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 SEPTEMBER 30, 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 November 7, 2005, 3,690,559 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 Sept. 30 Nine Months Ended Sept. 30 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 947,963 $1,253,551 $3,102,449 $4,301,459 Cost of revenues. . . . . . . . . . . . . . . . . . . . . . . . 688,751 946,805 2,260,547 3,105,042 ----------- ----------- ----------- ----------- Gross Profit. . . . . . . . . . . . . . . . . . . . . . . . . . 259,212 306,746 841,902 1,196,417 Operating expenses: Selling, general and administrative . . . . . . . . . . . . . 287,851 352,957 1,004,931 1,359,521 ----------- ----------- ----------- ----------- Operating loss. . . . . . . . . . . . . . . . . . . . . . . . . (28,639) (46,211) (163,029) (163,104) Nonoperating income (expense): Interest and dividend income. . . . . . . . . . . . . . . . . 2,272 5,947 4,420 21,505 Interest expense. . . . . . . . . . . . . . . . . . . . . . . (5,560) 66,291 (21,412) 16,871 Gain on legal debt forgiven . . . . . . . . . . . . . . . . . - - - 157,174 Loss from equity investment in joint venture. . . . . . . . . (32,058) (13,486) (155,584) (118,470) ----------- ----------- ----------- ----------- (35,346) 58,752 (172,576) 77,080 ----------- ----------- ----------- ----------- Income (loss) before income taxes . . . . . . . . . . . . . . . (63,985) 12,541 (335,605) (86,024) Federal and state income taxes. . . . . . . . . . . . . . . . . - - - - ----------- ----------- ----------- ----------- Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ (63,985) $ 12,541 $ (335,605) $ (86,024) =========== =========== =========== =========== Basic and diluted income (loss) per share . . . . . . . . . . . $ (0.02) $ 0.00 $ (0.10) $ (0.03) =========== =========== =========== =========== Weighted average common shares outstanding - basic and diluted. 3,528,146 3,210,423 3,492,054 3,016,243 =========== =========== =========== ===========
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS Sept. 30, 2005 (Unaudited) December 31, 2004 --------------------------- ------------------- ASSETS ----------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents: Unrestricted. . . . . . . . . . . . . . . . . . . . . . . . . . $ 164,927 $ 147,549 Restricted. . . . . . . . . . . . . . . . . . . . . . . . . . . 127,444 75,600 Receivables: Trade, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 958,415 578,070 Stock subscription. . . . . . . . . . . . . . . . . . . . . . . - 42,500 Notes receivable - current. . . . . . . . . . . . . . . . . . . . 68,593 112,802 Prepaid expenses and other assets . . . . . . . . . . . . . . . . 202,670 108,732 --------------------------- ------------------- Total current assets. . . . . . . . . . . . . . . . . . . . . . . 1,522,049 1,065,253 Property and Equipment, Net . . . . . . . . . . . . . . . . . . . 303,574 360,952 Investment in and Advances to Florida N-Viro, L.P.. . . . . . . . 30,891 186,475 Notes Receivable, net of current portion. . . . . . . . . . . . . - 338 Intangible and Other Assets, Net. . . . . . . . . . . . . . . . . 1,119,987 1,078,771 --------------------------- ------------------- $ 2,976,501 $ 2,691,789 =========================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY ----------------------------------------------------------------- CURRENT LIABILITIES Current maturities of long-term debt. . . . . . . . . . . . . . . $ 79,327 $ 91,072 Line-of-credit. . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 200,000 Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . 1,188,682 864,580 Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 326,799 293,201 --------------------------- ------------------- Total current liabilities . . . . . . . . . . . . . . . . . . . . 1,644,808 1,448,853 Long-term debt, less current maturities . . . . . . . . . . . . . 42,002 114,263 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.01 par value; authorized 7,000,000 shares; issued 3,814,159 in 2005 and 3,569,693 in 2004 . . . . . . . . . . . . 38,141 35,697 Preferred stock, $.01 par value; authorized 2,000,000 shares; issued -0- shares in 2005 and 1 share in 2004 . . . . . . . . . - - Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 15,285,525 14,791,346 Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . (13,349,085) (13,013,480) --------------------------- ------------------- 1,974,581 1,813,563 Less treasury stock, at cost, 123,500 shares. . . . . . . . . . . 684,890 684,890 --------------------------- ------------------- Total stockholders' equity. . . . . . . . . . . . . . . . . . . . 1,289,691 1,128,673 --------------------------- ------------------- $ 2,976,501 $ 2,691,789 =========================== ===================
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended Sept. 30 2005 2004 ---------- ---------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . $ 135,739 $(114,881) CASH FLOWS FROM INVESTING ACTIVITIES Collections on notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,768 24,000 Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,270) (3,395) Sales of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,409 Expenditures for intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,830) (26,257) Reductions to restricted cash and cash equivalents. . . . . . . . . . . . . . . . . . . . (51,844) (75,112) ---------- ---------- Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . (11,176) (79,355) CASH FLOWS FROM FINANCING ACTIVITIES Issuance of stock - options, warrants and private placement . . . . . . . . . . . . . . . 130,000 543,180 Borrowings under long-term obligations. . . . . . . . . . . . . . . . . . . . . . . . . . - 74,386 Private placement expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,180) (11,696) Principal payments on long-term obligations . . . . . . . . . . . . . . . . . . . . . . . (84,005) (222,992) Net payments on line-of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (150,000) (238,111) ---------- ---------- Net cash provided (used) by financing activities. . . . . . . . . . . . . . . . . . . . . (107,185) 144,767 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . 17,378 (49,469) CASH AND CASH EQUIVALENTS - BEGINNING . . . . . . . . . . . . . . . . . . . . . . . . . . 147,549 123,547 ---------- ---------- CASH AND CASH EQUIVALENTS - ENDING. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 164,927 $ 74,078 ========== ========== Supplemental disclosure of cash flows information: Cash paid during the nine months ended for interest . . . . . . . . . . . . . . . . . . $ 32,459 $ 37,767 ========== ========== During the nine months ended September 30, 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 nine months ended September 30, 2005 may not be indicative of the results of operations for the year ending 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 September 30, 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, Opinion 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 September 30, 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. 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 Note 4, "Contingencies". The fair value of options granted was determined using the Black-Scholes option pricing model. SFAS No. 123R, "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 nine months ended September 30, 2005, but is 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 Nine Months Ended Sept. 30, Sept. 30, ---------------------- ---------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net income (loss), as reported . . . . . . $ (63,985) $ 12,541 $(335,605) $ (86,024) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects. . . . . . . (48,624) (182,546) (130,121) (436,788) ---------- ---------- ---------- ---------- Pro forma net loss . . . . . . . . . . . . $(112,609) $(170,005) $(465,726) $(522,812) ========== ========== ========== ========== Income (loss) per share: Basic and diluted - as reported. . . . . $ (0.02) $ 0.00 $ (0.10) $ (0.03) ========== ========== ========== ========== Basic and diluted - pro-forma. . . . . . $ (0.03) $ (0.05) $ (0.13) $ (0.17) ========== ========== ========== ==========
NOTE 2. RELATED PARTY TRANSACTIONS 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". 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 (6.75% at September 30, 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. 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 2006, 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 September 30, 2005, the Company had $350,000 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 nine months ended September 30, 2005 and 2004 is approximately $28,200 and $37,100, 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 current 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 July 2005, Dr. Logan rescinded the stock options portion of his consulting agreement, effective with services rendered after June 2005. In August 2003, the Company entered into a Settlement Agreement with Mr. J. Patrick Nicholson and negotiated a new consulting agreement (the "Agreement"). The Agreement was scheduled to expire in August 2008, and Mr. Nicholson was required to provide future services to be eligible for compensation. Mr. Nicholson was 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 2005, Mr. Nicholson filed a Demand for Arbitration, claiming a breach of contract and damages of $50,000. No date for the arbitration hearing has been set, and no discovery has been taken at this time. On July 13, 2005, the Board of Directors of the Company voted to terminate the Agreement for cause, based on numerous specific instances of violations of the terms of the Agreement. Mr. Nicholson was being paid an aggregate of over $92,000 per year under the Consulting Agreement, exclusive of any other payouts earnable. 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 of Directors of the Company. The employment agreement will expire in June 2007, and future compensation amounts are to be determined annually by the Board of Directors. The agreement was disclosed in a filing on June 10, 2003 on Form 8-K. In the third quarter of 2004, the Company and Mr. Nicholson renegotiated primarily the stock option portion of the Agreement, and amended the Agreement. Because these options were priced lower than the fair market value as of that date, the Company is required to take a charge to earnings totaling approximately $68,400 ratably through June, 2007, the ending date of his employment agreement The Company 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 None. 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 third quarter of 2005, approximately 42% of the Company's revenue is from management operations, 56% from other domestic operations and 2% from research and development grants. Sales of the N-Viro technology are affected by general fluctuations in the business cycles in the United States and worldwide, instability of economic conditions (such as the current conditions in the Asia Pacific region and Latin America) and interest rates, as well as other factors. In addition, operating results of some of the Company's business segments are influenced by particular business cycles and seasonality, as well as other factors such as interest rates. COMPETITION. The Company conducts business in a highly competitive market and has fewer resources than most of its competitors. Businesses in this market compete within and outside the United States principally on the basis of price, product quality, custom design, technical support, reputation, equipment financing assistance and reliability. Competitive pressures and other factors could cause the Company to lose market share or could result in decreases in prices, either of which could have a material adverse effect on its financial position and results of operations. RISKS OF DOING BUSINESS IN OTHER COUNTRIES. The Company conducts business in markets outside the United States, and expects to continue to do so. In addition to the risk of currency fluctuations, the risks associated with conducting business outside the United States include: social, political and economic instability; slower payment of invoices; underdeveloped infrastructure; underdeveloped legal systems; and nationalization. The Company has not entered into any currency swap agreements which may reduce these risks. The Company may enter into such agreements in the future if it is deemed necessary to do so. Current economic and political conditions in the Asia Pacific and Middle East regions have affected the Company outlook for potential revenue there. The Company cannot predict the full impact of this economic instability, but it could have a material adverse effect on revenues and profits. The Company has determined that its reportable segments are those that are based on the Company's method of internal reporting, which segregates its business by product category and service lines. The Company's reportable segments are as follows: Management Operations - The Company provides employee and management services to operate the Toledo 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 September 30, 2005 and 2004 (dollars in thousands):
Management Domestic Foreign Research & Operations Operations Operations Development Total ----------- ----------- ------------ ------------ ------ Quarter Ended September 30, 2005 -------------------------------- Revenues . . . . . . . . . . . . . .$ 397 $ 528 $ - $ 23 $ 948 Cost of revenues . . . . . . . . . 277 390 3 19 689 Segment profits. . . . . . . . . . 120 138 (3) 4 259 Identifiable assets. . . . . . . . 244 52 - - 296 Depreciation . . . . . . . . . . . 14 3 - - 17 Quarter Ended September 30, 2004 -------------------------------- Revenues . . . . . . . . . . . . . .$ 464 $ 754 $ 13 $ 23 $1,254 Cost of revenues . . . . . . . . . 323 605 - 19 947 Segment profits. . . . . . . . . . 141 149 13 4 307 Identifiable assets. . . . . . . . 307 67 - - 374 Depreciation . . . . . . . . . . . 16 5 - - 21 Nine Months Ended September 30, 2005 -------------------------------- Revenues . . . . . . . . . . . . . .$ 1,077 $ 1,945 $ 13 $ 68 $3,103 Cost of revenues . . . . . . . . . 763 1,431 10 57 2,261 Segment profits. . . . . . . . . . 314 514 3 11 842 Identifiable assets. . . . . . . . 244 52 - - 296 Depreciation . . . . . . . . . . . 44 11 - - 55 Nine Months Ended September 30, 2004 -------------------------------- Revenues . . . . . . . . . . . . . .$ 1,458 $ 2,735 $ 39 $ 69 $4,301 Cost of revenues . . . . . . . . . 986 2,081 - 38 3,105 Segment profits. . . . . . . . . . 472 654 39 31 1,196 Identifiable assets. . . . . . . . 307 67 - - 374 Depreciation . . . . . . . . . . . 46 15 - - 61
A reconciliation of total segment revenues, cost of revenues, and segment profits to consolidated revenues, cost of revenues, and segment information to the consolidated financial statements for the periods ended September 30, 2005 and 2004 is as follows (dollars in thousands):
Qtr. Ended Nine Months Ended Sept. 30, Sept. 30, ---------------- ------------------ 2005 2004 2005 2004 ------- ------- -------- -------- Segment profits: Segment profits for reportable segments. . . . $ 259 $ 307 $ 842 $ 1,196 Corporate selling, general and administrative expenses and research + development costs. . (288) (353) (1,005) (1,359) Other income (expense) . . . . . . . . . . . . (35) 59 (173) 77 ------- ------- -------- -------- Consolidated income (loss) before taxes. . . . $ (64) $ 13 $ (336) $ (86) ======= ======= ======== ======== Identifiable assets: Identifiable assets for reportable segments. . $ 296 $ 374 $ 296 $ 374 Corporate property and equipment . . . . . . . 8 23 8 23 Current assets not allocated to segments . . . 1,522 1,211 1,522 1,211 Intangible and other assets not allocated to segments . . . . . . . . . . . . . . . . . . 1,151 1,322 1,151 1,322 ------- ------- -------- -------- Consolidated assets. . . . . . . . . . . . . . $2,977 $2,930 $ 2,977 $ 2,930 ======= ======= ======== ======== Depreciation and amortization: Depreciation for reportable segments . . . . . $ 17 $ 21 $ 55 $ 61 Corporate depreciation and amortization. . . . 37 36 112 114 ------- ------- -------- -------- Consolidated depreciation and amortization . . $ 54 $ 57 $ 167 $ 175 ======= ======= ======== ========
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 from Florida N-Viro. Condensed financial information of Florida N-Viro, L.P. for the quarters ended September 30, 2005 and 2004 is as follows:
For the Quarter Ended Sept. 30 ------------------------------ 2005 2004 --------- --------- Net sales. . . . . . . . . . . . $293,830 $346,115 Gross profit (loss). . . . . . . (36,292) 31,363 Loss from continuing operations. (67,490) (28,390) Net loss . . . . . . . . . . . . (67,490) (28,390)
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 $948,000 for the quarter ended September 30, 2005 compared to $1,254,000 for the same period of 2004. The net decrease in revenue is due primarily to a decrease in alkaline admixture sales and service fees, a decrease in royalty fees and a decrease in facility management fees. Our cost of revenues decreased to $689,000 in 2005 from $947,000 for the same period in 2004, and the gross profit percentage increased to 27% from 24% for the quarters ended September 30, 2005 and 2004, respectively. This increase in gross profit percentage is primarily due to the increase in the supply of alkaline admixture that is our lower-cost source and, a decrease in the costs of the facility management fee operations, which in turn was partially due to the closing of an offsite blending operation during the third quarter of 2004. 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., increased for the same period of 2005. We also recognized a one-time downward adjustment of $70,000 to an accrual for interest expense estimated to be due on a tax liability in the third quarter of 2004, whereas in 2005 this event does not reoccur. These changes collectively resulted in a net loss of approximately $64,000 for the quarter ended September 30, 2005 compared to net income of $13,000 for the same period in 2004. COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2005 WITH THREE MONTHS ENDED SEPTEMBER 30, 2004 Our overall revenue decreased $306,000, or 24%, to $948,000 for the quarter ended September 30, 2005 from $1,254,000 for the quarter ended September 30, 2004. The net decrease in revenue was due primarily to the following: a) Sales of alkaline admixture decreased $69,000 from the same period ended in 2004; b) Revenue from the service fees for the management of alkaline admixture decreased $29,000 from the same period ended in 2004; c) Our processing revenue, including facility management revenue, showed a net decrease of $143,000 over the same period ended in 2004; d) Miscellaneous revenues decreased $65,000 from the same period ended in 2004; and e) Research and development revenue did not change from the same period ended in 2004. Our gross profit decreased $48,000, or 16%, to $259,000 for the three months ended September 30, 2005 from $307,000 for the three months ended September 30, 2004, and the gross profit margin increased to 27% from 24% for the same periods. The increase in gross profit margin is primarily due to the increase in the supply of alkaline admixture that is our lower-cost source and, a decrease in the costs of the facility management fee operations, which in turn was partially due to the closing of an offsite blending operation during the third quarter of 2004. Our operating expenses decreased $65,000, or 18%, to $288,000 for the three months ended September 30, 2005 from $353,000 for the three months ended September 30, 2004. The decrease was primarily due to a decrease of approximately $72,000 in consulting fees and expenses and $51,000 in employee payroll and related expenses, partially offset by an increase of approximately $49,000 in legal fees and $18,000 in travel and meals expenses. As a result of the foregoing factors, we recorded an operating loss of $29,000 for the three months ended September 30, 2005 compared to an operating loss of $46,000 for the three months ended September 30, 2004, a decrease in the loss of approximately $17,000. Our net nonoperating income (expense) increased by $94,000 to net nonoperating expense of $35,000 for the three months ended September 30, 2005 from net nonoperating income of $59,000 for the three months ended September 30, 2004. The increase in nonoperating expense was primarily due to a decrease in the recognition of a one-time downward adjustment of $70,000 to an accrual for interest expense estimated to be due on a tax liability in the third quarter of 2004, whereas in 2005 this event does not reoccur. We recorded net loss of approximately $64,000 for the three months ended September 30, 2005 compared to net income of $13,000 for the same period ended in 2004, a decrease of approximately $77,000. For the three months ended September 30, 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. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2005 WITH NINE MONTHS ENDED SEPTEMBER 30, 2004 Our overall revenue decreased $1,199,000, or 28%, to $3,102,000 for the nine months ended September 30, 2005 from $4,301,000 for the nine months ended September 30, 2004. The net decrease in revenue was due primarily to the following: a) Sales of alkaline admixture decreased $334,000 from the same period ended in 2004; b) Revenue from the service fees for the management of alkaline admixture decreased $192,000 from the same period ended in 2004; c) Our processing revenue, including facility management revenue, showed a net decrease of $510,000 over the same period ended in 2004; d) Licensing of the N-Viro Process, which had $-0- license sales in the nine months of 2005, showed a net decrease of $72,000 over the same period in 2004; e) Miscellaneous revenues, including equipment rental and sales, decreased $91,000 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 $355,000, or 30%, to $842,000 for the nine months ended September 30, 2005 from $1,196,000 for the nine months ended September 30, 2004, and the gross profit margin decreased slightly to 27% from 28% for the same periods. The decrease in gross profit margin is primarily due to the reduction in the supply of alkaline admixture that is our lower-cost source and, a decrease in facility management fee operations without a corresponding reduction in related costs. The decrease was partially offset by the decrease in the cost of transporting our products, which was itself partially attributable to a reduction the cost and number of tons of product shipped out and reductions in our payroll and related costs of our management fee operation. Our operating expenses decreased $355,000, or 26%, to $1,005,000 for the nine months ended September 30, 2005 from $1,360,000 for the nine months ended September 30, 2004. The decrease was primarily due to a decrease of approximately $169,000 in employee payroll and related expenses, $78,000 in directors' fees paid in unregistered stock, $58,000 in insurance and office/administrative costs, $51,000 in litigation settlement charges and $23,000 in consulting fees and expenses, partially offset by an increase of approximately $72,000 in legal fees. As a result of the foregoing factors, we recorded an operating loss of $163,000 for both the nine months ended September 30, 2005 and in 2004. Our net nonoperating income (expense) decreased by $250,000 to net nonoperating expense of $173,000 for the nine months ended September 30, 2005 from net nonoperating income of $77,000 for the nine months ended September 30, 2004. The decrease in nonoperating income (expense) was primarily due to a decrease in the gain on the forgiveness of debt recognized in 2004, from a gain of $157,000 to $-0- in 2005, and, an increase in interest expense of $38,000 and an increase in the loss of approximately $37,000 in the equity of a joint venture, Florida N-Viro, L.P. We recorded net loss of approximately $336,000 for the nine months ended September 30, 2005 compared to a net loss of $86,000 for the same period ended in 2004, an increase in the loss of approximately $250,000. For the nine months ended September 30, 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 $123,000 at September 30, 2005, compared to a working capital deficit of $384,000 at December 31, 2004, resulting in an increase in working capital of $261,000. Current assets at September 30, 2005 included cash and investments of approximately $292,000 (including restricted cash of approximately $127,000), which is an increase of $69,000 from December 31, 2004. The increase in working capital was principally due to the private placement of unregistered common stock with four stock subscribers totaling $150,000, and the recognition into current assets of approximately $161,000 of deferred costs relating to the financial public relations agreement signed with Strategic Asset Management in September 2005, to be paid for in unregistered common stock. Compared to September 30, 2004, in the first nine months of 2005 our cash flow provided by operations was approximately $136,000, an increase of approximately $251,000 from the same period in 2004. This increase was principally due to the positive change in working capital of approximately $399,000, an increase in cash received from the issuance of stock for services of approximately $101,000 and decreased by the increase in the net loss of approximately $250,000. 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 recently renewed the line of credit through October 2006, 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 September 30, 2005, we had $350,000 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. In response to an increase in the amount of past due accounts, we increased the reserve for bad debts by $6,000 during the third quarter of 2005, to a reserve of $40,000. During the first nine months of 2005, our investment in a 47.5% owned joint venture, Florida N-Viro, L.P., recorded a net loss to us of approximately $326,000. Cash flow from operations of Florida N-Viro, L.P. was negative, 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 improvements in operating results for the balance of 2005 and into 2006 partially 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 and 2006 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 our patented N-Viro processes are very cost competitive, and well established in the market place. There are currently over 35 facilities worldwide using the N-Viro Process, most of which have been using the N-Viro process for over 10 years. 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 September 30, 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 September 30, 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) $ 70,700 $ 70,700 $ - $ - $ - Long-term debt obligations . . . . (2) 121,329 79,327 42,002 - - Operating leases . . . . . . . . . (3) 74,171 47,788 26,383 - - Capital lease obligations - - - - - Other long-term debt obligations - - - - - -------- ----------------- ------------ ------------ -------------- Total contractual cash obligations $266,200 $ 197,815 $ 68,385 $ - $ - ======== ================= ============ ============ ============== (1) Purchase obligations include agreements to purchase services that are enforceable and legally binding on the Company and that specify all significant terms and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. (2) Amounts represent the expected cash payments of our long-term obligations. (3) Amounts represent the expected cash payments of our operating lease obligations.
ITEM 3. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES As of September 30, 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 September 30, 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 September 30, 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 In June 2005, J. Patrick Nicholson, our former Chairman and CEO, filed a Demand for Arbitration, seeking damages of $50,000 based on a claimed breach of contract of a Consulting Agreement dated August 28, 2003 between us and Mr. Nicholson. This proceeding was previously reported in our Form 10-QSB filed August 15, 2005. We are uncertain as to any additional obligations to Mr. Nicholson under the Consulting Agreement or in settlement of any additional claims. On July 13, 2005, our Board of Directors voted to terminate for cause the Consulting Agreement, based on numerous specific instances of violations of the terms of the Consulting Agreement. The Consulting Agreement, filed as Exhibit B to the Form 8-K filed August 29, 2003, contained a term ending no earlier than five years from the date of the contract. Mr. Nicholson is a reporting beneficial owner of approximately 13.4% of our outstanding common stock, as of the date of his Form SC 13D/A filed October 24, 2005. Mr. Nicholson was currently being paid an aggregate of over $92,000 per year under the Consulting Agreement, exclusive of any other payouts earnable. From time to time we are involved in legal actions arising in the ordinary course of business. With respect to these matters, we believe we have adequate legal defenses and/or provided adequate accruals for related costs such that the ultimate outcome will not have a material adverse effect on our future financial position or results of operations. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION (a) None ITEM 6. EXHIBITS (a) Exhibits: See Exhibit Index below. (b) Reports on Form 8-K: We filed a report on Form 8-K on July 14, 2005, dated July 13, 2005, to announce the termination for cause of a consulting agreement dated August 28, 2003 between us and J. Patrick Nicholson. We filed a report on Form 8-K on September 21, 2005, dated September 20, 2005, that we had formed a subsidiary, Alternative Fuel Technology, Inc. We filed a report on Form 8-K on September 23, 2005, dated September 19, 2005, that we had appointed Howard E. Hartung as Chief Operating Officer. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. N-VIRO INTERNATIONAL CORPORATION Date: November 14, 2005 /s/ Daniel J. Haslinger ------------------- ------------------------ Daniel J. Haslinger Chief Executive Officer and President (Principal Executive Officer) Date: November 14, 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 (incorporated by reference to Exhibit 3.3 to Form 10-QSB filed May 16, 2005). 3.4 Amendment to the Certificate of Incorporation of the Company, dated July 6, 2005 (incorporated by reference to Exhibit 3.4 to Form 10-QSB filed August 15, 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). 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, Exhibit A and Exhibit B of the Form 8-K filed August 29, 2003). 10.5 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).* 10.6 Financial Public Relations Agreement dated September 15, 2005 between Strategic Asset Management, Inc. and N-Viro International Corporation (incorporated by reference to Exhibit 10.1 of Form 8-K dated October 12, 2005). 10.7 Warrant to Purchase 120,000 Shares of Common Stock dated September 15, 2005 between Strategic Asset Management, Inc. and N-Viro International Corporation (incorporated by reference to Exhibit 10.2 of Form 8-K dated October 12, 2005). 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.