ ---- ------------------------------- ---------------- ---------------------------------------
R. Francis DiPrete 2008 $ - $ 2,500 $ -
Gardenscape 2007 14,235 - -
Carl Richard 2007 - 4,848 -
Nicholas Lynn 2007 - 2,500 -
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE 5. EQUITY TRANSACTIONS
In addition to its first stock option plan approved in 1993, the Company has a
stock option plan approved in May 2004 and amended in June 2008 for directors
and key employees under which 1,500,000 shares of common stock may be issued.
Unless otherwise stated in the stock option agreement, options are 20% vested on
the date of grant, with the balance vesting 20% per year over the next four
years, except for directors whose options vest immediately, but can not be
exercised until six months from the date of grant. Options were granted in 2008
and 2007 at the approximate market value of the stock at date of grant.
In May 2004, 50,000 stock options were granted to Michael G. Nicholson pursuant
to his employment agreement dated June 2003. In the third quarter of 2004, the
Company and Mr. Nicholson renegotiated primarily the stock option portion of the
employment agreement, and changed the vesting of the 50,000 options as well as
the pricing. This amended agreement states the first 30,000 options are fully
vested at an option price of $0.90, and the balance of 20,000 options vest on
the third and fourth anniversary of the original agreement, June 6, 2005 and
2006, but priced at $1.95. Because these options were priced lower than the
fair market value as of the amended agreement date, the Company took a charge to
earnings totaling approximately $68,400 ratably from 2004 through June, 2007,
the ending date of his employment agreement. This charge was $8,842 for the
year ended December 31, 2007.
In January 2007, the Company executed an Investor Relations Agreement, or the IA
Agreement, with Institutional Analyst, or IA. For its services, the Company
paid IA $10,000 cash and issued 100,000 common stock purchase warrants to
purchase an equal number of shares of the Company's common stock at an exercise
price of $2.00 per share. To reflect the value of the consulting services
provided, the Company took a charge to earnings of $113,700 ratably through
December, 2007, the ending date of the IA Agreement. As of the conclusion of
the IA Agreement, the warrants had not been exercised and expired.
In April 2007, the Company executed a Consulting Agreement, or the Weil
Agreement, with Weil Consulting Corporation, or Weil. For its services, the
Company issued Weil 35,000 shares of the Company's unregistered common stock.
To reflect the value of the stock issued for the consulting services provided,
the Company was taking a charge to earnings totaling approximately $61,000
ratably through April, 2009, the ending date of the Weil Agreement. This charge
was approximately $21,000 for 2007. In December, 2008, the Company cancelled
the Weil Agreement and took a charge to earnings for the balance of the
unamortized costs on the remaining agreement, or a total of approximately
$40,000 in 2008.
On June 12, 2007, 100,000 stock options were granted to Robert W. Bohmer
pursuant to his two-year employment agreement dated June 2007. The options vest
25% immediately and the balance over three 6-month periods. To reflect the
value of the stock options granted for the employment services provided, the
Company is taking a charge to earnings totaling approximately $280,000 ratably
through June, 2011, the ending date of his employment agreement, extended in
June 2008 for two additional years. This charge was $93,333 for 2008 and
$70,000 for 2007. In connection with the option grant to Mr. Bohmer, the Board
of Directors adopted a waiver of certain provisions of the plan which would
otherwise limit the number of options that any participant may receive. In
particular, the plan provides that a participant may not receive options to
purchase more that 25,000 shares of common stock during any calendar year. The
Board adopted a limited amendment of these limitations in order to make the
grants to Mr. Bohmer.
In January 2008, the Company executed a second Consulting Agreement with Weil
Consulting Corporation, or the Weil Agreement #2. The Company engaged Weil to
provide services as a consultant in general business affairs of the Company for
a term of two years from the date of the Weil Agreement #2. For its services,
the Company issued Weil 50,000 shares of the Company's unregistered common
stock. Total valuation of the services to be performed as part of the Weil
Agreement #2 was estimated to be $133,000, to be amortized over the two year
period. In December, 2008, the Company cancelled the Weil Agreement #2 and
recorded to expense the balance of the unamortized costs on the remaining
agreement, or a total of $133,000 in 2008.
NOTE 5. EQUITY TRANSACTIONS (CONTINUED)
In January 2008, the Company executed a Consulting Agreement with SLD Capital
Corporation, or the SLD Agreement. The Company engaged SLD to provide services
as a consultant in general business affairs of the Company for a term of two
years from the date of the SLD Agreement. For its services, the Company issued
SLD 50,000 shares of the Company's unregistered common stock. Total valuation
of the services to be performed as part of the SLD Agreement was estimated to be
$133,000, to be amortized over the two year period. The Company recorded this
amount as deferred costs, with the short-term portion in current assets and the
long-term portion in Intangibles and other assets as deferred costs. In
December, 2008, the Company cancelled the SLD Agreement and recorded to expense
the balance of the unamortized costs on the remaining agreement, or a total of
$133,000 in 2008.
There were 109,900 stock options exercised in 2008, 146,300 in 2007. A total of
twelve grantees exercised at an average weighted price of $2.14.
The following summarizes the number of grants and their respective exercise
prices and grant date fair values per option for the years ended December 31,
2008 and 2007 and the number outstanding and exercisable at those dates:
2008 2007
--------------------------- --------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
---------- --------------- --------- ---------------
Outstanding, beginning of year 839,925 $ 2.19 1,031,875 $ 2.10
Granted 22,500 3.61 142,500 2.79
Exercised (109,900) 2.14 (146,300) 1.73
Expired during the year ( 6,500) 2.31 (188,150) 2.47
---------- ---------
Outstanding, end of year 746,025 2.28 839,925 2.19
========== =========
Eligible for exercise at end of year 746,025 2.28 774,925 2.18
========== =========
Weighted average fair value per option for
options granted during the year $ 3.61 $ 2.79
=============== ===============
A further summary of stock options follows:
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Contractual Exercise Contractual Exercise
Number Outstanding Life Price Life Price
------------------- ------------ --------- ------------------- ---------
2008
-------------------------------------------------------------------------------------------------------
Range of exercise prices:
0.70 - $1.45 37,925 5.19 $ 1.15 37,925 $ 1.15
1.50 - $1.99 92,450 4.64 1.71 92,450 1.71
2.00 - $2.40 350,000 7.42 2.02 350,000 2.02
2.45 - $3.05 240,150 6.98 2.83 240,150 2.83
4.00 - $5.19 25,500 6.01 4.36 25,500 4.36
------------------- -------------------
746,025 746,025
2007
-------------------------------------------------------------------------------------------------------
Range of exercise prices:
0.70 - $1.45 50,875 6.37 $ 1.10 50,875 $ 1.10
1.50 - $1.99 120,650 5.76 1.75 120,650 1.75
2.00 - $2.40 397,750 7.74 2.04 397,750 2.04
2.45 - $3.05 260,150 7.73 2.83 195,150 2.85
3.90 - $5.19 10,500 2.36 5.03 10,500 5.03
------------------- -------------------
839,925 774,925
NOTE 6. REVENUE AND MAJOR CUSTOMERS
Revenues for the years ended December 31, 2008 and 2007 consist of the
following:
2008 2007
---------- ----------
Facility management $3,188,539 $2,272,699
Technology fees 36,241 223,199
Products and services 1,776,994 1,589,233
---------- ----------
$5,001,774 $4,085,131
========== ==========
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
Revenues for the years ended December 31, 2008 and 2007 include revenues from
one major customer, the City of Toledo, Ohio (included in the facility
management, and, products and services classifications), which represented
approximately 39% for each year of total consolidated revenue. The accounts
receivable balance due (which is unsecured) from this customer at December 31,
2008 and 2007 was approximately $110,000 and $128,000, respectively. The
Company has six customers billed through Florida N-Viro, each representing
between 5%-12% of the consolidated revenue for the Company - total accounts
receivable balance for these six customers at December 31, 2008 and 2007 was
approximately $229,000 and $143,000, respectively.
A substantial portion of the Company's revenue is derived from services provided
under contracts and agreements with existing licensees. Some of these
contracts, especially those contracts with large municipalities, provide for
termination of the contract by the customer after giving relatively short notice
(in some cases as little as ten days). In addition, some of these contracts
contain liquidated damages clauses, which may or may not be enforceable in the
event of early termination of the contracts. If one or more of these contracts
are terminated prior to the expiration of its term, and the Company is not able
to replace revenues from the terminated contract or receive liquidated damages
pursuant to the terms of the contract, the lost revenue could have a material
and adverse effect on its business and financial condition.
NOTE 7. COMMITMENTS AND CONTINGENCIES
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 March, 2009 for five years. The total
minimum rental commitment for the years ending December 31, 2009 through 2013 is
$48,000 each year, and for 2014 is $12,000. The total rental expense included
in the statements of operations for the year ended December 31, 2008 and 2007 is
$48,000.
The Company leases processing equipment at it's Florida location which began in
2006 under a four year contract. The total minimum rental commitment for the
years ended December 31, 2009 and 2010 is $31,000 and $3,000, respectively.
The Company also leases other processing equipment at it's Florida location
which began in February 2008 under a three year lease. The total minimum rental
commitment for the following years ended December 31 are as follows: 2009 -
$46,200; 2010 - $46,200; 2011 - 4,000.
The Company's facility in Toledo, Ohio, utilizes patented technologies to
stabilize and disinfect municipal bio-solids pursuant to a permit to install
from the Ohio EPA that requires emissions be vented to a scrubber. In July of
2008, an inspection of the facility by local regulatory officials revealed that
the scrubber was not in operation. In February of 2009, the Company agreed to
enter into an administrative consent degree with the Ohio Environmental
Protection Agency ("Ohio EPA") that resolved, without any admission of fact,
violation, or liability, Ohio EPA's claims that the Company operated the
scrubber, an air contaminant source, in violation of its permit to install.
Pursuant to the terms of the consent degree, the Company agreed to pay a civil
penalty in the amount of $20,000. Payment of the penalty will be made in
installments of $4,000 over a 15-month period.
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.
From time to time the Company is involved in legal proceedings and subject
to claims which may arise in the ordinary course of business. The Company is
not aware of any legal proceedings or material claims at this time.
NOTE 8. INCOME TAX MATTERS
The composition of the deferred tax assets and liabilities at December 31, 2008
and 2007 is as follows:
2008 2007
------------ ------------
Gross deferred tax liabilities:
Property + equipment depreciation + amortization $ (94,900) $ (49,100)
Gross deferred tax assets:
Loss carryforwards 6,687,800 6,249,000
Section 754 basis step up 201,600 226,800
Allowance for doubtful accounts 20,000 16,000
Other 3,300 8,200
Less valuation allowance (6,817,800) (6,450,900)
------------ ------------
$ - $ -
============ ============
The income tax provisions differ from the amount of income tax determined by
applying the U.S. Federal income tax rate to pre-tax income from continuing
operations for the years ended December 31, 2008 and 2007 and are as follows:
2008 2007
---------- ----------
Computed "expected" tax (credits) $(462,700) $(600,200)
State taxes, net of federal tax benefit (40,700) (52,800)
(Decrease) increase in income taxes resulting
from:
Change in valuation allowance 366,900 732,200
Stock options and warrants 68,800 (17,700)
Other 67,700 (61,500)
---------- ----------
$ - $ -
========== ==========
The net operating losses available at December 31, 2008 to offset future taxable
income total approximately $16,800,000 and expire principally in years 2009 -
2028. Approximately $6,124,000 will expire if not used to offset taxable income
for the 2009 tax year.
NOTE 9. 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 territory or site licenses and royalty fees
to use N-Viro technology in the United States.
Foreign Operations - Sale of territory or site licenses and royalty fees to use
N-Viro technology in foreign operations.
Research and Development - The Company contracts with Federal and State agencies
to perform or assist in research and development on the Company's technology.
The accounting policies of the segments are the same as those described in Note
1 which contains 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.
NOTE 9. SEGMENT INFORMATION (CONTINUED)
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.
The table below presents information about the segment profits and segment
identifiable assets used by the chief operating decision makers of the Company
as of and for the years ended December 31, 2008 and 2007 (dollars in thousands).
Other
Management Domestic Foreign Research &
Operations Operations Operations Development Total
----------- ----------- ----------- ------------ ------
2008
-----------------------------------------------------------
Revenues $ 4,630 $ 372 $ - $ - $5,002
Cost of revenues 3,987 273 - - 4,260
----------- ----------- ----------- ------------ ------
Segment profits 643 99 - - 742
Identifiable assets 1,769 - - - 1,769
Depreciation and Amortization 285 124 - - 409
2007
-----------------------------------------------------------
Revenues $ 3,110 $ 959 $ 16 $ - $4,085
Cost of revenues 2,638 742 - - 3,380
----------- ----------- ----------- ------------ ------
Segment profits 472 217 16 - 705
Identifiable assets 1,196 87 - - 1,283
Depreciation and Amortization 182 119 - - 301
NOTE 9. SEGMENT INFORMATION (CONTINUED)
A reconciliation of total segment profits, identifiable assets and depreciation
and amortization to the consolidated financial statements as of and for the
years ended December 31, 2008 and 2007 follows (dollars in thousands):
2008 2007
-------- --------
Segment profits:
Segment profits for reportable segments $ 742 $ 705
Corporate selling, general and administrative
expenses and research and development costs (1,930) (2,146)
Other income (expense) 31 (59)
-------- --------
Consolidated earnings before taxes $(1,157) $(1,500)
======== ========
Identifiable assets:
Identifiable assets for reportable segments $ 1,769 $ 1,283
Corporate property and equipment 12 17
Current assets not allocated to segments 712 824
Intangible and other assets not allocated to segments 190 319
-------- --------
Consolidated assets $ 2,683 $ 2,443
======== ========
Depreciation and amortization:
Depreciation and amortization for reportable segments $ 409 $ 301
Corporate depreciation and amortization 38 373
-------- --------
Consolidated depreciation and amortization $ 447 $ 674
======== ========
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE 10. 401(K) PLAN
The Company has a 401(k) plan covering substantially all employees which
provides for contributions in such amounts as the Board of Directors may
determine annually. Participating employees may also contribute a portion of
their annual compensation. There were no employer contributions for the years
ended December 31, 2008 and 2007.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A(T). 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.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of consolidated financial statements
for external purposes in accordance with generally accepted accounting
principles.
Under the supervision and with the participation of our management,
including our Chief Financial Officer and Chief Executive Officer, we conducted
an evaluation of the effectiveness of our internal control over financial
reporting based on the framework established by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) as set forth in Internal Control
- Integrated Framework. Based on our evaluation, our management concluded that
our internal controls over financial reporting were not effective as of December
31, 2008 for the reasons described below.
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, 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 continue to develop and implement a remediation plan to address the
material weakness. To date, our remediation efforts have included adoption of
an expense reimbursement policy and the hiring of an employee to assist in the
financial area of our business. However, due to our continuing lack of
financial resources to hire and train accounting and financial personnel, we
have not yet fully remedied this material weakness.
During the quarter ended December 31, 2008, there were no material changes
in the Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
While we are not aware of any material errors to date, our inability to
maintain the adequate internal controls may result in a material error in our
financial statements. Further, because of its inherent limitations, internal
controls over financial reporting may not prevent or detect misstatements. It
should be noted that any system of controls, however well designed and operated,
can provide only reasonable, and not absolute, assurance that the objectives of
the system will be met. In addition, the design of any control system is based
in part upon certain assumptions about the likelihood of future events. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
This annual report does not include an audit or attestation report of our
registered public accounting firm regarding our internal control over financial
reporting. Our management's report was not subject to audit or attestation by
our registered public accounting firm pursuant to temporary rules of the SEC
that permit us to provide only management's report in this annual report.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference to the
information under the heading "Election of Directors" and "Management -
Directors and Executive Officers" in the definitive proxy statement of the
Company for the 2009 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
information under the heading "Executive Compensation" in the definitive proxy
statement of the Company for the 2009 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to the
information under the heading "Security Ownership of Certain Beneficial Owners
and Management" in the definitive proxy statement of the Company for the 2009
Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item is incorporated by reference to the
information under the heading "Certain Relationships and Related Transactions"
in the definitive proxy statement of the Company for the 2009 Annual Meeting of
Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the
information under the heading "Independent Auditors" in the definitive proxy
statement of the Company for the 2009 Annual Meeting of Stockholders.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibit
No. Description
--- -----------
3.1 Second Amended and Restated Certificate of Incorporation of the Company,
dated August 14, 2008 (incorporated by reference to Exhibit 10.1 to Form 10-Q
filed August 14, 2008)
3.2 Second Amended and Restated By-Laws of the Company, effective June 17,
2008 (incorporated by reference to Exhibit 10.2 to Form 10-Q filed August 14,
2008).
10.1 Commercial Line of Credit Agreement and Note dated October 15, 2008,
between N-Viro International Corporation and Monroe Bank + Trust (incorporated
by reference to Exhibit 99.1 to Form 8-K filed October 27, 2008).
10.2 First Amendment to Consulting Agreement dated July 1, 2004 between
Terry J. Logan and N-Viro International Corporation, effective February 13, 2006
(incorporated by reference to Exhibit 10.3 to Form 8-K filed March 20, 2006).*
10.3 Employment Agreement, dated February 13, 2007 between Timothy R.
Kasmoch and N-Viro International Corporation (incorporated by reference to
Exhibit 10.1 to Form 8-K filed March 12, 2007).*
10.4 First Amendment to Employment Agreement, dated April 2, 2008 between
Timothy R. Kasmoch and N-Viro International Corporation (incorporated by
reference to Exhibit 10.1 to Form 8-K filed April 7, 2008).
10.5 Employment Agreement, dated June 12, 2007 between Robert W. Bohmer and
N-Viro International Corporation (incorporated by reference to Exhibit 10.1 to
Form 8-K filed June 20, 2007).*
10.6 First Amendment to Employment Agreement, dated June 19, 2008 between
Robert W. Bohmer and N-Viro International Corporation (incorporated by reference
to Exhibit 10.1 to Form 8-K filed June 20, 2008).
10.7 The Amended and Restated N-Viro International Corporation Stock Option
Plan (incorporated by reference to Form S-8 filed May 9, 2000).*
10.8 The N-Viro International Corporation 2004 Stock Option Plan
(incorporated by reference to Form S-8 filed December 20, 2004).*
10.9 The N-Viro International Corporation Amended and Restated 2004 Stock
Option Plan (incorporated by reference to the Proxy Statement on Schedule 14A
filed May 14, 2008).*
14.1 Code of Ethics.
21.1 List of subsidiaries of the Company.#
23.1 Consent of UHY LLP.
24.1 Power(s) of Attorney.#
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
# Only included in Form 10-K filed electronically with the
Securities and Exchange Commission.
* Indicates a management contract or compensatory plan or
arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
N-VIRO INTERNATIONAL CORPORATION
Dated: March 31, 2009
By: /s/ Timothy R. Kasmoch
---------------------------
Timothy R. Kasmoch, Chief Executive Officer and President
(Principal Executive Officer)
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature
appears below constitutes and appoints James K. McHugh his attorney-in-fact,
each with the power of substitution, for him in any and all capacities, to sign
any amendments to this Form 10-K, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
Dated: March 31, 2009
/s/ Timothy R. Kasmoch /s/ James K. McHugh
------------------------- ----------------------
Timothy R. Kasmoch, Chief Executive Officer, James K. McHugh
President and Director Chief Financial Officer, Secretary and Treasurer
(Principal Executive Officer) (Principal Financial Officer)
/s/James H. Hartung* /s/ R. Francis DiPrete *
---------------------- ----------------------------
James H. Hartung, Director and Chairman of the Board R. Francis DiPrete,
Director
/s/ JosephH.Scheib, Director * /s/ Mark D. Hagans*
--------------------------------- ----------------------
Joseph H. Scheib, Director Mark D. Hagans, Director
/s/ Carl Richard* /s/Thomas L. Kovacik*
------------------- -----------------------
Carl Richard, Director Thomas L. Kovacik, Director