UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2011
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-21802
-----------------------
N-VIRO INTERNATIONAL CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 34-1741211
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3450 W. Central Avenue, Suite 328
Toledo, Ohio 43606
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (419) 535-6374
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T ( 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
As of May 10, 2011, 5,967,928 shares of N-Viro International
Corporation $ .01 par value common stock were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
N-VIRO INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended March 31
---------------------------
2011 2010
----------- ------------
REVENUES $1,952,401 $ 1,372,012
COST OF REVENUES 1,296,547 997,994
----------- ------------
GROSS PROFIT 655,854 374,018
OPERATING EXPENSES
Selling, general and administrative 563,393 1,521,293
----------- ------------
OPERATING INCOME (LOSS) 92,461 (1,147,275)
OTHER INCOME (EXPENSE)
Gain on market price decrease of warrants issued 512,699 -
Gain on extinguishment of liabilities 4,008 52,798
Interest income 314 224
Interest expense (20,275) (21,940)
Amortization of discount on convertible debentures (28,006) (26,661)
----------- ------------
468,740 4,421
----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES 561,201 (1,142,854)
Federal and state income taxes - -
----------- ------------
NET INCOME (LOSS) $ 561,201 $(1,142,854)
=========== ============
Basic and diluted income (loss) per share $ 0.09 $ (0.22)
=========== ============
Weighted average common shares outstanding - basic and diluted 6,445,794 5,176,146
=========== ============
See Notes to Condensed Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, 2011 December 31, 2010
---------------- -------------------
ASSETS
----------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted $ 92,427 $ 37,112
Restricted 207,752 207,465
Receivables, net:
Trade, net of allowance for doubtful accounts of
70,000 at March 31, 2011 and December 31, 2010 802,410 780,844
Related party - Mahoning Valley N-Viro 24,325 24,325
Prepaid expenses and other assets 46,845 80,994
Deferred costs - stock issued for services 540,978 622,086
---------------- -------------------
Total current assets 1,714,737 1,752,826
PROPERTY AND EQUIPMENT, NET 1,680,478 1,490,865
INTANGIBLE AND OTHER ASSETS, NET 137,387 159,304
---------------- -------------------
$ 3,532,602 $ 3,402,995
================ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 321,488 $ 337,799
Convertible debentures, net of discount 695,681 667,674
Line of credit 175,000 364,000
Accounts payable 1,086,070 1,089,513
Accrued liabilities 237,512 226,062
---------------- -------------------
Total current liabilities 2,515,751 2,685,048
Long-term debt, less current maturities 357,424 230,931
Fair value of warrant liability 231,777 744,476
---------------- -------------------
Total liabilities 3,104,952 3,660,455
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.01 par value, authorized 2,000,000 shares;
issued -0- shares in 2011 and 2010 - -
Common stock, $.01 par value; authorized 35,000,000 shares;
issued 6,062,214 in 2011 and 2010 60,622 60,622
Note receivable for common stock (300,000) (300,000)
Additional paid-in capital 24,672,553 24,548,644
Accumulated deficit (23,320,635) (23,881,836)
---------------- -------------------
1,112,540 427,430
Less treasury stock, at cost, 123,500 shares 684,890 684,890
---------------- -------------------
Total stockholders' equity (deficit) 427,650 (257,460)
---------------- -------------------
$ 3,532,602 $ 3,402,995
================ ===================
See Notes to Condensed Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31
---------------------------
2011 2010
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 433,516 $ 156,184
CASH FLOWS FROM INVESTING ACTIVITIES
Net change to restricted cash and cash equivalents (286) (223)
Advances to related parties - (3,000)
Purchases of property and equipment (299,096) (37,327)
---------- ----------
Net cash used in investing activities (299,382) (40,550)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock warrants exercised - 2,405
Net repayments on line of credit (189,000) (5,000)
Principal payments on long-term obligations (121,624) (128,641)
Proceeds from stock options exercised - 69,261
Proceeds from convertible debentures issued, net of issuance costs - 29,960
Borrowings under long-term obligations 231,805 37,327
---------- ----------
Net cash (used) provided by financing activities (78,819) 5,312
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 55,315 120,946
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 37,112 61,380
---------- ----------
CASH AND CASH EQUIVALENTS - ENDING OF PERIOD $ 92,427 $ 182,326
========== ==========
Supplemental disclosure of cash flows information:
Cash paid during the three months ended for interest $ 31,975 $ 37,580
========== ==========
See Notes to Condensed Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements of N-Viro International
Corporation (the "Company") are unaudited but, in management's opinion, reflect
all adjustments (including normal recurring accruals) necessary to present
fairly such information for the period and at the dates indicated. The results
of operations for the three months ended March 31, 2011 may not be indicative of
the results of operations for the year ending December 31, 2011. Since the
accompanying consolidated financial statements have been prepared in accordance
with Article 10 of Regulation S-X, they do not contain all information and
footnotes normally contained in annual consolidated financial statements;
accordingly, they should be read in conjunction with the consolidated financial
statements and notes thereto appearing in the Company's Form 10-K for the period
ending December 31, 2010.
The financial statements are consolidated as of March 31, 2011, December
31, 2010 and March 31, 2010 for the Company. All intercompany transactions were
eliminated.
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. There have
been no changes in the selection and application of critical accounting policies
and estimates disclosed in "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations" of our Annual Report on Form 10-K
for the year ended December 31, 2010.
NOTE 2. LONG-TERM DEBT AND LINE OF CREDIT
During the first quarter of 2011, the Company had a line of credit up to
$400,000 at the Comerica Bank, N.A. prime rate (3.25% at March 31, 2011) plus
0.75%, but in no event less than 5.75%, and secured by a first lien on all
assets (except equipment) of the Company, with Monroe Bank + Trust, or the Bank,
with a maturity date of April 15, 2011. Two certificates of deposit totaling
$141,000 from the Bank are held as a condition of maintaining the line of
credit. In April 2011, the renewal date of the line of credit was extended to
June 15, 2011. At March 31, 2011, the Company had $225,000 of borrowing
capacity under the credit facility.
From the beginning of 2009 through the first quarter of 2011, the Company
has borrowed a total of $1,587,626 from nine lenders to purchase processing and
automotive equipment. As of March 31, 2011, a total of sixteen term notes are
outstanding, ranging from 3.8% to 10.9% interest for terms ranging three to five
years, monthly payments totaling approximately $33,000 and all secured by
equipment. The total amount owed on all notes as of March 31, 2011 was
approximately $670,000 and all notes are expected to be paid in full on the
applicable maturity date, the last of which is in March 2016.
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
March 31, 2011, 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 first quarter ended March 31, 2011 and 2010, amortization
expense amounted to $27,006 and $26,661, respectively.
NOTE 3. COMMITMENTS AND CONTINGENCIES
On March 17, 2010, the Company and Mr. Timothy R. Kasmoch, the President
and Chief Executive Officer, entered into an Employment Agreement for a
five-year term. Mr. Kasmoch is to receive an annual base salary of $150,000,
subject to an annual discretionary increase. In addition, Mr. Kasmoch is
eligible for an annual cash bonus and was granted stock options from the
Company's Second Amended and Restated 2004 Stock Option Plan. Generally, the
Agreement may be terminated by the Company with or without cause or by the
Employee for any reason. Details of this event were announced in a Form 8-K
filed March 19, 2010.
On March 17, 2010, the Company and Mr. Robert W. Bohmer, the Executive Vice
President and General Counsel, entered into an Employment Agreement for a
five-year term. Mr. Bohmer is to receive an annual base salary of $150,000,
subject to an annual discretionary increase. In addition, Mr. Bohmer is
eligible for an annual cash bonus and was granted stock options from the
Company's Second Amended and Restated 2004 Stock Option Plan. Generally, the
Agreement may be terminated by the Company with or without cause or by the
Employee for any reason. Details of this event were announced in a Form 8-K
filed March 19, 2010.
On March 17, 2010, the Company and Mr. James K. McHugh, the Chief Financial
Officer, Secretary and Treasurer, entered into an Employment Agreement for a
five-year term. Mr. McHugh is to receive an annual base salary of $125,000,
subject to an annual discretionary increase. In addition, Mr. McHugh is
eligible for an annual cash bonus and was granted stock options from the
Company's Second Amended and Restated 2004 Stock Option Plan. Generally, the
Agreement may be terminated by the Company with or without cause or by the
Employee for any reason. Details of this event were announced in a Form 8-K
filed March 19, 2010.
The Company's executive and administrative offices are located in Toledo,
Ohio. Through April 2011, the Company operated under under a month to month
lease and the relationship with the lessor was satisfactory. The total rental
expense for this location included in the statements of operations for each of
the three months ended March 31, 2011 and 2010 is approximately $38,500. In
April 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. The Company also leases various
equipment on a month-to-month basis.
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 three
months ended March 31, 2011 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. In June 2010, the
Company renewed the lease for an additional year through May 31, 2011. The
total minimum rental commitment for the year ending December 31, 2011 is
$12,500. The total rental expense included in the statements of operations for
each of the three months ended March 31, 2011 and 2010 is $7,500.
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 three months ended
March 31, 2011 and 2010 is $36,000.
The Company leased processing equipment at its Florida location which began
in 2006 under a four year contract. The total minimum rental commitment for the
year ended December 31, 2010 was $3,000. The total rental expense included in
the statements of operations for each of the three months ended March 31, 2011
and 2010 is approximately $-0- and $3,000, respectively. In February 2010, the
Company purchased the equipment through a financing arrangement with an
equipment leasing company.
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 $3,900. The total rental
expense included in the statements of operations for each of the three months
ended March 31, 2011 and 2010 is approximately $3,900 and $11,600, respectively.
In February 2011, the Company purchased the equipment through a financing
arrangement with an equipment leasing company.
The Company operates in an environment with many financial risks,
including, but not limited to, major customer concentrations, customer contract
termination provisions, competing technologies, infringement and/or
misappropriation of intellectual property rights, the highly competitive and, at
times, seasonal nature of the industry and worldwide economic conditions.
Various federal, state and governmental agencies are considering, and some have
adopted, laws and regulations regarding environmental protection which could
adversely affect the business activities of the Company. The Company cannot
predict what effect, if any, current and future regulations may have on the
operations of the Company
From time to time the Company is involved in legal proceedings and subject
to claims which may arise in the ordinary course of business. The Company is not
aware of any legal proceedings or material claims at this time.
NOTE 4. NEW ACCOUNTING STANDARDS
Accounting Standards Updates not effective until after March 31, 2011 are
not expected to have a significant effect on the Company's consolidated
financial position or results of operations.
NOTE 5. 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.
NOTE 6. BASIC AND DILUTED INCOME (LOSS) PER SHARE
Basic and diluted income (loss) per share is computed using the treasury
stock method for outstanding stock options and warrants. For the three months
ended March 31, 2011, 1,637,200 outstanding stock options and warrants have been
excluded from the computation of diluted income per share because the exercise
prices of the equivalents were higher than the average market price of the
Company's common stock during that period and are anti-dilutive. For the three
months ended March 31, 2010, the Company incurred a net loss. Accordingly, no
stock options or warrants have been included in the computation of diluted loss
per share as the impact would be anti-dilutive.
NOTE 7. COMMON STOCK
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.
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 March 31, 2011, the Company has recorded a liability of
$231,777 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 three months ended March 31, 2011, the
Company recorded a gain of $512,699 on the revaluation from the two issuances of
the warrants to the end of the period.
NOTE 8. SUBSEQUENT EVENTS
None
The Company has performed a review of events subsequent to the balance
sheet date.
NOTE 9. STOCK OPTIONS
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.
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 three months ended March 31, 2011, this charge was $118,000.
On October 15, 2010, the Company granted a total of 75,000 stock options to
three employees. All of the options granted are for a period of ten years, are
exercisable at $1.89 per share and vest ratably over a period of four years from
the date of grant. These options were granted under the N-Viro International
Second Amended and Restated 2004 Stock Option Plan and are intended as Incentive
Stock Options. To reflect the value of the stock options granted, the Company
is taking a charge to earnings totaling approximately $121,300 through October
2014. For the three months ended March 31, 2011, this charge was $6,100.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
This 10-Q contains statements that are forward-looking. We caution that
words used in this document such as "expects," "anticipates," "believes," "may,"
and "optimistic," as well as similar words and expressions used herein, identify
and refer to statements describing events that may or may not occur in the
future. These forward-looking statements and the matters to which they refer
are subject to considerable uncertainty that may cause actual results to differ
materially from the results described in those statements. There are numerous
factors that could cause actual results to be different than those anticipated
or predicted by us, including: (i) a deterioration in economic conditions in
general; (ii) a decrease in demand for our products or services in particular;
(iii) our loss of a key employee or employees; (iv) regulatory changes,
including changes in environmental regulations, that may have an adverse affect
on the demand for our products or services; (v) increases in our operating
expenses resulting from increased costs of fuel, labor and/or consulting
services; (vi) our inability to exploit existing or secure additional sources of
revenues or capital to fund operations; (vii) a failure to collect upon or
otherwise secure the benefits of existing contractual commitments with third
parties, including our customers; and (viii) other factors and risks identified
in this Form 10-Q, or, as filed in Form 10-K for the year ending December 31,
2010 under the caption "Risk Factors." This list provides examples of factors
that could affect the results described by forward-looking statements contained
in this Form10-Q; however, this list is not exhaustive and many other factors
could impact our business and it is impossible to predict with any accuracy
which factors could result in negative impacts. Although we believe that the
forward-looking statements contained in this Form10-Q are reasonable, we cannot
provide you with any guarantee that the anticipated results will not be adverse
and that the anticipated results will be achieved. All forward-looking
statements in this Form10-Q are expressly qualified in their entirety by the
cautionary statements contained in this section and you are cautioned not to
place undue reliance on the forward-looking statements contained in this
Form10-Q. In addition to the risks listed above, other risks may arise in the
future, and we disclaim any obligation to update information contained in any
forward-looking statement.
OVERVIEW
We were incorporated in Delaware in April 1993, and became a public company
in October 1993. We own and sometimes license various N-Viro processes and
patented technologies to treat and recycle wastewater and other bio-organic
wastes, utilizing certain alkaline and mineral by-products produced by the
cement, lime, 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.
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.
RESULTS OF OPERATIONS
The dollar amounts in the following sections are stated as approximations,
rounded to the nearest $1,000.
Total revenues were $1,952,000 for the quarter ended March 31, 2011
compared to $1,372,000 for the same period of 2010. The net increase in revenue
is due primarily to an increase in processing revenue, specifically sludge
management fees. Our cost of revenues increased to $1,297,000 in 2011 from
$998,000 for the same period in 2010, and the gross profit margin increased to
34% for the quarter ended March 31, 2011, from 27% for the same period in 2010.
This increase in gross profit margin is due primarily to the increase in the
overall percentage of revenue derived from sludge management fees at our Florida
operation, which had an associated lower cost on this additional revenue because
of economies of scale. Operating expenses decreased substantially for the
quarter ended March 31, 2011 over the comparative prior year period, and was the
single biggest factor for the increase in net income for 2011 compared to 2010.
These changes collectively resulted in net income of $561,000 for the quarter
ended March 31, 2011 compared to a net loss of $1,143,000 for the same period in
2010, a decrease in the loss of $1,704,000.
Adding back non-cash expenses such as depreciation, amortization, stock and
stock options charges and subtracting cash out for capitalized assets and
principal (debt) repayments, resulted in an "adjusted cash income" (non-GAAP) of
$253,000 for the quarter ended March 31, 2011. The reconciliation between GAAP
net income and "adjusted cash income (non-GAAP)" is as follows:
GAAP net income $ 561,201
Depreciation + Amortization 116,300
Cash out for fixed assets capitalized (25,001)
Stock and stock options expensed 205,000
Stock discount on debentures expensed 28,000
Gain on market value of stock warrants (513,000)
Debt service payments (119,500)
----------
"Adjusted cash income (non-GAAP)" $ 253,000
==========
We feel this measure of our operating results is material as we
historically have a large amount of our results affected by non-cash events.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2011 WITH THREE MONTHS ENDED MARCH
31, 2010
Our overall revenue increased $580,000, or 42%, to $1,952,000 for the
quarter ended March 31, 2011 from $1,372,000 for the quarter ended March 31,
2010. The net increase in revenue was due primarily to the following:
a) Sales of alkaline admixture decreased $6,000 from the same period ended
in 2010 - this decrease was primarily the result of a decrease in demand with
our Ohio-area customers;
b) Revenue from the service fees for the management of alkaline admixture
increased $111,000 from the same period ended in 2010 - this increase was
attributed primarily to the Florida-area customers, which increased $98,000
compared to the same period in 2010; and
c) Our processing revenue, including facility management revenue, showed a
net increase of $472,000 over the same period ended in 2010. This was primarily
from our Florida operation, which showed an increase of $526,000 in facility
management fees over 2010. Offsetting the increase was facility management
revenue from the Toledo operation which decreased by $54,000 over 2010.
Our gross profit increased $282,000, or 75%, to $656,000 for the quarter
ended March 31, 2011 from $374,000 for the quarter ended March 31, 2010, and the
gross profit margin increased to 34% from 27% for the same periods. The
increase in gross profit margin is primarily due to the increase in the overall
percentage of revenue derived from sludge management fees at our Florida
operation, which had an associated lower cost on this additional revenue because
of economies of scale. Our Toledo operation contributed $140,000 of gross
profit on overall revenue of $284,000, which was an increase of $16,000 of gross
profit over the same period in 2010. Our Florida operation contributed $527,000
of gross profit on overall revenue of $1,622,000, which was an increase of
$271,000 of gross profit over the same period in 2010. A majority of this
increase in Florida's gross profit was from the increased revenue from sludge
management fees, which were realized at a lower cost percentage as a result of
economies of scale and increased efficiency in sludge handled at the facility.
The increased sludge management fees were the result of our agreement with
Orange County Utilities that began in December 2010 and ended in early March
2011. We do not expect Orange County to resume that agreement in the near
future.
Our operating expenses decreased $958,000, or 63%, to $564,000 for the
quarter ended March 31, 2011 from $1,521,000 for the quarter ended March 31,
2010. The decrease was primarily due to decreases of $486,000 in consulting
fees and expenses, $422,000 in payroll and related costs and $28,000 in legal
fees. Of the total decrease of $908,000 in combined payroll and consulting
costs, $912,000 were non-cash costs relating to the issuances of stock and stock
options. Therefore, for the first quarter 2011 actual cash outlays in these
combined categories decreased by a total of $4,000 over the same period in 2010.
As a result of the foregoing factors, we recorded operating income of
$92,000 for the quarter ended March 31, 2011 compared to an operating loss of
$1,147,000 for the quarter ended March 31, 2010, a decrease in the loss of
$1,239,000.
Our net nonoperating income (expense) increased by $464,000 to net
nonoperating income of $468,000 for the quarter ended March 31, 2011 from net
nonoperating income of $4,000 for the similar quarter in 2010. The increase in
net nonoperating income was primarily due to an increase of $513,000 from the
gain recorded on warrants issued whose value decreased from the issuance date,
offset by a decrease of $49,000 from 2010 to 2011 in the extinguishment of
certain liabilities no longer due.
We recorded net income of $561,000 for the quarter ended March 31, 2011
compared to a net loss of $1,143,000 for the same period ended in 2010, a
decrease in the loss of $1,704,000. Adding back non-cash expenses such as
depreciation, amortization, stock and stock options charges and subtracting cash
out on capitalized assets and debt repayments, resulted in adjusted cash income
(non-GAAP) of $253,000 for the quarter ended in 2011. Similar non-cash
expenses, cash out and debt repayments for the same period in 2010 resulted in
adjusted cash income (non-GAAP) of $7,000, an increase in adjusted cash income
(non-GAAP) of $246,000 in the first quarter 2011 versus 2010.
For the quarters ended March 31, 2011 and 2010, 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 $801,000 at March 31, 2011, compared to
a working capital deficit of $932,000 at December 31, 2010, resulting in an
increase in working capital of $131,000. Current assets at March 31, 2011
included cash and cash equivalents of $300,000 (including restricted cash of
$208,000), which is an increase of $55,000 from December 31, 2010. The net
positive change in working capital from December 31, 2010 was primarily from a
decrease to the line of credit of $189,000, offset by a decrease to the net
deferred current asset of $81,000 for amortization of common stock given
pursuant to consulting contracts entered into during 2009.
In the three months ended March 31, 2011 our cash flow provided by
operating activities was $364,000, an increase of $208,000 over the same period
in 2010. The components of the increase in cash flow provided by operating
activities from 2010 was principally due to an increase in net income of
$1,728,000 and a decrease of $98,000 in trade accounts payable, offset by a
$912,000 decrease in stock warrants and stock options issued for fees and
services, a decrease of $537,000 in the market price of derivatives issued, an
increase of $126,000 in trade accounts receivable and an increase of $48,000 in
deferred assets.
We have modified our business model and have been evolving away from sales
of alkaline admixture and royalty-based revenue agreements that typically
generate a higher gross profit margin, to long-term and sustainable revenue
based on integrated N-Viro technology and operations, but typically generating a
lower gross profit margin. From 2006 to the first quarter of 2010, the
percentage of combined revenues generated from our owned and operated facilities
in Toledo and Volusia County was: 2006 - 46%; 2007 - 77%; 2008 - 94%; 2009 -
95%; 2010 - 96%; through first quarter 2011 - 97%. We believe this shift will
allow us to enhance future revenue and profits through growth, efficiency and
revenue optimization.
The normal collection period for accounts receivable is approximately 30-60
days for the majority of customers. This is a result of the nature of the
license contracts, type of customer and the amount of time required to obtain
the information to prepare the billing. We make no assurances that payments
from our customer or payments to our vendors will become shorter and this may
have an adverse impact on our continuing operations.
During the first quarter of 2011, we had a line of credit up to $400,000 at
the Comerica Bank, N.A. prime rate (3.25% at March 31, 2011) 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, or the Bank, with a maturity date of April
15, 2011. Two certificates of deposit totaling $141,000 from the Bank are held
as a condition of maintaining the line of credit. In April 2011, the renewal
date of the line of credit was extended to June 15, 2011. At March 31, 2011, we
had $225,000 of borrowing capacity under the credit facility.
From the beginning of 2009 through the first quarter of 2011, we borrowed a
total of $1,587,626 from nine lenders to purchase processing and automotive
equipment. As of March 31, 2011, a total of sixteen term notes are outstanding,
ranging from 3.8% to 10.9% interest for terms ranging three to five years,
monthly payments totaling approximately $33,000 and all secured by equipment.
The total amount owed on all notes as of March 31, 2011 was approximately
$670,000 and all notes are expected to be paid in full on the applicable
maturity date, the last of which is in March 2016.
In 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 2009 we 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 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 March 31, 2011
we held $720,000 of Debentures.
Because the fair market value of our 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, we were 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
first quarter ended March 31, 2011 and 2010, amortization expense amounted to
$27,006 and $26,661, respectively.
Because the Debentures mature at June 30, 2011, we expect to either raise
or generate enough cash to satisfy some or all of the liability, extend the
maturity date with some or all of the debenture holders, convert some or all of
the debentures to equity or a combination of the three. Any of these
possiblities may involve issuing additional common stock or common stock
equivalents.
For the remainder of 2011 we expect to improve operating results and have
adequate cash or access to cash to adequately fund operations by focusing on
existing and expected new sources of revenue, especially from our N-Viro Fuel
technology, and cash generated from equity issuances and exercises of
outstanding warrants and options. We expect that market developments favoring
cleaner burning renewable energy sources and ongoing discussions with companies
in the fuel and wastewater industries could provide enhanced liquidity and have
a positive impact on future operations. We continue to pursue opportunities
with strategic partners for the development and commercialization of the
patented N-Viro Fuel technology. In addition, we are focusing on the
development of regional biosolids processing facilities, and are currently in
negotiations with potential partners to permit and develop independent, regional
facilities.
There can be no assurance these discussions will be successful or result in
new revenue or cash funding sources for the company. Our failure to achieve
improvements in operating results, including through these potential sources of
revenue, or in our ability to adequately finance or secure additional sources of
funds would likely have a material adverse effect on our continuing operations.
OFF-BALANCE SHEET ARRANGEMENTS
At March 31, 2011, 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 Condensed Consolidated Balance Sheets.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual cash obligations at March
31, 2011, and the effect these obligations are expected to have on liquidity and
cash flow in future periods:
Payments Due By Period
Note # Total Less than 1 year 2 - 4 years 5 - 6 years after 6 years
------- ---------- ----------------- ------------ ------------ -------------
Purchase obligations (1) 18,200 18,200 - - -
Long-term debt obligations and related interest (2) 1,457,581 1,070,020 362,543 25,018 -
Operating leases (3) 345,593 98,043 206,786 40,764 -
Capital lease obligations - - - - -
Line of Credit obligation 175,000 175,000 - -
Other long-term debt obligations - - - - -
---------- ----------------- ------------ ------------ -------------
Total contractual cash obligations $1,996,374 $ 1,361,263 $ 569,329 $ 65,782 $ -
========== ================= ============ ============ =============
(1) Purchase obligations include agreements to purchase services that are enforceable and legally binding
on the Company and that specify all significant terms and the approximate timing of the transaction.
Purchase obligations exclude agreements that are cancelable without penalty.
(2) Amounts represent the expected cash payments of our long-term obligations.
(3) Amounts represent the expected cash payments of our operating lease obligations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) that are
designed to ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms, and that such information is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosures. In designing and evaluating
the disclosure controls and procedures, management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
As of the end of the period covered by this report, management carried out
an evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of our disclosure controls
and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange
Act). Based upon the evaluation, 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.
CHANGES ON INTERNAL CONTROL OVER FINANCIAL REPORTING
During the three months ended March 31, 2011, there were no material
changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In April 2011, we sold a total of 29,214 shares of unregistered restricted
stock to two individuals, Wayne M. McDowell (16,556 shares at $1.51 per share)
and Arthur J. Rodrigues (12,658 shares at $1.58 per share) for total gross cash
proceeds of approximately $45,000. These proceeds were used for operating
expenses. Simultaneously and subject to the same terms and conditions, we
issued a total of 29,214 warrants to the two purchasers to acquire shares of our
common stock at a price of 30% above the respective purchase price each of them
paid for our common stock. The shares and the warrants were issued and sold in
a private offering transaction pursuant to an exemption under Section 4(2) of
the Securities Act of 1933 for transactions by an issuer not involving a public
offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
(a) None
(b) None
ITEM 6. EXHIBITS
Exhibits:
See Exhibit Index below.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
N-VIRO INTERNATIONAL CORPORATION
Date: May 16, 2011 /s/ Timothy R. Kasmoch
-------------- ----------------------
Timothy R. Kasmoch
Chief Executive Officer and President
(Principal Executive Officer)
Date: May 16, 2011 /s/ James K. McHugh
-------------- --------------------
James K. McHugh
Chief Financial Officer, Secretary and Treasurer
(Principal Financial & Accounting Officer)
EXHIBIT INDEX
=============
Exhibit No. Document
----------- --------
31.1 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act
of 2002.
31.2 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act
of 2002.
32.1 Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes - Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes - Oxley Act of 2002.