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, 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
[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: $13,516,000.
The number of shares of Common Stock of the registrant outstanding as of March
21, 2011 was 5,938,714.
DOCUMENTS INCORPORATED BY REFERENCE
None
INDEX
PAGE
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PART I
Item 1. Business 2
Item 1A. Risk Factors 8
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. (Removed and Reserved) 12
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 24
Item 9A. Controls and Procedures 24
Item 9B. Other Information 25
PART III
Item 10. Directors, Executive Officers and Corporate Governance 26
Item 11. Executive Compensation 32
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 36
Item 13. Certain Relationships and Related Transactions, and
Director Independence 38
Item 14. Principal Accountant Fees and Services 38
PART IV
Item 15. Exhibits, Financial Statement Schedules 40
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. 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, electrical generation and other industries. To date, the N-Viro
Process has been commercially utilized for the recycling of wastewater sludge
from municipal wastewater treatment facilities. All N-Viro products produced
according to the N-Viro Process specifications, are "exceptional quality" sludge
products under the 40 CFR Part 503 Sludge Regulations promulgated under the
Clean Water Act of 1987 (the "Part 503 Regs").
Our current business strategy is to market our N-Viro FuelTM technology,
which produces a renewable alternative fuel product out of certain bio-organic
wastes. This N-Viro Fuel process has been acknowledged by the USEPA as a fuel
product that can be used to produce alternative energy. In this business
strategy, the primary focus is to identify allies, public and private, which
will allow the opportunity for N-Viro to build, own and operate N-Viro Fuel
facilities either on its own or in concert with others.
Presently, we operate two biosolids processing facilities located in
Toledo, Ohio and Volusia County, Florida. These two facilities each produce the
N-Viro SoilTM agricultural product, and have provided us with working and
development capital. Our goal is to continue to operate these facilities and
aggressively market our N-Viro Fuel technology. These patented processes are
best suited for current and future demands, satisfying both waste treatment
needs as well as domestic and international directives for clean, renewable
alternative fuel sources.
THE N-VIRO PROCESS
The N-Viro Soil Process involves mixing wastewater residuals (sludge) with
an alkaline admixture and then subjecting the mixture to a controlled period of
storage, mechanical turning and accelerated drying. The N-Viro Process
stabilizes and pasteurizes the wastewater residuals, reduces odors to acceptable
levels, neutralizes or immobilizes various constituents and generates N-Viro
Soil , a product which has a granular appearance similar to soil and has
multiple agricultural uses. N-Viro and its licensees have successfully marketed
and distributed all N-Viro Soil product produced for beneficial reuse.
The alkaline products used in all N-Viro Processes consist of by-products
from the cement or lime industry and certain fly ashes from coal-fired systems
used in electric power generation. The particular admixture that is used
usually depends upon economics and availability in local markets. We are a
distributor of alkaline admixtures for others. We also work with established
by-product marketers to identify and utilize available materials. We generally
charge a mark-up over our cost for alkaline admixtures sold to third parties.
Our original N-Viro Process was enhanced in the 1990's with the addition of
advanced mechanical drying known as the N-Viro BioDry process. BioDry had been
successfully implemented in five plants operating in Canada.
N-VIRO FUEL(TM)
N-Viro Fuel is a relatively new and patented biomass alternative energy
fuel process that produces a product that has physical and chemical
characteristics similar to certain coals and is created from municipal
biosolids, collectable animal manure, pulp and paper sludge and possibly other
organic wastes. N-Viro Fuel is manufactured by blending the waste material(s)
with one or more alkaline products, followed by thorough drying of the mixture
using a thermal evaporative process. The resulting product can be easily
blended with coal, waste coal, petroleum coke and/or other biomass-type fuels,
and burned as a partial fuel substitute in combustion power plants. N-Viro Fuel
has satisfied initial 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 subject to state permitting. The N-Viro Fuel
technology, utilizing an alkaline/heat process to produce a fuel product, still
satisfies all requirements of the USEPA 40 CFR part 503 regulations and is a
safe product usable for agriculture as well as for energy production.
Our N-Viro Fuel technology can convert waste products presently being
landfilled or land applied into safe, beneficial and renewable long-term energy
solutions as part of a renewable-energy economy. Attaining this status means
that N-Viro Fuel technology is now a likely candidate to qualify for certain
economic incentives that may be granted to alternative energy technologies, and
a catalyst for obtaining permits more efficiently in each state. We plan to
accelerate our development efforts as this designation is an important factor
for our potential energy partners.
N-VIRO PROCESS FACILITIES
Our first N-Viro processing facility is located 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 22% of our total revenue in 2010. Under this
contract, we process Toledo's wastewater biosolids and sell the resulting N-Viro
Soil product to the agricultural market throughout Northwest Ohio. The current
contract has been extended several times, including 2004, 2009, and twice in
2010. The current extension runs until September 30, 2011, and is presently in
its twenty-second year of operation. 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 us beyond September 30, 2011.
Florida N-Viro, LP, a wholly-owned subsidiary we fully acquired effective
January 1, 2007, has been in continuous operation since 1995 in Florida. The
Florida facility is located in Volusia County and presently processes regional
biosolids for multiple communities and maintains contracts with the City of
Altamonte Springs, the City of Oviedo, Seminole County, the City of Palm Coast,
the City of Port Orange, the Tohopekaliga Water Authority and Volusia County.
Additionally, the company works with other regional biosolids management
companies and has worked with other municipalities with short-term and interim
agreements.
Florida N-Viro derives revenue from several sources. Each municipal
customer compensates N-Viro for the processing of their waste materials.
Florida N-Viro also receives revenue from utilizing the alkaline products
produced by regional power utilities, including Cedar Bay Generating, thru a
supply agreement with Headwaters Corporation and Jacksonville Electric
Authority. We have also been successful in marketing our N-Viro Soil to local
agricultural markets.
Our Volusia County facility operates under and is regulated by a permit
issued by the Florida Department of Environmental Quality. We believe we have a
satisfactory operating history and positive relationship with the regulatory
agencies. We lease the processing facility from Volusia County and renewed our
five year contract and lease agreement for the third time in 2010. Florida
N-Viro represented 74% of our total revenue in 2010, and this percentage and
total revenues have been escalating using N-Viro's regional processing model.
SALES AND MARKETING OF N-VIRO PROCESS
We market our technologies principally through internal sales efforts. All
domestic sales and marketing are controlled by management. The primary focus of
our marketing efforts is towards the full commercialization of our N-Viro Fuel
technologies.
The N-Viro Fuel market requires us to work within two different and unique
regulatory segments. First, our N-Viro Fuel facilities must satisfy biosolids
permit requirements for the 40 CFR Part 503 regulations. Second, the finished
fuel product must comply with each individual power generator's emission permit
requirements. To accomplish this requirement to satisfy air permitting in the
power generation facilities, N-Viro has procured, permitted, constructed and now
operates a mobile facility to produce N-Viro Fuel on a commercial full-scale
basis. We will use this facility to demonstrate the effectiveness of our
process at discrete locations with the purpose of meeting the requirements
necessary to ultimately permit, build, own and operate permanent N-Viro Fuel
processing facilities. We can provide no assurance in our ability to negotiate
long-term arrangements from the mobile facility's performance.
INTERNATIONAL SALES AND MARKETING
In certain countries outside the United States, we sell or license the
N-Viro Process through agents. In their respective territories, the agents
market licenses for the N-Viro Processes, serve as distributors of alkaline
admixture, oversee quality control of the installed N-Viro facilities, enforce
the terms of the license agreements with licensees and market N-Viro Soil. 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 Soil. 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:
Agent Territory
------------------- --------------------------------
VC Energy I, LLC China, Indiana and Texas
CRM Technologies Israel, Greece and Eastern Europe
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 2010,
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.
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
We continue to investigate methods to shorten drying time, improve the
N-Viro Fuel process, substitute various other materials for use as alkaline
admixtures, and improve the quality and attractiveness of N-Viro Fuel to a
variety of end-users. We see opportunities to improve the efficiency of our
process through the utilization of alterative heat sources such as methane,
waste heat solid fuel and gasification technologies, as viable alternatives to
the use of natural gas for process drying.
In 2007 we performed a full scale test of the N-Viro Fuel product at the
T.B. Simon Power Plant located on the campus of Michigan State University. The
successful results of this first full test encouraged us to focus primarily on
the development of the N-Viro Fuel technology.
PATENTS AND PROPRIETARY RIGHTS
We have several patents and licenses relating to the treatment and
processing of biosolids. While there is no one single patent that is alone
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 successfully be issued as patents, or that any already
issued patents will give us a competitive advantage. It is also possible that
our patents could be successfully challenged or circumvented by competitors or
other parties. In addition, we cannot assure that our treatment processes do
not infringe on patents held by third-parties or their proprietary rights. We
are aware of no such infringement, however.
We hold several patents relating to N-Viro Fuel. In the N-Viro Fuel
process, waste products, which can include domestic sewage sludge, manures and
other materials, are treated with mineral by-products, dried by a mechanical
dryer, and converted into a renewable fuel that can be used as a substitute for
coal in coal-fired boilers and kilns. We are actively marketing the N-Viro Fuel
process in response to the national policy encouraging both alternative energy
generation as well as attaining the highest and best reuse of waste materials.
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 UT, we agreed the
licensing of these early patents would generate a royalty payable by us to UT.
We also agreed with UT that claims to the traditional N-Viro Soil process was
one-quarter of one percent (1/4%) of technical revenues until expiration of
those patents. UT rights to BioBlend and certain other N-Viro technologies
range from 2% to 4% of technical revenues derived from these newer technologies.
Cumulative royalties paid to UT through December 31, 2010 were approximately
$65,000, and no amount was expensed during 2010, 2009 or 2008. UT has no claim
to the N-Viro Fuel technologies or process.
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 assurance 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.
INDUSTRY OVERVIEW
Under the Part 503 Regulations, landfills, surface disposal and
incineration remain permissible sludge management alternatives. However, these
conventional disposal options have become subject to more stringent regulatory
standards. The vast majority of states have enacted site restrictions and/or
other management practices governing the disposal of sludge in landfills or
surface disposal. 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 Regulations 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,
often at a dedicated site for disposal purposes. The Part 503 Regulations
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 are often 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 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 Regulations, N-Viro Soil is a product that meets certain stringent
standards. "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.
"Exceptional quality" products are treated by the USEPA as safe products,
thereby exempting these products from many federal restrictions on their use.
All N-Viro products that are produced according to N-Viro Process specifications
meet the pollutant concentration limits and other standards set forth in the
Part 503 Regulations, and therefore qualify as an "exceptional quality" product
that exceeds the USEPA's standards for unrestricted use.
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 many 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, 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 operation.
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 primary United States environmental laws which we
believe may be applicable to the N-Viro Process and the land application of
N-Viro SoilTM include Resource Conservation and Recovery Act ("RCRA"), the
Federal Water Pollution Control Act of 1972 ("Clean Water Act"), the
Comprehensive Environmental Response, Compensation, and Liability Act,
("CERCLA") and the Pollution Prevention Act of 1990 ("PPA"). These laws
regulate the management and disposal of wastes, control the discharge of
pollutants into the water, provide for the investigation and remediation of
contaminated land and groundwater resources and establish a pollution prevention
program. In addition, various states have implemented environmental protection
laws that are similar to the applicable federal laws. States also 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 are regulated under the Clean Water Act. In 1993, the
U.S. Environmental Protection Agency ("EPA") published the Part 503 Regulations
under the Clean Water Act, implementing the EPA's "exceptional quality" program.
These regulations establish sludge use and disposal standards applicable to
public and privately-owned wastewater treatment plants in the United States,
including publicly-owned treatment works, or POTWs. Under the Part 503 Regs,
sludge products that meet certain stringent standards are considered to be
"exceptional quality" ("Class A") products and are not subject to any federal
restrictions on agricultural use or land application. N-Viro Soil is an
"exceptional quality" product. Lower quality sludge products are subject to
federal restrictions governing, among other items, the type and location of
application, the volume of application and the cumulative application levels for
certain pollutants. Agricultural application of these lower quality sludges in
bulk amounts also requires an EPA permit. Agricultural and land applications of
all sludge and sludge products, including N-Viro Soil and other "exceptional
quality" products, are typically subject to state and local regulation and, in
most cases, require a permit.
In order to ensure compliance with the Part 503 Regs, we review the results
of regular testing of sludge required by the EPA to be conducted by wastewater
treatment plants, and it tests N-Viro Soil produced at N-Viro facilities on a
regular basis. In general, we do not license or permit the ongoing use of the
N-Viro Process to treat any sludge that may not be processed into an
"exceptional quality" sludge product. Although N-Viro Soil exceeds the current
federal standards imposed by the EPA for unrestricted agricultural use and land
application, state and local authorities are authorized under the Clean Water
Act to impose more stringent requirements than those promulgated by the EPA.
Most states require permits for land application of sludge and sludge based
products and several states have regulations for certain pollutants that impose
more stringent numerical concentration limits 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. 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 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 the N-Viro Process poses
little risk of releasing hazardous substances into the environment that
presently could result in liability under CERCLA.
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.
State Regulations. State regulations typically require an N-Viro facility
to obtain a permit for the sale of N-Viro Soil for agricultural use, and may
require a site-specific permit by the user of N-Viro Soil . In addition, in
some jurisdictions, state and/or local authorities have imposed permit
requirements for, or have prohibited, the land application or agricultural use
of sludge products, including "exceptional quality" sludge products. Certain of
our licensees operate in jurisdictions that require permits and have been able
to obtain them for the N-Viro product. There can be no assurance that any such
permits will be issued or that any further attempts to require permits for, or
to prohibit, the land application or agricultural use of sludge products will
not be successful.
In addition, many states enforce landfilling restrictions for non-hazardous
sludge. These regulations typically require a permit to sell or use sludge
products as landfill cover material. There can be no assurance that N-Viro
facilities or landfill operators will be able to obtain required permits.
Environmental impact studies may be required in connection with the
development of future N-Viro facilities. Such studies are generally time
consuming and may create delays in the construction process. In addition,
unfavorable conclusions reached in connection with such a study could result in
termination of or expensive alterations to the N-Viro facility being developed.
The costs of compliance are typically borne by our licensees, except in the
case of direct sludge processing into a facility. Normally this cost is not
material to us in relation to the total contract revenue.
EMPLOYEES
As of December 31, 2010, we had 34 employees. Six of our employees were
engaged in sales and marketing; three were in finance and administration and
twenty-five 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 two 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.
CURRENT DEVELOPMENTS
We are currently in discussions with several companies in the cement and
fuel/power generation industries for the development and commercialization of
the patented N-Viro Fuel technology. There can be no assurance that these
discussions will be successful. We continue to focus on the development of
regional biosolids processing facilities. Currently we are in negotiations with
several privatization firms to permit and develop independent, regional
facilities.
In response to the City of Toledo's 2010 Request for Qualifications (RFQ)
issued to identify the waste process to use for the next 10-20 years, our N-Viro
Fuel process was "short listed" and the City of Toledo issued a Request for
Proposals (RFP). In response to the RFP, we have joined with two strategic
partners for this project and formally proposed a long-term arrangement to
process all of Toledo sludge into N-Viro Fuel.
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 to James
K. McHugh, our Chief Financial Officer, at (419) 535-6374 or via e-mail to
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 years ended December 31,
2010 and 2009, we incurred net losses of $3.0 million and $2.4 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 years
ended December 31, 2010 and 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 2011, 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 providing 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,
2010 and 2009, our single largest customer accounted for approximately 22% and
32%, respectively, of our revenues and our top three customers accounted for
approximately 60% and 65%, respectively, of our revenues. Our agreement with
our largest customer - which represented approximately 22% of our revenues in
2010 - is due to expire at the end of September 2011. We are attempting to
negotiate either a renewal of that agreement or the issuance of a new contract
for a new facility, but we cannot assure you that we will be able to secure such
a renewal/new agreement 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 resources, 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 present 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 amount 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 operations and customers, price escalations or reductions in
the supply of fuel could increase our 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 the use of
non-disclosure and 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.
THERE IS ONLY A LIMITED TRADING MARKET FOR OUR COMMON STOCK, AND IT IS POSSIBLE
THAT YOU MAY NOT BE ABLE TO SELL YOUR SHARES EASILY.
There is currently only a limited trading market for our common stock. Our
common stock trades on the OTCQB, which is one of the quotation services for
SEC-registered and reporting companies that trade over the counter ("OTC
Markets"), under the symbol "NVIC", with limited trading volume. We cannot
assure you that a trading market will exist for our common stock.
WE HAVE NEVER PAID DIVIDENDS ON OUR SHARES OF COMMON STOCK.
We have not paid any cash dividends on our common stock heretofore, and we
have no present intention of paying any cash dividends for the foreseeable
future. Any determination to pay dividends in the future will be at the
discretion of the board of directors.
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, 2009 through March 21, 2011, our common
stock closing price fluctuated between a high of $3.85 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
Through April 2011, 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, 2010
and 2009 is approximately $38,500 and $37,600, respectively. We also lease
various equipment on a month-to-month basis. In March 2011, we signed a 68
month lease with a new lessor in Toledo. The total minimum rental commitment
for the year ending December 31, 2011 is approximately $15,600, for 2012 is
$37,400, for 2013 is $30,600 and for the years 2014 through 2016 is $40,800 each
year.
In October 2010, the Company began to lease the property in Emlenton,
Pennsylvania under a lease with A-C Valley Industrial Park, for one year. The
total minimum rental commitment for the year ended December 31, 2011 is $18,000.
The total rental expense included in the statements of operations for the twelve
months ended December 31, 2010 is $6,000.
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, which was extended for
a one-year term through May 2011. The total minimum rental commitment for the
year ended December 31, 2011 is $12,500. The total rental expense included in
the statements of operations for the twelve months ended December 31, 2010 and
2009 is $30,000 and $17,500, 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, 2011
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, 2010 and 2009 is $48,000.
The Company also leased other processing equipment at its Florida location
which began in February 2008 under a three-year lease. The total minimum rental
commitment for the year ending December 31, 2011 is $4,000. The total rental
expense included in the statements of operations for each of the twelve months
ended December 31, 2010 and 2009 is approximately $46,200. In February 2011,
the Company purchased the equipment through a financing arrangement with an
equipment leasing company.
Through January 2010, the Company also leased processing equipment at the
Florida location which began in 2006 under a four year contract. The total
rental expense included in the statements of operations for the twelve months
ended December 31, 2010 and 2009 was approximately $3,000 and $31,000,
respectively. In February 2010, the Company purchased the equipment through a
financing arrangement with an equipment leasing company.
Management believes that all of our properties are adequately covered by
insurance.
ITEM 3. LEGAL PROCEEDINGS
The Company's facility in Toledo, Ohio, utilizes patented technologies to
stabilize and disinfect municipal bio-solids pursuant to a permit to install
from the Ohio EPA that requires emissions be vented to a scrubber. In July of
2008, an inspection of the facility by local regulatory officials revealed that
the scrubber was not in operation. In February of 2009, the Company agreed to
enter into an administrative consent 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, in timely
installments from April 2009 to April 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 OTCQB, which is one of the
quotation services for SEC-registered and reporting companies that trade over
the counter ("OTC Markets"), under the symbol "NVIC". 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, 2009, was as follows:
Quarter High Low
------------ ----- ----
First 2009 $2.85 $1.20
Second 2009 $2.70 $1.65
Third 2009 $2.75 $1.91
Fourth 2009 $2.80 $1.95
First 2010 $2.39 $3.85
Second 2010 $2.70 $3.30
Third 2010 $1.95 $3.10
Fourth 2010 $1.51 $3.25
Our stock price closed at $1.53 per share on March 21, 2011.
HOLDERS
As of March 21, 2011, 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.
RECENT SALES OF UNREGISTERED SECURITIES
None
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,
2010 2009
------ ------
Technology fees 0.1% 1.1%
Facility management 66.2% 68.4%
Products and services 33.7% 30.5%
------ ------
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; and
research and 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 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 Soil sold by us; commissions earned on sales of equipment to an N-Viro
facility; and 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,
2010 Change 2009
---------- ------------- -----------
(Dollars in thousands)
-------------------------------------
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenues. . . . . . . . . . . . . . . $5,222 4.0% $5,021
Cost of revenues. . . . . . . . . . . 4,218 7.8% 3,912
------ --------
Gross profit. . . . . . . . . . . . . 1,004 (9.4%) 1,109
Operating expenses. . . . . . . . . . 3,767 5.1% 3,583
------ --------
(2,763) * (2,474)
Other income (expense). . . . . . . . ( 206) * 60
------ --------
Loss before income tax expense. . . . (2,969) * (2,414)
Federal and state income tax expense. 0 * 0
------ --------
Net loss. . . . . . . . . . . . . . . $(2,969) * $(2,414)
======= =======
PERCENTAGE OF REVENUES:
Revenues. . . . . . . . . . . . . . . 100.0% 100.0%
Cost of revenues. . . . . . . . . . . 80.8 77.9
------ --------
Gross profit. . . . . . . . . . . . . 19.2 22.1
Operating expenses. . . . . . . . . . 72.2 71.4
------ --------
(53.0) (49.3)
Other income (expense). . . . . . . . ( 3.9) 1.2
------ --------
Loss before income tax expense. . . . (56.9) (48.1)
Federal and state income tax expense. 0.0 0.0
------ --------
Net loss. . . . . . . . . . . . . . . (56.9%) (48.1%)
======= ======
* Period to period percentage change comparisons have only been calculated
for positive numbers.
COMPARISON OF YEAR ENDED DECEMBER 31, 2010 WITH YEAR ENDED DECEMBER 31, 2009
Our overall revenue increased $201,000, or 4%, to $5,222,000 for the year
ended December 31, 2010 from $5,021,000 for the year ended December 31, 2009.
The net increase in revenue was due primarily to the following:
a) Sales of alkaline admixture increased $39,000 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 $438,000 from the same period ended in 2009 - this increase was
attributed primarily to our Florida-area customers, which increased $464,000
compared to the same period in 2009; and
c) Our processing revenue, including facility management revenue, showed a
net decrease of $245,000 over the same period ended in 2009. Of the decrease,
our Toledo facility's management revenue decreased $315,000, and, N-Viro Soil
sales decreased by a total of $249,000, primarily attributable to the Toledo
facility as less product was available for sale from current and prior period
carryover production. Facility management revenue at our Florida operation for
the year ended showed an increase of $342,000 over 2009; and
d) Our license fee revenue showed a net decrease of $30,000 over the same
period ended in 2009.
Our gross profit decreased $105,000, or 9%, to $1,004,000 for the year
ended December 31, 2010 from $1,109,000 for the same period in 2009, and the
gross profit margin decreased to 19% from 22% for the same periods. The
decrease in gross profit margin is primarily due to the decrease in the overall
percentage of revenue derived from facility management revenue, as well as
higher costs of trucking the N-Viro Soil product. The Toledo operation
contributed $338,000 of gross profit on overall revenue of $1,150,000, which was
a decrease of $238,000 of gross profit over the same period in 2009. The
Florida operation contributed $646,000 of gross profit on overall revenue of
$3,859,000, which was an increase of $140,000 of gross profit over the same
period in 2009. Gross profit on the sale of the N-Viro Soil product also
contributed materially to the decrease in gross profit margin, as the Company
realized a decrease in gross profit contributed by product sales of $281,000
from 2009 to 2010, $211,000 of it from the Florida operation.
Our operating expenses increased $184,000, or 5%, to $3,767,000 for the
year ended December 31, 2010 from $3,583,000 for the year ended December 31,
2009. The increase was primarily due to increases of $312,000 in consulting
fees and expenses, $57,000 in director costs, $28,000 in office-related expenses
and $25,000 in litigation settlement expense, offset by a decrease of $235,000
in payroll and related costs. Of the total net increase of $134,000 in
consulting, director and payroll costs, $121,000 were non-cash costs relating to
the issuances of stock and stock options. Therefore, for the year ended
December 31, 2010 actual cash outlays in these categories increased by a total
of $13,000 over the same period in 2009.
As a result of the foregoing factors, we recorded an operating loss of
$2,763,000 for the year ended December 31, 2010 compared to an operating loss of
$2,474,000 for the year ended December 31, 2009, an increase in the loss of
$289,000.
Our net nonoperating income (expense) decreased by $266,000 to net
nonoperating expense of $206,000 for the year ended December 31, 2010 from net
nonoperating income of $60,000 for the year ended in 2009. The decrease in net
nonoperating income (expense) was primarily due to an increase of $140,000 from
the loss recorded on derivative securities issued whose value decreased from the
issuance date, a decrease of $23,000 in expense for the extinguishment of
certain liabilities no longer due during 2010, an increase of $84,000 on the
amortization expense for debentures issued and $19,000 in increased interest
expense.
We recorded a net loss of $2,969,000 for the year ended December 31, 2010
compared to a net loss of $2,414,000 for the same period ended in 2009, an
increase in the loss of $555,000. Adding back non-cash expenses such as
depreciation, amortization, stock and stock options charges and subtracting cash
out for capitalized assets and debt repayments, resulted in an adjusted cash
loss (non-GAAP) of $445,000 for the year ended in 2010. Similar non-cash
expenses, cash out and debt repayments for the same period in 2009 resulted in
an adjusted cash loss (non-GAAP) of $206,000, an increase in the adjusted cash
loss (non-GAAP) of $238,000 in the year ended in 2010 versus 2009.
For the year ended December 31, 2010 and 2009, we have not recognized the
future tax benefit of current or prior period losses due to our history of
operating losses. Accordingly, our effective tax rate for each period was zero.
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital deficit of $932,000 at December 31, 2010, compared
to working capital of $57,000 at December 31, 2009, resulting in a decrease in
working capital of $989,000. Current assets at December 31, 2010 included cash
and cash equivalents of $245,000 (including restricted cash of $207,000), which
is an increase of $44,000 from December 31, 2009. The net negative change in
working capital from December 31, 2009 to 2010 was primarily from a decrease to
the net deferred current asset of $344,000 for amortization of common stock
given pursuant to consulting contracts entered into during 2009 and 2010 and an
increase in the current liability of $668,000 for the convertible debentures to
now classify the instruments due June 30, 2011 as short-term on the balance
sheet.
In 2010 our cash flow provided by operating activities was $4,000, a
decrease of $22,000 over the same period in 2009. The components of the
decrease from 2009 in cash flow provided by operating activities was principally
due to an increase of $101,000 in trade accounts receivable and an increase in
the net loss of $555,000, offset by a decrease of $89,000 in prepaid assets, an
increase of $221,000 in trade accounts payable, a decrease of $140,000 in the
market price of derivatives issued, an increase of $121,000 in stock warrants
and stock options issued for fees and services and an increase in other non-cash
items of $62,000.
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 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%; 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. For 2009 and throughout 2010, 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 2010, we maintained a line of credit up to $400,000 at Comerica
Bank's prime rate (3.25% at December 31, 2010) plus 0.75%, but in no event less
than 5.75%, and secured by a first lien on all our assets (except equipment),
with Monroe Bank + Trust (the "Bank"), with a maturity date of April 15, 2011.
Two certificates of deposit totaling $140,893 from the Bank are held as a
condition of maintaining the line of credit. In April 2010, the line of credit
was renewed through April 2011, and the previous borrowing base restriction of
80% of our outstanding trade receivables not over 90 days was removed. At
December 31, 2010, we had $36,000 of borrowing capacity under the credit
facility.
During 2009 and 2010, we borrowed a total of $1,382,900 from seven lenders
to purchase processing and automotive equipment. As of December 31, 2010, a
total of fourteen term notes are outstanding, ranging from 3.8% to 10.9%
interest for terms ranging three to five years, monthly payments totaling
approximately $30,000 and all secured by equipment. The total amount owed on
all notes as of December 31, 2010 was approximately $521,000 and all notes are
expected to be paid in full on the applicable maturity date, the last of which
is in October 2013.
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 are issuable in $5,000
denominations, are unsecured and have a stated interest rate of 8%, payable
quarterly to holders of record. We have 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, we may redeem all or a part of the Debentures at face value
plus unpaid interest.
During 2010 we issued $55,000 of Debentures, and three investors converted
a total of $90,000 of Debentures into unregistered common stock. The Debentures
mature at June 30, 2011, and as of December 31, 2010 we held $720,000 of
Debentures exercisable at $2.00 per share, or 360,000 shares.
In July 2010, we executed a Purchase Agreement, License and Development
Agreement and Registration Rights Agreement (the "Agreements"), with VC Energy
I, LLC, or VC Energy. Concurrently, we sold VC Energy 200,000 shares of our
unregistered common stock at a price of $2.50 per share, issued VC Energy
200,000 warrants exercisable at $2.75 per share, and granted them an option to
acquire another 400,000 shares of our unregistered common stock at a price of
$2.50 per share, and 400,000 warrants exercisable at $2.75 per share. In
September 2010, we executed Amendment Number 1, effective September 15, 2010
(the "Amendment") to the Purchase Agreement. The purpose of the Amendment was
to modify certain of the purchase terms in the Purchase Agreement, and VC Energy
exercised its option to purchase 200,000 shares of our common stock for $500,000
which VC Energy paid for by delivering its unsecured promissory note to us for
$500,000, payable in installments over a 12 month period, with the first
$200,000 of such installments due bi-weekly between September 30, 2010 and
December 30, 2010 and the final $300,000 due September 15, 2011. We also
delivered 200,000 warrants to purchase shares of our common stock at an exercise
price of $2.50 per share. Under the Amendment, we transferred all 200,000
shares and 200,000 warrants to an Escrow Agent, and the shares and warrants are
released ratably to VC Energy as installments payments due us are received. VC
Energy paid all installments on time through December 2010 and the escrow agent
delivered 80,000 shares and 80,000 warrants to VC Energy, with the remaining
shares and warrants continuing to be held by the escrow agent. In addition, VC
Energy's option to purchase the remaining 200,000 shares of our common stock was
extended to December 31, 2010, and then a second time to March 1, 2011, on the
same terms as the original Purchase Agreement. VC Energy did not exercise the
purchase option for the additional 200,000 shares on or before March 1, 2011.
More details were provided on Form 8-K filings during 2010 and 2011.
For 2011 we expect to improve operating results and have adequate cash or
access to cash to adequately fund operations and debt service 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, 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.
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, 2010 and 2009 is $70,000 and $50,000,
respectively.
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:
There are no Accounting Standards Updates 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 corporation) and Subsidiaries as of
December 31, 2010 and 2009, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the years then
ended. 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, 2010 and 2009, and the results
of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ UHY LLP
------------
UHY LLP
Southfield, Michigan
March 31, 2011
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
--------------------------
2010 2009
---------- ----------
ASSETS
------------------------------------------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted $ 37,112 $ 61,380
Restricted 207,465 140,161
Receivables, net:
Trade 780,844 597,035
Related party - Mahoning Valley N-Viro 24,325 15,325
Deferred costs - stock issued for services 622,086 966,354
Prepaid expenses and other assets 80,994 108,138
---------- ----------
Total current assets 1,752,826 1,888,393
PROPERTY AND EQUIPMENT, NET 1,490,865 1,363,476
INTANGIBLE AND OTHER ASSETS, NET 159,304 211,457
---------- ----------
$3,402,995 $3,463,326
========== ==========
The accompanying notes are an integral part of these financial statements.
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
--------------------------
2010 2009
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 337,799 $ 353,800
Convertible debentures, net of discount 667,674 -
Line-of-credit 364,000 325,000
Accounts payable 1,089,513 932,831
Accrued liabilities 226,062 219,910
------------- -------------
Total current liabilities 2,685,048 1,831,541
Long-term debt, less current maturities 230,931 500,808
Fair value of warrant liability 744,476 -
Convertible debentures, net of discount - 610,840
------------- -------------
Total liabilities 3,660,455 2,943,189
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, Authorized - 2,000,000 shares
Issued - -0- shares in 2010 and 2009 - -
Common stock, $.01 par value
Authorized - 35,000,000 shares in 2010 and 25,000,000 in 2009
Issued - 6,062,214 shares in 2010 and 5,269,553 shares in 2009 60,622 52,696
Note receivable for common stock (300,000) -
Additional paid-in capital 24,548,644 21,453,168
Accumulated deficit (23,881,836) (20,300,837)
------------- -------------
427,430 1,205,027
Less treasury stock, at cost, 123,500 shares 684,890 684,890
------------- -------------
Total stockholders' equity (deficit) (257,460) 520,137
------------- -------------
$ 3,402,995 $ 3,463,326
============= =============
The accompanying notes are an integral part of these financial statements.
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2010 and 2009
--------------------------------------
2010 2009
------------ ------------
REVENUES $ 5,222,146 $ 5,021,169
COST OF REVENUES 4,217,773 3,912,310
------------ ------------
GROSS PROFIT 1,004,373 1,108,859
OPERATING EXPENSES
Selling, general and administrative 3,767,262 3,582,979
------------ ------------
OPERATING LOSS (2,762,889) (2,474,120)
OTHER INCOME (EXPENSE)
Interest income 1,110 1,354
Gain on extinguishment of liabilities 124,233 147,201
Amortization of discount on convertible debentures (108,335) (24,315)
Loss on market price increase of warrants issued (140,326) -
Interest expense (82,938) (64,313)
------------ ------------
(206,256) 59,927
------------ ------------
LOSS BEFORE INCOME TAXES (2,969,145) (2,414,193)
Federal and state income taxes - -
------------ ------------
NET LOSS $(2,969,145) $(2,414,193)
============ ============
Basic and diluted loss per share $ (0.55) $ (0.51)
============ ============
Weighted average common shares outstanding - basic and diluted 5,396,018 4,688,928
============ ============
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, 2010 and 2009
Note Additional
Shares of Common Receivable for Paid-in Accumulated Treasury
Common Stock Stock Common Stock Capital Deficit Stock
------------ ------- -------------- ----------- ------------- ----------
BALANCE JANUARY 1, 2009 4,468,025 $44,680 $ - $17,822,744 $(17,634,417) $(684,890)
Net loss - - - (2,414,193) -
Deemed dividend on extension of stock warrants - - 252,227 (252,227) -
Share-based compensation expense - - 1,371,921 - -
Exercise of stock options 21,400 214 29,823 - -
Exercise of stock warrants 13,672 137 29,015 - -
Conversion of debentures to stock 5,024 50 9,999 - -
Discount on convertible debentures issued - - 183,897 - -
Issuance of common stock 761,432 7,615 1,753,542 - -
------------ ------- ----------- ------------- ----------
BALANCE DECEMBER 31, 2009 5,269,553 52,696 - 21,453,168 (20,300,837) (684,890)
Net loss - - - (2,969,145) -
Deemed dividend on extension of stock warrants - - 611,854 (611,854) -
Issuance of common stock for cash and
Note Receivable - net 400,000 4,000 (300,000) 996,000 - -
Share-based compensation expense - - 1,031,770 - -
Exercise of stock options 54,125 541 101,306 - -
Exercise of stock warrants 15,050 150 27,640 - -
Conversion of debentures to stock 45,136 451 89,725 - -
Discount on convertible debentures issued 2,750 28 21,958 - -
Issuance of common stock 275,600 2,756 215,223 - -
------------ ------- ----------- ------------- ----------
BALANCE DECEMBER 31, 2010 6,062,214 $60,622 $ (300,000) $24,548,644 $(23,881,836) $(684,890)
============ ======= ============== =========== ============= ==========
Total
------------
BALANCE JANUARY 1, 2009 $ (451,883)
Net loss (2,414,193)
Deemed dividend on extension of stock warrants -
Share-based compensation expense 1,371,921
Exercise of stock options 30,037
Exercise of stock warrants 29,152
Conversion of debentures to stock 10,049
Discount on convertible debentures issued 183,897
Issuance of common stock 1,761,157
------------
BALANCE DECEMBER 31, 2009 520,137
Net loss (2,969,145)
Deemed dividend on extension of stock warrants -
Issuance of common stock for Note Receivable - net 700,000
Share-based compensation expense 1,031,770
Exercise of stock options 101,847
Exercise of stock warrants 27,790
Conversion of debentures to stock 90,176
Discount on convertible debentures issued 21,986
Issuance of common stock 217,979
------------
BALANCE DECEMBER 31, 2010 $ (257,460)
============
The accompanying notes are an integral part of these financial statements.
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2010 and 2009
2010 2009
------------ ------------
Cash Flows From Operating Activities
Net loss $(2,969,145) $(2,414,193)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization 449,122 467,990
Amortization of discount and costs of debentures 108,334 37,345
Provision (reduction) for bad debts 20,000 -
Issuance of stock for debt and services 1,103,153 793,646
Issuance of stock options and warrants for services 1,183,270 1,371,962
(Gain) loss on the sale of fixed assets (8,741) 1,161
Increase in market price of warrants issued 140,326 -
Changes in Operating Assets and Liabilities
Increase in trade receivables (203,809) (102,894)
Decrease (increase) in prepaid expenses and other assets 33,148 (55,693)
Increase (decrease) in accounts payable and accrued liabilities 148,263 (73,050)
------------ ------------
Net cash provided by (used in) operating activities 3,921 26,274
Cash Flows From Investing Activities
Proceeds from sale of property and equipment 10,834 3,006
Increases from restricted cash and cash equivalents (67,305) (1,348)
Advances to related parties (9,000) (15,300)
Purchases of property and equipment (532,454) (17,360)
------------ ------------
Net cash used in investing activities (597,925) (31,002)
Cash Flows From Financing Activities
Private placements of stock 611,994 -
Proceeds from convertible debentures issued 55,000 765,000
Issuance costs of convertible debentures issued (135) (58,666)
Borrowings under long-term obligations 196,869 139,848
Stock options exercised 101,873 30,037
Stock warrants exercised 27,735 29,152
Net borrowings (repayments) on line-of-credit 39,000 (73,000)
Principal payments on long-term obligations (462,600) (781,132)
------------ ------------
Net cash provided by financing activities 569,736 51,239
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (24,268) 46,511
Cash and Cash Equivalents - Beginning 61,380 14,869
------------ ------------
Cash and Cash Equivalents - Ending $ 37,112 $ 61,380
============ ============
Supplemental disclosure of cash flows information:
Cash paid during the year for interest $ 138,477 $ 125,460
============ ============
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, 2010 AND 2009
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 sludges 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 primarily 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; one certificate of deposit and corresponding accrued interest
which is held as collateral with a performance bond on behalf of one of the
Company's licensees; one certificate of deposit and corresponding accrued
interest which is held as collateral on behalf of the Florida Department of
Agriculture for the Company's soil distribution license.
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 $61,698 and $30,979 of receivables for
the years ended December 31, 2010 and 2009, 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 $70,000 and
$50,000 as of December 31, 2010 and 2009, respectively. The estimate is based
upon management's review of delinquent accounts and an assessment of the
Company's historical evidence of collections.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
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 $416,172
and $431,007 in 2010 and 2009, 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 15.8 and 16.0 years at December 31, 2010 and 2009,
respectively). Amortization expense amounted to $26,691 and $30,369 in 2010 and
2009, respectively. Estimated amortization expense, based on these patent costs
and territory rights at December 31, 2010, for each of the ensuing five years is
as follows: 2011 - $26,000; 2012 - $20,000; 2013 - $17,000; 2014 - $14,000;
2015 - $13,000. 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 $6,259 in 2010 and $6,613 in 2009. Estimated
amortization expense, based on these capitalized license and contracts at
December 31, 2010, for each of the ensuing five years is as follows: 2011 -
$2,000; 2012 - $2,000; 2013 - $2,000; 2014 - $2,000; 2015 - $1,000.
H. Revenue Recognition - Facility management 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, 2010 AND 2009
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, 2010 and 2009, the effects
of 2,273,300 and 1,279,825 stock options outstanding, respectively, 1,147,350
and 724,950 warrants to purchase common stock, respectively, and, debentures
that are convertible to 360,000 and 377,500 shares of common stock,
respectively, 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.
Compensation costs are recognized over the requisite period or periods that
services are rendered.
K. New Accounting Standards - There are no Accounting Standards Updates
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, 2010 and 2009, 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 2008 and later remain
subject to examination by the IRS and respective states.
M. Supplemental Disclosure of Non-Cash Activity:
2010 2009
---------- --------
Common Stock issued for commissions on debentures $ 5,500 $ 15,500
VC Energy - issuance of common stock warrants 604,150 -
Dividend deemed on extension of outstanding stock warrants 611,854 252,227
SLD Consulting - value of stock issued on consulting agreement 334,400 -
SAMI - value of stock issued on public relations agreement 304,500 -
Conversion of debentures to Common Stock 90,204 9,974
---------- --------
$1,950,608 $277,701
========== ========
N. Segment Information - During 2010, the Company determined that it
currently operates in one segment based on the financial information upon which
the chief operating decision maker regularly assesses performance and allocates
resources. The chief operating decision maker is the Chief Executive Officer.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
NOTE 2. BALANCE SHEET DATA
PROPERTY AND EQUIPMENT (AT COST):
2010 2009
---------- ----------
Leasehold improvements $ 121,411 $ 122,979
Equipment 3,296,751 2,763,211
Furniture, fixtures and computers 50,089 54,275
---------- ----------
3,468,251 2,940,465
Less accumulated depreciation 1,977,386 1,576,989
---------- ----------
$1,490,865 $1,363,476
========== ==========
DEFERRED COSTS:
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 was amortized ratably over the 12 month period
the services are to be rendered. The cost amortized for the years ended
December 31, 2010 and 2009 was $704,800 and $520,200, respectively. The amount
deferred at December 31, 2010 was $-0-.
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 was amortized ratably over the 12 month period the services are to be
rendered. The cost amortized for the year ended December 31, 2010 and 2009 was
$351,600 and $273,400, respectively. The amount deferred at December 31, 2010
was $-0-.
In December 2010, the Company executed a Financial Public Relations Agreement
with Strategic Asset Management, Inc., or SAMI. The Company engaged SAMI as its
non-exclusive financial public relations counsel for a term of three years. For
its services, the Company issued SAMI 150,000 shares of the Company's
unregistered common stock. The Company expects to record a non-cash charge to
earnings of approximately $305,000 ratably over a 36-month period starting in
December 2010.
In December 2010, the Company executed a Consulting Agreement, with SLD Capital
Corporation, or SLD. The Company engaged SLD to provide business consulting
services for a term of eighteen months. For its services, the Company issued
SLD 110,000 shares of the Company's unregistered common stock. The Company
expects to record a non-cash charge to earnings of approximately $330,000
ratably over an 18-month period starting in December 2010.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
NOTE 2. BALANCE SHEET DATA (CONTINUED)
The following is a summary of Deferred Costs - capitalized stock value on
contracts, net as of December 31:
2010 2009
-------- --------
Deferred costs - Investor Relations, less accumulated
amortization (2010 - $1,225,000; 2009 - $520,208) $ - $614,792
Deferred costs - Summit Trading, Ltd., less accumulated
amortization (2010 - $625,000; 2009 - $273,438) - 351,562
Deferred costs - SAMI, less accumulated
amortization (2010 - $6,333; 2009 - $-0-) 449,667 -
Deferred costs - SLD Capital, less accumulated
amortization (2010 - $12,585; 2009 - $-0-) 321,815 -
-------- --------
$771,482 $966,354
======== ========
INTANGIBLE AND OTHER ASSETS:
The following is a summary of intangible and other assets, net as of December
31:
2010 2009
-------- --------
Patents and related intangibles, less accumulated
amortization (2010 - $294,327; 2009 - $320,905) $ 99,926 $125,952
Territory rights, less accumulated amortization
(2010 - $6,470; 2009 - $5,882) 3,530 4,118
Customer list, less accumulated amortization
(2010 - $53,646; 2009 - $47,975) 9,109 14,780
Debenture issuance costs, less accumulated amortization
(2010 - $44,925; 2009 - $13,031) 16,742 43,136
Other 29,997 23,471
-------- --------
$159,304 $211,457
======== ========
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
NOTE 2. BALANCE SHEET DATA (CONTINUED)
ACCRUED LIABILITIES:
2010 2009
-------- --------
Accrued payroll and employee benefits $ 32,192 $ 26,768
Sales tax payable 177,421 177,470
Interest payable 16,449 15,672
-------- --------
$226,062 $219,910
======== ========
NOTE 3. PLEDGED ASSETS, LINE-OF-CREDIT AND LONG-TERM DEBT
During 2010, the Company maintained a line of credit up to $400,000 at Comerica
Bank's prime rate (3.25% at December 31, 2010) plus 0.75%, but in no event less
than 5.75%, and secured by a first lien on all the Company's assets (except
equipment), with Monroe Bank + Trust (the "Bank"), with a maturity date of April
15, 2011. Two certificates of deposit totaling $140,893 from the Bank are held
as a condition of maintaining the line of credit. In April 2010, the line of
credit was renewed through April 2011, and the previous borrowing base
restriction of 80% of the Company's outstanding trade receivables not over 90
days was removed. At December 31, 2010, the Company had $36,000 of borrowing
capacity under the credit facility.
Long-term debt at December 31, 2010 and 2009 is as follows:
2010 2009
---------- ----------
Notes payable - banks $ 365,703 $ 704,384
Notes payable - equipment vendors 203,027 150,224
Convertible debentures, net of discount of
52,326 in 2010 and $144,160 in 2009 667,674 610,840
---------- ----------
1,236,404 1,465,448
Less current maturities 1,005,473 353,800
---------- ----------
$ 230,931 $1,111,648
========== ==========
During 2010, the Company borrowed a total of $159,542 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 5.75% to 6.25% interest for a term not more than one year, monthly
payments totaling $16,383 and each are unsecured. The total amount owed on
these notes as of December 31, 2010 was approximately $47,400 and these notes
are expected to be paid in full on the applicable maturity date, the last of
which is August 2011.
During 2009 and 2010, the Company borrowed a total of $1,382,900 from seven
lenders to purchase processing and automotive equipment. As of December 31,
2010, a total of fourteen term notes are outstanding, ranging from 3.8% to 10.9%
interest for terms ranging three to five years, monthly payments totaling
approximately $30,000 and all secured by equipment. The total amount owed on
all notes as of December 31, 2010 was approximately $521,000 and all notes are
expected to be paid in full on the applicable maturity date, the last of which
is in October 2013.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
NOTE 3. PLEDGED ASSETS, LINE-OF-CREDIT AND LONG-TERM DEBT (CONTINUED)
In 2009 the Company approved an offering of up to $1,000,000 of Convertible
Debentures (the "Debentures"), convertible at any time into the Company's
unregistered common stock at $2.00 per share. 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 2009 the Company issued $765,000 of Debentures to a total of twenty three
accredited investors, and one investor redeemed $10,000 of Debentures into
unregistered common stock. During 2010 the Company issued $55,000 of
Debentures, and three investors converted a total of $90,000 of Debentures into
unregistered common stock. The Debentures mature at June 30, 2011 and as of
December 31, 2010, the Company held $720,000 of Debentures.
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 under GAAP to record
a discount given for certain Debentures sold to date, which totaled $184,975.
The discount is then required to be amortized as a period expense over the
periods the Debentures are scheduled to be outstanding, which averages 20
months. For the years ended December 31, 2010 and 2009, amortization expense
amounted to $108,000 and $24,300, respectively.
Approximate aggregate maturities of long-term debt for the years ending December
31 are as follows: 2011 - $1,058,000; 2012 - $173,000; 2013 - $59,000; 2014
and after - $1,000.
NOTE 4. RELATED PARTY TRANSACTIONS
During the years ended December 31, 2010 and 2009, the Company advanced funds
for start-up and beginning operating capital of $9,000 and $15,325,
respectively, 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 2010 and 2009, the Company paid Terri Kasmoch, the spouse of
President and Chief Executive Officer Timothy Kasmoch, outside consulting fees
for business development, web site and company media marketing and stock
promotion efforts for the Company, and as an employee with the same duties
starting in the 4th quarter of 2010.
During the year ended December 31, 2010, the Company paid Thomas L. Kovacik, a
member of the Board of Directors, a fee for consulting services. The fee was
paid with 10,000 stock options at an exercise price of $3.53, which vest
immediately and are exercisable over 10 years. To reflect the value of the
options, the Company recorded an expense of $31,421. The fee was exclusive of
director fees and expenses paid for with cash and stock options.
The following table summarizes these payments for 2010 and 2009 and the balance
to each of any monies owed as of December 31, 2010:
Payee Year Consulting fees Gross Payroll Total Account payable balance at December 31
----------------- ---- ---------------- -------------- ------- --------------------------------------
Terri Kasmoch 2010 $ 10,685 $ 10,833 $21,518 -
Terri Kasmoch 2009 11,000 - 11,000
Thomas L. Kovacik 2010 31,421 - 31,421 -
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
NOTE 5. EQUITY TRANSACTIONS
In January 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 was amortized ratably over the subsequent
six month period the services were rendered in 2010.
During 2010 we issued an additional $55,000 of Convertible Debentures, and three
investors converted a total of $90,000 of existing Debentures into unregistered
common stock. The amount of Debentures outstanding at the end of 2010 was
$720,000, convertible at $2.00 per share or 360,000 shares.
In July 2010, the Company executed a Purchase Agreement, License and Development
Agreement and Registration Rights Agreement (the "Agreements"), with VC Energy
I, LLC of Las Vegas, NV, or VC Energy. Concurrently, the Company sold VC Energy
200,000 shares of the Company's unregistered common stock at a price of $2.50
per share, issued VC Energy 200,000 warrants exercisable at $2.75 per share, and
also granted VC Energy an option to acquire another 400,000 shares of the
Company's unregistered common stock at a price of $2.50 per share, and 400,000
warrants exercisable at $2.75 per share.
In September 2010, the Company executed Amendment Number 1, effective September
15, 2010 (the "Amendment") to the Purchase Agreement with VC Energy. The
purpose of the Amendment was to modify certain of the purchase terms in the
Purchase Agreement, and VC Energy exercised its option to purchase 200,000
shares of the Company's common stock for $500,000 which VC Energy paid for by
delivering its unsecured promissory note to the Company for $500,000, payable in
installments over a 12 month period, with the first $200,000 of such
installments due bi-weekly between September 30, 2010 and December 30, 2010 and
the final $300,000 due September 15, 2011. The promissory note provides for
acceleration in the event of default and a default interest rate of 8% per
annum. The Company also delivered 200,000 warrants to purchase shares of its
common stock at an exercise price of $2.50 per share. Under the Amendment, the
Company will transfer all 200,000 shares and 200,000 warrants to an Escrow
Agent, and the shares and warrants will be released ratably to VC Energy as
installments payments due the Company are received. VC Energy made all
installment payments due through December 2010, and the escrow agent delivered
80,000 shares and 80,000 warrants to VC Energy, with the remaining shares and
warrants continuing to be held by the escrow agent. In addition, VC Energy's
option to purchase the remaining 200,000 shares of the Company's common stock
was extended to December 31, 2010 and then a second time to March 1, 2011, on
the same terms as the original Purchase Agreement. VC Energy did not exercise
the purchase option for the additional 200,000 shares on or before March 1,
2011. At each extension date, the Company recorded the difference in the fair
market value of the Company's common stock and the recorded price of the stock
warrants as a reduction to Accumulated Deficit and an increase to the Additional
Paid In Capital accounts, totaling $611,854 in 2010.
In both the VC Energy Agreements and the Amendment, the Company accounted for
the warrants issued within the transaction with a provision that protects
holders from declines in the stock price ("down-round" provisions) as a
derivative security at fair value with future changes in fair value recorded in
earnings. As of December 31, 2010, the Company has recorded a liability of
$744,476 to reflect the fair value of the warrants. The Company will be
periodically required to re-measure the fair value of the warrants at the
Balance Sheet date, with adjustments in the value recorded through the income
statement as a gain or loss. During the year ended December 31, 2010, the
Company recorded a loss of $140,326 on the revaluation from the two issuances of
the warrants to the end of the period.
On December 21, 2010, the Company issued 110,000 shares of unregistered Common
Stock to SLD Capital Corporation ("SLD"), as compensation for services rendered
by SLD to the Company under a Consulting Agreement, effective as of December 10,
2010. The agreement is for a term of eighteen months from the effective date.
More details of this Agreement are contained in Note 2.
Also on December 21, 2010, the Company issued 150,000 shares of unregistered
Common Stock to Strategic Asset Management, Inc., ("SAMI"), as compensation for
services rendered by SAMI to the Company under a Financial Public Relations
Agreement, effective as of December 15, 2010. The agreement is for a term of
two years from the effective date. More details of this Agreement are contained
in Note 2.
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 (the "2004 Plan"), for directors and key employees under which 2,500,000
shares of common stock may be issued. The Company also has a stock option plan
approved in July 2010 (the "2010 Plan"), for directors and key employees under
which 5,000,000 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. Options were granted in
2010 and 2009 from the 2004 Plan at the approximate market value of the stock at
date of grant, as defined in the plan.
Pursuant to their respective five-year employment agreements, in March 2010 a
total of 890,000 stock options were granted to the three executive officers of
the Company. Twenty percent of the options vested immediately on the date of
grant, with the balance of the options to vest in equal annual installments over
the next four years on the anniversary date of the original grant. These
options were granted pursuant to the 2004 Plan, are for a period of ten years
and are intended as Incentive Stock Options. 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 year ended December 31, 2010, this charge was $844,840. More information on
these equity transactions is contained in this Form 10-K under Item 11,
"Executive Compensation".
During the year ended December 31, 2010, the Company granted additional stock
options totaling 175,000 shares, exclusive of the officers: 90,000 options to
outside directors, 10,000 options to an outside director acting in his capacity
as a consultant and 75,000 options to three employees. All options granted are
for a period of ten years.
The options granted to the directors became fully vested six months after the
date of grant, and were priced, pursuant to the 2004 Plan, at a weighted average
price of $3.08 for a total expense of approximately $209,000, expensed ratably
over the subsequent six-month periods. The options granted to the consultant
vested immediately and were priced, pursuant to the 2004 Plan, at $3.53 for a
total expense of approximately $31,400, expensed immediately. More information
on these equity transactions is contained in this Form 10-K under Item 10,
"Directors, Executive Officers and Corporate Governance".
The options granted to the three employees vested twenty percent on the date of
grant, with the balance of the options to vest in equal annual installments over
the next four years on the anniversary date of the original grant. All of the
options are exercisable at $1.89 per share and were granted pursuant to the 2004
Plan and are intended as Incentive Stock Options.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
NOTE 5. EQUITY TRANSACTIONS (CONTINUED)
The following summarizes the stock options activity for the years ended December
31, 2010 and 2009:
2010 2009
---------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- --------- ----------- ---------
Outstanding, beginning of year 1,279,825 $ 2.24 746,025 $ 2.28
Granted 1,065,000 $ 3.16 634,000 $ 2.18
Exercised (54,125) $ 1.91 (21,400) $ 1.43
Expired during the year (17,400) $ 3.75 (78,800) $ 2.36
----------- --------- ----------- ---------
Outstanding, end of year 2,273,300 $ 2.67 1,279,825 $ 2.24
=========== ========= =========== =========
Eligible for exercise at end of year 1,501,300 $ 2.41 1,222,325 $ 2.24
=========== ========= =========== =========
Weighted average fair value per option for
options granted during the year $ 3.16 $ 2.09
=========== ===========
Options expected to vest over the life of the Plan 2,273,300 1,279,825
=========== ===========
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,
----------------------
2010 2009
---------- ----------
Expected dividend yield 0.00% 0.00%
Weighted average volatility 73.7% 79.4%
Risk free interest rate 2.5 - 3.6% 2.9 - 3.5%
Expected term (in years) 7 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
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
NOTE 5. EQUITY TRANSACTIONS (CONTINUED)
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).
On two more occasions during 2010, an automatic extension of time to exercise
their respective warrants was granted to all warrant holders of record, in March
and in September. All other terms of the warrant remained in place, other than
the expiration date.
NOTE 6. REVENUE AND MAJOR CUSTOMERS
Revenues for the years ended December 31, 2010 and 2009 include revenues from
one major customer, the City of Toledo, Ohio (included in the facility
management, and, products and services classifications), which represented
approximately 22% for 2010 and 32% for 2009 of total consolidated revenue. The
accounts receivable balance due (which is unsecured) from this customer at
December 31, 2010 and 2009 was approximately $68,000 and $188,000, respectively.
The contract with this customer is due to expire at the end of September 2011.
The Company is attempting to negotiate either a renewal of that agreement or the
issuance of a new contract for a new facility, but no assurance can be given the
Company will be able to secure such a renewal/new agreement at all or on terms
that are as favorable as the current agreement. The Company's failure to renew
this agreement on favorable terms would likely have a material adverse effect on
the Company's business, financial conditions and results of operations.
The Company's six largest customers billed through Florida N-Viro each represent
between 5% - 20% of the consolidated revenue for the Company, or a collective
total of approximately 63% for these six customers for 2010 and 57% for 2009.
Florida operations accounted for approximately 74% and 63% of consolidated
revenue during the years ended December 31, 2010 and 2009, respectively. The
accounts receivable balance due (which are unsecured) for these six Florida
N-Viro customers at December 31, 2010 and 2009 was approximately $328,000 and
$314,000, respectively.
A substantial portion of the Company's revenue is derived from services provided
under contracts and agreements with existing licensees. Some of these
contracts, especially those contracts with large municipalities, provide for
termination of the contract by the customer after giving relatively short notice
(in some cases as little as ten days). In addition, some of these contracts
contain liquidated damages clauses, which may or may not be enforceable in the
event of early termination of the contracts. If one or more of these contracts
are terminated prior to the expiration of its term, and the Company is not able
to replace revenues from the terminated contract or receive liquidated damages
pursuant to the terms of the contract, the lost revenue could have a material
and adverse effect on its business and financial condition.
NOTE 7. COMMITMENTS AND CONTINGENCIES
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.
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.
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.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
NOTE 7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Through April 2011, the Company's executive and administrative offices are
located in Toledo, Ohio, under a month to month lease, and believe our
relationship with the lessor is satisfactory. The total rental expense for this
location included in the statements of operations for each of the years ended
December 31, 2010 and 2009 is approximately $38,500 and $37,600, respectively.
The Company also leases various equipment on a month-to-month basis. In March
2011, the Company signed a 68 month lease with a new lessor in Toledo. The
total minimum rental commitment for the year ending December 31, 2011 is
approximately $15,600, for 2012 is $37,400, for 2013 is $30,600 and for the
years 2014 through 2016 is $40,800 each year.
In October 2010, the Company began to lease property in Emlenton, Pennsylvania
under a lease with A-C Valley Industrial Park, for one year. The total minimum
rental commitment for the year ended December 31, 2011 is $18,000. The total
rental expense included in the statements of operations for the twelve months
ended December 31, 2010 is $6,000.
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, which was extended for a
one-year term through May 2011. The total minimum rental commitment for the
year ended December 31, 2011 is $12,500. The total rental expense included in
the statements of operations for the twelve months ended December 31, 2010 and
2009 is $30,000 and $17,500, 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, 2011 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,
2010 and 2009 is $48,000.
The Company also leased other processing equipment at its Florida location which
began in February 2008 under a three-year lease. The total minimum rental
commitment for the year ending December 31, 2011 is $4,000. The total rental
expense included in the statements of operations for each of the twelve months
ended December 31, 2010 and 2009 is approximately $46,200. In February 2011,
the Company purchased the equipment through a financing arrangement with an
equipment leasing company.
Through January 2010, the Company also leased processing equipment at the
Florida location which began in 2006 under a four year contract. The total
rental expense included in the statements of operations for the twelve months
ended December 31, 2010 and 2009 was approximately $3,000 and $31,000,
respectively. In February 2010, the Company purchased the equipment through a
financing arrangement with an equipment leasing company.
Management believes that all of the Company's properties are adequately covered
by insurance.
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, 2010 AND 2009
NOTE 8. INCOME TAX MATTERS
The composition of the deferred tax assets and liabilities at December 31, 2010
and 2009 is as follows:
2010 2009
------------ ------------
Gross deferred tax liabilities:
Property and equipment and intangible assets $ (72,800) $ (99,800)
Gross deferred tax assets:
Loss carryforwards 4,214,800 4,084,400
Section 754 basis step up 128,500 149,900
Allowance for doubtful accounts 23,800 17,000
Other 500 3,100
Less valuation allowance (4,294,800) (4,154,600)
------------ ------------
$ - $ -
============ ============
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, 2010 and 2009 and are as follows:
2010 2009
------------ ------------
Computed "expected" tax expense (credit) $(1,009,500) $ (820,800)
State taxes, net of federal tax benefit - -
(Decrease) increase in income taxes resulting
from:
Change in valuation allowance 140,200 (1,701,200)
Net operating loss carryfoward expiration 520,300 2,082,200
Nondeductible stock options and warrants 351,800 440,000
Other (2,800) (200)
------------ ------------
$ - $ -
============ ============
The net operating losses available at December 31, 2010 to offset future taxable
income total approximately $12,400,000 and expire principally in years 2012 -
2030. Approximately $685,000 will expire if not used to offset taxable income
for the 2012 tax year.
N-VIRO INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
NOTE 9. 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, 2010 and 2009. In 2009, the
Company terminated the plan and distributed all plan assets to the participants.
NOTE 10.
The Company has adopted the provisions of ASC 820, Fair Value Measurements
and Disclosures ("ASC 820") related to nonfinancial assets and liabilities on a
prospective basis. ASC820 establishes the authoritative definition of fair
value, sets out a framework for measuring fair value and expands the required
disclosures about fair value measurement. The valuation techniques required by
ASC 820 are based on observable and unobservable inputs using the following
three-tier hierarchy:
- Level 1 - Inputs are unadjusted quoted prices in active markets for
indentical assets or liabilities.
- Level 2 - Inputs are quoted prices for similar assets and liabilities in
active markets, quoted prices for identical or similar assets and liabilities in
markets that are not active, or inputs that are observable for assets or
liabilities, either directly or indirectly, through market corroboration.
- Level 3 - Inputs are unobservable inputs based on the Company's own
assumptions.
The following table summarizes the basis used to measure assets and
liabilities at fair value on a recurring basis in the balance sheet:
as of December 31, 2010
----------------------------------------------------------
Level 1 Level 2 Level 3 Total
------------------------ -------- ---------- ----------
Warrants $ - $ - ($744,476) ($744,476)
NOTE 11. SUBSEQUENT EVENTS
The Company has performed a review of events subsequent to the balance
sheet date and no matters required disclosure.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. 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 principal executive officer and principal financial 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,
2010 for the reasons described below.
We lack 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. 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, 2010, 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 because the attestation report requirement has been removed for
"smaller reporting companies" under the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS OF THE COMPANY
The Board is currently composed of four Class I Directors: Carl Richard,
Joseph H. Scheib, Mark D. Hagans and Joan B. Wills; and three Class II
Directors: James H. Hartung, Timothy R. Kasmoch and Thomas L. Kovacik (whose
terms will expire upon the election and qualification of directors at the annual
meetings of stockholders to be held in 2011 and 2012, respectively). At each
annual meeting of stockholders, directors will be elected for a full term of two
years to succeed those directors whose terms are expiring.
The following table sets forth the names and ages of our directors.
Name Age Position
------------------ --- --------------------------------------------------------
Mark D. Hagans 44 Class I Director*
James H. Hartung 68 Class II Director, Chairman of the Board
Timothy R. Kasmoch 49 Class II Director, President and Chief Executive Officer
Thomas L. Kovacik 63 Class II Director
Carl Richard 84 Class I Director*
Joseph H. Scheib 54 Class I Director*
Joan B. Wills 58 Class I Director*
_____________
* Directors currently nominated for re-election.
MARK D. HAGANS is an attorney and partner with the law firm of Plassman, Rupp,
Short & Hagans, of Archbold, Ohio, and his practice focuses on corporation,
taxation and banking law. Mr. Hagans serves on numerous Boards of directors,
including the Fulton County Health Center, where he is presently chair of the
Finance Committee. Mr. Hagans earned his law degree from the University of
Toledo. Mr. Hagans has served as our director since December 2006 and is a
member of the Board's Audit, Finance and Technology Committees. Mr. Hagans's
experience as a lawyer and businessman enables him to bring valuable resources
to the Board.
JAMES H. HARTUNG is the former President and Chief Executive Officer of the
Toledo-Lucas County (Ohio) Port Authority, a position he held from 1994 until
2008. Mr. Hartung has served as our Director since January 2006 and is a member
of the Board's Compensation and Nominating Committees. Mr. Hartung presently
also serves as the Chairman of the Board/Executive Vice-President at Seasnake
World Wide Marketing LLC, a marketing concern commercializing the Seasnake
shipping system for the marine transportation of liquid, dry bulk, break-bulk
and inter-modal container cargo; and Senior Associate at James A. Poure &
Associates, which provides diverse management consultant services to small to
medium size business, family owned business and entrepreneurial start-ups. Mr.
Hartung's qualifications to serve as a director and our Chairman of the Board
consist of several years experience as a businessman, as an organizational
leader and community organizer, and in dealings with local government and
related agencies that enable him to bring valuable insights to the Board.
TIMOTHY R. KASMOCH has been our President and Chief Executive Officer since
February 2006 and a director since January 2006. Until April 1, 2007, Mr.
Kasmoch was also President and CEO of Tri-State Garden Supply, d/b/a
Gardenscape, a bagger and distributor of lawn and garden products, which has
provided trucking services to our Company. Mr. Kasmoch is a graduate of Penn
State University. Mr. Kasmoch is a member of the Board's Finance and Technology
Committees. Mr. Kasmoch's qualifications to serve as a director of the Company
consist of his experience in the soil and distribution business as well as an
extensive knowledge of the transportation and trucking industry. Mr. Kasmoch's
strength is in strategic planning and he possesses a broad, fundamental
understanding of the business drivers affecting us. He is the only "insider" on
the Board.
THOMAS L. KOVACIK is the Executive Director of Transportation Advocacy Group of
Northwest Ohio ("TAGNO"), a strategic planning organization working with local
and Ohio transportation and economic development officials, and the President of
Kovacik Consulting, a business consulting company. Mr. Kovacik was previously
employed by us from 1992 to 1995 as President of Great Lakes N-Viro, at the time
one of our divisions. Mr. Kovacik has also held various positions with local
government, utilities and environmental companies, and earned a masters degree
from Bowling Green State University in Geochemistry. Mr. Kovacik has served as
our Director since December 2006, and is a member of the Board's Compensation
and Technology Committees. Mr. Kovacik's qualifications to serve as a director
of the Company consist of his experience in the environmental, government and
utilities industries, and his prior position with us as a divisional president.
His strength in strategic planning and transactional experience offers a unique
perspective to the Board.
CARL RICHARD is the former Executive Vice-President of P.R. Transportation, a
trucking company located in Toledo, Ohio, and was a consultant to us from
January 2006 to April 2007. Mr. Richard served as Vice-President of C.A.
Transportation from 1988 through 2000 and as Vice-President of R.O.S.S.
Investments, a real estate holding company, from 1980 through 2000. Mr. Richard
has served as our director since December 2004 and is a member of the Board's
Nominating Committee. Mr. Richard's qualifications to serve as a director of
the Company consist of his extensive experience in the transportation and
trucking industry.
JOSEPH H. SCHEIB is a Certified Public Accountant and was the Chief Financial
Officer of Broad Street Software Group, a comprehensive software technology
company located in Edenton, North Carolina, a position he held until 2010. From
May 2000 until February 2003, Mr. Scheib was the Financial Operation
Principal/Compliance Officer of Triangle Securities, LLC of Raleigh, North
Carolina, an asset management, brokerage and investment banking firm. Mr.
Scheib is a graduate of East Carolina University with a degree in accounting.
Mr. Scheib has served as our Director since December 2004, and is a member of
the Board's Audit, Finance and Nominating Committees. Mr. Scheib's
qualifications to serve as a director of the Company consist of his strong
financial and asset management experience and serving the Company in a financial
oversight role as the Chair of the Audit Committee. Given his extensive
knowledge and experience in finance, Mr. Scheib has been determined to be an
audit committee financial expert by the board.
JOAN B. WILLS is currently legal counsel for The Narragansett Bay Commission, a
regional sewer authority located in Providence, Rhode Island, a position she has
held since 2008. Also, Ms. Wills is currently Co-Trustee of the Cooke Family
Trust, an owner of more than 5% of N-Viro International Corporation common
stock. From 2006 until 2008, Ms. Wills provided legal counsel to the Rhode
Island Office of Legislative Counsel, an agency involved in drafting new
legislation and amendments to the State of Rhode Island. Ms. Wills has been a
practicing attorney at various points in her career, and holds a Bachelor of
Arts degree from the University of Rhode Island and a Juris Doctorate from
Suffolk University Law School in Boston. Ms. Wills has served as our Director
since August 2009 and is a member of the Compensation Committee. Ms. Wills'
qualifications to serve as a director of the Company consist of her experience
as an attorney in the utilities industry.
KEY RELATIONSHIPS
Joan Wills is currently Co-Trustee of the Cooke Family Trust, an owner of
more than 5% of our common stock.
CORPORATE GOVERNANCE AND BOARD MATTERS
OUR BOARD OF DIRECTORS
Our business, property and affairs are managed under the direction of our
Board. We have determined that the Company's interests are best served by
having a Chairman of the Board who is independent of the management of the
Company because it is our view this inherently strengthens board independence in
dealing with issues that closely involve management. Our Chief Executive
Officer has responsibility for setting our strategic direction and the
day-to-day leadership and performance, while the Chairman of the Board has a
greater focus on long-range Company goals and plans and governance of our Board
of Directors. This balance between the two positions enables Mr. Kasmoch to
focus on the operational and strategic challenges we presently face, with Mr.
Hartung providing board leadership on matters of governance and management
oversight.
Our Board, as a whole, has the responsibility for risk oversight of
management. The role of our Board of Directors is to oversee the President and
Chief Executive Officer, the Executive Vice President and the Chief Financial
Officer in the operation of the Company, including management's establishment
and implementation of appropriate practices and policies with respect to areas
of potentially significant risk to us. Our Board considers risks to the Company
as part of the strategic planning process and thorough review of compliance
issues in committees of our Board, as appropriate. While the Board has the
ultimate oversight responsibility for such risk management process, various
committees of the Board are structured to oversee specific risks in the areas
covered by their respective assignments such as audits or compensation. In
addition, our Board may retain, on such terms as determined by the Board and in
its sole discretion, independent legal, financial and other consultants and
advisors to advise and assist the Board in fulfilling its oversight
responsibilities. Currently, there are no such consultants in any category
assisting or advising the Company.
Management is responsible for N-Viro's day-to-day risk management, and the
entire Board's role is to engage in informed oversight. Our Chief Executive
Officer is a member of the Board of Directors, and our Chief Financial Officer
and Executive Vice President/General Counsel regularly attend Board meetings,
which helps facilitate discussions regarding risk between the Board and our
senior management, as well as the exchange of risk-related information or
concerns between the Board and the senior management. The Board believes Mr.
Kasmoch's service as Chief Executive Officer and on the Board is appropriate
because it bridges a critical gap between our management and the Board, enabling
the Board to benefit from management's perspective on our business while the
Board performs its oversight function.
The Company's philosophy about diversity among its Board members is
discussed below under "Nominating Committee."
MEETINGS OF THE BOARD OF DIRECTORS
Our Board held eight meetings during 2010, consisting of one regular
meeting and seven special meetings. Each director attended 100% of the
aggregate number of meetings held by the Board of Directors and the Committees
of the Board of Directors on which he served. It is the policy of the Company
that the members of the Board attend our annual stockholder meeting. Failure to
attend annual meetings without good reason is a factor the Nominating Committee
and Board will consider in determining whether or not to renominate a current
Board member. All members of the Board serving at the time attended the 2010
Annual Meeting, except Mr. Scheib.
SHAREHOLDER COMMUNICATIONS WITH THE BOARD
We encourage stockholder communications with directors. Stockholders may
communicate with a particular director, all directors or the Chairman of the
Board by mail or courier addressed to him or the entire Board in care of James
K. McHugh, Corporate Secretary, N-Viro International Corporation, 3450 West
Central Avenue, Suite #328, Toledo, OH 43606. All correspondence should be in
a sealed envelope marked "Confidential" and will be forwarded unopened to the
director as appropriate.
BOARD INDEPENDENCE
Although we are not subject to the listing requirements of any stock
exchange, we are committed to a board in which a majority of our members consist
of independent directors, as defined under the NASDAQ rules. The Board has
reviewed the independence of its members, applying the NASDAQ standards and
considering other commercial, legal, accounting and familial relationships
between the directors and us. The Board has determined that all of the
directors and director nominees are independent other than Mr. Kasmoch, who is
not an independent director by virtue of his current position as our Chief
Executive Officer.
CODE OF ETHICS
We have adopted a Code of Ethics which covers the Chief Executive Officer
and Chief Financial Officer, which is administered and monitored by the Audit
Committee of the Board. A copy of the Code of Ethics is attached as Exhibit
14.1 to this Annual Report on Form 10-K for the year ended December 31, 2010,
and is posted on our web site at www.nviro.com.
-------------
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has the following standing committees: the Audit Committee, the
Compensation Committee, the Finance Committee, the Nominating Committee and the
Technology Committee. The composition and function of each Committee is set
forth below:
DIRECTOR AUDIT COMPENSATION NOMINATING FINANCE TECHNOLOGY
------------------ ----- ------------ ---------- ------- ----------
Mark D. Hagans X X* X
James H. Hartung X X
Timothy R. Kasmoch X X*
Thomas L. Kovacik X* X
Carl Richard X
Joseph H. Scheib X* X* X
Joan B. Wills X
* Committee Chair
AUDIT COMMITTEE
Our Audit Committee consisted of Messrs. Scheib and Hagans. In accordance
with our Audit Committee Charter, each of the Audit Committee members must be
"independent" as determined under the NASDAQ rules. The Audit Committee
currently is not subject to, and does not follow, the independence criteria set
forth in Section 10A of the Securities Exchange Act 1934, as amended. The Board
has determined that each of the directors who serve on the Audit Committee are
"independent" under the NASDAQ rules, meaning that none of them has a
relationship with us that may interfere with their independence from us and our
management. Further, the Board has determined that Mr. Scheib qualifies as a
"financial expert" as defined by the Securities and Exchange Commission (the
"SEC").
The Audit Committee recommends the appointment of the outside auditor,
oversees our accounting and internal audit functions and reviews and approves
the terms of transactions between us and related party entities. During 2010,
the Audit Committee met three times. The Audit Committee has retained UHY LLP
to conduct the audit for the year ended December 31, 2011. The Audit committee
is governed by a written charter, a copy of which was attached to the Proxy
Statement for our annual meeting held on June 8, 2007.
COMPENSATION COMMITTEE
The Compensation Committee determines officers' salaries and bonuses and
administers the grant of stock options pursuant to our stock option plans. The
Compensation Committee does not have a written charter. The Compensation
Committee consisted of Messrs. Kovacik and Hartung and Ms. Wills. The
Compensation Committee met three times during 2010.
The Board has determined that all of the members of the committee are
"independent" as determined under the NASDAQ standards.
FINANCE COMMITTEE
The Finance Committee, consisting of Messrs. Hagans, Kasmoch and Scheib,
assists in monitoring our cash flow requirements and approves any internal or
external financing or leasing arrangements. The Finance Committee does not have
a written charter. The Finance Committee met two times during 2010.
NOMINATING COMMITTEE
The Nominating Committee, consisting of Messrs. Scheib, Richard and
Hartung, considers and recommends to the Board qualified candidates for election
as Board members, and establishes and periodically reviews criteria for
selection of directors. The Nominating Committee does not have a written
charter. The Nominating Committee met one time during 2010.
The Board has determined that all of the members of the committee are
"independent" as determined under the NASDAQ standards.
The Nominating Committee will consider candidates recommended by
stockholders, directors, officers, third-party search firms and other sources
for nomination as a director. The Committee considers the needs of the Board
and evaluates each director candidate in light of, among other things, the
candidate's qualifications. Recommended candidates must be of the highest
character and integrity, free of any conflicts of interest and possess the
ability to work collaboratively with others, and have the time to devote to
Board activities. All candidates will be reviewed in the same manner,
regardless of the source of the recommendation. Presently, the Nominating
Committee does not consider diversity as a characteristic in its selection of
candidates except to the extent that the Nominating Committee seeks to expand
the range of categories of experience and relationships in different aspects of
the waste management process the Company requires for the different foci of its
business and potential contacts with sources of business opportunity for the
Company.
The Nominating Committee will consider all stockholder recommendations of
proposed director nominees, if such recommendations are timely received under
applicable SEC regulations and include all of the information required to be
included as set forth in the By-Laws. To be considered "timely received,"
recommendations must be received in writing at our principal executive offices,
at N-Viro International Corporation, 3450 W. Central Avenue, Suite 328, Toledo,
Ohio 43606, Attention: Chairman, Nominating Committee, c/o James K. McHugh,
Corporate Secretary, no later than February 25, 2012.
All candidates recommended by stockholders should be independent and
possess substantial and significant experience which would be of value to us in
the performance of the duties of a director. In addition, any stockholder
director nominee recommendation must include, at a minimum, the following
information: the stockholder's name; address; the number and class of shares
owned; the candidate's biographical information, including name, residential and
business address, telephone number, age, education, accomplishments, employment
history (including positions held and current position), and current and former
directorships; and the stockholder's opinion as to whether the stockholder
recommended candidate meets the definitions of "independent" under the NASDAQ
standards. In addition, the recommendation letter must provide the information
that would be required to be disclosed in the solicitation of proxies for
election of directors under federal securities laws. The stockholder must
include the candidate's statement that he/she meets these requirements; is
willing to promptly complete the Questionnaire required of all officers,
directors and candidates for nomination to the Board; will provide such other
information as the Committee may reasonably request; consents to serve on the
Board if elected; and a statement whether such candidate, if elected, intends to
tender, promptly following such person's election or re-election, an irrevocable
resignation effective upon such person's failure to receive the required vote
for re-election at the next meeting at which such person would face re-election.
COMPENSATION OF DIRECTORS
Our Board of Directors has approved the payment of cash compensation to
non-employee directors in exchange for their service on the Board. The amount
of cash compensation to be received by each non-employee director is $1,000 per
regular meeting attended during each calendar year, and $500 per special meeting
attended. Our Board of Directors generally has four meetings per calendar year.
The Directors are reimbursed for out-of-pocket expenses incurred in attending
meetings of the Board of Directors or any committees thereof.
Under both our current stock option plans (the N-Viro International
Corporation Second Amended and Restated 2004 Stock Option Plan ["2004 Plan"] and
the N-Viro International Corporation 2010 Stock Option Plan ["2010 Plan"]), each
non-employee Director automatically receives a grant of options to purchase
2,500 or 5,000 shares, respectively, of Common Stock for each regular meeting
attended, and an option to purchase 1,250 or 2,500 shares, respectively, of
Common Stock for each special meeting attended, subject to a maximum of 15,000
or 30,000 options, respectively, in any calendar year.
Directors who are our employees do not receive any additional compensation
for serving as Directors. Directors who are our consultants do not receive any
additional cash compensation for serving as Directors, but do receive stock
options per the provisions of either the 2004 Plan or the 2010 Plan.
See "Certain Relationships and Related Transactions" for additional
compensation to directors.
DIRECTOR COMPENSATION
Fees Non-Equity Non-Qualified Non-Qualified
Earned or Incentive Incentive Deferred All
Paid in Stock Option Plan Plan Compensation Other
Name Cash Awards Awards Compensation Compensation Earnings Compensation (1) TOTAL
------------------ ---------- ------- -------- ------------- -------------- -------------- ----------------- --------
Joseph H. Scheib $ 3,000 - $ 34,785 - - - - $ 37,785
Carl Richard $ 3,000 - $ 34,785 - - - - $ 37,785
James H. Hartung $ 3,000 - $ 34,785 - - - - $ 37,785
Mark D. Hagans $ 3,000 - $ 34,785 - - - - $ 37,785
Thomas L. Kovacik $ 3,000 - $ 34,785 - - - $ 31,421 $ 69,206
Joan B. Wills $ 3,000 - $ 34,785 - - - - $ 37,785
Timothy R. Kasmoch - - - - - - - $ 0
---------- ------- -------- ------------- -------------- -------------- ----------------- --------
$ 18,000 $ 0 $208,710 $ 0 $ 0 $ 0 $ 31,421 $258,131
========== ======= ======== ============= ============== ============== ================= ========
(1) represents a consulting fee paid to Mr. Kovacik in 2010 with 10,000 stock options.
EXECUTIVE OFFICERS OF THE COMPANY
Executive officers of the Company are appointed by the Board of Directors
and hold office at the pleasure of the Board. Set forth below is biographical
and other information on the current executive officers of the Company. Mr.
Kasmoch also serves as a member of the Board and his biographical information is
set forth above under the caption "Directors of the Company."
Name Age Position
------------------ --- ------------------------------------------------
Timothy R. Kasmoch 49 President and Chief Executive Officer
Robert W. Bohmer 41 Executive Vice-President and General Counsel
James K. McHugh 52 Chief Financial Officer, Secretary and Treasurer
ROBERT W. BOHMER has been our Executive Vice-President and General Counsel since
July 2007. From 1996 until joining the Company, Mr. Bohmer had been a partner
with the law firm of Watkins, Bates and Carey, LLP, Toledo, Ohio. From 2005
through June 2007, Mr. Bohmer had served as general outside counsel to the
Company.
JAMES K. MCHUGH has served as our Chief Financial Officer, Secretary and
Treasurer since January 1997. Prior to that date, Mr. McHugh served the Company
in various financial positions since April 1992, and was a key member of the
team that took the Company public in 1993.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and executive officers, and persons who own beneficially more than
ten percent (10%) of the shares of our Common Stock, to file reports of
ownership and changes of ownership with the Securities and Exchange Commission,
or SEC. Copies of all filed reports are required to be furnished to us pursuant
to Section 16(a). Based solely on the reports received by us and on written
representations from reporting persons, we believe that the current directors
and executive officers complied with all applicable filing requirements during
the fiscal year ended December 31, 2010, with the following exceptions:
Carl Richard was late filing a Form 4 (Statement of Changes of
Beneficial Ownership of Securities) in connection with a purchase of Common
Stock on the open market that occurred on October 18, 2010. The Form 4 was
filed on October 27, 2010.
Carl Richard was late filing a Form 4 in connection with six separate
purchases of Common Stock on the open market that occurred between November
7 and November 19, 2010. The Form 4 was filed on November 19, 2010.
Joseph R. Scheib was late filing a Form 4 for an exercise of stock
options and concurrent acquisition of Common Stock that occurred on April
2, 2010. The Form 4 was filed on May 11, 2010.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table presents the total compensation paid to our Chief
Executive Officer, Executive Vice President and Chief Financial Officer during
2010 and 2009. There were no other executive officers who were serving at the
end of 2010 or 2009 and whose total compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
Non-Equity Nonqualified
Incentive Deferred
Name and Principal Stock Option Plan Compensation All Other
Position Year Salary Bonus Awards Awards (4) Compensation Earnings Compensation TOTAL
--------------------------- ---- -------- ------ ------ ----------- ------------ ------------ ------------- --------
TIMOTHY R. KASMOCH 2010 $150,000 - - $ 446,152 - - $ 21,518 $617,670
President and Chief 2009 $150,000 - - $ 570,376 - - $ 11,000 $731,376
Executive Officer (1)
ROBERT W. BOHMER 2010 $150,000 - - $ 373,763 - - $ 0 $523,763
Executive Vice-President + 2009 $150,000 - - $ 454,344 - - $ 0 $604,344
General Counsel (2)
JAMES K. MCHUGH 2010 $125,000 $7,810 - $ 94,926 - - $ 399 $228,135
Chief Financial Officer, 2009 $116,688 - - $ 190,746 - - $ 399 $307,833
Secretary + Treasurer (3)
(1) For the "All Other Compensation" column, Mr. Kasmoch's spouse was
compensated for outside consulting services rendered to the Company at various
times during 2009 and 2010, in addition to employee wages paid in the last
quarter of 2010. All compensation was in cash.
(2) Mr. Bohmer's value of the 2009 Option Award includes the 2007 Option
Award recorded as an expense in the amount of $46,667. The value of the 2010
Option Award includes the 2007 Option Award recorded as an expense in the amount
of $70,000.
(3) For the "All Other Compensation" column, Mr. McHugh is taxed on the
imputed benefit of a life insurance policy that benefits his personal
beneficiary for one-half the face value of the policy and N-Viro International
Corporation for the other one-half.
(4) The amounts included in the Option Awards column include the aggregate
grant date fair value of options granted in the fiscal year computed in
accordance with FASB ASC Topic 718. We continue to use the Black-Scholes model
to measure the grant date fair value of stock options. For a discussion of the
valuation assumptions used to value the options, see Note 5 to our Consolidated
Financial Statements included in this annual report on Form 10-K for the fiscal
year ended December 31, 2010.
2010 GRANTS OF PLAN BASED AWARDS
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
Grant Approval ----------------------------------------------------------
Name Date Date Threshold ($) Target ($) Maximum ($)
------------------ --------- --------- --------------------------------- ---------- -----------
Timothy R. Kasmoch 3/17/2010 3/17/2010 - - -
Robert W. Bohmer 3/17/2010 3/17/2010 - - -
James K. McHugh 3/17/2010 3/17/2010 - - -
Estimated Future Payouts Under
Equity Incentive Plan Awards Full Grant Base Price
-------------------------------------------------------- Date Fair of Option
Name Threshold (#) Target (#) Maximum (#) Value ($) Awards ($/shr.)
------------------ ------------------------------- ---------- ----------- ----------- ---------------
Timothy R. Kasmoch - - 470,000 2.65 3.27
Robert W. Bohmer - - 320,000 2.65 3.27
James K. McHugh - - 100,000 2.65 3.27
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS STOCK AWARDS
--------------------------------------------------------------------- --------------------------
Equity
Incentive
Plan Market
# of # of Awards: # of Value of
Securities Securities # Securities Shares or Shares or
Underlying Underlying Underlying Units of Units of
Unexercised Unexercised Unexercised Option Option Stock That Stock That
Options (#) Options (#) Unearned Exercise Expiration Have Not Have Not
Name Exercisable Unexercisable Options (#) Price (#) Date Vested (#) Vested ($)
------------------ -------------- -------------- ------------- ---------- ---------- ------------- -----------
Timothy R. Kasmoch 250,000 - - $ 2.00 12/31/11 - -
Timothy R. Kasmoch 2,500 - - $ 1.70 2/15/16 - -
Timothy R. Kasmoch 25,000 - - $ 1.94 7/11/19 - -
Timothy R. Kasmoch 243,000 - - $ 2.23 7/22/19 - -
Timothy R. Kasmoch 188,000 282,000 - $ 3.27 3/18/20 - -
Robert W. Bohmer 100,000 - - $ 2.80 6/13/17 - -
Robert W. Bohmer 25,000 - - $ 1.94 7/11/19 - -
Robert W. Bohmer 168,000 - - $ 2.23 7/22/19 - -
Robert W. Bohmer 128,000 192,000 - $ 3.27 3/18/20 - -
James K. McHugh 10,000 - - $ 1.50 12/7/11 - -
James K. McHugh 12,000 - - $ 2.10 11/11/14 - -
James K. McHugh 50,000 - - $ 2.00 12/31/16 - -
James K. McHugh 25,000 - - $ 1.94 7/11/19 - -
James K. McHugh 68,000 - - $ 2.23 7/22/19 - -
James K. McHugh 40,000 60,000 - $ 3.27 3/18/20 - -
Equity Equity
Incentive Incentive
Plan Awards: Plan Awards:
# Unearned Market or
Shares, Payout Value
Units or of Unearned
Other Rights Shares, Units
That Have or Other Rights
Not That Have
Name Vested (#) Not Vested (#)
------------------ ------------- ----------------
Timothy R. Kasmoch - -
Timothy R. Kasmoch - -
Timothy R. Kasmoch - -
Timothy R. Kasmoch - -
Timothy R. Kasmoch - -
Robert W. Bohmer - -
Robert W. Bohmer - -
Robert W. Bohmer - -
Robert W. Bohmer - -
James K. McHugh - -
James K. McHugh - -
James K. McHugh - -
James K. McHugh - -
James K. McHugh - -
James K. McHugh - -
All options awards were made granted under the Company's current stock
option plan described under the caption "Equity Compensation Plan Information."
EMPLOYMENT AGREEMENTS
---------------------
On February 13, 2007, we entered into an employment agreement with Mr.
Timothy R. Kasmoch as our President and Chief Executive Officer. Mr. Kasmoch's
employment agreement was for a two-year term commencing on February 13, 2007 and
provided for automatic renewal of successive one-year terms unless notice was
provided ninety (90) days prior to the expiration of the then current term. The
agreement provided that Mr. Kasmoch was to receive an annual base salary of
$150,000, subject to an annual increase at the discretion of the Board. In
addition, Mr. Kasmoch was eligible for an annual cash bonus in an amount to be
determined, and otherwise subject to the discretion of, the Board. Generally,
Mr. Kasmoch's employment agreement may have been terminated by us with or
without cause or by the Employee for any reason. If the agreement was
terminated by us without cause (other than by reason of the death or disability
of Mr. Kasmoch), Mr. Kasmoch would have continued to receive his base salary
then in effect for the period between the termination date and the expiration
date of the agreement. If the agreement was terminated for any other reason by
either party, Mr. Kasmoch was entitled to receive his base salary through the
effective date of the termination plus any bonus or incentive compensation which
had been earned or payable through the termination date, as provided for in the
agreement. A copy of Mr. Kasmoch's employment agreement was attached to a Form
8-K as Exhibit 10.1, filed by us on March 12, 2007.
Effective April 2, 2008, we entered into a first amendment to the employment
agreement with Mr. Kasmoch. The amendment extended the term of Mr. Kasmoch's
employment agreement for an additional two years. As a result, the term of Mr.
Kasmoch's employment agreement was set to expire on February 12, 2011, instead
of February 12, 2009 as provided for in the original employment agreement. A
copy of the amendment to Mr. Kasmoch's employment agreement was attached to a
Form 8-K as Exhibit 10.1, filed by us on April 7, 2008.
Effective March 17, 2010, we entered into a new Employment Agreement (the
"Agreement") with Mr. Kasmoch commencing February 26, 2010. The Agreement is
for a five-year term commencing on February 26, 2010 and provides for automatic
renewal of successive one-year terms unless notice is provided ninety (90) days
prior to the expiration of the then current term. The agreement provides that
Mr. Kasmoch is to receive an annual base salary of $150,000, subject to annual
increase at the discretion of our Board of Directors. In addition, Mr. Kasmoch
is eligible for an annual cash bonus in an amount to be determined, and
otherwise subject to the discretion of the Board of Directors. Under the
agreement, this determination is to be based upon the Board of Directors review
of Mr. Kasmoch's performance. The Agreement also provides for a stock option
grant of 470,000 options that vest over a five year period, pursuant to the
Second Amended and Restated 2004 Stock Option Plan. While employed with the
Company, the Agreement allows Mr. Kasmoch to engage in other limited business
activities that are not competitive with and do not involve the Company, subject
to the prior disclosure to the Company's Audit Committee. The Employment
Agreement permits Mr. Kasmoch to terminate his employment in the event of a
change of control or certain enumerated material breaches thereof by the
Company. A copy of this employment agreement was attached to a Form 8-K as
Exhibit 10.1, filed by us on March 19, 2010.
In June 2007, we executed an employment agreement with Robert W. Bohmer as our
Vice-President of Business Development and General Counsel, which commenced July
1, 2007. Mr. Bohmer's agreement was for a two-year term at $150,000 per year
plus a stock option grant of 100,000 shares. In addition, Mr. Bohmer was
eligible for an annual cash bonus in an amount to be determined. Generally, the
agreement may have been terminated by us with or without cause or by the
Employee for any reason. A copy of Mr. Bohmer's employment agreement was
attached to a Form 8-K as Exhibit 10.1, filed by us on June 20, 2007.
Effective June 19, 2008, we entered into a first amendment to the employment
agreement with Mr. Bohmer. The amendment extended the term of Mr. Bohmer's
employment agreement for an additional two years. As a result, the term of Mr.
Bohmer's employment agreement was set to expire on July 1, 2011, instead of July
1, 2009 as provided for in the original employment agreement. Except for the
extension of the term, there were no other changes to Mr. Bohmer's employment
agreement. A copy of the amendment to Mr. Bohmer's employment agreement was
attached to a Form 8-K as Exhibit 10.1, filed by us on June 20, 2008.
Effective March 17, 2010, we entered into a new Employment Agreement (the
"Agreement") with Mr. Bohmer as our Executive Vice President and General
Counsel, commencing February 26, 2010. The Agreement is for a five-year term
commencing on February 26, 2010 and provides for automatic renewal of successive
one-year terms unless notice is provided ninety (90) days prior to the
expiration of the then current term. The Agreement provides that Mr. Bohmer is
to receive an annual base salary of $150,000, subject to an annual increase at
the discretion of our Board of Directors. In addition, Mr. Bohmer is eligible
for an annual cash bonus in an amount to be determined, and otherwise subject to
the discretion of the Board of Directors. Under the agreement, this
determination is to be based upon the President/Chief Executive Officer's and
Board of Directors review of Mr. Bohmer's performance. The Agreement also
provides for a stock option grant of 320,000 options that vest over a five year
period, pursuant to the Second Amended and Restated 2004 Stock Option Plan.
While employed with the Company, the Agreement allows Mr. Bohmer to engage in
other limited business activities that are not competitive with and do not
involve the Company, subject to the prior disclosure to the Company's Audit
Committee. The Employment Agreement permits Mr. Bohmer to terminate his
employment in the event of a change of control or certain enumerated material
breaches thereof by the Company. A copy of this employment agreement was
attached to a Form 8-K as Exhibit 10.1, filed by us on March 19, 2010.
Effective March 17, 2010, we entered into an Employment Agreement (the
"Agreement") with James K. McHugh to serve as the Company's Chief Financial
Officer commencing February 26, 2010. The Agreement is for a five-year term
commencing on February 26, 2010 and provides for automatic renewal of successive
one-year terms unless notice is provided ninety (90) days prior to the
expiration of the then current term. The agreement provides that Mr. McHugh is
to receive an annual base salary of $125,000, subject to annual increase at the
discretion of the Board of Directors of the Company. In addition, Mr. McHugh is
eligible for an annual cash bonus in an amount to be determined, and otherwise
subject to the discretion of, the Board of Directors. Under the agreement, this
determination is to be based upon the President/Chief Executive Officer's and
Board of Directors review of Mr. McHugh's performance. The Agreement also
provides for a stock option grant of 100,000 shares that vest over a five year
period, pursuant to the Second Amended and Restated 2004 Stock Option Plan.
While employed with the Company, the Agreement allows Mr. McHugh to engage in
other limited business activities that are not competitive with and do not
involve the Company, subject to the prior disclosure to the Company's Audit
Committee. The Employment Agreement permits Mr. McHugh to terminate his
employment in the event of a change of control or certain enumerated material
breaches thereof by the Company. A copy of this employment agreement was
attached to a Form 8-K as Exhibit 10.1, filed by us on March 19, 2010.
EQUITY COMPENSATION PLAN INFORMATION
We maintain three stock option plans (two are able to issue new grants) for
directors, executive officers and key employees. The most recent plan ("2010
Plan") was approved by the stockholders in August 2010. The 2010 Plan
authorizes the Board of Directors or a committee thereof, to grant awards of
incentive stock options and non-qualified stock options for up to a maximum of
5,000,000 shares of Common Stock. For all of the plans, the total number of
options granted and outstanding as of March 21, 2011 was 2,273,300, and the
number of options available for future issuance was 5,004,075. Currently, all
of the plans are administered by the Board of Directors via a committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
We had outstanding 5,938,714 shares of Common Stock, $.01 par value per
share, or the Common Stock, on March 21, 2011, which constitutes the only class
of our outstanding voting securities.
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 . . . . 1,679,300 $ $2.50 5,004,075 2
Equity compensation plans not
approved by security holders 258,270 1 $ $1.95 -0-
---------------------- --------------------- ---------------------------
Total 1,937,570 $ $2.43 5,004,075
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 is combined under our N-Viro
International Corporation 2010 Stock Option Plan as approved by the stockholders
on July 22, 2010 and the Second Amended and Restated 2004 Stock Option Plan.
FIVE PERCENT STOCKHOLDERS
As of March 21, 2011, the following were the only persons known to us to
own beneficially more than 5% of the outstanding shares of Common Stock:
Name Amount and Percentage of
Title of and Address of Nature of Outstanding Shares
Class Beneficial Owner Beneficial Ownership of Common Stock
------------ ----------------------------------------------------- -------------------- -------------------
Cooke Family Trust
90 Grande Brook Circle, #1526
Common Stock Wakefield, Rhode Island 02879 627,717 (1) 10.6%
------------ ----------------------------------------------------- -------------------- -------------------
VC Energy I, LLC
3900 Paradise Road, Suite U
Common Stock Las Vegas, NV 89169 800,000 (2) 12.6%
------------ ----------------------------------------------------- -------------------- -------------------
1. The shares attributed to the Cooke Family Trust include 627,267 shares owned
beneficially and 450 in Common Stock warrants exercisable to purchase an equal number of
shares of Common Stock. This information was derived from the Schedule 13D Amendment #5 filed
on May 10, 2010.
2. The shares attributed to VC Energy I, LLC include 400,000 shares owned beneficially
and 400,000 in Common Stock warrants exercisable to purchase an equal number of shares of
Common Stock. This information was derived from the Schedule 13G filed on July 8, 2010.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of March 21, 2011, unless otherwise
specified, certain information with respect to the beneficial ownership of our
shares of Common Stock by each person who is our director, a nominee for the
Board, each of the Named Executive Officers, and by our directors and executive
officers as a group. Unless otherwise noted, each person has voting and
investment power, with respect to all such shares, based on 5,938,714 shares of
Common Stock outstanding on the record date. Pursuant to the rules of the SEC,
shares of Common Stock which a person has the right to acquire within 60 days of
the date hereof pursuant to the exercise of stock options are deemed to be
outstanding for the purpose of computing the percentage ownership of such person
but are not deemed outstanding for the purpose of computing the percentage
ownership of any other person.
Name of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership 1 of Class
-------------- ----------------------------------------------------------- -------------------- -- ---------
Common Stock Mark D. Hagans 44,150 2 0.74%
Common Stock James H. Hartung 62,250 3 1.04%
Common Stock Timothy R. Kasmoch 866,500 4 12.94%
Common Stock Thomas L. Kovacik 52,500 5 0.88%
Common Stock Carl Richard 179,040 6 2.96%
Common Stock Joseph H. Scheib 241,072 7 3.98%
Common Stock Joan B. Wills 653,967 8 10.98%
Common Stock Robert W. Bohmer 423,600 9 6.66%
Common Stock James K. McHugh 218,920 10 3.56%
Common Stock All directors and executive officers as a group (9 persons) 2,741,999 11 35.50%
1. Except as otherwise indicated, all shares are directly owned with voting
and investment power held by the person named.
2. Represents 4,450 shares of Common Stock owned by Mr. Hagans and 39,700
shares issuable upon exercise of options which are currently exercisable at
prices ranging from $1.94 to $3.90 per share.
3. Represents 2,610 shares of Common Stock owned by Mr. Hartung, 48,750
shares issuable upon exercise of options which are currently exercisable at
prices ranging from $1.42 to $3.90 per share and 10,890 unregistered shares
issuable upon exercise of warrants which are currently exercisable at $2.00 per
share.
4. Represents 100,000 unregistered shares and 8,000 registered shares of
Common Stock owned by Mr. Kasmoch, 50,000 unregistered shares issuable upon
exercise of warrants which are currently exercisable at $1.85 per share and
708,500 shares issuable upon exercise of options which are currently exercisable
at prices ranging from $1.70 to $3.27 per share.
5. Represents 1,000 shares of Common Stock owned by Mr. Kovacik and 51,500
shares issuable upon exercise of options which are currently exercisable at
prices ranging from $1.82 to $3.90 per share.
6. Represents 61,601 shares of Common Stock owned by Mr. Richard, 60,000
shares issuable upon exercise of options which are currently exercisable at
prices ranging from $0.70 to $3.90 per share and 57,439 unregistered shares
issuable upon exercise of warrants which are currently exercisable at prices
ranging from $1.85 to $2.00 per share.
7. Represents 124,922 shares of Common Stock owned by Mr. Scheib, 61,250
shares issuable upon exercise of options which are currently exercisable at
prices ranging from $0.70 to $3.90 per share, 600 shares owned by a family
member over which Mr. Scheib acts as custodian and 54,300 unregistered shares
issuable upon exercise of warrants which are currently exercisable at prices
ranging from $1.85 to $2.52 per share.
8. Represents 10,000 shares of Common Stock owned by Ms. Wills, 16,250
shares issuable upon exercise of options which are currently exercisable at
prices ranging from $2.66 to $3.53 per share and 627,717 shares of Common Stock
owned beneficially by the Cooke Family Trust, a more than 5% stockholder of
which Ms. Wills is the trustee. See further information in the section "Five
Percent Stockholders".
9. Represents 2,600 shares of Common Stock owned by Mr. Bohmer and 421,000
shares issuable upon exercise of options which are currently exercisable at
prices ranging from $1.94 to $3.27 per share.
10. Represents 13,920 shares of Common Stock owned by Mr. McHugh and a total
of 205,000 shares issuable upon exercise of options which are currently
exercisable at prices ranging from $1.50 to $3.27 per share.
11. Represents 329,103 shares of Common Stock owned by the directors and
officers, 628,317 shares owned indirectly, 1,611,950 shares issuable upon
exercise of options which are currently exercisable at prices ranging from $0.70
to $3.90 per share and a total of 172,629 unregistered shares issuable upon
exercise of warrants which are currently exercisable at prices ranging from
$1.85 to $2.52 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
None
DIRECTOR INDEPENDENCE
Although we are not subject to the listing requirements of any stock
exchange, we are committed to a board in which a majority of our members consist
of independent directors, as defined under the NASDAQ rules. The Board has
reviewed the independence of its members, applying the NASDAQ standards and
considering other commercial, legal, accounting and familial relationships
between the Directors and us. The Board has determined that all of the
Directors and director nominees are independent other than Mr. Kasmoch, who is
not an independent Director by virtue of his current position as our chief
executive officer.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
Audit services of UHY LLP ("UHY") included the audit of our annual
financial statements for 2010 and 2009, and services related to quarterly
filings with the SEC through the reporting period ended September 30 in each of
those years. Fees for these services totaled approximately $73,500 for 2010 and
$72,000 for 2009.
AUDIT RELATED FEES
There were no fees billed for the years ended December 31, 2010 and
December 31, 2009 for assurance and related services by UHY that are reasonably
related to the performance of the audit or review of our financial statements.
TAX FEES
There were no fees billed for the years ended December 31, 2010 and
December 31, 2009 for professional services rendered by UHY for tax compliance,
tax advice, and tax planning.
ALL OTHER FEES
There were no fees billed for the years ended December 31, 2010 and
December 31, 2009 for assistance on accounting related matters.
Although the Audit Committee Charter does not explicitly require it, the
Audit Committee approves all engagements of outside auditors before any work is
begun on the engagement.
UHY LLP personnel work under the direct control of UHY LLP partners and are
leased from wholly-owned subsidiaries of UHY Advisors, Inc. in an alternative
practice structure.
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 Employment Agreement, dated March 17, 2010 between Timothy R. Kasmoch
and N-Viro International Corporation (incorporated by reference to Exhibit 10.1
to Form 8-K filed March 19, 2010)
10.8 Employment Agreement, dated March 17, 2010 between Robert W. Bohmer and
N-Viro International Corporation (incorporated by reference to Exhibit 10.2 to
Form 8-K filed March 19, 2010)
10.9 Employment Agreement, dated March 17, 2010 between James K. McHugh and
N-Viro International Corporation (incorporated by reference to Exhibit 10.3 to
Form 8-K filed March 19, 2010)
10.10 The Amended and Restated N-Viro International Corporation Stock Option
Plan (incorporated by reference to Form S-8 filed May 9, 2000).*
10.11 The N-Viro International Corporation 2004 Stock Option Plan
(incorporated by reference to Form S-8 filed December 20, 2004).*
10.12 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).*
10.13 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).*
10.14 The N-Viro International Corporation 2010 Stock Option Plan
(incorporated by reference to the Definitive Proxy Statement on Schedule 14A
filed June 23, 2010).*
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, 2011
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, 2011
/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, Director
and Chairman of the Board
/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
* by James K. McHugh, Attorney-In-Fact