UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
X
|
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
|
|
|
OF THE SECURITIES EXCHANGE ACT OF 1934.
|
|
|
For the quarterly period ended September 30, 2012
|
OR
|
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
|
|
|
OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period from ____________ to ____________
|
Commission File Number: 0-21802
N-VIRO INTERNATIONAL CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 34-1741211
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2254 Centennial Road
Toledo, Ohio 43617
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (419) 535-6374
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 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 (§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 x No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
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
As of November 13, 2012, 6,513,089 shares of N-Viro International Corporation $ .01 par value common stock were outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
|
N-VIRO INTERNATIONAL CORPORATION
|
|||||
|
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|||||
|
(unaudited)
|
|||||
|
Three Months Ended Sept 30
|
Nine Months Ended Sept 30
|
||||
|
2012
|
2011
|
2012
|
2011
|
||
|
REVENUES
|
$877,271
|
$1,194,721
|
$2,769,663
|
$4,579,511
|
|
|
COST OF REVENUES
|
687,847
|
1,074,805
|
2,288,115
|
3,689,942
|
|
|
GROSS PROFIT
|
189,424
|
119,916
|
481,548
|
889,569
|
|
|
OPERATING EXPENSES
|
|||||
|
Selling, general and administrative
|
331,487
|
1,741,321
|
1,414,575
|
2,945,373
|
|
|
Pension plan withdrawal expense
|
412,576
|
-
|
412,576
|
-
|
|
|
744,063
|
1,741,321
|
1,827,151
|
2,945,373
|
||
|
OPERATING LOSS
|
(554,639)
|
(1,621,405)
|
(1,345,603)
|
(2,055,804)
|
|
|
OTHER INCOME (EXPENSE)
|
|||||
|
Gain on market price changes of warrants issued
|
-
|
316,463
|
12,196
|
669,447
|
|
|
Gain on extinguishment of liabilities
|
53,878
|
-
|
58,086
|
40,008
|
|
|
Gain on debt modification
|
-
|
-
|
-
|
32,737
|
|
|
Interest income
|
663
|
278
|
1,025
|
868
|
|
|
Interest expense
|
(22,903)
|
(19,175)
|
(64,917)
|
(58,880)
|
|
|
Amortization of discount on convertible debentures
|
(4,092)
|
(4,092)
|
(12,276)
|
(56,418)
|
|
|
27,546
|
293,474
|
(5,886)
|
627,762
|
||
|
LOSS BEFORE INCOME TAXES
|
(527,093)
|
(1,327,931)
|
(1,351,489)
|
(1,428,042)
|
|
|
Federal and state income taxes
|
-
|
-
|
-
|
-
|
|
|
NET LOSS
|
$(527,093)
|
$(1,327,931)
|
$(1,351,489)
|
$(1,428,042)
|
|
|
Basic and diluted loss per share
|
$(0.09)
|
$(0.22)
|
$(0.22)
|
$(0.24)
|
|
|
Weighted average common shares outstanding - basic and diluted
|
6,191,567
|
6,021,219
|
6,149,825
|
5,975,204
|
|
See Notes to Condensed Consolidated Financial Statements
|
N-VIRO INTERNATIONAL CORPORATION
|
|||
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|||
|
(unaudited)
|
|||
|
September 30, 2012
|
December 31, 2011
|
||
|
ASSETS
|
|||
|
CURRENT ASSETS
|
|||
|
Cash and cash equivalents:
|
|||
|
Unrestricted
|
$29,894
|
$44,498
|
|
|
Restricted
|
209,023
|
208,510
|
|
|
Receivables, net:
|
|||
|
Trade, net of allowance for doubtful accounts of
|
|||
|
$80,000 at Sept. 30, 2012 and $70,000 at Dec. 31, 2011
|
313,168
|
416,192
|
|
|
Other
|
15,139
|
18,073
|
|
|
Prepaid expenses and other assets
|
90,561
|
97,155
|
|
|
Deferred costs - stock and warrants issued for services
|
309,339
|
547,012
|
|
|
Total current assets
|
967,124
|
1,331,440
|
|
|
PROPERTY AND EQUIPMENT, NET
|
1,080,678
|
1,327,320
|
|
|
INTANGIBLE AND OTHER ASSETS, NET
|
85,187
|
91,800
|
|
|
$2,132,989
|
$2,750,560
|
||
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|||
|
CURRENT LIABILITIES
|
|||
|
Current maturities of long-term debt
|
$211,247
|
$277,190
|
|
|
Note Payable - related party
|
200,000
|
200,000
|
|
|
Convertible debentures, net of discount
|
442,724
|
90,000
|
|
|
Line of credit
|
360,000
|
300,000
|
|
|
Accounts payable
|
657,142
|
833,068
|
|
|
Pension plan withdrawal liability
|
27,003
|
-
|
|
|
Accrued liabilities
|
72,889
|
39,798
|
|
|
Total current liabilities
|
1,971,005
|
1,740,056
|
|
|
Long-term debt, less current maturities
|
108,469
|
211,716
|
|
|
Convertible debentures - long-term, net of discount
|
-
|
340,447
|
|
|
Pension plan withdrawal liability - long-term
|
385,573
|
-
|
|
|
Fair value of warrant liability
|
-
|
12,196
|
|
|
Total liabilities
|
2,465,047
|
2,304,415
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|||
|
STOCKHOLDERS' EQUITY (DEFICIT)
|
|||
|
Preferred stock, $.01 par value, authorized 2,000,000 shares;
|
|||
|
issued -0- shares in 2012 and 2011
|
-
|
-
|
|
|
Common stock, $.01 par value; authorized 35,000,000 shares;
|
|||
|
issued 6,336,589 in 2012 and 6,191,420 in 2011
|
63,366
|
61,914
|
|
|
Additional paid-in capital
|
28,063,601
|
26,883,156
|
|
|
Accumulated deficit
|
(27,774,135)
|
(25,814,035)
|
|
|
352,832
|
1,131,035
|
||
|
Less treasury stock, at cost, 123,500 shares
|
684,890
|
684,890
|
|
|
Total stockholders' equity (deficit)
|
(332,058)
|
446,145
|
|
|
$2,132,989
|
$2,750,560
|
||
See Notes to Condensed Consolidated Financial Statements
|
N-VIRO INTERNATIONAL CORPORATION
|
||
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||
|
(Unaudited)
|
||
|
Nine Months Ended Sept. 30
|
||
|
2012
|
2011
|
|
|
NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES
|
$(91,457)
|
$228,911
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
||
|
Net change to restricted cash and cash equivalents
|
(513)
|
(838)
|
|
Proceeds from the sale of property and equipment
|
217,051
|
5
|
|
Increase to note receivable
|
(17,774)
|
-
|
|
Expenditures for intangibles and other assets
|
(7,500)
|
-
|
|
Purchases of property and equipment
|
(6,152)
|
(357,384)
|
|
Net cash provided (used) in investing activities
|
185,112
|
(358,217)
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||
|
Net borrowings (repayments) on line of credit
|
60,000
|
(2,000)
|
|
Principal payments on long-term obligations
|
(284,178)
|
(383,694)
|
|
Proceeds from stock warrants exercised
|
-
|
87,021
|
|
Proceeds from stock options exercised
|
985
|
984
|
|
Repayments of convertible debentures
|
-
|
(265,000)
|
|
Private placement of stock, net of expenditures
|
(55)
|
72,270
|
|
Borrowings from related party - short-term
|
-
|
200,000
|
|
Borrowings under long-term debt
|
114,989
|
396,746
|
|
Net cash provided (used) in financing activities
|
(108,259)
|
106,327
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
(14,604)
|
(22,979)
|
|
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
44,498
|
37,112
|
|
CASH AND CASH EQUIVALENTS - ENDING OF PERIOD
|
$29,894
|
$14,133
|
|
Supplemental disclosure of cash flows information:
|
||
|
Cash paid during the nine months ended for interest
|
$83,526
|
$100,001
|
See Notes to Condensed Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization and Basis of Presentation
The accompanying consolidated financial statements of N-Viro International Corporation (the “Company”) are unaudited but, in management's opinion, reflect all adjustments (including normal recurring accruals) necessary to present fairly such information for the period and at the dates indicated. The results of operations for the nine months ended September 30, 2012 may not be indicative of the results of operations for the year ending December 31, 2012. Since the accompanying consolidated financial statements have been prepared in accordance with Article 8 of Regulation S-X, they do not contain all information and footnotes normally contained in annual consolidated financial statements; accordingly, they should be read in conjunction with the consolidated financial statements and notes thereto appearing in the Company's Form 10-K for the period ending December 31, 2011.
The financial statements are consolidated as of September 30, 2012, December 31, 2011 and September 30, 2011 for the Company. All intercompany transactions were eliminated.
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. There have been no changes in the selection and application of critical accounting policies and estimates disclosed in “Item 8 – Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2011.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has negative working capital of approximately $1,004,000 at September 30, 2012, and has incurred negative cash flow from operating activities for the nine months ended September 30, 2012. Moreover, while the Company renewed its line of credit for one year until August 2013, the Company has minimal borrowing availability under the line of credit. The Company has borrowed money from third parties and a related party and expects to be able to generate future cash from the exercise of common stock warrants and new equity issuances. In April 2012, the Company modified all outstanding common stock warrants at that time to reduce their weighted average exercise price of $2.00 per share to $1.00 per share for all warrants. In addition, the Company’s operations in Florida, which now represent approximately 93% of the Company’s revenue, could be suspended temporarily or permanently by its landlord, the County of Volusia, for perceived on-site issues with material storage or for other issues deemed in the best interest of the county and in conformance with the lease agreement. The Company considers its relationship with the County of Volusia to be satisfactory, and is working to improve this relationship in the future.
Note 2. Long-Term Debt and Line of Credit
During the third quarter of 2012, the Company had a line of credit with Monroe Bank + Trust, or the Bank, up to $400,000 bearing interest at the Wall Street Journal Prime Rate (3.25% at September 30, 2012) plus 0.75%, but in no event less than 5.00%, and secured by a first lien on all assets (except equipment) of the Company. In August 2012 it was renewed with a maturity date of August 15, 2013. Two certificates of deposit totaling $141,716 from the Bank are held as a condition of maintaining the line of credit. At September 30, 2012, the Company had $40,000 of borrowing capacity under the credit facility.
In November 2012, the Company received a Notice and Demand of Payment Withdrawal Liability from Central States Southeast and Southwest Areas Pension Fund (the “Notice”), the pension trustee that was funded by the Company for the benefit of its former employees at its City of Toledo operation. The Notice demands a payment of $412,576, payable monthly over 20 years at an interest rate of approximately 2.8% at $2,250.27 per month, or approximately $27,000 per year. Payments at the end of the 20 year period would total $540,065. As of the balance sheet date, the Company has accrued this liability and recognized the expense. However, the Company is reviewing all possible options and plans to take whatever legal action is available and necessary to reduce or eliminate this liability. It is too early in the process to give any expectations on possible outcomes or outlook.
In 2011 the Company borrowed $200,000 with a Promissory Note payable to a related party of Timothy Kasmoch, the Company’s President and Chief Executive Officer, at 12% interest prepaid for a period of three months, renewable for an additional three months by the prepayment of additional interest and secured by certain equipment. Mr. Kasmoch has personally guaranteed the repayment of this Note. The Company extended the Note on January 30, 2012, April 30, 2012, July 30, 2012 and again on October 30, 2012. It is now due January 30, 2013. The Company expects to extend the Note on or before the due date but pay the Note in full during 2013.
From the beginning of 2006 through the third quarter of 2012, the Company has borrowed a total of $1,677,100 from ten lenders to purchase processing and automotive equipment. As of September 30, 2012, a total of eight term notes are outstanding, ranging from 6.2% to 10.9% interest for terms ranging three to five years, monthly payments totaling approximately $18,000 and all secured by equipment. The total amount owed on all equipment-secured notes as of September 30, 2012 was approximately $261,500 and all notes are expected to be paid in full on the applicable maturity date, the last of which is in March 2016.
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 converted $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 matured at June 30, 2011, however fifteen investors holding Debentures totaling $365,000 elected to replace them with new ones that now mature at June 30, 2013 but are not payable until the 10th business day of July. All other features of the “expired” Debentures remained the same in the replacement ones, except for the new maturity date. Of the four investors totaling $355,000 who did not replace their existing Debentures with new ones, two investors totaling $215,000 had their Debentures repaid; one investor converted $50,000 into unregistered common stock (at June 30, 2011) and one holding $90,000 of Debentures has not made a final decision. As of September 30, 2012, the Company held $455,000 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 (now) “expired” Debentures sold, which totaled $184,975. The discount was then required to be amortized as a period expense over the periods the Debentures were scheduled to be outstanding, which averaged 20 months, through the maturity date of June 30, 2011. Amortization expense on these “expired” Debentures for each of the three months ended September 30, 2012 and 2011 was $-0-, and for the nine months ended September 30, 2012 and 2011 was $-0- and $52,326, respectively.
For periods subsequent to June 30, 2011, the Company is required under GAAP to record a discount for certain Debentures replaced, which totals $32,737 and was recorded as a gain on debt modification during the quarter ended June 30, 2011. The discount is required to be amortized as a period expense over the next eight quarters the Debentures are scheduled to be outstanding. Amortization expense for each of the three months ended September 30, 2012 and 2011 was $4,092, and for the nine months ended September 30, 2012 and 2011 amounted to $12,276 and $4,092, respectively.
Note 3. Commitments and Contingencies
The Company’s executive and administrative offices are located in Toledo, Ohio. Through April 2011, the Company operated under a month to month lease at its former location. The total rental expense for this former location included in the statements of operations for the nine months and three months ended September 30, 2011 is approximately $12,850 and $-0-, respectively. In April 2011, the Company signed a 68 month lease with Deerpoint Development Co., Ltd. The total minimum rental commitment for the year ending December 31, 2012 is approximately $37,400, for 2013 is $30,600 and for the years 2014 through 2016 is $40,800 each year. The total rental expense for this current location included in the statements of operations for the three months and nine months ended September 30, 2012 is approximately $9,300 and $28,000, respectively. The Company also leases various equipment on a month-to-month basis.
In October 2010, the Company began to lease property in Emlenton, Pennsylvania under a lease with A-C Valley Industrial Park, for one year. After September 2011, the Company operated under a month to month lease agreement. The total rental expense included in the statements of operations for the three months ended September 30, 2012 and 2011 is $3,000 and $6,000, and for the nine months ended September 30, 2012 and 2011 is $9,000 and $18,000, respectively.
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. In June 2010, the Company renewed the lease for an additional year through May 31, 2011, and is currently operating under a month to month lease. The total rental expense included in the statements of operations for each of the three months ended September 30, 2012 and 2011 is $7,500, and for each of the nine months ended September 30, 2012 and 2011 is $22,500.
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, 2012 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 three months ended September 30, 2012 and 2011 is $12,000, and for each of the nine months ended September 30, 2012 and 2011 is $36,000.
The Company also leased processing equipment at its Florida location which began in February 2008 under a three-year lease. The total rental expense included in the statements of operations for the nine months ended September 30, 2012 and 2011 is approximately $-0- and $3,900, respectively. In February 2011, 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.
Note 4. New Accounting Standards
Accounting Standards Updates not effective until after September 30, 2012 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.
Note 5. 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.
Note 6. Basic and diluted income (loss) per share
Basic and diluted income (loss) per share is computed using the treasury stock method for outstanding stock options and warrants. For both the quarter and the nine months ended September 30, 2012 and 2011, the Company incurred a net loss. Accordingly, no stock options or warrants have been included in the computation of diluted loss per share as the impact would be anti-dilutive.
Note 7. Common Stock
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 provided 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 transferred all 200,000 shares and 200,000 warrants to an Escrow Agent, and the shares and warrants were to be released ratably to VC Energy as installments payments due the Company were 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 a deemed dividend for the increase in value of the purchase option as a reduction to Accumulated Deficit and an increase to the Additional Paid In Capital accounts.
In August 2011, the Company and VC Energy signed a Termination Agreement and terminated the License and Development Agreement dated June 29, 2010, the Promissory Note dated September 15, 2010 and the Escrow Agreement dated September 15, 2010. Included in these agreements was VC Energy’s option to purchase the unpaid balance of 120,000 shares of the Company’s common stock for $300,000. All other agreements between the Company and VC Energy remain in force, except to the extent the provisions contained in them are inconsistent with the terms and conditions of the Termination Agreement. In September 2011, the Company cancelled the 120,000 shares of common stock that were returned by operation of the Termination Agreement. Additional information is available in the Form 8-K filed by the Company on September 12, 2011.
In April 2012, the Company and VC Energy terminated the remaining agreements in effect, and VC Energy waived certain provisions regarding the remaining warrants held, including the removal of the “down-round” provision, and subsequently assigned those warrants to other, non-VC Energy holders. As a result, the Company will no longer be required to account for the future changes in the Company’s stock price after the second quarter of 2012, with regards to the warrants previously held by VC Energy.
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 September 30, 2012, the Company has recorded a liability of $-0- to reflect the fair value of the outstanding warrants, to reflect the removal of the “down-round” provision. However, through the second quarter of 2012, the Company was periodically required to re-measure the fair value of the remaining warrants at the Balance Sheet date, with adjustments in the value recorded through the income statement as a gain or loss. During the three months ended September 30, 2012 and 2011, the Company recorded a gain of $-0- and $316,500, respectively, on the revaluation and partial cancellation from the two issuances of the warrants to the end of the period. During the nine months ended September 30, 2012 and 2011, the Company recorded a gain of $12,200 and $669,500, respectively, on the revaluation and partial cancellation from the two issuances of the warrants to the end of the period, which includes the gain from the cancellation of 120,000 warrants as a result of the Termination Agreement.
In December 2010, the Company executed a Financial Public Relations Agreement with Strategic Asset Management, Inc. (“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 is recording a non-cash charge to earnings of approximately $305,000 ratably over a 36-month period starting in December 2010. For each of the three months ended September 30, 2012 and 2011, the charge to earnings was $25,400. For each of the nine months ended September 30, 2012 and 2011, the charge to earnings was $76,100.
In August 2011, the Company issued 100,000 shares of common stock to SAMI for additional services performed in connection with the December 2010 consulting agreement. To reflect the entire value of the stock issued, the Company is taking a charge to earnings of $150,000 through December 2013, the ending date of the consulting agreement. For the three months ended September 30, 2012 and 2011, the charge to earnings was $24,800 and $31,200, respectively. For the nine months ended September 30, 2012 and 2011, the charge to earnings was $71,400 and $31,200, respectively.
In December 2010, the Company executed a Consulting Agreement with SLD Capital Corporation (“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 recorded a non-cash charge to earnings of approximately $334,000 ratably over an 18-month period starting in December 2010. For the three months ended September 30, 2012 and 2011, the charge to earnings was $-0- and $55,700, respectively. For the nine months ended September 30, 2012 and 2011, the charge to earnings was $98,900 and $167,200, respectively.
In November 2011, the Company issued 50,000 shares of unregistered common stock to Rakgear, Inc. for business consulting services. To reflect the entire value of the stock issued, the Company is taking a non-cash charge to earnings of $73,000 ratably through November 2012, the ending date of the agreement. For the three months and nine months ended September 30, 2012, the charge to earnings was $18,250 and $54,750, respectively.
In February 2012, the Company issued 15,000 shares of unregistered common stock to Financial Insights, for investor relations services for a three month period. The Company recorded a non-cash charge to earnings of $19,500 during the three month period for these shares. In July 2012, Financial Insights returned all of these shares of common stock to the Company as part of an agreement and the Company reversed this charge to earnings.
In March 2012, the Company issued 80,000 shares of unregistered common stock to Newport Coast Securities for financial and investor relations services. To reflect the entire value of the stock issued, the Company took a non-cash charge to earnings of $104,000 ratably through May 2012, the ending date of the agreement. For the three months and nine months ended September 30, 2012, the charge to earnings was approximately $-0- and $104,000, respectively.
In August 2012, the Company issued 60,000 shares of unregistered common stock to Equiti-trend Advisors LLC/JT Trading, LLC for public relations and corporate communication services. To reflect the entire value of the stock issued, the Company will take a non-cash charge to earnings of $75,000 ratably through January 2013, the ending date of the agreement. For the three months ended September 30, 2012, the charge to earnings was approximately $11,500.
Note 8. Stock Options
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.
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 2011 from the 2010 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 each of the three months ended September 30, 2012 and 2011 this charge was $117,900, and for each of the nine months ended September 30, 2012 and 2011 this charge was $353,700.
Note 9. Stock Warrants
The Company accounts for stock warrants based on the estimated fair value of the warrants 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 warrant 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 warrant.
In August 2011, the Company granted warrants to purchase unregistered common stock to all members of the Board of Directors and all Officers. All the warrants are exercisable over a five year term, vest immediately and were priced using the average of the high and low trading price on the date of the grant. A total of 180,000 warrants were granted at $1.53 per warrant. To reflect the entire value of the stock warrants granted, the Company took an immediate charge to earnings during the third quarter 2011 totaling approximately $245,000.
Also in August 2011, the Company granted 100,000 warrants to purchase unregistered common stock to Strategic Asset Management, Inc. (SAMI), for additional services performed in connection with a December 2010 consulting agreement between SAMI and the Company. All the warrants are exercisable over a five year term, vest immediately and were priced at a premium over the fair market value of the Company’s common stock as of the date of the grant, or $1.65 per warrant. To reflect the entire value of the stock warrants granted, the Company is taking a charge to earnings totaling approximately $136,000 through December 2013, the ending date of the consulting agreement. For the three months ended September 30, 2012 and 2011, the charge to earnings was approximately $11,300 and $35,800, respectively. For the nine months ended September 30, 2012 and 2011, the charge to earnings was approximately $33,900 and $35,800, respectively.
In March 2012, the Board of Directors approved a plan to automatically extend to two holders of Company warrants the expiration date of the warrants by one (1) year. All other terms and conditions of each warrant remain unchanged. The two holders are Timothy R. Kasmoch, President and CEO of the Company, and, Strategic Asset Management Co, Inc., holders of 50,000 and 120,000 warrants, respectively, and extended to March 22, 2013 and March 26, 2013, respectively. The incremental fair value associated with the extension of the warrant expiration dates has been determined using the Black-Scholes model and has been recorded as a deemed dividend to common stockholders in the Statement of Stockholders’ Equity. For the three months and nine months ended September 30, 2012, the deemed dividend was $105,329. Additional information is available in the Form 8-K filed by the Company on March 27, 2012.
In April 2012, the Board of Directors approved a plan to modify all Company warrants whose expiration date was before December 31, 2015, by extending that expiration date to December 31, 2015, and to modify all Company warrants, regardless of their expiration date, by reducing the exercise price to $1.00. All other terms and conditions of each class of warrant remain unchanged. The incremental fair value associated with the extension of the warrant expiration dates has been determined using the Black-Scholes model and has been recorded as a deemed dividend to common stockholders in the Statement of Stockholders’ Equity. For the three months and nine months ended September 30, 2012, the deemed dividend was $503,281. Additional information is available in the Form 8-K filed by the Company on April 19, 2012.
Note 10. Subsequent Events
In October 2012, the Company extended the $200,000 Promissory Note payable to a related party of Timothy Kasmoch, the Company’s President and Chief Executive Officer, for an additional three months by the prepayment of additional interest, and is now due January 30, 2013. Additional details of this Note are provided in the Liquidity and Capital Resources section In Item 2, Management’s Discussion and Analysis or Plan of Operation.
In November 2012, the Company issued 300,000 shares of unregistered common stock and 150,000 warrants to purchase unregistered common stock to SAMI for additional services performed and a two year extension of time in connection with the December 2010 consulting agreement. To reflect the entire value of the stock and warrants issued, the Company expects to take a non-cash charge to earnings of approximately $421,000 ratably over the subsequent 24 months through December 2015, the ending date of the agreement. The agreement has been included in this Form 10-Q as Exhibit 10.1.
In November 2012, the Company received a Notice and Demand of Payment Withdrawal Liability from Central States Southeast and Southwest Areas Pension Fund (the “Notice”), the pension trustee that was funded by the Company for the benefit of its former employees at its City of Toledo operation. The Notice demands a payment of $412,576, payable monthly over 20 years. See Note 2, Long-Term Debt and Line of Credit above for more details. As of the balance sheet date, the Company has accrued this liability and recognized the expense. However, the Company is reviewing all possible options and plans to take whatever legal action is available and necessary to reduce or eliminate this liability. It is too early in the process to give any expectations on possible outcomes or outlook. The letter has been included in this Form 10-Q as Exhibit 99.1.
Item 2. Management’s Discussion and Analysis or Plan of Operation
Forward-Looking Statements
This 10-Q 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 differ materially from the results described in those statements. 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 fuel, 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-Q, or, as filed in Form 10-K for the year ending December 31, 2011 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-Q; however, this list is not exhaustive and many other factors could impact our business and it is impossible to predict with any accuracy which factors could result in negative impacts. Although we believe that the forward-looking statements contained in this Form 10-Q 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-Q 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-Q. In addition to the risks listed above, other risks may arise in the future, and we disclaim any obligation to update information contained in any forward-looking statement.
Overview
We 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.
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.
Through early November 2011, we operated two biosolids processing facilities located in Toledo, Ohio and Volusia County, Florida. These two facilities each produced the N-Viro SoilTM agricultural product, and have provided us with working and development capital. In late 2011, the City of Toledo awarded the contract to process all of its biosolids with another company, and we effectively ceased operations at that facility. Our goal is to continue to operate the Florida facility 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.
From the start-up in April 2011 to September 2011, we operated the first full-scale N-Viro Fuel™ mobile processing facility in western Pennsylvania. The purpose of the mobile system is to prepare quantities of N-Viro Fuel™ to facilitate necessary testing with cooperating power facilities. Once completed, we expect the initial test to evolve into long-term agreements for the N-Viro Fuel product. This mobile system will thereafter be available for use at various locations to demonstrate the N-Viro Fuel process to other municipalities and provide required test fuel quantities for power companies throughout the United States. This mobile system is expected to be a key component to developing N-Viro Fuel™ facilities for several years to come.
Results of Operations
The dollar amounts in the following sections are stated as approximations, rounded to the nearest $1,000.
Total revenues were $877,000 for the quarter ended September 30, 2012 compared to $1,195,000 for the same period of 2011. The net decrease in revenue is due primarily to a decrease in facility management revenue and a reduction of service fees for the management of alkaline admixture. Our cost of revenues decreased to $688,000 in 2012 from $1,075,000 for the same period in 2011, and the gross profit margin increased to 22% for the quarter ended September 30, 2012, from 10% for the same period in 2011. This increase in gross profit margin was primarily the result of not operating the mobile fuel processing facility in Pennsylvania during the current quarter, and secondarily the Florida operation and their pricing changes for the cost of inbound alkaline admixture and outbound product costs. Operating expenses decreased for the quarter ended September 30, 2012 over the comparative prior year period, and Nonoperating income (expense) showed a decrease from the third quarter of 2011 to 2012. These changes collectively resulted in a net loss of $527,000 for the quarter ended September 30, 2012 compared to a net loss of $1,328,000 for the same period in 2011, a decrease in the loss of $801,000.
Adding back non-cash expenses such as depreciation, amortization, stock and stock options charges and subtracting cash out for capitalized assets and principal (debt) repayments, resulted in an “adjusted cash loss” (non-GAAP) of $423,000 for the quarter ended September 30, 2012. The reconciliation between GAAP net loss and “adjusted cash loss (non-GAAP)” is as follows:
|
GAAP net loss
|
$(527,000)
|
|
|
Depreciation + Amortization
|
66,000
|
|
|
Net cash in (out) for assets purchased/sold
|
14,000
|
|
|
Stock and stock options expense
|
172,000
|
|
|
Deferred salaries
|
13,000
|
|
|
Gain on a/p write off
|
(54,000)
|
|
|
Amortization of discount on debentures
|
4,000
|
|
|
Debt service payments
|
(111,000)
|
|
|
"Adjusted cash loss (non-GAAP)"
|
$(423,000)
|
We feel this measure of our operating results is relevant to management and investors as we historically have a material part of our financial results affected by non-cash events.
Comparison of Three Months Ended September 30, 2012 with Three Months Ended September 30, 2011
Our overall revenue decreased $317,000, or 27%, to $877,000 for the three months ended September 30, 2012 from $1,195,000 for the three months ended September 30, 2011. The net decrease in revenue was due primarily to the following:
a) Sales of alkaline admixture decreased $12,000 from the same period ended in 2011;
b) Revenue from the service fees for the management of alkaline admixture decreased $84,000 from the same period ended in 2011 – this decrease was primarily due to the loss of the Toledo operation for $58,000 of the decrease and secondarily to our Florida-area customers, which decreased $26,000, and
c) Our processing revenue, including facility management revenue, showed a net decrease of $249,000 over the same period ended in 2011. This was primarily from the loss of the Toledo operation in late 2011, which accounted for $211,000 of the decrease and secondarily to our Florida operation, which showed a decrease of $58,000 in facility management and product revenue from 2011, primarily from the loss of the Seminole County contract at the end of 2011. Offsetting these decreases was an increase in royalty revenue of $26,000 from 2011 to 2012, which is all attributable to the processing start up of our licensee in Israel.
d) Revenue from license fees increased by $25,000 in 2012, from $-0- for the same period in 2011. This was the recognition of an up-front fee received, in accordance with a letter of agreement of mutual intent with a Pennsylvania power generation company for the final phase of N-Viro Fuel testing.
Our gross profit increased $69,000, or 58%, to $189,000 for the three months ended September 30, 2012 from $120,000 for the three months ended September 30, 2011, and the gross profit margin increased to 22% from 10% for the same periods. The increase in gross profit margin is primarily the result of not operating the mobile fuel processing facility in Pennsylvania during the current quarter, which operated at a gross loss of $89,000 on $7,000 of revenue for the quarter ended September 30, 2011, and secondarily the Florida operation and their pricing changes for the cost of inbound alkaline admixture and outbound product costs. Our Florida operation contributed $141,000 of gross profit on overall revenue of $797,000, which was an increase of $30,000 of gross profit over the same period in 2011. Offsetting these increases to gross profit and gross profit margin was the loss of the Toledo operation in late 2011, which contributed $79,000 of gross profit on revenues of $263,000 for the quarter ended September 30, 2011.
Our operating expenses decreased $997,000, or 57%, to $744,000 for the three months ended September 30, 2012 from $1,741,000 for the three months ended September 30, 2011. The decrease was primarily due to a decrease of $856,000 in payroll and related costs, a decrease of $314,000 in director costs, a decrease of $145,000 in consulting fees and expenses and an increase in the gain on the sale of fixed assets of $72,000, offset by an increase in pension withdrawal expense of $413,000. Of the total net decrease of $1,315,000 in director, employee related and consulting costs, $1,235,000 were non-cash costs. Therefore, for the three months ended September 30, 2012, actual cash outlays in these combined categories decreased by a total of $80,000 over the same period in 2011.
As a result of the foregoing factors, we recorded an operating loss of $554,000 for the three months ended September 30, 2012 compared to an operating loss of $1,621,000 for the three months ended September 30, 2011, a decrease in the loss of $1,067,000.
Our net nonoperating income (expense) decreased by $266,000 to net nonoperating income of $28,000 for the three months ended September 30, 2012 from net nonoperating expense of $294,000 for the similar period in 2011. The decrease in net nonoperating income was primarily due to a decrease of $316,000 from the gain recorded on warrants issued, offset by a $54,000 change in liabilities extinguished.
We recorded a net loss of $527,000 for the three months ended September 30, 2012 compared to a net loss of $1,328,000 for the same period ended in 2011, a decrease in the loss of $801,000. Adding back non-cash expenses such as depreciation, amortization, stock and stock options charges and subtracting cash out on capitalized assets and debt repayments, resulted in an adjusted cash loss (non-GAAP) of $423,000 for the three months ended in 2012. Similar non-cash expenses, cash out and debt repayments for the same period in 2011 resulted in an adjusted cash loss (non-GAAP) of $205,000, an increase in the adjusted cash loss (non-GAAP) of $218,000 in the three months ended September 30, 2012 versus the same period in 2011.
For the three months ended September 30, 2012 and 2011, 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.
Comparison of Nine Months Ended September 30, 2012 with Nine Months Ended September 30, 2011
Our overall revenue decreased $1,810,000, or 40%, to $2,770,000 for the nine months ended September 30, 2012 from $4,580,000 for the nine months ended September 30, 2011. The net decrease in revenue was due primarily to the following:
a) Sales of alkaline admixture decreased $32,000 from the same period ended in 2011;
b) Revenue from the service fees for the management of alkaline admixture decreased $457,000 from the same period ended in 2011 – this decrease was attributed primarily to the Florida-area customers, which decreased $249,000 compared to the same period in 2011 and secondarily to the loss of the Toledo operation, which accounted for $198,000 for the first nine months; and
c) Our processing revenue, including facility management revenue, showed a net decrease of $1,360,000 over the same period ended in 2011. This was primarily from our Florida operation, which showed a decrease of $730,000 in facility management and product revenue from 2011, and secondarily from the loss of the Toledo operation which accounted for $645,000 of the decrease. This decrease in the Florida operation was mainly the loss of the Orange County Utilities contract that began in December 2010 and ended in March 2011, and to a lesser extent the loss of the Seminole County contract at the end of 2011. These two contracts accounted for $657,000 of the processing revenue decrease. Offsetting these decreases was an increase in royalty revenue of $33,000 from 2011 to 2012, which is all attributable to the processing start up of licensee in Israel. Also offsetting these decreases was the decrease in the loss from the mobile fuel processing facility in Pennsylvania, a decrease in the gross loss of $186,000 for the nine months ended September 30, 2012 from the same period in 2011.
d) Revenue from license fees increased by $41,000 from $-0- for the same period in 2011. Of this increase, $25,000 was the recognition of an up-front fee received, in accordance with a letter of agreement of mutual intent with a Pennsylvania power generation company for the final phase of N-Viro Fuel testing. $16,000 was the final license fee received from our licensee in Israel.
Our gross profit decreased $408,000, or 46%, to $482,000 for the six months ended September 30, 2012 from $890,000 for the nine months ended September 30, 2011, and the gross profit margin decreased to 17% from 19% for the same periods. The decrease in gross profit margin is primarily due to the loss of our Toledo operation in late 2011 and not deriving any revenue from the Orange County, Florida contract after March 2011. The Toledo operation had contributed $348,000 of gross profit on revenue of $858,000 for the first nine months of 2011. For the first nine months of 2012, our Florida operation contributed $431,000 of gross profit on overall revenue of $2,564,000, which was a decrease of $268,000 of gross profit over the same period in 2011. This decrease in Florida’s gross profit was primarily from decreased revenue from sludge management fees for contracts no longer in force in 2012.
Our operating expenses decreased $1,118,000, or 38%, to $1,827,000 for the nine months ended September 30, 2012 from $2,945,000 for the nine months ended September 30, 2011. The decrease was primarily due to a decrease of $950,000 in payroll and related costs, a decrease of $391,000 in director costs, an increase in the gain on the sale of fixed assets of $154,000, a decrease of $28,000 in office-related expense and a decrease of $29,000 in travel and sales-related costs, partially offset by an increase in pension withdrawal expense of $413,000 and an increase of $27,000 in consulting fees and expenses. Of the total net decrease of $1,314,000 in employee related, consulting and director costs, $1,073,000 were non-cash costs. Therefore, for the nine months ended September 30, 2012, actual cash outlays in these combined categories decreased by a total of $241,000 over the same period in 2011.
As a result of the foregoing factors, we recorded an operating loss of $1,346,000 for the nine months ended September 30, 2012 compared to an operating loss of $2,056,000 for the nine months ended September 30, 2011, a decrease in the loss of $710,000.
Our net nonoperating income (expense) decreased by $634,000 to net nonoperating expense of $6,000 for the nine months ended September 30, 2012 from net nonoperating income of $628,000 for the similar period in 2011. The decrease in net nonoperating income was primarily due to a decrease of $657,000 from the gain recorded on warrants issued whose value and number of shares outstanding had decreased during the period, offset by a net increase of $11,000 in the gains and expenses associated with debentures issued in previous periods and an $18,000 increase in the gain from liabilities extinguished.
We recorded a net loss of $1,351,000 for the nine months ended September 30, 2012 compared to a net loss of $1,428,000 for the same period ended in 2011, a decrease in the loss of $77,000. Adding back non-cash expenses such as depreciation, amortization, stock and stock options charges and subtracting cash out on capitalized assets and debt repayments, resulted in an adjusted cash loss (non-GAAP) of $189,000 for the nine months ended in 2012. Similar non-cash expenses, cash out and debt repayments for the same period in 2011 resulted in an adjusted cash loss (non-GAAP) of $601,000, an increase in the adjusted cash loss (non-GAAP) of $376,000 in the nine months ended September 30, 2012 versus the same period in 2011.
For the nine months ended September 30, 2012 and 2011, 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 $1,004,000 at September 30, 2012, compared to a working capital deficit of $409,000 at December 31, 2011, resulting in a decrease in working capital of $595,000. Current assets at September 30, 2012 included cash and cash equivalents of $239,000 (including restricted cash of $209,000), which is a decrease of $14,000 from December 31, 2011. The net negative change in working capital from December 31, 2011 was primarily from a $353,000 increase to short-term liability of the convertible debenture liability payable in July 2013 and a decrease in the net deferred current asset of $238,000 for amortization of common stock and warrants given pursuant to consulting contracts entered into during 2010 and 2011.
In the nine months ended September 30, 2012, our cash flow used by operating activities was $91,000, a decrease of $320,000 over the same period in 2011. The components of the decrease from 2011 in cash flow provided by operating activities was principally due to a $1,107,000 decrease in stock warrants and stock options issued for fees and services, a decrease of $220,000 in trade accounts receivable, a decrease of $215,000 in depreciation and amortization, a $154,000 increase in the gain on sale of fixed assets and a decrease of $11,000 in debenture discount amortization, offset by an increase of $657,000 in the market price of derivatives issued, an increase of $413,000 in pension withdrawal payable, an increase of $174,000 in trade accounts payable, a decrease in the net loss of $77,000, a decrease in prepaid and other assets of $56,000 and an increase of $10,000 in the provision for bad debt allowance.
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 the third quarter of 2012, the percentage of combined revenues generated from our owned and operated facilities was: 2006 – 46%; 2007 – 77%; 2008 – 94%; 2009 – 95%; 2010 – 96%; 2011 – 96%; through third quarter 2012 – 93%. 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. We make no assurances that payments from our customer or payments to our vendors will become shorter and this may have an adverse impact on our continuing operations.
During the third quarter of 2012, we had a line of credit with Monroe Bank + Trust, or the Bank, up to $400,000 bearing interest at the Wall Street Journal Prime Rate (3.25% at September 30, 2012) plus 0.75%, but in no event less than 5.00%, and secured by a first lien on all our assets (except equipment). In August 2012 it was renewed with a maturity date of August 15, 2013. Two certificates of deposit totaling $141,716 from the Bank are held as a condition of maintaining the line of credit. At September 30, 2012, we had $40,000 of borrowing capacity under the credit facility.
In November 2012, we received a Notice and Demand of Payment Withdrawal Liability from Central States Southeast and Southwest Areas Pension Fund (the “Notice”), the pension trustee that was funded by the Company for the benefit of its former employees at its City of Toledo operation. The Notice demands a payment of $412,576, payable monthly over 20 years at an interest rate of approximately 2.8% at $2,250.27 per month, or approximately $27,000 per year. Payments at the end of the 20 year period would total $540,065. As of the balance sheet date, we have accrued this liability and recognized the expense. However, we are currently reviewing all possible options and plan to take whatever legal action is available and necessary to reduce or eliminate this liability. It is too early in the process to give any expectations on possible outcomes or outlook. The letter has been included in this Form 10-Q as Exhibit 99.1.
In August 2011, we borrowed $200,000 with a Promissory Note payable to a related party of Timothy Kasmoch, our President and Chief Executive Officer, at 12% interest prepaid for a period of three months, renewable for an additional three months by the prepayment of additional interest and secured by certain equipment. Mr. Kasmoch has personally guaranteed the repayment of this Note. We extended the Note on January 30, 2012, April 30, 2012, July 30, 2012 and again on October 30, 2012. It is now due January 30, 2013. We expect to extend the Note on or before the due date but pay the Note in full during 2013.
From the beginning of 2006 through the third quarter of 2012, we have borrowed a total of $1,677,100 from ten lenders to purchase processing and automotive equipment. As of September 30, 2012, a total of eight term notes are outstanding, ranging from 6.2% to 10.9% interest for terms ranging three to five years, monthly payments totaling approximately $18,000 and all secured by equipment. The total amount owed on all equipment-secured notes as of September 30, 2012 was approximately $261,500 and all notes are expected to be paid in full on the applicable maturity date, the last of which is in March 2016.
In 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 2009 we issued $765,000 of Debentures to a total of twenty-three accredited investors, and one investor converted $10,000 of Debentures into unregistered common stock. 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 matured at June 30, 2011, however fifteen investors holding Debentures totaling $365,000 elected to replace them with new ones that now mature at June 30, 2013 but are not payable until the 10th business day of July. All other features of the “expired” Debentures remained the same in the replacement ones, except for the new maturity date. Of the four investors totaling $355,000 who did not replace their existing Debentures with new ones, two investors totaling $215,000 had their Debentures repaid; one investor converted $50,000 into unregistered common stock (at June 30, 2011) and one holding $90,000 of Debentures has not made a final decision. As of September 30, 2012, we held $455,000 of Debentures.
Because the fair market value of our 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, we were required under GAAP to record a discount given for certain (now) “expired” Debentures sold, which totaled $184,975. The discount was then required to be amortized as a period expense over the periods the Debentures were scheduled to be outstanding, which averaged 20 months, through the maturity date of June 30, 2011. Amortization expense on these “expired” Debentures for each of the three months ended September 30, 2012 and 2011 was $-0-, and for the nine months ended September 30, 2012 and 2011 was $-0- and $52,326, respectively.
For periods subsequent to June 30, 2011, we are required under GAAP to record a discount for certain Debentures replaced, which totals $32,737 and was recorded as a gain on debt modification during the quarter ended June 30, 2011. The discount is required to be amortized as a period expense over the next eight quarters the Debentures are scheduled to be outstanding. Amortization expense for each of the three months ended September 30, 2012 and 2011 was $4,092, and for the nine months ended September 30, 2012 and 2011 amounted to $12,276 and $4,092, respectively.
For the remainder of 2012 and into 2013 we expect to maintain current operating results and have adequate cash or access to cash to adequately fund operations from cash generated from equity issuances and exercises of outstanding warrants and options, and by focusing on existing and expected new sources of revenue, especially from our N-Viro Fuel technology. 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.
Moreover, while we renewed our line of credit for one year until August 2013, we have minimal borrowing availability under the line of credit. We have borrowed money from third parties and a related party and expect to be able to generate future cash from the exercise of common stock warrants and new equity issuances. Earlier in the year we modified all outstanding common stock warrants to reduce their weighted average exercise price. In addition, our operations in Florida, which now represent approximately 93% of our revenue, could be suspended temporarily or permanently by our landlord for perceived on-site issues with material storage or for other issues deemed in the best interest of the county and in conformance with the lease agreement. We consider our relationship with our landlord to be satisfactory, and are working to improve this relationship in the future.
Off-Balance Sheet Arrangements
At September 30, 2012, other than operating leases disclosed elsewhere, 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 Condensed Consolidated Balance Sheets.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. 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.
Changes on Internal Control Over Financial Reporting
During the three months ended September 30, 2012, there were no material changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
As of the date of this filing, we are in default on $90,000 of Convertible Debentures to one investor. We are in negotiation with the investor and expect to resolve this default in 2012 or 2013.
Item 4. (Removed and Reserved)
Item 5. Other Information
|
(a)
|
None
|
|
(b)
|
None
|
Item 6. Exhibits
Exhibit No. Description
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema
101.CAL* XBRL Taxonomy Extension Calculation Linkbase
101.DEF* XBRL Taxonomy Extension Definition Linkbase
101.LAB* XBRL Taxonomy Extension Label Linkbase
101.PRE* XBRL Taxonomy Extension Presentation Linkbase
*filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
N-VIRO INTERNATIONAL CORPORATION
Date: November 19, 2012 /s/ Timothy R. Kasmoch
Timothy R. Kasmoch
Chief Executive Officer and President
(Principal Executive Officer)
Date: November 19, 2012 /s/ James K. McHugh
James K. McHugh
Chief Financial Officer, Secretary and Treasurer
(Principal Financial & Accounting Officer)
EXHIBIT INDEX
Exhibit No. Document
|
|
31.1
|
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes – Oxley Act of 2002.
|
|
|
31.2
|
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes – Oxley Act of 2002.
|
|
|
32.1
|
Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.
|
|
|
32.2
|
Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.
|
|
|
10.1
|
Agreement, dated October 26, 2012, between N-Viro International Corporation and Strategic Asset Management, Inc.
|
|
|
99.1
|
Letter from Central States Southeast and Southwest Areas Pension Fund dated November 7, 2012 to N-Viro International Corporation, Notice and Demand for Payment of Withdrawal Liability.
|