UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2009
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-21802
-----------------------
N-VIRO INTERNATIONAL CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 34-1741211
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3450 W. Central Avenue, Suite 328
Toledo, Ohio 43606
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (419) 535-6374
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T ( 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
As of May 4, 2009, 4,347,957 shares of N-Viro International
Corporation $ .01 par value common stock were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended March 31,
----------------------------
2009 2008
----------- -----------
REVENUES $1,350,613 $1,164,046
COST OF REVENUES 959,530 933,347
----------- -----------
GROSS PROFIT 391,083 230,699
OPERATING EXPENSES
Selling, general and administrative 357,094 395,393
----------- -----------
OPERATING INCOME (LOSS) 33,989 (164,694)
OTHER INCOME (EXPENSE)
Interest income 480 1,020
Interest expense (14,325) (13,446)
Gain on legal debt forgiven - 84,158
(13,845) 71,732
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 20,144 (92,962)
Federal and state income taxes - -
----------- -----------
NET INCOME (LOSS) $ 20,144 $ (92,962)
=========== ===========
Basic and diluted income (loss) per share $ 0.00 $ (0.02)
=========== ===========
Weighted average common shares outstanding - basic and diluted 4,467,391 4,127,191
=========== ===========
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 2009 (Unaudited) December 31, 2008
--------------------------- -------------------
ASSETS
------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted $ 32,685 $ 14,869
Restricted 139,292 138,812
Trade receivables, net 572,506 494,141
Prepaid expenses and other current assets 33,807 64,331
--------------------------- -------------------
Total current assets 778,290 712,153
PROPERTY AND EQUIPMENT, NET 1,673,410 1,781,290
INTANGIBLE AND OTHER ASSETS, NET 192,610 189,328
--------------------------- -------------------
$ 2,644,310 $ 2,682,771
=========================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
------------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 359,024 $ 360,501
Line of credit 361,858 398,000
Accounts payable 1,097,667 1,047,364
Accrued liabilities 193,569 193,425
--------------------------- -------------------
Total current liabilities 2,012,118 1,999,290
LONG-TERM DEBT, LESS CURRENT MATURITIES 1,034,297 1,135,364
--------------------------- -------------------
Total liabilities 3,046,415 3,134,654
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value; authorized 15,000,000 shares; issued
4,471,207 in 2009 and 4,468,025 in 2008 44,712 44,680
Additional paid-in capital 17,852,346 17,822,744
Accumulated deficit (17,614,273) (17,634,417)
--------------------------- -------------------
282,785 233,007
Less treasury stock, at cost, 123,500 shares 684,890 684,890
--------------------------- -------------------
Total stockholders' deficit (402,105) (451,883)
--------------------------- -------------------
$ 2,644,310 $ 2,682,771
=========================== ===================
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2009 2008
---------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 153,397 $(152,459)
CASH FLOWS FROM INVESTING ACTIVITIES
Reductions to restricted cash and cash equivalents (480) (1,020)
Purchases of property and equipment (725) (113,055)
---------- ----------
Net cash used in investing activities (1,205) (114,075)
CASH FLOWS FROM FINANCING ACTIVITIES
Stock warrants exercised 4,310 122,000
Net repayments on line of credit (36,142) (8,000)
Principal payments on long-term obligations (102,544) (67,993)
Stock options exercised - 135,154
Borrowings under long-term obligations - 108,485
---------- ----------
Net cash (used) provided by financing activities (134,376) 289,646
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 17,816 23,112
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 14,869 62,321
---------- ----------
CASH AND CASH EQUIVALENTS - ENDING OF PERIOD $ 32,685 $ 85,433
========== ==========
Supplemental disclosure of cash flows information:
Cash paid during the three months ended for interest $ 34,648 $ 24,853
========== ==========
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements of N-Viro International
Corporation (the "Company") are unaudited but, in management's opinion, reflect
all adjustments (including normal recurring accruals) necessary to present
fairly such information for the period and at the dates indicated. The results
of operations for the three months ended March 31, 2009 may not be indicative of
the results of operations for the year ending December 31, 2009. Since the
accompanying consolidated financial statements have been prepared in accordance
with Article 10 of Regulation S-X, they do not contain all information and
footnotes normally contained in annual consolidated financial statements;
accordingly, they should be read in conjunction with the consolidated financial
statements and notes thereto appearing in the Company's Form 10-K for the period
ending December 31, 2008.
The financial statements are consolidated as of March 31, 2009, December
31, 2008 and March 31, 2008 for the Company. All intercompany transactions were
eliminated.
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. There have
been no changes in the selection and application of critical accounting policies
and estimates disclosed in "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations" of our Annual Report on Form 10-K
for the year ended December 31, 2008.
NOTE 2. LONG-TERM DEBT AND LINE OF CREDIT
During the first quarter of 2009, the Company had a line of credit up to
$400,000 at the prime rate (3.25% at March 31, 2009) 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
$139,292 from the Bank are held as a condition of maintaining the line of
credit. At March 31, 2009, the Company had $38,142 of unrestricted borrowing
capacity under the credit facility.
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 the Company under a patent
license agreement from the same party. The amount owed on the note as of March
31, 2009 was approximately $374,000 and the second annual installment of $31,000
was paid on time in April 2009. The third annual installment of approximately
$34,000 is expected to be paid on time in early 2010, subject to expected
royalty offsets through 2009.
During the first quarter of 2009, the Company did not borrow any additional
funds.
NOTE 3. 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 three months ended
March 31, 2009 and 2008 is $12,000.
The Company leases processing equipment at its 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
total rental expense included in the statements of operations for the three
months ended March 31, 2009 and 2008 is approximately $7,700.
The Company also leases other processing equipment at its 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 total rental expense included in
the statements of operations for the three months ended March 31, 2009 and 2008
is approximately $11,500 and $7,700, respectively.
The Company's facility in Toledo, Ohio, utilizes patented technologies to
stabilize and disinfect municipal biosolids pursuant to a permit to install from
the Ohio EPA that requires emissions be vented to a scrubber. In July 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 quarterly
installments of $4,000 over a 15-month period. The first installment was paid
on time in April 2009.
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 4. NEW ACCOUNTING STANDARDS
No new accounting standards were issued during the quarter ended March 31,
2009 that will have an impact on the Company's financial statements.
NOTE 5. SEGMENT INFORMATION
The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting, which segregates its
business by product category and service lines. The Company's reportable
segments are as follows:
Management Operations - The Company provides employee and management
services to operate the Toledo Ohio Wastewater Treatment Facility and the
Daytona/Volusia County Florida Treatment Facility.
Other Domestic Operations - Sales of alkaline admixtures, territory or
site licenses and royalty fees to use N-Viro technology in the United States.
Foreign Operations - Sales of alkaline admixtures, territory or site
licenses and royalty fees to use N-Viro technology in foreign operations.
Research and Development - The Company contracts with federal and
state agencies to perform or assist in research and development on the Company's
technology.
The accounting policies of the segments are the same as those described in
Note 1 to the Company's consolidated financial statements contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 2008.
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 Other Domestic and Foreign operations segments differ in terms of
environmental and municipal legal issues, nature of the waste disposal
infrastructure, political climate and availability of funds for investing in the
Company's technology. These factors have not changed significantly over the
past several years and are not expected to change in the near term.
The Research and Development segment is unlike any other revenue in that it
is generated as a result of a specific project to conduct initial or additional
ongoing research into the Company's emerging technologies. The Company has not
recorded any revenue from this source since 2006.
For the first quarter of 2009, approximately 96% of the Company's revenue
was from management operations and 4% from other domestic operations. Since the
second quarter of 2006, the percentage of the Company's revenue from management
fee operations has grown from 45% to 96%, primarily the result of the
acquisition of the Florida operations at the end of 2006.
The table below presents information about the segment profits and segment
identifiable assets used by the chief operating decision makers of the Company
for the periods ended March 31, 2009 and 2008 (dollars in thousands):
Management Domestic Foreign Research &
Operations Operations Operations Development Total
---------------------------- ----------- ---------- ----------- -----
Quarter Ended March 31, 2009
-------------------------------------------------------------------------
Revenues 1,299 52 - - 1,351
Cost of revenues 920 40 - - 960
---------------------------- ----------- ---------- ----------- -----
Segment profits 379 12 - - 391
============================ =========== ========== =========== =====
Quarter Ended March 31, 2008
-------------------------------------------------------------------------
Revenues 1,050 114 - - 1,164
Cost of revenues 806 127 - - 933
---------------------------- ----------- ---------- ----------- -----
Segment profits 244 (13) - - 231
============================ =========== ========== =========== =====
A reconciliation of total segment profits to Consolidated income (loss)
before taxes for the periods ended March 31, 2009 and 2008 is as follows
(dollars in thousands):
Qtr. Ended March 31
-------------------
2009 2008
------- -------
Segment profits:
Segment profits for reportable segments $ 391 $ 231
Corporate selling, general and administrative expenses (357) (396)
Other income (expense) (14) 72
------- -------
Consolidated income (loss) before taxes $ 20 $ (93)
======= =======
NOTE 6. - BASIC AND DILUTED INCOME (LOSS) PER SHARE
Basic and diluted income (loss) per share is computed using the treasury
stock method for outstanding stock options and warrants. For the three months
ended March 31, 2008, the Company incurred a net loss. Accordingly, no common
stock equivalents for outstanding stock options and warrants have been included
in the computation of diluted loss per share for that period, as the impact
would be anti-dilutive230075074. For the three months ended March 31, 2009,
297,300 stock options were excluded from the computation of diluted income per
share because the exercise prices of the options were higher than the average
market price of the Company's common stock during that period and are
anti-dilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
This 10-Q contains statements that are forward-looking. We caution that
words used in this document such as "expects," "anticipates," "believes," "may,"
and "optimistic," as well as similar words and expressions used herein, identify
and refer to statements describing events that may or may not occur in the
future. These forward-looking statements and the matters to which they refer are
subject to considerable uncertainty that may cause actual results to differ
materially from described in those statements. There are numerous factors that
could cause actual results to be different than those anticipated or predicted
by us, including: (i) a deterioration in economic conditions in general; (ii) a
decrease in demand for our products or services in particular; (iii) our loss of
a key employee or employees; (iv) regulatory changes, including changes in
environmental regulations, that may have an adverse affect on the demand for our
products or services; (v) increases in our operating expenses resulting from
increased costs of fuel, labor and/or consulting services; (vi) our inability to
exploit existing or secure additional sources of revenues or capital to fund
operations; (vii) a failure to collect upon or otherwise secure the benefits of
existing contractual commitments with third parties, including our customers;
and (viii) other factors and risks identified in this Form 10-Q, or, as filed in
Form 10-K for the year ending December 31, 2008 under the caption "Risk
Factors." This list provides examples of factors that could affect the results
described by forward-looking statements contained in this Form10-Q; however,
this list is not exhaustive and many other factors could impact our business and
it is impossible to predict with any accuracy which factors could result in
negative impacts. Although we believe that the forward-looking statements
contained in this Form10-Q are reasonable, we cannot provide you with any
guarantee that the anticipated results will not be adverse and that the
anticipated results will be achieved. All forward-looking statements in this
Form 10-Q are expressly qualified in their entirety by the cautionary statements
contained in this section and you are cautioned not to place undue reliance on
the forward-looking statements contained in this Form 10-Q. In addition to the
risks listed above, other risks may arise in the future, and we disclaim any
obligation to update information contained in any forward-looking statement.
OVERVIEW
We were incorporated in Delaware in April 1993, and became a public company
in October 1993. We own and sometimes license various N-Viro processes and
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. To date, the N-Viro
Process has been commercially utilized for the recycling of wastewater sludge
from municipal wastewater treatment facilities. N-Viro SoilTM, produced
according to the N-Viro Process specifications, is an "exceptional quality"
sludge product under the 40 CFR Part 503 Sludge Regulations under the Clean
Water Act of 1987 (the "Part 503 Regs").
Our business strategy is to market our N-Viro technologies, which produces
an "exceptional quality" sludge product, as defined in the Part 503 Regs, with
multiple commercial uses. In this strategy, the primary focus is to identify
allies, public and private, who will allow the opportunity for N-Viro build own
and operate N-Viro facilities. Currently the company operates two biosolid
process facilities located in Toledo Ohio and Daytona Florida. Our goal is to
continue to operate these facilities and aggressively market our N-Viro BioDry
and N-Viro Fuel technologies. These patented processes are best suited for
current and future demands of both waste treatment as well as domestic and
international pressures for clean, renewable alternative fuel sources.
RESULTS OF OPERATIONS
The dollar amounts in the following sections are stated as approximations,
rounded to the nearest $1,000.
Total revenues were $1,351,000 for the quarter ended March 31, 2009
compared to $1,164,000 for the same period of 2008. The net increase in revenue
is due primarily to an increase in facility management revenue. Our cost of
revenues increased to $960,000 in 2009 from $933,000 for the same period in
2008, and the gross profit percentage increased to 29% from 20% for the quarters
ended March 31, 2009 and 2008, respectively. This increase in gross profit
percentage is due primarily to the increase in the overall percentage of revenue
derived from facility management fees, and secondarily the increase in N-Viro
Soil sales, which had a much higher gross profit in the first quarter of 2009
compared to a year earlier. Operating expenses continued to decrease for the
comparative period. These changes collectively resulted in net profit of
$20,000 for the quarter ended March 31, 2009 compared to a net loss of $93,000
for the same period in 2008, an increase of $113,000.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2009 WITH THREE MONTHS ENDED MARCH
31, 2008
Our overall revenue increased $187,000, or 16%, to $1,351,000 for the
quarter ended March 31, 2009 from $1,164,000 for the quarter ended March 31,
2008. The net increase in revenue was due primarily to the following:
a) Sales of alkaline admixture decreased $46,000 from the same period
ended in 2008 - this decrease was primarily the result of the loss of revenue of
various customers in the Midwest;
b) Revenue from the service fees for the management of alkaline admixture
decreased $3,000 from the same period ended in 2008 - this decrease was
attributed primarily to the Toledo-area customers, which decreased $37,000
compared to the same period in 2008;
c) Our processing revenue, including facility management revenue, showed a
net increase of $236,000 over the same period ended in 2008. Of this increase,
facility management revenue of $185,000 was contributed by the Florida operation
and $17,000 from the Toledo facility, and, N-Viro Soil sales increased by a
total of $48,000 from both operations, offset by a decrease in royalty revenue
of $15,000 primarily due to the loss of licensees no longer utilizing our
technology.
Our gross profit increased $160,000, or 69%, to $391,000 for the quarter
ended March 31, 2009 from $231,000 for the quarter ended March 31, 2008, and the
gross profit margin increased to 29% from 20% for the same periods. The
increase in gross profit margin is primarily due to the increase in the overall
percentage of revenue derived from facility management fees, and secondarily the
increase in N-Viro Soil sales, which had a much higher gross profit margin in
the first quarter of 2009 compared to a year earlier. The Toledo operation
contributed $181,000 of gross profit on overall revenue of $436,000, which was
an increase of $54,000 of gross profit over the same period in 2008. The
Florida operation contributed $198,000 on overall revenue of $863,000, which was
an increase of $110,000 of gross profit over the same period in 2008.
Our operating expenses decreased $38,000, or 10%, to $357,000 for the
quarter ended March 31, 2009 from $395,000 for the quarter ended March 31, 2008.
The decrease was primarily due to decreases of $61,000 in consulting fees and
expenses and $19,000 in payroll expense, partially offset by an increase of
$23,000 in legal and professional fees and $16,000 in director fees and
expenses.
As a result of the foregoing factors, we recorded operating income of
$34,000 for the quarter ended March 31, 2009 compared to an operating loss of
$165,000 for the quarter ended March 31, 2008, an increase of $199,000.
Our net nonoperating income (expense) decreased by $86,000 to net
nonoperating expense of $14,000 for the quarter ended March 31, 2009 from net
nonoperating income of $72,000 for the quarter ended March 31, 2008. The
decrease in net nonoperating income (expense) was primarily due to a gain on the
settlements of debt of $84,000 in 2008.
We recorded net income of $20,000 for the quarter ended March 31, 2009
compared to a net loss of $93,000 for the same period ended in 2008, an increase
of $113,000. Adding back non-cash expenses for depreciation, amortization,
stock and stock options charges and then subtracting cash out on capitalized
assets and debt repayments, resulted in cash operating income of $55,000.
Similar non-cash expenses, cash out and debt repayments for the same period in
2008 resulted in cash operating income of $21,000, an increase in cash operating
income of $34,000 in first quarter 2009 versus 2008.
For the quarter ended March 31, 2008, we have not recognized the future tax
benefit of current or prior period losses due to the Company's historical
operating losses. For the quarter ended March 31, 2009, we have not recognized
a tax provision on current period income due to the utilization of loss
carryforwards to offset taxable income. Accordingly, our effective tax rate for
each period was zero.
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital deficit of $1,234,000 at March 31, 2009, compared
to a working capital deficit of $1,287,000 at December 31, 2008, resulting in an
increase in working capital of $53,000. Current assets at March 31, 2009
included cash and investments of $172,000 (including restricted cash of
$139,000), which is an increase of $18,000 from December 31, 2008. The net
positive change in working capital from December 31, 2008 was primarily from the
cash provided by operating activities of $153,000 for the three months ended
March 31, 2009, offset negatively by payments on long-term debt obligations of
$100,000.
In the first quarter of 2009 our cash flow provided by operating activities
was $153,000, an increase of $306,000 from same three month period in 2008.
This change from 2008 was principally due to the increase of $63,000 in trade
accounts receivable, an increase of $172,000 in trade accounts payable, an
increase in net income of $113,000 and an increase in other non-cash items of
$20,000, offset by a $64,000 decrease in stock, 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 the first quarter of 2009, the
percentage of combined revenues generated from our owned and operated facilities
in Toledo and Volusia County was: 2006 - 46%; 2007 - 77%; 2008 - 94%; first
quarter 2009 - 96%. We believe this shift will allow us to enhance future
revenue and profits through growth, efficiency and revenue optimization.
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 and continuing into 2009, our
customers slowed the overall payment rate on our outstanding receivables, which
in turn contributed 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.
During the first quarter of 2009, the Company had a line of credit up to
$400,000 at the prime rate (3.25% at March 31, 2009) 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
$139,292 from the Bank are held as a condition of maintaining the line of
credit. At March 31, 2009, the Company had $38,142 of borrowing capacity under
the credit facility.
On December 28, 2006, the Company purchased the remaining ownership
interest in Florida N-Viro for $500,000 and financed $400,000 of it by
delivering a note to the seller, VFL Technology Corporation. The note is at 8%
interest for 10 years, to be paid in annual installments, including interest, of
$59,612, subject to an offset for royalties due us under a patent license
agreement from the same party. The amount owed on the note as of March 31, 2009
was $374,000 and the second annual installment of $31,000 was paid on time in
April 2009. The third annual installment of $34,000 is expected to be paid on
time in early 2010, subject to expected royalty offsets through 2009.
During the first quarter of 2009, the Company did not borrow any additional
funds.
For the remainder of 2009 and into 2010, 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 generated from
equity issuances and exercises of outstanding warrants and options. We expect
that market developments favoring cleaner burning renewable energy sources and
ongoing discussions with companies in the fuel and wastewater industries could
provide enhanced liquidity and have a positive impact on future operations. We
continue to pursue opportunities with strategic partners for the development and
commercialization of the patented N-Viro Fuel technology. In addition, we are
focusing on the development of regional biosolids processing facilities, and are
currently in negotiations with potential partners to permit and develop
independent, regional facilities.
There can be no assurance these discussions will be successful or result in
new revenue sources for the company. Our failure to achieve improvements in
operating results, including through these potential sources of revenue, or in
our ability to adequately finance or secure additional sources of funds would
likely have a material adverse effect on our continuing operations.
OFF-BALANCE SHEET ARRANGEMENTS
At March 31, 2009, we did not have any material commercial commitments,
including guarantees or standby repurchase obligations, or any relationships
with unconsolidated entities or financial partnerships, including entities often
referred to as structured finance or special purpose entities or variable
interest entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
From time to time, during the normal course of business, we may make
certain indemnities, commitments and guarantees under which we may be required
to make payments in relation to certain transactions. These include: (i)
indemnities to vendors and service providers pertaining to claims based on our
negligence or willful misconduct and (ii) indemnities involving the accuracy of
representations and warranties in certain contracts. Pursuant to Delaware law,
we may indemnify certain officers and directors for certain events or
occurrences while the officer or director is, or was, serving at our request in
such capacity. We also have director and officer insurance coverage that limits
our exposure and enables us to recover a portion of any future amounts that we
may pay for indemnification purposes. We believe the applicable insurance
coverage is generally adequate to cover any estimated potential liability for
which we may provide indemnification. The majority of these indemnities,
commitments and guarantees do not provide for any limitation of the maximum
potential for future payments we could be obligated to make. We have not
recorded any liability for these indemnities, commitments and other guarantees
in the accompanying Consolidated Balance Sheets.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual cash obligations at March
31, 2009, and the effect these obligations are expected to have on liquidity and
cash flow in future periods:
Payments Due By Period
Note # Total Less than 1 year 2 - 4 years 5 - 6 years after 6 years
------- ---------- ----------------- ------------ ------------ -------------
Purchase obligations (1) 91,000 72,800 18,200 - -
Long-term debt obligations and related interest (2) 1,715,931 466,798 941,384 263,040 44,709
Operating leases (3) 366,396 124,828 193,568 48,000 -
Capital lease obligations - - - - -
Line of Credit obligation 361,858 361,858 - - -
Other long-term debt obligations - - - - -
---------- ----------------- ------------ ------------ -------------
Total contractual cash obligations $2,535,185 $ 1,026,284 $ 1,153,152 $ 311,040 $ 44,709
========== ================= ============ ============ =============
(1) Purchase obligations include agreements to purchase services that are enforceable and legally
binding on the Company and that specify all significant terms and the approximate timing of the
transaction. Purchase obligations exclude agreements that are cancelable without penalty.
(2) Amounts represent the expected cash payments of our long-term obligations.
(3) Amounts represent the expected cash payments of our operating lease obligations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) that are
designed to ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms, and that such information is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As stated in our Form 10-K for the year ended December 31, 2008, 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, 2008, and we identified a material weakness.
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.
Other than the remedial measures described above, there were no other
changes in our internal control over financial reporting that have materially
affected, or are likely to materially affect our internal control over financial
reporting during the three months ended March 31, 2009.
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Our facility in Toledo, Ohio, utilizes patented technologies to stabilize
and disinfect municipal biosolids pursuant to a permit to install from the Ohio
EPA that requires emissions be vented to a scrubber. In July 2008, an
inspection of the facility by local regulatory officials revealed that the
scrubber was not in operation. In February 2009, we 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 we operated the scrubber, an air contaminant
source, in violation of its permit to install. Pursuant to the terms of the
consent degree, we agreed to pay a civil penalty in the amount of $20,000.
Payment of the penalty will be made in quarterly installments of $4,000 over a
15-month period. The first installment was paid on time in April 2009.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In the first quarter of 2009, we issued a total of 2,932 shares of
unregistered stock to four individuals pursuant to an extension of certain
warrants. In exchange for the extension, each warrant holder agreed to exercise
for cash 1% of their respective number of shares that were offered under this
extension. Total gross cash proceeds of $5,424 was used for operating expenses.
More details of this can be found in the Form 8-K/A filed May 1, 2009.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
(a) None
ITEM 6. EXHIBITS
Exhibits:
See Exhibit Index below.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
N-VIRO INTERNATIONAL CORPORATION
Date: May 14, 2009 /s/ Timothy R. Kasmoch
--------------- ----------------------
Timothy R. Kasmoch
Chief Executive Officer and President
(Principal Executive Officer)
Date: May 14, 2009 /s/ James K. McHugh
--------------- --------------------
James K. McHugh
Chief Financial Officer, Secretary and Treasurer
(Principal Financial & Accounting Officer)
EXHIBIT INDEX
=============
Exhibit No. Document
----------= --------
4.1 A form of the Warrant Agreement to Purchase Shares of N-Viro International
Corporation Common Stock (incorporated by reference to Exhibit 4.1 to Form 8-K
filed May 1, 2009).
31.1 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
31.2 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes - Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes - Oxley Act of 2002.