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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 JUNE 30, 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
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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
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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 August 9, 2002, 2,577,433 shares of N-Viro International
Corporation $ .01 par value common stock were outstanding.
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-1-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30 Six Months Ended June 30
2002 2001 2002 2001
------------------------------- --------------------------------
Revenues $ 1,240,414 $ 1,115,478 $ 2,658,193 $ 2,278,242
Cost of revenues 878,188 642,615 1,826,054 1,396,358
----------- ----------- ----------- -----------
Gross Profit 362,226 472,863 832,139 881,884
Operating expenses:
Selling, general and administrative 512,118 498,965 981,869 1,046,437
Patent litigation expense - 131,764 545 201,940
----------- ----------- ----------- -----------
512,118 630,729 982,414 1,248,377
----------- ----------- ----------- -----------
Operating loss (149,892) (157,866) (150,275) (366,493)
Nonoperating income (expense):
Interest income (expense), net (4,097) 6,338 (4,306) 5,694
Income (loss) from equity investment in joint venture 27,616 (51,630) 52,262 (62,095)
----------- ----------- ----------- -----------
23,519 (45,292) 47,956 (56,401)
----------- ----------- ----------- -----------
Income (loss) before income taxes (126,373) (203,158) (102,319) (422,894)
Federal and state income taxes - - - -
----------- ----------- ----------- -----------
Net income (loss) $ (126,373) $ (203,158) $ (102,319) $ (422,894)
=========== =========== =========== ===========
Basic and diluted earnings (loss) per share $ (0.05) $ (0.08) $ (0.04) $ (0.16)
=========== =========== =========== ===========
Weighted average common shares outstanding 2,577,433 2,643,683 2,577,433 2,643,683
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
-2-
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2002 December 31,
(Unaudited) 2001 (Audited)
--------------- --------------
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted $ 43,866 $ 45,427
Restricted 400,000 400,000
Securities available-for-sale 1,401 1,401
Receivables:
Trade, net of allowance of $87,501 788,125 854,011
Notes and other 22,800 22,000
Related parties 25,561 24,461
Prepaid expenses and other assets 150,807 49,757
------------ ------------
Total current assets 1,432,560 1,397,057
Property and Equipment 621,460 479,541
Investment in Florida N-Viro, L.P. 577,348 525,086
Intangible and Other Assets 1,704,172 1,731,647
------------ ------------
$ 4,335,540 $ 4,133,331
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 374,342 $ 438,534
Line-of-credit 610,000 503,613
Accounts payable 1,155,949 991,344
Accrued liabilities 412,565 418,926
------------ ------------
Total current liabilities 2,552,856 2,352,417
Long-term debt, less current maturities 564,430 460,342
COMMITMENTS AND CONTINGENCIES
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) (11,619,468) (11,517,150)
------------ ------------
1,903,144 2,005,462
Less treasury stock, at cost, 123,500 shares 684,890 684,890
------------ ------------
Total stockholders' equity 1,218,254 1,320,572
------------ ------------
$ 4,335,540 $ 4,133,331
============ ============
See Notes to Consolidated Financial Statements
-3-
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2002 2001
--------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 105,417 $ 19,745
CASH FLOWS FROM INVESTING ACTIVITIES
Collections on notes receivable 3,271 -
Increase in notes receivable - (195,718)
Advances to related parties (1,100) -
Purchases of property and equipment (23,527) (3,460)
Expenditures for intangible assets (53,063) (20,702)
--------- ---------
Net cash used in investing activities (74,419) (219,880)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line-of-credit 106,387 165,000
Borrowings under long-term obligations 71,811 58,736
Principal payments on long-term obligations (210,757) (70,756)
--------- ---------
Net cash provided (used) by financing activities (32,559) 152,980
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,561) (47,155)
CASH AND CASH EQUIVALENTS - BEGINNING 45,427 128,485
--------- ---------
CASH AND CASH EQUIVALENTS - ENDING $ 43,866 $ 81,330
========= =========
Non-cash investing and financing activities:
During the six months ended June 30, 2002, the Company borrowed $178,842 to
finance the purchase of equipment.
-4-
N-VIRO INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements of N-Viro
International Corporation (the "Company") are unaudited but, in management's
opinion, reflect all adjustments (including normal recurring accruals) necessary
to present fairly such information for the period and at the dates indicated.
The results of operations for the six months ended June 30, 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.
The financial statements are consolidated as of June 30, 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 certain significant estimates and assumptions made
in preparation of the financial statements:
Non-domestic license and territory fees - The Company does not
recognize revenue on any non-domestic license or territory fee contracts until
the cash is received, assuming all other tests of revenue recognition are met.
Canada is excluded from this definition of non-domestic.
Allowance for Doubtful Accounts - The Company estimates losses for
uncollectible accounts based on the aging of the accounts receivable and the
evaluation of the likelihood of success in collecting the receivable.
Income Taxes - The Company assumes the deductibility of certain costs
in income tax filings and estimates the recovery of deferred income tax assets.
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
$30,000 for the six months ended June 30, 2002 under a contract arrangement
signed in 1993 and amended in 1998 for consulting services. To secure this
obligation, 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.
-5-
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 (the "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 in favor of the other party. Pursuant to the terms of the
Settlement Agreement, among other things, 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. Also pursuant to the Settlement
Agreement, the Company 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 license concerned the
non-exclusive right to sell and use the N-Viro technology in New Jersey,
Delaware, Maryland and Eastern Pennsylvania. The third license 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 June 30, 2002, the outstanding principal balance on the
Note was $162,587.
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 pay in lieu of litigation. As of June 30,
2002, the Company has remitted all sales tax due the State, and has paid the
fine and interest. The Company has arranged to pay the balance of the civil
penalty pursuant to a short-term payment schedule agreed to by the Department.
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.
Prior to May 9, 2002, the Company's shares of voting, common stock were
traded on the SmallCap Market of the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). 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. In July,
2002 the Company decided not to pursue further appeal of the NASD's decision to
de-list its voting common stock. 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
-6-
Over-The-Counter market generally experience lower trading value than those
traded on the organized exchanges.
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 June 30, 2002 is approximately $33,000. The total rental
expense included in the statements of operations for the six months ended June
30, 2002 and 2001 is approximately $32,000 and $32,200, respectively.
The Company's remaining minimum commitment under an agreement with a
consultant (see Note 2 above) is $30,000, payable in cash or stock in 2002.
During 1999, the Company entered into employment and consulting
agreements with two officers of the Company. One employment agreement expired in
July 2002 and the other will expire in 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
$139,000 at July 2002. The cost was recognized over the term of the employment
agreement. The Company charged $25,464 to operations for the six months ended
June 30, 2002 in conjunction with these agreements. The consulting agreements
begin upon termination of the respective employment agreements and extend
through July 2015 and June 2014, respectively. The agreements require the
officers to provide minimum future services to be eligible for compensation.
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.
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 the financial
position and results of operations of the Company.
-7-
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 50% of the Company's revenue is from
management operations, 47% from other domestic operations, 2% from research and
development grants and the remaining 1% from foreign operations. Sales of the
N-Viro technology are affected by general fluctuations in the business cycles in
the United States and worldwide, instability of economic conditions (such as the
current conditions in the Asia Pacific region and Latin America) and interest
rates, as well as other factors. In addition, operating results of some of the
Company's business segments are influenced, along with other factors such as
interest rates, by particular business cycles and seasonality.
COMPETITION. The Company does business in a highly competitive market
and has fewer resources than most of its competitors. Businesses in this market
compete within and outside the United States principally on the basis of price,
product quality, custom design, technical support, reputation, equipment
financing assistance and reliability. Competitive pressures and other factors
could cause the Company to lose market share or could result in decreases in
prices, either of which could have a material adverse effect on its financial
position and results of operations.
RISKS OF DOING BUSINESS IN OTHER COUNTRIES. The Company conducts
business in markets outside the United States, and expects to continue to do so.
In addition to the risk of currency fluctuations, the risks associated with
conducting business outside the United States include: social, political and
economic instability; slower payment of invoices; underdeveloped infrastructure;
underdeveloped legal systems; and nationalization. The Company has not entered
into any currency swap agreements which may reduce these risks. The Company may
enter into such agreements in the future if it is deemed necessary to do so.
Current economic and political conditions in the Asia Pacific and Middle East
regions have affected the Company outlook for potential revenue there. The
Company cannot predict the full impact of this economic instability, but it
could have a material adverse effect on revenues and profits.
The Company has determined that its reportable segments are those that
are based on the Company's method of internal reporting, which segregates its
business by product category and service lines. The Company's reportable
segments are as follows:
Management Operations - The Company provides employee and
management services to operate the City of Toledo Sludge 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 countries.
Research and Development - The Company contracts with Federal and
State agencies to perform or assist in research and development on the Company's
technology.
The accounting policies of the segments are the same as the Company's
significant accounting policies. Fixed assets generating specific revenue are
identified with their respective segments and are accounted for as such in the
internal accounting records. All other assets, including cash and other
-8-
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
net nonoperating income (expense) are non-apportionable and not allocated to a
specific segment. The Company accounts for and analyzes the operating data for
its segments generally by geographic location, with the exception of the
Management Operations and Research and Development segments. 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 environmental and municipal legal issues,
nature of the waste disposal infrastructure, political climate, and availability
of funds for investing in the Company's technology. These factors have not
changed significantly over the past several years and are not expected to change
in the near term.
The Research and Development segment accounts for approximately 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.
-9-
The table below presents information about the segment profits and
segment identifiable assets used by the chief operating decision makers of the
Company for the periods ended June 30, 2002 and 2001 (dollars in thousands).
Other
Management Domestic Foreign Research &
Operations Operations Operations Development Total
----------------- --------------- --------------- ------------------ -----------
Quarter Ended June 30, 2002
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Revenues $ 622 $ 582 $ 12 $ 24 $ 1,240
Cost of revenues 361 507 - 10 878
Segment profits 261 75 12 14 362
Identifiable assets 365 79 - 47 491
Depreciation 13 10 - 2 25
Quarter Ended June 30, 2001
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Revenues $ 430 $ 614 $ 13 $ 59 $ 1,116
Cost of revenues 258 332 - 53 643
Segment profits 172 282 13 6 473
Identifiable assets 190 69 - 54 313
Depreciation 8 10 - 2 20
Year Ended June 30, 2002
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Revenues $ 1,141 $ 1,366 $ 25 $ 126 $ 2,658
Cost of revenues 744 970 1 111 1,826
Segment profits 397 396 24 15 832
Identifiable assets 365 79 - 47 491
Depreciation 21 20 - 4 45
Year Ended June 30, 2001
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Revenues $ 864 $ 1,269 $ 26 $ 119 $ 2,278
Cost of revenues 605 697 - 94 1,396
Segment profits 259 572 26 25 882
Identifiable assets 190 69 - 54 313
Depreciation 16 20 - 4 40
-10-
A reconciliation of total segment revenues, cost of revenues, and segment
profits to consolidated revenues, cost of revenues, and segment information to
the consolidated financial statements for the quarters ended June 30, 2002 and
2001 is as follows (dollars in thousands):
Quarter Quarter
Ended June Ended June
30, 2002 30, 2001
--------------- ---------------
Segment profits:
Segment profits for reportable segments $ 362 $ 473
Corporate selling, general and administrative
expenses and research and development costs (512) (631)
Other income (expense) 24 (45)
--------------- ---------------
Consolidated earnings before taxes $ (126) $ (203)
=============== ===============
Identifiable assets:
Identifiable assets for reportable segments $ 491 $ 313
Corporate property and equipment 130 216
Current assets not allocated to segments 1,433 1,993
Intangible and other assets not allocated to
segments 2,516 2,324
Consolidated eliminations (234) (234)
--------------- ---------------
Consolidated assets $4,336 $4,612
=============== ===============
Depreciation and amortization:
Depreciation for reportable segments $ 25 $ 20
Corporate depreciation and amortization 41 32
--------------- ---------------
Consolidated depreciation and amortization $ 66 $ 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 June 30, 2002 and 2001 is as follows:
Quarter Ended June 30,
-------------------------------------
2002 2001
----------------- ------------------
Net sales $ 866,547 $ 741,080
Gross profit 122,434 (38,381)
Income (loss) from continuing operations 58,139 (108,692)
Net income (loss) 58,139 (108,692)
-11-
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 $1,240,000 for the quarter ended June 30, 2002
compared to $1,115,000 for the same period of 2001. The net increase in revenue
is due primarily to an increase in revenues from service fees from the
management of alkaline admixture and facility management. The Company's cost of
revenues increased to $878,000 in 2002 from $643,000 for the same period in
2001, but the gross profit percentage decreased to 29% from 42% for the quarters
ended June 30, 2002 and 2001. This decrease in gross profit percentage is
primarily due to the increased share in revenues derived from both the service
fee for the management of alkaline admixture and the facility management
operation, both of which have a lower gross profit margin associated with them
than other types of revenue, and the start-up of a soil blending operation in
conjunction with the management fee operation. Operating expenses decreased for
the comparative period, while the Company's share of the income 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 a net loss of
approximately $126,000 for the quarter ended June 30, 2002 compared to a net
loss of $203,000 for the quarter ended June 30, 2001.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 WITH THREE MONTHS ENDED JUNE 30,
2001
Overall revenue increased $125,000, or 11%, to $1,240,000 for the
quarter ended June 30, 2002 from $1,115,000 for the quarter ended June 30, 2001.
The net increase in revenue was due primarily to the following:
a) Sales of alkaline admixture decreased $6,000 from the same period
ended in 2001;
b) Revenue from the service fees for the management of alkaline
admixture was $132,000 for 2002. This type of revenue 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 increase of $35,000 over the same period ended in 2001;
d) Miscellaneous revenues increased $2,000 from the same period ended in
2001;
e) Licensing of the N-Viro Process, including territory fees, earned the
Company $-0- for the period, the same as in 2001; and,
f) Research and development revenue decreased $38,000 from the same
period ended in 2001.
Gross profit decreased $111,000, or 23%, to $362,000 for the three
months ended June 30, 2002 from $473,000 for the three months ended June 30,
2001. This decrease in gross profit was primarily due to the increased
percentage of total revenue derived from both the service fees for the
management of
-12-
alkaline admixture and the facility management operation, both of which have a
lower gross profit margin associated with them than other types of revenue of
the Company. The gross profit margin decreased to 29% from 42%, mainly from the
larger percentage of total revenue derived from the service fees for the
management of alkaline admixture and facility management operations. In
conjunction with the facility management operation, the Company also started a
soil blending operation in the quarter, and expensed approximately $124,000 with
no revenue. The Company expects this operation to realize revenue in the third
quarter of 2002. If the Company had not started this operation, the gross margin
would have been approximately 37%.
Operating expenses decreased $119,000, or 19%, to $512,000 for the three
months ended June 30, 2002 from $631,000 for the three months ended June 30,
2001. The decrease was primarily due to a decrease in patent litigation costs of
$132,000.
As a result of the foregoing factors, the Company recorded an operating
loss of $150,000 for the three months ended June 30, 2002 compared to an
operating loss of $158,000 for the three months ended June 30, 2001.
Net nonoperating income (expense) increased by $69,000 to a net income
of $24,000 for the three months ended June 30, 2002 from a net expense of
$45,000 for the three months ended June 30, 2001. The increase was primarily due
to an increase in the equity of a joint venture from a loss of $52,000 in 2001
to income of $28,000 in 2002.
For the three months ended June 30, 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.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2002 WITH SIX MONTHS ENDED JUNE 30, 2001
Overall revenue increased $380,000, or 17%, to $2,658,000 for the six
months ended June 30, 2002 from $2,278,000 for the six months ended June 30,
2001. The net increase in revenue was due primarily to the following:
a) Sales of alkaline admixture increased $39,000 from the same period
ended in 2001;
b) Revenue from the service fees for the management of alkaline
admixture was $268,000 for 2002. This type of revenue is new this year, 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 $14,000 over the same period ended in 2001;
d) Miscellaneous revenues decreased $6,000 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 $1,000 from the same
period ended in 2001.
Gross profit decreased $50,000, or 6%, to $832,000 for the six months
ended June 30, 2002 from $882,000 for the six months ended June 30, 2001. This
decrease in gross profit was primarily due to the increased percentage of total
revenue derived from both the service fees from the management of alkaline
admixture and facility management operation, both of which have a lower gross
profit margin associated
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with them than other types of revenue of the Company. The gross profit margin
decreased to 31% from 39%, mainly from the larger percentage of total revenues
derived from the service fees from the management of alkaline admixture and
facility management operations. In conjunction with the facility management
operation, the Company also started a soil blending operation in the second
quarter, and expensed approximately $124,000 with no revenue. The Company
expects this operation to realize revenue in the third quarter of 2002. If the
Company had not started this operation, the gross margin for the six month
period would have been approximately 35%.
Operating expenses decreased $266,000, or 21%, to $982,000 for the six
months ended June 30, 2002 from $1,248,000 for the six months ended June 30,
2001. The decrease was primarily due to a decreases in patent litigation costs
of $202,000, and general office related expenses of $64,000.
As a result of the foregoing factors, the Company recorded an operating
loss of $150,000 for the six months ended June 30, 2002 compared to an operating
loss of $366,000 for the six months ended June 30, 2001.
Net nonoperating income (expense) increased by $104,000 to a net income
of $48,000 for the six months ended June 30, 2002 from a net expense of $56,000
for the six months ended June 30, 2001. The increase was primarily due to an
increase in the equity of a joint venture from a loss of $62,000 in 2001 to
income of $52,000 in 2002.
For the six months ended June 30, 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 $1,120,000 at June 30,
2002, compared to a working capital deficit of $955,000 at December 31, 2001,
which is an increase of $165,000. Current assets at June 30, 2002 included cash
and investments of $444,000 (including restricted cash of $400,000), which is a
decrease of $1,000 from December 31, 2001. The decrease in working capital was
principally due to the operating loss for the six month period.
The Company maintains a $400,000 certificate of deposit with a bank
which is held as collateral on the Company's working capital line of credit.
In April 2000, the Company renewed its agreement for a line of credit of
$1 million, and in May 2001 the line was renewed for $750,000. The lender
extended the line in April, 2002 and again July 31, 2002 and now expires January
31, 2003. The current agreement contains two demand Notes, for $400,000 and
$350,000, each expiring January 31, 2003. The first Note is secured by a
certificate of deposit with the lender of $400,000, and the second Note is
secured by all business assets and the assignment of the contract between the
City of Toledo and the Company, and requires the Company to maintain certain
financial covenants.. Borrowings on the first Note bear interest at prime plus
1%, and borrowings on the second Note bear interest at prime plus 3%. The
balance owed on the existing line at June 30, 2002 was $610,000.
The normal collection terms for accounts receivable are approximately 30
or 60 days for a majority of the customers. This is a result of the nature of
the license contracts and type of customer.
The Company's cash requirements for the next 90 days include a balloon
payment due Hydropress in October, 2002 and the remittance of sales tax to the
State of South Carolina (see Note 3 discussions). The Company also expects to
realize significant seasonal revenue from the sale of its soil products, and is
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initiating a plan of immediate cost-cutting and other measures to improve its
cash flow through the year end.
The Company is currently negotiating with several third parties which
may result in additional funds which, in management's opinion, would provide
adequate cash flows to finance the 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 and satisfactory completion of negotiations with third parties 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
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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
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
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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 may
never begin. 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 (the "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 in favor of the other party. Pursuant to the terms of the
Settlement Agreement, among other things, 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. Also pursuant to the Settlement
Agreement, the Company 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 license concerned the
non-exclusive right to sell and use the N-Viro technology in New Jersey,
Delaware, Maryland and Eastern Pennsylvania. The third license 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 June 30, 2002, the outstanding principal balance on the
Note was $162,587.
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 pay in lieu of litigation. As of June 30,
2002, the Company has remitted all sales tax due the State, and has paid the
fine and interest. The Company has arranged to pay the balance of the civil
penalty pursuant to a short-term payment schedule agreed to by the Department.
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.
Prior to May 9, 2002, the Company's shares of voting, common stock were
traded on the SmallCap Market of the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). 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. In July,
2002 the Company decided not to pursue further appeal of the NASD's decision to
de-list its voting common stock. 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
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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.
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. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 99.1 - Certification(s) Pursuant to Section
1350 of Chapter 63 of Title 18 of the United States Code.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K dated April
25, 2002, to disclose both the signing of agreements with
one of the Company's stockholders, and the retention of an
investment banking firm to assist in the issuance of shares
of preferred stock.
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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: August 14, 2002 /s/ Terry J. Logan
--------------------- ------------------------------------------
Terry J. Logan
Chief Executive Officer and President
(Principal Executive Officer)
Date: August 14, 2002 /s/ James K. McHugh
--------------------- ------------------------------------------
James K. McHugh
Chief Financial Officer, Secretary and
Treasurer
(Principal Financial & Accounting Officer)
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