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 MARCH 31, 2002
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 REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1741211
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3450 W. CENTRAL AVENUE, SUITE 328
TOLEDO, OHIO 43606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (419) 535-6374
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to the filing requirements for at least the past 90 days. Yes X No .
As of May 9, 2002, 2,577,433 shares of N-Viro International
Corporation $ .01 par value common stock were outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31
(Unaudited)
2002 2001
----------- -----------
Revenues $ 1,417,779 $ 1,162,764
Cost of revenues 947,866 753,742
----------- -----------
Gross Profit 469,913 409,022
Operating expenses:
Selling, general and administrative 469,750 547,472
Patent litigation expense 545 70,176
----------- -----------
470,295 617,648
----------- -----------
Operating loss (382) (208,626)
Nonoperating income (expense):
Interest income (expense), net (210) (644)
Income (loss) from equity investment in joint venture 24,646 (10,465)
----------- -----------
24,436 (11,109)
----------- -----------
Income (loss) before income taxes 24,054 (219,735)
Federal and state income taxes -- --
----------- -----------
Net income (loss) $ 24,054 $ (219,735)
=========== ===========
Basic and diluted earnings (loss) per share $ 0.01 $ (0.08)
=========== ===========
Weighted average common shares outstanding 2,577,433 2,643,683
=========== ===========
See Notes to Consolidated Financial Statements
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N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 2002 December 31, 2001
(Unaudited) (Audited)
-------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted $ 56,674 $ 45,427
Restricted 400,000 400,000
Securities available-for-sale 1,401 1,401
Receivables:
Trade, net of allowance of $87,501 1,049,159 854,011
Notes and other 21,100 22,000
Related parties 25,261 24,461
Prepaid expenses and other assets 125,927 49,757
------------ ------------
Total current assets 1,679,522 1,397,057
Property and Equipment 580,031 479,541
Investment in Florida N-Viro, L.P. 549,732 525,086
Intangible and Other Assets 1,721,342 1,731,647
------------ ------------
$ 4,530,627 $ 4,133,331
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 486,388 $ 438,534
Line-of-credit 583,613 503,613
Accounts payable 1,186,672 991,344
Accrued liabilities 408,402 418,926
------------ ------------
Total current liabilities 2,665,075 2,352,417
Long-term debt, less current maturities 520,925 460,342
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 7,000,000 shares; issued
2,700,933 shares 27,010 27,010
Additional paid-in capital 13,495,602 13,495,602
Retained earnings (deficit) (11,493,095) (11,517,150)
------------ ------------
2,029,517 2,005,462
Less treasury stock, at cost, 123,500 shares 684,890 684,890
------------ ------------
Total stockholders' equity 1,344,627 1,320,572
------------ ------------
$ 4,530,627 $ 4,133,331
============ ============
See Notes to Consolidated Financial Statements
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N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2002 2001
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES $ (27,581) $ (16,909)
CASH FLOWS FROM INVESTING ACTIVITIES
Collections on notes receivable 3,279 --
Increase in notes receivable -- (187,233)
Advances to related parties (800) --
Purchases of property and equipment (14,933) (1,680)
Expenditures for intangible and other assets (23,938) (3,234)
--------- ---------
Net cash used in investing activities (36,392) (192,147)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line-of-credit 80,000 75,000
Borrowings under long-term obligations 71,811 58,736
Principal payments on long-term obligations (76,591) (41,220)
--------- ---------
Net cash provided by financing activities 75,220 92,516
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,247 (116,540)
CASH AND CASH EQUIVALENTS - BEGINNING 45,427 128,485
--------- ---------
CASH AND CASH EQUIVALENTS - ENDING $ 56,674 $ 11,945
========= =========
Non-cash investing and financing activities:
During the first quarter of 2002, the Company borrowed $113,217 to finance the
purchase of equipment.
See Notes to Consolidated Financial Statements
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N-VIRO INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements of N-Viro
International Corporation (the "Company") are unaudited but, in management's
opinion, reflect all adjustments (including only normal recurring accruals)
necessary to present fairly such information for the period and at the dates
indicated. The results of operations for the three months ended March 31, 2002
may not be indicative of the results of operations for the year ended December
31, 2002. Since the accompanying consolidated financial statements have been
prepared in accordance with Article 10 of Regulation S-X, they do not contain
all information and footnotes normally contained in annual consolidated
financial statements; accordingly, they should be read in conjunction with the
consolidated financial statements and notes thereto appearing in the Company's
Form 10-K for the period ending December 31, 2001.
N-Viro International Corporation was incorporated in April 1993 and is
the successor to N-Viro Energy Systems, Ltd. (the "Partnership") and five
Company agents (the "Company Agents").
On October 19, 1993, the Partnership contributed to the Company all of
its assets (except certain marketable securities and accounts receivable from
certain related parties), subject to all liabilities (except certain retained
liabilities), and the shareholders of the Company Agents contributed to the
Company all of the outstanding capital stock of such entities in exchange for a
total of six million shares of Common Stock of the Company and organization
notes totaling $5,221,709 (such transactions are collectively referred to as the
"Organization"). The Organization notes were repaid out of the proceeds from an
initial public offering of two million shares of Company Common Stock. A total
of 2,112,000 new shares were issued in the initial public offering including
shares issued in the partial exercise by the Underwriters of an over-allotment
option.
The financial statements are consolidated as of March 31, 2002 and
December 31, 2001 for the Company. Adjustments have been made to eliminate all
intercompany transactions.
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The following are 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 by the Company, 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.
Income Taxes - We assume the deductibility of certain costs in our
income tax filings and estimate the recovery of deferred income tax assets.
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2. RELATED PARTY TRANSACTIONS
The Company recognized an expense to Mr. Bobby B. Carroll, a Director
of the Company and a former shareholder of Tennessee-Carolina N-Viro, Inc., of
$15,000 for the three months ended March 31, 2002 under a contract arrangement
signed in 1993 and amended in 1998 for consulting services. The Company granted
Mr. Carroll a security interest in all present and future receivables and
contract rights from licenses in the states of Tennessee, North Carolina and
South Carolina pursuant to the contract agreement.
3. CONTINGENCIES
In November, 2001, and as filed under Form 8-K dated December 14, 2001,
the Company and Hydropress Environmental Services, Inc. ("Hydropress") signed a
Settlement Agreement of a lawsuit between the parties related to alleged price
guarantees on shares of the Company's common stock and to alleged breaches of a
license agreement between the parties. Each party dismissed its claims against
the other with prejudice and entered into general releases of the other party.
N-Viro purchased back 66,250 N-Viro shares held by Hydropress at the market
price as of November 15, 2001, which was $1.01 per share, for a total of
$66,913. The Company also purchased back three patent license agreements
(including territory rights) from Hydropress valued at approximately $287,000.
The first license concerned the exclusive right to sell and use the N-Viro
technology in Massachusetts, Vermont and New Hampshire. The second concerned the
non-exclusive right to sell and use the N-Viro technology in New Jersey,
Delaware, Maryland and Eastern Pennsylvania. The third concerned amendments to
the two prior-mentioned agreements and the exclusive right to use the N-Viro
technology at Hydropress' facility in Phillipsburg, New Jersey. N-Viro and
Hydropress entered into a new patent license agreement granting Hydropress the
non-exclusive right to use the N-Viro technology at its facility in
Phillipsburg, New Jersey. The Company is paying certain amounts due to
Hydropress under the Settlement Agreement pursuant to the terms of a promissory
note (the "Note"). The original principal amount of the Note was $204,587. The
Note is non-interest bearing and matures on October 15, 2002 with a balloon
payment of $144,587. At March 31, 2002 the outstanding principal balance on the
Note was $180,587.
In 2001, officials of the North Carolina Department of Revenue (the
"Department") contacted the Company and indicated that the Company was under
investigation for failing to file sales tax returns in the state of North
Carolina during the period from December 1994 to June 2001. The Company
acknowledged to Department officials that during that period of time, it had
collected approximately $80,000 in sales taxes from certain customers but had
not collected sales tax from other customers in North Carolina. The Company
submitted a memorandum to the Department arguing that no sales tax was due by
the Company because the sales at issue were exempt from sales tax. The
Department disagreed with this memorandum and levied a fine and civil penalty
totaling approximately $70,000 plus interest due on the previous unremitted
taxes, which the Company agreed to in lieu of litigation. As of March 31, 2002,
the Company has remitted all sales tax due the State, as well as paid the fine
and approximately one-third of the civil penalty and interest due, and has
arranged a short-term payment schedule agreed to by the Department on the
balance.
The Company has voluntarily approached state tax authorities in South
Carolina and acknowledged failing to file sales tax returns within that state.
The Company has collected and accrued approximately $170,000 in sales tax from
customers in South Carolina that has not been remitted to South Carolina tax
authorities. The Company believes that the sales at issue are exempt from sales
tax. The Company has retained counsel in South Carolina to assist it in
negotiating a settlement of this matter.
The Company received notice on November 29, 2001 from Nasdaq regarding
the Company's continued listing on the Nasdaq SmallCap Market. Nasdaq maintained
that the Company was in
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violation of a listing rule requiring all listed companies to maintain either
(1) a net tangible asset value of $2,000,000 or more, or (2) $2,500,000 or more
in stockholders' equity, or (3) a market capitalization of $35,000,000, or (4)
net income of at least $500,000 for the most recently completed fiscal year, or
two of the three most recently completed fiscal years (the "Requirements").
Presently, the Company does not satisfy any of these Requirements. The Company
subsequently provided Nasdaq with a plan to achieve and sustain compliance with
all of the Requirements. On February 28, 2002, the Company received a Nasdaq
staff determination indicating that it had rejected the Company's plan and the
Company failed to comply with the minimum net tangible assets or minimum
stockholders' equity requirements for continued listing on the Nasdaq SmallCap
Market, as set forth in Nasdaq Marketplace Rule 4310(c)(2)(B). The Company filed
an appeal to the staff's determination. Pending resolution of the Company's
appeal, the Company's common stock remained listed on the Nasdaq SmallCap
Market. The Company's oral hearing before a Nasdaq Listing Qualifications Panel
was held on April 18, 2002. On Thursday, May 9, 2002, the Company received
notice from the NASD that the Company's shares of voting, common stock would be
de-listed effective with the open of business on May 10, 2002. Currently, the
Company's shares of common stock are traded on the Over-The-Counter market. The
Company does not anticipate that the delisting of its common stock from the
Nasdaq SmallCap Market will have a material adverse effect on the financial
condition or results of operations of the Company. The delisting of the
Company's common stock from Nasdaq, however, may have a material adverse effect
on the marketability of the Company's shares, as shares traded on the
Over-The-Counter market generally experience lower trading value than those
traded on the organized exchanges. The Company has until May 24, 2002 to decide
whether to pursue further appeal of the NASD's decision to de-list its voting
common stock. If the Company does appeal, there can be no assurances that such
an appeal will be successful.
The Company's executive and administrative offices are located in
Toledo, Ohio, under a lease that expires on December 31, 2002. The Company
believes its relationship with its lessor is satisfactory. The total minimum
rental commitment at March 31, 2002 is approximately $45,900. The total rental
expense included in the statements of operations for the three months ended
March 31, 2002 and 2001 is approximately $15,300 and $14,400, respectively.
The Company's minimum commitment under an agreement with a consultant
(see Note 2 above) is $45,000, payable in cash or stock in 2002.
During 1999, the Company entered into employment and consulting
agreements with two officers of the Company. The employment agreements expire in
July 2002 and June 2004. Future compensation amounts are to be determined
annually by the Board. In addition, one of the agreements provides for payment
of life insurance premiums and the provision of health insurance coverage to the
officer and his spouse for their lives. The present value of estimated costs
related to the provisions of this agreement total $129,000 at July 2002. The
cost is being recognized over the term of the employment agreement. The
consulting agreements begin upon termination of the respective employment
agreements and extend through July 2015 and June 2014, respectively. The
agreements require minimum future services to be provided to be eligible for
compensation. The Company charged $12,732 to operations for the three months
ended March 31, 2002 in conjunction with these agreements.
The Company is involved in legal proceedings and subject to claims
which have arisen in the ordinary course of business. These actions, when
concluded and determined, will not, in the opinion of management, have a
material adverse effect upon the financial position, results of operations or
cash flows of the Company.
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4. NEW ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133, as amended by SFAS No. 137, is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. In June 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 141, "Business
Combinations." SFAS No. 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method and further clarifies the criteria to recognize
intangible assets separately from goodwill. In June 2001, FASB issued SFAS No.
142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to periodic impairment tests. Other intangible assets will
continue to be amortized over their useful lives. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. In June 2001, FASB issued SFAS
No. 143, "Accounting for Asset Retirement Obligations," which is effective the
first quarter of fiscal year 2003. SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of long-lived assets
and the associated asset retirement cost. In August 2001, FASB issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-lived Assets," which is
effective the first quarter of fiscal year 2002. SFAS No. 144 modifies and
expands the financial accounting and reporting for the impairment or disposal of
long-lived assets other than goodwill. The adoption of SFAS Nos. 133, 141, 142
and 144 had no material effect on the Company's financial statements. The
Company is still evaluating the impact of SFAS No. 143, but at this time does
not believe its adoption will have a significant impact on its financial
position and results of operations.
Actual results could differ materially from the estimates and
assumptions that we use in the preparation of our financial statements.
5. SEGMENT INFORMATION
EARNINGS VARIATION DUE TO BUSINESS CYCLES AND SEASONAL FACTORS. The
Company's operating results can experience quarterly or annual variations due to
business cycles, seasonality and other factors. The market price for its common
stock may decrease if its operating results do not meet the expectations of the
market.
Currently, approximately 37% of the Company's revenue is from
management operations, 55% from other domestic operations, 7% from research and
development grants and the remaining 1% from foreign operations. Sales of the
N-Viro technology are affected by general fluctuations in the business cycles in
the United States and worldwide, instability of economic conditions (such as the
current conditions in the Asia Pacific region and Latin America) and interest
rates, as well as other factors. In addition, operating results of some of the
Company's business segments are influenced, along with other factors such as
interest rates, by particular business cycles and seasonality.
COMPETITION. The Company competes against companies in a highly
competitive market and has fewer resources than most of those companies. Its
business competes within and outside the United States principally on the basis
of price, product quality, custom design, technical support, reputation,
equipment financing assistance and reliability. Competitive pressures and other
factors could cause the Company to lose market share or could result in
decreases in prices, either of which could have a material adverse effect on its
financial position and results of operations.
RISKS OF DOING BUSINESS IN OTHER COUNTRIES. The Company conducts
business in markets outside the United States, and expects to continue to do so.
In addition to the risk of currency
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fluctuations, the risks associated with conducting business outside the United
States include: social, political and economic instability; slower payment of
invoices; underdeveloped infrastructure; underdeveloped legal systems; and
nationalization. The Company has not entered into any currency swap agreements
which may reduce these risks. The Company may enter into such agreements in the
future if it is deemed necessary to do so. Current economic and political
conditions in the Asia Pacific and Middle East regions have affected the Company
outlook for potential revenue there. The Company cannot predict the full impact
of this economic instability, but it could have a material adverse effect on
revenues and profits.
The Company has determined that its reportable segments are those that
are based on the Company's method of internal reporting, which segregates its
business by product category and service lines. The Company's reportable
segments are as follows:
Management Operations - The Company provides employee and
management services to operate the Toledo Wastewater Treatment Facility.
Other Domestic Operations - Sales of territory or site licenses
and royalty fees to use N-Viro technology in the United States.
Foreign Operations - Sale of territory or site licenses and
royalty fees to use N-Viro technology in foreign operations.
Research and Development - The Company contracts with Federal and
State agencies to perform or assist in research and development on the Company's
technology.
The accounting policies of the segments are the same as the Company's
significant accounting policies. Fixed assets generating specific revenue are
identified with their respective segments as they are accounted for as such in
the internal accounting records. All other assets, including cash and other
current assets and all long-term assets, other than fixed assets, are identified
with the Corporate segment. The Company allocates a total of approximately 6% of
its labor cost contained in selling, general, and administrative expenses to the
segments, to reflect the indirect cost of maintaining these segments. All of the
other income (expense) costs or income are non-apportionable and not allocated
to a specific segment. The Company accounts for and analyzes the operating data
for its segments generally by geographic location, with the exception of the
Management Operations and Research and Development segments. These segments
represent both a significant amount of business generated as well as a specific
location and unique type of revenue.
The next two segments are divided between domestic and foreign sources,
as these segments differ in terms of environment and municipal legal issues,
nature of the waste disposal infrastructure, political climate, and availability
of funds for investing in the Company's technology. These factors have not
changed significantly over the past several years and are not expected to change
in the near term.
The Research and Development segment accounts for approximately 7% of
the total revenue of the Company, and is unlike any other revenue, in that it is
generated as a result of a specific project to conduct initial or additional
ongoing research into the Company's emerging technologies.
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The table below presents information about the segment profits and
segment identifiable assets used by the chief operating decision makers of the
Company for the quarters ended March 31, 2002 and 2001 (dollars in thousands).
Other
Management Domestic Foreign Research &
Operations Operations Operations Development Total
---------- ---------- ---------- ----------- -----
2002
-------------------------------------------------------------------
Revenues $ 519 $ 784 $ 13 $ 102 $1,418
Cost of revenues 383 463 1 101 948
Segment profits 136 321 12 1 470
Identifiable assets 303 83 -- 49 435
Depreciation 8 10 -- 2 20
2001
-------------------------------------------------------------------
Revenues $ 434 $ 656 $ 13 $ 60 $1,163
Cost of revenues 347 366 -- 41 754
Segment profits 87 290 13 19 409
Identifiable assets 198 71 -- 56 325
Depreciation 8 10 -- 2 20
- 10 -
A reconciliation of total segment revenues, cost of revenues, and segment
profits sales to consolidated revenues, cost of revenues, and segment
information to the consolidated financial statements for the quarters ended
March 31, 2002 and 2001 is as follows (dollars in thousands):
2002 2001
------- -------
Segment profits:
Segment profits for reportable segments $ 470 $ 409
Corporate selling, general and administrative
expenses and research and development costs (470) (618)
Other income (expense) 24 (11)
------- -------
Consolidated earnings before taxes $ 24 $ (220)
======= =======
Identifiable assets:
Identifiable assets for reportable segments $ 435 $ 325
Corporate property and equipment 145 230
Current assets not allocated to segments 1,680 2,162
Intangible and other assets not allocated to
segments 2,505 2,380
Consolidated eliminations (234) (234)
------- -------
Consolidated assets $ 4,531 $ 4,863
======= =======
Depreciation and amortization:
Depreciation for reportable segments $ 20 $ 20
Corporate depreciation and amortization 40 32
------- -------
Consolidated depreciation and amortization $ 60 $ 52
======= =======
6. INVESTMENT IN FLORIDA N-VIRO, L. P.
Florida N-Viro, L.P. was formed in January 1996 pursuant to a joint
venture agreement between the Company and VFL Technology Corporation. The
Company owns a 47.5% interest in the joint venture.
Condensed financial information of the partnership for the quarters
ended March 31, 2002 and 2001 is as follows:
Quarter Ended March 31,
---------------------------
2002 2001
--------- ---------
Net sales $ 962,073 $ 929,258
Gross profit 107,456 40,453
Income (loss) from continuing operations 51,887 (22,032)
Net income (loss) 51,887 (22,032)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was incorporated in April, 1993, and became a public
company on October 12, 1993. The Company's business strategy is to market the
N-Viro Process, which produces an "exceptional quality" sludge product as
defined in the Section 503 Sludge Regulations under the Clean Water Act of 1987,
with multiple commercial uses. To date, the Company's revenues primarily have
been derived from the licensing of the N-Viro Process to treat and recycle
wastewater sludge generated by municipal wastewater treatment plants and from
the sale to licensees of the alkaline admixture used in the N-Viro Process. The
Company has also operated N-Viro facilities for third parties on a start-up
basis and currently operates one N-Viro facility on a contract management basis.
Total revenues were $1,418,000 for the quarter ended March 31, 2002
compared to $1,163,000 for the same period of 2001. The net increase in revenue
is due primarily to an increase in management of alkaline admixture revenue and
site licensing fees. The Company's cost of revenues increased to $948,000 in
2002 from $754,000 for the same period in 2001, but the gross profit percentage
decreased to 33% from 35% for the quarters ended March 31, 2002 and 2001. This
decrease in gross profit percentage is primarily due to the increased share in
revenue derived from the management of alkaline admixture, which has a lower
gross profit margin associated with it than other types of revenue. Operating
expenses decreased for the comparative period, while the Company's share in the
equity of a joint venture, the Company's interest in Florida N-Viro, L.P.,
increased for the same period of 2002. These changes collectively resulted in
net income of approximately $24,000 for the quarter ended March 31, 2002
compared to a net loss of $220,000 for the quarter ended March 31, 2001.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2002 WITH THREE MONTHS ENDED MARCH
31, 2001
Overall revenue increased $255,000, or 22%, to $1,418,000 for the
quarter ended March 31, 2002 from $1,163,000 for the quarter ended March 31,
2001. The net increase in revenue was due primarily to the following:
a) Sales of alkaline admixture increased $45,000 from the same period
ended in 2001;
b) Revenue from the management of alkaline admixture was $136,000 for
2002. This type of revenue is new this quarter, and is the fee charged by the
Company to manage and sell the alkaline admixture on behalf of a third party
customer;
c) The Company's processing revenue, including facility management
revenue, showed a net decrease of $49,000 over the same period ended in 2001;
d) Miscellaneous revenues decreased $7,000 from the same period ended
in 2001;
e) Licensing of the N-Viro Process, including territory fees, earned
the Company $92,000 for the period, an increase of $92,000 from the same period
in 2001; and,
f) Research and development revenue increased $38,000 from the same
period ended in 2001.
Gross profit increased $61,000, or 15%, to $470,000 for the three
months ended March 31, 2002 from $409,000 for the three months ended March 31,
2001. This increase in gross profit was primarily due to the increased sales of
the management of alkaline admixture, licensing fee revenue and alkaline
admixture sales. The gross profit margin decreased slightly to 33% from 35%,
mainly from the larger
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percentage of total revenue derived from the management and sale of alkaline
admixture during the same three month comparison.
Operating expenses decreased $147,000, or 24%, to $470,000 for the
three months ended March 31, 2002 from $618,000 for the three months ended March
31, 2001. The decrease was primarily due to a decrease in patent litigation
costs of $70,000, and personnel, promotion and sales support of $58,000.
As a result of the foregoing factors, the Company recorded an operating
loss of $400 for the three months ended March 31, 2002 compared to an operating
loss of $209,000 for the three months ended March 31, 2001.
Nonoperating income (expense) increased by $35,000 to a net income of
$24,000 for the three months ended March 31, 2002 from a net expense of $11,000
for the three months ended March 31, 2001. The increase was primarily due to an
increase in the equity of a joint venture from a loss of $10,000 in 2001 to
income of $25,000 in 2002.
For the three months ended March 31, 2002 and 2001, the Company has not
fully recognized the tax benefit of the losses incurred in prior periods.
Accordingly, the effective tax rate for each period was zero.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of $986,000 at March 31,
2002, compared to a working capital deficit of $955,000 at December 31, 2001, an
increase in the deficit of $31,000. Current assets at March 31, 2002 included
cash and investments of $457,000 (including restricted cash of $400,000), which
is an increase of $12,000 from December 31, 2001. The decrease in working
capital was principally due to the operating loss for the quarter.
The Company maintains a $400,000 certificate of deposit with a bank
which was held as collateral on the Company's working capital line of credit.
In 1997 the Company obtained a working capital line of credit of
$200,000 and in the third quarter of 1998 the line was increased to $500,000.
This debt was collateralized by a certificate of deposit with the lender,
accounts receivable, inventories and equipment, assignment of the Contract
between the City of Toledo and the Company, was due on demand, and, required the
Company to maintain certain financial covenants.
In April 2000, the Company renewed its agreement for a line of credit
of $1 million, and in May 2001 was renewed for $750,000, and was to have expired
on April 30, 2002. However, the lender has extended the line once again and it
now expires July 31, 2002. This agreement is secured by a certificate of deposit
with the lender of $400,000, with all other terms similar as agreed to in 1998
except there are no financial covenants. Borrowings up to $400,000 bear interest
at prime minus .5%, and borrowings above $400,000 bear interest at prime plus
1%. The balance owed on the line at March 31, 2002 was approximately $580,000.
The normal collection terms for accounts receivable are approximately
60 days for a majority of the customers. This is a result of the nature of the
license contracts, type of customer and the amount of time required to obtain
the information to prepare the billing.
The Company is currently negotiating with several third parties in an
attempt to obtain additional sources of funds which, in management's opinion,
would provide adequate cash flows to finance the
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Company's cash requirements. The satisfactory completion of these negotiations
is essential as these avenues are the Company's principal means of providing
sufficient cash flows to meet 2002 requirements. Because these negotiations are
still in progress, there can be no assurance the Company will have sufficient
funds to finance its operations.
The Company has agreed to go forward on a contract with the investment
banking firm of Laux & Company of Medina, Ohio, with respect to a proposal to
obtain up to $1.25 million in equity financing. The Company hopes to sell up to
500,000 shares of preferred stock at a price per share of $2.50. The specific
terms and conditions applicable to the preferred shares will be determined once
Laux & Company has identified a potential purchaser. There can be no assurance
that the Company will be successful in finding a buyer for the preferred stock
or in selling these shares. If the shares are sold, the proceeds from the
offering will be used to supplement the Company's working capital.
Current market trends and Company business development provide
significant basis for the Company's optimistic outlook for 2002 and beyond. The
national public attack on Class B levels of sludge treatment is rapidly moving
the market to Class A technologies, of which the Company's patented N-Viro
processes are very cost competitive, and well established in the market place.
The development and patenting of new technologies for animal manure treatment,
bio-fuel and nematode control have the potential to expand the Company's revenue
base over the next five years and beyond.
The Company believes that its working capital together with the line of
credit will provide sufficient cash to meet the Company's cash requirements
through 2002.
OUR ABILITY TO GROW MAY BE LIMITED BY COMPETITION
We provide a variety of technology and services relating to the
transportation and 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.
Some of these competitors are larger and have greater capital resources than we
do.
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, we may not be
the successful bidder. In addition, some of our contracts will expire in the
future and those contracts 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 and financial condition.
WE ARE AFFECTED BY UNUSUALLY ADVERSE WEATHER CONDITIONS
Our 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 business. In addition, our
revenues and operational results are adversely affected during the winter months
which limits the level of land application that can be performed. Long periods
of adverse weather could have a material negative effect on our business and
financial condition.
FUEL COST VARIATION COULD AFFECT OPERATING RESULTS AND EXPENSES
The price and supply of fuel is unpredictable and fluctuates based on
events outside our control, including demand for oil and gas, actions by OPEC
and other oil and gas producers, and war in oil producing countries. Because
fuel is needed to run the trucks that purchase the processing materials and
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supplies for our 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 DEPENDENT ON THE MEMBERS OF OUR MANAGEMENT TEAM
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 have entered into employment agreements with certain members of our
management team, which contain 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 us 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 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 our services. We
have not conducted an independent review of patents issued to third parties.
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.
The Company cautions that words used in this document such as
"expects," "anticipates," "believes," "may," and "optimistic," as well as
similar words and expressions used herein, identify and refer to statements
describing events that may or may not occur in the future. These forward-looking
statements and the matters to which they refer are subject to considerable
uncertainty that may cause actual results to be materially different from those
described herein. Some, but not all, of the factors that could cause actual
results to be different than those anticipated or predicted by the Company
include: (i) a deterioration in economic conditions in general; (ii) a decrease
in demand for the Company's products or services in particular; (iii) the
Company's loss of a key employee or employees; (iv) regulatory changes,
including changes in environmental regulations, that may have an adverse affect
on the demand for the Company's products or services; (v) increases in the
Company's operating expenses resulting from increased costs of labor and/or
consulting services; and (vi) a failure to collect upon or otherwise secure the
benefits of existing contractual commitments with third parties, including
customers of the Company. For example, while the Company anticipates obtaining
the permits and approvals necessary for the N-Viro Fuel pilot program to
commence operations in 2002, such program may not begin until 2003 or ever.
Delay or cancellation with respect to this project could result from (1) a
failure to achieve acceptable air quality levels in preliminary testing, (2)
costs associated with the use of N-Viro Fuel significantly exceeding current
estimates, or (3) competing technologies rendering the N-Viro Fuel process less
attractive.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November, 2001, and as filed under Form 8-K dated December 14, 2001,
the Company and Hydropress Environmental Services, Inc. ("Hydropress") signed a
Settlement Agreement of a lawsuit between the parties related to alleged price
guarantees on shares of the Company's common stock and to alleged breaches of a
license agreement between the parties.. Each party dismissed its claims against
the other with prejudice and entered into general releases of the other party.
N-Viro purchased back 66,250 N-Viro shares held by Hydropress at the market
price as of November 15, 2001, which was $1.01 per share for a total of $66,913.
The Company also purchased back three patent license agreements (including
territory rights) from Hydropress valued at approximately $287,000. The first
license concerned the exclusive right to sell and use the N-Viro technology in
Massachusetts, Vermont and New Hampshire. The second concerned the non-exclusive
right to sell and use the N-Viro technology in New Jersey, Delaware, Maryland
and Eastern Pennsylvania. The third concerned amendments to the two
prior-mentioned agreements and the exclusive right to use the N-Viro technology
at Hydropress' facility in Phillipsburg, New Jersey. N-Viro and Hydropress
entered into a new patent license agreement granting Hydropress the
non-exclusive right to use the N-Viro technology at its facility in
Phillipsburg, New Jersey. The Company is paying certain amounts due to
Hydropress under the Settlement Agreement pursuant to the terms of a promissory
note (the "Note"). The original principal amount of the Note was $204,587. The
Note is non-interest bearing and matures on October 15, 2002 with a balloon
payment of $144,587. At March 31, 2002 the outstanding principal balance on the
Note was $180,587.
In 2001, officials of the North Carolina Department of Revenue (the
"Department") contacted the Company and indicated that the Company was under
investigation for failing to file sales tax returns in the state of North
Carolina during the period from December 1994 to June 2001. The Company
acknowledged to Department officials that during that period of time, it had
collected approximately $80,000 in sales taxes from certain customers but had
not collected sales tax from other customers in North Carolina. The Company
submitted a memorandum to the Department arguing that no sales tax was due by
the Company because the sales at issue were exempt from sales tax. The
Department disagreed with this memorandum and levied a fine and civil penalty
totaling approximately $70,000 plus interest due on the previous unremitted
taxes, which the Company agreed to in lieu of litigation. As of March 31, 2002,
the Company has remitted all sales tax due the State, as well as paid the fine
and approximately one-third of the civil penalty and interest due, and has
arranged a short-term payment schedule agreed to by the Department on the
balance.
The Company has voluntarily approached state tax authorities in South
Carolina and acknowledged failing to file sales tax returns within that state.
The Company has collected and accrued approximately $170,000 in sales tax from
customers in South Carolina that has not been remitted to South Carolina tax
authorities. The Company believes that the sales at issue are exempt from sales
tax. The Company has retained counsel in South Carolina to assist it in
negotiating a settlement of this matter.
The Company received notice on November 29, 2001 from Nasdaq regarding
the Company's continued listing on the Nasdaq SmallCap Market. Nasdaq maintained
that the Company was in violation of a listing rule requiring all listed
companies to maintain either (1) a net tangible asset value of $2,000,000 or
more, or (2) $2,500,000 or more in stockholders' equity, or (3) a market
capitalization of $35,000,000, or (4) net income of at least $500,000 for the
most recently completed fiscal year, or two of the three most recently completed
fiscal years (the "Requirements"). Presently, the Company does not satisfy any
of these Requirements. The Company subsequently provided Nasdaq with a plan to
achieve and sustain compliance with all of the Requirements. On February 28,
2002, the Company received a Nasdaq staff determination indicating that it had
rejected the Company's plan and the Company failed to comply with the minimum
net tangible assets or minimum stockholders' equity requirements for
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continued listing on the Nasdaq SmallCap Market, as set forth in Nasdaq
Marketplace Rule 4310(c)(2)(B). The Company filed an appeal to the staff's
determination. Pending resolution of the Company's appeal, the Company's common
stock remained listed on the Nasdaq SmallCap Market. The Company's oral hearing
before a Nasdaq Listing Qualifications Panel was held on April 18, 2002. On
Thursday, May 9, 2002, the Company received notice from the NASD that the
Company's shares of voting, common stock would be de-listed effective with the
open of business on May 10, 2002. Currently, the Company's shares of common
stock are traded on the Over-The-Counter market. The Company does not anticipate
that the delisting of its common stock from the Nasdaq SmallCap Market will have
a material adverse effect on the financial condition or results of operations of
the Company. The delisting of the Company's common stock from Nasdaq, however,
may have a material adverse effect on the marketability of the Company's shares,
as shares traded on the Over-The-Counter market generally experience lower
trading value than those traded on the organized exchanges. The Company has
until May 24, 2002 to decide whether to pursue further appeal of the NASD's
decision to de-list its voting common stock. If the Company does appeal, there
can be no assurances that such an appeal will be successful.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. RECENT DEVELOPMENTS
On May 9, 2002, the Company received a letter from the Nasdaq
Stock Market, Inc., notifying the Company that pursuant to Nasdaq
Marketplace Rule 4310(c)(2), its common stock would be removed from
trading from the Nasdaq Small Cap Market, effective with the open of
business on May 10, 2002. On May 10, 2002, the Company issued a news
release concerning the delisting of its common stock from the Nasdaq
Small Cap Market and other matters. This news release is included in
this filing as Exhibit 99.1.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 99.1. News release dated May 9, 2002,
announcing the delisting from the Nasdaq Small Cap
Market of the Company's common stock.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K dated March 6,
2002, to disclose the receipt of a Nasdaq Staff
determination letter indicating the Company fails to comply
with the continued listing requirements of the Market.
The Company filed a report on Form 8-K dated March
18, 2002, to disclose both the receipt of a notice that the
Company's oral hearing before a Nasdaq Listing
Qualifications Panel will be held, and the announcement of
the retirement of Mr. James O'Neil from the Board of
Directors.
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N-VIRO INTERNATIONAL CORPORATION
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
N-VIRO INTERNATIONAL CORPORATION
Date: May 15, 2002 /s/ Terry J. Logan
------------ ----------------------------------------------------
Terry J. Logan
Chief Executive Officer and President
(Principal Executive Officer)
Date: May 15, 2002 /s/ James K. McHugh
------------ ----------------------------------------------------
James K. McHugh
Chief Financial Officer, Secretary and Treasurer
(Principal Financial & Accounting Officer)
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