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, 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
[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 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 (Sec.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 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: $7,967,000.
The number of shares of Common Stock of the registrant outstanding as of March
19, 2010 was 5,194,153.
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 2010 Annual Meeting of
Stockholders, which proxy statement will be filed with the Securities and
Exchange Commission on or before April 30, 2010.
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 13
Item 4. (Removed and Reserved) 14
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 22
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 25
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 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 27
Item 13. Certain Relationships and Related Transactions, and
Director Independence 27
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 impact our business and it is
impossible to predict with any accuracy which factors could result in negative
impacts. Although we believe that the forward-looking statements contained in
this Form 10-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 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 to build,
own and operate N-Viro facilities. Currently the company operates two biosolids
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(TM) and N-Viro Fuel(TM) 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 SOIL TM
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 FUEL TM
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 previously 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(TM). 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 accounted for about
32% of our total revenue in 2009. Through the end of 2009, we processed a
majority of Toledo's wastewater sludge and sold the resulting N-Viro SoilTM
product. In 2004, the City exercised its option to renew the contract for an
additional five years through 2009. In December of 2009 and again in March
2010, the City agreed to an extension of the contract, presently extending our
service to them to process 50% of the City's sludge until September 30, 2010.
Currently, the contract is in its twenty-first year of operation. The Company
is currently in discussions with the City to secure a long-term contract with
terms and conditions that will be mutually advantageous to both parties. We
consider our relationship with the City of Toledo to be satisfactory. However,
there can be no assurances that the City will continue to extend on a short-term
basis or sign a new long-term contract with the Company beyond September 30,
2010.
In December 2006, we acquired Headwaters Inc.'s ownership interest in
Florida N-Viro L.P. (Florida N-Viro), who 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.
Including the facilities in Toledo, Ohio and Volusia County, Florida, we
estimate there are currently facilities treating and recycling sludge using the
N-Viro process at an annualized rate of over 130,000 wet 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.
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(TM) and N-Viro Fuel(TM)
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 2009,
approximately 97% of our revenue was from management-run operations, 3% from
other domestic third party agreements and 0% from foreign agreements 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, 2010, as extended by a one-year
agreement signed in April 2009. Our research and development expenses were
under $5,000 in 2009 and 2008.
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.
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 and in conjunction with them. The results of the test 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. 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(TM) 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(TM) 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(TM) can be land applied as a fertilizer or lime
agent without regulation in most states.
"Exceptional quality" products are treated by the EPA as soil
amendments/fertilizer material, thereby exempting these products from federal
restrictions on their agricultural use or land application. N-Viro Soil(TM)
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(TM) 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(TM) 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(TM) 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(TM) 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(TM) 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(TM) for agricultural use, and may
require a site-specific permit by the user of N-Viro Soil(TM). 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, 2009, we had 31 employees. Six of our employees were
engaged in sales and marketing; three were in finance and administration and
twenty-two 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. In January
2010, the Labor Agreement was extended mutually on a day-to-day basis. In
conjunction with the extension of our contract with the City of Toledo, the
Labor Agreement was also extended. See "N-Viro Process Facilities" earlier in
this Item 1.
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(TM). In the N-Viro
Fuel(TM) 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 the jointly developed intellectual property that was 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(TM) process was
one-quarter of one percent ( %) of technical revenues until expiration of those
patents. UT rights to BioBlend(TM) 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, 2009 were approximately
$65,000, and no amount was expensed during 2009 or 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 ARE 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, 2009 and December 31, 2008, we incurred net losses of $2.4 million and $1.2
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, for the year
ended December 31, 2009, we experienced much higher than expected expenditures
for stock-related fees and compensation in excess of our increase in gross
revenue. 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 revenue 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. We have
previously 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 IN SEPTEMBER 2010, 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,
2009 and 2008, our single largest customer accounted for approximately 32% and
39%, respectively, of our revenues and our top three customers accounted for
approximately 65% and 62%, respectively, of our revenues. Our agreement with
our largest customer - which represented approximately 32% of our revenues in
2009 - is due to expire at the end of September 2010. 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(TM) 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 recently entered into new employment agreements with our Chief Executive
Officer, Timothy Kasmoch, our Executive Vice President and Chief Counsel, Robert
Bohmer and our Chief Financial Officer, James McHugh, 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, 2008 through March 19, 2010, our common
stock closing price fluctuated between a high of $4.25 and a low of $1.20. 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. The total rental expense for this location included in the
statements of operations for each of the years ended December 31, 2009 and 2008
is approximately $37,600 and $37,500, respectively. We also lease various
equipment on a month-to-month basis.
In June 2009, the Company began to maintain an office in West Unity, Ohio
under a lease with D&B Colon Leasing, LLC, for one year. The total minimum
rental commitment for the year ended December 31, 2010 is $12,500. The total
rental expense included in the statements of operations for the twelve months
ended December 31, 2009 and 2008 is $17,500 and $-0-, respectively.
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, 2010
through 2013 is $48,000 each year, and for 2014 is $12,000. The total rental
expense included in the statements of operations for each of the twelve months
ended December 31, 2009 and 2008 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
year ended December 31, 2010 is $3,000. The total rental expense included in
the statements of operations for each of the twelve months ended December 31,
2009 and 2008 is approximately $31,000.
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: 2010 -
$46,200; 2011 - $4,000. The total rental expense included in the statements of
operations for the twelve months ended December 31, 2009 and 2008 is
approximately $46,200 and $42,300, respectively.
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 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, the Company agreed to enter
into an administrative consent decree 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 decree, the Company agreed to pay a civil penalty in the
amount of $20,000. Payment of the penalty will be made in five quarterly
installments of $4,000 over a 15-month period. The first four installments were
paid on time from April 2009 to January 2010.
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. (REMOVED AND RESERVED)
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, 2008, was as follows:
Quarter High Low
------------ ----- ----
First 2008 $4.25 $2.60
Second 2008 $3.99 $2.80
Third 2008 $3.75 $2.40
Fourth 2008 $3.50 $2.50
First 2009 $2.85 $1.20
Second 2009 $2.70 $1.65
Third 2009 $2.75 $1.91
Fourth 2009 $2.80 $1.95
Our stock price closed at $3.25 per share on March 19, 2010.
HOLDERS
As of March 19, 2010, the number of holders of record of our Common Stock
was approximately 173.
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 . . . . 1,279,825 $ $2.24 1,061,675 2
Equity compensation plans not
approved by security holders 258,270 1 $ $1.95 -0-
---------------------- --------------------- ---------------------------
Total 1,538,095 $ $2.19 1,061,675
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, 138,270 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 a weighted average
of $2.04 per share.
2. The available number of shares to issue under our Second Amended and
Restated 2004 Stock Option Plan was increased to 2,500,000 shares as approved by
the stockholders on August 5, 2009.
RECENT SALES OF UNREGISTERED SECURITIES
There were no sales of unregistered securities during the fiscal year ended
December 31, 2009 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,
2009 2008
------ ------
Technology fees 1.1% 0.7%
Facility management 68.4% 63.8%
Products and services 30.5% 35.5%
------ ------
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 revenue received
from sales of N-Viro SoilTM sold 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,
2009 Change 2008
---------- ------------- -----------
(Dollars in thousands)
-------------------------------------
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenues. . . . . . . . . . . . . . . $5,021 0.4% $5,002
Cost of revenues. . . . . . . . . . . 3,912 (8.2%) 4,260
------ --------
Gross profit. . . . . . . . . . . . . 1,109 49.5% 742
Operating expenses. . . . . . . . . . 3,583 85.7% 1,930
------ --------
(2,474) * (1,188)
Other income (expense). . . . . . . . 60 89.8% 31
------ --------
Loss before income tax expense. . . . (2,414) * (1,157)
Federal and state income tax expense. 0 * 0
------ --------
Net loss. . . . . . . . . . . . . . . $(2,414) * $(1,157)
======= =======
PERCENTAGE OF REVENUES:
Revenues. . . . . . . . . . . . . . . 100.0% 100.0%
Cost of revenues. . . . . . . . . . . 77.9 85.2
------ --------
Gross profit. . . . . . . . . . . . . 22.1 14.8
Operating expenses. . . . . . . . . . 71.4 38.5
------ --------
(49.3) (23.7)
Other income (expense). . . . . . . . 1.2 0.6
------ --------
Loss before income tax expense. . . . (48.1) (23.1)
Federal and state income tax expense. 0.0 0.0
------ --------
Net loss. . . . . . . . . . . . . . . (48.1%) (23.1%)
======= ======
* Period to period percentage change comparisons have only been calculated
for positive numbers.
COMPARISON OF YEAR ENDED DECEMBER 31, 2009 WITH YEAR ENDED DECEMBER 31, 2008
Revenues increased $19,000, or approximately 0.4%, to $5,021,000 for the
year ended December 31, 2009 from $5,002,000 for the year ended December 31,
2008. The increase in revenue was due to a net increase in revenue from
existing company-managed facilities, primarily due to the following factors:
a) Sales of alkaline admixture decreased $79,000 from the same period
ended in 2008;
b) Revenue from the service fees for the management of alkaline admixture
showed a net decrease of $59,000 from the same period ended in 2008, primarily
from decreased sales of $144,000 into the Toledo location, partially offset by
an increase of $89,000 into the Florida N-Viro location;
c) Our processing revenue, including facility management revenue, showed a
net increase of $127,000 over the same period ended in 2008, primarily from
increased municipal sludge processing at the Florida N-Viro location partially
offset by a decrease in N-Viro Soil revenue from the Toledo location;
d) Territorial fees showed an increase of $30,000 from the same period
ended in 2008:
The decrease in the sales of alkaline admixture was primarily from
facilities no longer procuring their alkaline admixture through us, all located
in the midwestern United States.
The net decrease in service fees for the management of alkaline admixture
was primarily from the reduction in alkaline admixture marketed at the Toledo
location, which represented a decrease of $144,000. The Florida N-Viro location
showed an increase of $89,000 in fees for the management of alkaline admixture.
The net increase in processing revenue of $127,000 was primarily from an
increase in sludge processing volume at our Florida N-Viro location,
representing over $245,000 of the increase. Offsetting the facility management
were sales of the N-Viro Soil product which showed a decrease of $107,000,
primarily from our Toledo location, over 2008.
Our gross profit increased $367,000, or 50%, to $1,109,000 for the year
ended December 31, 2009 from $742,000 for the year ended December 31, 2008, and
the gross profit margin increased to 22% from 15% for the same periods. The
increase in gross profit margin is primarily due to the reduction in costs
associated with our facility management fee operations. These cost reductions
were primarily the cost of fuel, the continued transition to using company-owned
trucking from third-party vendors for sludge and ash shipments, and a reduction
in the cost of shipping N-Viro Soil negotiated with our soil customers
purchasing from the Toledo location.
Our operating expenses increased $1,653,000, or 86%, to $3,583,000 for the
year ended December 31, 2009 from $1,930,000 for the year ended December 31,
2008. The increase was primarily due to an increase of approximately $1,134,000
in payroll and related costs, $359,000 in consulting fees, $63,000 in
director-related costs, $28,000 in office and $18,000 in travel-related
expenses.
Of the increase of $1,134,000 in payroll and related costs, $1,122,000 were
non-cash costs relating to the issuance of stock options to officers. Of the
increase of $359,000 in consulting fees, $324,000 were non-cash costs for stock
given as compensation for the agreements entered into in 2009. Of the increase
of $63,000 in director-related costs, $75,000 were non-cash costs relating to
the issuance of stock options. Of the total increase of $1,556,000 in all three
of these categories from 2008 to 2009, $1,521,000 were for non-cash costs.
Of our total operating expenses in 2009 of $3,583,000, approximately $2,166,000
were non-cash expenses for stock and stock options issued during the year and
$492,000 in amortization and depreciation expense, or a total of $2,658,000.
Our nonoperating income (expense) increased by $28,000 to income of $60,000
for the year ended December 31, 2009 from income of $32,000 for the year ended
December 31, 2008. The increase in nonoperating income was primarily due to the
extinguishment of $147,000 of certain liabilities no longer due during 2009.
We recorded a net loss of approximately $2,414,000 for the year ended
December 31, 2009 compared to a net loss of approximately $1,157,000 for the
year ended December 31, 2008, an increase in the loss of approximately
$1,257,000.
LIQUIDITY AND CAPITAL RESOURCES
We had working capital of $57,000 at December 31, 2009, compared to a
working capital deficit of $1,287,000 at December 31, 2008, resulting in an
increase in working capital of $1,344,000. Current assets at December 31, 2009
included cash and cash equivalents of $202,000 (including restricted cash of
$140,000), which is an increase of $48,000 from December 31, 2008. The net
positive change in working capital from December 31, 2008 to 2009 was primarily
from an increase to the deferred current asset of $966,000 for common stock
given pursuant to consulting contracts entered into during the year, an increase
in cash provided by operating activities of $233,000 for the year ended December
31, 2009, further increased by $706,000 of cash from the issuance of convertible
debentures (net of issuance costs), offset negatively by an increase in payments
over advances from short and long-term debt obligations of $547,000.
In 2009 our cash flow provided by operating activities was $26,000, an
increase of $233,000 over the same period in 2008. The components of the
increase in cash flow provided by operating activities from 2008 was principally
due to a $1,520,000 increase in stock and stock options issued for fees and
services and an increase in other non-cash items of $82,000, offset by an
increase of $40,000 in trade accounts receivable, a decrease of $22,000 in trade
accounts payable and an increase of $50,000 in prepaid and other assets and, an
increase in the net loss of $1,257,000.
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 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%; 2009 - 95%. 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 throughout 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 customers or payments to
our vendors will become shorter and this may have an adverse impact on our
continuing operations.
During 2009, we had a line of credit up to $400,000 at the prime rate
(3.25% at December 31, 2009) plus 0.75% and secured by a first lien on all of
our assets, with Monroe Bank + Trust, or the Bank, with a maturity date of
October 15, 2009. Two certificates of deposit totaling $140,161 from the Bank
are held as a condition of maintaining the line of credit. In October, 2009,
the line of credit was renewed through October 2010. At December 31, 2009, we
had $75,000 of borrowing capacity under the credit facility.
During 2009, we borrowed a total of $139,849 from two lenders to purchase
insurance policies for general, property and directors & officers' insurance
coverage during the year. A total of two term notes were issued, ranging from
3.8% to 5.3% interest for a term not more than one year, monthly payments
totaling $14,312 and each are unsecured. The total amount owed on all notes as
of December 31, 2009 was approximately $54,800 and all notes are expected to be
paid in full on the applicable maturity date, the last of which is August 2010.
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
(the "Note") to the seller, VFL Technology Corporation. The Note was 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. On September 28, 2009, we remitted payment in
full satisfaction of the Note, as announced in a Form 8-K filing in October,
2009.
On May 18, 2009, we approved an offering of up to $1,000,000 of Convertible
Debentures (the "Debentures"), convertible at any time into our unregistered
common stock at $2.00 per share. The Debentures mature at June 30, 2011.
During 2009 we issued $765,000 of Debentures to a total of twenty (23)
accredited investors. The Debentures are issuable in $5,000 denominations, are
unsecured and have a stated interest rate of 8%, payable quarterly to holders of
record. In July and October 2009 and in January 2010, we timely paid accrued
interest to all Debenture holders of record as of the quarter-end dates. At any
time, we may redeem all or a part of the Debentures at face value plus unpaid
interest. During 2009, one accredited investor redeemed $10,000 of Debentures
into unregistered common stock.
For 2010, we expect to improve operating results and have adequate cash or
access to cash to adequately fund operations 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 or cash funding 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 December 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.
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, 2009 and 2008 is $50,000.
Property and Equipment/Long-Lived Assets - Property and equipment is
reviewed for impairment. 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.
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 June 2009, the Financial Accounting Standards Board (FASB)
issued its final Statement of Financial Accounting Standards (SFAS)
No. 168 - The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles a replacement of FASB
Statement No. 162. SFAS No. 168 made the FASB Accounting Standards
Codification (the Codification) the single source of U.S. GAAP used by
nongovernmental entities in the preparation of financial statements,
except for rules and interpretive releases of the SEC under authority
of federal securities laws, which are sources of authoritative
accounting guidance for SEC registrants. The Codification is meant to
simplify user access to all authoritative accounting guidance by
reorganizing U.S. GAAP pronouncements into roughly 90 accounting
topics within a consistent structure; its purpose is not to create new
accounting and reporting guidance. The Codification supersedes all
existing non-SEC accounting and reporting standards and was effective
for the company beginning July 1, 2009. Following SFAS No. 168, the
FASB will not issue new standards in the form of Statements, FASB
Staff Positions, or Emerging Issues Task Force Abstracts; instead, it
will issue Accounting Standards Updates. The FASB will not consider
Accounting Standards Updates as authoritative in their own right;
these updates will serve only to update the Codification, provide
background information about the guidance, and provide the bases for
conclusions on the change(s) in the Codification. In the description
of Accounting Standards Updates that follows, references in "italics"
relate to Codification Topics and Subtopics, and their descriptive
titles, as appropriate.
In June 2009, the FASB amended its guidance on determining
whether an entity's variable interests constitute controlling
financial interests in a variable interest entity. Among other things,
the updated guidance replaces the calculation for determining which
entities, if any, have a controlling financial interest in a variable
interest entity (VIE) from a quantitative based risks and rewards
calculation, to a qualitative approach that focuses on identifying
which entities have the power to direct the activities that most
significantly impact the VIE's economic performance and the obligation
to absorb losses of the VIE or the right to receive benefits from the
VIE. The update also requires ongoing assessments as to whether an
entity is the primary beneficiary of a VIE (previously,
reconsideration was only required upon the occurrence of specific
events), modifies the presentation of consolidated VIE assets and
liabilities, and requires additional disclosures about a company's
involvement in VIEs. This update will be effective for us beginning
January 1, 2010. We are currently evaluating the effect that adoption
of this update will have, if any, on our financial position and
results of operations when it becomes effective in 2010.
In October 2009 the FASB issued an update to its revenue
recognition standards that (1) removes the
objective-and-reliable-evidence-of-fair-value criterion from the
separation criteria used to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting, (2)
replaces references to "fair value" with "selling price" to
distinguish from other fair value measurement guidance, (3) provides a
hierarchy that entities must use to estimate the selling price, (4)
eliminates the use of the residual method for allocation, and (5)
expands the ongoing disclosure requirements. The new standard is
effective for us beginning January 1, 2011 and can be applied
prospectively or retrospectively. We are currently evaluating the
effect that adoption of this update will have, if any, on our
financial position and results of operations when it becomes effective
in 2011.
Other Accounting Standards Updates not effective until after December 31,
2009, are not expected to have a significant effect on the Company's
consolidated financial position or results of operations.
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' EQUITY (DEFICIT) F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 - F-25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
N-Viro International Corporation
We have audited the accompanying consolidated balance sheets of N-Viro
International Corporation (a Delaware entity) and Subsidiaries as of December
31, 2009 and 2008, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
two-year period ended December 31, 2009. 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 and Subsidiaries as of December 31, 2009 and 2008, and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America.
/s/ UHY LLP
------------
UHY LLP
Southfield, Michigan
March 31, 2010
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
--------------------------
2009 2008
---------- ----------
ASSETS
------------------------------------------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted $ 61,380 $ 14,869
Restricted 140,161 138,812
Receivables, net:
Trade 597,035 494,141
Related party - Mahoning Valley N-Viro 15,325 -
Deferred costs - stock issued for services 966,354 -
Prepaid expenses and other assets 108,138 64,331
---------- ----------
Total current assets 1,888,393 712,153
PROPERTY AND EQUIPMENT, NET 1,363,476 1,781,290
INTANGIBLE AND OTHER ASSETS, NET 211,457 189,328
---------- ----------
$3,463,326 $2,682,771
========== ==========
The accompanying notes are an integral part of these financial statements.
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
--------------------------
2009 2008
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 353,800 $ 360,501
Line-of-credit 325,000 398,000
Accounts payable 932,831 1,047,364
Accrued liabilities 219,910 193,425
------------- -------------
Total current liabilities 1,831,541 1,999,290
LONG-TERM DEBT, LESS CURRENT MATURITIES 500,808 1,135,364
LONG-TERM DEBT - Convertible debentures, net of discount 610,840 -
------------- -------------
Total liabilities 2,943,189 3,134,654
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value
Authorized - 2,000,000 shares
Issued - -0- shares in 2009 and 2008 - -
Common stock, $.01 par value
Authorized - 25,000,000 shares in 2009 and 15,000,000 in 2008
Issued - 5,269,553 shares in 2009 and 4,468,025 shares in 2008 52,696 44,680
Additional paid-in capital 21,453,168 17,822,744
Accumulated deficit (20,300,837) (17,634,417)
------------- -------------
1,205,027 233,007
Less treasury stock, at cost, 123,500 shares 684,890 684,890
------------- -------------
Total stockholders' equity (deficit) 520,137 (451,883)
------------- -------------
$ 3,463,326 $ 2,682,771
============= =============
The accompanying notes are an integral part of these financial statements.
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2009 and 2008
--------------------------------------
2009 2008
------------ ------------
REVENUES $ 5,021,169 $ 5,001,774
COST OF REVENUES 3,912,310 4,260,290
------------ ------------
GROSS PROFIT 1,108,859 741,484
OPERATING EXPENSES
Selling, general and administrative 3,582,979 1,929,777
------------ ------------
OPERATING LOSS (2,474,120) (1,188,293)
OTHER INCOME (EXPENSE)
Interest income 1,354 3,306
Gain on extinguishment of liabilities 147,201 88,785
Amortization of discount on convertible debentures (24,315) -
Interest expense (64,313) (60,513)
------------ ------------
59,927 31,578
------------ ------------
LOSS BEFORE INCOME TAXES (2,414,193) (1,156,715)
Federal and state income taxes - -
------------ ------------
NET LOSS $(2,414,193) $(1,156,715)
============ ============
Basic and diluted loss per share $ (0.51) $ (0.27)
============ ============
Weighted average common shares outstanding - basic and diluted 4,688,928 4,274,877
============ ============
The accompanying notes are an integral part of these financial statements.
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 2009 and 2008
Additional
Shares of Common Paid-in Accumulated Treasury
Common Stock Stock Capital Deficit Stock Total
------------ ------- ----------- ------------- ---------- ------------
BALANCE JANUARY 1, 2008 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)
Net loss - - - (2,414,193) - (2,414,193)
Deemed dividend on extension of stock warrants - - 252,227 (252,227) - -
Issuance of stock options - - 1,371,921 - - 1,371,921
Exercise of stock options 21,400 214 29,823 - - 30,037
Exercise of stock warrants 13,672 137 29,015 - - 29,152
Conversion of debentures to stock 5,024 50 9,999 - - 10,049
Discount on convertible debentures issued - - 183,897 - - 183,897
Issuance of common stock 761,432 7,615 1,753,542 - - 1,761,157
------------ ------- ----------- ------------- ---------- ------------
BALANCE DECEMBER 31, 2009 5,269,553 $52,696 $21,453,168 $(20,300,837) $(684,890) $ 520,137
============ ======= =========== ============= ========== ============
The accompanying notes are an integral part of these financial statements.
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2009 and 2008
--------------------------------------
2009 2008
------------ ------------
Cash Flows From Operating Activities
Net loss $(2,414,193) $(1,156,715)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization 467,990 447,365
Amortization of discount and costs of debentures 37,345 -
Provision (reduction) for bad debts - 10,000
Issuance of stock for debt and services 793,646 470,628
Issuance of stock options and warrants for services 1,371,962 174,483
(Gain) loss on the sale of fixed assets 1,161 (32,890)
Changes in Operating Assets and Liabilities
Increase in trade receivables (102,894) (63,182)
Increase in prepaid expenses and other assets (55,693) (5,112)
Decrease in accounts payable and accrued liabilities (73,050) (50,960)
------------ ------------
Net cash provided by (used in) operating activities 26,274 (206,383)
Cash Flows From Investing Activities
Proceeds from sale of property and equipment 3,006 79,773
Increase in investments - (125)
Increases from restricted cash and cash equivalents (1,348) (3,306)
Advances to related parties (15,300) -
Purchases of property and equipment (17,360) (923,673)
------------ ------------
Net cash used in investing activities (31,002) (847,331)
Cash Flows From Financing Activities
Proceeds from convertible debentures issued 765,000 -
Issuance costs of convertible debentures issued (58,666) -
Borrowings under long-term obligations 139,848 862,228
Stock options exercised 30,037 177,112
Stock warrants exercised 29,152 245,912
Net borrowings (repayments) on line-of-credit (73,000) 34,000
Principal payments on long-term obligations (781,132) (312,990)
------------ ------------
Net cash provided by financing activities 51,239 1,006,262
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 46,511 (47,452)
Cash and Cash Equivalents - Beginning 14,869 62,321
------------ ------------
Cash and Cash Equivalents - Ending $ 61,380 $ 14,869
============ ============
Supplemental disclosure of cash flows information:
Cash paid during the year for interest $ 125,460 $ 125,857
============ ============
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, 2009 AND 2008
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. 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.
E. 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 $30,979 and $50,940 of receivables for
the years ended December 31, 2009 and 2008, 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
as of December 31, 2009 and 2008. 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, 2009 AND 2008
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
F. 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 $431,007
and $395,928 in 2009 and 2008, 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.
G. 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 16.0 and 16.1 years at December 31, 2009 and 2008,
respectively). Amortization expense amounted to $30,369 and $37,015 in 2009 and
2008, respectively. Estimated amortization expense, based on these patent costs
and territory rights at December 31, 2009, for each of the ensuing five years is
as follows: 2010 - $27,000; 2011 - $24,000; 2012 - $19,000; 2013 - $15,000;
2014 - $14,000. 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.
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 $6,613 in 2009 and $14,422 in 2008. Estimated
amortization expense, based on these capitalized license and contracts at
December 31, 2009, for each of the ensuing five years is as follows: 2010 -
$6,000; 2011 - $2,000; 2012 - $2,000; 2013 - $2,000; 2014 - $2,000.
H. 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. 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. 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, 2009 AND 2008
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
I. 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, 2009 and 2008, the effects
of 1,279,825 stock options outstanding, 724,950 warrants to purchase common
stock, and, debentures that are convertible to 377,500 shares of common stock
are excluded from the diluted per share calculation because they would be
antidilutive.
J. Stock Options - The Company records share-based compensation expense
using a fair-value based method of measurement that results in compensation
costs for essentially all awards of stock-based compensation to employees.
K. New Accounting Standards - In June 2009, the Financial Accounting
Standards Board (FASB) issued its final Statement of Financial Accounting
Standards (SFAS) No. 168 - The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB
Statement No. 162. SFAS No. 168 made the FASB Accounting Standards Codification
(the Codification) the single source of U.S. GAAP used by nongovernmental
entities in the preparation of financial statements, except for rules and
interpretive releases of the SEC under authority of federal securities laws,
which are sources of authoritative accounting guidance for SEC registrants. The
Codification is meant to simplify user access to all authoritative accounting
guidance by reorganizing U.S. GAAP pronouncements into roughly 90 accounting
topics within a consistent structure; its purpose is not to create new
accounting and reporting guidance. The Codification supersedes all existing
non-SEC accounting and reporting standards and was effective for the company
beginning July 1, 2009. Following SFAS No. 168, the FASB will not issue new
standards in the form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts; instead, it will issue Accounting Standards Updates. The
FASB will not consider Accounting Standards Updates as authoritative in their
own right; these updates will serve only to update the Codification, provide
background information about the guidance, and provide the bases for conclusions
on the change(s) in the Codification. In the description of Accounting
Standards Updates that follows, references in "italics" relate to Codification
Topics and Subtopics, and their descriptive titles, as appropriate.
In June 2009, the FASB amended its guidance on determining whether an entity's
variable interests constitute controlling financial interests in a variable
interest entity. Among other things, the updated guidance replaces the
calculation for determining which entities, if any, have a controlling financial
interest in a variable interest entity (VIE) from a quantitative based risks and
rewards calculation, to a qualitative approach that focuses on identifying which
entities have the power to direct the activities that most significantly impact
the VIE's economic performance and the obligation to absorb losses of the VIE or
the right to receive benefits from the VIE. The update also requires ongoing
assessments as to whether an entity is the primary beneficiary of a VIE
(previously, reconsideration was only required upon the occurrence of specific
events), modifies the presentation of consolidated VIE assets and liabilities,
and requires additional disclosures about a company's involvement in VIE's.
This update will be effective for the company beginning January 1, 2010.
Management is currently evaluating the effect that adoption of this update will
have, if any, on the Company's financial position and results of operations when
it becomes effective in 2010.
In October 2009 the FASB issued an update to its revenue recognition standards
that (1) removes the objective-and-reliable-evidence-of-fair-value criterion
from the separation criteria used to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting, (2) replaces
references to "fair value" with "selling price" to distinguish from other fair
value measurement guidance, (3) provides a hierarchy that entities must use to
estimate the selling price, (4) eliminates the use of the residual method for
allocation, and (5) expands the ongoing disclosure requirements. The new
standard is effective for the company beginning January 1, 2011 and can be
applied prospectively or retrospectively. Management is currently evaluating
the effect that adoption of this update will have, if any, on the Company's
financial position and results of operations when it becomes effective in 2011.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Other Accounting Standards Updates not effective until after December 31, 2009,
are not expected to have a significant effect on the Company's consolidated
financial position or results of operations.
L. 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.
The accounting for uncertain tax positions requires the Company to evaluate each
income tax position using a two step process which includes a determination as
to whether it is more likely than not that the income tax position will be
sustained, based upon technical merit and upon examination by the taxing
authorities. At December 31, 2009 and 2008, there were no uncertain tax
positions that required accrual. None of the Company's federal or state income
tax returns are currently under examination by the Internal Revenue Service
("IRS") or state authorities. However, fiscal years 2006 and later remain
subject to examination by the IRS and respective states.
NOTE 2. BALANCE SHEET DATA
PROPERTY AND EQUIPMENT (AT COST):
2009 2008
---------- ----------
Leasehold improvements $ 122,979 $ 116,458
Equipment 2,763,211 2,779,103
Furniture, fixtures and computers 54,275 48,216
---------- ----------
2,940,465 2,943,777
Less accumulated depreciation 1,576,989 1,162,487
---------- ----------
$1,363,476 $1,781,290
========== ==========
DEFERRED COSTS:
In 2005, the Company executed a financial public relations 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, and was recorded as a
deferred cost. In 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.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE 2. BALANCE SHEET DATA (CONTINUED)
In 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, and was
recorded as a deferred cost. 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, and was recorded as a deferred cost. 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, and was recorded as a
deferred cost. 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.
In July 2009, the Company executed a Consulting Agreement, or the Agreement,
effective July 14, 2009, with Investor Relations Services, Inc. of New Smyrna
Beach, FL, or IRSI. The Company appointed IRSI as its non-exclusive stock
promotion and strategic communications counsel for a term of one year from the
date of the Agreement. For its services, the Company issued IRSI 500,000 shares
of the Company's unregistered common stock. Pursuant to the Agreement, the
Company entered into a Designation and Appointment agreement with Summit Trading
Limited of New Smyrna Beach, FL, to designate Summit Trading as the third party
appointee to be paid the shares of stock under the Consulting Agreement with
IRSI. The Company accounted for this transaction by recording a deferred
current asset of $1,135,000 that is amortized ratably over the 12 month period
the services are to be rendered. The cost amortized for the year ended December
31, 2009 was $520,200. The amount deferred at December 31, 2009 was $614,800.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE 2. BALANCE SHEET DATA (CONTINUED)
In July 2009, the Company executed a Finder's Fee and Non-Circumvention
Agreement with Summit Trading to locate possible merger and acquisition
candidates as well as sources of financing for the Company for a period of one
year, effective July 20, 2009. For its services, the Company issued Summit
Trading 250,000 shares of the Company's unregistered common stock. The Company
accounted for this transaction by recording a deferred current asset of $625,000
that is amortized ratably over the 12 month period the services are to be
rendered. The cost amortized for the year ended December 31, 2009 was $273,400.
The amount deferred at December 31, 2009 was $351,600.
The following is a summary of Deferred Costs - capitalized stock value on
contracts, net as of December 31:
2009 2008
-------- -----
Deferred costs - Investor Relations, less accumulated
amortization (2009 - $520,208; 2008 - $-0-) $614,792 $ -
Deferred costs - Summit Trading, Ltd., less accumulated
amortization (2009 - $273,437; 2008 - $-0-) 351,562 -
-------- -----
$966,354 $ -
======== =====
INTANGIBLE AND OTHER ASSETS:
The following is a summary of intangible and other assets, net as of December
31:
2009 2008
-------- --------
Patents and related intangibles, less accumulated
amortization (2009 - $320,905; 2008 - $376,150) $125,952 $155,733
Territory rights, less accumulated amortization
(2009 - $5,882; 2008 - $5,294) 4,118 4,706
Customer list, less accumulated amortization
(2009 - $47,975; 2008 - $41,362) 14,780 21,393
Debenture issuance costs, less accumulated amortization
(2009 - $13,031; 2008 - $-0-) 43,136 -
Other 23,471 7,496
-------- --------
$211,457 $189,328
======== ========
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE 2. BALANCE SHEET DATA (CONTINUED)
ACCRUED LIABILITIES:
2009 2008
-------- --------
Accrued payroll and employee benefits $ 26,768 $ 14,386
Sales tax payable 177,470 177,455
Interest payable 15,672 1,584
-------- --------
$219,910 $193,425
======== ========
NOTE 3. PLEDGED ASSETS, LINE-OF-CREDIT AND LONG-TERM DEBT
During 2009, the Company had a line of credit up to $400,000 at the prime rate
(3.25% at December 31, 2009) plus 0.75% 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 $140,161 from the
Bank are held as a condition of maintaining the line of credit. The Company is
permitted to borrow up to 80% of its outstanding trade accounts receivable not
over 90 days. In October 2009, the line of credit was renewed through October
2010. At December 31, 2009, the Company had $75,000 of borrowing capacity under
the credit facility.
Long-term debt at December 31, 2009 and 2008 is as follows:
2009 2008
---------- ----------
Notes payable - banks $ 704,384 $ 938,970
Notes payable - equipment vendors 150,224 183,481
Note payable - VFL - 373,414
Convertible debentures, net of discount 610,840 -
---------- ----------
1,465,448 1,495,865
Less current maturities 353,800 360,501
---------- ----------
$1,111,648 $1,135,364
========== ==========
During 2009, the Company borrowed a total of $139,849 from two lenders to
purchase insurance policies for general, property and directors & officers'
insurance coverage during the year. A total of two term notes were issued,
ranging from 3.8% to 5.3% interest for a term not more than one year, monthly
payments totaling $14,312 and each are unsecured. The total amount owed on
these notes as of December 31, 2009 was approximately $54,800 and these notes
are expected to be paid in full on the applicable maturity date, the last of
which is August 2010.
Prior to 2009, the Company has borrowed a total of $1,345,700 from seven lenders
to purchase processing and automotive equipment. A total of fourteen term notes
have been issued, ranging from 7.1% to 9.9% interest for terms ranging three to
five years, monthly payments totaling approximately $29,700 and all are secured.
The total amount owed on all notes as of December 31, 2009 was approximately
$799,800 and all notes are expected to be paid in full on the applicable
maturity date, the last of which is October 2013.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE 3. PLEDGED ASSETS, LINE-OF-CREDIT AND LONG-TERM DEBT (CONTINUED)
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
(the "Note") to the seller, VFL Technology Corporation. The Note was 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. On September 28, 2009, the Company
remitted payment in full satisfaction of the Note, as announced in a Form 8-K
filing in October, 2009.
On May 18, 2009, the Company approved an offering of up to $1,000,000 of
Convertible Debentures (the "Debentures"), convertible at any time into
unregistered common stock of the Company at $2.00 per share. The Debentures
mature at June 30, 2011. During 2009 the Company issued $765,000 of Debentures
to a total of twenty three accredited investors. The Debentures are issuable in
$5,000 denominations, are unsecured and have a stated interest rate of 8%,
payable quarterly to holders of record. In July and October 2009 and in January
2010, the Company timely paid accrued interest to all Debenture holders of
record as of the quarter-end dates. At any time, the Company may redeem all or
a part of the Debentures at face value plus unpaid interest. During 2009, one
accredited investor redeemed $10,000 of Debentures into unregistered common
stock. Because the fair market value of the Company's common stock (the
underlying security in the Debentures) may have been above the conversion price
of $2.00 per share at the date of issuance, the Company was required to record a
discount given on each Debenture sold, which totaled $169,475. The discount is
then required to be amortized as a period expense by the straight-line method
over the remaining periods the Debentures are scheduled to be outstanding, which
averages 20 months. Amortization expense amounted to $24,315 in 2009, the first
year.
Approximate aggregate maturities of long-term debt for the years ending December
31 are as follows: 2010 - $354,000; 2011 - $893,000; 2012 - $160,000; 2013 -
$57,000; 2014 and after - $1,000.
NOTE 4. RELATED PARTY TRANSACTIONS
During the year ended December 31, 2009, the Company advanced funds for start-up
and beginning operating capital totaling $15,325 to their joint venture limited
liability company, Mahoning Valley N-Viro. Mahoning Valley N-Viro is owned 50%
by the Company and 50% by SouthSide Environmental Group of Struthers, Ohio.
Also during 2009, the Company paid Terri Kasmoch, the spouse of President and
Chief Executive Officer Timothy Kasmoch, consulting fees for business
development, web site and company media marketing and stock promotion efforts
for the Company.
During the year ended December 31, 2008, the Company paid R. Francis DiPrete, a
former member of the Board of Directors, fees for consulting services. These
fees were exclusive of director fees and expenses paid for with cash and stock
options.
The following table summarizes these payments for 2009 and 2008 and the balance
to each of any monies owed as of December 31, 2009 and 2008:
Year Consulting fees Account payable balance at December 31
---- ---------------- ---------------------------------------
Terri Kasmoch 2009 $ 11,000 $ 2,737
R. Francis DiPrete 2008 2,500 -
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
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, amended in June 2008 and again in August
2009, for directors and key employees under which 2,500,000 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 cannot be exercised until six months from the date of grant.
Options were granted in 2009 and 2008 at the approximate market value of the
stock at date of grant, as defined by the stock option plan.
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
vested 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 $46,667 for 2009 and
$93,333 for 2008. 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 July 2009, the Company executed a Consulting Agreement, or the Agreement,
effective July 14, 2009, with Investor Relations Services, Inc. of New Smyrna
Beach, FL, or IRSI. The Company appointed IRSI as its non-exclusive stock
promotion and strategic communications counsel for a term of one year from the
date of the Agreement. For its services, the Company issued IRSI 500,000 shares
of the Company's unregistered common stock. Pursuant to the Agreement, the
Company entered into a Designation and Appointment agreement with Summit Trading
Limited of New Smyrna Beach, FL, to designate Summit Trading as the third party
appointee to be paid the shares of stock under the Consulting Agreement with
IRSI.
In July 2009, the Company executed a Finder's Fee and Non-Circumvention
Agreement with Summit Trading to locate possible merger and acquisition
candidates as well as sources of financing for the Company for a period of one
year, effective July 20, 2009. For its services, the Company issued Summit
Trading 250,000 shares of the Company's unregistered common stock.
During the year ended December 31, 2009, the Company granted stock options
totaling 634,000 shares: 80,000 options to outside directors and 554,000 options
to officers. The options granted to the directors became fully vested six
months after the date of grant, and were priced, pursuant to the Second Amended
and Restated 2004 Stock Options Plan, at a weighted average price of $2.13 for a
total expense of approximately $156,000. The options granted to the officers
vested immediately and were priced, pursuant to the Second Amended and Restated
2004 Stock Options Plan, at a weighted average price of $2.19 for a total
expense of approximately $1,214,000.
The following summarizes the stock options activity for the years ended December
31, 2009 and 2008:
2009 2008
---------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- --------- ---------- ---------
Outstanding, beginning of year 746,025 $ 2.28 839,925 $ 2.19
Granted 634,000 2.18 22,500 3.61
Exercised (21,400) 1.43 (109,900) 2.14
Expired during the year (78,800) 2.36 (6,500) 2.31
----------- ----------
Outstanding, end of year 1,279,825 2.24 746,025 2.28
=========== ==========
Eligible for exercise at end of year 1,222,325 2.24 746,025 2.28
=========== ==========
Weighted average fair value per option for
options granted during the year $ 2.09 $ 3.38
=========== ==========
Options expected to vest over the life of the Plan 1,279,825 746,025
=========== ==========
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE 5. EQUITY TRANSACTIONS (CONTINUED)
The Company records compensation expense for stock options based on the
estimated fair value of the options on the date of grant using the Black-Scholes
valuation model. The Company uses historical data among other factors to
estimate the expected price volatility, the expected option term and the
expected forfeiture rate. The risk-free rate is based on the U.S. Treasury
yield curve in effect at the date of grant for the expected term of the option.
The following assumptions were used to estimate the fair value of options
granted:
Year Ended December 31,
----------------------------
2009 2008
-------------------- ------
Expected dividend yield 0.00% 0.00%
Weighted average volatility 79.4% 112.2%
Risk free interest rate 2.9 - 3.5% 4.2%
Expected term (in years) 10 10
In October 2009, the Company approved a plan to extend to all holders of N-Viro
International Corporation warrants, a choice to extend their respective exercise
periods if they complete the transaction by December 31, 2009, by either (1)
exercising at least 1% of the existing number of warrants and receive the
balance of warrants with a 1-year extended date at the original exercise price
and date based on the original agreement, or, (2) choosing a 1:1 exercise of any
warrants held and receive a new warrant for a 5-year term at a new "strike
price" of $2.52 per share on the new warrants issued, whereby the holders of
such warrants will also receive the balance of their unexercised original
warrants with their expiration date extended for one additional year. The
incremental fair value associated with the extension of the warrant expiration
dates and issuance of replacement warrants has been determined using the
Black-Scholes model and has been recorded as a deemed dividend to common
stockholders in the accompanying Statement of Stockholders' Equity (Deficit).
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE 6. REVENUE AND MAJOR CUSTOMERS
Revenues for the years ended December 31, 2009 and 2008 consist of the
following:
2009 2008
---------- ----------
Facility management $3,431,533 $3,188,539
Technology fees 57,644 36,241
Products and services 1,531,991 1,776,994
---------- ----------
$5,021,168 $5,001,774
========== ==========
Revenues for the years ended December 31, 2009 and 2008 include revenues from
one major customer, the City of Toledo, Ohio (included in the facility
management, and, products and services classifications), which represented
approximately 32% for 2009 and 39% for 2008 of total consolidated revenue. The
accounts receivable balance due (which is unsecured) from this customer at
December 31, 2009 and 2008 was approximately $188,000 and $110,000,
respectively. The Company's six largest customers billed through Florida N-Viro
each represent between 5%-19% of the consolidated revenue for the Company, or a
collective total of approximately 57%. The accounts receivable balance due
(which are unsecured) for these six Florida N-Viro customers at December 31,
2009 and 2008 was approximately $314,000 and $229,000, 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.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
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, 2010 through 2013 is
$48,000 each year, and for 2014 is $12,000. The total rental expense included
in the statements of operations for each of the twelve months ended December 31,
2009 and 2008 is $48,000.
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
year ended December 31, 2010 is $3,000. The total rental expense included in
the statements of operations for each of the twelve months ended December 31,
2009 and 2008 is approximately $31,000.
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: 2010 -
$46,200; 2011 - 4,000. The total rental expense included in the statements of
operations for the twelve months ended December 31, 2009 and 2008 is
approximately $46,200 and $42,300, respectively.
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 decree 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 decree, the Company agreed to pay a civil
penalty in the amount of $20,000. The first four installments were paid on time
from April 2009 to January 2010.
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.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE 8. INCOME TAX MATTERS
The composition of the deferred tax assets and liabilities at December 31, 2009
and 2008 is as follows:
2009 2008
------------ ------------
Gross deferred tax liabilities:
Property + equipment depreciation + amortization $ (99,800) $ (80,700)
Gross deferred tax assets:
Loss carryforwards 4,084,400 5,745,400
Section 754 basis step up 149,900 171,300
Allowance for doubtful accounts 17,000 17,000
Other 3,100 2,800
Less valuation allowance (4,154,600) (5,855,800)
------------ ------------
$ - $ -
============ ============
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, 2009 and 2008 and are as follows:
2009 2008
------------ ----------
Computed "expected" tax (credits) $ (820,800) $(393,300)
State taxes, net of federal tax benefit - (34,600)
(Decrease) increase in income taxes resulting
from:
Change in valuation allowance (1,701,200) 372,500
Net operating loss carryfoward expiration 2,082,200 -
Nondeductible stock options and warrants 440,000 59,200
Other (200) (3,800)
------------ ----------
$ - $ -
============ ==========
The net operating losses available at December 31, 2009 to offset future taxable
income total approximately $12,000,000 and expire principally in years 2010 -
2029. Approximately $1,530,000 will expire if not used to offset taxable income
for the 2010 tax year.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
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.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
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 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, 2009 and 2008 (dollars in thousands).
Other
Management Domestic Foreign Research &
Operations Operations Operations Development Total
----------- ------------ ----------- ------------ ------
2009
------------------------------------------------------------------
Revenues $ 4,788 $ 203 $ - $ 30 $5,021
Cost of revenues 3,705 207 - - 3,912
----------- ------------ ----------- ------------ ------
Segment profits 1,083 (4) - 30 1,109
Identifiable assets 1,348 - - - 1,348
Depreciation and Amortization 436 - - - 436
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
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
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, 2009 and 2008 follows (dollars in thousands):
2009 2008
-------- --------
Segment profits:
Segment profits for reportable segments $ 1,109 $ 742
Corporate selling, general and administrative
expenses and research and development costs (3,583) (1,930)
Other income (expense) 60 31
-------- --------
Consolidated earnings before taxes $(2,414) $(1,157)
======== ========
Identifiable assets:
Identifiable assets for reportable segments $ 1,348 $ 1,769
Corporate property and equipment 15 12
Current assets not allocated to segments 1,888 712
Intangible and other assets not allocated to segments 212 190
-------- --------
Consolidated assets $ 3,463 $ 2,683
======== ========
Depreciation and amortization:
Depreciation and amortization for reportable segments $ 436 $ 409
Corporate depreciation and amortization 32 38
-------- --------
Consolidated depreciation and amortization $ 468 $ 447
======== ========
NOTE 10. 401(K) PLAN
Until 2009, the Company had a 401(k) plan covering substantially all
employees which provided for contributions in such amounts as the Board of
Directors would determine annually. Participating employees could also
contribute a portion of their annual compensation. There were no employer
contributions for the years ended December 31, 2009 and 2008. In 2009, the
Company terminated the plan and distributed all plan assets to the participants.
NOTE 11. SUBSEQUENT EVENTS
The Company has performed a review of events subsequent to the balance
sheet date and no matters required disclosure.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
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 disclosures. 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.
As of the end of the period covered by this report, management carried out
an evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of our disclosure controls
and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange
Act). Based upon the evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures were not
effective at a reasonable assurance level to ensure that information we are
required to disclose in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. 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 lack sufficient
technical expertise, reporting standards and written policies and procedures
regarding disclosure controls and procedures.
Because of the inherent limitations in all disclosure control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, will be or have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Additionally, disclosure controls can be circumvented by the individual acts of
some persons, by collusion of two or more people and/or by management override
of such controls. The design of any system of disclosure controls also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, disclosure controls and
procedures may become inadequate because of changes in conditions, and/or the
degree of compliance with the policies and procedures may deteriorate. Also,
misstatements due to error or fraud may occur and not be detected.
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 principal executive
officer and our principal financial officer concluded that our internal controls
over financial reporting were not effective as of December 31, 2009 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, 2009, 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 2010 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 2010 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 2010
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 2010 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 2010 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).*
10.10 The N-Viro International Corporation Second Amended and Restated 2004
Stock Option Plan (incorporated by reference to the Definitive Proxy
Statement on Schedule 14A filed July 13, 2009).*
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, 2010
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, 2010
/s/ Timothy R. Kasmoch /s/ James K. McHugh
------------------------- ----------------------
Timothy R. Kasmoch, Chief Executive Officer, James K. McHugh
President and Director Chief Financial Officer,
(Principal Executive Officer) Secretary and Treasurer
(Principal Financial Officer)
/s/ James H. Hartung* /s/ Mark D. Hagans *
---------------------- ------------------------
James H. Hartung, Director Mark D. Hagans
and Chairman of the Board Director
/s/ Joseph H.Scheib, Director * /s/ Thomas L. Kovacik*
--------------------------------- --------------------------
Joseph H. Scheib, Director Thomas L. Kovacik, Director
/s/ Carl Richard* /s/ Joan B. Wills*
------------------- ---------------------
Carl Richard, Director Joan B. Wills, Director