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EXCEL - IDEA: XBRL DOCUMENT - N-VIRO INTERNATIONAL CORP | Financial_Report.xls |
EX-32.2 - EXHIBIT 32.2 - CFO SECTION 906 - N-VIRO INTERNATIONAL CORP | nvic10q20130630_ex32z2.htm |
EX-31.1 - EXHIBIT 31.1 - CEO CERT - N-VIRO INTERNATIONAL CORP | nvic10q20130630_ex31z1.htm |
EX-32.1 - EXHIBIT 32.1 - CEO SECTION 906 - N-VIRO INTERNATIONAL CORP | nvic10q20130630_ex32z1.htm |
EX-31.2 - EXHIBIT 31.2 - CFO CERT - N-VIRO INTERNATIONAL CORP | nvic10q20130630_ex31z2.htm |
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, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-21802
N-VIRO INTERNATIONAL CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware
34-1741211
(State or other jurisdiction of
(IRS Employer Identification No.)
incorporation or organization)
2254 Centennial Road
Toledo, Ohio
43617
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (419) 535-6374
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 13, 2013, 6,920,731 shares of N-Viro International Corporation $.01 par value common stock were outstanding.
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PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
N-VIRO INTERNATIONAL CORPORATION | ||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||
(unaudited) | ||||
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Three Months |
Ended June 30 | Six Months Ended June 30 | |
| 2013 | 2012 | 2013 | 2012 |
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REVENUES | $ 938,133 | $ 903,557 | $ 1,721,337 | $ 1,892,392 |
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COST OF REVENUES | 754,967 | 750,249 | 1,693,881 | 1,600,267 |
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GROSS PROFIT | 183,166 | 153,308 | 27,456 | 292,125 |
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OPERATING EXPENSES |
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Selling, general and administrative | 597,219 | 594,537 | 1,099,039 | 1,083,089 |
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OPERATING LOSS | (414,053) | (441,229) | (1,071,583) | (790,964) |
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OTHER INCOME (EXPENSE) |
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Gain on extinguishment of liabilities | - | 4,208 | 60,755 | 4,208 |
Interest income | 285 | 166 | 660 | 360 |
Gain on market price changes of warrants issued | - | 7,375 | - | 12,196 |
Amortization of discount on convertible debentures | (4,092) | (4,092) | (8,184) | (8,184) |
Interest expense | (25,851) | (21,705) | (51,240) | (42,013) |
| (29,658) | (14,048) | 1,991 | (33,433) |
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LOSS BEFORE INCOME TAXES | (443,711) | (455,277) | (1,069,592) | (824,397) |
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Federal and state income taxes | - | - | - | - |
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NET LOSS | ($ 443,711) | ($ 455,277) | ($ 1,069,592) | ($ 824,397) |
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Basic and diluted loss per share | ($0.06) | ($0.07) | ($0.16) | ($0.13) |
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Weighted average common shares outstanding - basic and diluted | 6,916,821 | 6,167,304 | 6,757,380 | 6,128,724 |
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N-VIRO INTERNATIONAL CORPORATION | ||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||
(unaudited) | ||
| June 30, 2013 | December 31, 2012 |
ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents: |
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Unrestricted | $ 2,806 | $ 52,625 |
Restricted | 209,437 | 209,181 |
Receivables, net: |
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Trade, net of allowance for doubtful accounts of $91,260 |
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at June 30, 2013 and $90,000 at December 31, 2012 | 333,868 | 283,380 |
Other | 17,586 | 17,182 |
Prepaid expenses and other assets | 61,162 | 78,849 |
Deferred costs - stock and warrants issued for services | 583,981 | 343,480 |
Total current assets | 1,208,840 | 984,697 |
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PROPERTY AND EQUIPMENT, NET | 894,719 | 993,971 |
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INTANGIBLE AND OTHER ASSETS, NET | 280,470 | 359,841 |
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TOTAL ASSETS | $ 2,384,029 | $ 2,338,509 |
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LIABILITIES AND STOCKHOLDERS' DEFICIT |
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CURRENT LIABILITIES |
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Current maturities of long-term debt | $ 110,439 | $ 188,902 |
Note payable - related party | 200,000 | 200,000 |
Convertible debentures, net of discount | 455,000 | 446,816 |
Line of credit | 365,000 | 370,000 |
Accounts payable | 810,370 | 597,426 |
Pension plan withdrawal liability | 27,003 | 27,003 |
Accrued liabilities | 105,712 | 81,343 |
Total current liabilities | 2,073,524 | 1,911,490 |
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Long-term debt, less current maturities | 61,577 | 92,014 |
Pension plan withdrawal liability - long-term | 378,785 | 384,291 |
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Total liabilities | 2,513,886 | 2,387,795 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS' DEFICIT |
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Preferred stock, $.01 par value, authorized 2,000,000 shares; |
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issued -0- shares in 2013 and 2012 | - | - |
Common stock, $.01 par value; authorized 35,000,000 shares; |
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issued 7,044,231 in 2013 and 6,664,087 in 2012 | 70,442 | 66,641 |
Additional paid-in capital | 29,793,836 | 28,630,416 |
Accumulated deficit | (29,309,245) | (28,061,453) |
| 555,033 | 635,604 |
Less treasury stock, at cost, 123,500 shares | 684,890 | 684,890 |
Total stockholders' deficit | (129,857) | (49,286) |
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ 2,384,029 | $ 2,338,509 |
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N-VIRO INTERNATIONAL CORPORATION |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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(unaudited) |
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| Six Months Ended June 30 |
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| 2013 | 2012 |
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NET CASH USED IN OPERATING ACTIVITIES | (79,555) | (135,373) |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Increases from restricted cash | (256) | (353) |
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Proceeds from the sale of property and equipment | - | 127,551 |
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Increase to note receivable | (403) | (17,270) |
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Expenditures for intangibles and other assets | - | (7,500) |
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Purchases of property and equipment | (4,628) | (6,152) |
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Net cash provided (used) in investing activities | (5,287) | 96,276 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from stock warrants exercised | 123,923 | - |
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Proceeds from stock options exercised | - | 985 |
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Borrowings on long-term debt | 41,835 | 114,989 |
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Net borrowings (repayments) on line of credit | (5,000) | 95,000 |
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Principal payments on long-term obligations | (125,735) | (204,359) |
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Net cash provided by financing activities | 35,023 | 6,615 |
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NET DECREASE IN CASH AND CASH EQUIVALENTS | (49,819) | (32,482) |
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CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 52,625 | 44,498 |
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CASH AND CASH EQUIVALENTS - ENDING OF PERIOD | $ 2,806 | $ 12,016 |
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Supplemental disclosure of cash flows information: |
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Cash paid during the six months ended for interest | $ 56,402 | $ 55,739 |
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Non-cash investing and financing activities: |
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During the six months ended June 30, 2013, the Company issued common stock with a fair value of $98,600 as part of three consulting contracts. |
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During the three months ended June 30, 2013, the Company issued common stock with a fair value of $487,900 as part of a consulting contract. |
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During the three months ended June 30, 2012, the Company issued common stock with a fair value of $69,333 as part of a consulting contract. |
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See Notes to Condensed Consolidated Financial Statements
- 4 -
N-VIRO INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.
Organization and Basis of Presentation
The accompanying consolidated financial statements of N-Viro International Corporation (the Company) are unaudited but, in management's opinion, reflect all adjustments (including normal recurring accruals) necessary to present fairly such information for the period and at the dates indicated. The results of operations for the six months ended June 30, 2013 may not be indicative of the results of operations for the year ending December 31, 2013. Since the accompanying consolidated financial statements have been prepared in accordance with Article 8 of Regulation S-X, they do not contain all information and footnotes normally contained in annual consolidated financial statements; accordingly, they should be read in conjunction with the consolidated financial statements and notes thereto appearing in the Company's Form 10-K for the period ending December 31, 2012.
The financial statements are consolidated as of June 30, 2013, December 31, 2012 and June 30, 2012 for the Company. All intercompany transactions were eliminated.
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. There have been no changes in the selection and application of significant accounting policies and estimates disclosed in Item 8 Financial Statements and Supplementary Data of our Annual Report on Form 10-K for the year ended December 31, 2012.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has negative working capital of approximately $865,000 at June 30, 2013, and has incurred negative cash flow from operating activities for the six months ended June 30, 2013. In July 2013, the Company did not repay the principal portion and defaulted on its convertible debenture obligation. Moreover, even though the Companys line of credit is expected to be renewed until August 2014, the Company has minimal borrowing availability under the line of credit. The Company has borrowed money from third parties and a related party and expects to be able to generate future cash from the exercise of common stock warrants and new equity issuances, and, by focusing on existing and expected new sources of revenue, especially from our N-Viro Fuel technology. In 2012 the Company modified all outstanding common stock warrants at that time to reduce their weighted average exercise price of $2.00 per share to $1.00 per share for all warrants, and in 2013 further modified all outstanding warrants to enhance their exercisability. In addition, the Companys operations in Florida, which now represent approximately 99% of the Companys revenue, could be suspended temporarily or permanently by its landlord for perceived on-site issues with material storage or for other issues deemed in the best interest of the county and in conformance with the lease agreement. The Company considers its relationship with the landlord to be satisfactory overall, and is working to improve this relationship in the future. These factors raise substantial doubt as to the Companys ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Note 2.
Long-Term Debt and Line of Credit
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the line of credit. At June 30, 2013, the Company had $35,000 of borrowing capacity under the credit facility.
In December 2012, the Company borrowed $25,000 from a stockholder to provide operating capital. The Note Payable was for a term of three months at an interest rate of 12%. In February 2013, the stockholder converted the Note Payable to common stock at the fair market value of the stock at the time of conversion.
In November 2012, the Company received a Notice and Demand of Payment Withdrawal Liability from Central States Southeast and Southwest Areas Pension Fund (the Notice), the pension trustee that was funded by the Company for the benefit of its former employees at its City of Toledo operation. The Notice demands a payment of $412,576, payable monthly over 20 years at an interest rate of approximately 2.8% at $2,250 per month, or approximately $27,000 per year. Payments at the end of the 20 year period would total $540,065.
In 2011 the Company borrowed $200,000 with a Promissory Note payable to a related party of Timothy Kasmoch, the Companys President and Chief Executive Officer, at 12% interest prepaid for a period of three months, renewable for an additional three months by the prepayment of additional interest and secured by certain equipment. Mr. Kasmoch has personally guaranteed the repayment of this Note. The Company extended the Note on all four due dates during 2012 and again on January 30, April 30 and July 30, 2013, and is now due October 30, 2013. The Company expects to extend the Note on or before the due date but pay the Note in full during 2013 or early 2014.
From the beginning of 2006 through second quarter 2013, the Company has borrowed a total of $1,677,100 from ten lenders to purchase processing and automotive equipment. As of June 30, 2013, a total of five term notes are outstanding, ranging from 6.2% to 8.8% interest for terms ranging three to five years, monthly payments totaling approximately $8,500 and all secured by equipment. The total amount owed on all equipment-secured notes as of June 30, 2013 was approximately $130,000 and all notes are expected to be paid in full on the applicable maturity date, the last of which is in March 2016.
In 2009 the Company approved an offering of up to $1,000,000 of Convertible Debentures (the Debentures), convertible at any time into our unregistered common stock at $2.00 per share. The Debentures were issuable in $5,000 denominations, are unsecured and have a stated interest rate of 8%, payable quarterly to holders of record. The Company has timely paid all accrued interest due to all Debenture holders of record as of each quarter-end date starting in July 2009. At any time, the Company may redeem all or a part of the Debentures at face value plus unpaid interest.
During 2009 the Company issued $765,000 of Debentures to a total of twenty-three accredited investors, and one investor converted $10,000 of Debentures into unregistered common stock. During 2010 the Company issued $55,000 of Debentures, and three investors converted a total of $90,000 of Debentures into unregistered common stock. The Debentures matured at June 30, 2011, however sixteen investors holding Debentures totaling $455,000 elected to replace them with new ones that matured on June 30, 2013. All other features of the expired Debentures remained the same in the replacement ones, except for the new maturity date. Of the three investors totaling $265,000 who did not replace their existing Debentures with new ones, two investors totaling $215,000 had their Debentures repaid and one investor converted $50,000 into unregistered common stock concurrent at June 30, 2011.
As of June 30, 2013, the Company held $455,000 of Debentures, but defaulted and did not pay the holders the principal amount due, all of which currently remain outstanding. The Company will continue to accrue additional interest on the principal amount at the rate set forth in the Debentures until the principal amount is paid in full. The Company expects to pay all accrued interest due and the principal amount to all outstanding holders of the Debentures after completing substitute financial arrangements, though there can be no assurance of the timing of receipt of these funds and amounts available from these substitute arrangements.
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Because the fair market value of the Companys common stock (the underlying security in the Debentures) may have been above the conversion price of $2.00 per share at the date of issuance, the Company was required under GAAP to record a discount given for certain (now) expired Debentures sold, which totaled $184,975. The discount was then required to be amortized as a period expense over the periods the Debentures were scheduled to be outstanding, which averaged 20 months, through the maturity date of June 30, 2011. Amortization expense on these expired Debentures for each of the six months ended June 30, 2013 and 2012 was zero.
For periods subsequent to June 30, 2011, the Company is required under GAAP to record a discount for certain Debentures replaced, which totals $32,737 and was recorded as a gain on debt modification during the quarter ended June 30, 2011. The discount was required to be amortized as a period expense over the subsequent eight quarters the Debentures were scheduled to be outstanding. Amortization expense for each of the six months ended June 30, 2013 and 2012 was $8,184.
Note 3.
Commitments and Contingencies
In February 2013, the Companys Board of Directors received a letter from counsel on behalf of one of our stockholders (Counsel letter), demanding a review by the Board of option plan issuances in 2010 and 2011 to members of management. In response, the Board formed a Special Committee to evaluate the 2004 and 2010 Stock Option Plans for the issuances in 2010 pursuant to the multi-year employment agreements with Messrs. Kasmoch, Bohmer and McHugh under the 2004 Option Plan, and the 2011 award to Mr. Kasmoch under the 2010 Option Plan. The Special Committee and the Board finished reviewing the awards in May 2013, sent a letter in reply to the Counsel letter and anticipate a satisfactory resolution will be reached with the stockholder, avoiding any potential legal proceedings. If the stockholder elects to proceed even after analyzing the reply of the Special Committee and the Board, in that instance the Company would vigorously defend against such action.
On May 16, 2013, the Companys Board of Directors approved an amendment to each of the Companys executive officers respective employment agreement. Additional information is available in the Form 8-K filed by the Company on May 22, 2013.
The Companys executive and administrative offices are located in Toledo, Ohio. In April 2011, the Company signed a 68 month lease with Deerpoint Development Co., Ltd. The total minimum rental commitment for the year ending December 31, 2013 is $30,600 and for the years 2014 through 2016 is $40,800 each year. The total rental expense included in the statements of operations for the six months ended June 30, 2013 and 2012 is approximately $20,400 and $18,700, respectively. The total rental expense included in the statements of operations for the three months ended June 30, 2013 and 2012 is approximately $10,200 and $9,300, respectively. The Company also leases various office equipment on a month-to-month basis.
In October 2010, the Company began to lease property in Emlenton, Pennsylvania under a lease with Allegheny-Clarion Valley Development Corporation, for one year. After September 2011, the Company operated under a month-to-month lease agreement, for a reduced rate. The total rental expense included in the statements of operations for each of the six months and three months ended June 30, 2013 and 2012 is $6,000 and $3,000, respectively.
In June 2009, the Company began to maintain an office in West Unity, Ohio under a lease with D&B Colon Leasing, LLC, for one year. In June 2010, the Company renewed the lease for an additional year through May 31, 2011, and is currently operating under a month to month lease. The total rental expense included in the statements of operations for each of the six months and three months ended June 30, 2013 and 2012 is $15,000 and $7,500, respectively.
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The Company maintains an office in Daytona Beach under a lease with the County of Volusia, Florida, which was renewed in March, 2009 for five years. The total minimum rental commitment for the year ending December 31, 2013 is $48,000 and for 2014 is $12,000. The total rental expense included in the statements of operations for each of the six months and three months ended June 30, 2013 and 2012 is $24,000 and $12,000, respectively.
Management believes that all of the Companys properties are adequately covered by insurance.
The Company operates in an environment with many financial risks, including, but not limited to, major customer concentrations, customer contract termination provisions, competing technologies, infringement and/or misappropriation of intellectual property rights, the highly competitive and, at times, seasonal nature of the industry and worldwide economic conditions. Various federal, state and governmental agencies are considering, and some have adopted, laws and regulations regarding environmental protection which could adversely affect the business activities of the Company. The Company cannot predict what effect, if any, current and future regulations may have on the operations of the Company.
From time to time the Company is involved in legal proceedings and subject to claims which may arise in the ordinary course of business. The Company is not aware of any legal proceedings or material claims at this time.
Note 4.
New Accounting Standards
Accounting Standards Updates not effective until after June 30, 2013 are not expected to have a significant effect on the Companys consolidated financial position or results of operations.
Note 5.
Segment Information
During 2010, the Company determined that it currently operates in one segment based on the financial information upon which the chief operating decision maker regularly assesses performance and allocates resources. The chief operating decision maker is the Chief Executive Officer.
Note 6.
Basic and diluted income (loss) per share
Basic and diluted income (loss) per share is computed using the treasury stock method for outstanding stock options and warrants. For both the six months and three months ended June 30, 2013 and 2012 the Company incurred a net loss. Accordingly, no stock options or warrants have been included in the computation of diluted loss per share as the impact would be anti-dilutive.
Note 7.
Common Stock
In July 2010, the Company executed a Purchase Agreement, License and Development Agreement and Registration Rights Agreement (the Agreements), with VC Energy I, LLC of Las Vegas, NV, or VC Energy. Concurrently, the Company sold VC Energy 200,000 shares of the Company's unregistered common stock, issued VC Energy 200,000 warrants and granted VC Energy an option to acquire another 400,000 common shares and 400,000 warrants.
In August 2011, the Company and VC Energy signed a Termination Agreement and terminated the License and Development Agreement, a Promissory Note and an Escrow Agreement. All other agreements between the Company and VC Energy remained in force, with certain exceptions. In April 2012, the Company and VC Energy terminated the remaining agreements in effect. As a result, the
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Company was no longer required to account for the future changes in the Companys stock price after the second quarter of 2012, with regards to the warrants previously held by VC Energy.
In both the VC Energy Agreements and its Amendment, the Company accounted for the warrants issued within the transaction with a provision that protects holders from declines in the stock price (down-round provisions) as a derivative security at fair value with future changes in fair value recorded in earnings. As of June 30, 2013, the Company has recorded a liability of $-0- to reflect the fair value of the outstanding warrants and the removal of the down-round provision. However, through the second quarter of 2012, the Company was periodically required to re-measure the fair value of the remaining warrants at the Balance Sheet date, with adjustments in the value recorded through the income statement as a gain or loss. During the three months ended June 30, 2013 and 2012, the Company recorded a gain of $-0- and $7,400, respectively, on the revaluation and partial cancellation from the two issuances of the warrants to the end of the period. During the six months ended June 30, 2013 and 2012, the Company recorded a gain of $-0- and $12,200, respectively, on the revaluation and partial cancellation from the two issuances of the warrants to the end of the period.
In December 2010, the Company executed a Financial Public Relations Agreement with Strategic Asset Management, Inc., or SAMI. The Company engaged SAMI as its non-exclusive financial public relations counsel for a term of three years. For its services, the Company issued SAMI 150,000 shares of the Company's unregistered common stock. The Company is recording a non-cash charge to earnings of approximately $305,000 ratably over a 36-month period starting in December 2010. For each of the six months and three months ended June 30, 2013 and 2012, the charge to earnings was approximately $50,800 and $25,400, respectively.
In August 2011, the Company issued 100,000 shares of common stock and granted 100,000 stock warrants to SAMI for additional services performed in connection with the December 2010 Financial Public Relations Agreement. To reflect the entire value of the stock and warrants issued, the Company is taking a non-cash charge to earnings of $285,700 through December 2013, the ending date of the agreement. For each of the six months and three months ended June 30, 2013 and 2012, the charge to earnings was approximately $47,600 and $23,800, respectively.
In October 2012, the Company issued 300,000 shares of common stock and granted 150,000 stock warrants to SAMI to extend the period of services performed in connection with the December 2010 Financial Public Relations Agreement for an additional two years, through December 2015. To reflect the entire value of the stock and warrants issued, the Company is recording a non-cash charge to earnings of $421,300 starting in 2013, over a 36 month period. For the six months and three months ended June 30, 2013 the charge to earnings was approximately $91,000 and $57,000, respectively.
In December 2010, the Company executed a Consulting Agreement, with SLD Capital Corporation, or SLD. The Company engaged SLD to provide business consulting services for a term of eighteen months. For its services, the Company issued SLD 110,000 shares of the Company's unregistered common stock. The Company recorded a non-cash charge to earnings of approximately $334,000 ratably over an 18-month period starting in December 2010. For the six months months ended June 30, 2013 and 2012, the charge to earnings was approximately $-0- and $98,900, respectively.
In November 2011, the Company executed a Consulting Agreement with Rakgear, Inc. The Company engaged Rakgear to provide business consulting services for a term of one year. For its services, the Company issued Rakgear 50,000 shares of the Company's unregistered common stock. The Company recorded a non-cash charge to earnings of $73,000 ratably over a 12-month period starting in November 2011. For the six months ended June 30, 2013 and 2012, the charge to earnings was approximately $-0- and $36,500, respectively.
In February 2012, the Company issued 15,000 shares of unregistered common stock to Financial Insights, for investor relations services for a three month period. The Company recorded a non-cash charge to earnings of $19,500 during the six months ended June 30, 2012 for these shares. In July 2012,
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Financial Insights returned all of these shares of common stock to the Company as part of an agreement and the Company reversed this charge to earnings in the third quarter of 2012.
In March 2012, the Company issued 80,000 shares of unregistered common stock to Newport Coast Securities for financial and investor relations services for a three month period. To reflect the entire value of the stock issued, the Company recorded a non-cash charge to earnings ratably during the subsequent three month period. For the six months and three months ended June 30, 2012, the charge to earnings was $104,000 and $69,300, respectively.
In August 2012, the Company issued 60,000 shares of unregistered common stock to Equiti-trend Advisors LLC/JT Trading, LLC for public relations and corporate communication services. To reflect the entire value of the stock issued, the Company is recording a non-cash charge to earnings of $75,000 ratably through January 2013, the ending date of the agreement. For the six months and three months ended June 30, 2013, the charge to earnings was approximately $14,500 and $-0-, respectivley.
In December 2012, the Company borrowed $25,000 from a stockholder to provide operating capital. The Note Payable was for a term of three months at an interest rate of 12%. In February 2013, the stockholder converted the Note Payable to 24,760 shares of common stock, priced at the fair market value of the stock at the time of conversion.
In January 2013, the Company issued 70,000 shares of unregistered common stock to Webracadabra Internet Works, LLC, dba Oregon Resource Innovations, for financial consulting services to be performed over a six month period. To reflect the entire value of the stock issued, the Company is recording a non-cash charge to earnings of $70,000 ratably through July 2013, the ending date of the agreement. For the six months and three months ended June 30, 2013 the charge to earnings was approximately $67,400 and $35,000, respectively.
In April 2013, the Company executed a Consulting Agreement with Rakgear, Inc. The Company engaged Rakgear to provide financial consulting services for a term of one year. For its services, the Company issued Rakgear 150,000 shares of the Company's unregistered common stock and 150,000 warrants to puchase unregistered shares of common stock at a price of $1.49 per warrant. To reflect the entire value of the stock issued, the Company is recording a non-cash charge to earnings of $487,900 ratably through March 2014, the ending date of the agreement. For the three months ended June 30, 2013 the charge to earnings was approximately $122,000.
Note 8.
Stock Options
The Company records compensation expense for stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes valuation model. The Company uses historical data among other factors to estimate the expected price volatility, the expected option term and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the date of grant for the expected term of the option.
In addition to its first stock option plan approved in 1993, the Company has a stock option plan approved in May 2004, amended in June 2008 and again in August 2009 (the 2004 Plan), for directors and key employees under which 2,500,000 shares of common stock may be issued. The Company also has a stock option plan approved in July 2010 (the 2010 Plan), for directors and key employees under which 5,000,000 shares of common stock may be issued. Unless otherwise stated in the stock option agreement, options are 20% vested on the date of grant, with the balance vesting 20% per year over the next four years, except for directors whose options vest six months from the date of grant. Options were granted in 2012 and 2013 from both the 2004 and 2010 Plans at the approximate market value of the stock at date of grant, as defined in each of the plans.
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Pursuant to their respective five-year employment agreements, in March 2010 a total of 890,000 stock options were granted to the three executive officers of the Company. Twenty percent of the options vested immediately on the date of grant, with the balance of the options to vest in equal annual installments over the next four years on the anniversary date of the original grant. These options were granted pursuant to the 2004 Plan, are for a period of ten years and are intended as Incentive Stock Options. To reflect the value of the stock options granted for the employment services provided, the Company was taking a charge to earnings totaling approximately $2,358,000 through March 2014. For the six months ended June 30, 2013 and 2012 this charge was $176,800 and $236,000, respectively. For the three months ended June 30, 2013 and 2012 this charge was $58,900 and $117,900, respectively.
In May 2013, in connection and effective with their respective Amendment to employment agreement, the Board approved a grant of stock options to Messrs. Kasmoch, Bohmer and McHugh, which are immediately exercisable for shares of the Company's common stock. The grants were made pursuant to both the 2004 Plan and the 2010 Plan. The following table sets forth information about the stock option grants:
| 2004 Plan |
|
|
|
2010 Plan |
|
| ||
Officer | Grants returned | Grants received - May 2013 | Grants to receive - May 2014 |
| Grants returned | Grants received - May 2013 | Grants to receive - May 2014 | Grants to receive - May 2015 | Total Change |
Timothy Kasmoch | (395,000) | 25,000 | 25,000 |
| (400,000) | 100,000 | 100,000 | 100,000 | (445,000) |
|
|
|
|
|
|
|
|
|
|
Robert Bohmer | (245,000) | 25,000 | 25,000 |
| - | 100,000 | 50,000 | - | (45,000) |
|
|
|
|
|
|
|
|
|
|
James McHugh | (40,000) | 20,000 | 20,000 |
| - | 25,000 | 25,000 | - | 50,000 |
|
|
|
|
|
|
|
|
|
|
All grants awarded were priced at $1.25, in accordance with both the 2004 Plan and 2010 Plan. Future grants required under each officers Amendment will be priced at the time of grant. The Company took a non-cash charge to earnings of approximately $6,500 in the second quarter of 2013 to reflect the grant awarded to Mr. McHugh only, to reflect the net increase to him of 5,000 options granted currently. However, for all of the officers the Company will no longer record a non-cash charge to earnings of approximately $118,000 each quarter for the balance of 2013 and 2014, or a total of $315,000 and $98,000, respectively. Additional information is available in the Form 8-K filed by the Company on May 22, 2013.
In May 2013, the Company appointed Michael Burton-Prateley as a special advisor to the Board of Directors for a term of one year. For his services, the Company issued Mr. Burton-Prateley 25,000 stock options under the Companys 2004 Plan at a price of $1.28 per option that vested immediately. To reflect the entire value of the options issued, the Company recorded a non-cash charge to earnings of $31,240 during the second quarter of 2013.
In May 2013, the Company also granted stock options totaling 25,000 options to five directors. All of the options granted are for a period of ten years, are pursuant to the 2004 Plan, are exercisable at $1.30 and do not vest until November 2013. To reflect the value of the stock options granted, the Company is taking a charge to earnings totaling approximately $33,200 ratably over the subsequent six-month period. For the quarter ended June 30, 2013, the Company recorded an expense of approximately $9,300.
In May 2013, the Company granted 25,000 stock options to one employee. The options granted are for a period of ten years, are exercisable at $1.28 per share and vested immediately at the date of grant. These options were granted pursuant to the 2004 Plan and are intended as Incentive Stock Options. To reflect the entire value of the stock options granted, the Company recorded a charge to earnings of approximately $32,500 in the second quarter of 2013.
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Note 9.
Stock Warrants
The Company accounts for stock warrants based on the estimated fair value of the warrants on the date of grant using the Black-Scholes valuation model. The Company uses historical data among other factors to estimate the expected price volatility, the expected warrant term and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the date of grant for the expected term of the warrant.
In March 2012, the Board of Directors approved a plan to automatically extend to two holders of Company warrants the expiration date of the warrants by one (1) year. All other terms and conditions of each warrant remain unchanged. The two holders are Timothy R. Kasmoch, President and CEO of the Company, and, Strategic Asset Management Co, Inc., holders of 50,000 and 120,000 warrants, respectively, and extended to March 22, 2013 and March 26, 2013, respectively. The incremental fair value of $105,329 associated with the extension of the warrant expiration dates was determined using the Black-Scholes model and was recorded as a deemed dividend to common stockholders in the Statement of Stockholders Equity in the first quarter of 2012. Additional information is available in the Form 8-K filed by the Company on March 27, 2012.
In February 2013, the Board of Directors approved a plan to modify all Company warrants by offering any warrant holder who exercises a replacement warrant. All other terms and conditions of all outstanding warrants remain unchanged. In February and March 2013, five warrant holders exercised a total of 127,264 warrants at $1.00 and were issued a total of 127,264 shares of restricted common stock and 127,264 replacement warrants. All of the proceeds from the exercises were used in operations. The incremental fair value of $178,200 associated with the exercises and concurrent issuances of replacement warrants was determined using the Black-Scholes model and has been recorded as a deemed dividend to common stockholders in the Statement of Stockholders Equity in the first quarter of 2013.
Note 10.
Income Tax
For the six months ended June 30, 2013 and 2012, we are fully reserving our deferred tax asset value to zero as we have not recognized the future tax benefit of current or prior period losses due to our history of operating losses. Accordingly, our effective tax rate for each period was zero.
Note 11.
Subsequent Events
None
Item 2.
Managements Discussion and Analysis or Plan of Operation
Forward-Looking Statements
This 10-Q contains statements that are forward-looking. We caution that words used in this document such as expects, anticipates, believes, may, and optimistic, as well as similar words and expressions used herein, identify and refer to statements describing events that may or may not occur in the future. These forward-looking statements and the matters to which they refer are subject to considerable uncertainty that may cause actual results to differ materially from the results described in those statements. There are numerous factors that could cause actual results to be different than those anticipated or predicted by us, including: (i) a deterioration in economic conditions in general; (ii) a decrease in demand for our products or services in particular; (iii) our loss of a key employee or employees; (iv) regulatory changes, including changes in environmental regulations, that may have an adverse affect on the demand for our products or services; (v) increases in our operating expenses
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resulting from increased costs of fuel, labor and/or consulting services; (vi) our inability to exploit existing or secure additional sources of revenues or capital to fund operations; (vii) a failure to collect upon or otherwise secure the benefits of existing contractual commitments with third parties, including our customers; and (viii) other factors and risks identified in this Form 10-Q, or, as filed in Form 10-K for the year ending December 31, 2012 under the caption "Risk Factors." This list provides examples of factors that could affect the results described by forward-looking statements contained in this Form 10-Q; however, this list is not exhaustive and many other factors could impact our business and it is impossible to predict with any accuracy which factors could result in negative impacts. Although we believe that the forward-looking statements contained in this Form 10-Q are reasonable, we cannot provide you with any guarantee that the anticipated results will not be adverse and that the anticipated results will be achieved. All forward-looking statements in this Form 10-Q are expressly qualified in their entirety by the cautionary statements contained in this section and you are cautioned not to place undue reliance on the forward-looking statements contained in this Form 10-Q. In addition to the risks listed above, other risks may arise in the future, and we disclaim any obligation to update information contained in any forward-looking statement .
Overview
We were incorporated in Delaware in April 1993, and became a public company in October 1993. Our current business focus is to market our N-Viro FuelTM technology, which produces a renewable alternative fuel product out of certain bio-organic wastes. This N-Viro Fuel process has been acknowledged by the USEPA as a fuel product that can be used to produce alternative energy. In this business strategy, the primary objective is to identify allies, public and private, which will allow the opportunity for N-Viro to build, own and operate N-Viro Fuel facilities either on its own or in concert with others.
We operate a biosolids processing facility located in Volusia County, Florida. This facility produces the N-Viro SoilTM agricultural product, and provides us with working and development capital. Until November 2011 we operated a similar facility for a period in excess of 20 years in Toledo, Ohio, but our 2011 contract was not renewed. Our goal is to continue to operate the Florida facility and aggressively market our N-Viro Fuel technology. These patented processes are best suited for current and future demands, satisfying both waste treatment needs as well as domestic and international directives for clean, renewable alternative fuel sources.
From the start-up in April 2011 to September 2011, we operated the first full-scale N-Viro Fuel mobile processing facility in western Pennsylvania. The purpose of the mobile system is to prepare quantities of N-Viro Fuel to facilitate necessary testing with cooperating power facilities. In September 2011 an initial 10% substitution for coal test was performed at a western Pennsylvania power generator. In July 2012 the positive results of this test resulted in a letter agreement with the same power producer to perform a second and final 20% substitution test of N-Viro Fuel. We are required to obtain permitting from the Pennsylvania DEP for the mobile facility, which is in process. Once completed, we expect to negotiate long-term agreements for the N-Viro Fuel product at this power generation company.
Thereafter we intend to migrate this mobile system and make it available for use to demonstrate the N-Viro Fuel process to other municipalities and provide required test fuel quantities for power companies throughout the United States. We expect this mobile system to be a key component in developing N-Viro Fuel facilities for several years to come.
We also own and sometimes license various N-Viro processes and patented technologies to treat and recycle wastewater and other bio-organic wastes, utilizing certain alkaline and mineral by-products produced by the cement, lime, electrical generation and other industries. To date, the N-Viro Process has been commercially utilized for the recycling of wastewater sludge from municipal wastewater treatment facilities. All N-Viro products produced according to the N-Viro Process specifications, are "exceptional quality" sludge products under the 40 CFR Part 503 Sludge Regulations promulgated under the Clean Water Act of 1987 (the "Part 503 Regs").
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Results of Operations
The dollar amounts in the following sections are stated as approximations, rounded to the nearest $1,000.
Total revenues were $938,000 for the quarter ended June 30, 2013 compared to $904,000 for the same period of 2012. The net increase in revenue is due primarily to an increase in facility management revenue. Our cost of revenues increased to $755,000 in 2013 from $750,000 for the same period in 2012, and the gross profit margin increased to 20% for the quarter ended June 30, 2013, from 17% for the same period in 2012. This increase in gross profit margin was primarily the result of the increase in the share of gross revenue for the processing of sludge from the facility management contracts at the Florida operation. Operating expenses increased slightly for the quarter ended June 30, 2013 over the comparative prior year period, and Nonoperating income (expense) showed a decrease from the second quarter of 2012 to 2013. These changes collectively resulted in a net loss of $444,000 for the quarter ended June 30, 2013 compared to a net loss of $455,000 for the same period in 2012, a decrease in the loss of $11,000.
Comparison of Three Months Ended June 30, 2013 with Three Months Ended June 30, 2012
Our overall revenue increased $34,000, or 4%, to $938,000 for the three months ended June 30, 2013 from $904,000 for the three months ended June 30, 2012. The increase in revenue was due primarily to the following:
a) Sales of alkaline admixture decreased $31,000 from the same period ended in 2012;
b) Revenue from the service fees for the management of alkaline admixture decreased $57,000 from the same period ended in 2012, and
c) Our processing revenue, including facility management revenue, showed a net increase of $113,000 over the same period ended in 2012, and
d) Revenue from the licensing of the N-Viro process showed a net increase of $9,000 from 2012 into 2013.
Our gross profit increased $30,000, or 19.5%, to $183,000 for the three months ended June 30, 2013 from $153,000 for the three months ended June 30, 2012, and the gross profit margin increased to 20% from 17% for the same periods. The increase in gross profit margin is primarily the result of the increase in the share of gross revenue for processing sludge from the facility management contracts at our Florida operation, which typically is generated at our highest gross profit margin, offset secondarily by increased costs to truck sludge into the facility, which was transported by our subsidiary and third-party vendors at an increased cost to approved off-site disposal locations. These costs were incurred due to unprecedented and lengthy outages at the sources of the alkaline admixture required for the N-Viro process during the quarter, and the need to continue to serve our customers. Consequently we incurred greater costs to process and concurrently received lower alkaline admixture revenue for the duration of the supply shortages.
Our operating expenses increased $3,000, or 0.5%, to $597,000 for the three months ended June 30, 2013 from $594,000 for the three months ended June 30, 2012. The increase was primarily due to a decrease in the gain on the sale of fixed assets of $15,000 and an increase of $77,000 in consulting fees and expenses, offset by a decrease of $33,000 in employee compensation costs, a decrease of $34,000 in legal and professional fees, a decrease of $12,000 in bad debts expense and a decrease of $11,000 in stockholder relations expense. Of the total net increase of $44,000 in employee compensation and
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consulting costs, $55,000 were for non-cash costs. Therefore, for the three months ended June 30, 2013, actual cash outlays in these combined categories decreased by a total of $11,000 over the same period in 2012.
As a result of the foregoing factors, we recorded an operating loss of $414,000 for the three months ended June 30, 2013 compared to an operating loss of $441,000 for the three months ended June 30, 2012, a decrease in the loss of $27,000.
Our net nonoperating expense increased by $16,000 to net nonoperating expense of $30,000 for the three months ended June 30, 2013 from net nonoperating expense of $14,000 for the similar period in 2012. The increase in net nonoperating expense was primarily due to a decrease in the gain of $7,000 on the market price of warrants issued, and secondarily due to an increase of $4,000 in interest expense and $4,000 decrease in the on the extinguishment of liabilities.
We recorded a net loss of $444,000 for the three months ended June 30, 2013 compared to a net loss of $455,000 for the same period ended in 2012, a decrease in the loss of $11,000. Adding back non-cash expenses such as depreciation, amortization, stock and stock options charges and subtracting cash out for capitalized assets and debt repayments, resulted in an adjusted cash loss (non-GAAP) of $41,000 for the three months ended June 30, 2013. Similar non-cash expenses, cash out and debt repayments for the same period in 2012 resulted in an adjusted cash loss (non-GAAP) of $107,000, a decrease in the adjusted cash loss (non-GAAP) of $66,000 for the three months ended June 30, 2013 versus the same period in 2012.
For the three months ended June 30, 2013 and 2012, we have not recognized the future tax benefit of current or prior period losses due to our history of operating losses. Accordingly, our effective tax rate for each period was zero.
Comparison of Six Months Ended June 30, 2013 with Six Months Ended June 30, 2012
Our overall revenue decreased $171,000, or 9%, to $1,721,000 for the three months ended June 30, 2013 from $1,892,000 for the six months ended June 30, 2012. The decrease in revenue was due primarily to the following:
a) Sales of alkaline admixture decreased $62,000 from the same period ended in 2012;
b) Revenue from the service fees for the management of alkaline admixture decreased $258,000 from the same period ended in 2012, and
c) Our processing revenue, including facility management revenue, showed a net increase of $140,000 over the same period ended in 2012.
d) Revenue from the licensing of the N-Viro process showed a net increase of $9,000 from 2012 into 2013.
Our gross profit decreased $265,000, or 91%, to a negative $27,000 for the six months ended June 30, 2013 from $292,000 for the six months ended June 30, 2012, and the gross profit margin decreased to 2% from 15% for the same periods. The decrease in gross profit margin is primarily the result of increased costs to truck sludge to process with our Florida operation, which was transported by our subsidiary and third-party vendors at an increased cost to approved off-site disposal locations. These costs were incurred due to unprecedented and lengthy outages at the sources of the alkaline admixture required for the N-Viro process during the period, and the need to continue to serve our customers. Consequently we incurred greater costs to process and concurrently received lower alkaline admixture revenue for the duration of the supply shortages.
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Our operating expenses increased $16,000, or 1.5%, to $1,099,000 for the six months ended June 30, 2013 from $1,083,000 for the six months ended June 30, 2012. The increase was primarily due to a decrease in the gain on the sale of fixed assets of $81,000, an increase of $48,000 in consulting costs and an increase of $10,000 in director costs, offset by a decrease of $62,000 in employee compensation, a decrease of $24,000 in legal and professional fees, a decrease of $14,000 in auto, travel and office expense, a decrease of $12,000 in bad debts expense and a decrease of $9,000 in stockholder relations expense. Of the total net decrease of $4,000 in consulting, director and employee compensation costs, $39,000 were for non-cash costs. Therefore, for the six months ended June 30, 2013, actual cash outlays in these combined categories decreased by a total of $43,000 over the same period in 2012.
As a result of the foregoing factors, we recorded an operating loss of $1,072,000 for the six months ended June 30, 2013 compared to an operating loss of $791,000 for the six months ended June 30, 2012, an increase in the loss of $281,000.
Our net nonoperating income (expense) increased by $35,000 to net nonoperating income of $2,000 for the six months ended June 30, 2013 from net nonoperating expense of $33,000 for the similar period in 2012. The increase in net nonoperating income was primarily due to an increase of $57,000 in the gain on liabilities extinguished, offset by increases of $9,000 in interest expense and a $12,000 decrease in the gain on the market price of warrants issued.
We recorded a net loss of $1,069,000 for the six months ended June 30, 2013 compared to a net loss of $824,000 for the same period ended in 2012, an increase in the loss of $245,000. Adding back non-cash expenses such as depreciation, amortization, stock and stock options charges and subtracting cash out on capitalized assets and debt repayments, resulted in an adjusted cash loss (non-GAAP) of $449,000 for the six months ended in 2013. Similar non-cash expenses, cash out and debt repayments for the same period in 2012 resulted in an adjusted cash loss (non-GAAP) of $167,000, an increase in the adjusted cash loss (non-GAAP) of $283,000 for the six months ended June 30, 2013 versus the same period in 2012.
For the six months ended June 30, 2013 and 2012, we have not recognized the future tax benefit of current or prior period losses due to our history of operating losses. Accordingly, our effective tax rate for each period was zero.
Liquidity and Capital Resources
We had a working capital deficit of $865,000 at June 30, 2013, compared to a working capital deficit of $927,000 at December 31, 2012, resulting in an increase in working capital of $62,000. Current assets at June 30, 2013 included cash and cash equivalents of $212,000 (including restricted cash of $209,000), which is a decrease of $50,000 from December 31, 2012. The net positive change of $62,000 in working capital from December 31, 2012 was primarily from an increase in the current asset of $241,000 for deferred stock and warrant costs issued for consulting services, offset by a $170,000 increase in the change in short-term liabilities over assets.
In the six months ended June 30, 2013, our cash flow used by operating activities was $80,000, an increase of $56,000 over the same period in 2012. The components of the increase from 2012 in cash flow provided by operating activities was principally due to an increase of $219,000 in net current liabilities, a decrease of $81,000 in the gain on sale of fixed assets, a $37,000 increase in stock and stock derivatives issued for fees and services and a $12,000 decrease in the gain on the market price of warrants issued, offset by an increase in the net loss of $245,000 and a decrease in depreication of $40,000.
We have modified our business model and have been evolving away from sales of alkaline admixture and royalty-based revenue agreements that typically generate a higher gross profit margin, to long-term and sustainable revenue based on integrated N-Viro technology and operations, but typically generating a lower gross profit margin. From 2007 to the second quarter of 2013, the percentage of
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combined revenues generated from our owned and operated facilities was: 2007 77%; 2008 94%; 2009 95%; 2010 96%; 2011 96%; 2012 94%; through second quarter 2013 99%. We believe this shift will allow us to enhance future revenue and profits through growth, efficiency and revenue optimization.
The normal collection period for accounts receivable is approximately 30-60 days for the majority of customers. This is a result of the nature of the license contracts, type of customer and the amount of time required to obtain the information to prepare the billing. We make no assurances that payments from our customer or payments to our vendors will become shorter and this may have an adverse impact on our continuing operations.
During the second quarter of 2013, we had a line of credit with Monroe Bank + Trust, or the Bank, up to $400,000 bearing interest at the Wall Street Journal Prime Rate (3.25% at June 30, 2013) plus 0.75%, but in no event less than 5.00%, and secured by a first lien on all our assets, except equipment. In August 2013 it is expected to be renewed with a new maturity date of August 2014. Two certificates of deposit totaling $141,924 from the Bank are held as a condition of maintaining the line of credit. At June 30, 2013, we had $35,000 of borrowing capacity under the credit facility.
In December 2012, we borrowed $25,000 from a stockholder to provide operating capital. The Note Payable was for a term of three months at an interest rate of 12%. In February 2013, the stockholder converted the Note Payable to common stock at the fair market value of the stock at the time of conversion.
In November 2012, we received a Notice and Demand of Payment Withdrawal Liability from Central States Southeast and Southwest Areas Pension Fund (the Notice), the pension trustee that was funded by us for the benefit of our former employees at our City of Toledo operation. The Notice demands a payment of $412,576, payable monthly over 20 years at an interest rate of approximately 2.8% at $2,250 per month, or approximately $27,000 per year. Payments at the end of the 20 year period would total $540,065.
In 2011 we borrowed $200,000 with a Promissory Note payable to a related party of Timothy Kasmoch, our President and Chief Executive Officer, at 12% interest prepaid for a period of three months, renewable for an additional three months by the prepayment of additional interest and secured by certain equipment. Mr. Kasmoch has personally guaranteed the repayment of this Note. We extended the Note on all four due dates during 2012 and again on January 30, April 30 and July 30, 2013, and is now due October 30, 2013. We expect to extend the Note on or before the due date but pay the Note in full during 2013 or early 2014.
From the beginning of 2006 through second quarter 2013, we have borrowed a total of $1,677,100 from ten lenders to purchase processing and automotive equipment. As of June 30, 2013, a total of five term notes are outstanding, ranging from 6.2% to 8.8% interest for terms ranging three to five years, monthly payments totaling approximately $8,500 and all secured by equipment. The total amount owed on all equipment-secured notes as of June 30, 2013 was approximately $130,000 and all notes are expected to be paid in full on the applicable maturity date, the last of which is in March 2016.
In 2009 we approved an offering of up to $1,000,000 of Convertible Debentures (the Debentures), convertible at any time into our unregistered common stock at $2.00 per share. The Debentures were issuable in $5,000 denominations, are unsecured and have a stated interest rate of 8%, payable quarterly to holders of record. We have timely paid all accrued interest due to all Debenture holders of record as of each quarter-end date starting in July 2009. At any time, we may redeem all or a part of the Debentures at face value plus unpaid interest.
During 2009 we issued $765,000 of Debentures to a total of twenty-three accredited investors, and one investor converted $10,000 of Debentures into unregistered common stock. During 2010 the
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Company issued $55,000 of Debentures, and three investors converted a total of $90,000 of Debentures into unregistered common stock. The Debentures matured at June 30, 2011, however sixteen investors holding Debentures totaling $455,000 elected to replace them with new ones that matured on June 30, 2013. All other features of the expired Debentures remained the same in the replacement ones, except for the new maturity date. Of the three investors totaling $265,000 who did not replace their existing Debentures with new ones, two investors totaling $215,000 had their Debentures repaid and one investor converted $50,000 into unregistered common stock concurrent at June 30, 2011.
As of June 30, 2013, we held $455,000 of Debentures but did not pay the holders that principal amount due, all of which remain outstanding. We will continue to accrue additional interest on the principal amount at the rate set forth in the Debentures until the principal amount is paid in full. We expect to pay all accrued interest due and the principal amount to all outstanding holders of the Debentures after completing substitute financial arrangements, though there can be no assurance of the timing of receipt of these funds and amounts available from these substitute arrangements.
Because the fair market value of our common stock (the underlying security in the Debentures) may have been above the conversion price of $2.00 per share at the date of issuance, we were required under GAAP to record a discount given for certain (now) expired Debentures sold, which totaled $184,975. The discount was then required to be amortized as a period expense over the periods the Debentures were scheduled to be outstanding, which averaged 20 months, through the maturity date of June 30, 2011. Amortization expense on these expired Debentures for each of the six months ended June 30, 2013 and 2012 was zero.
For periods subsequent to June 30, 2011, we are required under GAAP to record a discount for certain Debentures replaced, which totals $32,737 and was recorded as a gain on debt modification during the quarter ended June 30, 2011. The discount was required to be amortized as a period expense over the subsequent eight quarters the Debentures were scheduled to be outstanding. Amortization expense for each of the six months ended June 30, 2013 and 2012 was $8,184.
For 2013, we expect to maintain current operating results and have adequate cash or access to cash to adequately fund operations from cash generated from equity issuances and exercises of outstanding warrants and options, and by focusing on existing and expected new sources of revenue, especially from our N-Viro Fuel technology. We expect that market developments favoring cleaner burning renewable energy sources and ongoing discussions with companies in the fuel and wastewater industries could provide enhanced liquidity and have a positive impact on future operations. We continue to pursue opportunities with strategic partners for the development and commercialization of the N-Viro Fuel technology both domestically and internationally. In addition, we are focusing on the development of regional biosolids processing facilities, and are currently in negotiations with potential partners to permit and develop independent, regional facilities.
There can be no assurance these discussions will be successful or result in new revenue or cash funding sources for the company. Our failure to achieve improvements in operating results, including through these potential sources of revenue, or in our ability to adequately finance or secure additional sources of funds would likely have a material adverse effect on our continuing operations.
Moreover, while we expect to renew our line of credit until August 2014, we have minimal borrowing availability under the line of credit. We have borrowed money from third parties and a related party and expect to be able to generate future cash from the exercise of common stock warrants and new equity issuances. In 2012 we modified all outstanding common stock warrants to reduce their weighted average exercise price. In 2013 we further modified all outstanding warrants to enhance their exercisability and have realized $124,000 in exercises so far in 2013. In addition, our operations in Florida, which now represent approximately 99% of our revenue, could be suspended temporarily or permanently by our landlord for perceived on-site issues with material storage or for other issues deemed in the best interest of the county and in conformance with the lease agreement. We consider our relationship with our landlord to be satisfactory overall, and are working to improve this relationship in the future.
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For our financial statements for the year ended December 31, 2012, we have received an unqualified audit report from our independent registered public accounting firm that includes an explanatory paragraph describing their substantial doubt about our ability to continue as a going concern. As discussed in Note 1 to the condensed consolidated financial statements, our recurring losses, negative cash flow from operations and net working capital deficiency raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Off-Balance Sheet Arrangements
At June 30, 2013, other than operating leases disclosed elsewhere, we did not have any material commercial commitments, including guarantees or standby repurchase obligations, or any relationships with unconsolidated entities or financial partnerships, including entities often referred to as structured finance or special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
From time to time, during the normal course of business, we may make certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These include: (i) indemnities to vendors and service providers pertaining to claims based on our negligence or willful misconduct and (ii) indemnities involving the accuracy of representations and warranties in certain contracts. Pursuant to Delaware law, we may indemnify certain officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. We also have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts that we may pay for indemnification purposes. We believe the applicable insurance coverage is generally adequate to cover any estimated potential liability for which we may provide indemnification. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments we could be obligated to make. We have not recorded any liability for these indemnities, commitments and other guarantees in the accompanying Condensed Consolidated Balance Sheets.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As of the end of the period covered by this report, management carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer,
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of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon the evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Our history of losses has severely limited our budget to hire and train enough accounting and financial personnel needed to adequately provide this function. Consequently, we lack sufficient technical expertise, reporting standards and written policies and procedures regarding disclosure controls and procedures.
Because of the inherent limitations in all disclosure control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be or have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, disclosure controls can be circumvented by the individual acts of some persons, by collusion of two or more people and/or by management override of such controls. The design of any system of disclosure controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, disclosure controls and procedures may become inadequate because of changes in conditions, and/or the degree of compliance with the policies and procedures may deteriorate. Also, misstatements due to error or fraud may occur and not be detected.
Changes on Internal Control Over Financial Reporting
During the six months ended June 30, 2013, there were no material changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal proceedings
In February 2013, the Companys Board of Directors received a letter from counsel on behalf of one of our stockholders (Counsel letter), demanding a review by the Board of option plan issuances in 2010 and 2011 to members of management. In response, the Board formed a Special Committee to evaluate the 2004 and 2010 Stock Option Plans for the issuances in 2010 pursuant to the multi-year employment agreements with Messrs. Kasmoch, Bohmer and McHugh under the 2004 Option Plan, and the 2011 award to Mr. Kasmoch under the 2010 Option Plan. The Special Committee and the Board finished reviewing the awards in May 2013, sent a letter in reply to the Counsel letter and anticipate a satisfactory resolution will be reached with the stockholder, avoiding any potential legal proceedings. If the stockholder elects to proceed even after analyzing the reply of the Special Committee and the Board, in that instance the Company would vigorously defend against such action.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
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Item 3. Defaults Upon Senior Securities
As of the date of this filing, we are in default on $455,000 of Convertible Debentures. Additional information is available in the Form 8-K filed by the Company on August 5, 2013.
Item 4. (Removed and Reserved)
Item 5. Other Information
(a)
None
(b)
None
Item 6.
Exhibits
Exhibit No.
Description
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase
101.DEF*
XBRL Taxonomy Extension Definition Linkbase
101.LAB*
XBRL Taxonomy Extension Label Linkbase
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase
*filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
N-VIRO INTERNATIONAL CORPORATION
Date:
August 19, 2013
/s/ Timothy R. Kasmoch
Timothy R. Kasmoch
Chief Executive Officer and President
(Principal Executive Officer)
Date:
August 19, 2013
/s/ James K. McHugh
James K. McHugh
Chief Financial Officer, Secretary and Treasurer
(Principal Financial & Accounting Officer)
EXHIBIT INDEX
Exhibit No .
Document
31.1
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
31.2
Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
32.2
Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
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