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 September 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 November 5, 2007, 4,021,859 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 Sept. 30 Nine Months Ended Sept. 30
------------------------ ------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
Revenues $ 935,639 $ 884,852 $3,089,913 $2,866,015
Cost of revenues 777,683 596,607 2,521,340 1,827,741
----------- ----------- ----------- -----------
Gross Profit 157,956 288,245 568,573 1,038,274
Operating expenses:
Selling, general and administrative 374,947 444,715 1,384,258 1,357,912
----------- ----------- ----------- -----------
Operating loss (216,991) (156,470) (815,685) (319,638)
Nonoperating income (expense):
Interest income 1,267 2,408 4,565 6,690
Interest expense (19,375) (3,211) (48,229) (11,896)
(18,108) (803) (43,664) (5,206)
----------- ----------- ----------- -----------
Loss before income taxes (235,099) (157,273) (859,349) (324,844)
Federal and state income taxes - - - -
----------- ----------- ----------- -----------
Net loss $ (235,099) $ (157,273) $ (859,349) $ (324,844)
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.06) $ (0.04) $ (0.22) $ (0.09)
=========== =========== =========== ===========
Weighted average common shares outstanding - basic and diluted 4,003,104 3,719,543 3,937,114 3,707,180
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 2007 (Unaudited) December 31, 2006
------------------------------- -------------------
ASSETS
- -----------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted $ 84,471 $ 162,633
Restricted 134,429 131,498
Trade Receivables, net 513,193 667,617
Prepaid expenses and other current assets 195,257 250,590
------------------------------- -------------------
Total current assets 927,350 1,212,338
Property and Equipment, Net 1,361,703 931,820
Intangible and Other Assets, Net 664,127 801,972
------------------------------- -------------------
$ 2,953,180 $ 2,946,130
=============================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 161,905 $ 106,673
Line-of-credit 366,075 205,000
Accounts payable 983,255 1,048,094
Accrued liabilities 231,751 202,295
------------------------------- -------------------
Total current liabilities 1,742,986 1,562,062
Long-term debt, less current maturities 802,028 554,437
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 7,000,000 shares; issued
4,145,359 in 2007 and 3,864,059 in 2006 41,454 38,641
Additional paid-in capital 16,888,189 16,453,119
Accumulated deficit (15,836,587) (14,977,239)
------------------------------- -------------------
1,093,056 1,514,521
Less treasury stock, at cost, 123,500 shares 684,890 684,890
------------------------------- -------------------
Total stockholders' equity 408,166 829,631
------------------------------- -------------------
$ 2,953,180 $ 2,946,130
=============================== ===================
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended Sept. 30
--------------------------
2007 2006
---------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $(159,163) $ 173,896
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (639,660) (320,838)
Expenditures for intangible assets - (3,414)
Proceeds from the sale of property and equipment 7,181 9,800
Reductions to restricted cash and cash equivalents (2,931) (2,493)
---------- ----------
Net cash used in investing activities (635,410) (316,945)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under long-term obligations 394,917 219,309
Principal payments on long-term obligations (92,096) (67,262)
Net borrowings (payments) on line-of credit 161,075 (55,000)
Stock options exercised 252,515 0
---------- ----------
Net cash provided by financing activities 716,411 97,047
NET DECREASE IN CASH AND CASH EQUIVALENTS (78,162) (46,002)
CASH AND CASH EQUIVALENTS - BEGINNING 162,633 224,447
---------- ----------
CASH AND CASH EQUIVALENTS - ENDING $ 84,471 $ 178,445
========== ==========
Supplemental disclosure of cash flows information:
Cash paid during the nine months ended for interest $ 72,879 $ 16,370
========== ==========
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements of N-Viro International
Corporation (the "Company") are unaudited but, in management's opinion, reflect
all adjustments (including normal recurring accruals) necessary to present
fairly such information for the period and at the dates indicated. The results
of operations for the nine months ended September 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 September 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 September 30, 2007 is $35,000 and at
December 31, 2006 is $170,000. This balance was reduced from $170,000
during the third quarter of 2007 as accounts with some of the Company's
customers who were part of a related group were written off as part of a
settlement agreement to discontinue licensing arrangements with them.
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 - Income taxes are provided at the applicable rates on
the basis of items included in the determination of income for income tax
purposes for the Company.
Deferred Income Taxes - Deferred income taxes are provided from timing
difference between financial statement income and tax return income under
provision of SFAS No. 109 which requires deferred income taxes be computed
on the liability method and deferred tax assets are recognized only when
realization in certain. The tax effect of such differences are zero at the
end of each period presented.
NOTE 2. RELATED PARTY TRANSACTIONS
During the quarter ended September 30, 2007, there were no material related
party transactions.
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 the prime rate (7.75% at September 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 $134,429 from the Bank are
held as a condition of maintaining the facility. As announced in a Form 8-K
filing on November 7, 2007, the Company extended the maturity date of the line
of credit until October 17, 2008. At September 30, 2007, the Company had
approximately $34,000 of borrowing capacity under the line of credit.
In the third quarter 2007, the Company's wholly-owned subsidiary,
Bio-Mineral Transportation LLC ("BMT"), borrowed a total of $127,000 from Monroe
Bank + Trust, to purchase a truck that was placed into service during the
quarter. A term note was issued at 8.1% interest for five years, monthly
payments due of $2,581 and secured by the truck. The total amount owed on all
notes by BMT as of September 30, 2007 was approximately $500,000 and all are
expected to be paid in full on the applicable maturity date, the last of which
is July 2012.
In the third quarter 2007, the Company's wholly-owned subsidiary, Florida
N-Viro LP, did not borrow any additional funds. The total amount owed on all
notes by Florida N-Viro as of September 30, 2007 was approximately $66,000 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% interest 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 September 30, 2007 was approximately $398,000 and the first
installment is expected to be paid on time in early 2008. The Company estimates
this first installment will be approximately $26,000, accounting for expected
royalty offsets through year end.
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 September 30,
2007 is $12,000, as this property commitment was acquired pursuant to the Share
Purchase Agreement with VFL Technology Corporation, effective date 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 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 sought
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 renewed its motion to dismiss. On
October 12, 2007, the Court granted all motions to dismiss, including N-Viro's
Motion, and dismissed with prejudice the Amended Complaint in its entirety.
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 nine months
ended September 30, 2007 and 2006 is approximately $27,900 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 September 30, 2007.
NOTE 6. SEGMENT INFORMATION
The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting, which segregates its
business by product category and service lines. The Company's reportable
segments are as follows:
Management Operations - 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.
For the third quarter of 2007, approximately 86% of the Company's revenue
was from management operations and 14% from other domestic operations.
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 September 30, 2007 and 2006 (dollars in thousands):
Management Domestic Foreign Research &
Operations Operations Operations Development Total
------------------------------------ ---------- ----------- ----------- -----
Quarter Ended September 30, 2007
---------------------------------------------------------------------------------
Revenues 808 128 - - 936
Cost of revenues 654 124 - - 778
------------------------------------ ---------- ----------- ----------- -----
Segment profits 154 4 - - 158
==================================== ========== =========== =========== =====
Identifiable assets 1,253 90 - - 1,343
Depreciation 51 33 - - 84
Quarter Ended September 30, 2006
---------------------------------------------------------------------------------
Revenues 447 408 - 30 885
Cost of revenues 269 298 9 21 597
------------------------------------ ---------- ----------- ----------- -----
Segment profits 178 110 (9) 9 288
==================================== ========== =========== =========== =====
Identifiable assets 484 102 - - 586
Depreciation 20 10 - - 30
Nine Months Ended September 30, 2007
---------------------------------------------------------------------------------
Revenues 2,235 855 - - 3,090
Cost of revenues 1,891 631 - - 2,522
------------------------------------ ---------- ----------- ----------- -----
Segment profits 344 224 - - 568
==================================== ========== =========== =========== =====
Identifiable assets 1,253 90 - - 1,343
Depreciation 133 83 - - 216
Nine Months Ended September 30, 2006
---------------------------------------------------------------------------------
Revenues 1,332 1,378 66 90 2,866
Cost of revenues 743 1,002 1 82 1,828
------------------------------------ ---------- ----------- ----------- -----
Segment profits 589 376 65 8 1,038
==================================== ========== =========== =========== =====
Identifiable assets 484 102 - - 586
Depreciation 54 16 - - 70
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 September 30, 2007
and 2006 is as follows (dollars in thousands):
Qtr. Ended Nine Months Ended
Sept. 30 Sept. 30
---------------- ------------------
2007 2006 2007 2006
------- ------- -------- --------
Segment profits:
Segment profits for reportable segments $ 158 $ 288 $ 568 $ 1,038
Corporate selling, general and administrative expenses (375) (445) (1,384) (1,358)
Other income (expense) (18) (1) (43) (5)
------- ------- -------- --------
Consolidated loss before taxes $ (235) $ (158) $ (859) $ (325)
======= ======= ======== ========
Identifiable assets:
Identifiable assets for reportable segments $1,343 $ 586 $ 1,343 $ 586
Corporate property and equipment 19 20 19 20
Current assets not allocated to segments 927 1,052 927 1,052
Intangible and other assets not allocated to
segments 664 814 664 814
------- ------- -------- --------
Consolidated assets $2,953 $2,472 $ 2,953 $ 2,472
======= ======= ======== ========
Depreciation and amortization:
Depreciation for reportable segments $ 84 $ 30 $ 216 $ 70
Corporate depreciation and amortization 21 35 66 105
------- ------- -------- --------
Consolidated depreciation and amortization $ 105 $ 65 $ 282 $ 175
======= ======= ======== ========
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.
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 September 30, 2007
(after the Company's purchase of its remaining interest in Florida N-Viro) and
2006 is as follows:
Sept. 30, Sept. 30,
2007 2006
(unaudited) (unaudited)
------------ ------------
Current assets $ 351,648 $ 278,961
Long-term assets 428,576 259,682
------------ ------------
$ 780,224 $ 538,643
============ ============
Current liabilities $ 229,031 $ 1,682,090
Long-term liabilities 47,923 -
Member capital 500,000 -
Partners' capital (deficit) 3,270 (1,143,447)
------------ ------------
$ 780,224 $ 538,643
============ ============
Three Months Ended Sept. 30,
--------------------------------------------
2007 2006
(unaudited) (unaudited)
------------------------------ ------------
Net sales $ 376,050 $ 286,433
Net income (loss) 321 (94,245)
Nine Months Ended Sept. 30,
--------------------------------------------
2007 2006
(unaudited) (unaudited)
------------------------------ ------------
Net sales $ 1,183,588 $ 1,054,972
Net income (loss) 3,270 (192,515)
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 or in our Form 10-KSB, 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 or
referenced 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 or referenced 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 $936,000 for the quarter ended September 30, 2007
compared to $885,000 for the same period of 2006. The net increase in revenue is
due primarily to an increase in facility management revenue. Our cost of
revenues increased to $778,000 in 2007 from $597,000 for the same period in
2006, and the gross profit percentage decreased to 17% from 33% for the quarters
ended September 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 decreased for
the comparative period. These changes collectively resulted in a net loss of
approximately $235,000 for the quarter ended September 30, 2007 compared to a
net loss of $157,000 for the same period in 2006, an increase in the net loss of
approximately $78,000.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2007 WITH THREE MONTHS ENDED
SEPTEMBER 30, 2006
Our overall revenue increased $51,000, or 6%, to $936,000 for the quarter
ended September 30, 2007 from $885,000 for the quarter ended September 30, 2006.
The net increase in revenue was due primarily to the following:
a) Sales of alkaline admixture decreased $205,000 from the same period
ended in 2006;
b) Revenue from the service fees for the management of alkaline admixture
increased $35,000 from the same period ended in 2006 - this increase was
contributed primarily by the Florida operation, which was acquired in late 2006;
c) Our processing revenue, including facility management revenue, showed a
net increase of $251,000 over the same period ended in 2006. Of this gross
facility management revenue increase, $376,000 was contributed by the Florida
operation, which was acquired in late 2006;
d) Research and development revenue was $-0- in 2007, a decrease of
$30,000 from the same period ended in 2006.
Our gross profit decreased $130,000, or 45%, to $158,000 for the quarter
ended September 30, 2007 from $288,000 for the quarter ended September 30, 2006,
and the gross profit margin decreased to 17% from 33% for the same periods. The
decrease in gross profit margin is primarily due to the continued shift in
percentage of overall gross revenue to our management fee operation segment,
which operated at a lower profit margin. Gross revenue decreased $15,000 from
our Toledo operation, contributing approximately $3,000 of this decrease in
gross profit. The acquisition of the Florida operation in late 2006 added
approximately $7,000 of gross profit on overall revenue of $376,000, but was an
increase of approximately $61,000 of gross profit over the same period in 2006
when it was operated by a different company.
Our operating expenses decreased $70,000, or 16%, to $375,000 for the
quarter ended September 30, 2007 from $445,000 for the quarter ended September
30, 2006. The decrease was primarily due to a decrease of approximately $78,000
in legal and professional fees, $47,000 for the recovery of bad debts previously
reserved, $23,000 in director-related expenses and $13,000 in amortization of
intangible assets, partially offset by an increase of $60,000 in employee
payroll and related expenses, $10,000 in a gain on an asset sale in the previous
year and $21,000 in office-related and selling 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
$217,000 for the quarter ended September 30, 2007 compared to an operating loss
of $156,000 for the quarter ended September 30, 2006, an increase in the loss of
approximately $61,000.
Our net nonoperating expense increased by $17,000 to net nonoperating
expense of $18,000 for the quarter ended September 30, 2007 from net
nonoperating expense of $1,000 for the quarter ended September 30, 2006. The
increase in nonoperating expense was primarily due to the increase of $16,000 in
interest expense for the financing of the acquisition of the Florida operation
in December 2006 and an increase in borrowing on the line of credit for the
period compared to 2006.
We recorded a net loss of approximately $235,000 for the quarter ended
September 30, 2007 compared to a net loss of $157,000 for the same period ended
in 2006, an increase in the loss of approximately $78,000. Total non-cash
expenses for depreciation, amortization and stock or stock options charges
totaling $199,000, offset by the decrease of $135,000 in the reserve in
allowance for bad debts, accounted for approximately $64,000 of the loss for the
quarter ended September 30, 2007. Similar non-cash expenses for the same period
in 2006 totaled approximately $138,000.
For the quarter ended September 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 NINE MONTHS ENDED SEPTEMBER 30, 2007 WITH NINE MONTHS ENDED
SEPTEMBER 30, 2006
Our overall revenue increased $224,000, or 8%, to $3,090,000 for the nine
months ended September 30, 2007 from $2,866,000 for the nine months ended
September 30, 2006. The net increase in revenue was due primarily to the
following:
a) Sales of alkaline admixture decreased $469,000 from the same period
ended in 2006;
b) Revenue from the service fees for the management of alkaline admixture
increased $223,000 from the same period ended in 2006 - this increase was
contributed primarily by the Florida operation, which was purchased in late
2006;
c) Our processing revenue, including facility management revenue, showed a
net increase of $596,000 over the same period ended in 2006. Of this gross
facility management revenue increase, $941,000 was contributed by the Florida
operation, which was acquired 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
$90,000 from the same period ended in 2006.
Our gross profit decreased $470,000, or 45%, to $568,000 for the nine
months ended September 30, 2007 from $1,038,000 for the nine months ended
September 30, 2006, and the gross profit margin decreased to 18% from 36% 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
$246,000 from our Toledo operation, contributing approximately $82,000 of this
decrease in gross profit. The gross revenue from the Toledo operation decreased
in 2007 compared to the first nine 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 $388,000, was primarily the result of the
decrease in sales of alkaline admixture, royalty and miscellaneous revenues. The
acquisition of the placeStateFlorida operation in late 2006 added approximately
$37,000 of gross profit on overall revenue of $1,184,000, but was an increase of
approximately $110,000 of gross profit over the same period in 2006 when it was
operated by a different company.
Our operating expenses increased $26,000, or 2%, to $1,384,000 for the nine
months ended September 30, 2007 from $1,358,000 for the nine months ended
September 30, 2006. The increase was primarily due to an increase of
approximately $109,000 in employee payroll and related expenses, $20,000 in
director-related expenses, $19,000 in consulting expenses and $19,000 in
stockholder relations expense, partially offset by a decrease of $70,000 in
legal and professional fees, $47,000 for the recovery of bad debts previously
reserved and $39,000 in amortization of intangible assets. 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
$816,000 for the nine months ended September 30, 2007 compared to an operating
loss of $319,000 for the nine months ended September 30, 2006, an increase in
the loss of approximately $496,000.
Our net nonoperating expense increased by $38,000 to net nonoperating
expense of $44,000 for the nine months ended September 30, 2007 from net
nonoperating expense of $5,000 for the nine months ended September 30, 2006. The
increase in nonoperating expense was primarily due to the increase of $36,000 in
interest expense for the financing of the acquisition of the Florida operation
in December 2006 and an increase in borrowing on the line of credit for the
period compared to 2006.
We recorded a net loss of approximately $859,000 for the nine months ended
September 30, 2007 compared to a net loss of $325,000 for the same period ended
in 2006, an increase in the loss of approximately $534,000. Total non-cash
expenses for depreciation, amortization and stock or stock options charges
totaling $588,000, offset by the decrease of $135,000 in the reserve in
allowance for bad debts, accounted for approximately $453,000 of the loss for
the nine months ended September 30, 2007. Similar non-cash expenses for the same
period in 2006 totaled approximately $427,000.
For the nine months ended September 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 $816,000 at September 30,
2007, compared to a working capital deficit of $350,000 at December 31, 2006,
resulting in a decrease in working capital of $466,000. Current assets at
September 30, 2007 included cash and investments of approximately $219,000
(including restricted cash of approximately $134,000), which is a decrease of
$75,000 from December 31, 2006.
Our cash flow used by operations for the first nine months ended September
30, 2007 was approximately $159,000, a decrease of approximately $333,000 from
the first nine months of 2006. This decrease was principally due to the increase
in the net loss of $534,000, further decreased by $48,000 in other non-cash
charges to earnings, but offset by the positive change in working capital of
approximately $235,000 and $14,000 for stock, warrants and stock options issued
for fees and services. The positive change in working capital of $235,000 was
primarily a decrease in accounts receivable of approximately $182,000 compared
to the similar period in 2006.
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
alkaline admixture or license contracts, type of customer and the amount of time
required to obtain the information to prepare the billing. The normal payment
period for accounts payable is approximately 45-75 days for the majority of
vendors. This is also a result of the customer contracts and the related cost
of goods sold associated with each customer. We have periodically extended
payments on certain vendors to assist us in our cash flow needs. Principal
vendor types are trucking, fuel, alkaline admixture (materials) and outside
professional fees.
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% interest and a line of credit up to
$400,000 at the prime rate (7.75% at September 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 $134,429 from the Bank are
held as a condition of maintaining the facility. As announced in a Form 8-K
filing on November 7, 2007, we renewed the line of credit through October 2008.
At September 30, 2007, we had $34,000 of borrowing capacity under the credit
facility.
In the third quarter 2007, our wholly-owned subsidiary, Bio-Mineral
Transportation LLC ("BMT"), borrowed a total of $127,000 from Monroe Bank +
Trust, to purchase a truck that was placed into service during the quarter. A
term note was issued at 8.1% interest for five years, monthly payments due of
$2,581 and secured by the truck. The total amount owed on all notes by BMT as of
September 30, 2007 was approximately $500,000 and all are expected to be paid in
full on the applicable maturity date, the last of which is July 2012.
In the third quarter 2007, our wholly-owned subsidiary, Florida N-Viro LP,
did not borrow any additional funds. The total amount owed on all notes by
Florida N-Viro as of September 30, 2007 was approximately $66,000 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% interest 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 September 30, 2007 was approximately $398,000 and the first
installment is expected to be paid on time in early 2008. We estimate this first
installment will be approximately $26,000, accounting for expected royalty
offsets through year end. Through September 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
the end of 2007 and into 2008.
For the remainder of 2007 and into early 2008, we expect improvements in
operating results 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 future 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.
We are currently in discussions with companies in the cement and fuel
industries for the development and commercialization of the patented N-Viro fuel
technology. There can be no assurance these discussions will be successful. We
continue to focus on the development of regional biosolids processing
facilities. Currently we are in negotiations with potential partners to permit
and develop independent, regional facilities.
OFF-BALANCE SHEET ARRANGEMENTS
At September 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
September 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) $ 54,600 $ 54,600 $ - $ - $ -
Long-term debt obligations
and related interest (2) 1,244,327 211,750 617,088 162,139 253,350
Operating leases (3) 203,471 83,808 115,964 3,699 -
Capital lease obligations - - - - -
Line of Credit obligation 366,075 366,075 - - -
Other long-term debt obligations - - - - -
---------- ----------------- ------------ ------------ --------------
Total contractual cash obligations $1,868,473 $ 716,233 $ 733,052 $ 165,838 $ 253,350
========== ================= ============ ============ ==============
<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 September 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 September 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 September 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 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 sought
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 renewed its motion to dismiss.
On October 12, 2007, the Court granted all motions to dismiss, including
N-Viro's Motion, and dismissed with prejudice the Amended Complaint in its
entirety.
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: November 14, 2007 /s/ Timothy R. Kasmoch
----------------- -----------------------
Timothy R. Kasmoch
Chief Executive Officer and President
(Principal Executive Officer)
Date: November 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 -
OxleyAct of 2002.
32.2 Certification of CFO Pursuant to Section 906 of the Sarbanes -
Oxley Actof 2002.