UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2010
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-21802
-----------------------
N-VIRO INTERNATIONAL CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 34-1741211
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3450 W. Central Avenue, Suite 328
Toledo, Ohio 43606
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (419) 535-6374
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T ( 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
As of May 10, 2010, 5,226,478 shares of N-Viro International
Corporation $ .01 par value common stock were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
N-VIRO INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended March 31
---------------------------
2010 2009
------------ -----------
REVENUES $ 1,372,012 $1,350,613
COST OF REVENUES 997,994 959,530
------------ -----------
GROSS PROFIT 374,018 391,083
OPERATING EXPENSES
Selling, general and administrative 1,521,293 357,094
------------ -----------
OPERATING INCOME (LOSS) (1,147,275) 33,989
OTHER INCOME (EXPENSE)
Interest income 224 480
Amortization of discount on convertible debentures (26,661) -
Interest expense (21,940) (14,325)
Gain on extinguishment of liabilities 52,798 -
-----------
4,421 (13,845)
------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (1,142,854) 20,144
Federal and state income taxes - -
------------ -----------
NET INCOME (LOSS) $(1,142,854) $ 20,144
============ ===========
Basic and diluted income (loss) per share $ (0.22) $ 0.00
============ ===========
Weighted average common shares outstanding - basic and diluted 5,176,146 4,467,391
============ ===========
See Notes to Condensed Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2010 (Unaudited) December 31, 2009
--------------------------- -------------------
ASSETS
-------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted $ 182,327 $ 61,380
Restricted 140,384 140,161
Receivables, net:
Trade, net of allowance for doubtful accounts of
50,000 at March 31, 2010 and December 31, 2009 492,562 597,035
Related party - Mahoning Valley N-Viro 18,325 15,325
Prepaid expenses and other assets 85,431 108,138
Deferred costs - stock issued for services 552,604 966,354
--------------------------- -------------------
Total current assets 1,471,633 1,888,393
PROPERTY AND EQUIPMENT, NET 1,296,622 1,363,476
INTANGIBLE AND OTHER ASSETS, NET 214,484 211,457
--------------------------- -------------------
$ 2,982,739 $ 3,463,326
=========================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 322,948 $ 353,800
Line of credit 320,000 325,000
Accounts payable 860,350 932,831
Accrued liabilities 199,913 219,910
--------------------------- -------------------
Total current liabilities 1,703,211 1,831,541
Long-term debt, less current maturities 439,670 500,808
Long-term debt - convertible debentures, net of discount 617,501 610,840
--------------------------- -------------------
Total liabilities 2,760,382 2,943,189
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, authorized 2,000,000 shares;
issued -0- shares in 2010 and 2009 - -
Common stock, $.01 par value; authorized 25,000,000 shares; issued
5,343,178 in 2010 and 5,269,553 in 2009 53,432 52,696
Additional paid-in capital 22,297,506 21,453,168
Accumulated deficit (21,443,691) (20,300,837)
--------------------------- -------------------
907,247 1,205,027
Less treasury stock, at cost, 123,500 shares 684,890 684,890
--------------------------- -------------------
Total stockholders' equity 222,357 520,137
--------------------------- -------------------
$ 2,982,739 $ 3,463,326
=========================== ===================
See Notes to Condensed Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31
---------------------------
2010 2009
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 156,184 $ 153,397
CASH FLOWS FROM INVESTING ACTIVITIES
Net change to restricted cash and cash equivalents (223) (480)
Advances to related parties (3,000) -
Proceeds from the sale of property and equipment 1 -
Purchases of property and equipment (37,327) (725)
---------- ----------
Net cash used in investing activities (40,549) (1,205)
CASH FLOWS FROM FINANCING ACTIVITIES
Stock warrants exercised 2,405 4,310
Net repayments on line of credit (5,000) (36,142)
Principal payments on long-term obligations (128,641) (102,544)
Stock options exercised 69,261 -
Proceeds from convertible debentures issued, net of issuance costs 29,960 -
Borrowings under long-term obligations 37,327 -
---------- ----------
Net cash (used) provided by financing activities 5,312 (134,376)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 120,947 17,816
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 61,380 14,869
---------- ----------
CASH AND CASH EQUIVALENTS - ENDING OF PERIOD $ 182,327 $ 32,685
========== ==========
Supplemental disclosure of cash flows information:
Cash paid during the three months ended for interest $ 37,580 $ 34,648
========== ==========
See Notes to Condensed Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements of N-Viro International
Corporation (the "Company") are unaudited but, in management's opinion, reflect
all adjustments (including normal recurring accruals) necessary to present
fairly such information for the period and at the dates indicated. The results
of operations for the three months ended March 31, 2010 may not be indicative of
the results of operations for the year ending December 31, 2010. Since the
accompanying consolidated financial statements have been prepared in accordance
with Article 10 of Regulation S-X, they do not contain all information and
footnotes normally contained in annual consolidated financial statements;
accordingly, they should be read in conjunction with the consolidated financial
statements and notes thereto appearing in the Company's Form 10-K for the period
ending December 31, 2009.
The financial statements are consolidated as of March 31, 2010, December
31, 2009 and March 31, 2009 for the Company. All intercompany transactions were
eliminated.
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. There have
been no changes in the selection and application of critical accounting policies
and estimates disclosed in "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations" of our Annual Report on Form 10-K
for the year ended December 31, 2009.
NOTE 2. LONG-TERM DEBT AND LINE OF CREDIT
During the first quarter of 2010, the Company had a line of credit up to
$400,000 at the Comerica Bank of Detroit prime rate (5% at March 31, 2010) plus
0.75%, but in no event less than 5.75%, 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, 2010. Two certificates of deposit totaling $140,384 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 April 2010, the line of credit was renewed through April
2011. At March 31, 2010, the Company had $80,000 of borrowing capacity under
the credit facility.
During the first quarter of 2010, the Company borrowed a total of $37,327
from a lender to purchase processing equipment. A term note was issued at 10.9%
interest for three years, monthly payments of $1,220 and is secured by the
equipment. The total amount owed on this note as of March 31, 2010 was
approximately $34,700 and the note is expected to be paid in full on the
applicable maturity date of January 2013.
From the beginning of 2009 through the first quarter of 2010, the Company
has borrowed a total of $1,382,900 from seven lenders to purchase processing and
automotive equipment. A total of fifteen term notes have been issued, ranging
from 3.8% to 10.9% interest for terms ranging three to five years, monthly
payments totaling approximately $31,000 and all are secured by equipment. The
total amount owed on all notes as of March 31, 2010 was approximately $754,700
and all notes are expected to be paid in full on the applicable maturity date,
the last of which is October 2013.
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 the first quarter of 2010 the Company issued
$30,000 of Debentures to one accredited investor. The Debentures are issuable
in $5,000 denominations, are unsecured and have a stated interest rate of 8%,
payable quarterly to holders of record. The Company has timely paid all accrued
interest due to all Debenture holders of record as of each quarter-end date
starting in July 2009. At any time, the Company may redeem all or a part of the
Debentures at face value plus unpaid interest. During the first quarter of 2010
one accredited investor redeemed $50,000 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 for all Debentures sold to date, which totaled $179,975. The
discount is then required to be amortized as a period expense over the remaining
periods the Debentures are scheduled to be outstanding, which averages 20
months. For the first quarter ended March 31, 2010, amortization expense
amounted to $26,661.
NOTE 3. COMMITMENTS AND CONTINGENCIES
On March 17, 2010, the Company and Mr. Timothy R. Kasmoch, the President
and Chief Executive Officer, entered into an Employment Agreement for a
five-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 and was granted stock options from the
Company's Second Amended and Restated 2004 Stock Option Plan. Generally, the
Agreement may be terminated by the Company with or without cause or by the
Employee for any reason. Details of this event were announced in a Form 8-K
filed March 19, 2010.
On March 17, 2010, the Company and Mr. Robert W. Bohmer, the Executive Vice
President and General Counsel, entered into an Employment Agreement for a
five-year term. Mr. Bohmer is to receive an annual base salary of $150,000,
subject to an annual discretionary increase. In addition, Mr. Bohmer is
eligible for an annual cash bonus and was granted stock options from the
Company's Second Amended and Restated 2004 Stock Option Plan. Generally, the
Agreement may be terminated by the Company with or without cause or by the
Employee for any reason. Details of this event were announced in a Form 8-K
filed March 19, 2010.
On March 17, 2010, the Company and Mr. James K. McHugh, the Chief Financial
Officer, Secretary and Treasurer, entered into an Employment Agreement for a
five-year term. Mr. McHugh is to receive an annual base salary of $125,000,
subject to an annual discretionary increase. In addition, Mr. McHugh is
eligible for an annual cash bonus and was granted stock options from the
Company's Second Amended and Restated 2004 Stock Option Plan. Generally, the
Agreement may be terminated by the Company with or without cause or by the
Employee for any reason. Details of this event were announced in a Form 8-K
filed March 19, 2010.
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 ending December 31, 2010 is $12,500. The total
rental expense included in the statements of operations for the three months
ended March 31, 2010 and 2009 is $7,500 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 three months ended
March 31, 2010 and 2009 is $12,000.
The Company leased 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 was $3,000. The total rental expense included in
the statements of operations for each of the three months ended March 31, 2010
and 2009 is approximately $3,000 and $9,000, respectively. In February 2010, the
Company purchased the equipment through a financing arrangement with an
equipment leasing company.
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 three months ended March 31, 2010 and 2009 is approximately
$11,600.
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 entire penalty was paid timely in
installments from April 2009 to April 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.
NOTE 4. NEW ACCOUNTING STANDARDS
In June 2009, the Financial Accounting Standards Board (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 was effective for the Company beginning January 1, 2010. Management has
determined that adoption of this update will have no effect on the company's
financial position and results of operations.
ACCOUNTING STANDARDS UPDATES NOT YET EFFECTIVE
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.
Other Accounting Standards Updates not effective until after March 31, 2010
are not expected to have a significant effect on the company's consolidated
financial position or results of operations.
NOTE 5. SEGMENT INFORMATION
The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting, which segregates its
business by product category and service lines. The Company's reportable
segments are as follows:
Management Operations - This segment provides employee and management
services to operate the Toledo Ohio Wastewater Treatment Facility and the
Daytona/Volusia County Florida Treatment Facility.
Other Domestic Operations - Sales of alkaline admixtures, territory or
site licenses and royalty fees to use N-Viro technology in the United States.
Foreign Operations - Sales of alkaline admixtures, territory or site
licenses and royalty fees to use N-Viro technology in foreign operations.
Research and Development - This segment 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 of the Company's Form 10-K for the year ended December 31, 2009, 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 Other Domestic and Foreign Operations segments differ in terms of
environmental and municipal legal issues, nature of the waste disposal
infrastructure, political climate and availability of funds for investing in the
Company's technology. These factors have not changed significantly over the
past several years and are not expected to change in the near term.
The Research and Development segment is unlike any other revenue segment 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.
For the first quarter of 2010, approximately 96% of the Company's revenue
was from Management Operations and 4% from Other Domestic Operations. Since the
second quarter of 2006, the percentage of the Company's revenue from Management
Operations has grown from 45% to as high as 96%, primarily the result of the
acquisition of the Florida operations at the end of 2006. Revenues for the
quarter ended March 31, 2010 include revenues from one major customer, the City
of Toledo, Ohio (the "City'), which represented approximately 24% of total
consolidated revenue. We expect this percentage to decrease for the remainder
of 2010, as the percentage of the City's sludge that the Company processes has
decreased in accordance with an agreement signed with the City in March 2010.
Per the agreement, the Company was granted an extension of time to process
approximately 50% of the available sludge from the City of Toledo, through
September 30, 2010, a decrease from approximately 75% of the available sludge
from the City through March 31, 2010. The Company's six largest customers
billed through Florida N-Viro each represent between 6%-20% of the consolidated
revenue for the Company, or a collective total of approximately 66%.
The table below presents information about the segment profits and segment
identifiable assets used by the chief operating decision makers of the Company
for the quarters ended March 31, 2010 and 2009 (dollars in thousands):
Management Domestic Foreign Research &
Operations Operations Operations Development Total
---------------------------- ----------- ---------- ----------- -----
Quarter Ended March 31, 2010
-------------------------------------------------------------------------
Revenues 1,319 53 - - 1,372
Cost of revenues 938 60 - - 998
---------------------------- ----------- ---------- ----------- -----
Segment profits 381 (7) - - 374
============================ =========== ========== =========== =====
Quarter Ended March 31, 2009
-------------------------------------------------------------------------
Revenues 1,299 52 - - 1,351
Cost of revenues 920 40 - - 960
---------------------------- ----------- ---------- ----------- -----
Segment profits 379 12 - - 391
============================ =========== ========== =========== =====
A reconciliation of total segment profits to Consolidated income (loss)
before taxes for the quarters ended March 31, 2010 and 2009 is as follows
(dollars in thousands):
Qtr. Ended March 31
-------------------
2010 2009
-------- ------
Segment profits:
Segment profits for reportable segments $ 374 $ 391
Corporate selling, general and administrative expenses (1,521) (357)
Other income (expense) 4 (14)
-------- ------
Consolidated income (loss) before taxes $(1,143) $ 20
======== ======
NOTE 6. - BASIC AND DILUTED INCOME (LOSS) PER SHARE
Basic and diluted income (loss) per share is computed using the treasury
stock method for outstanding stock options and warrants. For the three months
ended March 31, 2010, the Company incurred a net loss. Accordingly, no common
stock equivalents for outstanding stock options and warrants have been included
in the computation of diluted loss per share for that period, as the impact
would be anti-dilutive. For the three months ended March 31, 2009, 297,300
stock options were excluded from the computation of diluted income per share
because the exercise prices of the options were higher than the average market
price of the Company's common stock during that period and are anti-dilutive.
NOTE 7. - COMMON STOCK
On January 19, 2010, the Company executed a Placement Agent Agreement, or
the Agreement, with Burnham Hill Partners of New York, NY, or BHP. The Company
has engaged BHP as its placement agent in connection with the issuance of debt
or equity securities through a transaction exempt from registration for a term
of six months from the date of the Agreement. For its services, the Company
issued BHP 10,000 shares of the Company's unregistered common stock. The shares
were issued in a private transaction pursuant to an exemption under Section 4(2)
of the Securities Act of 1933. In the event the Company secures a financing
placement through BHP, the Company will issue common stock placement warrants
equal to 8% of the number of common stock shares issued in the financing, for a
term of seven years and be exercisable at 120% of the price paid per share by
the investors. The Company accounted for this transaction by recording a
deferred current asset of $30,000 that is amortized ratably over the six month
period the services are to be rendered. The cost amortized for the quarter
ended March 31, 2010 was $12,500. The amount deferred at March 31, 2010 was
$17,500.
On March 29, 2010, one of the holders of the Company's convertible
debentures elected to convert $50,000 worth of their debentures to 25,000
unregistered common shares of the Company's stock. There were no other
conversions during the quarter ended March 31, 2010.
NOTE 8. - SUBSEQUENT EVENTS
The Company has performed a review of events subsequent to the balance
sheet date and no matters required disclosure.
NOTE 9. - STOCK OPTIONS
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
six months from the date of grant.
Pursuant to their respective five-year employment agreements, on March 17,
2010 stock options totaling 890,000 were granted to Timothy Kasmoch, Robert
Bohmer and James McHugh. All of the options vested 20% immediately and the
balance over the following four years at the one year anniversary date. To
reflect the value of the stock options granted for the employment services
provided, the Company is taking a charge to earnings totaling approximately
$2,358,000 through March 2014. For the quarter ended March 31, 2010, this
charge was $491,186. Further details are provided in the Form 8-K filed March
19, 2010.
During the quarter ended March 31, 2010, the Company also granted stock
options totaling 7,500 options to directors and 10,000 options to a director who
was compensated as a consultant to the Company. The options granted to the
directors were priced, pursuant to the Amended and Restated 2004 Stock Options
Plan, at a weighted average price of $3.14 for a total expense of $55,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
This 10-Q contains statements that are forward-looking. We caution that
words used in this document such as "expects," "anticipates," "believes," "may,"
and "optimistic," as well as similar words and expressions used herein, identify
and refer to statements describing events that may or may not occur in the
future. These forward-looking statements and the matters to which they refer
are subject to considerable uncertainty that may cause actual results to differ
materially from the results described in those statements. There are numerous
factors that could cause actual results to be different than those anticipated
or predicted by us, including: (i) a deterioration in economic conditions in
general; (ii) a decrease in demand for our products or services in particular;
(iii) our loss of a key employee or employees; (iv) regulatory changes,
including changes in environmental regulations, that may have an adverse affect
on the demand for our products or services; (v) increases in our operating
expenses resulting from increased costs of fuel, labor and/or consulting
services; (vi) our inability to exploit existing or secure additional sources of
revenues or capital to fund operations; (vii) a failure to collect upon or
otherwise secure the benefits of existing contractual commitments with third
parties, including our customers; and (viii) other factors and risks identified
in this Form 10-Q, or, as filed in Form 10-K for the year ending December 31,
2009 under the caption "Risk Factors." This list provides examples of factors
that could affect the results described by forward-looking statements contained
in this Form10-Q; however, this list is not exhaustive and many other factors
could impact our business and it is impossible to predict with any accuracy
which factors could result in negative impacts. Although we believe that the
forward-looking statements contained in this Form10-Q are reasonable, we cannot
provide you with any guarantee that the anticipated results will not be adverse
and that the anticipated results will be achieved. All forward-looking
statements in this Form10-Q are expressly qualified in their entirety by the
cautionary statements contained in this section and you are cautioned not to
place undue reliance on the forward-looking statements contained in this
Form10-Q. In addition to the risks listed above, other risks may arise in the
future, and we disclaim any obligation to update information contained in any
forward-looking statement.
OVERVIEW
We were incorporated in Delaware in April 1993, and became a public company
in October 1993. We own and sometimes license various N-Viro processes 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 we operate 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
and N-Viro Fuel technologies. These patented processes are best suited for
current and future demands of both waste treatment as well as domestic and
international pressures for clean, renewable alternative fuel sources.
RESULTS OF OPERATIONS
The dollar amounts in the following sections are stated as approximations,
rounded to the nearest $1,000.
Total revenues were $1,372,000 for the quarter ended March 31, 2010
compared to $1,351,000 for the same period of 2009. The net increase in revenue
is due primarily to an increase in service fees for the management of alkaline
admixture. Our cost of revenues increased to $998,000 in 2010 from $960,000 for
the same period in 2009, but the gross profit margin decreased to 27% for the
quarter ended March 31, 2010, from 29% for the same period in 2009. This
decrease in gross profit margin is due primarily to the increase in the overall
percentage of revenue derived from service fees for the management of alkaline
admixture, which had an associated higher purchase cost of the alkaline
admixture that was sold. Operating expenses increased substantially for the
quarter ended March 31, 2010 over the comparative prior year period, and was the
single biggest factor for the increased loss for 2010 compared to 2009. These
changes collectively resulted in a net loss of $1,143,000 for the quarter ended
March 31, 2010 compared to net income of $20,000 for the same period in 2009, an
increase in the loss of $1,163,000.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2010 WITH THREE MONTHS ENDED MARCH
31, 2009
Our overall revenue increased $21,000, or 2%, to $1,372,000 for the quarter
ended March 31, 2010 from $1,351,000 for the quarter ended March 31, 2009. The
net increase in revenue was due primarily to the following:
a) Sales of alkaline admixture increased $9,000 from the same period ended
in 2009 - this increase was primarily the result of an increase in demand with
our Ohio-area customers;
b) Revenue from the service fees for the management of alkaline admixture
increased $113,000 from the same period ended in 2009 - this increase was
attributed primarily to the Florida-area customers, which increased $128,000
compared to the same period in 2009; and
c) Our processing revenue, including facility management revenue, showed a
net decrease of $100,000 over the same period ended in 2009. Of this decrease,
facility management revenue of $29,000 is attributable to the Toledo facility,
and, N-Viro Soil sales decreased by a total of $91,000, with $55,000
attributable to the Toledo facility and the other $35,000 attributable to the
Florida operation. The Company expects a decrease in facility management
revenue from the City of Toledo to continue into the second and third quarters
of 2010 when compared to previous periods, as the amount of sludge available
from the City to process is expected to decrease. See Note 5 for more details.
Our gross profit decreased $17,000, or 4%, to $374,000 for the quarter
ended March 31, 2010 from $391,000 for the quarter ended March 31, 2009, and the
gross profit margin decreased to 27% from 29% for the same periods. The
decrease in gross profit margin is primarily due to the increase in the overall
percentage of revenue derived from an increase in service fees for the
management of alkaline admixture. The Toledo operation contributed $124,000 of
gross profit on overall revenue of $336,000, which was a decrease of $57,000 of
gross profit over the same period in 2009. The Florida operation contributed
$257,000 of gross profit on overall revenue of $983,000, which was an increase
of $59,000 of gross profit over the same period in 2009.
Our operating expenses increased $1,164,000, or 326%, to $1,521,000 for the
quarter ended March 31, 2010 from $357,000 for the quarter ended March 31, 2009.
The increase was primarily due to increases of $561,000 in payroll and related
costs, $556,000 in consulting fees and expenses and $25,000 in professional
fees. Of the total increase of $1,117,000 in payroll and consulting costs,
$1,092,000 were non-cash costs relating to the issuances of stock and stock
options. Therefore, actual cash outlays in these categories increased for the
first quarter 2010 by a total of $25,000 over the same period in 2009.
As a result of the foregoing factors, we recorded an operating loss of
$1,147,000 for the quarter ended March 31, 2010 compared to operating income of
$34,000 for the quarter ended March 31, 2009, an increase in the loss of
$1,181,000.
Our net nonoperating income (expense) increased by $18,000 to net
nonoperating income of $4,000 for the quarter ended March 31, 2010 from net
nonoperating expense of $14,000 for the similar quarter in 2009. The increase
in net nonoperating income was primarily due to the extinguishment of $53,000 of
certain liabilities no longer due during 2010.
We recorded net loss of $1,143,000 for the quarter ended March 31, 2010
compared to net income of $20,000 for the same period ended in 2009, an increase
in the loss of $1,163,000. Adding back non-cash expenses for depreciation,
amortization, stock and stock options charges and subtracting cash out on
capitalized assets and debt repayments, resulted in cash operating income of
$7,000 for the quarter ended in 2010. Similar non-cash expenses, cash out and
debt repayments for the same period in 2009 resulted in a cash operating loss of
$55,000, a decrease in cash operating income of $48,000 in the first quarter
2010 versus 2009.
For the quarters ended March 31, 2010 and 2009, we have not recognized the
future tax benefit of current or prior period losses due to the Company's
historical operating losses. Accordingly, our effective tax rate for each
period was zero.
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital deficit of $232,000 at March 31, 2010, compared to
working capital of $57,000 at December 31, 2009, resulting in a decrease in
working capital of $289,000. Current assets at March 31, 2010 included cash and
cash equivalents of $323,000 (including restricted cash of $140,000), which is
an increase of $121,000 from December 31, 2009. The net negative change in
working capital from December 31, 2009 was primarily from a decrease to the net
deferred current asset of $414,000 for amortization of common stock given
pursuant to consulting contracts entered into during 2009, an increase in
payments over advances from short and long-term debt obligations of $97,000,
offset by an increase in cash provided by operating activities of $156,000 for
the three months ended March 31, 2010, further increased by the application of
$72,000 of cash from stock warrants and stock options exercised.
In the three months ended March 31, 2010 our cash flow provided by
operating activities was $156,000, an increase of $3,000 over the same period in
2009. The components of the increase in cash flow provided by operating
activities from 2009 was principally due to a $1,091,000 increase in stock
warrants and stock options issued for fees and services, a decrease of $183,000
in trade accounts receivable, a decrease of $11,000 in prepaid and other assets
and an increase in other non-cash items of $21,000, offset by a decrease of
$141,000 in trade accounts payable and an increase in the net loss of
$1,163,000.
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 the first quarter of 2010, 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%; through first quarter 2010 - 96%. We believe this shift will allow us to
enhance future revenue and profits through growth, efficiency and revenue
optimization.
The normal collection period for accounts receivable is approximately 30-60
days for the majority of customers. This is a result of the nature of the
license contracts, type of customer and the amount of time required to obtain
the information to prepare the billing. We make no assurances that payments
from our customer or payments to our vendors will become shorter and this may
have an adverse impact on our continuing operations.
During the first quarter of 2010, the Company had a line of credit up to
$400,000 at the Comerica Bank of Detroit prime rate (5% at March 31, 2010) plus
0.75%, but in no event less than 5.75%, 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, 2010. Two certificates of deposit totaling $140,384 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 April 2010, the line of credit was renewed through April
2011. At March 31, 2010, the Company had $80,000 of borrowing capacity under
the credit facility.
During the first quarter of 2010, the Company borrowed a total of $37,327
from a lender to purchase processing equipment. A term note was issued at 10.9%
interest for three years, monthly payments of $1,220 and is secured by the
equipment. The total amount owed on this note as of March 31, 2010 was
approximately $34,700 and the note is expected to be paid in full on the
applicable maturity date of January 2013.
From the beginning of 2009 through the first quarter of 2010, the Company
has borrowed a total of $1,382,900 from seven lenders to purchase processing and
automotive equipment. A total of fifteen term notes have been issued, ranging
from 3.8% to 10.9% interest for terms ranging three to five years, monthly
payments totaling approximately $31,000 and all are secured by equipment. The
total amount owed on all notes as of March 31, 2010 was approximately $754,700
and all notes are expected to be paid in full on the applicable maturity date,
the last of which is October 2013.
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 the first quarter of 2010 the Company issued
$30,000 of Debentures to one accredited investor. The Debentures are issuable
in $5,000 denominations, are unsecured and have a stated interest rate of 8%,
payable quarterly to holders of record. The Company has timely paid all accrued
interest due to all Debenture holders of record as of each quarter-end date
starting in July 2009. At any time, the Company may redeem all or a part of the
Debentures at face value plus unpaid interest. During the first quarter of 2010
one accredited investor redeemed $50,000 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 for all Debentures sold to date, which totaled $179,975. The
discount is then required to be amortized as a period expense over the remaining
periods the Debentures are scheduled to be outstanding, which averages 20
months. For the first quarter ended March 31, 2010, amortization expense
amounted to $26,661.
For the remainder of 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 March 31, 2010, we did not have any material commercial commitments,
including guarantees or standby repurchase obligations, or any relationships
with unconsolidated entities or financial partnerships, including entities often
referred to as structured finance or special purpose entities or variable
interest entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
From time to time, during the normal course of business, we may make
certain indemnities, commitments and guarantees under which we may be required
to make payments in relation to certain transactions. These include: (i)
indemnities to vendors and service providers pertaining to claims based on our
negligence or willful misconduct and (ii) indemnities involving the accuracy of
representations and warranties in certain contracts. Pursuant to Delaware law,
we may indemnify certain officers and directors for certain events or
occurrences while the officer or director is, or was, serving at our request in
such capacity. We also have director and officer insurance coverage that limits
our exposure and enables us to recover a portion of any future amounts that we
may pay for indemnification purposes. We believe the applicable insurance
coverage is generally adequate to cover any estimated potential liability for
which we may provide indemnification. The majority of these indemnities,
commitments and guarantees do not provide for any limitation of the maximum
potential for future payments we could be obligated to make. We have not
recorded any liability for these indemnities, commitments and other guarantees
in the accompanying Consolidated Balance Sheets.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual cash obligations at March
31, 2010, and the effect these obligations are expected to have on liquidity and
cash flow in future periods:
Payments Due By Period
------------------------------------------------------------------
Note # Total Less than 1 year 2 - 4 years 5 - 6 years
------- ---------- ----------------- ------------ ------------
Purchase obligations (1) 18,200 18,200 - -
Long-term debt obligations and related interest (2) 1,537,234 432,008 1,105,226 -
Operating leases (3) 249,768 99,603 150,165 -
Capital lease obligations - - - -
Line of Credit obligation 320,000 320,000 - -
Other long-term debt obligations - - - -
---------- ----------------- ------------ ------------
Total contractual cash obligations $2,125,202 $ 869,811 $ 1,255,391 $ -
========== ================= ============ ============
after 6 years
--------------
Purchase obligations -
Long-term debt obligations and related interest -
Operating leases -
Capital lease obligations -
Line of Credit obligation -
Other long-term debt obligations -
--------------
Total contractual cash obligations $ -
==============
(1) Purchase obligations include agreements to purchase services that are enforceable and legally binding
on the Company and that specify all significant terms and the approximate timing of the transaction.
Purchase obligations exclude agreements that are cancelable without penalty.
(2) Amounts represent the expected cash payments of our long-term obligations.
(3) Amounts represent the expected cash payments of our operating lease obligations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. 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, out 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. We lack personnel in accounting and
financial staff to sufficiently monitor and process financial transactions in an
efficient and timely manner. Consequently, we lack sufficient technical
expertise, reporting standards and written policies and procedures.
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.
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.
CHANGES ON INTERNAL CONTROL OVER FINANCIAL REPORTING
During the three months ended March 31, 2010, there were no material
changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's facility in Toledo, Ohio, utilizes patented technologies to
stabilize and disinfect municipal bio-solids pursuant to a permit to install
from the Ohio EPA that requires emissions be vented to a scrubber. In July of
2008, an inspection of the facility by local regulatory officials revealed that
the scrubber was not in operation. In February of 2009, the Company agreed to
enter into an administrative consent 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 entire penalty was paid timely in
installments from April 2009 to April 2010.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 19, 2010, the Company executed a Placement Agent Agreement, or
the Agreement, with Burnham Hill Partners of New York, NY, or BHP. The Company
has engaged BHP as its placement agent in connection with the issuance of debt
or equity securities through a transaction exempt from registration for a term
of six months from the date of the Agreement. For its services, the Company
issued BHP 10,000 shares of the Company's unregistered common stock. The shares
were issued in a private transaction pursuant to an exemption under Section 4(2)
of the Securities Act of 1933. In the event the Company secures a financing
placement through BHP, the Company will issue common stock placement warrants
equal to 8% of the number of common stock shares issued in the financing, for a
term of seven years and be exercisable at 120% of the price paid per share by
the investors. The Company accounted for this transaction by recording a
deferred current asset of $30,000 that is amortized ratably over the six month
period the services are to be rendered. The cost amortized for the quarter
ended March 31, 2010 was $12,500. The amount deferred at March 31, 2010 was
$17,500.
On March 29, 2010, one of the holders of the Company's convertible
debentures elected to convert $50,000 worth of their debentures to 25,000
unregistered common shares of the Company's stock. There were no other
conversions during the quarter ended March 31, 2010.
In addition to the preceding, in the first quarter of 2010 a stockholder
was issued a total of 1,500 shares pursuant to their finder's fee agreements for
a total of $30,000 of debentures sold.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
(a) None
(b) None
ITEM 6. EXHIBITS
Exhibits:
See Exhibit Index below.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
N-VIRO INTERNATIONAL CORPORATION
Date: May 17, 2010 /s/ Timothy R. Kasmoch
-------------- ---------------------
Timothy R. Kasmoch
Chief Executive Officer and President
(Principal Executive Officer)
Date: May 17, 2010 /s/ James K. McHugh
-------------- --------------------
James K. McHugh
Chief Financial Officer, Secretary and Treasurer
(Principal Financial & Accounting Officer)
EXHIBIT INDEX
=============
Exhibit No. Document
----------- --------
31.1 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act
of 2002.
31.2 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act
of 2002.
32.1 Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes - Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes - Oxley Act of 2002.