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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, 2003
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.
---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12-2). Yes No X
---
As of August 6, 2003, 2,577,433 shares of N-Viro International
Corporation $ .01 par value common stock were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30 Six Months Ended June 30
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues. . . . . . . . . . . . . . . . . . . . . . . $1,408,122 $1,240,414 $2,653,391 $2,658,193
Cost of revenues. . . . . . . . . . . . . . . . . . . 1,061,963 878,188 1,975,360 1,826,054
----------- ----------- ----------- -----------
Gross Profit. . . . . . . . . . . . . . . . . . . . . 346,159 362,226 678,031 832,139
Operating expenses:
Selling, general and administrative . . . . . . . . . 643,799 512,118 1,095,067 981,869
Patent litigation expense . . . . . . . . . . . . . . - - - 545
----------- ----------- ----------- -----------
643,799 512,118 1,095,067 982,414
----------- ----------- ----------- -----------
Operating loss. . . . . . . . . . . . . . . . . . . . (297,640) (149,892) (417,036) (150,275)
Nonoperating income (expense):
Interest and dividend income. . . . . . . . . . . . . - 8,865 2,396 15,339
Interest expense. . . . . . . . . . . . . . . . . . . (72,293) (12,962) (94,623) (19,645)
Income (loss) from equity investment in joint venture (14,627) 27,616 (12,824) 52,262
----------- ----------- ----------- -----------
(86,920) 23,519 (105,051) 47,956
----------- ----------- ----------- -----------
Loss before income taxes. . . . . . . . . . . . . . . (384,560) (126,373) (522,087) (102,319)
Federal and state income taxes. . . . . . . . . . . . - - - -
----------- ----------- ----------- -----------
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (384,560) $ (126,373) $ (522,087) $ (102,319)
=========== =========== =========== ===========
Basic and diluted loss per share. . . . . . . . . . . $ (0.15) $ (0.05) $ (0.20) $ (0.04)
=========== =========== =========== ===========
Weighted average common shares outstanding. . . . . . 2,577,433 2,577,433 2,577,433 2,577,433
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2003 December 31, 2002
(Unaudited) (Audited)
-------------------------- ----------------------------
ASSETS
- ------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents:
Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,897 $ 4,935
Restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 400,000
Receivables:
Trade, net of allowance of $40,000 in 2003 and 2002. . . . . . . . 1,124,260 659,932
Notes and other. . . . . . . . . . . . . . . . . . . . . . . . . . 4,358 16,358
Prepaid expenses and other assets. . . . . . . . . . . . . . . . . 170,503 137,257
Inventory - stated at lower of cost or market. . . . . . . . . . . 117,440 117,440
-------------------------- ----------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 1,449,458 1,335,922
Property and Equipment . . . . . . . . . . . . . . . . . . . . . . 539,891 559,095
Investment in Florida N-Viro, L.P. . . . . . . . . . . . . . . . . 477,759 490,583
Intangible and Other Assets. . . . . . . . . . . . . . . . . . . . 1,602,234 1,641,990
-------------------------- ----------------------------
$ 4,069,342 $ 4,027,590
========================== ============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt . . . . . . . . . . . . . . . $ 296,694 $ 392,078
Line-of-credit . . . . . . . . . . . . . . . . . . . . . . . . . . 436,172 656,087
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 1,634,353 957,716
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . 481,567 370,251
-------------------------- ----------------------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . 2,848,786 2,376,132
Long-term debt, less current maturities. . . . . . . . . . . . . . 481,922 426,738
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 . . . . . . . . . . . . . . . . . . . . 13,531,602 13,495,602
Retained earnings (deficit). . . . . . . . . . . . . . . . . . . . (12,135,088) (11,613,002)
-------------------------- ----------------------------
1,423,524 1,909,610
Less treasury stock, at cost, 123,500 shares . . . . . . . . . . . 684,890 684,890
-------------------------- ----------------------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 738,634 1,224,720
-------------------------- ----------------------------
$ 4,069,342 $ 4,027,590
========================== ============================
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2003 2002
---------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $(81,092) $105,417
CASH FLOWS FROM INVESTING ACTIVITIES
Collections on notes receivable. . . . . . . . . . . 12,000 3,271
Advances to related party - net. . . . . . . . . . . - (1,100)
Purchases of property and equipment. . . . . . . . . (12,976) (23,527)
Expenditures for intangible assets . . . . . . . . . (29,855) (53,063)
---------- ----------
Net cash used in investing activities. . . . . . . . (30,831) (74,419)
CASH FLOWS FROM FINANCING ACTIVITIES
Reductions to restricted cash and cash equivalents . 400,000 -
Net borrowings (payments) on line-of-credit. . . . . (219,915) 106,387
Borrowings under long-term obligations . . . . . . . 336,003 71,811
Principal payments on long-term obligations. . . . . (376,203) (210,757)
---------- ----------
Net cash provided (used) by financing activities . . 139,885 (32,559)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27,962 (1,561)
CASH AND CASH EQUIVALENTS BEGINNING. . . . . . . . . 4,935 45,427
---------- ----------
CASH AND CASH EQUIVALENTS ENDING . . . . . . . . . . $ 32,897 $ 43,866
========== ==========
Supplemental disclosure of cash flows information:
Cash paid during the six months ended for interest . $ 56,400 $ 24,269
========== ==========
During the six months ended June 30, 2003, the Company issued stock warrants
with a fair value of $30,000 as part of debt refinancing.
During the six months ended June 30, 2003, the Company purchased a truck
with a fair value of $44,000, for $10,000 cash and sale of product for the balance.
See Notes to Consolidated Financial Statements
N-VIRO INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements of N-Viro International
Corporation (the "Company") are unaudited but, in management's opinion, reflect
all adjustments (including normal recurring accruals) necessary to present
fairly such information for the period and at the dates indicated. The results
of operations for the six months ended June 30, 2003 may not be indicative of
the results of operations for the year ended December 31, 2003. 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, 2002.
The financial statements are consolidated as of June 30, 2003 and December
31, 2002 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:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has in the past and
continues to sustain net and operating losses. In addition, the Company has
used substantial amounts of working capital in its operations which has reduced
the Company's liquidity to a low level. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
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.
Property and Equipment/Long-Lived Assets - Property and equipment is
reviewed for impairment pursuant to the provisions of SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." The carrying amount of an
asset (group) is considered impaired if it exceeds the sum of our estimate of
the undiscounted future cash flows expected to result from the use and eventual
disposition of the asset (group), excluding interest charges.
Equity Method Investment - The Company accounts for its investments in
joint ventures under the equity method. The Company periodically evaluates the
recoverability of its equity investments in accordance with APB No. 18, "The
Equity Method of Accounting for Investments in Common Stock." If circumstances
were to arise where a loss would be considered other than temporary, the Company
would record a write-down of excess investment cost. Management has determined
that no write-down was required at June 30, 2003.
Intangible Assets - Intangible assets deemed to have indefinite lives are
tested for impairment by comparing the fair value with its carrying value.
Significant estimates used in the determination of fair value include estimates
of future cash flows. As required under current accounting standards, the
Company tests for impairment when events and circumstances indicate that the
assets might be impaired and the carrying value of those assets may not be
recoverable.
Fair Value of Financial Instruments - The carrying amounts of cash and cash
equivalents, receivables, accounts payable and accrued liabilities approximate
their fair values because of the short-term nature of these instruments.
Management believes the carrying amounts of the current and long-term debt
approximate their fair value based on interest rates for the same or similar
debt offered to the Company having the same or similar terms and maturities.
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 has an unsecured receivable from a related party, N-Viro Energy
Systems, Inc., a corporation of which Mr. J. Patrick Nicholson is the
controlling stockholder, of $24,606 at June 30, 2003. The amount due from the
related party has been deemed to be noncurrent by management in the accompanying
balance sheets. No additional advances were made to the related party during
the six months ended June 30, 2003.
3. LONG-TERM DEBT
During the six months ended June 30, 2003, the Company closed on an
$845,000 credit facility with a local bank. This senior debt credit facility is
comprised of a $295,000 four year term note at 7.5% and a line of credit up to
$550,000 at Prime plus 1 1/2% and secured by a first lien on all assets of the
Company. The Company will use the funds to refinance existing debt and to
provide working capital. Previously, the Company had a $750,000 line of credit
with another financial institution, secured by a $400,000 restricted Certificate
of Deposit, required and held by this financial institution. Effectively, the
former line of credit provided only $350,000 of additional working capital. The
effective increase in the line will provide the Company with additional working
capital, and the debt refinance will provide lower cost and longer term debt,
improving cash flow. To secure the credit facility, the Company was required by
the financial institution to obtain additional collateral of $100,000 (the
"Additional Collateral") from a real estate mortgage from a third party.
Messrs. J. Patrick Nicholson, the Chairman of the Board and Consultant to the
Company; Michael G. Nicholson, the Company's Chief Operating Officer and a
Director; Robert F. Nicholson, a Company employee, and Timothy J. Nicholson, a
Company employee, ("the Nicholsons") collectively provided the $100,000
Additional Collateral. In exchange for their commitment, the Company has agreed
to provide the Nicholsons the following: (1) an annual fee in an amount equal to
two percent (2%) of the aggregate value of the Mortgage or Mortgages encumbering
the Additional Collateral, which fee originally shall be $2,000 per annum; (2)
interest at an annual rate of 5% of the aggregate value of the Mortgage or
Mortgages encumbering the Additional Collateral beginning on the first
anniversary date of the closing of the Credit Facility, and (3) grant, jointly,
a warrant to acquire in the aggregate, 50,000 shares of the Company's voting
common stock at a purchase price of $0.90 per share, which was the closing
market price of the Company's common stock on the prior business day to the
closing of the Credit Facility. In addition, the Company granted to the
Nicholsons a lien upon the Company's inventory and accounts receivable. This
lien is subordinated to both existing liens on the Company's assets and all
liens granted by the Company in favor of the financial institution providing the
Credit Facility. The value of the warrants is estimated to be $30,000 based
upon a calculation using the Black-Scholes pricing model. In estimating the
value of the warrants, the following assumptions were used: no assumed dividend
rate; risk-free interest rate of 2.05% on expected life of 3 years; and expected
price volatility of 108%. The fair value is being amortized over the 4-year
life of the guarantee.
The Company is in violation of financial covenants contained in the
agreement, concerning the maintenance of both a tangible net worth amount and
positive debt service coverage ratio for the period, of which requires positive
earnings. The Company's bank waived this violation in light of the Company's net
loss for the six months ended June 30, 2003.
4. CONTINGENCIES
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 ("OTC") market. The Company
does not believe that the delisting of its common stock from the Nasdaq SmallCap
Market has or 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 had a material adverse effect on the
marketability of the Company's shares, as shares traded on the OTC market
generally experience lower trading value than those traded on the organized
exchanges.
The Company leases its executive and administrative offices in Toledo,
Ohio. The Company believes its relationship with its lessor is satisfactory.
The total minimum annual rental commitment through 2006 is approximately $56,000
each year. The total rental expense included in the statements of operations
for the six months ended June 30, 2003 and 2002 is approximately $28,100 and
$31,200, respectively. The Company also leases various equipment on a
month-to-month basis.
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 totalled
approximately $134,200 at June 30, 2003. The cost was recognized over the term
of the employment agreement. The Company charged $3,074 in payments against the
liability for the six months ended June 30, 2003. 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.
5. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill
and intangible assets deemed to have indefinite lives are no longer amortized
but are subject to periodic impairment tests. Other intangible assets continue
to be amortized over their useful lives. SFAS No. 142 was adopted by the
Company in 2002.
In August 2001, the 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 tangible long-lived assets and the associated
asset retirement cost.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets," which was adopted by the Company
in 2002. SFAS No. 144 supercedes SFAS No. 121 and modifies and expands the
financial accounting and reporting for the impairment or disposal of long-lived
assets other than goodwill.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Provisions of SFAS No. 145 become effective in 2002 and 2003.
Under SFAS No. 145, gains and losses from the extinguishment of debt should be
classified as extraordinary items only if they meet the criteria of Accounting
Principles Board Opinion No. 30. SFAS No. 145 also addresses financial
accounting and reporting for capital leases that are modified in such a way as
to give rise to a new agreement classified as an operating lease.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which is effective for exit or
disposal activities initiated after December 31, 2002. SFAS No. 146 nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." Under SFAS No. 146, a liability is
required to be recognized for costs, including certain lease termination costs
and employee termination benefits, associated with an exit or disposal activity
when the liability is incurred. SFAS No. 146 applies to costs associated with an
exit activity that does not involve an entity newly acquired in a business
combination or with a retirement or disposal activity covered by SFAS Nos. 143
and 144.
In November 2002, the FASB issued FIN 45, which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. FIN 45
requires the recognition of an initial liability for the fair value of an
obligation assumed by issuing a guarantee. The provision for initial recognition
and measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based, Compensation - Transition and Disclosure," that amends SFAS No.
123, "Accounting for Stock-Based Compensation," to provide alternative methods
of transition to the fair value method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123
and APB Opinion No. 28, "Interim Financial Reporting," to require disclosure in
the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
The Statement does not amend SFAS No. 123 to require companies to account for
employee stock options using the fair value method. The Statement is effective
for fiscal years beginning after December 15, 2002.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for contracts entered into or modifies
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The Company does not expect the application of the provisions of SFAS No.
149 to have a material impact on its financial position, results of operations
or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company does not expect
the application of the provisions of SFAS No. 150 to have a material impact on
its financials position, results of operations or cash flows.
The adoption of the new standards did not, or is not expected to,
materially affect the Company's financial position and results of operations.
6. SEGMENT INFORMATION
EARNINGS VARIATION DUE TO BUSINESS CYCLES AND SEASONAL FACTORS. The
Company's operating results can experience quarterly or annual variations due to
business cycles, seasonality and other factors. The market price for its common
stock may decrease if its operating results do not meet the expectations of the
market.
For the second quarter of 2003, approximately 36% of the Company's revenue
is from management operations, 61% 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 Toledo Wastewater Treatment Facility.
Other Domestic Operations - Sales of territory or site licenses and
royalty fees to use N-Viro technology in the United States.
Foreign Operations - Sale of territory or site licenses and royalty
fees to use N-Viro technology in foreign operations.
Research and Development - The Company contracts with Federal and
State agencies to perform or assist in research and development on the Company's
technology.
The accounting policies of the segments are the same as the Company's
significant accounting policies. Fixed assets generating specific revenue are
identified with their respective segments and are accounted for as such in the
internal accounting records. All other assets, including cash and other current
assets and all long-term assets, other than fixed assets, are 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 2% of the
total year-to-date revenue of the Company, and is unlike any other revenue in
that it is generated as a result of a specific project to conduct initial or
additional ongoing research into the Company's emerging technologies.
The table below presents information about the segment profits and segment
identifiable assets used by the chief operating decision makers of the Company
for the periods ended June 30, 2003 and 2002 (dollars in thousands):
Other
Management Domestic Foreign Research &
Operations Operations Operations Development Total
---------------------------- ----------- ----------- ------------ ------
Quarter Ended June 30, 2003
----------------------------
Revenues . . . . . . . . . . . . $ 504 $ 868 $ 13 $ 23 $1,408
Cost of revenues . . . . . . . . 368 674 - 20 1,062
Segment profits. . . . . . . . . 136 194 13 3 346
Identifiable assets. . . . . . . 395 93 - - 488
Depreciation . . . . . . . . . . 17 10 - - 27
Quarter Ended June 30, 2002
- --------------------------------
Revenues . . . . . . . . . . . . $ 622 $ 582 $ 13 $ 24 $1,241
Cost of revenues . . . . . . . . 407 461 1 10 879
Segment profits. . . . . . . . . 215 121 12 14 362
Identifiable assets. . . . . . . 365 79 - 47 491
Depreciation . . . . . . . . . . 13 10 - 2 25
Six Months Ended June 30, 2003
- --------------------------------
Revenues . . . . . . . . . . . . $ 1,007 $ 1,575 $ 25 $ 46 $2,653
Cost of revenues . . . . . . . . 715 1,216 - 44 1,975
Segment profits. . . . . . . . . 292 359 25 2 678
Identifiable assets. . . . . . . 395 93 - - 488
Depreciation . . . . . . . . . . 31 21 - - 52
Six Months Ended June 30, 2002
- --------------------------------
Revenues . . . . . . . . . . . . $ 1,141 $ 1,366 $ 25 $ 126 $2,658
Cost of revenues . . . . . . . . 790 924 1 111 1,826
Segment profits. . . . . . . . . 351 442 24 15 832
Identifiable assets. . . . . . . 365 79 - 47 491
Depreciation . . . . . . . . . . 21 20 - 4 45
A reconciliation of total segment revenues, cost of revenues, and segment
profits to consolidated revenues, cost of revenues, and segment information to
the consolidated financial statements for the periods ended June 30, 2003 and
2002 is as follows (dollars in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Segment profits:
Segment profits for reportable segments. . . . $ 346 $ 362 $ 678 $ 832
Corporate selling, general and administrative
expenses and research and development costs. . (644) (512) (1,095) (982)
Other income (expense) . . . . . . . . . . . . (87) 24 (105) 48
------- ------- -------- -------
Consolidated earnings before taxes . . . . . . $ (385) $ (126) $ (522) $ (102)
======= ======= ======== =======
Identifiable assets:
Identifiable assets for reportable segments. . $ 488 $ 491 $ 488 $ 491
Corporate property and equipment . . . . . . . 52 130 52 130
Current assets not allocated to segments . . . 1,449 1,433 1,449 1,433
Intangible and other assets not allocated to
segments . . . . . . . . . . . . . . . . . . . 2,314 2,516 2,314 2,516
Consolidated eliminations. . . . . . . . . . . (234) (234) (234) (234)
------- ------- -------- -------
Consolidated assets. . . . . . . . . . . . . . $4,069 $4,336 $ 4,069 $4,336
======= ======= ======== =======
Depreciation and amortization:
Depreciation for reportable segments . . . . . $ 27 $ 25 $ 52 $ 45
Corporate depreciation and amortization. . . . 42 41 84 69
------- ------- -------- -------
Consolidated depreciation and amortization . . $ 69 $ 66 $ 136 $ 114
======= ======= ======== =======
7. INVESTMENT IN FLORIDA N-VIRO, L. P.
Florida N-Viro, L.P. was formed in January 1996 pursuant to a joint venture
agreement between the Company and VFL Technology Corporation. The Company owns
a 47.5% interest in the joint venture.
Condensed financial information of the partnership for the quarters ended
June 30, 2003 and 2002 is as follows:
Quarter Ended June 30
---------------------
2003 2002
---- ----
Net sales $ 603,243 $ 866,547
Gross profit 30,184 122,434
Income (loss) from continuing operations (30,794) 58,139
Net income (loss) (30,794) 58,139
8. STOCK OPTIONS
The Company accounts for stock-based compensation issued to its employees
and directors in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no compensation cost
has been recognized for the stock option plans, as all options granted under the
plans have an exercise price equal to the market value of the underlying common
stock on the date of the grant. The fair value of options granted was
determined using the Black-Scholes option pricing model.
The following table illustrates the effect on net income (loss) and net
income (loss) per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-based Compensation"
to stock-based employee compensation:
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- -------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net loss, as reported $(384,560) $(126,373) $(522,087) $(102,319)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects. . . . . . . (20,294) (65,287) (38,915) (130,574)
---------- ---------- ---------- ----------
Pro forma net loss . . . . . . . . . . . . $(404,854) $(191,660) $(561,002) $(232,893)
========== ========== ========== ==========
Loss per share:
Basic and diluted - as reported. . . . . . $ (0.15) $ (0.05) $ (0.20) $ (0.04)
========== ========== ========== ==========
Basic and diluted - pro-forma. . . . . . . $ (0.16) $ (0.07) $ (0.22) $ (0.09)
========== ========== ========== ==========
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 $1,408,000 for the quarter ended June 30, 2003 compared
to $1,240,000 for the same period of 2002. The net increase in revenue is due
primarily to an increase in the management of alkaline admixture. The Company's
cost of revenues increased to $1,062,000 in 2003 from $878,000 for the same
period in 2002, and the gross profit percentage decreased to 25% from 29% for
the quarters ended June 30, 2003 and 2002, respectively. The decrease in gross
profit percentage was the net result of an increase in costs on purchasing the
alkaline admixture used in the process, offset by a decrease in costs to start
up the soil blending operation, started in May, 2002. Operating expenses
increased 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., decreased for
the same period of 2003. These changes collectively resulted in a net loss of
approximately $385,000 for the quarter ended June 30, 2003 compared to a net
loss of $126,000 for the same period in 2002.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2003 WITH THREE MONTHS ENDED JUNE 30,
2002
Overall revenue increased $168,000, or 14%, to $1,408,000 for the quarter
ended June 30, 2003 from $1,240,000 for the quarter ended June 30, 2002. The
net increase in revenue was due primarily to the following:
a) Sales of alkaline admixture increased $60,000 from the same period
ended in 2002;
b) Revenue from the service fees for the management of alkaline admixture
increased $189,000 from the same period ended in 2002;
c) The Company's processing revenue, including facility management
revenue, showed a net decrease of $99,000 over the same period ended in 2002;
d) Miscellaneous revenues increased $15,000 from the same period ended in
2002;
e) Research and development revenue increased $2,000 from the same period
ended in 2002.
Gross profit decreased $16,000, or 4%, to $346,000 for the three months
ended June 30, 2003 from $362,000 for the three months ended June 30, 2002. This
decrease in gross profit was primarily due to the Company's higher percentage of
overall sales from alkaline admixture and the service fees for the management of
alkaline admixture. The gross profit margin decreased to 25% from 29%, and was
the net result of an increase in costs on purchasing the alkaline admixture used
in the process, offset by a decrease in costs to start up the soil blending
operation, started in May, 2002.
Operating expenses increased $132,000, or 26%, to $644,000 for the three
months ended June 30, 2003 from $512,000 for the three months ended June 30,
2002. The increase was primarily due to an increase of $232,000 in insurance and
outside professional fees, partially offset by a decrease of $100,000 in
personnel-related, selling and stockholder relation costs. Included in the
increase of $232,000 for insurance and outside professional fees was $86,000 for
expenses related to a derivative action filed by a stockholder, and $82,000 in
one-time costs, paid for in the prior year and previously deferred in the
Company's balance sheet, related to the contracts with investment banking firms
to obtain equity and debt financing. See Part II Item I "Legal Proceedings" and
following this section, "Liquidity and Capital Resources", respectively, for
further discussion.
As a result of the foregoing factors, the Company recorded an operating
loss of $298,000 for the three months ended June 30, 2003 compared to an
operating loss of $150,000 for the three months ended June 30, 2002, an increase
in the loss of approximately $148,000.
Net nonoperating expense increased by $110,000 to a net nonoperating
expense of $87,000 for the three months ended June 30, 2003 from net
nonoperating income of $23,000 for the three months ended June 30, 2002. The
increase was primarily due to an increase in interest expense of $59,000 and a
decrease of income of $42,000 in the equity of a joint venture, to a loss of
$15,000 in 2003 from income of $27,000 in 2002.
The Company recorded a net loss of $385,000 for the three months ended June
30, 2003 compared to a net loss of $126,000 for the same period ended in 2002,
an increase in the loss of approximately $258,000.
For the three months ended June 30, 2003 and 2002, 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, 2003 WITH SIX MONTHS ENDED JUNE 30, 2002
Overall revenue decreased $5,000, or 0.2%, to $2,653,000 for the six months
ended June 30, 2003 from $2,658,000 for the six months ended June 30, 2002. The
net decrease in revenue was due primarily to the following:
a) Sales of alkaline admixture decreased $33,000 from the same period
ended in 2002;
b) Revenue from the service fees for the management of alkaline admixture
increased $310,000 from the same period ended in 2002;
c) The Company's processing revenue, including facility management
revenue, showed a net decrease of $148,000 over the same period ended in 2002;
d) Miscellaneous revenues increased $32,000 from the same period ended in
2002;
e) Licensing of the N-Viro Process, including territory fees, earned the
Company $-0- for the period, a decrease of $92,000 from 2002; and,
f) Research and development revenue decreased $74,000 from the same period
ended in 2002.
Gross profit decreased $154,000, or 18%, to $678,000 for the six months
ended June 30, 2003 from $832,000 for the six months ended June 30, 2002. This
decrease in gross profit was primarily due to the increase in the cost of
supplying alkaline admixture to all domestic facilities and additional product
shipping costs at its management facility operation. The gross profit margin
decreased to 26% from 31%, and was primarily due to the increased costs
associated with the sale of alkaline admixture and the Company's management
facility operation for the same period.
Operating expenses increased $113,000, or 11%, to $1,095,000 for the six
months ended June 30, 2003 from $982,000 for the six months ended June 30, 2002.
The increase was primarily due to an increase of $270,000 in insurance and
outside professional fees, partially offset by a decrease of $159,000 in
personnel-related, selling and stockholder relation costs. Included in the
increase of $270,000 for insurance and outside professional fees was $142,000
for expenses related to a derivative action filed by a stockholder, and $82,000
in one-time costs, paid for in the prior year and previously deferred in the
Company's balance sheet, related to the contracts with investment banking firms
to obtain equity and debt financing. See Part II Item I "Legal Proceedings" and
following this section, "Liquidity and Capital Resources", respectively, for
further discussion.
As a result of the foregoing factors, the Company recorded an operating
loss of $417,000 for the six months ended June 30, 2003 compared to an operating
loss of $150,000 for the six months ended June 30, 2002, an increase in the loss
of approximately $267,000.
Net nonoperating expense increased by $153,000 to a net nonoperating
expense of $105,000 for the six months ended June 30, 2003 from net nonoperating
income of $48,000 for the six months ended June 30, 2002. The increase was
primarily due to an increase in interest expense of $75,000 and a decrease of
income of $65,000 in the equity of a joint venture, to a loss of $13,000 in 2003
from income of $52,000 in 2002.
The Company recorded a net loss of $522,000 for the six months ended June
30, 2003 compared to a net loss of $102,000 for the same period ended in 2002,
an increase in the loss of approximately $420,000.
For the six months ended June 30, 2003 and 2002, 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 $1,399,000 at June 30, 2003,
compared to a working capital deficit of $1,040,000 at December 31, 2002, a
decrease in working capital of $359,000. Current assets at June 30, 2003
included cash and investments of $33,000, which is a decrease of $372,000 from
December 31, 2002. This decrease in cash and investments was the result of the
Company closing on an $845,000 credit facility with a local bank, and redeeming
its $400,000 certificate of deposit in the transaction. The decrease in working
capital was principally due to the Credit Facility obtained which assisted in
refinancing existing short-term debt to long-term, but offset by the operating
loss for the six month period.
In the first six months of 2003 the Company's cash flow generated from
operations was a deficit of $81,000, a decrease of approximately $186,000 from
2002. No unusual cash transactions were recorded in the first six months of
2003 that affected cash flow from operations.
In February 2003 the Company closed on an $845,000 credit facility with a
local bank. This senior debt credit facility is comprised of a $295,000 four
year term note at 7.5% and a line of credit up to $550,000 at Prime plus 1 % and
secured by a first lien on all assets of the Company. The Company will use the
funds to refinance existing debt and to provide working capital. Previously,
the Company had a $750,000 line of credit with another financial institution,
secured by a $400,000 restricted Certificate of Deposit, required and held by
this financial institution. Effectively, the former line of credit provided
only $350,000 of additional working capital. The effective increase in the line
will provide the Company with additional working capital, and the debt refinance
will provide lower cost and longer term debt, improving cash flow. To secure
the credit facility, the Company was required by the financial institution to
obtain Additional Collateral of $100,000 from a real estate mortgage from a
third party. Messrs. J. Patrick Nicholson, the Chairman of the Board and
Consultant to the Company; Michael G. Nicholson, the Company's Chief Operating
Officer and a Director; Robert F. Nicholson, a Company employee, and Timothy J.
Nicholson, a Company employee, ("the Nicholsons") collectively provided the
$100,000 Additional Collateral. In exchange for their commitment, the Company
has agreed to provide the Nicholsons the following: (1) an annual fee in an
amount equal to two percent (2%) of the aggregate value of the Mortgage or
Mortgages encumbering the Additional Collateral, which fee originally shall be
$2,000.00 per annum; (2) interest at an annual rate of 5% of the aggregate
value of the Mortgage or Mortgages encumbering the Additional Collateral
beginning on the first anniversary date of the closing of the Credit Facility,
and (3) grant, jointly, a warrant to acquire in the aggregate, 50,000 shares of
the Company's voting common stock at a purchase price of $0.90 per share, which
was the closing market price of the Company's common stock on the prior business
day to the closing of the Credit Facility. In addition, the Company granted to
the Nicholsons a lien upon the Company's inventory and accounts receivable.
This lien is subordinated to both existing liens on the Company's assets and all
liens granted by the Company in favor of the financial institution providing the
Credit Facility.
The Company is in violation of financial covenants contained in the
agreement, concerning the maintenance of both a tangible net worth amount and
positive debt service coverage ratio for the period, of which requires positive
earnings. The Company's bank waived this violation in light of the Company's net
loss for the six months ended June 30, 2003.
The normal collection period for accounts receivable are approximately
30-60 days for the majority of customers. This is a result of the nature of the
license contracts, type of customer and the amount of time required to obtain
the information to prepare the billing. The Company did not change its reserve
for bad debts during the first six months of 2003.
The Company is currently actively pursuing sale of its investment in
Florida N-Viro, LP, which may provide, in management's opinion, additional funds
to finance the Company's cash requirements. Because these efforts are still in
progress, there can be no assurance the Company will successfully complete these
negotiations.
The Company paid certain amounts due to Hydropress Environmental Services,
Inc. ("Hydropress") under a Settlement Agreement dated December 14, 2001 and
pursuant to the terms of a promissory note (the "Hydropress Note"). The
original principal amount of the Hydropress Note was $204,587, was non-interest
bearing and matured on October 15, 2002 with a balloon payment of $144,587. At
September 30, 2002, the outstanding principal balance on the Hydropress Note was
$144,587, which was paid in full to Hydropress in October 2002. In conjunction
with the final discharge of the Hydropress Note, the Company arranged an
unsecured loan from a third-party licensee for $144,587, with monthly payments
of $13,966 due for one year through October 15, 2003. At June 30, 2003, the
outstanding principal balance on the note was $52,732.
The Company is currently working 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.
Also, the Company has gone forward on contracts with two investment banking
firms with respect to a proposal to obtain up to $800,000 of mezzanine debt
financing. The specific terms and conditions applicable to the debt will be
determined once either firm has identified a potential debtor. There can be no
assurance that the Company will be successful in finding a lender for the
financing. If the financing is obtained, the proceeds from the offering will be
used to supplement the Company's working capital.
The Company is currently in discussions with several companies in the
cement and fuel industries for the development and commercialization of the
patented N-Viro fuel technology. Because these discussions are still in
progress, there can be no assurance they will be successful.
The Company continues to focus on the development of regional biosolids
processing facilities. Currently the Company is in negotiations with several
privatization firms to permit and develop independent, regional facilities.
The Company expects improvements in operating results for 2003 as a result
of maintaining lower administrative costs, along with realized and expected new
sources of revenue. Additionally, market developments and ongoing discussions
with companies in the cement, fuel and wastewater industries could provide
enhanced liquidity and positively impact 2003 operations.
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.
RISK FACTORS
THE COMPANY'S LICENSEES ARE SUBJECT TO EXTENSIVE AND INCREASINGLY STRICT
FEDERAL, STATE AND LOCAL ENVIRONMENTAL REGULATION AND PERMITTING
The Company's licensees and their operations are subject to increasingly
strict environmental laws and regulations, including laws and regulations
governing the emission, discharge, disposal and transportation of certain
substances and related odor. Wastewater treatment plants and other plants at
which our biosolids products or processes may be implemented are usually
required to have permits, registrations and/or approvals from state and/or local
governments for the operation of such facilities. Some of our licensee's
facilities require air, wastewater, storm water, biosolids processing, use or
siting permits, registrations or approvals. These licensees may not be able to
maintain or renew their current permits or registrations or to obtain new
permits or registrations. The process of obtaining a required permit or
registration can be lengthy and expensive. They may not be able to meet
applicable regulatory or permit requirements, and therefore may be subject to
related legal or judicial proceedings that could have a materially adverse
effect on our income derived from these licensees.
Any of the permits, registrations or approvals noted above, or related
applications may be subject to denial, revocation or modification, or challenge
by a third party, under various circumstances. In addition, if new environmental
legislation or regulations are enacted or existing legislation or regulations
are amended or are enforced differently, these licensees may be required to
obtain additional, or modify existing, operating permits, registrations or
approvals.
Maintaining, modifying or renewing current permits or registrations or
obtaining new permits or registrations after new environmental legislation or
regulations are enacted or existing legislation or regulations are amended or
enforced differently may be subject to public opposition or challenge. Much of
this public opposition and challenge, as well as related complaints, relates to
odor issues, even when our licensees are in compliance with odor requirements
and even though the licensee has worked hard to minimize odor from their
operations. Public misperceptions about the business and any related odor could
influence the governmental process for issuing such permits or registrations or
for responding to any such public opposition or challenge. Community groups
could pressure local municipalities or state governments to implement laws and
regulations which could increase our licensee's costs of its operations that in
turn could have a material and adverse effect on the Company's business and
financial condition.
THE ABILITY TO GROW MAY BE LIMITED BY COMPETITION
The Company provides a variety of technology and services relating to the
treatment of wastewater residuals. The Company is 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.
The Company derives a substantial portion of revenue from services provided
under municipal contracts, and many of these are subject to competitive bidding.
The Company also intends to bid on additional municipal contracts, however, and
may not be the successful bidder. In addition, some of its contracts will expire
in the future and those contracts may be renewed on less attractive terms. If
the Company is 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 its business, financial condition and results of
operation.
THE COMPANY'S CUSTOMER CONTRACTS MAY BE TERMINATED PRIOR TO THE EXPIRATION OF
THEIR TERM.
A substantial portion of the Company's revenue is derived from services
provided under contracts and agreements with existing licensees. Some of these
contracts, especially those contracts with large municipalities, provide for
termination of the contract by the customer after giving relative short notice
(in some cases as little as ten days). In addition, some of these contracts
contain liquidated damages clauses, which may or may not be enforceable in the
event of early termination of the contracts. If one or more of these contracts
are terminated prior to the expiration of its term, and we are not able to
replace revenues from the terminated contract or receive liquidated damages
pursuant to the terms of the contract, the lost revenue could have a material
and adverse effect on our business and financial condition.
A SIGNIFICANT AMOUNT OF THE COMPANY'S BUSINESS COMES FROM A LIMITED NUMBER OF
CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST
ONE OR MORE OF THEM AS CUSTOMERS.
The Company's business depends on provision of services to a limited number
of customers. One or more of these customers may stop contracting for services
from us or may substantially reduce the amount of services we provide them. Any
cancellation, deferral or significant reduction in the services we provide these
principal customers or a significant number of smaller customers could seriously
harm our business and financial condition. For the quarter and six months ended
June 30, 2003, our single largest customer accounted for approximately 36
percent and 38 percent, respectively, of our revenues and our top three
customers accounted for approximately 71 percent and 70 percent, respectively,
of our revenues.
THE COMPANY IS AFFECTED BY UNUSUALLY ADVERSE WEATHER CONDITIONS
The Company's business is adversely affected by unusual weather conditions
and unseasonably heavy rainfall which can temporarily reduce the availability of
land application sites in close proximity to our operations. In addition,
revenues and operational results are adversely affected during months of
inclement weather which limits the level of land application that can be
performed. Long periods of adverse weather could have a material negative
effect on the Company's 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 for the trucks that purchase the processing materials and
supplies for our customers, price escalations or reductions in the supply of
fuel could increase operating expenses and have a negative impact on the results
of operations. The Company is 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.
THE COMPANY IS DEPENDENT ON THE MEMBERS OF ITS MANAGEMENT TEAM
The Company is highly dependent on the services of its management team, the
loss of any of whom may have a material adverse effect on its business and
financial condition.
The Company has entered into employment agreements with certain members of
its management team, which contain non-compete and other provisions. The laws of
each state differ concerning the enforceability of non-competition agreements.
The Company 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 its key executive officers were to leave and the courts
refused to enforce the non-compete covenant, the Company might be subject to
increased competition, which could have a material and adverse effect on its
business and financial condition.
THE COMPANY'S INTELLECTUAL PROPERTY MAY BE MISAPPROPRIATED OR SUBJECT TO CLAIMS
OF INFRINGEMENT
The Company attempts to protect our intellectual property rights through a
combination of patent, trademark, and trade secret laws, as well as licensing
agreements. The Company's 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.
The Company's 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 the Company's ability to
offer services. The Company has not conducted an independent review of patents
issued to third parties.
The Company also relies on unpatented proprietary technology. It is
possible that others will independently develop the same or similar technology
or otherwise obtain access to its unpatented technology. If the Company is
unable to maintain the proprietary nature of our technologies, it 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 Bio-Fuel pilot program to commence operations in 2003, such
program may not begin until 2004 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 Bio-Fuel
significantly exceeding current estimates, or (3) competing technologies
rendering the Bio-Fuel process less attractive.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to credit risk from its customers. Credit limits are
closely monitored as are collections of accounts receivable. The Company
generally does not require collateral from its customers. Historically, losses
from bad debt have been within management's expectations.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this Quarterly Report on Form
10-Q, an evaluation was performed under the supervision and with the
participation of our management, including the chief executive officer and chief
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures were effective as of June 30, 2003, and the evaluation
date. There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 11, 2003, Strategic Asset Management, Inc. ("SAMI"), the beneficial
owner of 464,372 shares of the voting, common stock of the Company or 17.63% of
the total number of issued and outstanding shares of voting, common stock, filed
a stockholder's derivative action in Delaware Chancery Court against the Company
and its Board of Directors, seeking, among other things, to enjoin the Company
from modifying the terms and conditions contained in a consulting agreement
dated December 2, 1999, effective as of July 20, 2002 (the "Consulting
Agreement") by and between the Company and J. Patrick Nicholson, the Chairman of
the Board and a consultant to the Company. R. Francis DiPrete, the president and
a member of the board of directors of SAMI, is a member of the Board of
Directors of the Company. As reported by the Company in a Form 8-K filed August
29, 2003 in accordance with the requirements of the Securities and Exchange Act
of 1934 and the rules and regulations promulgated thereunder, the Company has
settled this lawsuit, subject to the approval of the Delaware Chauncery Court.
The specific terms and conditions of the settlement, including a complete copy
of the settlement agreement, were included in the Company's filing.
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 31.1 - Certification of CEO Pursuant to Section 302 of the Sarbanes
- - Oxley Act of 2002.
Exhibit 31.2 - Certification of CFO Pursuant to Section 302 of the Sarbanes
- Oxley Act of 2002.
Exhibit 32.1 - Certification of CEO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.2 - Certification of CFO Pursuant to Section 906 of the Sarbanes
-Oxley Act of 2002.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K dated June 6, 2003, to disclose
the signing of an employment agreement with an officer and director of the
Company, Michael G. Nicholson.
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 29, 2003 /s/ Terry J. Logan
----------------- ---------------------
Terry J. Logan
Chief Executive Officer and President
(Principal Executive Officer)
Date: August 29, 2003 /s/ James K. McHugh
----------------- ----------------------
James K. McHugh
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial &
Accounting Officer)