-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KGgelfMNY7FNhXqBzLFPiWD+/dOjjcGs/C76y5YO6iyVjXRXq4NcRjCCCkxEtDZy GyrGQzseA1m7rW9ZI6Mijg== 0000904896-04-000028.txt : 20040524 0000904896-04-000028.hdr.sgml : 20040524 20040524171549 ACCESSION NUMBER: 0000904896-04-000028 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040524 FILER: COMPANY DATA: COMPANY CONFORMED NAME: N-VIRO INTERNATIONAL CORP CENTRAL INDEX KEY: 0000904896 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 341741211 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-21802 FILM NUMBER: 04827700 BUSINESS ADDRESS: STREET 1: 3450 W CENTRAL AVE STREET 2: STE 328 CITY: TOLEDO STATE: OH ZIP: 43606 BUSINESS PHONE: 4195356374 MAIL ADDRESS: STREET 1: 3450 WEST CENTRAL AVENUE SUITE 328 CITY: TOLEDO STATE: OH ZIP: 43606 10QSB 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (MARK ONE) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER: 0-21802 N-VIRO INTERNATIONAL CORPORATION (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER) DELAWARE 34-1741211 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 3450 W. CENTRAL AVENUE, SUITE 328 TOLEDO, OHIO 43606 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 535-6374 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes X No. As of May 14, 2004, 2,994,905 shares of N-Viro International Corporation $ .01 par value common stock were outstanding. Transitional Small Business Disclosure Format (check one): Yes No X PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended March 31 2004 2003 ----------- ----------- Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,458,369 $1,245,269 Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . 1,040,213 913,397 ----------- ----------- Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . 418,156 331,872 Operating expenses: Selling, general and administrative. . . . . . . . . . . . . . 509,451 451,268 ----------- ----------- 509,451 451,268 ----------- ----------- Operating loss . . . . . . . . . . . . . . . . . . . . . . . . (91,295) (119,396) Nonoperating income (expense): Interest and dividend income . . . . . . . . . . . . . . . . . 4,751 2,396 Interest expense . . . . . . . . . . . . . . . . . . . . . . . (26,147) (22,329) Income (loss) from equity investment in joint venture. . . . . (43,823) 1,804 ----------- ----------- (65,219) (18,129) ----------- ----------- Loss before income taxes . . . . . . . . . . . . . . . . . . . (156,514) (137,525) Federal and state income taxes . . . . . . . . . . . . . . . . - - ----------- ----------- Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (156,514) $ (137,525) =========== =========== Basic and diluted loss per share . . . . . . . . . . . . . . . $ (0.06) $ (0.05) =========== =========== Weighted average common shares outstanding - basic and diluted 2,796,165 2,577,433 =========== ===========
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS March 31, 2004 (Unaudited) December 31, 2003 --------------------------- ------------------- ASSETS - ----------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents: Unrestricted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 117,180 $ 123,547 Restricted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 - Receivables: Trade, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,328,172 842,583 Notes receivable - current. . . . . . . . . . . . . . . . . . . . . . . . . . 73,605 59,017 Related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,000 17,000 Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . 167,082 49,540 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,332 80,932 --------------------------- ------------------- Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,855,371 1,172,619 Property and Equipment, Net . . . . . . . . . . . . . . . . . . . . . . . . . 446,440 468,497 Investment in Florida N-Viro, L.P.. . . . . . . . . . . . . . . . . . . . . . - - Notes Receivable, net of current portion. . . . . . . . . . . . . . . . . . . 292,976 346,248 Intangible and Other Assets, Net. . . . . . . . . . . . . . . . . . . . . . . 1,185,060 1,209,825 --------------------------- ------------------- $ 3,779,847 $ 3,197,189 =========================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------------- CURRENT LIABILITIES Current maturities of long-term debt. . . . . . . . . . . . . . . . . . . . . $ 305,384 $ 259,782 Line-of-credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 398,223 Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,814,904 1,737,019 Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481,209 419,377 --------------------------- ------------------- Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 2,801,497 2,814,401 Long-term debt, less current maturities . . . . . . . . . . . . . . . . . . . 352,860 394,722 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) Common stock, $.01 par value; authorized 7,000,000 shares; issued 3,118,405 in 2004 and 2,713,833 in 2003 . . . . . . . . . . . . . . . . . . . 31,184 27,138 Preferred stock, $.01 par value; authorized 2,000,000 shares; issued 1 share. - - Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . 14,377,376 13,587,484 Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,098,180) (12,941,666) --------------------------- ------------------- 1,310,380 672,956 Less treasury stock, at cost, 123,500 shares. . . . . . . . . . . . . . . . . 684,890 684,890 --------------------------- ------------------- Total stockholders' equity (deficit). . . . . . . . . . . . . . . . . . . . . 625,490 (11,934) --------------------------- ------------------- $ 3,779,847 $ 3,197,189 =========================== ===================
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended Mar. 31 2004 2003 ---------- ---------- NET CASH USED BY OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . $(262,544) $(102,857) CASH FLOWS FROM INVESTING ACTIVITIES Increases (reductions) to restricted cash and cash equivalents . . . . . . . . . (75,000) 400,000 Collections on notes receivable. . . . . . . . . . . . . . . . . . . . . . . . . 8,000 6,000 Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . . (2,004) (870) Expenditures for intangible assets . . . . . . . . . . . . . . . . . . . . . . . (12,765) (9,820) ---------- ---------- Net cash provided (used) in investing activities . . . . . . . . . . . . . . . . (81,769) 395,310 CASH FLOWS FROM FINANCING ACTIVITIES Issuance of stock - options, warrants and private placement. . . . . . . . . . . 543,180 - Borrowings under long-term obligations . . . . . . . . . . . . . . . . . . . . . 74,386 336,003 Private placement expenditures . . . . . . . . . . . . . . . . . . . . . . . . . (10,751) - Principal payments on long-term obligations. . . . . . . . . . . . . . . . . . . (70,646) (304,790) Net borrowings (payments) on line-of credit. . . . . . . . . . . . . . . . . . . (198,223) (314,915) ---------- ---------- Net cash provided (used) by financing activities . . . . . . . . . . . . . . . . 337,946 (283,702) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . (6,367) 8,751 CASH AND CASH EQUIVALENTS - BEGINNING. . . . . . . . . . . . . . . . . . . . . . 123,547 4,935 ---------- ---------- CASH AND CASH EQUIVALENTS - ENDING . . . . . . . . . . . . . . . . . . . . . . . $ 117,180 $ 13,686 ========== ========== Supplemental disclosure of cash flows information: Cash paid during the three months ended for interest . . . . . . . . . . . . . . $ 20,039 $ 22,827 ========== ========== During the three months ended March 31, 2004, the Company issued unregistered common stock with a fair market value of $162,533 for payment of trade debts During the three months ended March 31, 2004, the Company issued unregistered common stock with a fair market value of $91,710 to current and former directors
See Notes to Consolidated Financial Statements N-VIRO INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION The accompanying consolidated financial statements of N-Viro International Corporation (the "Company") are unaudited but, in management's opinion, reflect all adjustments (including normal recurring accruals) necessary to present fairly such information for the period and at the dates indicated. The results of operations for the three months ended March 31, 2004 may not be indicative of the results of operations for the year ended December 31, 2004. Since the accompanying consolidated financial statements have been prepared in accordance with Article 10 of Regulation S-X, they do not contain all information and footnotes normally contained in annual consolidated financial statements; accordingly, they should be read in conjunction with the consolidated financial statements and notes thereto appearing in the Company's Form 10-K for the period ending December 31, 2003. The financial statements are consolidated as of March 31, 2004 and December 31, 2003 for the Company. There were no intercompany transactions. 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: The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has in the past and continues to sustain net and operating losses. In addition, the Company has used substantial amounts of working capital in its operations which has reduced the Company's liquidity to a low level. At March 31, 2004, current liabilities exceed current assets by $946,126. These matters raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties. Non-domestic license and territory fees - The Company does not recognize revenue on any non-domestic license or territory fee contracts until the cash is received, assuming all other tests of revenue recognition are met. Canada is excluded from this definition of non-domestic. Allowance for Doubtful Accounts - 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. Inventory - Inventory is recorded at lower of cost or market and consists of N-Viro soil, manufactured by the Company, which is available for sale and used in commercial, agricultural and horticultural applications. The weighted-average method is used to value the inventory. Property and Equipment/Long-Lived Assets - Property and equipment is reviewed for impairment pursuant to the provisions of 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. Equity Method Investment - The Company accounts for its investments in joint ventures under the equity method. The Company periodically evaluates the recoverability of its equity investments in accordance with APB No. 18, "The Equity Method of Accounting for Investments in Common Stock." If circumstances were to arise where a loss would be considered other than temporary, the Company would record a write-down of excess investment cost. Management has determined that no write-down was required at March 31, 2004. 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. The Company is also amortizing the capitalized cost of obtaining its credit facility, for the additional collateral required and evidenced by a warrant to purchase 50,000 shares of the Company's common stock. The Company estimated this cost at February 26, 2003 to be $30,000, and is amortizing this over 4 years by the straight-line method. 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 Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure About Fair Value of Financial Instruments," rates available at balance sheet dates to the Company are 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 recovery of deferred income tax assets. Preferred Stock - The Company has authorized, issued and outstanding one share of Series A Redeemable Preferred Stock (the "Preferred Stock"), is non-transferable, has a term equal to ten years and is subject to re-purchase by the Company for a nominal sum. The Preferred Stock has no voting rights, but has the special right, voting separately as a single class, to nominate and elect one member of the Board of Directors of the Corporation at the annual meeting of the shareholders of the Corporation at which such member is to be elected. The Preferred Stock is not convertible or exchangeable for any other securities or property of the Company and has no liquidation preference. Stock Options - The Company accounts for stock-based compensation issued to its employees and directors in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized 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. The fair value of options granted was determined using the Black-Scholes option pricing model. The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-based Compensation" to stock-based employee compensation:
Three Months Ended March 31, 2004 2003 ---------- ---------- Net income (loss), as reported. . . . . . . $(156,514) $(137,525) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects . . . . . . . (18,621) (18,621) ---------- ---------- Pro forma net income (loss) . . . . . . . . $(175,135) $(156,146) ========== ========== Income (loss) per share: Basic and diluted - as reported . . . . . . $ (0.06) $ (0.05) ========== ========== Basic and diluted - pro-forma . . . . . . . $ (0.06) $ (0.06) ========== ==========
2. RELATED PARTY TRANSACTIONS The Company has an unsecured receivable from a related party, N-Viro Energy Systems, Inc. estimated to be $17,000 at March 31, 2004. The amount due from the related party has been deemed to be current by management in the accompanying balance sheets. No additional advances were made to the related party during the three months ended March 31, 2004. This debt is scheduled to be repaid per the terms of a Settlement Agreement signed in August, 2003. During the first quarter of 2004, 50,000 warrants were exercised jointly by J. Patrick Nicholson and three of his sons, Michael, Robert and Timothy Nicholson, pursuant to the terms of an Agreement signed in February, 2003 to pledge additional collateral in securing additional financing to the Company. These warrants were exercised at $0.90 per share, and the Company issued unregistered common stock in exchange for the $45,000 in proceeds. The proceeds of the exercises of both the options and warrants were used for working capital. Also during the first quarter of 2004, the Company issued 7,329 shares of unregistered common stock to Phillip Levin and Daniel Haslinger, respectively, both members of the Board of Directors, in exchange for services rendered to management incurred from April through December, 2003, for $9,000 each, or a total of $18,000. An additional 32,760 shares of unregistered common stock were issued to current and former members of the Board of Directors, to replace stock options earned as a board member from August 2002 to May 2003 but not granted, at a total estimated cost of $73,710. 3. LONG-TERM DEBT In February 2003 the Company closed on an $845,000 credit facility with Monroe Bank + Trust (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 $550,000 at Prime plus 1.5% and secured by a first lien on all assets of the Company. The Company used the funds to refinance its prior debt and to provide working capital. The Company was in violation of financial covenants governing the credit facility at December 31, 2003, concerning the maintenance of both a tangible net worth amount and positive debt service coverage ratio for the period, both of which require positive earnings. The Bank waived this violation in light of the Company's net loss for the year ended December 31, 2003, but required additional consideration in exchange for this waiver. In January 2004, the Company obtained a certificate of deposit in the amount of $75,000 with the Bank, and transferred custodianship of its treasury stock to the Bank. In February, 2004, the Company renewed its line of credit with the Bank through April, 2004, and in April 2004 it was renewed again through October, 2004. As part of this renewal, the Bank decreased the maximum amount available to borrow on the line to $400,000. At March 31, 2004, the Company had $200,000 of borrowing capacity under the Credit Facility. 4. CONTINGENCIES The Company leases its executive and administrative offices in Toledo, Ohio, under a lease that was renewed in January 2003. The Company believes its relationship with its lessor is satisfactory. The total minimum rental commitment through 2006 is approximately $56,000 each year. The total rental expense included in the statements of operations for each of the three months ended March 31, 2004 and 2003 is approximately $14,000. The Company also leases various equipment on a month-to-month basis. During 1999, the Company entered into employment and consulting agreements with an officer of the Company, Dr. Terry J. Logan. The employment agreement will expire in June 2004. Future compensation amounts are to be determined annually by the Board. The consulting agreement begins upon termination of the employment agreement and extends through July 2014, respectively. The agreement requires Dr. Logan to provide minimum future services to be eligible for compensation. In the second quarter of 2003, the Company entered into an employment with another officer of the Company, Michael G. Nicholson. The employment agreement will expire in June 2007. Future compensation amounts are to be determined annually by the Board. The agreement was disclosed in a filing on June 10, 2003 on Form 8-K. In August 2003, the Company entered into a Settlement Agreement with Mr. J. Patrick Nicholson and negotiated a new consulting agreement. The new consulting agreement will expire in August 2008, and Mr. Nicholson will be required to provide future services to be eligible for compensation. Mr. Nicholson is also entitled to payments of $48,000 per year for non-competition and $6,000 per year for office space reimbursement, in addition to life and health insurance coverage similar to the provision contained in his 1999 employment and consulting agreements previously discussed. The details of this new agreement were disclosed in a filing on August 29, 2003 on Form 8-K 5. NEW ACCOUNTING STANDARDS There were no new accounting pronouncements issued in the first quarter of 2004 that affect the Company. 6. SEGMENT INFORMATION EARNINGS VARIATION DUE TO BUSINESS CYCLES AND SEASONAL FACTORS. The Company's operating results can experience quarterly or annual variations due to business cycles, seasonality and other factors. The market price for its common stock may decrease if its operating results do not meet the expectations of the market. For the first quarter of 2004, approximately 34% of the Company's revenue is from management operations, 63% from other domestic operations, 2% from research and development grants and the remaining 1% from foreign operations. Sales of the N-Viro technology are affected by general fluctuations in the business cycles in the United States and worldwide, instability of economic conditions (such as the current conditions in the Asia Pacific region and Latin America) and interest rates, as well as other factors. In addition, operating results of some of the Company's business segments are influenced by particular business cycles and seasonality, as well as other factors such as interest rates. COMPETITION. The Company does business in a highly competitive market and has fewer resources than most of its competitors. Businesses in this market compete within and outside the United States principally on the basis of price, product quality, custom design, technical support, reputation, equipment financing assistance and reliability. Competitive pressures and other factors could cause the Company to lose market share or could result in decreases in prices, either of which could have a material adverse effect on its financial position and results of operations. RISKS OF DOING BUSINESS IN OTHER COUNTRIES. The Company conducts business in markets outside the United States, and expects to continue to do so. In addition to the risk of currency fluctuations, the risks associated with conducting business outside the United States include: social, political and economic instability; slower payment of invoices; underdeveloped infrastructure; underdeveloped legal systems; and nationalization. The Company has not entered into any currency swap agreements which may reduce these risks. The Company may enter into such agreements in the future if it is deemed necessary to do so. Current economic and political conditions in the Asia Pacific and Middle East regions have affected the Company outlook for potential revenue there. The Company cannot predict the full impact of this economic instability, but it could have a material adverse effect on revenues and profits. The Company has determined that its reportable segments are those that are based on the Company's method of internal reporting, which segregates its business by product category and service lines. The Company's reportable segments are as follows: Management Operations - The Company provides employee and management services to operate the Toledo Wastewater 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. The Company allocates a total of approximately 24% of its labor cost contained in selling, general, and administrative expenses to the segments, to reflect the indirect cost of maintaining these segments. 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 a specific location and unique type of revenue. The domestic and foreign operations segments differ in terms of environmental and municipal legal issues, nature of the waste disposal infrastructure, political climate and availability of funds for investing in the Company's technology. These factors have not changed significantly over the past several years and are not expected to change in the near term. The Research and Development segment accounts for approximately 2% of the total year-to-date revenue of the Company, and is unlike any other revenue in that it is generated as a result of a specific project to conduct initial or additional ongoing research into the Company's emerging technologies. The table below presents information about the segment profits and segment identifiable assets used by the chief operating decision makers of the Company for the periods ended March 31, 2004 and 2003 (dollars in thousands):
Management Domestic Foreign Research & Operations Operations Operations Development Total ----------------------------- ----------- ----------- ------------- ------ Quarter Ended March 31, 2004 ----------------------------- Revenues . . . . . . . . . . . $ 500 $ 922 $ 13 $ 23 $1,458 Cost of revenues . . . . . . . 356 665 - 19 1,040 Segment profits. . . . . . . . 144 257 13 4 418 Identifiable assets. . . . . . 338 82 - - 420 Depreciation . . . . . . . . . 16 5 - - 21 Quarter Ended March 31, 2003 ------------------------------ Revenues . . . . . . . . . . . $ 503 $ 707 $ 12 $ 23 $1,245 Cost of revenues . . . . . . . 347 542 - 24 913 Segment profits. . . . . . . . 156 165 12 (1) 332 Identifiable assets. . . . . . 366 101 - - 467 Depreciation . . . . . . . . . 14 11 - - 25
A reconciliation of total segment revenues, cost of revenues, and segment profits to consolidated revenues, cost of revenues, and segment information to the consolidated financial statements for the periods ended March 31, 2004 and 2003 is as follows (dollars in thousands):
Three Months Ended March 31 2004 2003 ------- ------- Segment profits: Segment profits for reportable segments. . . . $ 418 $ 332 Corporate selling, general and administrative expenses and research and development costs. . (509) (451) Other income (expense) . . . . . . . . . . . . (65) (19) ------- ------- Consolidated earnings before taxes . . . . . . $ (156) $ (138) ======= ======= Identifiable assets: Identifiable assets for reportable segments. . $ 420 $ 467 Corporate property and equipment . . . . . . . 26 61 Current assets not allocated to segments . . . 1,855 1,330 Intangible and other assets not allocated to segments . . . . . . . . . . . . . . . . . . . 1,479 2,334 Consolidated eliminations. . . . . . . . . . . - (234) ------- ------- Consolidated assets. . . . . . . . . . . . . . $3,780 $3,958 ======= ======= Depreciation and amortization: Depreciation for reportable segments . . . . . $ 21 $ 25 Corporate depreciation and amortization. . . . 39 42 ------- ------- Consolidated depreciation and amortization . . $ 60 $ 67 ======= =======
7. INVESTMENT IN FLORIDA N-VIRO, L. P. Florida N-Viro, L.P. was formed in January 1996 pursuant to a joint venture agreement between the Company and VFL Technology Corporation (VFL). The Company owns a 47.5% interest in the joint venture and accounts for its investment under the equity method. The Company's limited partner interest in the joint venture was reflected at a -0- value as of December 31, 2003. Any additional losses passed through from the partnership were recorded as an increase to the allowance against the Note Receivable due from the partnership. Condensed financial information of the partnership for the quarters ended March 31, 2004 and 2003 is as follows:
For the Quarter Ended March 31 ------------------------------ 2004 2003 --------- Net sales . . . . . . . . . . . . . . . . $596,147 $905,532 Gross profit (loss) . . . . . . . . . . . (6,148) 61,100 Income (loss) from continuing operations. (92,259) 3,797 Net income (loss) . . . . . . . . . . . . (92,259) 3,797
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION OVERVIEW The Company was incorporated in April, 1993, and became a public company on October 12, 1993. The Company's business strategy is to market the N-Viro Process, which produces an "exceptional quality" sludge product as defined in the Section 503 Sludge Regulations under the Clean Water Act of 1987, with multiple commercial uses. To date, the Company's revenues primarily have been derived from the licensing of 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. The Company has also operated N-Viro facilities for third parties on a start-up basis and currently operates one N-Viro facility on a contract management basis. Total revenues were approximately $1,458,000 for the quarter ended March 31, 2004 compared to approximately $1,245,000 for the same period of 2003. The net increase in revenue is due primarily to an increase in site license fee and alkaline admixture service and sales revenues. The Company's cost of revenues increased to approximately $1,040,000 in 2004 from approximately $913,000 for the same period in 2003, and the gross profit percentage increased to 29% from 27% for the quarters ended March 31, 2004 and 2003, respectively. The increase in gross profit percentage was primarily the result of the increase in revenue derived from the site license fee contract sold for the quarter. Operating expenses increased for the comparative period, while the Company's share of the income of a joint venture, the Company's interest in Florida N-Viro, L.P., decreased for the same period of 2004. These changes collectively resulted in a net loss of approximately $157,000 for the quarter ended March 31, 2004 compared to a net loss of approximately $138,000 for the same period in 2003. COMPARISON OF THREE MONTHS ENDED MARCH 31, 2004 WITH THREE MONTHS ENDED MARCH 31, 2003 Overall revenue increased $213,000, or 17%, to $1,458,000 for the quarter ended March 31, 2004 from $1,245,000 for the quarter ended March 31, 2003. The net increase in revenue was due primarily to the following: a) Sales of alkaline admixture increased $56,000 from the same period ended in 2003; b) Revenue from the service fees for the management of alkaline admixture increased $54,000 from the same period ended in 2003; c) The Company's processing revenue, including facility management revenue, showed a net increase of $25,000 over the same period ended in 2003; d) Licensing of the N-Viro Process showed a net increase of $72,000 from the same period in 2003, which had $-0- license sales. e) Miscellaneous revenues increased $6,000 from the same period ended in 2003; f) Research and development revenue did not change from the same period ended in 2003. Gross profit increased $86,000, or 26%, to $418,000 for the three months ended March 31, 2004 from $332,000 for the three months ended March 31, 2003, and the gross profit margin increased to 29% from 27% for the same periods. The increases in both gross profit and gross profit margin are primarily due to the increase in revenue from one-time license fees, which are at a higher gross profit percentage than other types of revenue. Operating expenses increased $58,000, or 13%, to $509,000 for the three months ended March 31, 2004 from $451,000 for the three months ended March 31, 2003. The increase was primarily due to an increase of approximately $92,000 in director-related fees and expenses and approximately $22,000 in selling and travel costs, partially offset by a decrease of approximately $52,000 in outside professional fees. Included in the increase of $92,000 for director-related costs was $74,000 for the value of unregistered stock issued to current and former outside directors for board meeting compensation. As a result of the foregoing factors, the Company recorded an operating loss of $91,000 for the three months ended March 31, 2004 compared to an operating loss of $119,000 for the three months ended March 31, 2003, an increase in the loss of approximately $28,000. Net nonoperating expense increased by $47,000 to a net nonoperating expense of $65,000 for the three months ended March 31, 2004 from net nonoperating expense of $18,000 for the three months ended March 31, 2003. The increase was primarily due to an increase in the loss of $46,000 in the equity of a joint venture, to a loss of $44,000 in 2004 from net income of $2,000 in 2003. The Company recorded a net loss of $157,000 for the three months ended March 31, 2004 compared to a net loss of $138,000 for the same period ended in 2003, an increase in the loss of approximately $19,000. For the three months ended March 31, 2004 and 2003, the Company has not fully recognized the tax benefit of the losses incurred in prior periods. Accordingly, the effective tax rate for each period was zero. LIQUIDITY AND CAPITAL RESOURCES The Company had a working capital deficit of $946,000 at March 31, 2004, compared to a working capital deficit of $1,642,000 at December 31, 2003, an increase in working capital of $696,000. Current assets at March 31, 2004 included cash and investments of $192,000 (including restricted cash of $75,000), which is an increase of $68,000 from December 31, 2003. The increase in working capital was principally due to the private placement of unregistered common stock with four stockholders for $435,188, the Company issuing stock for payment of trade payables for approximately $254,000 and the exercise of stock warrants and options totaling approximately $111,000, offset by the operating loss for the three month period. In the first three months of 2004 the Company's cash flow used by operations was approximately $263,000, a decrease of approximately $160,000 from the same period in 2003, principally due to the loss for the first three months. In February 2003 the Company closed on an $845,000 credit facility with Monroe Bank + Trust (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 $550,000 at Prime plus 1.5% and secured by a first lien on all assets of the Company. The Company used the funds to refinance its prior debt and to provide working capital. The Company was in violation of financial covenants governing the credit facility at December 31, 2003, concerning the maintenance of both a tangible net worth amount and positive debt service coverage ratio for the period, both of which require positive earnings. The Bank waived this violation in light of the Company's net loss for the year ended December 31, 2003, but required additional consideration in exchange for this waiver. In January 2004, the Company obtained a certificate of deposit in the amount of $75,000 with the Bank, and transferred custodianship of its treasury stock to the Bank. In February, 2004, the Company renewed its line of credit with the Bank through April, 2004, and in April 2004 it was renewed again through October, 2004. As part of this renewal, the Bank decreased the maximum amount available to borrow on the line to $400,000. At March 31, 2004, the Company had $200,000 of borrowing capacity under the Credit Facility. The normal collection period for accounts receivable are 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. The Company did not change its reserve for bad debts during the first three months of 2004. During the first three months of 2004, the Company's investment in a 47.5% owned partnership, Florida N-Viro, L.P., recorded a net loss of approximately $92,000. Cash flow from operations was negative, partially due to the planned closing of one of it's operating facilities, but the Company believes Florida N-Viro, L.P. will provide adequate cash flow to fund it's operations for 2004. The Company is currently actively pursuing sale of its investment in Florida N-Viro, L.P., which may provide, in management's opinion, additional funds to finance the Company's cash requirements. Because these efforts are still in progress, there can be no assurance the Company will successfully complete these negotiations. During the first quarter of 2004, an additional 41,500 shares of common stock were issued to employees and former directors of the Company for stock options exercised, realizing total proceeds to the Company of $66,117. Also during the first quarter of 2004, 50,000 warrants were exercised jointly by J. Patrick Nicholson and three of his sons, Michael, Robert and Timothy Nicholson, pursuant to the terms of an Agreement signed in February, 2003 to pledge additional collateral in securing additional financing to the Company. These warrants were exercised at $0.90 per share, and the Company issued unregistered common stock in exchange for the $45,000 in proceeds. The proceeds of the exercises of both the options and warrants were used for working capital. Also during the first quarter of 2004, the Company issued 72,237 shares of unregistered common stock to two trade creditors, eliminating $162,533 worth of debt owed by the Company to such creditors. In addition, 7,329 shares of unregistered common stock were issued to Phillip Levin and Daniel Haslinger, respectively, both members of the Board of Directors, in exchange for services rendered to management incurred from April through December, 2003, for $9,000 each, or a total of $18,000. An additional 32,760 shares of unregistered common stock were issued to current and former members of the Board of Directors, to replace stock options earned as a board member from August 2002 to May 2003 but not granted, at a total estimated cost of $73,710. The Company is currently completing a private placement of up to $750,000 in unregistered shares of its common stock. The Company hopes to sell up to 333,333 shares of common stock at a price per share of $2.25. As of the date of this filing, the Company has issued 193,417 shares for total proceeds of $435,188. There can be no assurance that the Company will be successful in finding a buyer for the balance of the private offering. If the shares are sold, the proceeds from the offering will be used to supplement the Company's working capital. On March 24, 2004, the Company announced in a Form 8-K that the Board of Directors had approved a Rights Offering for the beneficial owners of its common stock. The Company plans to issue one right to purchase one share of common stock, for each ten shares of stock beneficially owned. The Rights, which are being issued without registration, will be non-transferable and exercisable only by the beneficial owners in whose names they are issued. On April 8, 2004, the Company announced the record date for the Rights Offering will be April 16, 2004. If the Rights are exercised, the proceeds from the offering will be used to supplement the Company's working capital. The Company is currently in discussions with several companies in the cement and fuel industries for the development and commercialization of the patented N-Viro fuel technology. Because these discussions are still in progress, there can be no assurance they will be successful. The Company continues to focus on the development of regional biosolids processing facilities. Currently the Company is in negotiations with several privatization firms to permit and develop independent, regional facilities. The Company expects continued improvements in operating results for 2004 as a result of a return to low administrative costs, along with realized and expected new sources of revenue. Additionally, market developments and ongoing discussions with companies in the cement, fuel and wastewater industries could provide enhanced liquidity and positively impact 2004 operations. Management believes that current market trends and Company business development provide significant basis for an optimistic outlook for 2004 and beyond. The national public attack on Class B levels of sludge treatment is rapidly moving the market to Class A technologies, of which the Company's patented N-Viro processes are very cost competitive, and well established in the market place. The development and patenting of new technologies for animal manure treatment, bio-fuel and nematode control have the potential to expand the Company's revenue base over the next five years and beyond. Management believes it has sufficient liquidity to continue operations over the next twelve months. OFF-BALANCE SHEET ARRANGEMENTS AND OTHER At March 31, 2004, the Company 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, the Company may make certain indemnities, commitments and guarantees under which the Company 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 the Company's negligence or willful misconduct and (ii) indemnities involving the accuracy of representations and warranties in certain contracts. Pursuant to Delaware law, the Company may indemnify certain officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company's request in such capacity. The Company also has director and officer insurance coverage that limits its exposure and enables the Company to recover a portion of any future amounts that it may pay for indemnification purposes. The Company believes the applicable insurance coverage is generally adequate to cover any estimated potential liability for which it may provide indemnification. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and other guarantees in the accompanying Consolidated Balance Sheets. CONTRACTUAL OBLIGATIONS The following table summarizes our contractual cash obligations at March 31, 2004, and the effect these obligations are expected to have on liquidity and cash flow in future periods:
Payments Due By Period footnote Total Less than 1 year 1 - 3 years 4 - 5 years after 5 years ----------- ----------------- ------------ ------------ -------------- Purchase obligations . . . . . . . (1) $ 3,292,000 $ 208,000 $ 1,014,000 $ 676,000 $1,394,000 Long-term debt obligations . . . . (2) 658,244 305,384 352,860 - - Operating leases . . . . . . . . . (3) 184,447 61,127 123,320 - - Capital lease obligations. . . . . - - - - - Other long-term debt obligations . - - - - - ----------- ----------------- ------------ ------------ -------------- Total contractual cash obligations $4,134,691 $ 574,511 $ 1,490,180 $ 676,000 $1,394,000 =========== ================= ============ ============ ===========
(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. RISK FACTORS AND FORWARD LOOKING STATEMENTS THE COMPANY'S LICENSEES ARE SUBJECT TO EXTENSIVE AND INCREASINGLY STRICT FEDERAL, STATE AND LOCAL ENVIRONMENTAL REGULATION AND PERMITTING. The Company's licensees and their operations are subject to increasingly strict environmental laws and regulations, including laws and regulations governing the emission, discharge, disposal and transportation of certain substances and related odor. Wastewater treatment plants and other plants at which our biosolids products or processes may be implemented are usually required to have permits, registrations and/or approvals from state and/or local governments for the operation of such facilities. Some of our licensee's facilities require air, wastewater, storm water, biosolids processing, use or siting permits, registrations or approvals. These licensees may not be able to maintain or renew their current permits or registrations or to obtain new permits or registrations. The process of obtaining a required permit or registration can be lengthy and expensive. They may not be able to meet applicable regulatory or permit requirements, and therefore may be subject to related legal or judicial proceedings that could have a materially adverse effect on our income derived from these licensees. Any of the permits, registrations or approvals noted above, or related applications may be subject to denial, revocation or modification, or challenge by a third party, under various circumstances. In addition, if new environmental legislation or regulations are enacted or existing legislation or regulations are amended or are enforced differently, these licensees may be required to obtain additional, or modify existing, operating permits, registrations or approvals. Maintaining, modifying or renewing current permits or registrations or obtaining new permits or registrations after new environmental legislation or regulations are enacted or existing legislation or regulations are amended or enforced differently may be subject to public opposition or challenge. Much of this public opposition and challenge, as well as related complaints, relates to odor issues, even when our licensees are in compliance with odor requirements and even though the licensees have worked hard to minimize odor from their operations. Public misperceptions about the business and any related odor could influence the governmental process for issuing such permits or registrations or for responding to any such public opposition or challenge. Community groups could pressure local municipalities or state governments to implement laws and regulations which could increase our licensees' costs of their operations that in turn could have a material and adverse effect on the Company's business and financial condition. THE ABILITY TO GROW MAY BE LIMITED BY COMPETITION. The Company provides a variety of technology and services relating to the treatment of wastewater residuals. The Company is in direct and indirect competition with other businesses that provide some or all of the same services including regional residuals management companies and national and international water and wastewater operations/privatization companies, technology suppliers, municipal solid waste companies and farming operations. Many of these competitors are larger and have significantly greater capital resources. The Company derives a substantial portion of its revenue from services provided under municipal contracts, and many of these are subject to competitive bidding. The Company also intends to bid on additional municipal contracts, however, and may not be the successful bidder. In addition, some of its contracts will expire in the future and those contracts may not be renewed or may be renewed on less attractive terms. If the Company is not able to replace revenues from contracts lost through competitive bidding or from the renegotiation of existing contracts with other revenues within a reasonable time period, the lost revenue could have a material and adverse effect on its business, financial condition and results of operation. THE COMPANY'S CUSTOMER CONTRACTS MAY BE TERMINATED PRIOR TO THE EXPIRATION OF THEIR TERM. A substantial portion of the Company's revenue is derived from services provided under contracts and agreements with existing licensees. Some of these contracts, especially those contracts with large municipalities, provide for termination of the contract by the customer after giving relative short notice (in some cases as little as ten days). In addition, some of these contracts contain liquidated damages clauses, which may or may not be enforceable in the event of early termination of the contracts. If one or more of these contracts are terminated prior to the expiration of its term, and we are not able to replace revenues from the terminated contract or receive liquidated damages pursuant to the terms of the contract, the lost revenue could have a material and adverse effect on our business, financial condition and results of operations. A SIGNIFICANT AMOUNT OF THE COMPANY'S BUSINESS COMES FROM A LIMITED NUMBER OF CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST ONE OR MORE OF THEM AS CUSTOMERS. The Company's business depends on provision of services to a limited number of customers. One or more of these customers may stop contracting for services from us or may substantially reduce the amount of services we provide them. Any cancellation, deferral or significant reduction in the services we provide these principal customers or a significant number of smaller customers could seriously harm our business and financial condition. For the quarter ended March 31, 2004, the Company's single largest customer, the City of Toledo, accounted for approximately 34 percent of gross revenue and the top three customers accounted for approximately 67 percent of gross revenue. THE COMPANY IS AFFECTED BY UNUSUALLY ADVERSE WEATHER CONDITIONS. The Company's business is adversely affected by unusual weather conditions and unseasonably heavy rainfall which can temporarily reduce the availability of land application sites in close proximity to our operations. In addition, revenues and operational results are adversely affected during months of inclement weather which limits the level of land application that can be performed. Long periods of adverse weather could have a material negative effect on the Company's business and financial condition. FUEL COST VARIATION COULD AFFECT OPERATING RESULTS AND EXPENSES. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including demand for oil and gas, actions by OPEC and other oil and gas producers, and war in oil producing countries. Because fuel is needed for the trucks that transport the processing materials and supplies for our customers, price escalations or reductions in the supply of fuel could increase operating expenses and have a negative impact on the results of operations. The Company is not always able to pass through all or part of the increased fuel costs due to the terms of certain customers' contracts and the inability to negotiate such pass through costs in a timely manner. THE COMPANY IS DEPENDENT ON THE MEMBERS OF ITS MANAGEMENT TEAM. The Company is highly dependent on the services of its management team, the loss of any of whom may have a material adverse effect on its business and financial condition. The Company has entered into employment agreements with certain members of its management team, which contain non-compete and other provisions. The laws of each state differ concerning the enforceability of non-competition agreements. The Company cannot predict with certainty whether or not a court will enforce a non-compete covenant in any given situation based on the facts and circumstances at that time. If one of its key executive officers was to leave and the courts refused to enforce the non-compete covenant, the Company might be subject to increased competition, which could have a material and adverse effect on its business and financial condition. THE COMPANY'S INTELLECTUAL PROPERTY MAY BE MISAPPROPRIATED OR SUBJECT TO CLAIMS OF INFRINGEMENT. The Company attempts to protect our intellectual property rights through a combination of patent, trademark, and trade secret laws, as well as licensing agreements. The Company's failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business and financial condition. The Company's competitors, many of whom have substantially greater resources and have made substantial investments in competing technologies, may have applied for or obtained, or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with the Company's ability to offer services. The Company has not conducted an independent review of patents issued to third parties. The Company also relies on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to its unpatented technology. If the Company is unable to maintain the proprietary nature of its technologies, it could be materially adversely affected. The Company cautions 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. Some, but not all, of the factors that could cause actual results to be different than those anticipated or predicted by the Company include: (i) a deterioration in economic conditions in general; (ii) a decrease in demand for the Company's products or services in particular; (iii) the Company's 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 the Company's products or services; (v) increases in the Company's operating expenses resulting from increased costs of labor and/or consulting services; and (vi) a failure to collect upon or otherwise secure the benefits of existing contractual commitments with third parties, including customers of the Company. For example, while the Company anticipates obtaining the permits and approvals necessary for the Bio-Fuel pilot program to commence operations within the next twelve months, such program may not begin until after that period or ever. Delay or cancellation with respect to this project could result from (1) a failure to achieve acceptable air quality levels in preliminary testing, (2) costs associated with the use of Bio-Fuel significantly exceeding current estimates, or (3) competing technologies rendering the Bio-Fuel process less attractive. ITEM 3. CONTROLS AND PROCEDURES As of March 31, 2004, under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. We concluded that our disclosure controls and procedures were effective as of March 31, 2004, 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. There were no significant changes in our internal controls over financial reporting during the quarter ended March 31, 2004 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 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. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES From January 12, 2004 through February 17, 2004, an additional 41,500 shares of unregistered common stock were issued to employees and former directors of the Company for stock options exercised, realizing total proceeds to the Company of $66,117. On January 29, 2004, 50,000 warrants were exercised jointly by J. Patrick Nicholson and three of his sons, Michael, Robert and Timothy Nicholson, pursuant to the terms of an Agreement signed in February, 2003 to pledge additional collateral in securing additional financing to the Company. These warrants were exercised at $0.90 per share, and the Company issued 50,000 unregistered shares of common stock in exchange for the $45,000 in proceeds. On or before February 13, 2004, the Company issued 72,237 shares of unregistered common stock to two trade creditors, eliminating $162,533 worth of debt owed by the Company to such creditors. On January 9, 2004, 7,329 shares of unregistered common stock were issued to Phillip Levin and Daniel Haslinger, respectively, both members of the Board of Directors, in exchange for services rendered to management incurred from April through December, 2003, in the amount of $9,000 each, or a total of $18,000. On March 17, 2004, an additional 32,760 shares of unregistered common stock were issued to current and former members of the Board of Directors, to replace the automatic awards of stock options which were not granted to the non-employee directors after May 10, 2003 as a result of the termination of the Company's 1998 Amended and Restated Stock Option Plan (the "1998 Plan") and the failure of the stockholders to approve the proposed 2003 Stock Option Plan at the 2003 annual meeting, at a total estimated cost of $73,710. The Company is currently completing a private placement of up to $750,000 in unregistered shares of its common stock. The Company hopes to sell up to 333,333 shares of common stock at a price per share of $2.25. During February and early March, 2004, the Company issued 193,417 shares for total proceeds of $435,188. All of the foregoing issuances were exempt from registration pursuant to Section 4(2) of the Securities and Exchange Act of 1933. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 31.1 - Certification of CEO Pursuant to Section 302 of the Sarbanes - - Oxley Act of 2002. Exhibit 31.2 - Certification of CFO Pursuant to Section 302 of the Sarbanes - - Oxley Act of 2002. Exhibit 32.1 - Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 32.2 - Certification of CFO Pursuant to Section 906 of the Sarbanes - -Oxley Act of 2002. (b) Reports on Form 8-K: The Company filed a report on Form 8-K on January 27, 2004, dated January 27, 2004, to announce it had received a preliminary offer to meet its minimum funding for the current private placement of its common stock. The Company filed a report on Form 8-K on February 9, 2004, dated February 5, 2004, to announce it had closed on a Security Units Purchase Agreement with Ophir Holdings, Inc. The Company filed a report on Form 8-K on February 12, 2004, dated February 6, 2004, to announce it had dismissed its independent auditors, Hausser + Taylor LLC, and engaged the services of Follmer Rudzewicz PLC as its new independent auditors. The Company filed an amended report on Form 8-K/A on February 25, 2004, dated February 6, 2004, regarding its announcement that it had dismissed its independent auditors, Hausser + Taylor LLC, and engaged the services of Follmer Rudzewicz PLC as its new independent auditors. The Company filed a report on Form 8-K on February 25, 2004, dated February 24, 2004, to announce that Headwaters Incorporated of South Jordan, Utah had announced that it had entered into a definitive agreement to purchase VFL Technology Corporation, subject to due diligence. VFL Technology and N-Viro International Corporation jointly own Florida N-Viro L.P. The Company filed a report on Form 8-K on March 24, 2004, dated March 22, 2004, to announce that its Board of Directors had approved a rights offering for the beneficial owners of its Common Stock. N-VIRO INTERNATIONAL CORPORATION Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. N-VIRO INTERNATIONAL CORPORATION Date: May 24, 2004 /s/ Terry J. Logan -------------- --------------------- Terry J. Logan Chief Executive Officer and President (Principal Executive Officer) Date: May 24, 2004 /s/ James K. McHugh -------------- ---------------------- James K. McHugh Chief Financial Officer, Secretary and Treasurer (Principal Financial & Accounting Officer) Exhibit 31.1 ------------ N-Viro International Corporation Certifications I, Terry J. Logan, President and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of N-Viro International Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of theregistrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 24, 2004 /s/ Terry J. Logan --------------------- President and Chief Executive Officer Exhibit 31.2 ------------ N-Viro International Corporation Certifications I, James K. McHugh, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of N-Viro International Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 24, 2004 /s/ James K. McHugh ---------------------- Chief Financial Officer Exhibit32.1 ----------- CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Terry J. Logan, the Chief Executive Officer of N-Viro International Corporation, certify that (i) the Form 10-QSB fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of N-Viro International Corporation. /s/ Terry J. Logan - --------------------- Terry J. Logan, Chief Executive Officer May 24, 2004 Exhibit 32.2 ------------ CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, James K. McHugh, the Chief Financial Officer of N-Viro International Corporation, certify that (i) the Form 10-QSB fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of N-Viro International Corporation. /s/ James K. McHugh - ---------------------- James K. McHugh, Chief Financial Officer May 24, 2004 -----END PRIVACY-ENHANCED MESSAGE-----