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 June 30, 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 August 6, 2007, 3,996,359 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 June 30 Six Months Ended June 30
------------------------ ------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
Revenues $1,022,014 $ 952,337 $2,154,274 $1,981,155
Cost of revenues 856,543 554,406 1,743,657 1,231,131
----------- ----------- ----------- -----------
Gross Profit 165,471 397,931 410,617 750,024
Operating expenses:
Selling, general and administrative 530,444 431,700 1,009,311 913,192
----------- ----------- ----------- -----------
Operating loss (364,973) (33,769) (598,694) (163,168)
Nonoperating income (expense):
Interest income 1,565 1,756 3,297 4,281
Interest expense (17,938) (4,049) (28,854) (8,684)
----------- ----------- ----------- -----------
(16,373) (2,293) (25,557) (4,403)
----------- ----------- ----------- -----------
Loss before income taxes (381,346) (36,062) (624,251) (167,571)
Federal and state income taxes - - - -
----------- ----------- ----------- -----------
Net loss $ (381,346) $ (36,062) $ (624,251) $ (167,571)
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.10) $ (0.01) $ (0.16) $ (0.05)
=========== =========== =========== ===========
Weighted average common shares outstanding - basic and diluted 3,965,706 3,707,087 3,903,573 3,700,918
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2007 (Unaudited) December 31, 2006
-------------------------- -------------------
ASSETS
- -----------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted $ 97,975 $ 162,633
Restricted 133,404 131,498
Trade Receivables, net 740,593 667,617
Prepaid expenses and other current assets 217,777 250,590
-------------------------- -------------------
Total current assets 1,189,749 1,212,338
Property and Equipment, Net 1,235,522 931,820
Intangible and Other Assets, Net 723,686 801,972
-------------------------- -------------------
$ 3,148,957 $ 2,946,130
========================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 139,363 $ 106,673
Line-of-credit 371,000 205,000
Accounts payable 1,119,496 1,048,094
Deferred revenue 12,145 -
Accrued liabilities 230,214 202,295
-------------------------- -------------------
Total current liabilities 1,872,218 1,562,062
Long-term debt, less current maturities 729,015 554,437
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 7,000,000 shares; issued
4,117,859 in 2007 and 3,864,059 in 2006 41,179 38,641
Additional paid-in capital 16,792,923 16,453,119
Accumulated deficit (15,601,488) (14,977,239)
-------------------------- -------------------
1,232,614 1,514,521
Less treasury stock, at cost, 123,500 shares 684,890 684,890
-------------------------- -------------------
Total stockholders' equity 547,724 829,631
-------------------------- -------------------
$ 3,148,957 $ 2,946,130
========================== ===================
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30
2007 2006
---------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (7,185) $ 234,106
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (428,834) (173,289)
Expenditures for intangible assets - (2,199)
Reductions to restricted cash and cash equivalents (1,906) (1,623)
---------- ----------
Net cash used in investing activities (430,740) (177,111)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under long-term obligations 267,917 88,973
Principal payments on long-term obligations (60,650) (39,656)
Net borrowings (payments) on line-of credit 166,000 (48,974)
---------- ----------
Net cash provided by financing activities 373,267 343
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (64,658) 57,338
CASH AND CASH EQUIVALENTS - BEGINNING 162,633 224,447
---------- ----------
CASH AND CASH EQUIVALENTS - ENDING $ 97,975 $ 281,785
========== ==========
Supplemental disclosure of cash flows information:
Cash paid during the six months ended for interest $ 43,873 $ 9,118
========== ==========
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 six months ended June 30, 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 June 30, 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 June 30, 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 vested 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 June 30, 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
former 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 June 30, 2007:
Payee Trucking, repairs and services Consulting fees Account payable balance at 6/30/07
- ------------ ------------------------------- ---------------- -----------------------------------
Gardenscape $ 4,543 $ - $ 4,234
Carl Richard - 693 -
NOTE 3. LONG-TERM DEBT
Through the first quarter of 2007, the Company had a $695,000 credit
facility with Monroe Bank + Trust, or the Bank. This senior debt credit facility
was 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 June 30, 2007) plus 1.5% and secured by a first
lien on all assets of the Company. The term note was paid off in March 2007,
leaving the line of credit as the remaining debt on this original credit
facility. Two certificates of deposit totaling $133,404 from the Bank are held
as a condition of maintaining the facility. The Company has currently renewed
the line of credit through October 2007. At June 30, 2007, the Company had
$29,000 of borrowing capacity under the line of credit.
In the second quarter 2007, the Company's wholly-owned subsidiary,
Bio-Mineral Transportation LLC ("BMT"), borrowed a total of $93,541 from
Navistar Financial, to purchase a truck that was placed into service during the
quarter. A term note was issued at 9.34% for five years, monthly payments due of
$1,958 and secured by the truck. The total amount owed on all notes by BMT as of
June 30, 2007 was approximately $399,000 and all are expected to be paid in full
on the applicable maturity date, the last of which is April 2012.
In the second quarter 2007, the Company's wholly-owned subsidiary, Florida
N-Viro LP, borrowed a total of $19,041 from General Motors Acceptance
Corporation to purchase a truck that was placed into service during the quarter.
A term note was issued at 10% for five years, monthly payments due of $404 and
secured by the truck. Florida N-Viro also borrowed a total of $26,930 from Irwin
Finance Company to purchase processing equipment that was placed into service
during the quarter. A term note was issued at 8.5% for three years, monthly
payments due of $851 and secured by the equipment. The total amount owed on all
notes by Florida N-Viro as of June 30, 2007 was approximately $72,000 and all
are expected to be paid in full on the applicable maturity date, the last of
which is May 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 $59,612, 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 June 30, 2007 was approximately $399,700 and the first installment is
expected to be paid on time in early 2008.
NOTE 4. CONTINGENCIES AND OTHER OBLIGATIONS TO RELATED PARTIES
In June 2007, the Company executed an Employment Agreement with Robert W.
Bohmer as Vice-President of Business Development and General Counsel, which
commenced July 1, 2007. The Company and Mr. Bohmer agreed primarily to enter
into an employment arrangement for a two-year term at $150,000 per year plus a
stock option grant of 100,000 shares. In addition, Mr. Bohmer is eligible for
an annual cash bonus. Generally, the Agreement may be terminated by the Company
with or without cause or by the Employee for any reason A copy of Mr. Bohmer's
Employment Agreement was attached to a Form 8-K as Exhibit 10.1, filed by the
Company on June 20, 2007.
In March 2007, the Company and Mr. Timothy R. Kasmoch, the President and
Chief Executive Officer, entered into an Employment Agreement dated and
commencing February 13, 2007, for a two-year term. Mr. Kasmoch is to receive an
annual base salary of $150,000, subject to an annual discretionary increase. In
addition, Mr. Kasmoch is eligible for an annual cash bonus. Generally, the
Agreement may be terminated by the Company with or without cause or by the
Employee for any reason. A copy of Mr. Kasmoch's Employment Agreement was
attached to a Form 8-K as Exhibit 10.1, filed by the Company on March 12, 2007.
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 June 30, 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 on 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. The Company did not extend Mr.
Richard's agreement beyond May 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. In June 2007, the Arbitrator ruled the
Company was legally justified in its termination for cause of Mr. Nicholson's
Consulting Agreement, in addition to not being liable for any additional payouts
that could have been earnable by him under the Agreement. All claims made by
Mr. Nicholson under the matter were dismissed with prejudice in their entirety
by the Arbitrator, who also elected not to award legal fees to either party in
the matter. The Company filed a Form 8-K on June 28, 2007 disclosing this
event.
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 now-concluded 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 has renewed its motion to
dismiss and will continue to vigorously defend against the allegations. In
response to motions to dismiss filed by all of the defendants, Mr. Nicholson and
his company dismissed with prejudice Messrs. Haslinger, Levin and Logan. All
discovery has been stayed pending the anticipated ruling on the motions 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. 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 was required to take a charge to
earnings totaling approximately $68,400 ratably through June 2007, the ending
date of his employment agreement. The Agreement was not renewed or extended by
the Company at that time, as disclosed in a filing on Form 8-K on June 12, 2007.
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 six
months ended June 30, 2007 and 2006 is approximately $18,600 each year. 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 these 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
No new accounting standards were issued by the Financial Accounting
Standards Board during the quarter ended June 30, 2007.
NOTE 6. SEGMENT INFORMATION
For the second quarter of 2007, approximately 70% of the Company's revenue
was from management operations and 30% 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.
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.
COMPETITION. The Company conducts business in a highly competitive market
and has fewer resources than most of its competitors. Principal competitors are
mainly from the waste management and disposal, water and alternative energy
industries. Businesses from these markets 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 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 June 30, 2007 and 2006 (dollars in thousands):
Management Domestic Foreign Research &
Operations Operations Operations Development Total
------------------------------ ---------- ---------- ------------ -----
Quarter Ended June 30, 2007
---------------------------------------------------------------------------
Revenues 714 308 - - 1,022
Cost of revenues 641 216 - - 857
------------------------------ ---------- ---------- ------------ -----
Segment profits 73 92 - - 165
============================== ========== ========== ============ =====
Identifiable assets 1,126 93 - - 1,219
Depreciation 48 25 - - 73
Quarter Ended June 30, 2006
---------------------------------------------------------------------------
Revenues 432 424 66 30 952
Cost of revenues 218 297 2 37 554
------------------------------ ---------- ---------- ------------ -----
Segment profits 214 127 64 (7) 398
============================== ========== ========== ============ =====
Identifiable assets 381 104 - - 485
Depreciation 17 3 - - 20
Six Months Ended June 30, 2007
---------------------------------------------------------------------------
Revenues 1,427 727 - - 2,154
Cost of revenues 1,235 509 - - 1,744
------------------------------ ---------- ---------- ------------ -----
Segment profits 192 218 - - 410
============================== ========== ========== ============ =====
Identifiable assets 381 104 - - 485
Depreciation 82 50 - - 132
Six Months Ended June 30, 2006
---------------------------------------------------------------------------
Revenues 885 970 66 60 1,981
Cost of revenues 474 689 6 62 1,231
------------------------------ ---------- ---------- ------------ -----
Segment profits 411 281 60 (2) 750
============================== ========== ========== ============ =====
Identifiable assets 381 104 - - 485
Depreciation 34 6 - - 40
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 June 30, 2007 and
2006 is as follows (dollars in thousands):
Qtr. Ended Six Months Ended
June 30 June 30
---------------- -----------------
2007 2006 2007 2006
------- ------- -------- -------
Segment profits:
Segment profits for reportable segments $ 165 $ 398 $ 410 $ 750
Corporate selling, general and administrative expenses (530) (432) (1,009) (913)
Other income (expense) (16) (2) (25) (4)
------- ------- -------- -------
Consolidated loss before taxes $ (381) $ (36) $ (624) $ (167)
======= ======= ======== =======
Identifiable assets:
Identifiable assets for reportable segments $1,219 $ 485 $ 1,219 $ 485
Corporate property and equipment 17 4 17 4
Current assets not allocated to segments 1,190 1,138 1,190 1,138
Intangible and other assets not allocated to
segments 723 883 723 883
Consolidated assets $3,149 $2,510 $ 3,149 $2,510
======= ======= ======== =======
Depreciation and amortization:
Depreciation for reportable segments $ 73 $ 20 $ 132 $ 40
Corporate depreciation and amortization 22 35 45 70
------- ------- -------- -------
Consolidated depreciation and amortization $ 95 $ 55 $ 177 $ 110
======= ======= ======== =======
NOTE 7. INVESTMENT IN FLORIDA N-VIRO, L. P.
On December 28, 2006, the Company entered into a Share Purchase Agreement
(the "Agreement") with VFL Technology Corporation ("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 were cancelled.
Condensed financial information of Florida N-Viro as of June 30, 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 $ 421,942 $ 325,958
Long-term assets 491,353 265,791
------------ ------------
$ 913,295 $ 591,749
============ ============
Current liabilities $ 364,020 $ 1,673,790
Long-term liabilities 51,064 -
Member capital 500,000 -
Partners' capital (deficit) (1,790) (1,082,041)
------------ ------------
$ 913,294 $ 591,749
============ ============
Quarter Ended June 30,
-----------------------------------------
2007 2006
(unaudited) (unaudited)
--------------------------- ------------
Net sales $ 417,130 $ 353,972
Net income (loss) (11,278) (61,534)
Six Months Ended June 30,
-----------------------------------------
2007 2006
(unaudited) (unaudited)
--------------------------- ------------
Net sales $ 807,537 $ 768,538
Net income (loss) (1,789) (98,271)
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 sludges 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 has developed 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, we focus on identifying 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, Florida area.
RESULTS OF OPERATIONS
Total revenues were $1,022,000 for the quarter ended June 30, 2007 compared
to $952,000 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 $857,000 in 2007 from $554,000 for the same period in 2006, and the
gross profit percentage decreased to 16% from 42% for the quarters ended June
30, 2007 and 2006, respectively. This decrease in gross profit percentage is due
primarily 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 increased for the comparative
period. These changes collectively resulted in a net loss of approximately
$381,000 for the quarter ended June 30, 2007 compared to a net loss of $36,000
for the same period in 2006, an increase in the net loss of approximately
$345,000.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2007 WITH THREE MONTHS ENDED JUNE 30,
2006
Our overall revenue increased $70,000, or 7%, to $1,022,000 for the quarter
ended June 30, 2007 from $952,000 for the quarter ended June 30, 2006. The net
increase in revenue was due primarily to the following:
a) Sales of alkaline admixture decreased $128,000 from the same period
ended in 2006;
b) Revenue from the service fees for the management of alkaline admixture
increased $97,000 from the same period ended in 2006 - this increase was
primarily 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 $143,000 over the same period ended in 2006. Of this gross
facility management revenue increase, $336,000 was contributed by the
acquisition of the Florida operation in late 2006;
d) Miscellaneous revenues decreased $13,000 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 $232,000, or 58%, to $165,000 for the quarter
ended June 30, 2007 from $398,000 for the quarter ended June 30, 2006, and the
gross profit margin decreased to 16% from 42% for the same periods. The decrease
in gross profit margin is primarily due to the shift in percentage of overall
gross revenue to our management fee operation segment, which operated at a lower
profit margin. Gross revenue decreased $100,000 from our Toledo operation,
contributing approximately $32,000 of this decrease in gross profit. The gross
revenue from the Toledo operation decreased in 2007 compared to the second
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
$200,000, was primarily the result of the decrease in sales of alkaline
admixture, royalty and miscellaneous revenues. The acquisition of the Florida
operation in late 2006 added approximately $12,000 of gross profit on overall
revenue of $417,000, but was an increase of approximately $45,000 of gross
profit over the same period in 2006 when it was operated by a different company.
Our operating expenses increased $99,000, or 23%, to $531,000 for the
quarter ended June 30, 2007 from $432,000 for the quarter ended June 30, 2006.
The increase was primarily due to an increase of approximately $62,000 in
director-related expenses, $15,000 in employee payroll and related expenses,
$11,000 in consulting expenses and $15,000 in stockholder relations expense.
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
$365,000 for the quarter ended June 30, 2007 compared to an operating loss of
$34,000 for the quarter ended June 30, 2006, an increase in the loss of
approximately $331,000.
Our net nonoperating expense increased by $14,000 to net nonoperating
expense of $16,000 for the quarter ended June 30, 2007 from net nonoperating
expense of $2,000 for the quarter ended June 30, 2006. The increase in
nonoperating expense was primarily due to an increase in interest expense for
the financing of the acquisition of the Florida operation in December 2006 and
an increase in borrowing for the period compared to 2006.
We recorded a net loss of approximately $381,000 for the quarter ended June
30, 2007 compared to a net loss of $36,000 for the same period ended in 2006, an
increase in the loss of approximately $345,000. Total non-cash expenses for
depreciation, amortization and stock or stock options charges accounted for
approximately $215,000 of the loss for the quarter ended June 30, 2007.
Non-cash expenses for the same period in 2006 totaled approximately $122,000.
For the quarter ended June 30, 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.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2007 WITH SIX MONTHS ENDED JUNE 30, 2006
Our overall revenue increased $173,000, or 9%, to $2,154,000 for the six
months ended June 30, 2007 from $1,981,000 for the six months ended June 30,
2006. The net increase in revenue was due primarily to the following:
a) Sales of alkaline admixture decreased $264,000 from the same period
ended in 2006;
b) Revenue from the service fees for the management of alkaline admixture
increased $188,000 from the same period ended in 2006 - this increase was
primarily 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 $344,000 over the same period ended in 2006. Of this gross
facility management revenue increase, $639,000 was contributed by the
acquisition of the Florida operation in late 2006;
d) Miscellaneous revenues decreased $35,000 from the same period ended in
2006; and
e) Research and development revenue was $-0- in 2007, a decrease of
$60,000 from the same period ended in 2006.
Our gross profit decreased $339,000, or 45%, to $411,000 for the six months
ended June 30, 2007 from $750,000 for the six months ended June 30, 2006, and
the gross profit margin decreased to 19% from 38% for the same periods. The
decrease in gross profit margin is primarily due to the shift in percentage of
overall gross revenue to our management fee operation segment, which operated at
a lower profit margin. Gross revenue decreased $231,000 from our Toledo
operation, contributing approximately $80,000 of this decrease in gross profit.
The gross revenue from the Toledo operation decreased in 2007 compared to the
first six months 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 $260,000, was primarily the result of the decrease in sales of
alkaline admixture, royalty and miscellaneous revenues. The acquisition of the
Florida operation in late 2006 added approximately $25,000 of gross profit on
overall revenue of $808,000, but was an increase of approximately $45,000 of
gross profit over the same period in 2006 when it was operated by a different
company.
Our operating expenses increased $96,000, or 10.5%, to $1,009,000 for the
six months ended June 30, 2007 from $913,000 for the six months ended June 30,
2006. The increase was primarily due to an increase of approximately $44,000 in
director-related expenses, $49,000 in employee payroll and related expenses,
$18,000 in consulting expenses and $17,000 in stockholder relations expense.
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
$599,000 for the six months ended June 30, 2007 compared to an operating loss of
$163,000 for the six months ended June 30, 2006, an increase in the loss of
approximately $436,000.
Our net nonoperating expense increased by $21,000 to net nonoperating
expense of $26,000 for the six months ended June 30, 2007 from net nonoperating
expense of $4,000 for the six months ended June 30, 2006. The increase in
nonoperating expense was primarily due to an increase in interest expense for
the financing of the acquisition of the Florida operation in December 2006 and
an increase in borrowing compared to 2006.
We recorded a net loss of approximately $624,000 for the six months ended
June 30, 2007 compared to a net loss of $168,000 for the same period ended in
2006, an increase in the loss of approximately $457,000. Total non-cash
expenses for depreciation, amortization and stock or stock options charges
accounted for approximately $383,000 of the loss for the six months ended June
30, 2007. Non-cash expenses for the same period in 2006 totaled approximately
$266,000.
For the six months ended June 30, 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 $682,000 at June 30,
2007, compared to a working capital deficit of $350,000 at December 31, 2006,
resulting in a decrease in working capital of $332,000. Current assets at June
30, 2007 included cash and investments of approximately $231,000 (including
restricted cash of approximately $133,000), which is an increase of $13,000 from
December 31, 2006.
Our cash flow used by operations for the first six months ended June 30,
2007 was approximately $7,000, a decrease of approximately $241,000 from the
first six months of 2006. This decrease was principally due to the negative
change in working capital of approximately $49,000, increased by $206,000 for
cash received on stock options exercised, further increased by $20,000 in the
amount of stock, warrants and stock options issued for fees and services from
2006 and further increased by $39,000 in other non-cash charges to earnings,
decreased by $457,000 for the increase in the net loss.
Through the first quarter of 2007, we had a $695,000 credit facility with
Monroe Bank + Trust, or the Bank. This senior debt credit facility was 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 June 30, 2007) plus 1.5% and secured by a first lien on all
assets of the Company. The term note was paid off in March 2007, leaving the
line of credit as the remaining debt on this original credit facility. Two
certificates of deposit totaling $133,404 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 attempting to refinance or extend the line of
credit beyond the October 2007 date. However, there can be no assurance that we
will be successful in negotiating these transactions. At June 30, 2007, we had
$29,000 of borrowing capacity under the credit facility.
In the second quarter 2007, our wholly-owned subsidiary, Bio-Mineral
Transportation LLC ("BMT"), borrowed a total of $93,541 from Navistar Financial,
to purchase a truck that was placed into service during the quarter. A term note
was issued at 9.34% for five years, monthly payments due of $1,958 and secured
by the truck. The total amount owed on all notes by BMT as of June 30, 2007 was
approximately $399,000 and all are expected to be paid in full on the applicable
maturity date, the last of which is April 2012.
In the second quarter 2007, our wholly-owned subsidiary, Florida N-Viro LP,
borrowed a total of $19,041 from General Motors Acceptance Corporation to
purchase a truck that was placed into service during the quarter. A term note
was issued at 10% for five years, monthly payments due of $404 and secured by
the truck. Florida N-Viro also borrowed a total of $26,930 from Irwin Finance
Company to purchase processing equipment that was placed into service during the
quarter. A term note was issued at 8.5% for three years, monthly payments due of
$851 and secured by the equipment. The total amount owed on all notes by Florida
N-Viro as of June 30, 2007 was approximately $72,000 and all are expected to be
paid in full on the applicable maturity date, the last of which is May 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 $59,612, 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 June 30, 2007 was approximately $399,700 and the
first installment is expected to be paid on time in early 2008. Through June
30, 2007 cash flow from continuing operations of Florida N-Viro has been
positive, and we believe that Florida N-Viro will be able to generate enough
funds to finance its 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 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. Failure to
achieve improvements in operating results or in the 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 June 30, 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 June 30,
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 2 - 4 years 5 - 6 years after 6 years
------- ---------- ----------------- ------------ ------------ --------------
Purchase obligations (1) $ 72,800 $ 72,800 $ - $ - $ -
Long-term debt obligations (2) 869,323 139,363 404,655 149,771 175,534
Operating leases (3) 215,363 82,476 132,887 - -
Capital lease obligations - - - - -
Line of Credit obligation 371,000 371,000 - - -
Other long-term debt obligations - - - - -
---------- ----------------- ------------ ------------ --------------
Total contractual cash obligations $1,528,486 $ 665,639 $ 537,542 $ 149,771 $ 175,534
========== ================= ============ ============ ==============
<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 June 30, 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
June 30, 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 June 30, 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. In June 2007, the Arbitrator ruled the
Company was legally justified in its termination for cause of Mr. Nicholson's
Consulting Agreement, in addition to not being liable for any additional payouts
that could have been earnable by him under the Agreement. All claims made by
Mr. Nicholson under the matter were dismissed with prejudice in their entirety
by the Arbitrator, who also elected not to award legal fees to either party in
the matter. The Company filed a Form 8-K on June 28, 2007 disclosing this
event.
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 now-concluded 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 has renewed its motion to
dismiss and will continue to vigorously defend against the allegations. In
response to motions to dismiss filed by all of the defendants, Mr. Nicholson and
his company dismissed with prejudice Messrs. Haslinger, Levin and Logan. All
discovery has been stayed pending the anticipated ruling on the motions 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
On April 27, 2007, we issued 35,000 unregistered shares of our stock to
Weil Consulting Corporation, for compensation to provide general business
consulting services for a period of two years from the date of the Agreement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 8, 2007, we held our Annual Meeting of Stockholders. The
matters on which the stockholders voted, in person or by proxy, were:
- the election of four Class I directors to our board of
directors; and
- the ratification of UHY LLP as our independent
outside auditors for the fiscal year ending December 31, 2007.
ELECTION OF BOARD OF DIRECTORS:
DIRECTOR VOTES FOR VOTES WITHHELD
- ---------------------------- --------- --------------
R. Francis DiPrete 3,349,904 50,840
Carl Richard 3,347,584 53,160
Joseph Scheib 3,347,519 53,225
Mark Hagans 3,350,041 50,703
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS:
VOTES FOR VOTES AGAINST VOTES ABSTAIN
- --------- ------------- -------------
3,362,803 15,866 22,075
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: August 14, 2007 /s/ Timothy R. Kasmoch
--------------- -----------------------
Timothy R. Kasmoch
Chief Executive Officer and President
(Principal Executive Officer)
Date: August 14, 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 - OxleyAct
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.