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, 2005 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 2, 2005, 3,508,559 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 2005 2004 ----------- ----------- Revenues . . . . . . . . . . . . . . . . . . $1,136,446 $1,458,369 Cost of revenues . . . . . . . . . . . . . . 789,296 1,040,213 ----------- ----------- Gross Profit . . . . . . . . . . . . . . . . 347,150 418,156 Operating expenses: Selling, general and administrative. . . . . 349,162 509,451 ----------- ----------- 349,162 509,451 ----------- ----------- Operating loss . . . . . . . . . . . . . . . (2,012) (91,295) Nonoperating income (expense): Interest and dividend income . . . . . . . . 1,119 4,751 Interest expense . . . . . . . . . . . . . . (7,186) (26,147) Loss from equity investment in joint venture (55,703) (43,823) ----------- ----------- (61,770) (65,219) ----------- ----------- Loss before income taxes . . . . . . . . . . (63,782) (156,514) Federal and state income taxes . . . . . . . - - ----------- ----------- Net loss . . . . . . . . . . . . . . . . . . $ (63,782) $ (156,514) =========== ===========
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS Mar. 31, 2005 (Unaudited) December 31, 2004 -------------------------- ------------------- ASSETS ---------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents: Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 247,147 $ 147,549 Restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,914 75,600 Receivables: Trade, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 743,732 578,070 Stock subscription . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,500 42,500 Notes receivable - current . . . . . . . . . . . . . . . . . . . . . . . . . 54,892 112,802 Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . . . . . 149,167 108,732 -------------------------- ------------------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,408,352 1,065,253 Property and Equipment, Net. . . . . . . . . . . . . . . . . . . . . . . . . 340,715 360,952 Investment in and Advances to Florida N-Viro, L.P. . . . . . . . . . . . . . 130,772 186,475 Notes Receivable, net of current portion . . . . . . . . . . . . . . . . . . - 338 Intangible and Other Assets, Net . . . . . . . . . . . . . . . . . . . . . . 1,044,409 1,078,771 -------------------------- ------------------- $ 2,924,248 $ 2,691,789 ========================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY ---------------------------------------------------------------------------- CURRENT LIABILITIES Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . $ 92,919 $ 91,072 Line-of-credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 200,000 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,092,570 864,580 Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336,466 293,201 -------------------------- ------------------- Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 1,671,955 1,448,853 Long-term debt, less current maturities. . . . . . . . . . . . . . . . . . . 90,213 114,263 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.01 par value; authorized 7,000,000 shares; issued 3,642,059 in 2005 and 3,569,693 in 2004. . . . . . . . . . . . . . . . . . . 36,421 35,697 Preferred stock, $.01 par value; authorized 2,000,000 shares; issued 1 share - - Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 14,887,811 14,791,346 Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,077,262) (13,013,480) -------------------------- ------------------- 1,846,970 1,813,563 Less treasury stock, at cost, 123,500 shares . . . . . . . . . . . . . . . . 684,890 684,890 -------------------------- ------------------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 1,162,080 1,128,673 -------------------------- ------------------- $ 2,924,248 $ 2,691,789 ========================== ===================
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31 2005 2004 --------- ---------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . $140,292 $(262,544) CASH FLOWS FROM INVESTING ACTIVITIES Collections on notes receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,768 8,000 Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (2,004) Expenditures for intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,829) (12,765) Reductions to restricted cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . (50,314) (75,000) --------- ---------- Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,375) (81,769) CASH FLOWS FROM FINANCING ACTIVITIES Issuance of stock - options, warrants and private placement. . . . . . . . . . . . . . . . . . . 42,500 543,180 Borrowings under long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 74,386 Private placement expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,616) (10,751) Principal payments on long-term obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . (22,203) (70,646) Net payments on line-of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50,000) (198,223) --------- ---------- Net cash provided (used) by financing activities . . . . . . . . . . . . . . . . . . . . . . . . (32,319) 337,946 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . 99,598 (6,367) CASH AND CASH EQUIVALENTS - BEGINNING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,549 123,547 --------- ---------- CASH AND CASH EQUIVALENTS - ENDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $247,147 $ 117,180 ========= ========== Supplemental disclosure of cash flows information: Cash paid during the three months ended for interest . . . . . . . . . . . . . . . . . . . . $ 17,174 $ 20,039 ========= ========== During the three months ended March 31, 2005, the Company issued unregistered common stock with a fair market value of $4,864 to current directors for past services rendered.
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, 2005 may not be indicative of the results of operations for the year ended December 31, 2005. 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, 2004. The financial statements are consolidated as of March 31, 2005 and December 31, 2004 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: Non-domestic license and territory fees - The Company does not recognize revenue on any non-domestic (excluding Canada) license or territory fee contracts until the cash is received, assuming all other tests of revenue recognition are met. 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. 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. 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 Accounting Principals Board Opinion (or 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, 2005. 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 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 two million (2,000,000) shares of preferred stock, of which one share of Series A Redeemable Preferred Stock (the "Preferred Stock") has been issued. The Preferred Stock is non-transferable, has a term of ten years from August 27, 2003 and is subject to redemption 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 stockholders 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. The Preferred Stock is redeemable upon the occurrence of certain events, including the reduction in the initial holder's holdings of the Company's common stock to less than 17.5% of the outstanding shares of common stock as reflected on reports filed with the Securities and Exchange Commission under Section 16 of the Securities and Exchange Act of 1934, as amended, through transfers or sales of the Company's common stock by the initial holder, his family members or entities controlled by him. Stock Options - The Company accounts for stock-based compensation issued to its employees and directors in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost 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, except for the options granted in May, 2004 to Michael Nicholson, which is explained further in "Related Party Transactions". The fair value of options granted was determined using the Black-Scholes option pricing model. SFAS No. 123, "Accounting for Stock-Based Compensation", was revised in December 2004, which revision changes the accounting for transactions in which an entity obtains employee services in a share-based payment transaction. For Small Business issuers, the Statement is effective as of the beginning of the first interim period or annual reporting period that begins after December 15, 2005. The adoption of this standard had no effect on our financial condition or results of operations for the three months ended March 31, 2005, but it expected to affect our financial condition and results of operations starting with the first quarter of 2006. 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 Financial Accounting Standards Board (or FASB) Statement No. 123, "Accounting for Stock-based Compensation" to stock-based employee compensation:
Three Months Ended March 31 ---------------------------- 2005 2004 --------- ---------- Net loss, as reported. . . . . . . . . . . $(63,782) $(156,514) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects. . . . . . . (26,774) (18,621) --------- ---------- Pro forma net loss . . . . . . . . . . . . $(90,556) $(175,135) ========= ========== Loss per share: Basic and diluted - as reported. . . . . . $ (0.02) $ (0.06) ========= ========== Basic and diluted - pro-forma. . . . . . . $ (0.03) $ (0.06) ========= ==========
NOTE 2. RELATED PARTY TRANSACTIONS During the first quarter of 2005, the Company issued 958 and 1,358 shares of unregistered common stock to Phillip Levin and Daniel Haslinger, respectively, both members of the Board of Directors, in exchange for management consulting work performed outside their duties as directors from January to April 2004, for $3,000 and $4,000, respectively, or a total of $7,000. During the first quarter of 2005, 10,000 restricted shares of unregistered common stock of the Company were subscribed to by Carl Richard, a director, in a private placement. These shares were issued in May 2005 at $1.25 per share, with associated warrants to purchase additional shares at $1.85 per share. NOTE 3. LONG-TERM DEBT In February 2003 the Company closed on an $845,000 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 $550,000 at Prime (5.25% at March 31, 2005) plus 1.5% and secured by a first lien on all assets of the Company. The Company used the funds to refinance prior debt and to provide working capital. The Company was in violation of financial covenants governing the credit facility at December 31, 2003, but the Bank waived this violation but required additional consideration in exchange for this waiver. In January 2004, the Company purchased a certificate of deposit in the amount of $75,000 from the Bank, and transferred custodianship of all treasury stock of the Company to the Bank. At the first anniversary of the initial credit facility, the Bank decreased the maximum amount available to borrow on the line to $400,000, but also reduced the financial covenants to make it easier for the Company to maintain the facility. The Company has currently renewed the line of credit through October 2005, and is not in violation of any financial covenants. In February 2005, the Bank amended the facility and released certain additional collateral but required the Company to provide an additional $50,000 certificate of deposit. At March 31, 2005, the Company had $250,000 of borrowing capacity under the credit facility. NOTE 4. CONTINGENCIES 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 total minimum rental commitment for the years ending December 31, 2005 and 2006 is approximately $37,200 each year. The total rental expense included in the statements of operations for the three months ended March 31, 2005 and 2004 is approximately $9,600 and $14,000, respectively. The Company also leases various equipment on a month-to-month basis. On July 1, 2004, the Company completed negotiations and engaged its former Chief Executive Officer and a member of the Board of Directors, Terry J. Logan, as an outside consultant. The consulting agreement extends through June 2006 and requires Dr. Logan to provide a minimum of 104 business days annually, to be paid at a rate of $700 per day and 1,000 stock options per month. In August 2003, the Company entered into a Settlement Agreement with Mr. J. Patrick Nicholson and negotiated a new consulting agreement. The consulting agreement will expire in August 2008, and Mr. Nicholson is 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. In June 2003, the Company entered into an Employment Agreement (the "Agreement") with Michael G. Nicholson, the Chief Development Officer and a member of the Board. The employment agreement will expire in June 2007, and 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 the third quarter of 2004, the Company and Mr. Nicholson renegotiated primarily the stock option portion of the Agreement, and amended the Agreement. Because these options were priced lower than the fair market value as of that date, the Company is required to take a charge to earnings totaling approximately $68,400 ratably through June, 2007, the ending date of his employment agreement On September 27, 2004, the Company executed both a memorandum of employment and storage site agreement with a member of the Board of Directors, Daniel J. Haslinger, effective August 16, 2004. Mr. Haslinger was subsequently appointed Chief Executive Officer effective January 1, 2005. Under these agreements, Mr. Haslinger is paid $1,500 per month as an employee, and, a company co-owned by him is paid $5,000 per month for the rental of land owned by him. Both of these agreements are terminable "at-will". 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. NOTE 5. NEW ACCOUNTING STANDARDS In March 2005, FASB Interpretation No. 47 (or FIN 47), "Accounting for Conditional Asset Retirement Obligations-an interpretation of FASB Statement No. 143", was issued. The primary objective of FIN 47 is to provide guidance with respect to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and (or) method of settlement of the obligation are conditional on a future event. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company does not expect the application of the provisions of FIN 47 to have a material impact on its financial position, results of operations or cash flows. NOTE 6. SEGMENT INFORMATION EARNINGS VARIATION DUE TO BUSINESS CYCLES AND SEASONAL FACTORS. The Company's operating results can experience quarterly or annual variations due to business cycles, seasonality and other factors. The market price for its common stock may decrease if its operating results do not meet the expectations of the market. For the first quarter of 2005, approximately 30% of the Company's revenue is from management operations, 67% 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. 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, 2005 and 2004 (dollars in thousands):
Management Domestic Foreign Research & Operations Operations Operations Development Total ---------------------------------- ----------- ----------- ------------ ------ Three Months Ended March 31, 2005 ---------------------------------------------------------------------------------- Revenues. . . . . . $ 342 $ 758 $ 13 $ 23 $1,136 Cost of revenues. . 222 548 - 19 789 Segment profits . . 120 210 13 4 347 Identifiable assets 272 59 - - 331 Depreciation. . . . 15 4 - - 19 Three Months 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
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, 2005 and 2004 is as follows (dollars in thousands):
Three Months Ended March 31 ---------------------------- 2005 2004 ------- ------- Segment profits: Segment profits for reportable segments. . . . $ 347 $ 418 Corporate selling, general and administrative expenses and research + development costs. (349) (509) Other income (expense) . . . . . . . . . . . . (62) (65) ------- ------- Consolidated loss before taxes . . . . . . . . $ (64) $ (156) ======= ======= Identifiable assets: Identifiable assets for reportable segments. . $ 331 $ 420 Corporate property and equipment . . . . . . . 10 26 Current assets not allocated to segments . . . 1,408 1,855 Intangible and other assets not allocated to segments . . . . . . . . . . . . . . . . . 1,175 1,479 Consolidated assets. . . . . . . . . . . . . . $2,924 $3,780 ======= ======= Depreciation and amortization: Depreciation for reportable segments . . . . . $ 19 $ 21 Corporate depreciation and amortization. . . . 37 39 ------- ------- Consolidated depreciation and amortization . . $ 56 $ 60 ======= =======
NOTE 7. INVESTMENT IN FLORIDA N-VIRO, L. P. Florida N-Viro, L.P. was formed in January 1996 pursuant to a joint venture agreement between the Company and VFL Technology Corporation (VFL). The Company owns a 47.5% interest in the joint venture and accounts for its investment under the equity method. The Company has recognized its share of the joint venture's losses to the extent of its investment. Any additional losses passed through from the joint venture are recorded as an increase to the allowance against the Note Receivable. Condensed financial information of the partnership for the quarters ended March 31, 2005 and 2004 is as follows:
For the Quarter Ended March 31 ------------------------------ 2005 2004 ---------- --------- Net sales. . . . . . . . . . . . $ 299,682 $596,147 Gross profit (loss). . . . . . . (62,602) (6,148) Loss from continuing operations. (117,268) (92,259) Net loss . . . . . . . . . . . . (117,268) (92,259)
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; and (vi) a failure to collect upon or otherwise secure the benefits of existing contractual commitments with third parties, including our customers. 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 the Company's business and it is impossible to predict with any accuracy which factors could result in negative impacts. Although we believe that the forward-looking statements contained in this Form 10-QSB are reasonable, we cannot provide you with any guarantee that the anticipated results will not be adverse and that the anticipated results will be achieved. All forward-looking statements in this Form 10-QSB are expressly qualified in their entirety by the cautionary statements contained in this section and you are cautioned not to place undue reliance on the forward-looking statements contained in this Form 10-QSB. In addition to the risks listed above, other risks may arise in the future, and we disclaim any obligation to update information contained in any forward-looking statement. OVERVIEW We incorporated in April, 1993, and became a public company on October 12, 1993. Our business strategy is to market the N-Viro Process, which produces a sludge product with multiple commercial uses having an "exceptional quality" as defined in the Section 503 Sludge Regulations under the Clean Water Act of 1987. To date, our revenues have been derived primarily 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. We also operate N-Viro facilities for third parties on a start-up basis and currently operate one N-Viro facility on a contract management basis. RESULTS OF OPERATIONS Total revenues were $1,136,000 for the quarter ended March 31, 2005 compared to $1,458,000 for the same period of 2004. The net decrease in revenue is due primarily to a decrease in facility management fees and one-time license revenue. Our cost of revenues decreased to $789,000 in 2005 from $1,040,000 for the same period in 2004, but the gross profit percentage increased to 31% from 29% for the quarters ended March 31, 2005 and 2004, respectively. This increase in gross profit percentage is primarily due to the decrease in costs of processing at privatized facilities, reducing the cost of transporting our products and reductions in our payroll and related costs. Operating expenses decreased for the comparative period, while our share of the loss of a joint venture, our interest in Florida N-Viro, L.P., decreased for the same period of 2005. These changes collectively resulted in a net loss of approximately $64,000 for the quarter ended March 31, 2005 compared to a net loss of $157,000 for the same period in 2004. COMPARISON OF THREE MONTHS ENDED MARCH 31, 2005 WITH THREE MONTHS ENDED MARCH 31, 2004 Our overall revenue decreased $322,000, or 22%, to $1,136,000 for the quarter ended March 31, 2005 from $1,458,000 for the quarter ended March 31, 2004. The net decrease in revenue was due primarily to the following: a) Sales of alkaline admixture decreased $24,000 from the same period ended in 2004; b) Revenue from the service fees for the management of alkaline admixture decreased $61,000 from the same period ended in 2004; c) Our processing revenue, including facility management revenue, showed a net decrease of $175,000 over the same period ended in 2004; d) Licensing of the N-Viro Process, which had $-0- license sales in the first quarter of 2005, showed a net decrease of $72,000 over the same period in 2004; e) Miscellaneous revenues increased $10,000 from the same period ended in 2004; and f) Research and development revenue did not change from the same period ended in 2004. Our gross profit decreased $71,000, or 17%, to $347,000 for the three months ended March 31, 2005 from $418,000 for the three months ended March 31, 2004, but the gross profit margin increased to 31% from 29% for the same periods. The increase in gross profit margin is primarily due to the decrease in costs of processing at privatized facilities, reducing the cost of transporting our products and reductions in our payroll and related costs. Our operating expenses decreased $160,000, or 31%, to $349,000 for the three months ended March 31, 2005 from $509,000 for the three months ended March 31, 2004. The decrease was primarily due to a decrease of approximately $78,000 in directors' fees paid in unregistered stock, $50,000 in employee payroll and related expenses, $34,000 in employee travel expenses and $42,000 in insurance and office/administrative costs, partially offset by an increase of approximately $37,000 in consulting fees and expenses and $14,000 in legal fees. As a result of the foregoing factors, we recorded an operating loss of $2,000 for the three months ended March 31, 2005 compared to an operating loss of $91,000 for the three months ended March 31, 2004, a decrease in the loss of approximately $89,000. Our net nonoperating income (expense) increased by $3,000 to net nonoperating expense of $62,000 for the three months ended March 31, 2005 from net nonoperating expense of $65,000 for the three months ended March 31, 2004. The increase in nonoperating expense was primarily due to a decrease in interest expense of $19,000 from 2004, partially offset by an increase in the loss of approximately $12,000 in the equity of a joint venture, from a loss of $44,000 in 2004 to a loss of $56,000 in 2005. We recorded net loss of approximately $64,000 for the three months ended March 31, 2005 compared to a net loss of $157,000 for the same period ended in 2004, a decrease in the loss of approximately $93,000. For the three months ended March 31, 2005 and 2004, 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 $264,000 at March 31, 2005, compared to a working capital deficit of $384,000 at December 31, 2004, resulting in an increase in working capital of $120,000. Current assets at March 31, 2005 included cash and investments of approximately $373,000 (including restricted cash of approximately $126,000), which is an increase of $150,000 from December 31, 2004. The increase in working capital was principally due to the private placement of unregistered common stock with three stock subscribers totaling $87,500. Compared to March 31, 2004, in the first three months of 2005 our cash flow provided by operations was approximately $140,000, an increase of approximately $403,000 from the same period in 2004. This increase was principally due to a decrease in the net loss of approximately $93,000 and a decrease in cash received from the issuance of stock for services of approximately $247,000, increased by the change in working capital of approximately $746,000. Our $845,000 credit facility with Monroe Bank + Trust, or the Bank is 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 our assets . In January 2004, we purchased a certificate of deposit in the amount of $75,000 from the Bank, and transferred custodianship of all of our treasury stock to the Bank. In February 2004, the Bank decreased the maximum amount available to borrow on the line to $400,000, but also reduced the financial covenants to make it easier for us to maintain the facility. We currently have renewed the line of credit through October 2005, and are not in violation of any financial covenants. In February 2005, the Bank amended the facility and released certain additional collateral but required us to provide an additional $50,000 certificate of deposit. At March 31, 2005, we had $250,000 of borrowing capacity under the Credit Facility. The normal collection period for accounts receivable is approximately 30-60 days for the majority of customers. This is a result of the nature of the license contracts, type of customer and the amount of time required to obtain the information to prepare the billing. We did not change our reserve for bad debts during the first three months of 2005. During the first three months of 2005, our investment in a 47.5% owned partnership, Florida N-Viro, L.P., recorded a net loss to us of approximately $56,000. Cash flow from operations of Florida N-Viro, L.P. was negative, partially due to the planned closing of one of its operating facilities, but we believe Florida N-Viro, L.P. will have sufficient cash flow to fund its operations for the rest of 2005. We are currently in discussions with several companies in the cement and fuel industries for the development and commercialization of the patented N-Viro fuel technology. There can be no assurance that these discussions will be successful. We continue to focus on the development of regional biosolids processing facilities. Currently we are in negotiations with several privatization firms to permit and develop independent, regional facilities. We expect continued improvements in operating results for 2005 primarily due to realized and expected new sources of revenue. Additionally, market developments and ongoing discussions with companies in the fuel and wastewater industries could provide enhanced liquidity and positively impact 2005 operations. We believe that current market trends and increased and more focused emphasis on our business development efforts provide a basis for an optimistic outlook for 2005 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. There are currently over 40 facilities worldwide using the N-Viro Process, most of which have been using the N-Viro process for over 10 years. Five new facilities are expected to come on-line in the next twelve to eighteen months. The development and patenting of new technologies for animal manure treatment, bio-fuel and nematode control have the potential to expand our revenue base over the next five years and beyond. We believe we have sufficient liquidity to continue operations over the next twelve months. OFF-BALANCE SHEET ARRANGEMENTS At March 31, 2005, we did not have any material commercial commitments, including guarantees or standby repurchase obligations, or any relationships with unconsolidated entities or financial partnerships, including entities often referred to as structured finance or special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. From time to time, during the normal course of business, we may make certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These include: (i) indemnities to vendors and service providers pertaining to claims based on our negligence or willful misconduct and (ii) indemnities involving the accuracy of representations and warranties in certain contracts. Pursuant to Delaware law, we may indemnify certain officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. We also have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts that we may pay for indemnification purposes. We believe the applicable insurance coverage is generally adequate to cover any estimated potential liability for which we may provide indemnification. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments we could be obligated to make. We have not recorded any liability for these indemnities, commitments and other guarantees in the accompanying Consolidated Balance Sheets. CONTRACTUAL OBLIGATIONS The following table summarizes our contractual cash obligations at March 31, 2005, and the effect these obligations are expected to have on liquidity and cash flow in future periods:
Payments Due By Period --------------------------------------------------------------------------- Total Less than 1 year 1 - 3 years 4 - 5 years after 5 years -------- ----------------- ------------ ------------ -------------- Purchase obligations . . . . . . . (1) $691,500 $ 150,800 $ 252,200 $ 156,000 $ 132,500 Long-term debt obligations . . . . (2) 183,132 92,919 90,213 - - Operating leases . . . . . . . . . (3) 98,895 48,042 50,853 - - Capital lease obligations - - - - - Other long-term debt obligations - - - - - -------- ----------------- ------------ ------------ -------------- Total contractual cash obligations $973,527 $ 291,761 $ 393,266 $ 156,000 $ 132,500 ======== ================= ============ ============ ============== (1) Purchase obligations include agreements to purchase services that are enforceable and legally binding on the Company and that specify all significant terms and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. (2) Amounts represent the expected cash payments of our long-term obligations. (3) Amounts represent the expected cash payments of our operating lease obligations.
ITEM 3. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES As of March 31, 2005, 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, 2005, such that the information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. INTERNAL CONTROLS There were no changes in our internal controls over financial reporting during the quarter ended March 31, 2005 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 A final order has been issued in the stockholder derivative action, or the Lawsuit filed by Strategic Asset Management, Inc., or SAMI, in the Court of Chancery of the State of Delaware for New Castle County, or the Court. On April 21, 2005, the Court issued an order, or the Order, that the Settlement Agreement and Release, or the Agreement, between us, certain directors and SAMI, filed June 30, 2004 in response to the Lawsuit, a copy of which was attached to the Form 10-QSB filed August 16, 2004, has been confirmed and approved, with one change to the Agreement. The Court awarded the sum of $150,000 for fees and expenses. The Order was attached to the Form 8-K filed April 29, 2005. We were notified on April 22, 2005 that SAMI, the Plaintiff, and Mark Behringer, Intervening Plaintiff, jointly filed a Notice of Motion of Dismissal Pursuant to Rule 41(a) on April 22, 2005, dismissing the derivative action by SAMI. The Notice of Motion of Dismissal Pursuant to Rule 41(a) was attached to the Form 8-K filed April 29, 2005. This concludes the Lawsuit. 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 During the first quarter of 2005, we issued 958 and 1,358 shares of unregistered common stock to Phillip Levin and Daniel Haslinger, respectively, both members of the Board of Directors, in exchange for management consulting work performed outside their duties as directors from January to April 2004, for $3,000 and $4,000, respectively, or a total of $7,000. During the first quarter of 2005, Carl Richard, a director, subscribed for 10,000 shares of our restricted unregistered common stock in a private placement. These shares were issued in May 2005 at $1.25 per share, with associated warrants to purchase additional shares at $1.85 per share. We are currently completing a private placement of up to $835,188 in unregistered shares of our common stock. We hope to sell up to 668,151 shares of common stock at a price per share of $1.25. As announced in a Form 8-K on June 18, 2004, this price was lowered from $2.25 per share, the total amount of the private placement increased from $750,000 and the price of the associated warrants decreased to $1.85 from $2.85. During February and early March, 2004, we issued 193,417 shares for total proceeds of $435,188. To reflect the re-pricing, in June, 2004 we issued an additional 154,734 shares for no additional proceeds. During December, 2004, we issued an additional 125,200 shares for total proceeds of $156,500. During the first quarter of 2005, a director and two non-affiliated stockholders signed subscription agreements for an additional 70,000 shares, which we recorded as a receivable of $87,500 at March 31, 2005. We issued all 70,000 shares in the second quarter of 2005. All of the foregoing issuances were exempt from registration pursuant to Section 4(2) of the Securities and Exchange Act of 1933, and no underwriters or placement agents were involved. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION (a) Our Board of Directors has postponed the Annual Meeting of our stockholders originally scheduled for Thursday, May 19, 2005, until June 30, 2005. The location of our Annual Meeting has not changed and will be in the Garden Room of the Toledo Club, 235 14th Street, Toledo, Ohio at 10:00 a.m. We filed a Notice of Postponement on May 11, 2005 with the SEC in a Schedule 14A, Definitive Additional Materials, and was sent to all stockholders on May 13, 2005. We will file a revised definitive proxy statement on an Amended Schedule 14A, which will be sent to all stockholders subsequent to the filing of this Form 10-QSB. (b) None ITEM 6. EXHIBITS (a) Exhibits: See Exhibit Index below. (b) Reports on Form 8-K: None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. N-VIRO INTERNATIONAL CORPORATION Date: May 16, 2005 /s/Daniel J. Haslinger -------------- ------------------------ Daniel J. Haslinger Chief Executive Officer and President (Principal Executive Officer) Date: May 16, 2005 /s/ James K. McHugh -------------- ---------------------- James K. McHugh Chief Financial Officer, Secretary and Treasurer (Principal Financial & Accounting Officer) EXHIBIT INDEX ============= EXHIBIT NO. DOCUMENT ----------- -------- 3.1 Amended and Restated Certificate of Incorporation, dated June 17, 1998 (incorporated by reference to Exhibit 3.2 to Form 10-K filed April 14, 2004). 3.2 Amendment to the Certificate of Incorporation of the Company, dated November 13, 2003 (incorporated by reference to Exhibit 3.4 to Form 10-K filed April 14, 2004). 3.3 Amended and Restated By-Laws of the Company, dated May 13, 2005. 4.1 Certificate of Designation of Series A Redeemable Preferred Stock, dated August 27, 2003 (incorporated by reference to Exhibit 3.3 to Form 10-K filed April 14, 2004). 4.2 The N-Viro International Corporation 2004 Stock Option Plan (incorporated by reference to Form S-8 filed December 20, 2004).* 4.3 The Amended and Restated N-Viro International Corporation Stock Option Plan (incorporated by reference to Form S-8 filed May 9, 2000).* 10.1 Employment Agreement, dated June 14, 1999, between N-Viro International Corporation and Terry J. Logan (incorporated by reference to Exhibit 1 to the Form 8-K filed June 30, 1999).* 10.2 Amended and Restated Employment Agreement, dated June 6, 2003, between N-Viro International Corporation and Michael G. Nicholson (incorporated by reference to Exhibit 99.1 to the Form 8-K filed June 9, 2003).* 10.3 Business Loan Agreement dated February 26, 2003, between N-Viro International Corporation and Monroe Bank + Trust; letter of credit enhancement dated February 25, 2003 between N-Viro International Corporation and Messrs. J. Patrick Nicholson, Michael G. Nicholson, Robert P. Nicholson and Timothy J. Nicholson (all incorporated by reference to Exhibits 99.1 through 99.3 to the Form 8-K filed March 3, 2003). 10.4 Settlement Agreement and Release dated August 29, 2003 between N-Viro International Corporation and Strategic Asset Management, Inc.; Consulting Agreement dated August 28, 2003 between N-Viro International Corporation and J. Patrick Nicholson (all incorporated by reference to Item 5 of the Form 8-K filed August 29, 2003). 10.5 Security Units Purchase Agreement dated January 30, 2004 between N-Viro International Corporation and Ophir Holdings, Inc. (incorporated by reference to Exhibit 99.1 to the Form 8-K filed February 5, 2004). 10.6 Memorandum of Employment Agreement and Storage Site Agreement, respectively, both dated September 27, 2004, between N-Viro International Corporation and, Daniel J. Haslinger and Micro Macro Integrated Technologies, Inc., respectively (incorporated by reference to Exhibit 10.1 of Form 8-K dated October 1, 2004).* 31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. 31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. 32.1 Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Indicates a management contract or compensatory plan or arrangement.