10-K 1 form10kfye123110.txt FORM 10-K - FYE 12-31-10 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) X ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010 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 [GRAPHIC OMITTED] N-VIRO INTERNATIONAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 34-1741211 (STATE OR OTHER JURISDICTION OF (I.R.S. 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 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, par value $.01 per share Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No X Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes No X 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 such filing requirements for at least the past 90 days. Yes X No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company X Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter: $13,516,000. The number of shares of Common Stock of the registrant outstanding as of March 21, 2011 was 5,938,714. DOCUMENTS INCORPORATED BY REFERENCE None INDEX PAGE ---- PART I Item 1. Business 2 Item 1A. Risk Factors 8 Item 2. Properties 11 Item 3. Legal Proceedings 12 Item 4. (Removed and Reserved) 12 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 13 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19 Item 8. Financial Statements and Supplementary Data 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24 Item 9A. Controls and Procedures 24 Item 9B. Other Information 25 PART III Item 10. Directors, Executive Officers and Corporate Governance 26 Item 11. Executive Compensation 32 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 36 Item 13. Certain Relationships and Related Transactions, and Director Independence 38 Item 14. Principal Accountant Fees and Services 38 PART IV Item 15. Exhibits, Financial Statement Schedules 40 PART I CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS This annual report on Form 10-K contains statements that are forward-looking. We caution that words used in this document such as "expects," "anticipates," "believes," "may," and "optimistic," as well as similar words and expressions used herein, identify and refer to statements describing events that may or may not occur in the future. These forward-looking statements and the matters to which they refer are subject to considerable uncertainty that may cause actual results to be materially different from those described herein. There are numerous factors that could cause actual results to be different than those anticipated or predicted by us, including: (i) a deterioration in economic conditions in general; (ii) a decrease in demand for our products or services in particular; (iii) our loss of a key employee or employees; (iv) regulatory changes, including changes in environmental regulations, that may have an adverse affect on the demand for our products or services; (v) increases in our operating expenses resulting from increased costs of labor and/or consulting services; (vi) our inability to exploit existing or secure additional sources of revenues or capital to fund operations; (vii) a failure to collect upon or otherwise secure the benefits of existing contractual commitments with third parties, including our customers; and (viii) other factors and risks identified in this Form 10-K, including under the caption "Risk Factors." This list provides examples of factors that could affect the results described by forward-looking statements contained in this Form 10-K; however, this list is not exhaustive. Many other factors could impact our business and it is impossible to predict with any accuracy which factors could result in negative impacts. Although we believe that the forward-looking statements contained in this Form 10-K 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-K 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-K. 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. ITEM 1. BUSINESS GENERAL We were incorporated in Delaware in April 1993, and became a public company in October 1993. We own and sometimes license various N-Viro processes and patented technologies to treat and recycle wastewater and other bio-organic wastes, utilizing certain alkaline and mineral by-products produced by the cement, lime, electrical generation and other industries. To date, the N-Viro Process has been commercially utilized for the recycling of wastewater sludge from municipal wastewater treatment facilities. All N-Viro products produced according to the N-Viro Process specifications, are "exceptional quality" sludge products under the 40 CFR Part 503 Sludge Regulations promulgated under the Clean Water Act of 1987 (the "Part 503 Regs"). Our current business strategy is to market our N-Viro FuelTM technology, which produces a renewable alternative fuel product out of certain bio-organic wastes. This N-Viro Fuel process has been acknowledged by the USEPA as a fuel product that can be used to produce alternative energy. In this business strategy, the primary focus is to identify allies, public and private, which will allow the opportunity for N-Viro to build, own and operate N-Viro Fuel facilities either on its own or in concert with others. Presently, we operate two biosolids processing facilities located in Toledo, Ohio and Volusia County, Florida. These two facilities each produce the N-Viro SoilTM agricultural product, and have provided us with working and development capital. Our goal is to continue to operate these facilities and aggressively market our N-Viro Fuel technology. These patented processes are best suited for current and future demands, satisfying both waste treatment needs as well as domestic and international directives for clean, renewable alternative fuel sources. THE N-VIRO PROCESS The N-Viro Soil Process involves mixing wastewater residuals (sludge) with an alkaline admixture and then subjecting the mixture to a controlled period of storage, mechanical turning and accelerated drying. The N-Viro Process stabilizes and pasteurizes the wastewater residuals, reduces odors to acceptable levels, neutralizes or immobilizes various constituents and generates N-Viro Soil , a product which has a granular appearance similar to soil and has multiple agricultural uses. N-Viro and its licensees have successfully marketed and distributed all N-Viro Soil product produced for beneficial reuse. The alkaline products used in all N-Viro Processes consist of by-products from the cement or lime industry and certain fly ashes from coal-fired systems used in electric power generation. The particular admixture that is used usually depends upon economics and availability in local markets. We are a distributor of alkaline admixtures for others. We also work with established by-product marketers to identify and utilize available materials. We generally charge a mark-up over our cost for alkaline admixtures sold to third parties. Our original N-Viro Process was enhanced in the 1990's with the addition of advanced mechanical drying known as the N-Viro BioDry process. BioDry had been successfully implemented in five plants operating in Canada. N-VIRO FUEL(TM) N-Viro Fuel is a relatively new and patented biomass alternative energy fuel process that produces a product that has physical and chemical characteristics similar to certain coals and is created from municipal biosolids, collectable animal manure, pulp and paper sludge and possibly other organic wastes. N-Viro Fuel is manufactured by blending the waste material(s) with one or more alkaline products, followed by thorough drying of the mixture using a thermal evaporative process. The resulting product can be easily blended with coal, waste coal, petroleum coke and/or other biomass-type fuels, and burned as a partial fuel substitute in combustion power plants. N-Viro Fuel has satisfied initial guidelines set forth by the U.S. Environmental Protection Agency (EPA) to qualify as an alternative energy source that may be utilized in commercial power generation subject to state permitting. The N-Viro Fuel technology, utilizing an alkaline/heat process to produce a fuel product, still satisfies all requirements of the USEPA 40 CFR part 503 regulations and is a safe product usable for agriculture as well as for energy production. Our N-Viro Fuel technology can convert waste products presently being landfilled or land applied into safe, beneficial and renewable long-term energy solutions as part of a renewable-energy economy. Attaining this status means that N-Viro Fuel technology is now a likely candidate to qualify for certain economic incentives that may be granted to alternative energy technologies, and a catalyst for obtaining permits more efficiently in each state. We plan to accelerate our development efforts as this designation is an important factor for our potential energy partners. N-VIRO PROCESS FACILITIES Our first N-Viro processing facility is located in Toledo, Ohio and has been managed by us through a contract management agreement with the City of Toledo since our inception. Revenue generated from and related to the Toledo operation accounted for about 22% of our total revenue in 2010. Under this contract, we process Toledo's wastewater biosolids and sell the resulting N-Viro Soil product to the agricultural market throughout Northwest Ohio. The current contract has been extended several times, including 2004, 2009, and twice in 2010. The current extension runs until September 30, 2011, and is presently in its twenty-second year of operation. We consider our relationship with the City of Toledo to be satisfactory. However, there can be no assurances that the City will continue to extend on a short-term basis or sign a new long-term contract with us beyond September 30, 2011. Florida N-Viro, LP, a wholly-owned subsidiary we fully acquired effective January 1, 2007, has been in continuous operation since 1995 in Florida. The Florida facility is located in Volusia County and presently processes regional biosolids for multiple communities and maintains contracts with the City of Altamonte Springs, the City of Oviedo, Seminole County, the City of Palm Coast, the City of Port Orange, the Tohopekaliga Water Authority and Volusia County. Additionally, the company works with other regional biosolids management companies and has worked with other municipalities with short-term and interim agreements. Florida N-Viro derives revenue from several sources. Each municipal customer compensates N-Viro for the processing of their waste materials. Florida N-Viro also receives revenue from utilizing the alkaline products produced by regional power utilities, including Cedar Bay Generating, thru a supply agreement with Headwaters Corporation and Jacksonville Electric Authority. We have also been successful in marketing our N-Viro Soil to local agricultural markets. Our Volusia County facility operates under and is regulated by a permit issued by the Florida Department of Environmental Quality. We believe we have a satisfactory operating history and positive relationship with the regulatory agencies. We lease the processing facility from Volusia County and renewed our five year contract and lease agreement for the third time in 2010. Florida N-Viro represented 74% of our total revenue in 2010, and this percentage and total revenues have been escalating using N-Viro's regional processing model. SALES AND MARKETING OF N-VIRO PROCESS We market our technologies principally through internal sales efforts. All domestic sales and marketing are controlled by management. The primary focus of our marketing efforts is towards the full commercialization of our N-Viro Fuel technologies. The N-Viro Fuel market requires us to work within two different and unique regulatory segments. First, our N-Viro Fuel facilities must satisfy biosolids permit requirements for the 40 CFR Part 503 regulations. Second, the finished fuel product must comply with each individual power generator's emission permit requirements. To accomplish this requirement to satisfy air permitting in the power generation facilities, N-Viro has procured, permitted, constructed and now operates a mobile facility to produce N-Viro Fuel on a commercial full-scale basis. We will use this facility to demonstrate the effectiveness of our process at discrete locations with the purpose of meeting the requirements necessary to ultimately permit, build, own and operate permanent N-Viro Fuel processing facilities. We can provide no assurance in our ability to negotiate long-term arrangements from the mobile facility's performance. INTERNATIONAL SALES AND MARKETING In certain countries outside the United States, we sell or license the N-Viro Process through agents. In their respective territories, the agents market licenses for the N-Viro Processes, serve as distributors of alkaline admixture, oversee quality control of the installed N-Viro facilities, enforce the terms of the license agreements with licensees and market N-Viro Soil. In general, the agents have paid one-time, up-front fees to us for the rights to market or use the N-Viro Process in their respective territories. Typically, the agreements with the agents provide for us to receive a portion of the up-front license fees, ongoing royalty fees paid by the licensees, a portion of the proceeds from the distribution and resale of alkaline admixture and the sale of N-Viro Soil. Agents have total responsibility and control over the marketing and contracts for N-Viro technology, subject only to license models or minimum agreements with us. The following table sets forth our Agents and the territorial rights of each Agent: Agent Territory ------------------- -------------------------------- VC Energy I, LLC China, Indiana and Texas CRM Technologies Israel, Greece and Eastern Europe EARNINGS VARIATION DUE TO BUSINESS CYCLES AND SEASONAL FACTORS. Our operating results can experience quarterly or annual variations due to business cycles, seasonality and other factors. During the last fiscal quarter of 2010, approximately 97% of our revenue was from management-run operations, 3% from other domestic third party agreements and 0% from foreign agreements or 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 and interest rates, as well as other factors. RISKS OF DOING BUSINESS IN OTHER COUNTRIES. We conduct a very small amount of business in markets outside the United States, and expect 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. We have not entered into any currency swap agreements which may reduce these risks. We may enter into such agreements in the future if it is deemed necessary to do so. We cannot predict the full impact of this economic instability, but it could have a material adverse effect on revenues and profits. RESEARCH AND DEVELOPMENT We continue to investigate methods to shorten drying time, improve the N-Viro Fuel process, substitute various other materials for use as alkaline admixtures, and improve the quality and attractiveness of N-Viro Fuel to a variety of end-users. We see opportunities to improve the efficiency of our process through the utilization of alterative heat sources such as methane, waste heat solid fuel and gasification technologies, as viable alternatives to the use of natural gas for process drying. In 2007 we performed a full scale test of the N-Viro Fuel product at the T.B. Simon Power Plant located on the campus of Michigan State University. The successful results of this first full test encouraged us to focus primarily on the development of the N-Viro Fuel technology. PATENTS AND PROPRIETARY RIGHTS We have several patents and licenses relating to the treatment and processing of biosolids. While there is no one single patent that is alone material to our business, we believe that our aggregate patents are important to our prospects for future success. However, we cannot be certain that future patent applications will successfully be issued as patents, or that any already issued patents will give us a competitive advantage. It is also possible that our patents could be successfully challenged or circumvented by competitors or other parties. In addition, we cannot assure that our treatment processes do not infringe on patents held by third-parties or their proprietary rights. We are aware of no such infringement, however. We hold several patents relating to N-Viro Fuel. In the N-Viro Fuel process, waste products, which can include domestic sewage sludge, manures and other materials, are treated with mineral by-products, dried by a mechanical dryer, and converted into a renewable fuel that can be used as a substitute for coal in coal-fired boilers and kilns. We are actively marketing the N-Viro Fuel process in response to the national policy encouraging both alternative energy generation as well as attaining the highest and best reuse of waste materials. Some early N-Viro patents were developed jointly with the former Medical College of Ohio, now under the name of the University of Toledo ("UT"). Because of the joint development of early N-Viro patents with UT, we agreed the licensing of these early patents would generate a royalty payable by us to UT. We also agreed with UT that claims to the traditional N-Viro Soil process was one-quarter of one percent (1/4%) of technical revenues until expiration of those patents. UT rights to BioBlend and certain other N-Viro technologies range from 2% to 4% of technical revenues derived from these newer technologies. Cumulative royalties paid to UT through December 31, 2010 were approximately $65,000, and no amount was expensed during 2010, 2009 or 2008. UT has no claim to the N-Viro Fuel technologies or process. In addition, we make use of our trade secrets or "know-how" developed in the course of our experience in the marketing of our services. To the extent that we rely upon trade secrets, unpatented know-how and the development of improvements in establishing and maintaining a competitive advantage in the market for our services, we can provide no assurance that such proprietary technology will remain a trade secret or that others will not develop substantially equivalent or superior technologies to compete with our services. INDUSTRY OVERVIEW Under the Part 503 Regulations, landfills, surface disposal and incineration remain permissible sludge management alternatives. However, these conventional disposal options have become subject to more stringent regulatory standards. The vast majority of states have enacted site restrictions and/or other management practices governing the disposal of sludge in landfills or surface disposal. Amendments to the Clean Air Act governing incineration and disposal of residual ash also impose stricter air emission standards for incineration in general, and the Part 503 Regulations impose additional specific pollutant limits for sludge to be incinerated and for the resulting air emissions. Surface disposal of sludge involves the placement of sludge on the land, often at a dedicated site for disposal purposes. The Part 503 Regulations subject surface disposal to increased regulation by requiring, among other things, run-off and leachate collection systems, methane monitoring systems and monitoring of, and limits on, pollutant levels. In addition, sludge placed in a surface disposal site are often required to meet certain standards with respect to pathogen levels relating to coliform or salmonella bacteria counts ("Class B" pathogen levels), levels of various pollutants, including metals, and elimination of attractiveness to pests, such as insects and rodents. Land application for beneficial use involves the application of sludge or sludge-based products, for non-disposal purposes, including agricultural, silvicultural and horticultural uses and for land reclamation. Under the Part 503 Regulations, N-Viro Soil is a product that meets certain stringent standards. "Class A" pathogen levels", levels of various pollutants, including metals, and elimination of attractiveness to pests, such as insects and rodents, are considered by the EPA to be "exceptional quality" products. The Class A pathogen levels are significantly more stringent than the Class B pathogen levels. "Exceptional quality" products are treated by the USEPA as safe products, thereby exempting these products from many federal restrictions on their use. All N-Viro products that are produced according to N-Viro Process specifications meet the pollutant concentration limits and other standards set forth in the Part 503 Regulations, and therefore qualify as an "exceptional quality" product that exceeds the USEPA's standards for unrestricted use. COMPETITION We are in direct and indirect competition with other businesses, including disposal and other wastewater sludge treatment businesses, some of which are larger and more firmly established and may have greater marketing and development budgets and capital resources than us. There can be no assurance that we will be able to maintain a competitive position in the sludge treatment industry. We compete against companies in a highly competitive market and have fewer resources than many of those companies. Our business competes within and outside the United States principally on the basis of pricing, reliability of our services provided, product quality, specifications and technical support. Competitive pressures and other factors could cause us to lose market share or could result in decreases in prices, either of which could have a material adverse effect on our financial position and results of operation. ENVIRONMENTAL REGULATION Various environmental protection laws have been enacted and amended during recent decades in response to public concern over the environment. Our operations and those of our licensees are subject to these evolving laws and the implementing regulations. The primary United States environmental laws which we believe may be applicable to the N-Viro Process and the land application of N-Viro SoilTM include Resource Conservation and Recovery Act ("RCRA"), the Federal Water Pollution Control Act of 1972 ("Clean Water Act"), the Comprehensive Environmental Response, Compensation, and Liability Act, ("CERCLA") and the Pollution Prevention Act of 1990 ("PPA"). These laws regulate the management and disposal of wastes, control the discharge of pollutants into the water, provide for the investigation and remediation of contaminated land and groundwater resources and establish a pollution prevention program. In addition, various states have implemented environmental protection laws that are similar to the applicable federal laws. States also may require, among other things, permits to construct N-Viro facilities and to sell and/or use N-Viro SoilTM. There can be no assurance that any such permits will be issued. The Part 503 Regulations. Historically, sludge management has involved either disposal, principally by landfilling, incineration, ocean dumping and surface disposal, or land application for beneficial use. Sewage sludge and the use and disposal thereof are regulated under the Clean Water Act. In 1993, the U.S. Environmental Protection Agency ("EPA") published the Part 503 Regulations under the Clean Water Act, implementing the EPA's "exceptional quality" program. These regulations establish sludge use and disposal standards applicable to public and privately-owned wastewater treatment plants in the United States, including publicly-owned treatment works, or POTWs. Under the Part 503 Regs, sludge products that meet certain stringent standards are considered to be "exceptional quality" ("Class A") products and are not subject to any federal restrictions on agricultural use or land application. N-Viro Soil is an "exceptional quality" product. Lower quality sludge products are subject to federal restrictions governing, among other items, the type and location of application, the volume of application and the cumulative application levels for certain pollutants. Agricultural application of these lower quality sludges in bulk amounts also requires an EPA permit. Agricultural and land applications of all sludge and sludge products, including N-Viro Soil and other "exceptional quality" products, are typically subject to state and local regulation and, in most cases, require a permit. In order to ensure compliance with the Part 503 Regs, we review the results of regular testing of sludge required by the EPA to be conducted by wastewater treatment plants, and it tests N-Viro Soil produced at N-Viro facilities on a regular basis. In general, we do not license or permit the ongoing use of the N-Viro Process to treat any sludge that may not be processed into an "exceptional quality" sludge product. Although N-Viro Soil exceeds the current federal standards imposed by the EPA for unrestricted agricultural use and land application, state and local authorities are authorized under the Clean Water Act to impose more stringent requirements than those promulgated by the EPA. Most states require permits for land application of sludge and sludge based products and several states have regulations for certain pollutants that impose more stringent numerical concentration limits than the federal rules. The Resource Conservation and Recovery Act. RCRA regulates all phases of hazardous waste generation, management and disposal. Waste is subject to regulation as a hazardous waste under RCRA if it is a solid waste specifically listed as a hazardous waste by the EPA or exhibits a defined hazardous characteristic. Although domestic sewage and mixtures of domestic sewage and other wastes that pass through a sewer system to a POTW are specifically exempted from the definition of solid waste, once treated by the POTW, the sewage sludge is considered a solid waste. Although neither the alkaline admixture nor wastewater sludge used in the N-Viro Process are regulated as hazardous waste under RCRA, states may impose restrictions that are more stringent than federal regulations. Accordingly, the raw materials used in the N-Viro Process may be regulated under some state hazardous waste laws as "special wastes," in which case specific storage and record keeping requirements may apply. The Comprehensive Environmental Response, Compensation and Liability Act of 1980. CERCLA imposes strict, joint and several liability upon owners and operators of facilities where a release of hazardous substances has occurred, upon parties who generated hazardous substances into the environment that were released at such facilities and upon parties who arranged for the transportation of hazardous substances to such facilities. We believe the N-Viro Process poses little risk of releasing hazardous substances into the environment that presently could result in liability under CERCLA. Other Environmental Laws. The Pollution Prevention Act of 1990 establishes pollution prevention as a national objective, naming it a primary goal wherever feasible. The act states that where pollution cannot be prevented, materials should be recycled in an environmentally safe manner. We believe that the N-Viro Process contributes to pollution prevention by providing an alternative to disposal. State Regulations. State regulations typically require an N-Viro facility to obtain a permit for the sale of N-Viro Soil for agricultural use, and may require a site-specific permit by the user of N-Viro Soil . In addition, in some jurisdictions, state and/or local authorities have imposed permit requirements for, or have prohibited, the land application or agricultural use of sludge products, including "exceptional quality" sludge products. Certain of our licensees operate in jurisdictions that require permits and have been able to obtain them for the N-Viro product. There can be no assurance that any such permits will be issued or that any further attempts to require permits for, or to prohibit, the land application or agricultural use of sludge products will not be successful. In addition, many states enforce landfilling restrictions for non-hazardous sludge. These regulations typically require a permit to sell or use sludge products as landfill cover material. There can be no assurance that N-Viro facilities or landfill operators will be able to obtain required permits. Environmental impact studies may be required in connection with the development of future N-Viro facilities. Such studies are generally time consuming and may create delays in the construction process. In addition, unfavorable conclusions reached in connection with such a study could result in termination of or expensive alterations to the N-Viro facility being developed. The costs of compliance are typically borne by our licensees, except in the case of direct sludge processing into a facility. Normally this cost is not material to us in relation to the total contract revenue. EMPLOYEES As of December 31, 2010, we had 34 employees. Six of our employees were engaged in sales and marketing; three were in finance and administration and twenty-five were in operations. We consider our relationship with our employees to be satisfactory. We are a party to a collective bargaining agreement (the "Labor Agreement") covering two employees of National N-Viro Tech, Inc., our wholly-owned subsidiary. The employees that are covered by the Labor Agreement work at the Toledo, Ohio N-Viro facility, which is operated by us for the City of Toledo on a contract management basis. These employees are members of the International Brotherhood of Teamsters, Chauffeurs, Warehouseman and Helpers Local Union No. 20, and we consider our relationship with the organization to be satisfactory. CURRENT DEVELOPMENTS We are currently in discussions with several companies in the cement and fuel/power generation 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. In response to the City of Toledo's 2010 Request for Qualifications (RFQ) issued to identify the waste process to use for the next 10-20 years, our N-Viro Fuel process was "short listed" and the City of Toledo issued a Request for Proposals (RFP). In response to the RFP, we have joined with two strategic partners for this project and formally proposed a long-term arrangement to process all of Toledo sludge into N-Viro Fuel. SECURITIES AND EXCHANGE COMMISSION As a public company, we are required to file periodic reports, as well as other information, with the Securities and Exchange Commission (SEC) within established deadlines. Any document we file with the SEC may be viewed or copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Additional information regarding the Public Reference Room can be obtained by calling the SEC at (800) SEC-0330. Our SEC filings are also available to the public through the SEC's web site located at www.sec.gov. We maintain a corporate Web site at www.nviro.com, on which investors may access free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q and amendments to those reports as soon as is reasonably practicable after furnishing such material with the SEC. In addition, we will voluntarily provide electronic or paper copies of our filings free of charge upon request to James K. McHugh, our Chief Financial Officer, at (419) 535-6374 or via e-mail to jmchugh@nviro.com. ITEM 1A. RISK FACTORS WE HAVE A HISTORY OF LOSSES AND THERE CAN BE NO ASSURANCES REGARDING IF AND WHEN WE WILL ACHIEVE PROFITABILITY. IF WE ARE UNABLE TO ACHIEVE PROFITABLE OPERATIONS, WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO CONTINUE OUR OPERATIONS, WHICH MAY NOT BE AVAILABLE ON COMMERCIALLY REASONABLE TERMS OR AT ALL, AND WHICH MAY DILUTE OUR STOCKHOLDERS. Since 2000, we have experienced net losses and we have not been consistently profitable on an annual basis. For the years ended December 31, 2010 and 2009, we incurred net losses of $3.0 million and $2.4 million, respectively. We believe our history of net losses is primarily due to our inability to add enough new sources of revenue to replace decreasing business from existing sources of revenue and, more recently, through a shift of our business toward lower margin products and services. Further, for the years ended December 31, 2010 and 2009, we experienced much higher than expected expenditures for stock-related fees and compensation in excess of our increase in gross revenue. To achieve profitability, we must accomplish numerous objectives, including growth in our business, the development of new products and commercial relationships, and decreasing our costs. We can not foresee with any certainty whether we will be able to achieve these objectives in the future. Accordingly, we may not generate sufficient net revenue to achieve profitability. FAILURE TO MAINTAIN EFFECTIVE INTERNAL CONTROLS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, OPERATING RESULTS AND STOCK PRICE. We have evaluated and will continue to evaluate our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires an annual management assessment of the design and effectiveness of our internal controls over financial reporting. We have previously identified a material weakness in our internal controls over financial reporting due to a lack of personnel to sufficiently monitor and process transactions. Due to our continuing lack of financial resources to hire and train accounting and financial personnel, we have not yet remedied this material weakness. While we are not aware of any material errors to date, our inability to maintain the adequate internal controls may result in a material error in our financial statements. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we experience a material error in our financial statements or if we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly. COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS MAY REDUCE, DELAY OR PREVENT OUR REALIZATION OF LICENSE REVENUES. Our licensees and their operations are subject to increasingly strict environmental laws and regulations, including laws and regulations governing the emission, discharge, disposal and transportation of certain substances and related odor. Wastewater treatment plants and other plants at which our biosolids products or processes may be implemented are usually required to have permits, registrations and/or approvals from state and/or local governments for the operation of such facilities. Some of our licensee's facilities require air, wastewater, storm water, biosolids processing, use or siting permits, registrations or approvals. These licensees may not be able to maintain or renew their current permits or registrations or to obtain new permits or registrations. The process of obtaining a required permit or registration can be lengthy and expensive. They may not be able to meet applicable regulatory or permit requirements, and therefore may be subject to related legal or judicial proceedings that could have a materially adverse effect on our income derived from these licensees. Any of the permits, registrations or approvals noted above, or related applications may be subject to denial, revocation or modification, or challenge by a third party, under various circumstances. In addition, if new environmental legislation or regulations are enacted or existing legislation or regulations are amended or are enforced differently, these licensees may be required to obtain additional, or modify existing, operating permits, registrations or approvals. Maintaining, modifying or renewing current permits or registrations or obtaining new permits or registrations after new environmental legislation or regulations are enacted or existing legislation or regulations are amended or enforced differently may be subject to public opposition or challenge. Much of this public opposition and challenge, as well as related complaints, relates to odor issues, even when our licensees are in compliance with odor requirements and even though the licensees have worked hard to minimize odor from their operations. Public misperceptions about the business and any related odor could influence the governmental process for issuing such permits or registrations or for responding to any such public opposition or challenge. Community groups could pressure local municipalities or state governments to implement laws and regulations which could increase our licensees' costs of their operations that in turn could have a material and adverse effect on our business and financial condition. OUR ABILITY TO GROW OUR REVENUES AND OPERATIONS MAY BE LIMITED BY COMPETITION. We provide a variety of technology and services relating to the treatment of wastewater residuals. We are in direct and indirect competition with other businesses that provide some or all of the same services including regional residuals management companies and national and international water and wastewater operations/privatization companies, technology suppliers, municipal solid waste companies and farming operations. Many of these competitors are larger and have significantly greater capital resources. We derive a substantial portion of our revenue from services provided under municipal contracts, and many of these are subject to competitive bidding. We also intend to bid on additional municipal contracts, however, and may not be the successful bidder. In addition, some of our contracts will expire in the future and those contracts may not be renewed or may be renewed on less attractive terms. If we are not able to replace revenues from contracts lost through competitive bidding or from the renegotiation of existing contracts with other revenues within a reasonable time period, the lost revenue could have a material and adverse effect on our business, financial condition and results of operation. OUR CUSTOMER CONTRACTS MAY BE TERMINATED PRIOR TO THE EXPIRATION OF THEIR TERM. A substantial portion of our revenue is derived from services provided under contracts and agreements with existing licensees. Some of these contracts, especially those contracts with large municipalities, provide for termination of the contract by the customer after giving relative short notice (in some cases as little as ten days). In addition, some of these contracts contain liquidated damages clauses, which may or may not be enforceable in the event of early termination of the contracts. If one or more of these contracts are terminated prior to the expiration of its term, and we are not able to replace revenues from the terminated contract or receive liquidated damages pursuant to the terms of the contract, the lost revenue could have a material and adverse effect on our business, financial condition and results of operations. A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST ONE OR MORE OF THEM AS CUSTOMERS. FURTHER, THE AGREEMENT WITH OUR MOST SIGNIFICANT CUSTOMER EXPIRES IN SEPTEMBER 2011, AND OUR FAILURE TO RENEW THAT AGREEMENT ON FAVORABLE TERMS WOULD LIKELY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS. Our business depends on providing services to a limited number of customers. One or more of these customers may stop contracting for services from us or may substantially reduce the amount of services we provide them. Any cancellation, deferral or significant reduction in the services we provide these principal customers or a significant number of smaller customers could seriously harm our business and financial condition. For the years ended December 31, 2010 and 2009, our single largest customer accounted for approximately 22% and 32%, respectively, of our revenues and our top three customers accounted for approximately 60% and 65%, respectively, of our revenues. Our agreement with our largest customer - which represented approximately 22% of our revenues in 2010 - is due to expire at the end of September 2011. We are attempting to negotiate either a renewal of that agreement or the issuance of a new contract for a new facility, but we cannot assure you that we will be able to secure such a renewal/new agreement at all or on terms that are as favorable as the current agreement. Our failure to renew that agreement on favorable terms would likely have a material adverse effect on our business, financial conditions and results of operations. THE CURRENT ECONOMIC DOWNTURN MAY CAUSE US TO EXPERIENCE DELAYS OF PAYMENT FROM OUR CUSTOMERS. Our accounts receivable are derived primarily from municipal or local governments. Although our collection history has been good, from time to time a customer may not pay us on a timely basis because of adverse market conditions. In light of the current economic downturn, we may experience larger than expected delays in receiving payments on our accounts receivable. Given our history of losses and our limited cash resources, any significant payment delay by one of our customers, may force us to delay payment to our creditors, which may have a material and adverse effect on our business, financial condition and results of operations. WE ARE AFFECTED BY UNUSUALLY ADVERSE WEATHER CONDITIONS. Our present business is adversely affected by unusual weather conditions and unseasonably heavy rainfall which can temporarily reduce the availability of land application sites in close proximity to our operations. In addition, revenues and operational results are adversely affected during months of inclement weather which limits the amount of land application that can be performed. Long periods of adverse weather could have a material negative effect on our business and financial condition. For example, our Toledo, Ohio operation is affected by unusually adverse weather conditions by lowering the demand for N-Viro Soil(TM) distribution to the local agricultural community. FUEL COST VARIATION COULD ADVERSELY AFFECT OUR OPERATING RESULTS AND EXPENSES. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including demand for oil and gas, actions by OPEC and other oil and gas producers, and war in oil producing countries. Because fuel is needed for the trucks that transport the processing materials and supplies for our operations and customers, price escalations or reductions in the supply of fuel could increase our operating expenses and have a negative impact on the results of operations. We are not always able to pass through all or part of the increased fuel costs due to the terms of certain customers' contracts and the inability to negotiate such pass through costs in a timely manner. WE ARE HIGHLY DEPENDENT ON THE SERVICES OF OUR MANAGEMENT TEAM, THE LOSS OF ANY OF WHOM MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL CONDITION. We recently entered into new employment agreements with our Chief Executive Officer, Timothy Kasmoch, our Executive Vice President and Chief Counsel, Robert Bohmer and our Chief Financial Officer, James McHugh, each of which contains non-compete and other provisions. The laws of each state differ concerning the enforceability of non-competition agreements. We cannot predict with certainty whether or not a court will enforce a non-compete covenant in any given situation based on the facts and circumstances at that time. If one of our key executive officers were to leave our employ and the courts refused to enforce the non-compete covenant, we might be subject to increased competition, which could have a material and adverse effect on our business and financial condition. OUR INTELLECTUAL PROPERTY MAY BE MISAPPROPRIATED OR SUBJECT TO CLAIMS OF INFRINGEMENT. We attempt to protect our intellectual property rights through a combination of patent, trademark, and trade secret laws, as well as the use of non-disclosure and licensing agreements. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business and financial condition. Our competitors, many of whom have substantially greater resources and have made substantial investments in competing technologies, may have applied for or obtained, or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to offer services. We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. If we are unable to maintain the proprietary nature of our technologies, we could be materially adversely affected. THERE IS ONLY A LIMITED TRADING MARKET FOR OUR COMMON STOCK, AND IT IS POSSIBLE THAT YOU MAY NOT BE ABLE TO SELL YOUR SHARES EASILY. There is currently only a limited trading market for our common stock. Our common stock trades on the OTCQB, which is one of the quotation services for SEC-registered and reporting companies that trade over the counter ("OTC Markets"), under the symbol "NVIC", with limited trading volume. We cannot assure you that a trading market will exist for our common stock. WE HAVE NEVER PAID DIVIDENDS ON OUR SHARES OF COMMON STOCK. We have not paid any cash dividends on our common stock heretofore, and we have no present intention of paying any cash dividends for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of the board of directors. VOLATILITY IN THE TRADING PRICE OF OUR COMMON STOCK COULD NEGATIVELY IMPACT THE PRICE OF OUR COMMON STOCK, AND MAY ELIMINATE A SOURCE OF OUR POTENTIAL REVENUE FROM EXERCISES OF STOCK OPTIONS AND STOCK PURCHASE WARRANTS. During the period from January 1, 2009 through March 21, 2011, our common stock closing price fluctuated between a high of $3.85 and a low of $1.20. The trading price of our common stock could be subject to wide fluctuations in response to many factors, some of which are beyond our control, including general economic conditions, the thinly-traded nature of our common stock and the outlook of analysts and investors on our industry. Further, significant market fluctuations, such as over the past six months, may adversely affect the trading price of our common stock. Over the past several years, we have relied on, in part, exercises of stock options by current and former officers and directors and stock purchase warrants by investors for operating cash. Wide fluctuations in the price of our common stock or a stock price that is not significantly above the exercise price of outstanding stock options or warrants, would likely reduce future exercises of stock options or warrants, and which would reduce or eliminate a historic source of cash for our operations. ITEM 2. PROPERTIES Through April 2011, our executive and administrative offices are located in Toledo, Ohio, under a month to month lease. We believe our relationship with our lessor is satisfactory. The total rental expense for this location included in the statements of operations for each of the years ended December 31, 2010 and 2009 is approximately $38,500 and $37,600, respectively. We also lease various equipment on a month-to-month basis. In March 2011, we signed a 68 month lease with a new lessor in Toledo. The total minimum rental commitment for the year ending December 31, 2011 is approximately $15,600, for 2012 is $37,400, for 2013 is $30,600 and for the years 2014 through 2016 is $40,800 each year. In October 2010, the Company began to lease the property in Emlenton, Pennsylvania under a lease with A-C Valley Industrial Park, for one year. The total minimum rental commitment for the year ended December 31, 2011 is $18,000. The total rental expense included in the statements of operations for the twelve months ended December 31, 2010 is $6,000. In June 2009, the Company began to maintain an office in West Unity, Ohio under a lease with D&B Colon Leasing, LLC, for one year, which was extended for a one-year term through May 2011. The total minimum rental commitment for the year ended December 31, 2011 is $12,500. The total rental expense included in the statements of operations for the twelve months ended December 31, 2010 and 2009 is $30,000 and $17,500, respectively. The Company maintains an office in Daytona Beach under a lease with the County of Volusia, Florida, which was renewed in March, 2009 for five years. The total minimum rental commitment for the years ending December 31, 2011 through 2013 is $48,000 each year, and for 2014 is $12,000. The total rental expense included in the statements of operations for each of the twelve months ended December 31, 2010 and 2009 is $48,000. The Company also leased other processing equipment at its Florida location which began in February 2008 under a three-year lease. The total minimum rental commitment for the year ending December 31, 2011 is $4,000. The total rental expense included in the statements of operations for each of the twelve months ended December 31, 2010 and 2009 is approximately $46,200. In February 2011, the Company purchased the equipment through a financing arrangement with an equipment leasing company. Through January 2010, the Company also leased processing equipment at the Florida location which began in 2006 under a four year contract. The total rental expense included in the statements of operations for the twelve months ended December 31, 2010 and 2009 was approximately $3,000 and $31,000, respectively. In February 2010, the Company purchased the equipment through a financing arrangement with an equipment leasing company. Management believes that all of our properties are adequately covered by insurance. ITEM 3. LEGAL PROCEEDINGS The Company's facility in Toledo, Ohio, utilizes patented technologies to stabilize and disinfect municipal bio-solids pursuant to a permit to install from the Ohio EPA that requires emissions be vented to a scrubber. In July of 2008, an inspection of the facility by local regulatory officials revealed that the scrubber was not in operation. In February of 2009, the Company agreed to enter into an administrative consent decree with the Ohio Environmental Protection Agency ("Ohio EPA") that resolved, without any admission of fact, violation, or liability, Ohio EPA's claims that the Company operated the scrubber, an air contaminant source, in violation of its permit to install. Pursuant to the terms of the consent decree, the Company agreed to pay a civil penalty in the amount of $20,000. The entire penalty was paid, in timely installments from April 2009 to April 2010. 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 4. (REMOVED AND RESERVED) PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES MARKET INFORMATION Our shares of Common Stock are quoted on the OTCQB, which is one of the quotation services for SEC-registered and reporting companies that trade over the counter ("OTC Markets"), under the symbol "NVIC". The prices quoted below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The closing price range per share of the Common Stock since January 1, 2009, was as follows:
Quarter High Low ------------ ----- ---- First 2009 $2.85 $1.20 Second 2009 $2.70 $1.65 Third 2009 $2.75 $1.91 Fourth 2009 $2.80 $1.95 First 2010 $2.39 $3.85 Second 2010 $2.70 $3.30 Third 2010 $1.95 $3.10 Fourth 2010 $1.51 $3.25
Our stock price closed at $1.53 per share on March 21, 2011. HOLDERS As of March 21, 2011, the number of holders of record of our Common Stock was approximately 173. DIVIDENDS We have never paid dividends with respect to our Common Stock. Payment of dividends is within the discretion of our Board of Directors and would depend, among other factors, on our earnings, capital requirements and our operating and financial condition. RECENT SALES OF UNREGISTERED SECURITIES None ITEM 6. SELECTED FINANCIAL DATA As a smaller reporting company we are not required to provide this information under Item 301 of Regulation S-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following is a discussion of our results of operations and financial position for the periods described below, and should be read in conjunction with our Financial Statements and Supplementary Data appearing elsewhere in this Form 10-K. The discussion includes various forward-looking statements about our markets, products, services and our results. These statements are based on certain assumptions that we consider reasonable. Our actual results may differ materially from these indicated forward-looking statements. Please see "Cautionary Statement with Respect to Forward-Looking Comments" and "Risk Factors" elsewhere in this annual report on Form 10-K. The following table sets forth, as a percentage of total revenues for the periods presented, revenues related to each of (i) technology fees, (ii) facility management, (iii) products and services:
For the Year Ended December 31, 2010 2009 ------ ------ Technology fees 0.1% 1.1% Facility management 66.2% 68.4% Products and services 33.7% 30.5% ------ ------ Totals 100.0% 100.0% ====== ======
Technology fee revenue is defined as: royalty revenue, which represent ongoing amounts received from licensees for continued use of the N-Viro Process and are typically based on volumes of sludge processed; license and territory fees, which represent non-recurring payments for the right to use the N-Viro Process in a specified geographic area or at a particular N-Viro facility; and research and development revenue, which represent payments from federal and state agencies awarded to us to fund ongoing site-specific research utilizing the N-Viro technology. Facility management revenues are recognized under contracts where we manage the N-Viro Process ourselves to treat sludge, pursuant to a fixed price contract. Product and service revenue is defined as: alkaline admixture revenue, which represent ongoing payments from licensees arising from the sale and distribution of alkaline admixture by us to N-Viro facilities; service fee revenue for the management of alkaline admixture, which represent fees charged by us to manage and sell the alkaline admixture on behalf of a third party customer; N-Viro SoilTM sales, which represent revenue received from sales of N-Viro Soil sold by us; commissions earned on sales of equipment to an N-Viro facility; and rental of equipment to a licensee or agent; equipment sales, which represent the price charged for equipment held for subsequent sale. Our policy is to record the revenues payable to us pursuant to agency and license agreements when we have fulfilled our obligations under the relevant contract, except when it pertains to a foreign license agreement. In the case of foreign licenses, revenue is recorded when cash is received and when we have fulfilled our obligations under the relevant foreign license agreement. RESULTS OF OPERATIONS The following tables set forth, for the periods presented, (i) certain items in the Combined Statement of Operations, (ii) the percentage change of each such item from period to period and (iii) each such item as a percentage of total revenues in each period presented.
Year Ended Period to Period Year Ended December 31, Percentage December 31, 2010 Change 2009 ---------- ------------- ----------- (Dollars in thousands) ------------------------------------- COMBINED STATEMENT OF OPERATIONS DATA: Revenues. . . . . . . . . . . . . . . $5,222 4.0% $5,021 Cost of revenues. . . . . . . . . . . 4,218 7.8% 3,912 ------ -------- Gross profit. . . . . . . . . . . . . 1,004 (9.4%) 1,109 Operating expenses. . . . . . . . . . 3,767 5.1% 3,583 ------ -------- (2,763) * (2,474) Other income (expense). . . . . . . . ( 206) * 60 ------ -------- Loss before income tax expense. . . . (2,969) * (2,414) Federal and state income tax expense. 0 * 0 ------ -------- Net loss. . . . . . . . . . . . . . . $(2,969) * $(2,414) ======= =======
PERCENTAGE OF REVENUES: Revenues. . . . . . . . . . . . . . . 100.0% 100.0% Cost of revenues. . . . . . . . . . . 80.8 77.9 ------ -------- Gross profit. . . . . . . . . . . . . 19.2 22.1 Operating expenses. . . . . . . . . . 72.2 71.4 ------ -------- (53.0) (49.3) Other income (expense). . . . . . . . ( 3.9) 1.2 ------ -------- Loss before income tax expense. . . . (56.9) (48.1) Federal and state income tax expense. 0.0 0.0 ------ -------- Net loss. . . . . . . . . . . . . . . (56.9%) (48.1%) ======= ======
* Period to period percentage change comparisons have only been calculated for positive numbers. COMPARISON OF YEAR ENDED DECEMBER 31, 2010 WITH YEAR ENDED DECEMBER 31, 2009 Our overall revenue increased $201,000, or 4%, to $5,222,000 for the year ended December 31, 2010 from $5,021,000 for the year ended December 31, 2009. The net increase in revenue was due primarily to the following: a) Sales of alkaline admixture increased $39,000 from the same period ended in 2009 - this increase was primarily the result of an increase in demand with our Ohio-area customers; b) Revenue from the service fees for the management of alkaline admixture increased $438,000 from the same period ended in 2009 - this increase was attributed primarily to our Florida-area customers, which increased $464,000 compared to the same period in 2009; and c) Our processing revenue, including facility management revenue, showed a net decrease of $245,000 over the same period ended in 2009. Of the decrease, our Toledo facility's management revenue decreased $315,000, and, N-Viro Soil sales decreased by a total of $249,000, primarily attributable to the Toledo facility as less product was available for sale from current and prior period carryover production. Facility management revenue at our Florida operation for the year ended showed an increase of $342,000 over 2009; and d) Our license fee revenue showed a net decrease of $30,000 over the same period ended in 2009. Our gross profit decreased $105,000, or 9%, to $1,004,000 for the year ended December 31, 2010 from $1,109,000 for the same period in 2009, and the gross profit margin decreased to 19% from 22% for the same periods. The decrease in gross profit margin is primarily due to the decrease in the overall percentage of revenue derived from facility management revenue, as well as higher costs of trucking the N-Viro Soil product. The Toledo operation contributed $338,000 of gross profit on overall revenue of $1,150,000, which was a decrease of $238,000 of gross profit over the same period in 2009. The Florida operation contributed $646,000 of gross profit on overall revenue of $3,859,000, which was an increase of $140,000 of gross profit over the same period in 2009. Gross profit on the sale of the N-Viro Soil product also contributed materially to the decrease in gross profit margin, as the Company realized a decrease in gross profit contributed by product sales of $281,000 from 2009 to 2010, $211,000 of it from the Florida operation. Our operating expenses increased $184,000, or 5%, to $3,767,000 for the year ended December 31, 2010 from $3,583,000 for the year ended December 31, 2009. The increase was primarily due to increases of $312,000 in consulting fees and expenses, $57,000 in director costs, $28,000 in office-related expenses and $25,000 in litigation settlement expense, offset by a decrease of $235,000 in payroll and related costs. Of the total net increase of $134,000 in consulting, director and payroll costs, $121,000 were non-cash costs relating to the issuances of stock and stock options. Therefore, for the year ended December 31, 2010 actual cash outlays in these categories increased by a total of $13,000 over the same period in 2009. As a result of the foregoing factors, we recorded an operating loss of $2,763,000 for the year ended December 31, 2010 compared to an operating loss of $2,474,000 for the year ended December 31, 2009, an increase in the loss of $289,000. Our net nonoperating income (expense) decreased by $266,000 to net nonoperating expense of $206,000 for the year ended December 31, 2010 from net nonoperating income of $60,000 for the year ended in 2009. The decrease in net nonoperating income (expense) was primarily due to an increase of $140,000 from the loss recorded on derivative securities issued whose value decreased from the issuance date, a decrease of $23,000 in expense for the extinguishment of certain liabilities no longer due during 2010, an increase of $84,000 on the amortization expense for debentures issued and $19,000 in increased interest expense. We recorded a net loss of $2,969,000 for the year ended December 31, 2010 compared to a net loss of $2,414,000 for the same period ended in 2009, an increase in the loss of $555,000. Adding back non-cash expenses such as depreciation, amortization, stock and stock options charges and subtracting cash out for capitalized assets and debt repayments, resulted in an adjusted cash loss (non-GAAP) of $445,000 for the year ended in 2010. Similar non-cash expenses, cash out and debt repayments for the same period in 2009 resulted in an adjusted cash loss (non-GAAP) of $206,000, an increase in the adjusted cash loss (non-GAAP) of $238,000 in the year ended in 2010 versus 2009. For the year ended December 31, 2010 and 2009, we have not recognized the future tax benefit of current or prior period losses due to our history of operating losses. Accordingly, our effective tax rate for each period was zero. LIQUIDITY AND CAPITAL RESOURCES We had a working capital deficit of $932,000 at December 31, 2010, compared to working capital of $57,000 at December 31, 2009, resulting in a decrease in working capital of $989,000. Current assets at December 31, 2010 included cash and cash equivalents of $245,000 (including restricted cash of $207,000), which is an increase of $44,000 from December 31, 2009. The net negative change in working capital from December 31, 2009 to 2010 was primarily from a decrease to the net deferred current asset of $344,000 for amortization of common stock given pursuant to consulting contracts entered into during 2009 and 2010 and an increase in the current liability of $668,000 for the convertible debentures to now classify the instruments due June 30, 2011 as short-term on the balance sheet. In 2010 our cash flow provided by operating activities was $4,000, a decrease of $22,000 over the same period in 2009. The components of the decrease from 2009 in cash flow provided by operating activities was principally due to an increase of $101,000 in trade accounts receivable and an increase in the net loss of $555,000, offset by a decrease of $89,000 in prepaid assets, an increase of $221,000 in trade accounts payable, a decrease of $140,000 in the market price of derivatives issued, an increase of $121,000 in stock warrants and stock options issued for fees and services and an increase in other non-cash items of $62,000. We have modified our business model and have been evolving away from sales of alkaline admixture and royalty-based revenue agreements that typically generate a higher gross profit margin, to long-term and sustainable revenue based on integrated N-Viro technology and operations, but typically generating a lower gross profit margin. From 2006 to 2010, the percentage of combined revenues generated from our owned and operated facilities in Toledo and Volusia County was: 2006 - 46%; 2007 - 77%; 2008 - 94%; 2009 - 95%; 2010 - 96%. We believe this shift will allow us to enhance future revenue and profits through growth, efficiency and revenue optimization. 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. For 2009 and throughout 2010, our customers slowed the overall payment rate on our outstanding receivables, which in turn contributed to us extending payment times to our vendors on our payables. We make no assurances that payments from our customers or payments to our vendors will become shorter and this may have an adverse impact on our continuing operations. During 2010, we maintained a line of credit up to $400,000 at Comerica Bank's prime rate (3.25% at December 31, 2010) plus 0.75%, but in no event less than 5.75%, and secured by a first lien on all our assets (except equipment), with Monroe Bank + Trust (the "Bank"), with a maturity date of April 15, 2011. Two certificates of deposit totaling $140,893 from the Bank are held as a condition of maintaining the line of credit. In April 2010, the line of credit was renewed through April 2011, and the previous borrowing base restriction of 80% of our outstanding trade receivables not over 90 days was removed. At December 31, 2010, we had $36,000 of borrowing capacity under the credit facility. During 2009 and 2010, we borrowed a total of $1,382,900 from seven lenders to purchase processing and automotive equipment. As of December 31, 2010, a total of fourteen term notes are outstanding, ranging from 3.8% to 10.9% interest for terms ranging three to five years, monthly payments totaling approximately $30,000 and all secured by equipment. The total amount owed on all notes as of December 31, 2010 was approximately $521,000 and all notes are expected to be paid in full on the applicable maturity date, the last of which is in October 2013. On May 18, 2009, we approved an offering of up to $1,000,000 of Convertible Debentures (the "Debentures"), convertible at any time into our unregistered common stock at $2.00 per share. The Debentures are issuable in $5,000 denominations, are unsecured and have a stated interest rate of 8%, payable quarterly to holders of record. We have timely paid all accrued interest due to all Debenture holders of record as of each quarter-end date starting in July 2009. At any time, we may redeem all or a part of the Debentures at face value plus unpaid interest. During 2010 we issued $55,000 of Debentures, and three investors converted a total of $90,000 of Debentures into unregistered common stock. The Debentures mature at June 30, 2011, and as of December 31, 2010 we held $720,000 of Debentures exercisable at $2.00 per share, or 360,000 shares. In July 2010, we executed a Purchase Agreement, License and Development Agreement and Registration Rights Agreement (the "Agreements"), with VC Energy I, LLC, or VC Energy. Concurrently, we sold VC Energy 200,000 shares of our unregistered common stock at a price of $2.50 per share, issued VC Energy 200,000 warrants exercisable at $2.75 per share, and granted them an option to acquire another 400,000 shares of our unregistered common stock at a price of $2.50 per share, and 400,000 warrants exercisable at $2.75 per share. In September 2010, we executed Amendment Number 1, effective September 15, 2010 (the "Amendment") to the Purchase Agreement. The purpose of the Amendment was to modify certain of the purchase terms in the Purchase Agreement, and VC Energy exercised its option to purchase 200,000 shares of our common stock for $500,000 which VC Energy paid for by delivering its unsecured promissory note to us for $500,000, payable in installments over a 12 month period, with the first $200,000 of such installments due bi-weekly between September 30, 2010 and December 30, 2010 and the final $300,000 due September 15, 2011. We also delivered 200,000 warrants to purchase shares of our common stock at an exercise price of $2.50 per share. Under the Amendment, we transferred all 200,000 shares and 200,000 warrants to an Escrow Agent, and the shares and warrants are released ratably to VC Energy as installments payments due us are received. VC Energy paid all installments on time through December 2010 and the escrow agent delivered 80,000 shares and 80,000 warrants to VC Energy, with the remaining shares and warrants continuing to be held by the escrow agent. In addition, VC Energy's option to purchase the remaining 200,000 shares of our common stock was extended to December 31, 2010, and then a second time to March 1, 2011, on the same terms as the original Purchase Agreement. VC Energy did not exercise the purchase option for the additional 200,000 shares on or before March 1, 2011. More details were provided on Form 8-K filings during 2010 and 2011. For 2011 we expect to improve operating results and have adequate cash or access to cash to adequately fund operations and debt service by focusing on existing and expected new sources of revenue, especially from our N-Viro Fuel technology, and cash generated from equity issuances and exercises of outstanding warrants and options. We expect that market developments favoring cleaner burning renewable energy sources and ongoing discussions with companies in the fuel and wastewater industries could provide enhanced liquidity and have a positive impact on future operations. We continue to pursue opportunities with strategic partners for the development and commercialization of the patented N-Viro Fuel technology. In addition, we are focusing on the development of regional biosolids processing facilities, and are currently in negotiations with potential partners to permit and develop independent, regional facilities. There can be no assurance these discussions will be successful or result in new revenue or cash funding sources for the company. Our failure to achieve improvements in operating results, including through these potential sources of revenue, or in our ability to adequately finance or secure additional sources of funds would likely have a material adverse effect on our continuing operations. OFF-BALANCE SHEET ARRANGEMENTS At December 31, 2010, 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. CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS In preparing financial statements in conformity with accounting principles generally accepted in the United States, 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 the significant estimates and assumptions made in preparation of the financial statements: Non-domestic license and territory fees - We do not recognize revenue on any non-domestic license or territory fee contracts until the cash is received, assuming all other tests of revenue recognition are met. Canada is excluded from this definition of non-domestic. Allowance for Doubtful Accounts - We estimate losses for uncollectible accounts based on the aging of the accounts receivable and the evaluation and the likelihood of success in collecting the receivable. The balance of the allowance at December 31, 2010 and 2009 is $70,000 and $50,000, respectively. Property and Equipment/Long-Lived Assets - Property and equipment is reviewed for impairment. The carrying amount of an asset (group) is considered impaired if it exceeds the sum of our 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. We believe the carrying amount is not impaired based upon estimated future cash flows. Intangible Assets - Intangible assets deemed to have indefinite lives are tested for impairment by comparing the fair value with its carrying value. Significant estimates used in the determination of fair value include estimates of future cash flows. As required under current accounting standards, we test for impairment when events and circumstances indicate that the assets might be impaired and the carrying value of those assets may not be recoverable. Income Taxes - We assume the deductibility of certain costs in income tax filings and estimate the recovery of deferred income tax assets, all of which is fully reserved. New Accounting Standards - The Financial Accounting Standards Board, or FASB, has issued the following new accounting and interpretations, which may be applicable in the future to us: There are no Accounting Standards Updates expected to have a significant effect on the Company's consolidated financial position or results of operations. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company we are not required to provide this information under Item 305 of Regulation S-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Page ---- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1 FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS F-2 - F-3 CONSOLIDATED STATEMENTS OF OPERATIONS F-4 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 - F-25 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors N-Viro International Corporation We have audited the accompanying consolidated balance sheets of N-Viro International Corporation (a Delaware corporation) and Subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of N-Viro International Corporation and Subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ UHY LLP ------------ UHY LLP Southfield, Michigan March 31, 2011
N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 2010 and 2009 -------------------------- 2010 2009 ---------- ---------- ASSETS ------------------------------------------ CURRENT ASSETS Cash and cash equivalents: Unrestricted $ 37,112 $ 61,380 Restricted 207,465 140,161 Receivables, net: Trade 780,844 597,035 Related party - Mahoning Valley N-Viro 24,325 15,325 Deferred costs - stock issued for services 622,086 966,354 Prepaid expenses and other assets 80,994 108,138 ---------- ---------- Total current assets 1,752,826 1,888,393 PROPERTY AND EQUIPMENT, NET 1,490,865 1,363,476 INTANGIBLE AND OTHER ASSETS, NET 159,304 211,457 ---------- ---------- $3,402,995 $3,463,326 ========== ==========
The accompanying notes are an integral part of these financial statements.
N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 2010 and 2009 -------------------------- 2010 2009 ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) --------------------------------------------------------------- CURRENT LIABILITIES Current maturities of long-term debt $ 337,799 $ 353,800 Convertible debentures, net of discount 667,674 - Line-of-credit 364,000 325,000 Accounts payable 1,089,513 932,831 Accrued liabilities 226,062 219,910 ------------- ------------- Total current liabilities 2,685,048 1,831,541 Long-term debt, less current maturities 230,931 500,808 Fair value of warrant liability 744,476 - Convertible debentures, net of discount - 610,840 ------------- ------------- Total liabilities 3,660,455 2,943,189 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock, $.01 par value, Authorized - 2,000,000 shares Issued - -0- shares in 2010 and 2009 - - Common stock, $.01 par value Authorized - 35,000,000 shares in 2010 and 25,000,000 in 2009 Issued - 6,062,214 shares in 2010 and 5,269,553 shares in 2009 60,622 52,696 Note receivable for common stock (300,000) - Additional paid-in capital 24,548,644 21,453,168 Accumulated deficit (23,881,836) (20,300,837) ------------- ------------- 427,430 1,205,027 Less treasury stock, at cost, 123,500 shares 684,890 684,890 ------------- ------------- Total stockholders' equity (deficit) (257,460) 520,137 ------------- ------------- $ 3,402,995 $ 3,463,326 ============= =============
The accompanying notes are an integral part of these financial statements.
N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2010 and 2009 -------------------------------------- 2010 2009 ------------ ------------ REVENUES $ 5,222,146 $ 5,021,169 COST OF REVENUES 4,217,773 3,912,310 ------------ ------------ GROSS PROFIT 1,004,373 1,108,859 OPERATING EXPENSES Selling, general and administrative 3,767,262 3,582,979 ------------ ------------ OPERATING LOSS (2,762,889) (2,474,120) OTHER INCOME (EXPENSE) Interest income 1,110 1,354 Gain on extinguishment of liabilities 124,233 147,201 Amortization of discount on convertible debentures (108,335) (24,315) Loss on market price increase of warrants issued (140,326) - Interest expense (82,938) (64,313) ------------ ------------ (206,256) 59,927 ------------ ------------ LOSS BEFORE INCOME TAXES (2,969,145) (2,414,193) Federal and state income taxes - - ------------ ------------ NET LOSS $(2,969,145) $(2,414,193) ============ ============ Basic and diluted loss per share $ (0.55) $ (0.51) ============ ============ Weighted average common shares outstanding - basic and diluted 5,396,018 4,688,928 ============ ============
The accompanying notes are an integral part of these financial statements.
N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) Years Ended December 31, 2010 and 2009 Note Additional Shares of Common Receivable for Paid-in Accumulated Treasury Common Stock Stock Common Stock Capital Deficit Stock ------------ ------- -------------- ----------- ------------- ---------- BALANCE JANUARY 1, 2009 4,468,025 $44,680 $ - $17,822,744 $(17,634,417) $(684,890) Net loss - - - (2,414,193) - Deemed dividend on extension of stock warrants - - 252,227 (252,227) - Share-based compensation expense - - 1,371,921 - - Exercise of stock options 21,400 214 29,823 - - Exercise of stock warrants 13,672 137 29,015 - - Conversion of debentures to stock 5,024 50 9,999 - - Discount on convertible debentures issued - - 183,897 - - Issuance of common stock 761,432 7,615 1,753,542 - - ------------ ------- ----------- ------------- ---------- BALANCE DECEMBER 31, 2009 5,269,553 52,696 - 21,453,168 (20,300,837) (684,890) Net loss - - - (2,969,145) - Deemed dividend on extension of stock warrants - - 611,854 (611,854) - Issuance of common stock for cash and Note Receivable - net 400,000 4,000 (300,000) 996,000 - - Share-based compensation expense - - 1,031,770 - - Exercise of stock options 54,125 541 101,306 - - Exercise of stock warrants 15,050 150 27,640 - - Conversion of debentures to stock 45,136 451 89,725 - - Discount on convertible debentures issued 2,750 28 21,958 - - Issuance of common stock 275,600 2,756 215,223 - - ------------ ------- ----------- ------------- ---------- BALANCE DECEMBER 31, 2010 6,062,214 $60,622 $ (300,000) $24,548,644 $(23,881,836) $(684,890) ============ ======= ============== =========== ============= ========== Total ------------ BALANCE JANUARY 1, 2009 $ (451,883) Net loss (2,414,193) Deemed dividend on extension of stock warrants - Share-based compensation expense 1,371,921 Exercise of stock options 30,037 Exercise of stock warrants 29,152 Conversion of debentures to stock 10,049 Discount on convertible debentures issued 183,897 Issuance of common stock 1,761,157 ------------ BALANCE DECEMBER 31, 2009 520,137 Net loss (2,969,145) Deemed dividend on extension of stock warrants - Issuance of common stock for Note Receivable - net 700,000 Share-based compensation expense 1,031,770 Exercise of stock options 101,847 Exercise of stock warrants 27,790 Conversion of debentures to stock 90,176 Discount on convertible debentures issued 21,986 Issuance of common stock 217,979 ------------ BALANCE DECEMBER 31, 2010 $ (257,460) ============
The accompanying notes are an integral part of these financial statements.
N-VIRO INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2010 and 2009 2010 2009 ------------ ------------ Cash Flows From Operating Activities Net loss $(2,969,145) $(2,414,193) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization 449,122 467,990 Amortization of discount and costs of debentures 108,334 37,345 Provision (reduction) for bad debts 20,000 - Issuance of stock for debt and services 1,103,153 793,646 Issuance of stock options and warrants for services 1,183,270 1,371,962 (Gain) loss on the sale of fixed assets (8,741) 1,161 Increase in market price of warrants issued 140,326 - Changes in Operating Assets and Liabilities Increase in trade receivables (203,809) (102,894) Decrease (increase) in prepaid expenses and other assets 33,148 (55,693) Increase (decrease) in accounts payable and accrued liabilities 148,263 (73,050) ------------ ------------ Net cash provided by (used in) operating activities 3,921 26,274 Cash Flows From Investing Activities Proceeds from sale of property and equipment 10,834 3,006 Increases from restricted cash and cash equivalents (67,305) (1,348) Advances to related parties (9,000) (15,300) Purchases of property and equipment (532,454) (17,360) ------------ ------------ Net cash used in investing activities (597,925) (31,002) Cash Flows From Financing Activities Private placements of stock 611,994 - Proceeds from convertible debentures issued 55,000 765,000 Issuance costs of convertible debentures issued (135) (58,666) Borrowings under long-term obligations 196,869 139,848 Stock options exercised 101,873 30,037 Stock warrants exercised 27,735 29,152 Net borrowings (repayments) on line-of-credit 39,000 (73,000) Principal payments on long-term obligations (462,600) (781,132) ------------ ------------ Net cash provided by financing activities 569,736 51,239 ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents (24,268) 46,511 Cash and Cash Equivalents - Beginning 61,380 14,869 ------------ ------------ Cash and Cash Equivalents - Ending $ 37,112 $ 61,380 ============ ============ Supplemental disclosure of cash flows information: Cash paid during the year for interest $ 138,477 $ 125,460 ============ ============
The accompanying notes are an integral part of these financial statements. N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of certain accounting policies followed in the preparation of these financial statements. The policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements: A. Nature of Business - The Company owns and licenses the N-Viro Process, a patented technology to treat and recycle wastewater sludges and other bio-organic wastes, utilizing certain alkaline by-products produced by the cement, lime, electric utilities and other industries. Revenue and the related accounts receivable are due from companies acting as independent agents or licensees, principally municipalities. B. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. C. Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. D. Cash and Cash Equivalents - The Company has cash on deposit primarily in one financial institution which, at times, may be in excess of FDIC insurance limits. For purposes of the statements of cash flows, the Company considers all certificates of deposit with initial maturities of 90 days or less to be cash equivalents. Restricted cash consists of: two certificates of deposit and corresponding accrued interest which are held as collateral against the Company's line-of-credit; one certificate of deposit and corresponding accrued interest which is held as collateral with a performance bond on behalf of one of the Company's licensees; one certificate of deposit and corresponding accrued interest which is held as collateral on behalf of the Florida Department of Agriculture for the Company's soil distribution license. E. Accounts Receivable - The Company extends unsecured credit to customers under normal trade agreements, which require payment within 30 days. Accounts greater than 90 days past due amounted to $61,698 and $30,979 of receivables for the years ended December 31, 2010 and 2009, respectively. The Company's policy is not to accrue and record interest income on past due trade receivables. The Company does bill the customer finance charges on past due accounts and records the interest income when collected. Credit is generally granted on an unsecured basis. Periodic credit evaluations of customers are conducted and appropriate allowances are established. Management estimates an allowance for doubtful accounts, which was $70,000 and $50,000 as of December 31, 2010 and 2009, respectively. The estimate is based upon management's review of delinquent accounts and an assessment of the Company's historical evidence of collections. N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) F. Property and Equipment - Property, machinery and equipment are stated at cost less accumulated depreciation. Depreciation has been computed primarily by the straight-line method over the estimated useful lives of the assets. Generally, useful lives are five to fifteen years. Leasehold improvements are capitalized and amortized over the lesser of the life of the lease or the estimated useful life of the asset. Depreciation expense amounted to $416,172 and $431,007 in 2010 and 2009, respectively. Management has reviewed property and equipment for impairment when events and circumstances indicate that the assets might be impaired and the carrying values of those assets may not be recoverable. Management believes the carrying amount is not impaired based upon estimated future cash flows. G. Intangible Assets - Patent costs and territory rights are recorded at cost and then amortized by the straight-line method over their estimated useful lives (periods ranging from one and one-half to seventeen years; weighted-average amortization periods for patents/related intangibles and territory rights were 15.8 and 16.0 years at December 31, 2010 and 2009, respectively). Amortization expense amounted to $26,691 and $30,369 in 2010 and 2009, respectively. Estimated amortization expense, based on these patent costs and territory rights at December 31, 2010, for each of the ensuing five years is as follows: 2011 - $26,000; 2012 - $20,000; 2013 - $17,000; 2014 - $14,000; 2015 - $13,000. Management has reviewed intangible assets for impairment when events and circumstances indicate that the assets might be impaired and the carrying values of those assets may not be recoverable. The Company has capitalized the cost of acquiring certain customer licenses and contracts as part of the acquisition of Florida N-Viro on December 31, 2006. Amortization expense amounted to $6,259 in 2010 and $6,613 in 2009. Estimated amortization expense, based on these capitalized license and contracts at December 31, 2010, for each of the ensuing five years is as follows: 2011 - $2,000; 2012 - $2,000; 2013 - $2,000; 2014 - $2,000; 2015 - $1,000. H. Revenue Recognition - Facility management revenue and royalty fees are recognized under contracts where the Company or licensees utilize the N-Viro Process to treat sludge, either pursuant to a fixed-price contract or based on volumes of sludge processed. Revenue is recognized as services are performed. Alkaline admixture sales, alkaline admixture management service revenue, equipment sales and N-Viro SoilTM revenue are recognized upon shipment. License and territory fees are generated by selling the right to market or use the N-Viro Process in a specified territory. The Company's policy is to record revenue for the license agreements when all material services relating to the revenue have been substantially performed, conditions related to the contract have been met and no material contingencies exist. We do not recognize revenue on any non-domestic license or territory fee contracts until the cash is received, assuming all other tests of revenue recognition are met. Canada is excluded from this definition of non-domestic. Research and development revenue is recognized as work is performed and billed to the contracting entity in accordance with the contract. The Company records the amount of shipping and handling costs billed to customers as revenue. The cost incurred for shipping and handling has been included in the cost of sales. N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) I. Loss Per Common Share - Loss per common share has been computed on the basis of the weighted-average number of common shares outstanding during each period presented. For the years ended December 31, 2010 and 2009, the effects of 2,273,300 and 1,279,825 stock options outstanding, respectively, 1,147,350 and 724,950 warrants to purchase common stock, respectively, and, debentures that are convertible to 360,000 and 377,500 shares of common stock, respectively, are excluded from the diluted per share calculation because they would be antidilutive. J. Stock Options - The Company records share-based compensation expense using a fair-value based method of measurement that results in compensation costs for essentially all awards of stock-based compensation to employees. Compensation costs are recognized over the requisite period or periods that services are rendered. K. New Accounting Standards - There are no Accounting Standards Updates expected to have a significant effect on the Company's consolidated financial position or results of operations. L. Income Taxes - Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the current period plus or minus the change during the period in deferred tax assets and liabilities. The accounting for uncertain tax positions requires the Company to evaluate each income tax position using a two step process which includes a determination as to whether it is more likely than not that the income tax position will be sustained, based upon technical merit and upon examination by the taxing authorities. At December 31, 2010 and 2009, there were no uncertain tax positions that required accrual. None of the Company's federal or state income tax returns are currently under examination by the Internal Revenue Service ("IRS") or state authorities. However, fiscal years 2008 and later remain subject to examination by the IRS and respective states. M. Supplemental Disclosure of Non-Cash Activity:
2010 2009 ---------- -------- Common Stock issued for commissions on debentures $ 5,500 $ 15,500 VC Energy - issuance of common stock warrants 604,150 - Dividend deemed on extension of outstanding stock warrants 611,854 252,227 SLD Consulting - value of stock issued on consulting agreement 334,400 - SAMI - value of stock issued on public relations agreement 304,500 - Conversion of debentures to Common Stock 90,204 9,974 ---------- -------- $1,950,608 $277,701 ========== ========
N. Segment Information - During 2010, the Company determined that it currently operates in one segment based on the financial information upon which the chief operating decision maker regularly assesses performance and allocates resources. The chief operating decision maker is the Chief Executive Officer. N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 NOTE 2. BALANCE SHEET DATA PROPERTY AND EQUIPMENT (AT COST):
2010 2009 ---------- ---------- Leasehold improvements $ 121,411 $ 122,979 Equipment 3,296,751 2,763,211 Furniture, fixtures and computers 50,089 54,275 ---------- ---------- 3,468,251 2,940,465 Less accumulated depreciation 1,977,386 1,576,989 ---------- ---------- $1,490,865 $1,363,476 ========== ==========
DEFERRED COSTS: In July 2009, the Company executed a Consulting Agreement, or the Agreement, effective July 14, 2009, with Investor Relations Services, Inc. of New Smyrna Beach, FL, or IRSI. The Company appointed IRSI as its non-exclusive stock promotion and strategic communications counsel for a term of one year from the date of the Agreement. For its services, the Company issued IRSI 500,000 shares of the Company's unregistered common stock. Pursuant to the Agreement, the Company entered into a Designation and Appointment agreement with Summit Trading Limited of New Smyrna Beach, FL, to designate Summit Trading as the third party appointee to be paid the shares of stock under the Consulting Agreement with IRSI. The Company accounted for this transaction by recording a deferred current asset of $1,135,000 that was amortized ratably over the 12 month period the services are to be rendered. The cost amortized for the years ended December 31, 2010 and 2009 was $704,800 and $520,200, respectively. The amount deferred at December 31, 2010 was $-0-. In July 2009, the Company executed a Finder's Fee and Non-Circumvention Agreement with Summit Trading to locate possible merger and acquisition candidates as well as sources of financing for the Company for a period of one year, effective July 20, 2009. For its services, the Company issued Summit Trading 250,000 shares of the Company's unregistered common stock. The Company accounted for this transaction by recording a deferred current asset of $625,000 that was amortized ratably over the 12 month period the services are to be rendered. The cost amortized for the year ended December 31, 2010 and 2009 was $351,600 and $273,400, respectively. The amount deferred at December 31, 2010 was $-0-. In December 2010, the Company executed a Financial Public Relations Agreement with Strategic Asset Management, Inc., or SAMI. The Company engaged SAMI as its non-exclusive financial public relations counsel for a term of three years. For its services, the Company issued SAMI 150,000 shares of the Company's unregistered common stock. The Company expects to record a non-cash charge to earnings of approximately $305,000 ratably over a 36-month period starting in December 2010. In December 2010, the Company executed a Consulting Agreement, with SLD Capital Corporation, or SLD. The Company engaged SLD to provide business consulting services for a term of eighteen months. For its services, the Company issued SLD 110,000 shares of the Company's unregistered common stock. The Company expects to record a non-cash charge to earnings of approximately $330,000 ratably over an 18-month period starting in December 2010. N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 NOTE 2. BALANCE SHEET DATA (CONTINUED) The following is a summary of Deferred Costs - capitalized stock value on contracts, net as of December 31:
2010 2009 -------- -------- Deferred costs - Investor Relations, less accumulated amortization (2010 - $1,225,000; 2009 - $520,208) $ - $614,792 Deferred costs - Summit Trading, Ltd., less accumulated amortization (2010 - $625,000; 2009 - $273,438) - 351,562 Deferred costs - SAMI, less accumulated amortization (2010 - $6,333; 2009 - $-0-) 449,667 - Deferred costs - SLD Capital, less accumulated amortization (2010 - $12,585; 2009 - $-0-) 321,815 - -------- -------- $771,482 $966,354 ======== ========
INTANGIBLE AND OTHER ASSETS: The following is a summary of intangible and other assets, net as of December 31:
2010 2009 -------- -------- Patents and related intangibles, less accumulated amortization (2010 - $294,327; 2009 - $320,905) $ 99,926 $125,952 Territory rights, less accumulated amortization (2010 - $6,470; 2009 - $5,882) 3,530 4,118 Customer list, less accumulated amortization (2010 - $53,646; 2009 - $47,975) 9,109 14,780 Debenture issuance costs, less accumulated amortization (2010 - $44,925; 2009 - $13,031) 16,742 43,136 Other 29,997 23,471 -------- -------- $159,304 $211,457 ======== ========
N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 NOTE 2. BALANCE SHEET DATA (CONTINUED) ACCRUED LIABILITIES:
2010 2009 -------- -------- Accrued payroll and employee benefits $ 32,192 $ 26,768 Sales tax payable 177,421 177,470 Interest payable 16,449 15,672 -------- -------- $226,062 $219,910 ======== ========
NOTE 3. PLEDGED ASSETS, LINE-OF-CREDIT AND LONG-TERM DEBT During 2010, the Company maintained a line of credit up to $400,000 at Comerica Bank's prime rate (3.25% at December 31, 2010) plus 0.75%, but in no event less than 5.75%, and secured by a first lien on all the Company's assets (except equipment), with Monroe Bank + Trust (the "Bank"), with a maturity date of April 15, 2011. Two certificates of deposit totaling $140,893 from the Bank are held as a condition of maintaining the line of credit. In April 2010, the line of credit was renewed through April 2011, and the previous borrowing base restriction of 80% of the Company's outstanding trade receivables not over 90 days was removed. At December 31, 2010, the Company had $36,000 of borrowing capacity under the credit facility. Long-term debt at December 31, 2010 and 2009 is as follows:
2010 2009 ---------- ---------- Notes payable - banks $ 365,703 $ 704,384 Notes payable - equipment vendors 203,027 150,224 Convertible debentures, net of discount of 52,326 in 2010 and $144,160 in 2009 667,674 610,840 ---------- ---------- 1,236,404 1,465,448 Less current maturities 1,005,473 353,800 ---------- ---------- $ 230,931 $1,111,648 ========== ==========
During 2010, the Company borrowed a total of $159,542 from two lenders to purchase insurance policies for general, property and directors & officers' insurance coverage during the year. A total of two term notes were issued, ranging from 5.75% to 6.25% interest for a term not more than one year, monthly payments totaling $16,383 and each are unsecured. The total amount owed on these notes as of December 31, 2010 was approximately $47,400 and these notes are expected to be paid in full on the applicable maturity date, the last of which is August 2011. During 2009 and 2010, the Company borrowed a total of $1,382,900 from seven lenders to purchase processing and automotive equipment. As of December 31, 2010, a total of fourteen term notes are outstanding, ranging from 3.8% to 10.9% interest for terms ranging three to five years, monthly payments totaling approximately $30,000 and all secured by equipment. The total amount owed on all notes as of December 31, 2010 was approximately $521,000 and all notes are expected to be paid in full on the applicable maturity date, the last of which is in October 2013. N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 NOTE 3. PLEDGED ASSETS, LINE-OF-CREDIT AND LONG-TERM DEBT (CONTINUED) In 2009 the Company approved an offering of up to $1,000,000 of Convertible Debentures (the "Debentures"), convertible at any time into the Company's unregistered common stock at $2.00 per share. The Debentures are issuable in $5,000 denominations, are unsecured and have a stated interest rate of 8%, payable quarterly to holders of record. The Company has timely paid all accrued interest due to all Debenture holders of record as of each quarter-end date starting in July 2009. At any time, the Company may redeem all or a part of the Debentures at face value plus unpaid interest. During 2009 the Company issued $765,000 of Debentures to a total of twenty three accredited investors, and one investor redeemed $10,000 of Debentures into unregistered common stock. During 2010 the Company issued $55,000 of Debentures, and three investors converted a total of $90,000 of Debentures into unregistered common stock. The Debentures mature at June 30, 2011 and as of December 31, 2010, the Company held $720,000 of Debentures. Because the fair market value of the Company's common stock (the underlying security in the Debentures) may have been above the conversion price of $2.00 per share at the date of issuance, the Company was required under GAAP to record a discount given for certain Debentures sold to date, which totaled $184,975. The discount is then required to be amortized as a period expense over the periods the Debentures are scheduled to be outstanding, which averages 20 months. For the years ended December 31, 2010 and 2009, amortization expense amounted to $108,000 and $24,300, respectively. Approximate aggregate maturities of long-term debt for the years ending December 31 are as follows: 2011 - $1,058,000; 2012 - $173,000; 2013 - $59,000; 2014 and after - $1,000. NOTE 4. RELATED PARTY TRANSACTIONS During the years ended December 31, 2010 and 2009, the Company advanced funds for start-up and beginning operating capital of $9,000 and $15,325, respectively, to their joint venture limited liability company, Mahoning Valley N-Viro. Mahoning Valley N-Viro is owned 50% by the Company and 50% by SouthSide Environmental Group of Struthers, Ohio. Also during 2010 and 2009, the Company paid Terri Kasmoch, the spouse of President and Chief Executive Officer Timothy Kasmoch, outside consulting fees for business development, web site and company media marketing and stock promotion efforts for the Company, and as an employee with the same duties starting in the 4th quarter of 2010. During the year ended December 31, 2010, the Company paid Thomas L. Kovacik, a member of the Board of Directors, a fee for consulting services. The fee was paid with 10,000 stock options at an exercise price of $3.53, which vest immediately and are exercisable over 10 years. To reflect the value of the options, the Company recorded an expense of $31,421. The fee was exclusive of director fees and expenses paid for with cash and stock options. The following table summarizes these payments for 2010 and 2009 and the balance to each of any monies owed as of December 31, 2010:
Payee Year Consulting fees Gross Payroll Total Account payable balance at December 31 ----------------- ---- ---------------- -------------- ------- -------------------------------------- Terri Kasmoch 2010 $ 10,685 $ 10,833 $21,518 - Terri Kasmoch 2009 11,000 - 11,000 Thomas L. Kovacik 2010 31,421 - 31,421 -
N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 NOTE 5. EQUITY TRANSACTIONS In January 2010, the Company executed a Placement Agent Agreement, or the Agreement, with Burnham Hill Partners of New York, NY, or BHP. The Company has engaged BHP as its placement agent in connection with the issuance of debt or equity securities through a transaction exempt from registration for a term of six months from the date of the Agreement. For its services, the Company issued BHP 10,000 shares of the Company's unregistered common stock. The shares were issued in a private transaction pursuant to an exemption under Section 4(2) of the Securities Act of 1933. In the event the Company secures a financing placement through BHP, the Company will issue common stock placement warrants equal to 8% of the number of common stock shares issued in the financing, for a term of seven years and be exercisable at 120% of the price paid per share by the investors. The Company accounted for this transaction by recording a deferred current asset of $30,000 that was amortized ratably over the subsequent six month period the services were rendered in 2010. During 2010 we issued an additional $55,000 of Convertible Debentures, and three investors converted a total of $90,000 of existing Debentures into unregistered common stock. The amount of Debentures outstanding at the end of 2010 was $720,000, convertible at $2.00 per share or 360,000 shares. In July 2010, the Company executed a Purchase Agreement, License and Development Agreement and Registration Rights Agreement (the "Agreements"), with VC Energy I, LLC of Las Vegas, NV, or VC Energy. Concurrently, the Company sold VC Energy 200,000 shares of the Company's unregistered common stock at a price of $2.50 per share, issued VC Energy 200,000 warrants exercisable at $2.75 per share, and also granted VC Energy an option to acquire another 400,000 shares of the Company's unregistered common stock at a price of $2.50 per share, and 400,000 warrants exercisable at $2.75 per share. In September 2010, the Company executed Amendment Number 1, effective September 15, 2010 (the "Amendment") to the Purchase Agreement with VC Energy. The purpose of the Amendment was to modify certain of the purchase terms in the Purchase Agreement, and VC Energy exercised its option to purchase 200,000 shares of the Company's common stock for $500,000 which VC Energy paid for by delivering its unsecured promissory note to the Company for $500,000, payable in installments over a 12 month period, with the first $200,000 of such installments due bi-weekly between September 30, 2010 and December 30, 2010 and the final $300,000 due September 15, 2011. The promissory note provides for acceleration in the event of default and a default interest rate of 8% per annum. The Company also delivered 200,000 warrants to purchase shares of its common stock at an exercise price of $2.50 per share. Under the Amendment, the Company will transfer all 200,000 shares and 200,000 warrants to an Escrow Agent, and the shares and warrants will be released ratably to VC Energy as installments payments due the Company are received. VC Energy made all installment payments due through December 2010, and the escrow agent delivered 80,000 shares and 80,000 warrants to VC Energy, with the remaining shares and warrants continuing to be held by the escrow agent. In addition, VC Energy's option to purchase the remaining 200,000 shares of the Company's common stock was extended to December 31, 2010 and then a second time to March 1, 2011, on the same terms as the original Purchase Agreement. VC Energy did not exercise the purchase option for the additional 200,000 shares on or before March 1, 2011. At each extension date, the Company recorded the difference in the fair market value of the Company's common stock and the recorded price of the stock warrants as a reduction to Accumulated Deficit and an increase to the Additional Paid In Capital accounts, totaling $611,854 in 2010. In both the VC Energy Agreements and the Amendment, the Company accounted for the warrants issued within the transaction with a provision that protects holders from declines in the stock price ("down-round" provisions) as a derivative security at fair value with future changes in fair value recorded in earnings. As of December 31, 2010, the Company has recorded a liability of $744,476 to reflect the fair value of the warrants. The Company will be periodically required to re-measure the fair value of the warrants at the Balance Sheet date, with adjustments in the value recorded through the income statement as a gain or loss. During the year ended December 31, 2010, the Company recorded a loss of $140,326 on the revaluation from the two issuances of the warrants to the end of the period. On December 21, 2010, the Company issued 110,000 shares of unregistered Common Stock to SLD Capital Corporation ("SLD"), as compensation for services rendered by SLD to the Company under a Consulting Agreement, effective as of December 10, 2010. The agreement is for a term of eighteen months from the effective date. More details of this Agreement are contained in Note 2. Also on December 21, 2010, the Company issued 150,000 shares of unregistered Common Stock to Strategic Asset Management, Inc., ("SAMI"), as compensation for services rendered by SAMI to the Company under a Financial Public Relations Agreement, effective as of December 15, 2010. The agreement is for a term of two years from the effective date. More details of this Agreement are contained in Note 2. In addition to its first stock option plan approved in 1993, the Company has a stock option plan approved in May 2004, amended in June 2008 and again in August 2009 (the "2004 Plan"), for directors and key employees under which 2,500,000 shares of common stock may be issued. The Company also has a stock option plan approved in July 2010 (the "2010 Plan"), for directors and key employees under which 5,000,000 shares of common stock may be issued. Unless otherwise stated in the stock option agreement, options are 20% vested on the date of grant, with the balance vesting 20% per year over the next four years, except for directors whose options vest six months from the date of grant. Options were granted in 2010 and 2009 from the 2004 Plan at the approximate market value of the stock at date of grant, as defined in the plan. Pursuant to their respective five-year employment agreements, in March 2010 a total of 890,000 stock options were granted to the three executive officers of the Company. Twenty percent of the options vested immediately on the date of grant, with the balance of the options to vest in equal annual installments over the next four years on the anniversary date of the original grant. These options were granted pursuant to the 2004 Plan, are for a period of ten years and are intended as Incentive Stock Options. To reflect the value of the stock options granted for the employment services provided, the Company is taking a charge to earnings totaling approximately $2,358,000 through March 2014. For the year ended December 31, 2010, this charge was $844,840. More information on these equity transactions is contained in this Form 10-K under Item 11, "Executive Compensation". During the year ended December 31, 2010, the Company granted additional stock options totaling 175,000 shares, exclusive of the officers: 90,000 options to outside directors, 10,000 options to an outside director acting in his capacity as a consultant and 75,000 options to three employees. All options granted are for a period of ten years. The options granted to the directors became fully vested six months after the date of grant, and were priced, pursuant to the 2004 Plan, at a weighted average price of $3.08 for a total expense of approximately $209,000, expensed ratably over the subsequent six-month periods. The options granted to the consultant vested immediately and were priced, pursuant to the 2004 Plan, at $3.53 for a total expense of approximately $31,400, expensed immediately. More information on these equity transactions is contained in this Form 10-K under Item 10, "Directors, Executive Officers and Corporate Governance". The options granted to the three employees vested twenty percent on the date of grant, with the balance of the options to vest in equal annual installments over the next four years on the anniversary date of the original grant. All of the options are exercisable at $1.89 per share and were granted pursuant to the 2004 Plan and are intended as Incentive Stock Options. N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 NOTE 5. EQUITY TRANSACTIONS (CONTINUED) The following summarizes the stock options activity for the years ended December 31, 2010 and 2009:
2010 2009 ---------------------- ---------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ----------- --------- ----------- --------- Outstanding, beginning of year 1,279,825 $ 2.24 746,025 $ 2.28 Granted 1,065,000 $ 3.16 634,000 $ 2.18 Exercised (54,125) $ 1.91 (21,400) $ 1.43 Expired during the year (17,400) $ 3.75 (78,800) $ 2.36 ----------- --------- ----------- --------- Outstanding, end of year 2,273,300 $ 2.67 1,279,825 $ 2.24 =========== ========= =========== ========= Eligible for exercise at end of year 1,501,300 $ 2.41 1,222,325 $ 2.24 =========== ========= =========== ========= Weighted average fair value per option for options granted during the year $ 3.16 $ 2.09 =========== =========== Options expected to vest over the life of the Plan 2,273,300 1,279,825 =========== ===========
The Company records compensation expense for stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes valuation model. The Company uses historical data among other factors to estimate the expected price volatility, the expected option term and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the date of grant for the expected term of the option. The following assumptions were used to estimate the fair value of options granted:
Year Ended December 31, ---------------------- 2010 2009 ---------- ---------- Expected dividend yield 0.00% 0.00% Weighted average volatility 73.7% 79.4% Risk free interest rate 2.5 - 3.6% 2.9 - 3.5% Expected term (in years) 7 10
In October 2009, the Company approved a plan to extend to all holders of N-Viro International Corporation warrants, a choice to extend their respective exercise periods if they complete the transaction by December 31, 2009, by either (1) exercising at least 1% of the existing number of warrants and receive the balance of warrants with a 1-year extended date at the original exercise price and date based on the original agreement, or, (2) choosing a 1:1 exercise of any warrants held and receive a new warrant for a 5-year term at a new "strike price" of $2.52 per share on the new warrants issued, whereby the holders of such warrants will also receive the balance of their unexercised original warrants with their expiration date extended for one additional year. The incremental fair value associated with the extension of the warrant N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 NOTE 5. EQUITY TRANSACTIONS (CONTINUED) expiration dates and issuance of replacement warrants has been determined using the Black-Scholes model and has been recorded as a deemed dividend to common stockholders in the accompanying Statement of Stockholders' Equity (Deficit). On two more occasions during 2010, an automatic extension of time to exercise their respective warrants was granted to all warrant holders of record, in March and in September. All other terms of the warrant remained in place, other than the expiration date. NOTE 6. REVENUE AND MAJOR CUSTOMERS Revenues for the years ended December 31, 2010 and 2009 include revenues from one major customer, the City of Toledo, Ohio (included in the facility management, and, products and services classifications), which represented approximately 22% for 2010 and 32% for 2009 of total consolidated revenue. The accounts receivable balance due (which is unsecured) from this customer at December 31, 2010 and 2009 was approximately $68,000 and $188,000, respectively. The contract with this customer is due to expire at the end of September 2011. The Company is attempting to negotiate either a renewal of that agreement or the issuance of a new contract for a new facility, but no assurance can be given the Company will be able to secure such a renewal/new agreement at all or on terms that are as favorable as the current agreement. The Company's failure to renew this agreement on favorable terms would likely have a material adverse effect on the Company's business, financial conditions and results of operations. The Company's six largest customers billed through Florida N-Viro each represent between 5% - 20% of the consolidated revenue for the Company, or a collective total of approximately 63% for these six customers for 2010 and 57% for 2009. Florida operations accounted for approximately 74% and 63% of consolidated revenue during the years ended December 31, 2010 and 2009, respectively. The accounts receivable balance due (which are unsecured) for these six Florida N-Viro customers at December 31, 2010 and 2009 was approximately $328,000 and $314,000, respectively. A substantial portion of the Company's revenue is derived from services provided under contracts and agreements with existing licensees. Some of these contracts, especially those contracts with large municipalities, provide for termination of the contract by the customer after giving relatively short notice (in some cases as little as ten days). In addition, some of these contracts contain liquidated damages clauses, which may or may not be enforceable in the event of early termination of the contracts. If one or more of these contracts are terminated prior to the expiration of its term, and the Company is not able to replace revenues from the terminated contract or receive liquidated damages pursuant to the terms of the contract, the lost revenue could have a material and adverse effect on its business and financial condition. NOTE 7. COMMITMENTS AND CONTINGENCIES On March 17, 2010, the Company and Mr. Timothy R. Kasmoch, the President and Chief Executive Officer, entered into an Employment Agreement for a five-year term. Mr. Kasmoch is to receive an annual base salary of $150,000, subject to an annual discretionary increase. In addition, Mr. Kasmoch is eligible for an annual cash bonus and was granted stock options from the Company's Second Amended and Restated 2004 Stock Option Plan. Generally, the Agreement may be terminated by the Company with or without cause or by the Employee for any reason. On March 17, 2010, the Company and Mr. Robert W. Bohmer, the Executive Vice President and General Counsel, entered into an Employment Agreement for a five-year term. Mr. Bohmer is to receive an annual base salary of $150,000, subject to an annual discretionary increase. In addition, Mr. Bohmer is eligible for an annual cash bonus and was granted stock options from the Company's Second Amended and Restated 2004 Stock Option Plan. Generally, the Agreement may be terminated by the Company with or without cause or by the Employee for any reason. On March 17, 2010, the Company and Mr. James K. McHugh, the Chief Financial Officer, Secretary and Treasurer, entered into an Employment Agreement for a five-year term. Mr. McHugh is to receive an annual base salary of $125,000, subject to an annual discretionary increase. In addition, Mr. McHugh is eligible for an annual cash bonus and was granted stock options from the Company's Second Amended and Restated 2004 Stock Option Plan. Generally, the Agreement may be terminated by the Company with or without cause or by the Employee for any reason. N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 NOTE 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) Through April 2011, the Company's executive and administrative offices are located in Toledo, Ohio, under a month to month lease, and believe our relationship with the lessor is satisfactory. The total rental expense for this location included in the statements of operations for each of the years ended December 31, 2010 and 2009 is approximately $38,500 and $37,600, respectively. The Company also leases various equipment on a month-to-month basis. In March 2011, the Company signed a 68 month lease with a new lessor in Toledo. The total minimum rental commitment for the year ending December 31, 2011 is approximately $15,600, for 2012 is $37,400, for 2013 is $30,600 and for the years 2014 through 2016 is $40,800 each year. In October 2010, the Company began to lease property in Emlenton, Pennsylvania under a lease with A-C Valley Industrial Park, for one year. The total minimum rental commitment for the year ended December 31, 2011 is $18,000. The total rental expense included in the statements of operations for the twelve months ended December 31, 2010 is $6,000. In June 2009, the Company began to maintain an office in West Unity, Ohio under a lease with D&B Colon Leasing, LLC, for one year, which was extended for a one-year term through May 2011. The total minimum rental commitment for the year ended December 31, 2011 is $12,500. The total rental expense included in the statements of operations for the twelve months ended December 31, 2010 and 2009 is $30,000 and $17,500, respectively. The Company maintains an office in Daytona Beach under a lease with the County of Volusia, Florida, which was renewed in March, 2009 for five years. The total minimum rental commitment for the years ending December 31, 2011 through 2013 is $48,000 each year, and for 2014 is $12,000. The total rental expense included in the statements of operations for each of the twelve months ended December 31, 2010 and 2009 is $48,000. The Company also leased other processing equipment at its Florida location which began in February 2008 under a three-year lease. The total minimum rental commitment for the year ending December 31, 2011 is $4,000. The total rental expense included in the statements of operations for each of the twelve months ended December 31, 2010 and 2009 is approximately $46,200. In February 2011, the Company purchased the equipment through a financing arrangement with an equipment leasing company. Through January 2010, the Company also leased processing equipment at the Florida location which began in 2006 under a four year contract. The total rental expense included in the statements of operations for the twelve months ended December 31, 2010 and 2009 was approximately $3,000 and $31,000, respectively. In February 2010, the Company purchased the equipment through a financing arrangement with an equipment leasing company. Management believes that all of the Company's properties are adequately covered by insurance. 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. From time to time the Company is involved in legal proceedings and subject to claims which may arise in the ordinary course of business. The Company is not aware of any legal proceedings or material claims at this time. N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 NOTE 8. INCOME TAX MATTERS The composition of the deferred tax assets and liabilities at December 31, 2010 and 2009 is as follows:
2010 2009 ------------ ------------ Gross deferred tax liabilities: Property and equipment and intangible assets $ (72,800) $ (99,800) Gross deferred tax assets: Loss carryforwards 4,214,800 4,084,400 Section 754 basis step up 128,500 149,900 Allowance for doubtful accounts 23,800 17,000 Other 500 3,100 Less valuation allowance (4,294,800) (4,154,600) ------------ ------------ $ - $ - ============ ============
The income tax provisions differ from the amount of income tax determined by applying the U.S. Federal income tax rate to pre-tax income from continuing operations for the years ended December 31, 2010 and 2009 and are as follows:
2010 2009 ------------ ------------ Computed "expected" tax expense (credit) $(1,009,500) $ (820,800) State taxes, net of federal tax benefit - - (Decrease) increase in income taxes resulting from: Change in valuation allowance 140,200 (1,701,200) Net operating loss carryfoward expiration 520,300 2,082,200 Nondeductible stock options and warrants 351,800 440,000 Other (2,800) (200) ------------ ------------ $ - $ - ============ ============
The net operating losses available at December 31, 2010 to offset future taxable income total approximately $12,400,000 and expire principally in years 2012 - 2030. Approximately $685,000 will expire if not used to offset taxable income for the 2012 tax year. N-VIRO INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 NOTE 9. 401(K) PLAN Until 2009, the Company had a 401(k) plan covering substantially all employees which provided for contributions in such amounts as the Board of Directors would determine annually. Participating employees could also contribute a portion of their annual compensation. There were no employer contributions for the years ended December 31, 2010 and 2009. In 2009, the Company terminated the plan and distributed all plan assets to the participants. NOTE 10. The Company has adopted the provisions of ASC 820, Fair Value Measurements and Disclosures ("ASC 820") related to nonfinancial assets and liabilities on a prospective basis. ASC820 establishes the authoritative definition of fair value, sets out a framework for measuring fair value and expands the required disclosures about fair value measurement. The valuation techniques required by ASC 820 are based on observable and unobservable inputs using the following three-tier hierarchy: - Level 1 - Inputs are unadjusted quoted prices in active markets for indentical assets or liabilities. - Level 2 - Inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or inputs that are observable for assets or liabilities, either directly or indirectly, through market corroboration. - Level 3 - Inputs are unobservable inputs based on the Company's own assumptions. The following table summarizes the basis used to measure assets and liabilities at fair value on a recurring basis in the balance sheet:
as of December 31, 2010 ---------------------------------------------------------- Level 1 Level 2 Level 3 Total ------------------------ -------- ---------- ---------- Warrants $ - $ - ($744,476) ($744,476)
NOTE 11. SUBSEQUENT EVENTS The Company has performed a review of events subsequent to the balance sheet date and no matters required disclosure. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. As of the end of the period covered by this report, management carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon the evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Our history of losses has severely limited our budget to hire and train enough accounting and financial personnel needed to adequately provide this function. Consequently, we lack sufficient technical expertise, reporting standards and written policies and procedures regarding disclosure controls and procedures. Because of the inherent limitations in all disclosure control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be or have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, disclosure controls can be circumvented by the individual acts of some persons, by collusion of two or more people and/or by management override of such controls. The design of any system of disclosure controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, disclosure controls and procedures may become inadequate because of changes in conditions, and/or the degree of compliance with the policies and procedures may deteriorate. Also, misstatements due to error or fraud may occur and not be detected. MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as set forth in Internal Control - Integrated Framework. Based on our evaluation, our principal executive officer and our principal financial officer concluded that our internal controls over financial reporting were not effective as of December 31, 2010 for the reasons described below. We lack personnel in accounting and financial staff to sufficiently monitor and process financial transactions in an efficient and timely manner. Our history of losses has severely limited our budget to hire and train enough accounting and financial personnel needed to adequately provide this function. Consequently, we lacked sufficient technical expertise, reporting standards and written policies and procedures. Specifically, controls were not effective to ensure that significant non-routine transactions, accounting estimates, and other adjustments were appropriately reviewed, analyzed and monitored by competent accounting staff on a timely basis. We continue to develop and implement a remediation plan to address the material weakness. To date, our remediation efforts have included adoption of an expense reimbursement policy and the hiring of an employee to assist in the financial area of our business. However, due to our continuing lack of financial resources to hire and train accounting and financial personnel, we have not yet fully remedied this material weakness. During the quarter ended December 31, 2010, there were no material changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. While we are not aware of any material errors to date, our inability to maintain the adequate internal controls may result in a material error in our financial statements. Further, because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This annual report does not include an audit or attestation report of our registered public accounting firm regarding our internal control over financial reporting because the attestation report requirement has been removed for "smaller reporting companies" under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. ITEM 9B. OTHER INFORMATION None PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE DIRECTORS OF THE COMPANY The Board is currently composed of four Class I Directors: Carl Richard, Joseph H. Scheib, Mark D. Hagans and Joan B. Wills; and three Class II Directors: James H. Hartung, Timothy R. Kasmoch and Thomas L. Kovacik (whose terms will expire upon the election and qualification of directors at the annual meetings of stockholders to be held in 2011 and 2012, respectively). At each annual meeting of stockholders, directors will be elected for a full term of two years to succeed those directors whose terms are expiring. The following table sets forth the names and ages of our directors.
Name Age Position ------------------ --- -------------------------------------------------------- Mark D. Hagans 44 Class I Director* James H. Hartung 68 Class II Director, Chairman of the Board Timothy R. Kasmoch 49 Class II Director, President and Chief Executive Officer Thomas L. Kovacik 63 Class II Director Carl Richard 84 Class I Director* Joseph H. Scheib 54 Class I Director* Joan B. Wills 58 Class I Director*
_____________ * Directors currently nominated for re-election. MARK D. HAGANS is an attorney and partner with the law firm of Plassman, Rupp, Short & Hagans, of Archbold, Ohio, and his practice focuses on corporation, taxation and banking law. Mr. Hagans serves on numerous Boards of directors, including the Fulton County Health Center, where he is presently chair of the Finance Committee. Mr. Hagans earned his law degree from the University of Toledo. Mr. Hagans has served as our director since December 2006 and is a member of the Board's Audit, Finance and Technology Committees. Mr. Hagans's experience as a lawyer and businessman enables him to bring valuable resources to the Board. JAMES H. HARTUNG is the former President and Chief Executive Officer of the Toledo-Lucas County (Ohio) Port Authority, a position he held from 1994 until 2008. Mr. Hartung has served as our Director since January 2006 and is a member of the Board's Compensation and Nominating Committees. Mr. Hartung presently also serves as the Chairman of the Board/Executive Vice-President at Seasnake World Wide Marketing LLC, a marketing concern commercializing the Seasnake shipping system for the marine transportation of liquid, dry bulk, break-bulk and inter-modal container cargo; and Senior Associate at James A. Poure & Associates, which provides diverse management consultant services to small to medium size business, family owned business and entrepreneurial start-ups. Mr. Hartung's qualifications to serve as a director and our Chairman of the Board consist of several years experience as a businessman, as an organizational leader and community organizer, and in dealings with local government and related agencies that enable him to bring valuable insights to the Board. TIMOTHY R. KASMOCH has been our President and Chief Executive Officer since February 2006 and a director since January 2006. Until April 1, 2007, Mr. Kasmoch was also President and CEO of Tri-State Garden Supply, d/b/a Gardenscape, a bagger and distributor of lawn and garden products, which has provided trucking services to our Company. Mr. Kasmoch is a graduate of Penn State University. Mr. Kasmoch is a member of the Board's Finance and Technology Committees. Mr. Kasmoch's qualifications to serve as a director of the Company consist of his experience in the soil and distribution business as well as an extensive knowledge of the transportation and trucking industry. Mr. Kasmoch's strength is in strategic planning and he possesses a broad, fundamental understanding of the business drivers affecting us. He is the only "insider" on the Board. THOMAS L. KOVACIK is the Executive Director of Transportation Advocacy Group of Northwest Ohio ("TAGNO"), a strategic planning organization working with local and Ohio transportation and economic development officials, and the President of Kovacik Consulting, a business consulting company. Mr. Kovacik was previously employed by us from 1992 to 1995 as President of Great Lakes N-Viro, at the time one of our divisions. Mr. Kovacik has also held various positions with local government, utilities and environmental companies, and earned a masters degree from Bowling Green State University in Geochemistry. Mr. Kovacik has served as our Director since December 2006, and is a member of the Board's Compensation and Technology Committees. Mr. Kovacik's qualifications to serve as a director of the Company consist of his experience in the environmental, government and utilities industries, and his prior position with us as a divisional president. His strength in strategic planning and transactional experience offers a unique perspective to the Board. CARL RICHARD is the former Executive Vice-President of P.R. Transportation, a trucking company located in Toledo, Ohio, and was a consultant to us from January 2006 to April 2007. Mr. Richard served as Vice-President of C.A. Transportation from 1988 through 2000 and as Vice-President of R.O.S.S. Investments, a real estate holding company, from 1980 through 2000. Mr. Richard has served as our director since December 2004 and is a member of the Board's Nominating Committee. Mr. Richard's qualifications to serve as a director of the Company consist of his extensive experience in the transportation and trucking industry. JOSEPH H. SCHEIB is a Certified Public Accountant and was the Chief Financial Officer of Broad Street Software Group, a comprehensive software technology company located in Edenton, North Carolina, a position he held until 2010. From May 2000 until February 2003, Mr. Scheib was the Financial Operation Principal/Compliance Officer of Triangle Securities, LLC of Raleigh, North Carolina, an asset management, brokerage and investment banking firm. Mr. Scheib is a graduate of East Carolina University with a degree in accounting. Mr. Scheib has served as our Director since December 2004, and is a member of the Board's Audit, Finance and Nominating Committees. Mr. Scheib's qualifications to serve as a director of the Company consist of his strong financial and asset management experience and serving the Company in a financial oversight role as the Chair of the Audit Committee. Given his extensive knowledge and experience in finance, Mr. Scheib has been determined to be an audit committee financial expert by the board. JOAN B. WILLS is currently legal counsel for The Narragansett Bay Commission, a regional sewer authority located in Providence, Rhode Island, a position she has held since 2008. Also, Ms. Wills is currently Co-Trustee of the Cooke Family Trust, an owner of more than 5% of N-Viro International Corporation common stock. From 2006 until 2008, Ms. Wills provided legal counsel to the Rhode Island Office of Legislative Counsel, an agency involved in drafting new legislation and amendments to the State of Rhode Island. Ms. Wills has been a practicing attorney at various points in her career, and holds a Bachelor of Arts degree from the University of Rhode Island and a Juris Doctorate from Suffolk University Law School in Boston. Ms. Wills has served as our Director since August 2009 and is a member of the Compensation Committee. Ms. Wills' qualifications to serve as a director of the Company consist of her experience as an attorney in the utilities industry. KEY RELATIONSHIPS Joan Wills is currently Co-Trustee of the Cooke Family Trust, an owner of more than 5% of our common stock. CORPORATE GOVERNANCE AND BOARD MATTERS OUR BOARD OF DIRECTORS Our business, property and affairs are managed under the direction of our Board. We have determined that the Company's interests are best served by having a Chairman of the Board who is independent of the management of the Company because it is our view this inherently strengthens board independence in dealing with issues that closely involve management. Our Chief Executive Officer has responsibility for setting our strategic direction and the day-to-day leadership and performance, while the Chairman of the Board has a greater focus on long-range Company goals and plans and governance of our Board of Directors. This balance between the two positions enables Mr. Kasmoch to focus on the operational and strategic challenges we presently face, with Mr. Hartung providing board leadership on matters of governance and management oversight. Our Board, as a whole, has the responsibility for risk oversight of management. The role of our Board of Directors is to oversee the President and Chief Executive Officer, the Executive Vice President and the Chief Financial Officer in the operation of the Company, including management's establishment and implementation of appropriate practices and policies with respect to areas of potentially significant risk to us. Our Board considers risks to the Company as part of the strategic planning process and thorough review of compliance issues in committees of our Board, as appropriate. While the Board has the ultimate oversight responsibility for such risk management process, various committees of the Board are structured to oversee specific risks in the areas covered by their respective assignments such as audits or compensation. In addition, our Board may retain, on such terms as determined by the Board and in its sole discretion, independent legal, financial and other consultants and advisors to advise and assist the Board in fulfilling its oversight responsibilities. Currently, there are no such consultants in any category assisting or advising the Company. Management is responsible for N-Viro's day-to-day risk management, and the entire Board's role is to engage in informed oversight. Our Chief Executive Officer is a member of the Board of Directors, and our Chief Financial Officer and Executive Vice President/General Counsel regularly attend Board meetings, which helps facilitate discussions regarding risk between the Board and our senior management, as well as the exchange of risk-related information or concerns between the Board and the senior management. The Board believes Mr. Kasmoch's service as Chief Executive Officer and on the Board is appropriate because it bridges a critical gap between our management and the Board, enabling the Board to benefit from management's perspective on our business while the Board performs its oversight function. The Company's philosophy about diversity among its Board members is discussed below under "Nominating Committee." MEETINGS OF THE BOARD OF DIRECTORS Our Board held eight meetings during 2010, consisting of one regular meeting and seven special meetings. Each director attended 100% of the aggregate number of meetings held by the Board of Directors and the Committees of the Board of Directors on which he served. It is the policy of the Company that the members of the Board attend our annual stockholder meeting. Failure to attend annual meetings without good reason is a factor the Nominating Committee and Board will consider in determining whether or not to renominate a current Board member. All members of the Board serving at the time attended the 2010 Annual Meeting, except Mr. Scheib. SHAREHOLDER COMMUNICATIONS WITH THE BOARD We encourage stockholder communications with directors. Stockholders may communicate with a particular director, all directors or the Chairman of the Board by mail or courier addressed to him or the entire Board in care of James K. McHugh, Corporate Secretary, N-Viro International Corporation, 3450 West Central Avenue, Suite #328, Toledo, OH 43606. All correspondence should be in a sealed envelope marked "Confidential" and will be forwarded unopened to the director as appropriate. BOARD INDEPENDENCE Although we are not subject to the listing requirements of any stock exchange, we are committed to a board in which a majority of our members consist of independent directors, as defined under the NASDAQ rules. The Board has reviewed the independence of its members, applying the NASDAQ standards and considering other commercial, legal, accounting and familial relationships between the directors and us. The Board has determined that all of the directors and director nominees are independent other than Mr. Kasmoch, who is not an independent director by virtue of his current position as our Chief Executive Officer. CODE OF ETHICS We have adopted a Code of Ethics which covers the Chief Executive Officer and Chief Financial Officer, which is administered and monitored by the Audit Committee of the Board. A copy of the Code of Ethics is attached as Exhibit 14.1 to this Annual Report on Form 10-K for the year ended December 31, 2010, and is posted on our web site at www.nviro.com. ------------- COMMITTEES OF THE BOARD OF DIRECTORS The Board has the following standing committees: the Audit Committee, the Compensation Committee, the Finance Committee, the Nominating Committee and the Technology Committee. The composition and function of each Committee is set forth below:
DIRECTOR AUDIT COMPENSATION NOMINATING FINANCE TECHNOLOGY ------------------ ----- ------------ ---------- ------- ---------- Mark D. Hagans X X* X James H. Hartung X X Timothy R. Kasmoch X X* Thomas L. Kovacik X* X Carl Richard X Joseph H. Scheib X* X* X Joan B. Wills X
* Committee Chair AUDIT COMMITTEE Our Audit Committee consisted of Messrs. Scheib and Hagans. In accordance with our Audit Committee Charter, each of the Audit Committee members must be "independent" as determined under the NASDAQ rules. The Audit Committee currently is not subject to, and does not follow, the independence criteria set forth in Section 10A of the Securities Exchange Act 1934, as amended. The Board has determined that each of the directors who serve on the Audit Committee are "independent" under the NASDAQ rules, meaning that none of them has a relationship with us that may interfere with their independence from us and our management. Further, the Board has determined that Mr. Scheib qualifies as a "financial expert" as defined by the Securities and Exchange Commission (the "SEC"). The Audit Committee recommends the appointment of the outside auditor, oversees our accounting and internal audit functions and reviews and approves the terms of transactions between us and related party entities. During 2010, the Audit Committee met three times. The Audit Committee has retained UHY LLP to conduct the audit for the year ended December 31, 2011. The Audit committee is governed by a written charter, a copy of which was attached to the Proxy Statement for our annual meeting held on June 8, 2007. COMPENSATION COMMITTEE The Compensation Committee determines officers' salaries and bonuses and administers the grant of stock options pursuant to our stock option plans. The Compensation Committee does not have a written charter. The Compensation Committee consisted of Messrs. Kovacik and Hartung and Ms. Wills. The Compensation Committee met three times during 2010. The Board has determined that all of the members of the committee are "independent" as determined under the NASDAQ standards. FINANCE COMMITTEE The Finance Committee, consisting of Messrs. Hagans, Kasmoch and Scheib, assists in monitoring our cash flow requirements and approves any internal or external financing or leasing arrangements. The Finance Committee does not have a written charter. The Finance Committee met two times during 2010. NOMINATING COMMITTEE The Nominating Committee, consisting of Messrs. Scheib, Richard and Hartung, considers and recommends to the Board qualified candidates for election as Board members, and establishes and periodically reviews criteria for selection of directors. The Nominating Committee does not have a written charter. The Nominating Committee met one time during 2010. The Board has determined that all of the members of the committee are "independent" as determined under the NASDAQ standards. The Nominating Committee will consider candidates recommended by stockholders, directors, officers, third-party search firms and other sources for nomination as a director. The Committee considers the needs of the Board and evaluates each director candidate in light of, among other things, the candidate's qualifications. Recommended candidates must be of the highest character and integrity, free of any conflicts of interest and possess the ability to work collaboratively with others, and have the time to devote to Board activities. All candidates will be reviewed in the same manner, regardless of the source of the recommendation. Presently, the Nominating Committee does not consider diversity as a characteristic in its selection of candidates except to the extent that the Nominating Committee seeks to expand the range of categories of experience and relationships in different aspects of the waste management process the Company requires for the different foci of its business and potential contacts with sources of business opportunity for the Company. The Nominating Committee will consider all stockholder recommendations of proposed director nominees, if such recommendations are timely received under applicable SEC regulations and include all of the information required to be included as set forth in the By-Laws. To be considered "timely received," recommendations must be received in writing at our principal executive offices, at N-Viro International Corporation, 3450 W. Central Avenue, Suite 328, Toledo, Ohio 43606, Attention: Chairman, Nominating Committee, c/o James K. McHugh, Corporate Secretary, no later than February 25, 2012. All candidates recommended by stockholders should be independent and possess substantial and significant experience which would be of value to us in the performance of the duties of a director. In addition, any stockholder director nominee recommendation must include, at a minimum, the following information: the stockholder's name; address; the number and class of shares owned; the candidate's biographical information, including name, residential and business address, telephone number, age, education, accomplishments, employment history (including positions held and current position), and current and former directorships; and the stockholder's opinion as to whether the stockholder recommended candidate meets the definitions of "independent" under the NASDAQ standards. In addition, the recommendation letter must provide the information that would be required to be disclosed in the solicitation of proxies for election of directors under federal securities laws. The stockholder must include the candidate's statement that he/she meets these requirements; is willing to promptly complete the Questionnaire required of all officers, directors and candidates for nomination to the Board; will provide such other information as the Committee may reasonably request; consents to serve on the Board if elected; and a statement whether such candidate, if elected, intends to tender, promptly following such person's election or re-election, an irrevocable resignation effective upon such person's failure to receive the required vote for re-election at the next meeting at which such person would face re-election. COMPENSATION OF DIRECTORS Our Board of Directors has approved the payment of cash compensation to non-employee directors in exchange for their service on the Board. The amount of cash compensation to be received by each non-employee director is $1,000 per regular meeting attended during each calendar year, and $500 per special meeting attended. Our Board of Directors generally has four meetings per calendar year. The Directors are reimbursed for out-of-pocket expenses incurred in attending meetings of the Board of Directors or any committees thereof. Under both our current stock option plans (the N-Viro International Corporation Second Amended and Restated 2004 Stock Option Plan ["2004 Plan"] and the N-Viro International Corporation 2010 Stock Option Plan ["2010 Plan"]), each non-employee Director automatically receives a grant of options to purchase 2,500 or 5,000 shares, respectively, of Common Stock for each regular meeting attended, and an option to purchase 1,250 or 2,500 shares, respectively, of Common Stock for each special meeting attended, subject to a maximum of 15,000 or 30,000 options, respectively, in any calendar year. Directors who are our employees do not receive any additional compensation for serving as Directors. Directors who are our consultants do not receive any additional cash compensation for serving as Directors, but do receive stock options per the provisions of either the 2004 Plan or the 2010 Plan. See "Certain Relationships and Related Transactions" for additional compensation to directors. DIRECTOR COMPENSATION
Fees Non-Equity Non-Qualified Non-Qualified Earned or Incentive Incentive Deferred All Paid in Stock Option Plan Plan Compensation Other Name Cash Awards Awards Compensation Compensation Earnings Compensation (1) TOTAL ------------------ ---------- ------- -------- ------------- -------------- -------------- ----------------- -------- Joseph H. Scheib $ 3,000 - $ 34,785 - - - - $ 37,785 Carl Richard $ 3,000 - $ 34,785 - - - - $ 37,785 James H. Hartung $ 3,000 - $ 34,785 - - - - $ 37,785 Mark D. Hagans $ 3,000 - $ 34,785 - - - - $ 37,785 Thomas L. Kovacik $ 3,000 - $ 34,785 - - - $ 31,421 $ 69,206 Joan B. Wills $ 3,000 - $ 34,785 - - - - $ 37,785 Timothy R. Kasmoch - - - - - - - $ 0 ---------- ------- -------- ------------- -------------- -------------- ----------------- -------- $ 18,000 $ 0 $208,710 $ 0 $ 0 $ 0 $ 31,421 $258,131 ========== ======= ======== ============= ============== ============== ================= ======== (1) represents a consulting fee paid to Mr. Kovacik in 2010 with 10,000 stock options.
EXECUTIVE OFFICERS OF THE COMPANY Executive officers of the Company are appointed by the Board of Directors and hold office at the pleasure of the Board. Set forth below is biographical and other information on the current executive officers of the Company. Mr. Kasmoch also serves as a member of the Board and his biographical information is set forth above under the caption "Directors of the Company."
Name Age Position ------------------ --- ------------------------------------------------ Timothy R. Kasmoch 49 President and Chief Executive Officer Robert W. Bohmer 41 Executive Vice-President and General Counsel James K. McHugh 52 Chief Financial Officer, Secretary and Treasurer
ROBERT W. BOHMER has been our Executive Vice-President and General Counsel since July 2007. From 1996 until joining the Company, Mr. Bohmer had been a partner with the law firm of Watkins, Bates and Carey, LLP, Toledo, Ohio. From 2005 through June 2007, Mr. Bohmer had served as general outside counsel to the Company. JAMES K. MCHUGH has served as our Chief Financial Officer, Secretary and Treasurer since January 1997. Prior to that date, Mr. McHugh served the Company in various financial positions since April 1992, and was a key member of the team that took the Company public in 1993. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons who own beneficially more than ten percent (10%) of the shares of our Common Stock, to file reports of ownership and changes of ownership with the Securities and Exchange Commission, or SEC. Copies of all filed reports are required to be furnished to us pursuant to Section 16(a). Based solely on the reports received by us and on written representations from reporting persons, we believe that the current directors and executive officers complied with all applicable filing requirements during the fiscal year ended December 31, 2010, with the following exceptions: Carl Richard was late filing a Form 4 (Statement of Changes of Beneficial Ownership of Securities) in connection with a purchase of Common Stock on the open market that occurred on October 18, 2010. The Form 4 was filed on October 27, 2010. Carl Richard was late filing a Form 4 in connection with six separate purchases of Common Stock on the open market that occurred between November 7 and November 19, 2010. The Form 4 was filed on November 19, 2010. Joseph R. Scheib was late filing a Form 4 for an exercise of stock options and concurrent acquisition of Common Stock that occurred on April 2, 2010. The Form 4 was filed on May 11, 2010. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF EXECUTIVE OFFICERS The following table presents the total compensation paid to our Chief Executive Officer, Executive Vice President and Chief Financial Officer during 2010 and 2009. There were no other executive officers who were serving at the end of 2010 or 2009 and whose total compensation exceeded $100,000. SUMMARY COMPENSATION TABLE
Non-Equity Nonqualified Incentive Deferred Name and Principal Stock Option Plan Compensation All Other Position Year Salary Bonus Awards Awards (4) Compensation Earnings Compensation TOTAL --------------------------- ---- -------- ------ ------ ----------- ------------ ------------ ------------- -------- TIMOTHY R. KASMOCH 2010 $150,000 - - $ 446,152 - - $ 21,518 $617,670 President and Chief 2009 $150,000 - - $ 570,376 - - $ 11,000 $731,376 Executive Officer (1) ROBERT W. BOHMER 2010 $150,000 - - $ 373,763 - - $ 0 $523,763 Executive Vice-President + 2009 $150,000 - - $ 454,344 - - $ 0 $604,344 General Counsel (2) JAMES K. MCHUGH 2010 $125,000 $7,810 - $ 94,926 - - $ 399 $228,135 Chief Financial Officer, 2009 $116,688 - - $ 190,746 - - $ 399 $307,833 Secretary + Treasurer (3) (1) For the "All Other Compensation" column, Mr. Kasmoch's spouse was compensated for outside consulting services rendered to the Company at various times during 2009 and 2010, in addition to employee wages paid in the last quarter of 2010. All compensation was in cash. (2) Mr. Bohmer's value of the 2009 Option Award includes the 2007 Option Award recorded as an expense in the amount of $46,667. The value of the 2010 Option Award includes the 2007 Option Award recorded as an expense in the amount of $70,000. (3) For the "All Other Compensation" column, Mr. McHugh is taxed on the imputed benefit of a life insurance policy that benefits his personal beneficiary for one-half the face value of the policy and N-Viro International Corporation for the other one-half. (4) The amounts included in the Option Awards column include the aggregate grant date fair value of options granted in the fiscal year computed in accordance with FASB ASC Topic 718. We continue to use the Black-Scholes model to measure the grant date fair value of stock options. For a discussion of the valuation assumptions used to value the options, see Note 5 to our Consolidated Financial Statements included in this annual report on Form 10-K for the fiscal year ended December 31, 2010.
2010 GRANTS OF PLAN BASED AWARDS
Estimated Future Payouts Under Non-Equity Incentive Plan Awards Grant Approval ---------------------------------------------------------- Name Date Date Threshold ($) Target ($) Maximum ($) ------------------ --------- --------- --------------------------------- ---------- ----------- Timothy R. Kasmoch 3/17/2010 3/17/2010 - - - Robert W. Bohmer 3/17/2010 3/17/2010 - - - James K. McHugh 3/17/2010 3/17/2010 - - - Estimated Future Payouts Under Equity Incentive Plan Awards Full Grant Base Price -------------------------------------------------------- Date Fair of Option Name Threshold (#) Target (#) Maximum (#) Value ($) Awards ($/shr.) ------------------ ------------------------------- ---------- ----------- ----------- --------------- Timothy R. Kasmoch - - 470,000 2.65 3.27 Robert W. Bohmer - - 320,000 2.65 3.27 James K. McHugh - - 100,000 2.65 3.27
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS STOCK AWARDS --------------------------------------------------------------------- -------------------------- Equity Incentive Plan Market # of # of Awards: # of Value of Securities Securities # Securities Shares or Shares or Underlying Underlying Underlying Units of Units of Unexercised Unexercised Unexercised Option Option Stock That Stock That Options (#) Options (#) Unearned Exercise Expiration Have Not Have Not Name Exercisable Unexercisable Options (#) Price (#) Date Vested (#) Vested ($) ------------------ -------------- -------------- ------------- ---------- ---------- ------------- ----------- Timothy R. Kasmoch 250,000 - - $ 2.00 12/31/11 - - Timothy R. Kasmoch 2,500 - - $ 1.70 2/15/16 - - Timothy R. Kasmoch 25,000 - - $ 1.94 7/11/19 - - Timothy R. Kasmoch 243,000 - - $ 2.23 7/22/19 - - Timothy R. Kasmoch 188,000 282,000 - $ 3.27 3/18/20 - - Robert W. Bohmer 100,000 - - $ 2.80 6/13/17 - - Robert W. Bohmer 25,000 - - $ 1.94 7/11/19 - - Robert W. Bohmer 168,000 - - $ 2.23 7/22/19 - - Robert W. Bohmer 128,000 192,000 - $ 3.27 3/18/20 - - James K. McHugh 10,000 - - $ 1.50 12/7/11 - - James K. McHugh 12,000 - - $ 2.10 11/11/14 - - James K. McHugh 50,000 - - $ 2.00 12/31/16 - - James K. McHugh 25,000 - - $ 1.94 7/11/19 - - James K. McHugh 68,000 - - $ 2.23 7/22/19 - - James K. McHugh 40,000 60,000 - $ 3.27 3/18/20 - - Equity Equity Incentive Incentive Plan Awards: Plan Awards: # Unearned Market or Shares, Payout Value Units or of Unearned Other Rights Shares, Units That Have or Other Rights Not That Have Name Vested (#) Not Vested (#) ------------------ ------------- ---------------- Timothy R. Kasmoch - - Timothy R. Kasmoch - - Timothy R. Kasmoch - - Timothy R. Kasmoch - - Timothy R. Kasmoch - - Robert W. Bohmer - - Robert W. Bohmer - - Robert W. Bohmer - - Robert W. Bohmer - - James K. McHugh - - James K. McHugh - - James K. McHugh - - James K. McHugh - - James K. McHugh - - James K. McHugh - -
All options awards were made granted under the Company's current stock option plan described under the caption "Equity Compensation Plan Information." EMPLOYMENT AGREEMENTS --------------------- On February 13, 2007, we entered into an employment agreement with Mr. Timothy R. Kasmoch as our President and Chief Executive Officer. Mr. Kasmoch's employment agreement was for a two-year term commencing on February 13, 2007 and provided for automatic renewal of successive one-year terms unless notice was provided ninety (90) days prior to the expiration of the then current term. The agreement provided that Mr. Kasmoch was to receive an annual base salary of $150,000, subject to an annual increase at the discretion of the Board. In addition, Mr. Kasmoch was eligible for an annual cash bonus in an amount to be determined, and otherwise subject to the discretion of, the Board. Generally, Mr. Kasmoch's employment agreement may have been terminated by us with or without cause or by the Employee for any reason. If the agreement was terminated by us without cause (other than by reason of the death or disability of Mr. Kasmoch), Mr. Kasmoch would have continued to receive his base salary then in effect for the period between the termination date and the expiration date of the agreement. If the agreement was terminated for any other reason by either party, Mr. Kasmoch was entitled to receive his base salary through the effective date of the termination plus any bonus or incentive compensation which had been earned or payable through the termination date, as provided for in the agreement. A copy of Mr. Kasmoch's employment agreement was attached to a Form 8-K as Exhibit 10.1, filed by us on March 12, 2007. Effective April 2, 2008, we entered into a first amendment to the employment agreement with Mr. Kasmoch. The amendment extended the term of Mr. Kasmoch's employment agreement for an additional two years. As a result, the term of Mr. Kasmoch's employment agreement was set to expire on February 12, 2011, instead of February 12, 2009 as provided for in the original employment agreement. A copy of the amendment to Mr. Kasmoch's employment agreement was attached to a Form 8-K as Exhibit 10.1, filed by us on April 7, 2008. Effective March 17, 2010, we entered into a new Employment Agreement (the "Agreement") with Mr. Kasmoch commencing February 26, 2010. The Agreement is for a five-year term commencing on February 26, 2010 and provides for automatic renewal of successive one-year terms unless notice is provided ninety (90) days prior to the expiration of the then current term. The agreement provides that Mr. Kasmoch is to receive an annual base salary of $150,000, subject to annual increase at the discretion of our Board of Directors. In addition, Mr. Kasmoch is eligible for an annual cash bonus in an amount to be determined, and otherwise subject to the discretion of the Board of Directors. Under the agreement, this determination is to be based upon the Board of Directors review of Mr. Kasmoch's performance. The Agreement also provides for a stock option grant of 470,000 options that vest over a five year period, pursuant to the Second Amended and Restated 2004 Stock Option Plan. While employed with the Company, the Agreement allows Mr. Kasmoch to engage in other limited business activities that are not competitive with and do not involve the Company, subject to the prior disclosure to the Company's Audit Committee. The Employment Agreement permits Mr. Kasmoch to terminate his employment in the event of a change of control or certain enumerated material breaches thereof by the Company. A copy of this employment agreement was attached to a Form 8-K as Exhibit 10.1, filed by us on March 19, 2010. In June 2007, we executed an employment agreement with Robert W. Bohmer as our Vice-President of Business Development and General Counsel, which commenced July 1, 2007. Mr. Bohmer's agreement was for a two-year term at $150,000 per year plus a stock option grant of 100,000 shares. In addition, Mr. Bohmer was eligible for an annual cash bonus in an amount to be determined. Generally, the agreement may have been terminated by us with or without cause or by the Employee for any reason. A copy of Mr. Bohmer's employment agreement was attached to a Form 8-K as Exhibit 10.1, filed by us on June 20, 2007. Effective June 19, 2008, we entered into a first amendment to the employment agreement with Mr. Bohmer. The amendment extended the term of Mr. Bohmer's employment agreement for an additional two years. As a result, the term of Mr. Bohmer's employment agreement was set to expire on July 1, 2011, instead of July 1, 2009 as provided for in the original employment agreement. Except for the extension of the term, there were no other changes to Mr. Bohmer's employment agreement. A copy of the amendment to Mr. Bohmer's employment agreement was attached to a Form 8-K as Exhibit 10.1, filed by us on June 20, 2008. Effective March 17, 2010, we entered into a new Employment Agreement (the "Agreement") with Mr. Bohmer as our Executive Vice President and General Counsel, commencing February 26, 2010. The Agreement is for a five-year term commencing on February 26, 2010 and provides for automatic renewal of successive one-year terms unless notice is provided ninety (90) days prior to the expiration of the then current term. The Agreement provides that Mr. Bohmer is to receive an annual base salary of $150,000, subject to an annual increase at the discretion of our Board of Directors. In addition, Mr. Bohmer is eligible for an annual cash bonus in an amount to be determined, and otherwise subject to the discretion of the Board of Directors. Under the agreement, this determination is to be based upon the President/Chief Executive Officer's and Board of Directors review of Mr. Bohmer's performance. The Agreement also provides for a stock option grant of 320,000 options that vest over a five year period, pursuant to the Second Amended and Restated 2004 Stock Option Plan. While employed with the Company, the Agreement allows Mr. Bohmer to engage in other limited business activities that are not competitive with and do not involve the Company, subject to the prior disclosure to the Company's Audit Committee. The Employment Agreement permits Mr. Bohmer to terminate his employment in the event of a change of control or certain enumerated material breaches thereof by the Company. A copy of this employment agreement was attached to a Form 8-K as Exhibit 10.1, filed by us on March 19, 2010. Effective March 17, 2010, we entered into an Employment Agreement (the "Agreement") with James K. McHugh to serve as the Company's Chief Financial Officer commencing February 26, 2010. The Agreement is for a five-year term commencing on February 26, 2010 and provides for automatic renewal of successive one-year terms unless notice is provided ninety (90) days prior to the expiration of the then current term. The agreement provides that Mr. McHugh is to receive an annual base salary of $125,000, subject to annual increase at the discretion of the Board of Directors of the Company. In addition, Mr. McHugh is eligible for an annual cash bonus in an amount to be determined, and otherwise subject to the discretion of, the Board of Directors. Under the agreement, this determination is to be based upon the President/Chief Executive Officer's and Board of Directors review of Mr. McHugh's performance. The Agreement also provides for a stock option grant of 100,000 shares that vest over a five year period, pursuant to the Second Amended and Restated 2004 Stock Option Plan. While employed with the Company, the Agreement allows Mr. McHugh to engage in other limited business activities that are not competitive with and do not involve the Company, subject to the prior disclosure to the Company's Audit Committee. The Employment Agreement permits Mr. McHugh to terminate his employment in the event of a change of control or certain enumerated material breaches thereof by the Company. A copy of this employment agreement was attached to a Form 8-K as Exhibit 10.1, filed by us on March 19, 2010. EQUITY COMPENSATION PLAN INFORMATION We maintain three stock option plans (two are able to issue new grants) for directors, executive officers and key employees. The most recent plan ("2010 Plan") was approved by the stockholders in August 2010. The 2010 Plan authorizes the Board of Directors or a committee thereof, to grant awards of incentive stock options and non-qualified stock options for up to a maximum of 5,000,000 shares of Common Stock. For all of the plans, the total number of options granted and outstanding as of March 21, 2011 was 2,273,300, and the number of options available for future issuance was 5,004,075. Currently, all of the plans are administered by the Board of Directors via a committee. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS We had outstanding 5,938,714 shares of Common Stock, $.01 par value per share, or the Common Stock, on March 21, 2011, which constitutes the only class of our outstanding voting securities. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
(a) (b) (c) Number of securities Number of securities remaining available for to be issued Weighted-average future issuance under upon exercise of exercise price of equity compensation outstanding options, outstanding options, plans (excluding securities Plan category warrants and rights warrants and rights reflected in column (a)) --------------------------------------- -------------------- --------------------- ---------------------------- Equity compensation plans approved by security holders . . . . 1,679,300 $ $2.50 5,004,075 2 Equity compensation plans not approved by security holders 258,270 1 $ $1.95 -0- ---------------------- --------------------- --------------------------- Total 1,937,570 $ $2.43 5,004,075 1. Represents 120,000 warrants to purchase our Common Stock, issued to Strategic Asset Management, Inc., in 2005 as part of an agreement to provide consulting services, issued at $1.84 per share, and, 138,270 warrants to purchase our Common Stock, issued to certain members of the Board of Directors in December 2006 in payment for services rendered, issued at a weighted average of $2.04 per share. 2. The available number of shares to issue is combined under our N-Viro International Corporation 2010 Stock Option Plan as approved by the stockholders on July 22, 2010 and the Second Amended and Restated 2004 Stock Option Plan.
FIVE PERCENT STOCKHOLDERS As of March 21, 2011, the following were the only persons known to us to own beneficially more than 5% of the outstanding shares of Common Stock:
Name Amount and Percentage of Title of and Address of Nature of Outstanding Shares Class Beneficial Owner Beneficial Ownership of Common Stock ------------ ----------------------------------------------------- -------------------- ------------------- Cooke Family Trust 90 Grande Brook Circle, #1526 Common Stock Wakefield, Rhode Island 02879 627,717 (1) 10.6% ------------ ----------------------------------------------------- -------------------- ------------------- VC Energy I, LLC 3900 Paradise Road, Suite U Common Stock Las Vegas, NV 89169 800,000 (2) 12.6% ------------ ----------------------------------------------------- -------------------- ------------------- 1. The shares attributed to the Cooke Family Trust include 627,267 shares owned beneficially and 450 in Common Stock warrants exercisable to purchase an equal number of shares of Common Stock. This information was derived from the Schedule 13D Amendment #5 filed on May 10, 2010. 2. The shares attributed to VC Energy I, LLC include 400,000 shares owned beneficially and 400,000 in Common Stock warrants exercisable to purchase an equal number of shares of Common Stock. This information was derived from the Schedule 13G filed on July 8, 2010.
SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, as of March 21, 2011, unless otherwise specified, certain information with respect to the beneficial ownership of our shares of Common Stock by each person who is our director, a nominee for the Board, each of the Named Executive Officers, and by our directors and executive officers as a group. Unless otherwise noted, each person has voting and investment power, with respect to all such shares, based on 5,938,714 shares of Common Stock outstanding on the record date. Pursuant to the rules of the SEC, shares of Common Stock which a person has the right to acquire within 60 days of the date hereof pursuant to the exercise of stock options are deemed to be outstanding for the purpose of computing the percentage ownership of such person but are not deemed outstanding for the purpose of computing the percentage ownership of any other person.
Name of Amount and Nature of Percent Title of Class Beneficial Owner Beneficial Ownership 1 of Class -------------- ----------------------------------------------------------- -------------------- -- --------- Common Stock Mark D. Hagans 44,150 2 0.74% Common Stock James H. Hartung 62,250 3 1.04% Common Stock Timothy R. Kasmoch 866,500 4 12.94% Common Stock Thomas L. Kovacik 52,500 5 0.88% Common Stock Carl Richard 179,040 6 2.96% Common Stock Joseph H. Scheib 241,072 7 3.98% Common Stock Joan B. Wills 653,967 8 10.98% Common Stock Robert W. Bohmer 423,600 9 6.66% Common Stock James K. McHugh 218,920 10 3.56% Common Stock All directors and executive officers as a group (9 persons) 2,741,999 11 35.50% 1. Except as otherwise indicated, all shares are directly owned with voting and investment power held by the person named. 2. Represents 4,450 shares of Common Stock owned by Mr. Hagans and 39,700 shares issuable upon exercise of options which are currently exercisable at prices ranging from $1.94 to $3.90 per share. 3. Represents 2,610 shares of Common Stock owned by Mr. Hartung, 48,750 shares issuable upon exercise of options which are currently exercisable at prices ranging from $1.42 to $3.90 per share and 10,890 unregistered shares issuable upon exercise of warrants which are currently exercisable at $2.00 per share. 4. Represents 100,000 unregistered shares and 8,000 registered shares of Common Stock owned by Mr. Kasmoch, 50,000 unregistered shares issuable upon exercise of warrants which are currently exercisable at $1.85 per share and 708,500 shares issuable upon exercise of options which are currently exercisable at prices ranging from $1.70 to $3.27 per share. 5. Represents 1,000 shares of Common Stock owned by Mr. Kovacik and 51,500 shares issuable upon exercise of options which are currently exercisable at prices ranging from $1.82 to $3.90 per share. 6. Represents 61,601 shares of Common Stock owned by Mr. Richard, 60,000 shares issuable upon exercise of options which are currently exercisable at prices ranging from $0.70 to $3.90 per share and 57,439 unregistered shares issuable upon exercise of warrants which are currently exercisable at prices ranging from $1.85 to $2.00 per share. 7. Represents 124,922 shares of Common Stock owned by Mr. Scheib, 61,250 shares issuable upon exercise of options which are currently exercisable at prices ranging from $0.70 to $3.90 per share, 600 shares owned by a family member over which Mr. Scheib acts as custodian and 54,300 unregistered shares issuable upon exercise of warrants which are currently exercisable at prices ranging from $1.85 to $2.52 per share. 8. Represents 10,000 shares of Common Stock owned by Ms. Wills, 16,250 shares issuable upon exercise of options which are currently exercisable at prices ranging from $2.66 to $3.53 per share and 627,717 shares of Common Stock owned beneficially by the Cooke Family Trust, a more than 5% stockholder of which Ms. Wills is the trustee. See further information in the section "Five Percent Stockholders". 9. Represents 2,600 shares of Common Stock owned by Mr. Bohmer and 421,000 shares issuable upon exercise of options which are currently exercisable at prices ranging from $1.94 to $3.27 per share. 10. Represents 13,920 shares of Common Stock owned by Mr. McHugh and a total of 205,000 shares issuable upon exercise of options which are currently exercisable at prices ranging from $1.50 to $3.27 per share. 11. Represents 329,103 shares of Common Stock owned by the directors and officers, 628,317 shares owned indirectly, 1,611,950 shares issuable upon exercise of options which are currently exercisable at prices ranging from $0.70 to $3.90 per share and a total of 172,629 unregistered shares issuable upon exercise of warrants which are currently exercisable at prices ranging from $1.85 to $2.52 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE None DIRECTOR INDEPENDENCE Although we are not subject to the listing requirements of any stock exchange, we are committed to a board in which a majority of our members consist of independent directors, as defined under the NASDAQ rules. The Board has reviewed the independence of its members, applying the NASDAQ standards and considering other commercial, legal, accounting and familial relationships between the Directors and us. The Board has determined that all of the Directors and director nominees are independent other than Mr. Kasmoch, who is not an independent Director by virtue of his current position as our chief executive officer. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES AUDIT FEES Audit services of UHY LLP ("UHY") included the audit of our annual financial statements for 2010 and 2009, and services related to quarterly filings with the SEC through the reporting period ended September 30 in each of those years. Fees for these services totaled approximately $73,500 for 2010 and $72,000 for 2009. AUDIT RELATED FEES There were no fees billed for the years ended December 31, 2010 and December 31, 2009 for assurance and related services by UHY that are reasonably related to the performance of the audit or review of our financial statements. TAX FEES There were no fees billed for the years ended December 31, 2010 and December 31, 2009 for professional services rendered by UHY for tax compliance, tax advice, and tax planning. ALL OTHER FEES There were no fees billed for the years ended December 31, 2010 and December 31, 2009 for assistance on accounting related matters. Although the Audit Committee Charter does not explicitly require it, the Audit Committee approves all engagements of outside auditors before any work is begun on the engagement. UHY LLP personnel work under the direct control of UHY LLP partners and are leased from wholly-owned subsidiaries of UHY Advisors, Inc. in an alternative practice structure. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES Exhibit No. Description --- ----------- 3.1 Second Amended and Restated Certificate of Incorporation of the Company, dated August 14, 2008 (incorporated by reference to Exhibit 10.1 to Form 10-Q filed August 14, 2008) 3.2 Second Amended and Restated By-Laws of the Company, effective June 17, 2008 (incorporated by reference to Exhibit 10.2 to Form 10-Q filed August 14, 2008). 10.1 Commercial Line of Credit Agreement and Note dated October 15, 2008, between N-Viro International Corporation and Monroe Bank + Trust (incorporated by reference to Exhibit 99.1 to Form 8-K filed October 27, 2008). 10.2 First Amendment to Consulting Agreement dated July 1, 2004 between Terry J. Logan and N-Viro International Corporation, effective February 13, 2006 (incorporated by reference to Exhibit 10.3 to Form 8-K filed March 20, 2006).* 10.3 Employment Agreement, dated February 13, 2007 between Timothy R. Kasmoch and N-Viro International Corporation (incorporated by reference to Exhibit 10.1 to Form 8-K filed March 12, 2007).* 10.4 First Amendment to Employment Agreement, dated April 2, 2008 between Timothy R. Kasmoch and N-Viro International Corporation (incorporated by reference to Exhibit 10.1 to Form 8-K filed April 7, 2008). 10.5 Employment Agreement, dated June 12, 2007 between Robert W. Bohmer and N-Viro International Corporation (incorporated by reference to Exhibit 10.1 to Form 8-K filed June 20, 2007).* 10.6 First Amendment to Employment Agreement, dated June 19, 2008 between Robert W. Bohmer and N-Viro International Corporation (incorporated by reference to Exhibit 10.1 to Form 8-K filed June 20, 2008). 10.7 Employment Agreement, dated March 17, 2010 between Timothy R. Kasmoch and N-Viro International Corporation (incorporated by reference to Exhibit 10.1 to Form 8-K filed March 19, 2010) 10.8 Employment Agreement, dated March 17, 2010 between Robert W. Bohmer and N-Viro International Corporation (incorporated by reference to Exhibit 10.2 to Form 8-K filed March 19, 2010) 10.9 Employment Agreement, dated March 17, 2010 between James K. McHugh and N-Viro International Corporation (incorporated by reference to Exhibit 10.3 to Form 8-K filed March 19, 2010) 10.10 The Amended and Restated N-Viro International Corporation Stock Option Plan (incorporated by reference to Form S-8 filed May 9, 2000).* 10.11 The N-Viro International Corporation 2004 Stock Option Plan (incorporated by reference to Form S-8 filed December 20, 2004).* 10.12 The N-Viro International Corporation Amended and Restated 2004 Stock Option Plan (incorporated by reference to the Proxy Statement on Schedule 14A filed May 14, 2008).* 10.13 The N-Viro International Corporation Second Amended and Restated 2004 Stock Option Plan (incorporated by reference to the Definitive Proxy Statement on Schedule 14A filed July 13, 2009).* 10.14 The N-Viro International Corporation 2010 Stock Option Plan (incorporated by reference to the Definitive Proxy Statement on Schedule 14A filed June 23, 2010).* 21.1 List of subsidiaries of the Company.# 23.1 Consent of UHY LLP. 24.1 Power(s) of Attorney.# 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. # Only included in Form 10-K filed electronically with the Securities and Exchange Commission. * Indicates a management contract or compensatory plan or arrangement. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. N-VIRO INTERNATIONAL CORPORATION Dated: March 31, 2011 By: /s/ Timothy R. Kasmoch --------------------------- Timothy R. Kasmoch, Chief Executive Officer and President (Principal Executive Officer) POWER OF ATTORNEY Know all persons by these presents, that each person whose signature appears below constitutes and appoints James K. McHugh his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Dated: March 31, 2011 /s/ Timothy R. Kasmoch /s/ James K. McHugh ------------------------- ---------------------- Timothy R. Kasmoch, Chief Executive Officer, James K. McHugh President and Director Chief Financial Officer, (Principal Executive Officer) Secretary and Treasurer (Principal Financial Officer) /s/ James H. Hartung* /s/ Mark D. Hagans * ---------------------- ------------------------ James H. Hartung, Director Mark D. Hagans, Director and Chairman of the Board /s/ Joseph H.Scheib, Director * /s/ Thomas L. Kovacik* --------------------------------- -------------------------- Joseph H. Scheib, Director Thomas L. Kovacik, Director /s/ Carl Richard* /s/ Joan B. Wills* ------------------- --------------------- Carl Richard, Director Joan B. Wills, Director * by James K. McHugh, Attorney-In-Fact