UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 2007
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
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to the filing requirements for the past 90 days.
Yes X No
----
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, 2007, 3,983,001 shares of N-Viro International Corporation $
..01 par value common stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31
2007 2006
----------- -----------
Revenues $1,132,260 $1,028,819
Cost of revenues 887,113 676,726
----------- -----------
Gross Profit 245,147 352,093
Operating expenses:
Selling, general and administrative 478,867 481,492
----------- -----------
Operating loss (233,720) (129,399)
Nonoperating income (expense):
Interest income 1,733 2,526
Interest expense (10,916) (4,636)
(9,183) (2,110)
----------- -----------
Loss before income taxes (242,903) (131,509)
Federal and state income taxes - -
----------- -----------
Net loss $ (242,903) $ (131,509)
=========== ===========
Basic and diluted loss per share $ (0.06) $ (0.04)
=========== ===========
Weighted average common shares outstanding - basic and diluted 3,840,748 3,694,726
=========== ===========
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 2007 (Unaudited) December 31, 2006
--------------------------- -------------------
ASSETS
- -----------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted $ 136,791 $ 162,633
Restricted 132,382 131,498
Trade Receivables, net 578,994 667,617
Prepaid expenses and other current assets 239,882 250,590
--------------------------- -------------------
Total current assets 1,088,049 1,212,338
Property and Equipment, Net 1,104,485 931,820
Intangible and Other Assets, Net 754,546 801,972
--------------------------- -------------------
$ 2,947,080 $ 2,946,130
=========================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 112,032 $ 106,673
Line-of-credit 235,000 205,000
Accounts payable 1,063,903 1,048,094
Accrued liabilities 221,929 202,295
--------------------------- -------------------
Total current liabilities 1,632,864 1,562,062
Long-term debt, less current maturities 641,288 554,437
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 7,000,000 shares; issued
4,007,197 in 2007 and 3,864,059 in 2006 40,072 38,641
Additional paid-in capital 16,537,888 16,453,119
Accumulated deficit (15,220,142) (14,977,239)
--------------------------- -------------------
1,357,818 1,514,521
Less treasury stock, at cost, 123,500 shares 684,890 684,890
--------------------------- -------------------
Total stockholders' equity 672,928 829,631
--------------------------- -------------------
$ 2,947,080 $ 2,946,130
=========================== ===================
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31
2007 2006
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 81,369 $ 83,516
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (225,535) (12,746)
Expenditures for intangible assets (3,000) -
Reductions to restricted cash and cash equivalents (883) (512)
---------- ---------
Net cash used in investing activities (229,418) (13,258)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under long-term obligations 128,405 -
Principal payments on long-term obligations (36,198) (19,638)
Net borrowings (payments) on line-of credit 30,000 (59,000)
---------- ---------
Net cash provided by (used in) financing activities 122,207 (78,638)
NET DECREASE IN CASH AND CASH EQUIVALENTS (25,842) (8,380)
CASH AND CASH EQUIVALENTS - BEGINNING 162,633 224,447
---------- ---------
CASH AND CASH EQUIVALENTS - ENDING $ 136,791 $216,067
========== =========
Supplemental disclosure of cash flows information:
Cash paid during the three months ended for interest $ 18,520 $ 5,025
========== =========
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2007 may not be indicative of
the results of operations for the year ending December 31, 2007. Since the
accompanying consolidated financial statements have been prepared in accordance
with Item 310 of Regulation S-B, 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-KSB for the
period ending December 31, 2006.
The financial statements are consolidated as of March 31, 2007 and December
31, 2006 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. The
following are certain significant estimates and assumptions made in preparation
of the financial statements:
Allowance for Doubtful Accounts - The Company estimates losses for
uncollectible accounts based on the aging of the accounts receivable and
the evaluation of the likelihood of success in collecting the receivable.
The balance of the allowance at March 31, 2007 and December 31, 2006 is
$170,000.
Property and Equipment/Long-Lived Assets - Property and equipment is
reviewed for impairment pursuant to the provisions of Statement of
Financial Accounting Standards (or SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The carrying amount of an
asset (group) is considered impaired if it exceeds the sum of the Company's
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. Management believes 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, the Company tests for impairment when events and
circumstances indicate that the assets might be impaired and the carrying
value of those assets may not be recoverable.
Fair Value of Financial Instruments - The fair values of cash,
accounts receivable, accounts payable and other short-term obligations
approximate their carrying values because of the short maturity of these
financial instruments. The carrying values of the Company's long-term
obligations approximate their fair value. In accordance with SFAS No. 107,
"Disclosure About Fair Value of Financial Instruments," rates available at
balance sheet dates to the Company is used to estimate the fair value of
existing debt.
Income Taxes - The Company assumes the deductibility of certain costs
in income tax filings and estimates the possible recovery of deferred
income tax assets, which are at zero at the end of each period presented.
Stock Options - Through December 31, 2005, the Company accounted for
stock-based compensation issued to its employees and directors in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation cost was recognized through that
period for the stock option plans, as all options granted under the plans
have an exercise price equal to the market value of the underlying common
stock on the date of the grant, except for the options granted in May, 2004
to Michael G. Nicholson, which is explained further in Note 4,
"Contingencies and Other Obligations to Related Parties". The fair value of
options granted was determined using the Black-Scholes option pricing
model. In December 2004, SFAS No. 123R, "Accounting for Stock-Based
Compensation" was issued and changed the accounting for transactions in
which an entity obtains employee services in a share-based payment
transaction. For Small Business issuers such as the Company, the Statement
is effective as of the beginning of the first interim period or annual
reporting period that begins after December 15, 2005. The adoption of this
standard was reflected in 2006 by the expensing of existing stock options
granted in 2004 that vest through 2006 to current optionees, and options
granted in the current period to directors for a board meeting.
NOTE 2. RELATED PARTY TRANSACTIONS
During the quarter ended March 31, 2007, the Company contracted for
trucking, repair parts and labor for repair services with Gardenscape, a company
that the Company's Chief Executive Officer, Timothy R. Kasmoch, was also the
President and CEO of during the quarter. The Company also paid Carl Richard, a
member of the Board, fees for consulting services. These fees were exclusive of
director fees and expenses paid for with cash and stock options.
The following table summarizes these payments and the balance to each of any
monies owed as of March 31, 2007:
Payee Trucking, repairs and services Consulting fees Account payable balance at 3/31/07
- ------------ ------------------------------- ---------------- -----------------------------------
Gardenscape $ 11,855 $ - $ 3,420
Carl Richard - 4,155 -
NOTE 3. LONG-TERM DEBT
The Company presently has a $695,000 credit facility with Monroe Bank +
Trust, or the Bank. This senior debt credit facility is comprised of a $295,000
four year term note at 7.5% and a line of credit up to $400,000 at Prime (8.25%
at March 31, 2007) plus 1.5% and secured by a first lien on all assets of the
Company. Two certificates of deposit totaling $132,382 from the Bank are held
as a condition of maintaining the facility. The Company has currently renewed
the line of credit through October 2007, and is not in violation of any
financial covenants. At March 31, 2007, the Company had $165,000 of borrowing
capacity under the credit facility. The term note was paid off in March 2007.
In the first quarter 2007, the Company's wholly-owned subsidiary,
Bio-Mineral Transportation LLC ("BMT"), borrowed a total of $98,540 from
Wachovia Financial Services, to purchase a truck that was placed into service
during the quarter. A term note was issued at 9.04% for five years and secured
by the truck. The total amount owed on all notes by BMT as of March 31, 2007 was
approximately $324,000 and all are expected to be paid in full by April 2012.
In the first quarter 2007, the Company's wholly-owned subsidiary, Florida
N-Viro LP, borrowed a total of $23,253 from General Motors Acceptance
Corporation to purchase a truck that was placed into service during the quarter.
A term note was issued at 9.82% for five years and secured by the truck. The
total amount owed on all notes by Florida N-Viro as of March 31, 2007 was
approximately $29,000 and all are expected to be paid in full by February 2012
On December 28, 2006, we purchased the remaining ownership interest in
Florida N-Viro for $500,000 and financed $400,000 of it by delivering a note to
the seller, VFL Technology Corporation. The note is at 8% for 10 years, to be
paid in annual installments of $59,611.80, subject to an offset for royalties
due us under a patent license agreement from the same party. The amount owed on
the note as of March 31, 2007 was approximately $399,800.
NOTE 4. CONTINGENCIES AND OTHER OBLIGATIONS TO RELATED PARTIES
In February 2006, the Company executed an Employment Agreement with Timothy
R. Kasmoch. Mr. Kasmoch is now employed by the Company as President and Chief
Executive Officer, and is a member of the Company's Board of Directors. The
Company and Mr. Kasmoch agreed primarily to enter into an employment arrangement
for a one-year term, at $60,000 per year plus 50,000 unregistered shares of
stock in the Company. The Employment Agreement was terminable with or without
cause, and was effective at the date of agreement.
In March 2007, the Company and Mr. Kasmoch entered into a new Employment
Agreement dated and commencing February 13, 2007, for a two-year term. Mr.
Kasmoch is to receive an annual base salary of $150,000, subject to an annual
discretionary increase. In addition, Mr. Kasmoch is eligible for an annual cash
bonus. Generally, the agreement may be terminated by the Company with or
without cause or by the Employee for any reason. A copy of Mr. Kasmoch's new
Employment Agreement was attached to a Form 8-K as Exhibit 10.1, filed by the
Company March 12, 2007.
On December 28, 2006, the Company purchased the remaining ownership
interest in Florida N-Viro and now operates the facility in Volusia County,
Florida. The Company maintains an office in Daytona Beach under a lease with the
County of Volusia, Florida which was renewed in April, 2005 for five years. The
total minimum rental commitment for the years ending December 31, 2007 through
2009 is $48,000 each year, and for 2010 is $12,000. The total rental expense
included in the statements of operations for the quarter ended March 31, 2007 is
$12,000, as this property commitment was acquired pursuant to the Share Purchase
Agreement with VFL Technology Corporation, effective December 31, 2006. We also
lease various equipment on a month-to-month basis at our Florida operation.
In March 2006, the Company approved a First Amendment to a Consulting
Agreement dated July 1, 2004 with Terry J. Logan, then a member of the Board.
The existing Consulting Agreement was scheduled to expire on June 30, 2006, and
was extended an additional two (2) years from that date. All other terms of the
existing Consulting Agreement have been retained, with the exception of Section
5.4, referring to Dr. Logan's stock option compensation, which has been deleted
by the First Amendment. Dr. Logan will continue to be compensated at a base fee
of $87.50 per hour. The First Amendment to the Consulting Agreement is
effective as of February 13, 2006. A copy of the Consulting Agreement was
attached to a Form 8-K as Exhibit 10.3, filed by the Company March 20, 2006.
In March 2006, the Company approved a Consulting Agreement with Carl
Richard, a current member of the Board. The term of the Consulting Agreement
was one (1) year, terminable by Mr. Richard upon fifteen (15) days notice or by
us upon ninety (90) days notice. Payments under the Consulting Agreement were
$1,600 per month. The Consulting Agreement was effective as of February 13,
2006. A copy of the Consulting Agreement was attached to a Form 8-K as Exhibit
10.2, filed by the Company March 20, 2006. At this time, the Company is
considering extending Mr. Richard's agreement until the end of 2007.
In June 2005, J. Patrick Nicholson filed a Demand for Arbitration based on
a claimed breach of a Consulting Agreement dated August 28, 2003 between the
Company and Mr. Nicholson. In July 2005, the Company terminated for cause his
Consulting Agreement. Mr. Nicholson was being paid an aggregate of over $92,000
per year under the Agreement, exclusive of any other payouts earnable. In
November 2005, Mr. Nicholson filed an amended complaint pertaining to his Demand
for Arbitration. The Company is vigorously contesting Mr. Nicholson's claims in
this proceeding. A hearing on the matter commenced over two days in January
2007, and was concluded in April 2007. A decision by the arbitrator is expected
in the near future.
In January 2006, J. Patrick Nicholson applied to the Delaware Chancery
Court for an order to compel the Company to allow him access to inspect our
corporate and business books and records and our stockholder list. No monetary
relief is sought in this action. The Company contends that the documents sought
by Mr. Nicholson in this action far exceed those to which he is entitled, and
principally relate to his claims in the arbitration described above. The
Company is vigorously defending this action and has filed a response in the
Delaware Chancery Court, but no discovery has been conducted, and no relief has
been granted as of the date of this Form 10-QSB.
In July 2006, J. Patrick Nicholson and N-Viro Energy Systems, Inc. filed a
Complaint with Jury Demand in the United States District Court for the Northern
District of Ohio, against the Company, Ophir Holdings, Inc., Strategic Asset
Management, Inc., Robert A. Cooke, the Cooke Family Trust and the following
current and former members of our Board of Directors: Daniel J. Haslinger,
Phillip Levin, R. Francis DiPrete and Terry J. Logan. The Complaint is seeking
undeterminable damages and other relief from the named defendants. N-Viro filed
a motion to dismiss the lawsuit in August 2006. Mr. Nicholson requested several
extensions to amend his complaint. An amended complaint alleging mostly the
same claims was filed on that date. The Company plans to renew its motion to
dismiss, and will vigorously defend against the allegations. All discovery has
been stayed pending the anticipated motion to dismiss.
In June 2003, the Company entered into an Employment Agreement with Michael
G. Nicholson, the Chief Development Officer and then a member of the Board of
Directors of the Company. The employment agreement will expire in June 2007,
and future compensation amounts are to be determined annually by the Board of
Directors. The agreement was disclosed in a filing on June 10, 2003 on Form
8-K. In the third quarter of 2004, the Company and Mr. Nicholson renegotiated
primarily the stock option portion of the Agreement, and amended the Agreement.
Because these options were priced lower than the fair market value as of that
date, the Company is required to take a charge to earnings totaling
approximately $68,400 ratably through June 2007, the ending date of his
employment agreement.
The Company leases its executive and administrative office in Toledo, Ohio,
under a lease that was renewed in January 2003 and amended in November 2004. The
Company believes its relationship with its lessor is satisfactory. The lease
expired on February 28, 2007, and we have not renewed it at this time. The total
rental expense included in the statements of operations for the three months
ended March 31, 2007 and 2006 is approximately $9,400 and $9,300, respectively.
The Company also leases various equipment on a month-to-month basis.
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.
The Company is involved in legal proceedings and subject to claims which
have arisen in the ordinary course of business. These actions, when concluded
and determined, will not, in the opinion of management, have a material adverse
effect upon the financial position, results of operations or cash flows of the
Company.
NOTE 5. NEW ACCOUNTING STANDARDS
In February 2007, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities - including an amendment of FASB Statement No. 115". This
Statement permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. This Statement
applies to all entities, including not-for-profit organizations, and most of the
provisions apply only to entities that elect the fair value option. This
Statement is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning
of a fiscal year that begins on or before November 15, 2007, provided the entity
also elects to apply the provisions of FASB Statement No. 157, "Fair Value
Measurements." No entity is permitted to apply this Statement retrospectively
to fiscal years preceding the effective date unless the entity chooses early
adoption. The choice to adopt early should be made after issuance of this
Statement but within 120 days of the beginning of the fiscal year of adoption,
provided the entity has not yet issued financial statements, including required
notes to those financial statements, for any interim period of the fiscal year
of adoption. The Company does not expect to adopt the provisions of Standard
No. 159 at this time.
NOTE 6. SEGMENT INFORMATION
EARNINGS VARIATION DUE TO BUSINESS CYCLES AND SEASONAL FACTORS. The
Company's operating results can experience quarterly or annual variations due to
business cycles, seasonality and other factors. The market price for its common
stock may decrease if its operating results do not meet the expectations of the
market.
For the first quarter of 2007, approximately 63% of the Company's revenue
is from management operations and 37% from other domestic operations. 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
(such as the current conditions in the Asia Pacific region and Latin America)
and interest rates, as well as other factors. In addition, operating results of
some of the Company's business segments are influenced by particular business
cycles and seasonality, as well as other factors such as interest rates.
COMPETITION. The Company conducts business in a highly competitive market
and has fewer resources than most of its competitors. Businesses in this market
compete within and outside the United States principally on the basis of price,
product quality, custom design, technical support, reputation, equipment
financing assistance and reliability. Competitive pressures and other factors
could cause the Company to lose market share or could result in decreases in
prices, either of which could have a material adverse effect on its financial
position and results of operations.
RISKS OF DOING BUSINESS IN OTHER COUNTRIES. The Company conducts business
in markets outside the United States, and expects 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. The Company has not entered
into any currency swap agreements which may reduce these risks. The Company may
enter into such agreements in the future if it is deemed necessary to do so.
Current economic and political conditions in the Asia Pacific and Middle East
regions have affected the Company outlook for potential revenue there. The
Company cannot predict the full impact of this economic instability, but it
could have a material adverse effect on revenues and profits.
The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting, which segregates its
business by product category and service lines. The Company's reportable
segments are as follows:
Management Operations - The Company provides employee and management
services to operate the Toledo Ohio Wastewater Treatment Facility and the
Daytona/Volusia County Florida Treatment Facility.
Other Domestic Operations - Sales of territory or site licenses and
royalty fees to use N-Viro technology in the United States.
Foreign Operations - Sale of territory or site licenses and royalty
fees to use N-Viro technology in foreign operations.
Research and Development - The Company contracts with Federal and
State agencies to perform or assist in research and development on the Company's
technology.
The accounting policies of the segments are the same as the Company's
significant accounting policies. Fixed assets generating specific revenue are
identified with their respective segments and are accounted for as such in the
internal accounting records. All other assets, including cash and other current
assets and all long-term assets, other than fixed assets, are not identified
with any segments, but rather the Company's administrative functions. All of
the net nonoperating income (expense) are non-apportionable and not allocated to
a specific segment. The Company accounts for and analyzes the operating data
for its segments generally by geographic location, with the exception of the
Management Operations and Research and Development segments. The Management
Operations segment represents both a significant amount of business generated as
well as specific locations and unique type of revenue.
The domestic and foreign operations segments differ in terms of
environmental and municipal legal issues, nature of the waste disposal
infrastructure, political climate and availability of funds for investing in the
Company's technology. These factors have not changed significantly over the
past several years and are not expected to change in the near term.
The Research and Development segment accounts for approximately 3% of the
total year-to-date revenue of the Company, and is unlike any other revenue in
that it is generated as a result of a specific project to conduct initial or
additional ongoing research into the Company's emerging technologies.
The table below presents information about the segment profits and segment
identifiable assets used by the chief operating decision makers of the Company
for the periods ended March 31, 2007 and 2006 (dollars in thousands):
Management Domestic Foreign Research &
Operations Operations Operations Development Total
---------------------------- ---------- ----------- ----------- -----
Quarter Ended March 31, 2007
-------------------------------------------------------------------------
Revenues 713 419 - - 1,132
Cost of revenues 594 293 - - 887
---------------------------- ---------- ----------- ----------- -----
Segment profits 119 126 - - 245
============================ ========== =========== =========== =====
Identifiable assets 991 96 - - 1,087
Depreciation 24 11 - - 35
Quarter Ended March 31, 2006
-------------------------------------------------------------------------
Revenues 454 545 - 30 1,029
Cost of revenues 257 391 4 25 677
---------------------------- ---------- ----------- ----------- -----
Segment profits 197 154 (4) 5 352
============================ ========== =========== =========== =====
Identifiable assets 238 131 - - 369
Depreciation 17 3 - - 20
A reconciliation of total segment revenues, cost of revenues, and segment
profits to consolidated revenues, cost of revenues, and segment information to
the consolidated financial statements for the periods ended March 31, 2007 and
2006 is as follows (dollars in thousands):
Qtr. Ended March 31
----------------
2007 2006
------- -------
Segment profits:
Segment profits for reportable segments $ 245 $ 352
Corporate selling, general and administrative expenses (479) (481)
Other income (expense) (9) (2)
------- -------
Consolidated loss before taxes $ (243) $ (131)
======= =======
Identifiable assets:
Identifiable assets for reportable segments $1,087 $ 369
Corporate property and equipment 17 5
Current assets not allocated to segments 1,088 1,166
Intangible and other assets not allocated to
segments 755 960
------- -------
Consolidated assets $2,947 $2,500
======= =======
Depreciation and amortization:
Depreciation for reportable segments $ 35 $ 20
Corporate depreciation and amortization 47 35
------- -------
Consolidated depreciation and amortization $ 82 $ 55
======= =======
NOTE 7. INVESTMENT IN FLORIDA N-VIRO, L. P.
Florida N-Viro, L.P. was formed in January 1996 pursuant to a joint venture
agreement between the Company and VFL Technology Corporation (VFL). Through
December 28, 2006, the Company owned a 47.5% interest in the joint venture and
accounted for its investment under the equity method. The Company has
recognized its share of the joint venture's losses to the extent of its
investment. Any additional losses passed through from the joint venture were
recorded as an increase to the allowance against the Note Receivable, through
November 2005, when the total losses matched the value of the Notes. Since that
date, the Company has not recorded any additional loss even though Florida
N-Viro continued to sustain losses, because of a lack of basis in this
investment. The total loss recorded by Florida N-Viro in 2006 was $291,997. Of
this, the Company would have been required to record 47.5% of the loss, or
$138,699, but recorded $-0-.
Up until the acquisition date of December 28, 2006, an unsecured, 9.75%
demand note receivable totaling $158,137 (including accrued interest of $38,137)
and two unsecured, prime (stated by a local bank) plus % demand notes
receivable totaling $304,721 (including accrued interest of $74,721) were due
from Florida N-Viro, the Company's joint venture investee. The notes due from
Florida N-Viro were deemed to be noncurrent by management in the accompanying
balance sheets. In 2006, no interest was received on the notes due from Florida
N-Viro. During 2006, the Company recorded an additional allowance of $39,453
for the interest portion of the notes receivable. The Company's limited partner
interest in the joint venture and the value of the Notes due from the joint
venture are both reflected at a $-0- value as of the acquisition date.
On December 28, 2006, the Company entered into a Share Purchase Agreement
(the "Agreement") with VFL, pursuant to which the Company acquired VFL's
membership interests in Florida N-Viro L.P. and Florida N-Viro Management, LLC,
the general partner of Florida N-Viro L.P. The purchase price paid by the
Company to VFL for the acquisition of the membership interests was $500,000,
with $100,000 paid at closing and the balance payable over ten years at 8%
interest, pursuant to the terms of a promissory note delivered by the Company at
closing. Pursuant to the Purchase Agreement, the payments on the Note will be
offset first from annual royalties payable by VFL to the Company pursuant to an
existing license agreement between the Company and VFL. Any remaining amounts
due under the note are payable in cash within thirty days after the end of the
fiscal year, after a yearly accounting is agreed to between the parties. In
accordance with the Agreement, all Notes due the Company from Florida N-Viro are
cancelled.
Condensed financial information of Florida N-Viro as of March 31, 2007
(after the Company's purchase of its remaining interest in Florida N-Viro) and
2006 is as follows:
2007 2006
(unaudited) (unaudited)
------------ ------------
Current assets $ 330,470 $ 342,477
Long-term assets 480,640 278,430
------------ ------------
$ 811,110 $ 620,907
============ ============
Current liabilities $ 282,981 $ 1,619,488
Long-term liabilities 18,640 -
Member capital 500,000 -
Partners' capital (deficit) 9,489 (998,581)
------------ ------------
$ 811,110 $ 620,907
============ ============
Quarter Ended March 31,
------------------------
2007 2006
(unaudited) (unaudited)
------------ ------------
Net sales $ 390,407 $ 414,566
Net income (loss) 9,489 (36,737)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
This 10-QSB 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-QSB, 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-QSB; however, this list is not exhaustive
and many other factors could impact our business and it is impossible to predict
with any accuracy which factors could result in negative impacts. Although we
believe that the forward-looking statements contained in this Form 10-QSB 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-QSB 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-QSB. 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 license the N-Viro Process, a patented
technology to treat and recycle wastewater sledges and other bio-organic wastes,
utilizing certain alkaline and mineral by-products produced by the cement, lime,
electric utilities and other industries.
Our business strategy went from being a low cost provider of a process to
marketing the N-Viro Process, which produces an "exceptional quality" sludge
product, as defined in the 40 CFR Part 503 Sludge Regulations under the Clean
Water Act of 1987 (the "Part 503 Regs"), with multiple commercial uses. In this
strategy, the primary focus is to identify allies, public and private, who will
build and operate an N-Viro facility. To date, our revenues primarily have been
derived from licensing the N-Viro Process to treat and recycle wastewater sludge
generated by municipal wastewater treatment plants and from the sale to
licensees of the alkaline admixture used in the N-Viro Process. We have also
operated N-Viro facilities for third parties on a start-up basis and currently
operate one N-Viro facility on a contract management basis. At the end of 2006
we acquired and now manage a merchant facility which accepts wastewater sludge
from several sources in the Orlando area.
RESULTS OF OPERATIONS
Total revenues were $1,132,000 for the quarter ended March 31, 2007
compared to $1,028,000 for the same period of 2006. The net increase in revenue
is due primarily to an increase in facility management revenue and service fees
generated for the management of alkaline admixture. Our cost of revenues
increased to $887,000 in 2007 from $677,000 for the same period in 2006, and the
gross profit percentage decreased to 22% from 34% for the quarters ended March
31, 2007 and 2006, respectively. This decrease in gross profit percentage is
primarily due to the decreased profitability of the facility management fee
operations, primarily as the result of the acquisition of the Florida operations
at the end of 2006, which operate at a lower gross profit margin than our other
management fee facility. Operating expenses decreased for the comparative
period. These changes collectively resulted in a net loss of approximately
$243,000 for the quarter ended March 31, 2007 compared to a net loss of $132,000
for the same period in 2006, an increase in the net loss of approximately
$111,000.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2007 WITH THREE MONTHS ENDED MARCH
31, 2006
Our overall revenue increased $103,000, or 10%, to $1,132,000 for the
quarter ended March 31, 2007 from $1,029,000 for the quarter ended March 31,
2006. The net increase in revenue was due primarily to the following:
a) Sales of alkaline admixture decreased $136,000 from the same period
ended in 2006;
b) Revenue from the service fees for the management of alkaline admixture
increased $91,000 from the same period ended in 2006 - this increase was the
result of the acquisition of the Florida operation, purchased in late 2006;
c) Our processing revenue, including facility management revenue, showed a
net increase of $201,000 over the same period ended in 2006 - of this increase,
$303,000 was contributed by the acquisition of the Florida operation in late
2006;
d) Miscellaneous revenues decreased $22,000 from the same period ended in
2006; and
e) Research and development revenue was $-0- in 2007, a decrease of
$30,000 from the same period ended in 2006.
Our gross profit decreased $107,000, or 30%, to $245,000 for the quarter
ended March 31, 2007 from $352,000 for the quarter ended March 31, 2006, and the
gross profit margin decreased to 22% from 34% for the same periods. The
decrease in gross profit margin is primarily due to the decrease in
profitability of the facility management fee operations. Gross revenue
decreased $124,000 from our Toledo operation, contributing approximately $40,000
of this decrease in gross profit. The gross revenue from the Toledo operation
decreased in 2007 compared to the first quarter of 2006 because of unscheduled
repairs and a reduction in the volume of incoming sludge processing due to the
weather. The balance of the decrease, or $67,000, was primarily the result of
the decrease in sales of alkaline admixture and miscellaneous revenues. The
acquisition of the Florida operation in late 2006 added approximately $13,000 on
overall revenue of $390,000, but was an increase of approximately $46,000 over
the same period in 2006 when it was operated by a different company.
Our operating expenses decreased $3,000, or 0.5%, to $479,000 for the
quarter ended March 31, 2007 from $482,000 for the quarter ended March 31, 2006.
The decrease was primarily due to an increase of approximately $33,000 in
employee payroll and related expenses and $7,000 in consulting expense, offset
by a decrease of $19,000 in director-related expenses and $14,000 in travel and
sales-related expenses. The acquisition of the Florida operation had an
immaterial effect on the change in operating expenses from 2006 to 2007.
As a result of the foregoing factors, we recorded an operating loss of
$234,000 for the quarter ended March 31, 2007 compared to an operating loss of
$129,000 for the quarter ended March 31, 2006, an increase in the loss of
approximately $105,000.
Our net nonoperating expense increased by $7,000 to net nonoperating
expense of $9,000 for the quarter ended March 31, 2007 from net nonoperating
expense of $2,000 for the quarter ended March 31, 2006. The increase in
nonoperating expense was primarily due to an increase in interest expense of
$8,000 for the financing of the acquisition of the Florida operation in December
2006.
We recorded a net loss of approximately $243,000 for the quarter ended
March 31, 2007 compared to a net loss of $132,000 for the same period ended in
2006, an increase in the loss of approximately $111,000. Total non-cash
expenses for depreciation, amortization and stock or stock options charges
accounted for approximately $168,000 of the loss for the quarter ended March 31,
2007. Non-cash expenses for the same period in 2006 totaled approximately
$145,000.
For the quarter ended March 31, 2007 and 2006, we have not fully recognized
the tax benefit of the losses incurred in prior periods. Accordingly, our
effective tax rate for each period was zero.
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital deficit of approximately $514,000 at March 31,
2007, compared to a working capital deficit of $350,000 at December 31, 2006,
resulting in a decrease in working capital of $165,000. Current assets at March
31, 2007 included cash and investments of approximately $269,000 (including
restricted cash of approximately $132,000), which is a decrease of $25,000 from
December 31, 2006.
Our cash flow provided by operations for the first three months ended March
31, 2007 was approximately $81,000, a decrease of approximately $2,000 from
2006. This decrease was principally due to the positive change in working
capital of approximately $46,000, increased by $38,000 in the amount of stock,
warrants and stock options issued for fees and services from 2006 and further
increased by $25,000 in other non-cash charges to earnings, decreased by
$111,000 for the increase in the net loss.
We presently have a $695,000 credit facility with Monroe Bank + Trust, or
the Bank. This senior debt credit facility is comprised of a $295,000 four year
term note at 7.5% and a line of credit up to $400,000 at Prime (8.25% at March
31, 2007) plus 1.5% and secured by a first lien on all assets of the Company.
Two certificates of deposit totaling $125,000 from the Bank are held as a
condition of maintaining the facility. We have currently renewed the line of
credit through October 2007, and are not in violation of any financial
covenants. At March 31, 2007, we had $165,000 of borrowing capacity under the
credit facility. The term note was paid off in March 2007.
In the first quarter 2007, our wholly-owned subsidiary, Bio-Mineral
Transportation LLC ("BMT"), borrowed a total of $98,540 from Wachovia Financial
Services to purchase a truck that was placed into service during the quarter. A
term note was issued at 9.04% for five years and secured by the truck. The
total amount owed on all notes held by BMT as of March 31, 2007 was
approximately $324,000 and all are expected to be paid in full by April 2012.
In the first quarter 2007, our wholly-owned subsidiary, Florida N-Viro LP
("Florida N-Viro"), borrowed a total of $23,253 from General Motors Acceptance
Corporation to purchase a truck that was placed into service during the quarter.
A term note was issued at 9.82% for five years and secured by the truck. The
total amount owed on all notes held by Florida N-Viro as of March 31, 2007 was
approximately $29,000 and all are expected to be paid in full by February 2012.
In early 2006, the dormant Ft. Meade facility, which was owned by Florida
N-Viro, was sold to an independent third party, and the proceeds were used to
fund operations. On December 28, 2006, we purchased the remaining ownership
interest in Florida N-Viro for $500,000 and financed $400,000 of it by
delivering a note to the seller, VFL Technology Corporation. The note is at 8%
for 10 years, to be paid in annual installments of $59,611.80, subject to an
offset for royalties due us under a patent license agreement from the same
party. Through March 31, 2007 cash flow from operations of Florida N-Viro has
been positive, and we believe that Florida N-Viro will be able to generate
enough funds to finance operations through 2007.
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 are currently in discussions with several companies in the cement and
fuel 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.
For the remainder of 2007, we expect continued improvements in operating
results for 2007 primarily due to lowered administrative costs together with
existing sources and expected new sources of revenue, strategic relationships
and cash from equity issuances. Additionally, market developments and ongoing
discussions with companies in the fuel and wastewater industries could provide
enhanced liquidity and have a positive impact on 2007 operations.
OFF-BALANCE SHEET ARRANGEMENTS
At March 31, 2007, we did not have any material commercial commitments,
including guarantees or standby repurchase obligations, or any relationships
with unconsolidated entities or financial partnerships, including entities often
referred to as structured finance or special purpose entities or variable
interest entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
From time to time, during the normal course of business, we may make
certain indemnities, commitments and guarantees under which we may be required
to make payments in relation to certain transactions. These include: (i)
indemnities to vendors and service providers pertaining to claims based on our
negligence or willful misconduct and (ii) indemnities involving the accuracy of
representations and warranties in certain contracts. Pursuant to Delaware law,
we may indemnify certain officers and directors for certain events or
occurrences while the officer or director is, or was, serving at our request in
such capacity. We also have director and officer insurance coverage that limits
our exposure and enables us to recover a portion of any future amounts that we
may pay for indemnification purposes. We believe the applicable insurance
coverage is generally adequate to cover any estimated potential liability for
which we may provide indemnification. The majority of these indemnities,
commitments and guarantees do not provide for any limitation of the maximum
potential for future payments we could be obligated to make. We have not
recorded any liability for these indemnities, commitments and other guarantees
in the accompanying Consolidated Balance Sheets.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual cash obligations at March
31, 2007, 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 1 - 3 years 4 - 5 years after 5 years
------- --------- ----------------- ------------ ------------ --------------
Purchase obligations (1) $ 91,000 $ 72,800 $ 18,200 $ - $ -
Long-term debt obligations (2) 753,811 112,031 320,202 135,090 186,488
Operating leases (3) 265,636 92,411 173,225 - -
Capital lease obligations - - - - -
Other long-term debt obligations - - - - -
---------- ----------------- ------------ ------------ --------------
Total contractual cash obligations $1,110,447 $ 277,242 $ 511,627 $ 135,090 $ 186,488
========== ================= ============ ============ ==============
<FN>
(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. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
As of March 31, 2007, under the direction of our Chief Executive Officer
and Chief Financial Officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.
We concluded that our disclosure controls and procedures were effective as of
March 31, 2007, such that the information required to be disclosed in our SEC
reports is recorded, processed, summarized and reported within the time periods
specified by the SEC's rules and forms, and is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
INTERNAL CONTROLS
There were no changes in our internal controls over financial reporting
during the quarter ended March 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 2005, J. Patrick Nicholson filed a Demand for Arbitration based on
a claimed breach of a Consulting Agreement dated August 28, 2003 between the
Company and Mr. Nicholson. In July 2005, the Company terminated for cause his
Consulting Agreement. Mr. Nicholson was being paid an aggregate of over $92,000
per year under the Agreement, exclusive of any other payouts earnable. In
November 2005, Mr. Nicholson filed an amended complaint pertaining to his Demand
for Arbitration. The Company is vigorously contesting Mr. Nicholson's claims in
this proceeding. A hearing on the matter commenced over two days in January
2007, and was concluded in April 2007. A decision by the arbitrator is expected
in the near future.
In January 2006, J. Patrick Nicholson applied to the Delaware Chancery
Court for an order to compel the Company to allow him access to inspect our
corporate and business books and records and our stockholder list. No monetary
relief is sought in this action. The Company contends that the documents sought
by Mr. Nicholson in this action far exceed those to which he is entitled, and
principally relate to his claims in the arbitration described above. The
Company is vigorously defending this action and has filed a response in the
Delaware Chancery Court, but no discovery has been conducted, and no relief has
been granted as of the date of this Form 10-QSB.
In July 2006, J. Patrick Nicholson and N-Viro Energy Systems, Inc. filed a
Complaint with Jury Demand in the United States District Court for the Northern
District of Ohio, against the Company, Ophir Holdings, Inc., Strategic Asset
Management, Inc., Robert A. Cooke, the Cooke Family Trust and the following
current and former members of our Board of Directors: Daniel J. Haslinger,
Phillip Levin, R. Francis DiPrete and Terry J. Logan. The Complaint is seeking
undeterminable damages and other relief from the named defendants. N-Viro filed
a motion to dismiss the lawsuit in August 2006. Mr. Nicholson requested several
extensions to amend his complaint. An amended complaint alleging mostly the
same claims was filed on that date. The Company plans to renew its motion to
dismiss, and will vigorously defend against the allegations. All discovery has
been stayed pending the anticipated motion to dismiss.
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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
(a) None
ITEM 6. EXHIBITS
Exhibits:
See Exhibit Index below.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
N-VIRO INTERNATIONAL CORPORATION
Date: May 15, 2007 /s/ Timothy R. Kasmoch
---------------- -----------------------
Timothy R. Kasmoch
Chief Executive Officer and President
(Principal Executive Officer)
Date: May 15, 2007 /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 of CEO Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002.
31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes - Oxley Act of
2002.
32.1 Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.