Notes to Unaudited Condensed Consolidated Financial Statements
Note 1.
Organization and Basis of Presentation
The accompanying consolidated financial statements of N-Viro International Corporation (the “Company”) are unaudited but, in management's opinion, reflect all adjustments (including normal recurring accruals) necessary to present fairly such information for the period and at the dates indicated. The results of operations for the nine months and three months ended September 30, 2016 may not be indicative of the results of operations for the year ending December 31, 2016. 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, 2015.
The financial statements are consolidated as of September 30, 2016, December 31, 2015 and September 30, 2015 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, 2015.
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 $2,737,000 at September 30, 2016, and has incurred recurring losses and negative cash flow from operations for the nine months ended September 30, 2016 and years ended December 31, 2015 and 2014. Moreover, while the Company expects to arrange for financing with lending institutions, there can be no assurances that the Company will have the ability to do so. The Company has borrowed money from third parties and related parties and expects to be able to generate future cash from the exercises of common stock options and warrants, new debt and equity issuances. The Company has substantially slowed payments to trade vendors, and has renegotiated payment terms with several existing and prior vendors to lengthen the time and/or reduce the amount of cash to repay these trade payables. In 2014, 2015 and early 2016, the Company issued new equity for total cash realized of approximately $1.4 million. In 2013, 2014 and again in 2015, the Company modified all outstanding warrants to enhance their exercisability and realized a total of $246,000 in exercises in 2013 and 2014. In October 2015, the Company extended the expiration date of all outstanding warrants for exactly one year. Beginning in March 2014, the Company’s operations in Volusia County, Florida, which at the time represented substantially all of its revenue, were voluntarily delayed while the Company employed additional personnel and moved assets to its new site in Bradley, Florida. When operations resumed in Bradley in June 2014, this reduction in revenue materially reduced available cash to fund current or prior expenses incurred, and has remained at this lower level or decreased over subsequent periods to date.
For the next twelve months the Company expects to have adequate cash to sufficiently fund operations from cash generated from equity and convertible debt issuances, exercises of outstanding warrants and options and by focusing on existing and expected new sources of revenue, though there can be no assurances the Company will do so. The Company continues to pursue opportunities with strategic partners for the development and commercialization of the N-Viro Fuel technology both domestically and internationally. In addition, the Company is focusing on the development of regional biosolids processing facilities, and currently is in negotiations with potential partners to permit and develop independent, regional facilities. First, the Company requires a funding source to enable the development
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of processing facilities, and expect this to happen by early 2017 at an estimated cost of $100,000. Within six months after financing, the Company expects sales of new equipment and other sources of up-front revenue to provide additional sources of revenue, with the start up of the facility in late 2017, then to increase capacity to planned levels and full production by the beginning of 2018. At that time the Company expects these new facilities to provide adequate levels of cash to fund operations without additional equity or debt issuances.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Certain amounts in the Condensed Consolidated Balance Sheets at December 31, 2015 have been reclassified to conform to the current period presentation.
Note 2.
Notes Receivable
In January 2016, the Company entered into a Promissory Note (the “Note Receivable”) for $100,000 with N-Viro Energy Limited (“Ltd”), a related party, and concurrently advanced Ltd $55,000 of cash for expenses in connection with its China project. The Note Receivable was due on April 15, 2016 at a stated interest rate of 5% per annum. In May 2016, the Company agreed to a revised Note Receivable for $120,000, and concurrently advanced Ltd $65,000 of cash for expenses in connection with its China project. No other terms of the Note Receivable were changed, and the Note Receivable is in default as of the date of this filing. The entire balance of principal and related accrued interest receivable has been fully reserved, as collectability is deemed doubtful, and a charge to earnings has been recorded at September 30, 2016.
Note 3.
Notes Payable
In 2011 the Company borrowed $200,000 with a Promissory Note (“the Note”) payable to David and Edna Kasmoch (“the Kasmochs”), the parents of Timothy Kasmoch, the Company’s President and Chief Executive Officer, at 12% interest and prepaid for a period of three months, renewable for an additional three months by the prepayment of additional interest and secured by certain equipment. Timothy Kasmoch has personally guaranteed the repayment of this Note. As of September 30, 2016 the Note was past due and the Company is in default. The Company expects to extend the Note in the near future and pay it in full within the next six months, although there can be no assurance the Company will have adequate cash flow to allow for any additional payments or that the maturity date will be extended. In September 2015, the Company received a demand letter from counsel for the Note holder declaring a default under the Note. Counsel demanded payment of the entire amount due under the Note as well as defaulted payments under the related Bowling Green Holdings (“BGH”) capital lease discussed in Note 4, along with additional accrued interest and penalties. At September 30, 2016 and December 31, 2015 the Company accrued a total of $192,500 and $95,780, respectively, in estimated interest and penalties. The Company is in negotiations with counsel, BGH and the Kasmochs to resolve this default, although there can be no assurance these negotiations will be successful. In addition, during the third quarter the Company has exchanged certain monies with BGH for operating funds for the Florida location, with a balance of $7,459 due BGH at September 30, 2016. The Company has presented all amounts due either BGH (excluding the capital lease) or the Kasmochs as one line item amount on the accompanying balance sheet, “Notes and fees payable - related parties, in default”.
In 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. In December 2013, the Company received a Notice of Default from Central States, and in September 2014 the Company agreed to pay Central States a total of $415,000 plus interest on a financed settlement over
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19 months, with payments of $6,000 per month for the first twelve months and $10,000 per month for the following six months, with a balloon payment of approximately $312,000 due on or before February 1, 2016. Concurrently a separate security agreement was agreed on, effectively securing all of the Company’s assets and future rights to assets. As of the date of this filing, the Company is not in compliance with the new settlement agreement, as the remaining two payments of $10,000 as well as the balloon payment are overdue. In an event of default, the Company becomes liable for liquidating damages to Central States in the amount of $78,965. This liability has been added to the total amount owed under this agreement. The amount owed under this agreement was $422,091 as of September 30, 2016 and $408,031 as of December 31, 2015, respectively.
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. 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 became due. During 2015, two of the Company’s debenture holders converted their respective debt to restricted shares of the Company’s common stock, reducing the amount of Debentures that remain outstanding and in default at September 30, 2016 to $365,000. The Company continues to accrue interest on the principal amount at the rate set forth in the Debentures until the principal amount is paid in full. The Company has not made the interest payments due in October 2015 or all four quarterly installments due in 2016. 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.
In October 2015, the Company financed its directors and officers insurance and borrowed $30,100 over 10 months at 9% interest, with monthly payments of $3,136 and the note was unsecured. The note was paid in full as of September 30, 2016.
In December 2015, the Company entered into an agreement with JSJ Investments, Inc. (“JSJ”) to issue a convertible promissory note (“JSJ Note”) to the Company for $125,000 in cash, less $10,000 in fees paid in debt issuance costs to a third party. The JSJ Note was for a term of nine (9) month, an interest rate of 10%, and a $4,000 original issue discount fee on actual payments made. JSJ could elect to convert all or part of the debt into restricted shares of the Company’s common stock for a price equaling the lesser of $0.43 or a 40% discount to the lowest trading price during the previous twenty (20) trading days to the date of the conversion notice. The Company was also required to reserve 1,250,000 authorized but unissued shares of its common stock, per an irrevocable letter to the Company’s transfer agent. The transaction was exempt from the registration requirements under the Securities Act pursuant to section 4(2) as a transaction by an issuer not involving a public offering. The conversion feature of the JSJ Note was determined to be a beneficial conversion feature and was recorded as a debt discount at a fair value of $83,000 at the time of issuance, and was subsequently amortized to interest expense ratably over the term outstanding. As a result of the June 2016 convertible note issued to JMJ Financial, explained later in this Note 3, the JSJ Note was retired in late June 2016 for a total payment of approximately $190,300, including accrued interest and $62,500 in an early prepayment premium.
In January 2016, the Company entered into an agreement with JMJ Financial (“JMJ”), to issue a Convertible Promissory Note (“JMJ Note”) to the Company for $500,000, with an initial loan of $100,000 in cash, less $6,950 in debt issuance costs paid to Craft Capital Management, LLC (“Craft”). Craft also received 4,000 stock warrants, valued at $3,000, to purchase unregistered common stock of the Company at an exercise price of $1.00 per share. The JMJ Note is for a term of two (2) years, an interest rate of 12% if not paid within the first 90 days, and a 10% original issue discount fee on actual payments made. After 180 days from the agreement date, JMJ can elect to convert all or part of the debt into restricted shares of the Company’s common stock for a price equaling the lesser of $0.77 or a 40% discount to the lowest trading price during the previous twenty-five (25) trading days to the date of the conversion notice. The Company was also required to reserve 2,500,000 authorized but unissued shares of its common stock, per an irrevocable Letter of Instructions to the Company’s transfer agent. The
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transaction was exempt from the registration requirements under the Securities Act pursuant to section 4(2) as a transaction by an issuer not involving a public offering. From July through September 2016, JMJ Financial was issued a total of 155,000 registered shares of the Company’s common stock to convert $46,785 of debt, in accordance with the JMJ Note. Exemption from registration is claimed under section 3(a)(9) of the Securities Act as a transaction involving an exchange of securities of the same issuer where no commissions are being paid. The conversion feature of the JMJ Note was determined to be a beneficial conversion feature and was recorded as a debt discount at fair value of $67,000. This debt discount is being amortized to interest expense ratably over the two year note term. The total amount owed on the JMJ Note was $53,215 and the gross discount was $48,301, including net debt issuance costs of $6,427, as of September 30, 2016. The carrying amount on the JMJ Note was $4,914 as of September 30, 2016, and is classified as long-term debt on the balance sheet.
In March 2016, the Company entered into an agreement with Tangiers Investment Group, LLC (“Tangiers”), to issue a 10% Convertible Promissory Note (“Tangiers Note”) to the Company for $58,500 in cash, less $8,500 in original issue discount retained by Tangiers for due diligence and legal expenses. The Tangiers Note was for a term of one (1) year, an interest rate of zero percent if prepaid within the first 90 days, with a graduated prepayment penalty every 30 days, up until 180 days from the March 2016 effective date. At any time Tangiers could elect to convert all or part of the debt into restricted shares of the Company‘s common stock for a price equaling the lesser of $0.60 or a 40% discount to the lowest trading price during the previous twenty (20) trading days to the date of the conversion notice. The Company was also required to reserve 700,000 authorized but unissued shares of its common stock, per an irrevocable Letter of Instructions to the Company’s transfer agent. The transaction was exempt from the registration requirements under the Securities Act pursuant to section 4(2) as a transaction by an issuer not involving a public offering. The conversion feature of the Tangiers Note was determined to be a beneficial conversion feature, and was recorded as a debt discount at fair value of $39,000 at the time of issuance and subsequently amortized to interest expense ratably over the term outstanding. As a result of the June 2016 convertible note issued to JMJ Financial, explained later in this Note 3, the Tangiers Note was retired in late June 2016 for a total payment of $81,900, including accrued interest and approximately $17,600 in an early prepayment premium.
In April 2016, the Company entered into an agreement with Tangiers Global, LLC (“Tangiers Global”), to issue a 10% Convertible Promissory Note (“Tangiers Global Note”) to the Company for $110,000 in cash, less $10,000 in original issue discount retained by Tangiers Global. The Tangiers Global Note was for a term of one (1) year, an interest rate of zero percent if prepaid within the first 90 days, with a graduated prepayment penalty every 30 days, up until 180 days from the April 2016 effective date. At any time Tangiers Global could elect to convert all or part of the debt into restricted shares of the Company‘s common stock for a price equaling the lesser of $0.60 or a 40% discount to the lowest trading price during the previous twenty (20) trading days to the date of the conversion notice. The Company was also required to reserve 1,400,000 authorized but unissued shares of its common stock, per an irrevocable Letter of Instructions to the Company’s transfer agent. The transaction was exempt from the registration requirements under the Securities Act pursuant to section 4(2) as a transaction by an issuer not involving a public offering. The conversion feature of the Tangiers Global Note was determined to be a beneficial conversion feature, and was recorded as a debt discount at a fair value of $73,000 and subsequently amortized to interest expense ratably over the term outstanding. As a result of the June 2016 convertible note issued to JMJ Financial, explained later in this Note 3, the Tangiers Global Note was retired in late June 2016 for a total payment of $121,000, including a $11,000 early prepayment premium.
In June 2016, the Company entered into a second agreement with JMJ Financial (“JMJ”), to issue a convertible promissory note to JMJ (“JMJ Note #2”) in the principal amount of $585,000 in cash, less $60,000 in original issue discount retained by JMJ, less $31,500 in debt issuance costs paid to Craft Capital Management LLC. Craft also received 21,000 stock warrants, valued at $19,900, to purchase unregistered common stock of the Company at a purchase price of $1.00 per share. The JMJ Note #2 is due and payable on June 13, 2017 and is convertible at the lesser of $0.90 or 75% of the lowest trade price in the 25 trading days previous to the conversion date. The JMJ Note #2 is convertible at the sole
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option of JMJ. The Company has the right to repay up to 98% of the JMJ Note #2 after the effective date in an amount equal to 120% of the sum of the principal sum being repaid plus all accrued and unpaid interest, original issue discount, liquidated damages, fees and other amounts due on such principal sum or, alternatively, at any time on or before 180 days after the issuance date of the JMJ Note #2 to pay an amount equal to 140% of the sum of the principal sum being repaid, plus all accrued and unpaid interest, original issue discount, liquidated damages, fees and other amounts due of such principal sum. After 180 days after the issuance date of the JMJ Note #2, the Company may not prepay the note prior to the maturity date without the approval of JMJ. JMJ has the right in its sole discretion to require the Company to repurchase the JMJ Note #2 from JMJ at any time after the issuance date in an amount equal to 125% of the sum of the principal sum plus all accrued and unpaid interest, original issue discount, liquidated damages, fees and other amounts due on such principal sum. The Company was required to reserve 8,000,000 shares of common stock for potential conversion of the JMJ Note #2. The Company also agreed to file an S-1 Registration Statement (“S-1”) to register the resale of the shares of common stock issuable upon conversion of the JMJ Note #2 as well as the resale of 455,000 warrants issued to JMJ in connection with this transaction. The S-1 is required to include 5,000,000 shares of common stock for potential resale of the securities issuable upon conversion of the JMJ Note #2 and exercise of the warrants. The Registration Rights Agreement, as amended, provides for a $50,000 penalty in the event the S-1 is not filed with the SEC on or before August 1, 2016 and a $25,000 penalty if the S-1 is not declared effective by October 31, 2016. Exemption from registration is claimed under Section 4(2) of the Securities Act as transaction by an issuer not involving a public offering. The Company filed the S-1 on July 25, 2016, thus avoiding the $50,000 penalty, and filed Amendment No. 1 to the Form S-1 on October 24, 2016, and as of the date of this filing the S-1 has not yet been declared effective, however, JMJ has yet to contact the Company on enforcing the $25,000 penalty as of the date of this filing. The conversion feature and attached warrants of the JMJ Note #2 were valued and determined to be beneficial. The fair value of the beneficial conversion feature and warrants were recorded as a debt discount at their relative fair values totalling $473,600. This debt discount is being amortized to interest expense ratably over the one year note term. The total amount owed on the JMJ Note #2 is $585,000 and the gross discount is $411,125, including an original issue discount of $113,304 and net debt issuance costs of $36,123, as of September 30, 2016. The carrying amount on the JMJ Note #2 was $173,875 as of September 30, 2016, and is classified as short-term debt on the balance sheet.
As of September 30, 2016, both of the outstanding convertible notes to JMJ Financial (collectively, “the JMJ Notes”) have no floor price but provide that unless otherwise agreed to in writing by the Company and JMJ, at no time will JMJ convert any amount of the JMJ Notes into common stock that would result in the investor owning more than 4.99% of the Company’s outstanding common stock. In October 2016, the Company filed Amendment No. 1 to Form S-1 Registration Statement to register 2,000,000 shares of common stock for resale, which includes 455,000 shares issuable upon exercise of warrants and up to 1,545,000 shares of common stock issuable upon conversion of the JMJ Notes in the aggregate principal amount of $685,000. As of the filing date of this Form 10-Q, said Registration Statement has not been declared effective by the Securities and Exchange Commission.
In September 2016 the Company approved an offering of up to $250,000 of Convertible Debentures (the “2016 Debentures”), convertible at any time into shares of the Company’s unregistered common stock at $0.30 per share. The 2016 Debentures were issuable in $10,000 denominations, are unsecured, have a stated interest rate of 12%, are payable monthly to holders of record and include stock warrants for 50% of the amount of debt, the warrants convertible at a price of $0.60 per share. The conversion feature and attached warrants of the 2016 Debentures were valued and determined to be beneficial. The fair value of the beneficial conversion feature and warrants were recorded as a debt discount at their relative fair values totalling $13,500 as of September 30, 2016, for the total of $100,000 received on that date from Michael Thompson. This debt discount will be amortized to interest expense ratably over the one year note term. The total amount owed on the 2016 Debentures is $100,000 and the gross discount is $13,500 as of September 30, 2016. The carrying amount on the 2016 Debentures was $86,500 as of September 30, 2016, and is classified as short-term debt on the balance sheet. An additional $110,000 was issued in October 2016. The Company timely made the interest payments due on October 31, 2016.
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Note 4.
Capital Lease, in default
In June 2014, Mulberry Processing, LLC, a wholly owned subsidiary of the Company, entered into a contract to lease certain real property and buildings in Bradley, Florida from Bowling Green Holdings, LLC (“BGH”), a company owned by David Kasmoch, the father of Timothy R. Kasmoch, the Company’s President and Chief Executive Officer. The lease term is for five years beginning June 1, 2014 and a monthly payment of $10,000. This lease has been determined to be a capital lease and a liability and related asset of $420,346 was recorded in June 2014 concurrent with the start of the lease agreement.
Depreciation on assets under capital leases charged to expense for both the nine and three months ended September 30, 2016 and 2015 was $63,052 and $21,017, respectively, recorded as cost of sales. Interest charged related to capital lease liabilities for the nine months ended September 30, 2016 and 2015 was $33,134 and $41,010, respectively, and for the three months ended September 30, 2016 and 2015 was $10,334 and $13,058, respectively, recorded as interest expense. At both September 30, 2016 and December 31, 2015, the Company was delinquent in its payments and in default of its lease agreement however there is no acceleration provision in the lease agreement. The total lease liability at both September 30, 2016 and December 31, 2015 was $375,436.
Note 5.
Commitments and Contingencies
Effective July 17, 2016, the Company entered into an Employment Agreement (the “Agreement”) with Timothy R. Kasmoch to serve as the Company’s President and Chief Executive Officer commencing July 17, 2016. The Agreement is for a three-year term and provides for automatic renewal of successive one-year terms unless notice is provided ninety (90) days prior to the expiration of the then current term. The Agreement provides that Mr. Kasmoch is to receive an annual base salary of $150,000, subject to annual increase at the discretion of the Board of Directors of the Company. In addition, Mr. Kasmoch is eligible for an annual cash bonus in an amount to be determined, a vehicle allowance, and otherwise subject to the discretion of, the Board of Directors. Under the Agreement, this determination is to be based upon the Board of Directors review of Mr. Kasmoch's performance. The Agreement also provides for annual stock option grants to Mr. Kasmoch. The Employment Agreement permits Mr. Kasmoch to terminate his employment in the event of a change of control or certain enumerated material breaches thereof by the Company. In the event the Company terminates his Employment Agreement without cause, Mr. Kasmoch is entitled to receive his base salary for the period between the termination date and the natural expiration of his Employment Agreement or any extension thereof. Employee shall also have the right to exercise all options that have vested through and including the termination date. Additional information about the Agreement is available as Exhibit 10.7 in the Form S-1 filed on July 25, 2016.
Effective July 17, 2016, the Company entered into an Employment Agreement (the “Agreement”) with Robert W. Bohmer to serve as the Company’s Executive Vice President and General Counsel commencing July 17, 2016. The Agreement is for a three-year term and provides for automatic renewal of successive one-year terms unless notice is provided ninety (90) days prior to the expiration of the then current term. The Agreement provides that Mr. Bohmer is to receive an annual base salary of $57,200, subject to annual increase at the discretion of the Board of Directors of the Company. In addition, Mr. Bohmer is eligible for an annual cash bonus in an amount to be determined, and otherwise subject to the discretion of, the Board of Directors. Under the Agreement, this determination is to be based upon the President/Chief Executive Officer’s and Board of Directors review of Mr. Bohmer's performance. The Agreement also provides for annual stock option grants to Mr. Bohmer. The Employment Agreement permits Mr. Bohmer to terminate his employment in the event of a change of control or certain enumerated material breaches thereof by the Company. In the event the Company terminates his Employment Agreement without cause, Mr. Bohmer is entitled to receive his base salary for the period between the termination date and the natural expiration of his Employment Agreement or any extension
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thereof. Employee shall also have the right to exercise all options that have vested through and including the termination date. Additional information about the Agreement is available as Exhibit 10.8 in the Form S-1 filed on July 25, 2016.
Effective July 17, 2016, the Company entered into an Employment Agreement (the “Agreement”) with James K. McHugh to serve as the Company’s Chief Financial Officer, Secretary and Treasurer commencing July 17, 2016. The Agreement is for a three-year term and provides for automatic renewal of successive one-year terms unless notice is provided ninety (90) days prior to the expiration of the then current term. The Agreement provides that Mr. McHugh is to receive an annual base salary of $125,000, subject to annual increase at the discretion of the Board of Directors of the Company. In addition, Mr. McHugh is eligible for an annual cash bonus in an amount to be determined, and otherwise subject to the discretion of, the Board of Directors. Under the Agreement, this determination is to be based upon the President/Chief Executive Officer’s and Board of Directors review of Mr. McHugh's performance. The Agreement also provides for annual stock option grants to Mr. McHugh. The Employment Agreement permits Mr. McHugh to terminate his employment in the event of a change of control or certain enumerated material breaches thereof by the Company. In the event the Company terminates his Employment Agreement without cause, Mr. McHugh is entitled to receive his base salary for the period between the termination date and the natural expiration of his Employment Agreement or any extension thereof. Employee shall also have the right to exercise all options that have vested through and including the termination date. Additional information about the Agreement is available as Exhibit 10.9 in the Form S-1 filed on July 25, 2016.
As of September 30, 2016, the Company has accrued a liability of approximately $191,000 to reflect the total amount of salary and related payroll taxes voluntarily deferred by its three executive officers since February 2012 under their 2010 (as amended) and 2016 employment agreements, as well as approximately $123,000 in undeferred salary and related payroll taxes, for a combined total of approximately $314,000 in unpaid salaries and related payroll taxes. Additional information about the 2010 employment agreements and any subsequent amendments for the officers is available in Item 11 Executive Compensation of the Form 10-K filed on April 14, 2016.
The Company’s executive and administrative offices are located in Toledo, Ohio. In April 2011, the Company signed a 68 month lease with Deerpoint Development Co., Ltd. (“Deerpoint”). The total minimum rental commitment for the remaining contracted year of 2016 is $40,764. In June 2015, the Company issued Deerpoint 16,106 shares of unregistered common stock at a price of $1.43 per share in exchange for six months rent, resulting in net additional expense of approximately $2,600 above the contracted amount, but saving approximately $20,400 of cash. The total rental expense included in the statements of operations for the nine months ended September 30, 2016 and 2015 is approximately $30,600 and $33,200, respectively. The total rental expense included in the statements of operations for both the three months ended September 30, 2016 and 2015 is approximately $10,200.
In October 2010, the Company began to lease property in Emlenton, Pennsylvania under a lease with A-C Valley Industrial Park, for one year. After September 2011, the Company operated under a month-to-month lease agreement, for a reduced rate, therefore there is no minimum rental commitment at September 30, 2016 for any of the succeeding five years. The total rental expense included in the statements of operations for each of the nine months and three months ended September 30, 2016 and 2015 is $9,000 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, (“D&B”) for one year. In June 2010, the Company renewed the lease for an additional year through May 2011, and operated under a month-to-month lease until the Company closed the office in September 2014. In June 2015, the Company issued D&B 20,997 shares of unregistered common stock at a price of $1.48 per share in exchange for the remaining eleven months rent owed, resulting in net additional expense of approximately $3,600 above the contracted amount, but saving $27,500 of cash. The total rental expense included in the statements of operations for the nine months
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ended September 30, 2016 and 2015 is $-0- and $3,600, respectively. The total rental expense included in the statements of operations for both the three months ended September 30, 2016 and 2015 is $-0-.
For each of the nine months and three months ended September 30, 2016 and 2015, the Company paid a total of $19,800 and $6,600, respectively, recorded as rent in selling, general and administrative expense, on behalf of the Chief Executive Officer. No future commitment exists in any succeeding years as the residential building lease is not in the Company’s name, however the Company expects to pay $2,200 for the remainder of 2016 through the lease term maturing October 31, 2016.
In June 2014, Mulberry Processing, LLC, a wholly owned subsidiary of the Company, entered into a contract to lease certain real property and buildings in Bradley, Florida from Bowling Green Holdings, LLC, for a five year lease term beginning June 1, 2014 and a monthly payment of $10,000. More details can be found in Note 4 Capital Lease, in default.
In September 2014, the Company entered into an operating lease with Caterpillar Financial for operating equipment at its Bradley, Florida location. The lease term is for three years beginning October 2014 and a monthly payment of $3,155. The total minimum rental commitment for the year ending December 31, 2016 is $37,900 and for the year ending December 31, 2017 is $28,400. The total rental expense included in the statements of operations for each of the nine months and three months ended September 30, 2016 and 2015 is $28,395 and $9,465, respectively.
For all of the Company’s operating leases, the total rental expense included in the statements of operations for the nine months ended September 30, 2016 and 2015 is $85,800 and $94,000, respectively. The total rental expense included in the statements of operations for the three months ended September 30, 2016 and 2015 is $27,300 and $29,300, respectively.
As of September 30, 2016, the only properties management believes to be adequately covered by insurance are the lease with Caterpillar Financial and a truck operating at its Bradley Florida location. The Company’s general and automotive liability insurance lapsed effective September 1, 2016.
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. Certain unsecured creditors have brought civil action against the Company related to nonpayment. The Company has not accrued any additional amount related to these charges, but continue to negotiate payment plans to satisfy these creditors.
Note 6.
New Accounting Standards
In August 2016, the FASB issued ASU 2016-15
“Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments”
. Current U.S. GAAP either is unclear or does not include specific guidance on eight specific cash flow classification issues included in the amendments in this update. The update addresses these cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
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In March 2016, the FASB issued ASU No. 2016-09,
"Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting"
("ASU 2019-09"), which includes multiple amendments intended to simplify aspects of share-based payment accounting. ASU 2016-09 will be effective for annual reporting periods beginning after December 15, 2016, and early adoption is permitted. Amendments to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, and forfeitures will be applied using a modified retrospective transition method through a cumulative-effect adjustment to equity as of the beginning of the period of adoption. Amendments to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement will be applied retrospectively, and amendments requiring the recognition of excess tax benefits and tax deficiencies in the income statement are to be applied prospectively. The Company is currently evaluating the impact that the standard will have on our consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
“Leases (Topic 842)”
(“ASU 2016-02”)¸which requires that all leases with a term of more than one year, covering leased assets such as real estate and equipment, be reflected on the balance sheet as assets and liabilities for the rights and obligations created by these leases. ASU 2016-02 is effective for fiscal years fiscal years and interim periods beginning after December 15, 2018. The Company is currently evaluating the impact of the provisions of this new standard on our consolidated financial statements.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17,
“Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes”
(“ASU 2015-17”), which requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating
deferred taxes into current and noncurrent amounts. ASU 2015-17 is effective for fiscal years and interim periods beginning after December 15, 2016. The
Company is currently evaluating the impact of the provisions of this new standard on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.
The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. We adopted this guidance effective January 1, 2016 and have reclassified $14,962 of unamortized debt issuance costs within the short-term convertible notes, net of discount line on the balance sheet. The prior period unamortized debt issuance costs in the amount of $9,382 have been reclassified to conform to the current period presentation.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “
Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern
” (“ASU 2014-15”), which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or
events that raise substantial doubt about the entity’s ability to continue as a going concern and provide related disclosures. ASU 2014-15 is effective for the
first interim period within annual reporting periods beginning after December 15, 2016 and is not expected to have a material impact on the Company’s
consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,
“Revenue from Contracts with Customers”
(“ASU 2014-09”), which provides for a single five-step model to be applied to all revenue contracts with customers. The new guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Entities can use either a retrospective approach or a cumulative effect adjustment approach to implement the guidance. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. In 2016, the FASB issued ASU 2016-08, ASU 2016-10 and ASU 2016-12 as amendments to ASU 2014-09 to clarify the implementation guidance for: 1) principal versus agent considerations, 2) identifying performance obligations, 3) the accounting for licenses of intellectual property, and 4) narrow scope improvements on
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assessing collectability, presentation of sales taxes, non-cash consideration and completed contracts and contract modifications at transition. The Company is currently evaluating the impact of the provisions of this standard on our consolidated financial statements.
A variety of proposed or otherwise potential accounting standards are currently under consideration by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, management has not yet determined the effect, if any, the implementation of such proposed standards would have on the Company’s consolidated financial statements.
Note 7.
Segment Information
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 8.
Revenue and Major Customers
For the nine months ended September 30, 2016 and 2015, the Company’s largest customer accounted for approximately 36% and 30% of its revenues, respectively, and approximately 54% and 25% for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, the top three customers accounted summarily for approximately 55% and 74%, respectively, and 76% and 64% for the three months ended September 30, 2016 and 2015, respectively, of the Company’s revenues. The accounts receivable balance due (which are unsecured) for these three customers at September 30, 2016 was approximately $31,000, or 81% of the accounts receivable balance.
Customers who accounted for more than 10% of the Company’s revenue for the nine months ended September 30, 2016 were: Altamonte Springs, Florida ($107,700) and Jacksonville (Fla) Electric Authority ($55,900). Customers who accounted for more than 10% of the Company’s revenue for the nine months ended September 30, 2015 were: Jacksonville (Fla) Electric Authority ($285,900), Altamonte Springs, Florida ($253,200), Merrell Brothers, (Fla) Inc. ($165,500) and Indiantown, Florida ($108,300).
Customers who accounted for more than 10% of the Company’s revenue for the three months ended September 30, 2016 were: Indiantown, Florida ($27,500) and Merrell Brothers, (Fla) Inc. ($11,400). Customers who accounted for more than 10% of the Company’s revenue for the three months ended September 30, 2015 were: Altamonte Springs, Florida ($68,900); Jacksonville (Fla) Electric Authority ($57,200); Indiantown, Florida ($52,100) and Merrell Brothers, (Fla) Inc. ($36,400).
The Company’s sludge processing agreement with Altamonte Springs, which was its largest customer in 2014, it’s second largest in 2015 and its largest in both the first quarter and year to date 2016 revenue, was not renewed effective April 2016 and therefore did not contribute any revenue during the second or third quarters. The Company’s failure to renew that agreement had a material adverse effect on its business, financial conditions and results of operations. Beginning in March 2014, the Company’s operations in Florida were voluntarily delayed for a short time while the Company moved assets and personnel to a new site in Bradley, Florida. While operations subsequently resumed, this reduction in revenue has materially reduced available cash to fund current or prior expenses incurred, remained at this lower level and then further decreased over subsequent periods to date. Total revenue for the third quarter of 2016 was approximately $51,000, an 82% decrease from the same period in 2015 and a 74% decrease from the first quarter of 2016.
- 16 -
A substantial portion of the Company's revenue is derived from services provided under contracts and agreements with existing licensees. Some of these contracts provide for termination of the contract by the customer after giving relatively short notice. 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 the Company is 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 its business and financial condition.
Note 9.
Basic and diluted loss per share
Basic and diluted loss per share is computed using the treasury stock method for outstanding stock options and warrants. For both the nine months and three months ended September 30, 2016 and 2015 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 10.
Common Stock
In October 2012, the Company issued 300,000 shares of common stock and granted 150,000 stock warrants to Strategic Asset Management, Inc., to extend the period through December 2015 of services performed in connection with a December 2010 Financial Public Relations Agreement. To reflect the entire value of the stock and warrants issued, the Company recorded a non-cash charge to earnings of $421,300 ratably from 2013 to 2015. For the nine months ended September 30, 2016 and 2015, the charge to earnings was approximately $-0- and $125,200, respectively. For the three months both ended September 30, 2016 and 2015, the charge to earnings was $-0-.
In September 2014, the Company executed a Financial Public Relations Agreement with Dynasty Wealth, Inc., for a one year term. For its services, the Company issued Dynasty Wealth 350,000 warrants to purchase the Company's unregistered common stock at an exercise price of $1.50 per share, and $10,000 per month, to be paid in either cash or shares of the Company’s unregistered common stock at the Company’s discretion. To reflect the entire value of the warrants issued, the Company recorded a non-cash charge to earnings of $460,700 ratably through September 14, 2015, the ending date of the agreement. For the nine months ended September 30, 2016 and 2015 the charge to earnings for the entire agreement was approximately $-0- and $411,300, respectively, of which the non-cash portion of the agreement was approximately $-0- and $326,300, respectively. For the three months ended September 30, 2016 and 2015 the charge to earnings for the entire agreement was approximately $-0- and $121,000, respectively, of which the non-cash portion of the agreement was approximately $-0- and $96,000, respectively. In the third quarter of 2015, the Company notified Dynasty that it was not renewing its contract.
In November 2014, the Company executed a Public Relations Agreement with Global IR Group, Inc., for a one year term. For its services, the Company issued Global IR 100,000 shares of the Company’s unregistered common stock. To reflect the entire value of the stock issued, the Company was recording a non-cash charge to earnings of $165,000 ratably through November 2015, the original ending date of the agreement. For the nine months ended September 30, 2016 and 2015, the charge to earnings was approximately $-0- and $146,200, respectively. For the three months both ended September 30, 2016 and 2015, the charge to earnings was $-0-. In the third quarter of 2015, the Company notified Global IR that it was not renewing its contract.
In
July 2015, the Company executed a Public Relations Agreement with Financial Genetics, LLC, for a one year term. For its services, the Company issued Financial Genetics 100,000 shares of the Company’s unregistered common stock. To reflect the entire value of the Agreement, the Company is recording a non-cash charge to earnings of $100,000 ratably through July 2016, the ending date of the
- 17 -
agreement. For the nine months ended September 30, 2016 and 2015, the charge to earnings was $54,200 and $20,800, respectively. For the three months ended September 30, 2016 and 2015, the charge to earnings was $4,200 and $20,800, respectively.
In March 2016, the Company entered into an initial one (1) year agreement with Arrowroot Partners, LLC (“Arrowroot”), to assist in obtaining equity or debt financing for the Company. The Company issued 15,460 shares of its unregistered common stock, valued at $15,000, to Arrowroot as a non-refundable restricted equity share retainer fee, which can be applied toward future financing fees in connection with any placements. A cash fee of 8% of the gross proceeds and a warrant fee of 8% of the number of shares placed, in addition to preapproved expenses, will be paid to Arrowroot for its services if they are successful in obtaining debt or equity financing.
In late March 2016, the Company executed a two week preliminary public relations agreement with M & T Business Consultants, Inc., (“M&T”). For the services rendered the Company issued M&T 50,000 shares of the Company’s unregistered common stock. To reflect the entire value of the Agreement, the Company is recording a non-cash charge to earnings of $43,000 ratably between March and April 2016, the ending date of the agreement. For the nine months ended September 30, 2016 and 2015, the charge to earnings was $43,000 and $-0-, respectively. For the three months both ended September 30, 2016 and 2015, the charge to earnings was $-0-.
In March 2016, the Company issued a total of 4,652 shares of unregistered common stock, valued at a total of $4,000, to four independent directors in lieu of cash owed for a board meeting attended. To reflect the value of the stock issued, the Company recorded a charge to earnings totaling $4,000 in the first quarter of 2016.
In April 2016, we entered into a share purchase agreement with Woodrow Young, pursuant to which we sold 100,000 shares of our common stock (the “Shares”) to Mr. Young for a total of $100,000, or a purchase price of $1.00 per share, and 50,000 warrants to purchase stock for $1.50 per share, to provide operating capital. All the shares issued were restricted and have limited “piggy-back” registration rights in connection with certain registration statement filings of the Company under the Securities Act of 1933 as amended (the “Securities Act”). The transaction was exempt from the registration requirements under the Securities Act pursuant to section 4(2) as a transaction by an issuer not involving a public offering. Additional information about this agreement is available as Exhibit 10.24 in the Form S-1 filed on July 25, 2016.
In June 2016, the Company executed a four month financial and investor relations agreement with Triumph Investor Relations, Inc., (“Triumph”). For the services rendered the Company issued Triumph 75,000 shares of the Company’s unregistered common stock. To reflect the entire value of the Agreement, the Company is recording a non-cash charge to earnings of $72,750 ratably between June and September 2016, the ending date of the agreement. For the nine months ended September 30, 2016 and 2015, the charge to earnings was $72,750 and $-0-, respectively. For the three months ended September 30, 2016 and 2015, the charge to earnings was $54,563 and $-0-, respectively.
In late June 2016, the Company executed a three month public relations agreement with M & T Business Consultants, Inc., (“M&T”). For the services rendered the Company issued M&T 325,000 shares of the Company’s unregistered common stock, and $91,667 per month, to be paid in either cash or shares of the Company’s unregistered common stock, with the type of payment to be agreed upon between M&T and the Company. To reflect the entire value of the Agreement, the Company recorded a charge to earnings of $567,500 ratably between June and September 2016, the ending date of the agreement, with the non-cash portion of the agreement valued at $292,500. For the nine months ended September 30, 2016 and 2015 the charge to earnings for the entire agreement was $567,500 and $-0-, respectively, of which the non-cash portion of the agreement was $292,500 and $-0-, respectively. For the three months ended September 30, 2016 and 2015 the charge to earnings for the entire agreement was $548,795 and $-0-, respectively, of which the non-cash portion of the agreement was $282,962 and $-0-, respectively.
- 18 -
In July 2016, the Company issued a total of 3,192 shares of unregistered common stock, valued at a total of $3,000, to three independent directors in lieu of cash owed for a board meeting attended. To reflect the value of the stock issued, the Company recorded a charge to earnings totaling $3,000 in the third quarter of 2016.
On July 25, 2016, the Company filed an S-1 Registration Statement with the Securities and Exchange Commission, and on October 24, 2016 the Company filed Amendment No. 1 to the Form S-1. See Note 3 Notes Payable for further details on the Form S-1 Registration Statement and amendments filed subsequent to and in conjunction with the convertible debt agreement with JMJ Financial executed in June 2016.
During the third quarter of 2016, JMJ Financial converted $46,785 of debt the Company owed from their January 2016 convertible debt agreement with the Company and was issued a total of 155,000 registered shares of stock. See Note 3 Notes Payable for further details of this agreement.
In August 2016, the Company executed a twelve month financial, investor and public relations consulting agreement with Wilson Nixon (“Nixon”). For the services rendered the Company issued Nixon 200,000 shares of the Company’s unregistered common stock. To reflect the entire value of the Agreement, the Company is recording a non-cash charge to earnings of $150,000 ratably between August 2016 and July 2017, the ending date of the agreement. For both the nine months and three months ended September 30, 2016 and 2015, the charge to earnings was $25,000 and $-0-, respectively.
In late September 2016, the Company executed a three month consulting and service agreement with Peter Schultz (“Schultz”). For the services rendered the Company issued Schultz 30,000 shares of the Company’s unregistered common stock. To reflect the entire value of the Agreement, the Company is recording a non-cash charge to earnings of $8,700 ratably between September and December 2016, the ending date of the agreement. For both the nine months and three months ended September 30, 2016 and 2015, the charge to earnings was $1,000 and $-0-, respectively.
In all of the issuances contained in this Note 10, the value of stock issued was determined based on the trading price of the shares on the commitment date of the agreement and any warrants issued were valued using the Black Scholes valuation model as of the commitment date – for more details see Note 11 Stock Options.
Note 11.
Stock Options
The Company records share-based 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.
The following assumptions were used to estimate the fair value of options granted:
|
|
| |
|
|
Nine Months Ended September 30,
|
|
|
2016
|
2015
|
|
Expected dividend yield
|
0.0%
|
0.0%
|
|
Weighted average volatility
|
279.8%
|
284.3%
|
|
Risk free interest rate
|
1.1 – 1.4%
|
1.6 – 1.9%
|
|
Expected term (in years)
|
7
|
7
|
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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 could have been issued. No other shares can be issued from the 2004 Plan, and approximately 1,583,000 options are outstanding as of September 30, 2016. All stock options granted were fully vested and expensed and therefore there no compensation expense was recorded related to the 2004 Plan for each of the nine or three months ended September 30, 2016 and 2015.
The Company 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. Key employee stock option agreements, unless otherwise stated in the agreement, are 20% vested on the date of grant, with the balance vesting 20% per year over the next four years. The Company grants stock options to its independent directors as compensation for services performed, currently for board and committee meetings attended. All director options granted are for a period of ten years from the date of issuance and vest six (6) months from the issuance date. The Company granted a total of 51,000 new stock options to directors with exercise prices ranging from $0.77 to $1.18 per share during the nine months ended September 30, 2016. Total compensation expense was $50,433 and $98,183 for the nine months ended September 30, 2016 and 2015, respectively, and $20,350 and $30,850 for the three months ended September 30, 2016 and 2015, respectively. The Company grants stock options to its key employees (officers) as compensation for services performed. All key employee options granted are for a period of ten years from the date of issuance and vest immediately, designed to be incentive stock options. The Company granted a total of 300,000 new stock options to officers with an exercise price of $0.94 per share in July 2016, as part of their 2016 employment agreements – more information on the agreements can be found in Note 5 Commitments and Contingencies. Total compensation expense was $255,000 and $-0- for both the nine months and three months ended September 30, 2016 and 2015, respectively. A total of 1,397,500 options are outstanding as of September 30, 2016.
Note 12.
Stock Warrants
The Company records compensation expense 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.
The following assumptions were used to estimate the fair value of stock warrants issued:
|
|
| |
|
|
Nine Months Ended September 30,
|
|
|
2016
|
2015
|
|
Expected dividend yield
|
0.0%
|
0.0%
|
|
Weighted average volatility
|
280.0%
|
192.6%
|
|
Risk free interest rate
|
1.0 – 1.5%
|
1.6%
|
|
Expected term (in years)
|
7
|
5
|
In June 2015, the Company issued 50,000 five year warrants at an exercise price of $1.50 per share in connection with the private placement of stock to Avatar Investments, LLC.
In January 2016, the Company issued 4,000 five year warrants at an exercise price of $1.00 per share to Craft Capital Management, LLC in connection with the January 2016 debt financing with JMJ Financial. More details can be found in Note 3 Notes Payable.
In April 2016, the Company issued 50,000 three year warrants at an exercise price of $1.50 per share in connection with a share purchase agreement for the sale of 100,000 shares of the Company’s stock to Woodrow Young. More details can be found in Note 10, Common Stock.
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In June 2016, the Company issued a total of 476,000 five year warrants at a weighted average exercise price of $0.90 per share to two parties in connection with the debt financing with JMJ Financial. More details can be found in Note 3 Notes Payable.
In September 2016, the Company issued a total of 50,000 five year warrants at an exercise price of $0.60 per share in connection with the debt financing with Michael Thompson. More details can be found in Note 3 Notes Payable.
Approximately 3,260,000 warrants are eligible for exercise at a weighted average exercise price of $1.03 per warrant, as of September 30, 2016.
Note 13.
Income Tax
For both the nine and three months ended September 30, 2016 and 2015, 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 14.
Gain on extinguishment of liabilities
The Gain on extinguishment of liabilities of $136,070 in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2016 was principally from the settlement of a $107,870 liability due the County of Volusia, Florida (the “County”), the Company’s landlord before relocating to its present location in Bradley, Florida, which was approved by the County in April 2016. For a full and total release of its legal and financial obligations to the County, it agreed to a total payment of $25,000 to be paid in five (5) installments of $5,000 from May through September 2016. The Company completed its payment obligation to the County in the third quarter of 2016.
Note 15.
Supplemental Disclosure of Cash Flows Information
The cash paid for interest during the nine months ended September 30, 2016 and 2015 was $108,188 and $96,595, respectively.
During the nine months ended September 30, 2016, the Company issued common stock with a fair value of $292,500 as part of a consulting contract.
During the nine months ended September 30, 2016, the Company issued common stock with a fair value of $150,000 as part of a consulting contract.
During the nine months ended September 30, 2016, the Company issued common stock with a fair value of $72,750 as part of a consulting contract.
During the nine months ended September 30, 2016, the Company issued common stock with a fair value of $43,000 as part of a consulting contract.
During the nine months ended September 30, 2016, the Company issued a total of 155,000 registered shares of common stock to convert $46,785 of debt.
During the nine months ended September 30, 2016, the Company issued common stock with a fair value of $8,700 as part of a consulting contract.
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During the nine months ended September 30, 2016, the Company issued common stock with a fair value of $15,000 as part of a convertible debt agreement.
During the nine months ended September 30, 2015, the Company issued common stock with a fair value of $100,000 as part of a consulting contract.
During the nine months ended September 30, 2015, the Company issued common stock with a fair value of $91,260 as part of a conversion of debentures.
During the nine months ended September 30, 2015, the Company issued common stock with a fair value of $54,107 for the payment of accrued rent.
During the nine months ended September 30, 2015, the Company recorded a deemed dividend of $15,000 on the issuance of stock and exercise of warrants.
Note 16.
Subsequent Events
On October 24, 2016, the Company filed Amendment No. 1 to the S-1 Registration Statement with the Securities and Exchange Commission. See Note 3 Notes Payable for further details on the Form S-1 Registration Statement and amendments filed subsequent to and in conjunction with the convertible debt agreement with JMJ Financial executed in June 2016.
In October and November 2016, JMJ Financial was issued a total of 205,000 registered shares of stock to convert $26,085 of debt the Company owed JMJ, per their January 2016 convertible debt agreement with the Company.
In late October 2016, JMJ Financial requested and was approved by the Company’s stock registrar to fully reserve all of the remaining authorized shares of the Company’s common stock, in accordance with both the January and June 2016 Irrevocable Transfer Agent letters, both issued as part of each Convertible Debenture Agreements executed in January and June 2016. See Note 3 Notes Payable for further details of these agreements.
In October 2016 the Company issued an additional $110,000 of Convertible Debentures and timely paid the monthly interest due on October 31, 2016. More details are included in Note 3 Notes Payable.
In October 2016, the Company advanced $20,000 cash to N-Viro Energy Limited (“Ltd”), a related party, for expenses in connection with its China project, further modifying its Note Receivable with Ltd, to a total principal due the Company of $140,000. No other terms of the Note Receivable were changed, and the Note Receivable is in default as of the date of this filing. It is anticpated the entire balance of principal and related accrued interest receivable will be fully reserved as of the end of the fiscal year, as collectability is deemed doubtful. More details are included in Note 2 Notes Receivable.
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Item 2.
Management’s Discussion and Analysis or Plan of Operation
Forward-Looking Statements
This 10-Q contains statements that are forward-looking. We caution that words used in this document such as “expects,” “anticipates,” “believes,” “may,” and “optimistic,” as well as similar words and expressions used herein, identify and refer to statements describing events that may or may not occur in the future. These forward-looking statements and the matters to which they refer are subject to considerable uncertainty that may cause actual results to differ materially from the results described in those statements. There are numerous factors that could cause actual results to be different than those anticipated or predicted by us, including: (i) a deterioration in economic conditions in general; (ii) a decrease in demand for our products or services in particular; (iii) our loss of a key employee or employees; (iv) regulatory changes, including changes in environmental regulations, that may have an adverse affect on the demand for our products or services; (v) increases in our operating expenses resulting from increased costs of fuel, labor and/or consulting services; (vi) our inability to exploit existing or secure additional sources of revenues or capital to fund operations; (vii) a failure to collect upon or otherwise secure the benefits of existing contractual commitments with third parties, including our customers; and (viii) other factors and risks identified in this Form 10-Q, or, as filed in Form 10-K for the year ending December 31, 2015 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 Fuel
TM
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.
Our patented N-Viro Fuel technology can convert waste products presently being landfilled or land applied into safe, beneficial and renewable long-term energy solutions as part of a renewable-energy economy. Attaining and maintaining this status means that N-Viro Fuel technology is now a candidate for certain economic incentives that may be granted to alternative energy technologies, and it is also a catalyst for obtaining permits more efficiently in each state. We plan to accelerate our development efforts as this designation is an important factor for our potential energy partners.
In June 2014 we received a final determination from the USEPA that our N-Viro Fuel process satisfies the requirements of 40 CFR part 241.3(b)(4), designating our process and its outcome as a non-waste fuel product. The determination is the result of our request for determination submitted to the USEPA in response to their issuance of 40 CFR 241.3, “Standards and procedures for identification of non-hazardous secondary materials that are derived solid wastes when used as fuels or ingredients in combustion units” (the “Part 241 Rules”). The USEPA concluded through review of our request and
- 23 -
subsequent correspondence the N-Viro Fuel process does satisfy the legitimacy criteria for both process and fuel quality. Specifically, we were able to demonstrate that the N-Viro Fuel process:
·
manages the waste material as a valuable commodity;
·
creates material with meaningful heating value; and
·
results in materials with contaminant levels comparable to or less than those in traditional fuels.
We previously operated a biosolids processing facility located in Volusia County, Florida. This facility produced the N-Viro Soil
™
agricultural product, and provided us with working and development capital. In June 2014, we began production at our new biosolids processing facility in Polk County (Bradley) Florida. Until November 2011 we operated a similar facility for a period in excess of 20 years in Toledo, Ohio. Our goal is to continue to operate the Bradley, Florida facility and aggressively market our N-Viro Fuel technology. These patented processes are best suited for current and future demands for alternate energy forms because they satisfy waste treatment needs and domestic and international directives for clean, renewable alternative fuel sources.
For the nine months ended September 30, 2016 and 2015, our largest customer accounted for approximately 36% and 30% of our revenues, respectively, and the top three customers accounted summarily for approximately 55% and 74%, respectively, of our revenues. Customers who accounted for more than 10% of our revenue during the first nine months of 2016 were Altamonte Springs, Florida and Jacksonville (Fla) Electric Authority, and during the first nine months of 2015 were Jacksonville (Fla) Electric Authority, Altamonte Springs, Florida, Merrell Brothers, (Fla) Inc. and Indiantown, Florida.
A substantial portion of the Company's revenue is derived from services provided under contracts and agreements with existing licensees. Some of these contracts provide for termination of the contract by the customer after giving relatively short notice. 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 the Company is 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 its business and financial condition.
From April 2011 to September 2011, we operated the first full-scale N-Viro Fuel
™
mobile processing facility in western Pennsylvania as a pilot project. The mobile system is intended to prepare quantities of N-Viro Fuel
™
for necessary testing by power facilities who may eventually become Company customers. In September 2011 an initial 10% substitution of N-Viro Fuel for coal test was successfully 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 submitted a permit approval request to the Pennsylvania Department of Environmental Protection for the mobile facility for this second test in January 2013, but the Pennsylvania DEP only issued the permit in February 2015. The Company and the power facility ended the process in May 2015 because the facility had its own permitting issues with the Pennsylvania DEP. Full permitting will again be required if and when this development is resumed in Pennsylvania or elsewhere.
We intend to migrate this mobile system and make it available for use to demonstrate the N-Viro Fuel process to other markets 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
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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").
We are an investor in N-Viro Energy, Limited, a United Kingdom registered development and capital-sourcing entity for us and, in particular, the international development of our projects. At present, we hold 45% of the Class C voting shares that select Directors for N-Viro Energy, Limited. N-Viro Energy, Limited is actively developing N-Viro Fuel processes in China.
For the next twelve months we expect to have adequate cash to sufficiently fund operations from cash generated from equity and convertible debt issuances, exercises of outstanding warrants and options and by focusing on existing and expected new sources of revenue, though there can be no assurances we will do so. 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. First, we require a funding source to enable us to development processing facilities, and expect this to happen by the end of 2016 or early 2017 at an estimated cost of $100,000. Within six months after financing, we expect sales of new equipment and other sources of up-front revenue to provide us with additional sources of revenue, with the start up of the facility in late 2017, then to increase capacity to planned levels and full production by the beginning of 2018. At that time we would expect these new facilities to provide us with adequate levels of cash to fund operations without additional equity or debt issuances.
There can be no assurance these discussions will be successful or result in new revenue or cash funding sources for us. 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.
Results of Operations
The dollar amounts in the following sections are stated as approximations, rounded to the nearest $1,000.
Total revenues were $51,000 for the quarter ended September 30, 2016 compared to $280,000 for the same period of 2015. The net decrease in revenue is due primarily to decreases in service fees for the management of alkaline admixture and sludge processing revenue. Our cost of revenues decreased to $78,000 in 2016 from $309,000 for the same period in 2015, and the gross profit margin decreased to negative 53% for the quarter ended September 30, 2016, from negative 10% for the same period in 2015. This decrease in gross profit margin was primarily the result of the decrease in gross revenue, under the break even level. Operating expenses increased for the quarter ended September 30, 2016 over the comparative prior year period, and Nonoperating expense showed an increase from the third quarter of 2015 to 2016. These changes collectively resulted in a net loss of $1,337,000 for the quarter ended September 30, 2016 compared to a net loss of $488,000 for the same period in 2015, an increase in the loss of $849,000.
Comparison of Three Months Ended September 30, 2016 with Three Months Ended September 30, 2015
Our overall revenue decreased $229,000, or 82%, to $51,000 for the three months ended September 30, 2016 from $280,000 for the three months ended September 30, 2015. The decrease in revenue was due primarily to the following:
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a) Revenue from the service fees for the management of alkaline admixture decreased $82,000 from the same period ended in 2015;
b) Our sludge processing revenue showed a decrease of $111,000 over the same period ended in 2015, and
c) Our product revenue showed a decrease of $36,000 from 2015.
Our gross profit increased $2,000 to negative $27,000 for the three months ended September 30, 2016 from negative $29,000 for the three months ended September 30, 2015, and the gross profit margin decreased to negative 53% from negative 10% for the same periods. The decrease in gross profit margin is the result of the lower gross revenue, under the breakeven level.
Our operating expenses increased $704,000, or 165%, to $1,131,000 for the three months ended September 30, 2016 from $427,000 for the three months ended September 30, 2015. The increase was primarily due to an increase of $492,000 in consulting fees, $257,000 in salaries and employee compensation expense, $14,000 in legal and professional fees and $2,000 in bad debt expense, offset by a $47,000 decrease in penalties, $13,000 in directors’ compensation and $1,000 in office-related charges. Of the net increase of $749,000 in consulting and employee compensation costs, actual cash outlays in total for these groups increased by $242,000 over the same period in 2015.
As a result of the foregoing factors, we recorded an operating loss of $1,158,000 for the three months ended September 30, 2016 compared to an operating loss of $456,000 for the three months ended September 30, 2015, an increase in the loss of $702,000.
Our net nonoperating expense increased by $146,000 to net nonoperating expense of $178,000 for the three months ended September 30, 2016 from net nonoperating expense of $32,000 for the similar period in 2015. The increase in net nonoperating expense was due to an increase in interest expense of $176,000, offset by an increase in the gain on the extinguishment of liabilities of $28,000. See Note 14, Gain on extinguishment of liabilities, for a more detailed discussion.
We recorded a net loss of $1,337,000 for the three months ended September 30, 2016 compared to a net loss of $488,000 for the same period ended in 2015, an increase in the loss of $849,000. Adding back non-cash expenses such as depreciation, amortization, stock and stock derivative charges and subtracting cash out for capitalized assets and debt repayments, resulted in an adjusted cash loss (not in accordance with Generally Accepted Accounting Principles, or “non-GAAP”) of $550,000 for the three months ended September 30, 2016. Similar non-cash expenses, cash out and debt repayments for the same period in 2015 resulted in an adjusted cash loss (non-GAAP) of $329,000, an increase in the adjusted cash loss (non-GAAP) of $221,000 for the three months ended September 30, 2016 versus the same period in 2015. The reconciliation between adjusted cash loss (non-GAAP) and GAAP net loss is as follows: