**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

**FORM 10-K**

**(Mark One)**

x**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended December 31, 2012**

**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 registrant as specified in its charter)**

**Delaware                                                                                  34-1741211**

**(State or other jurisdiction of incorporation or organization)                                            (I.R.S. Employer Identification No.)**

**2254 Centennial Road    Toledo, Ohio                                         43617**

**(Address of principal executive offices)                                                                   (Zip Code)**

**Registrant's telephone number, including area code:                                                   (419) 535-6374**

**Securities registered pursuant to Section 12(b) of the Exchange Act:                                                   **None

**Securities registered pursuant to Section 12(g) of the Act:**                        Common Stock, par value $.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o     No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes  o     No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:   $7,000,000.

The number of shares of Common Stock of the registrant outstanding as of March 25, 2013 was 6,765,611.

**DOCUMENTS INCORPORATED BY REFERENCE**

None

**INDEX**

**PART I**

Item 1.

Business

2

Item 1A.

Risk Factors

8

Item 2.

Properties

12

Item 3.

Legal Proceedings

13

Item 4.

Mine Safety Disclosures

13

 

**PART II**

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  14

Item 6.

Selected Financial Data

14

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

15

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

21

Item 8.

Financial Statements and Supplementary Data

22

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

23

Item 9A.

Controls and Procedures

23

Item 9B.

Other Information

24

 

**PART III**

Item 10.

Directors, Executive Officers and Corporate Governance

25

Item 11.

Executive Compensation

31

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

34

Item 13.

Certain Relationships and Related Transactions and Director Independence

36

Item 14.

Principal Accountant Fees and Services

36

 

**PART IV**

Item 15.

Exhibits, Financial Statement Schedules

37

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**PART I**

**Cautionary Statement with Respect to Forward-Looking Statements**

This annual report on Form 10-K 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 be materially different from those described herein.  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 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-K, including 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-K; however, this list is not exhaustive. 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-K 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-K 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-K.  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 .
**Item 1.**

**Business**

**General**

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.  Thes 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 FuelTM mobile processing facility in western Pennsylvania.  The purpose of the mobile system is to prepare quantities of N-Viro FuelTM to facilitate necessary testing with cooperating power facilities.  In September 2011 an intial 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 todemonstrate the N-Viro Fuel process to other municipalities and provide required test fuel quantities for power companies throughout the 

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United States.  We expect this mobile system to be a key component in developing N-Viro FuelTM 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").

**N-Viro Fuel****TM**

N-Viro FuelTM is a relatively new and patented biomass alternative energy fuel process that produces a product that has physical and chemical characteristics similar to certain coals and is created from municipal biosolids, collectable animal manure, pulp and paper sludge and possibly other organic wastes.  N-Viro Fuel is manufactured by blending the waste material(s) with one or more alkaline products, followed by thorough drying of the mixture using a thermal evaporative process.  The resulting product can be easily blended with coal, waste coal, petroleum coke and/or other biomass-type fuels, and burned as a partial fuel substitute in combustion power plants.  N-Viro Fuel satisfied initial guidelines set forth by the U.S. Environmental Protection Agency (EPA) to qualify as an alternative energy source that may be utilized in commercial power generation subject to state permitting.  Secondary and waste-derived fuel sources now also require a non-waste determination for use by power producers under applicable Federal regulations (40 CFR 241.3).  This determination requires that the resulting fuel product be managed as a valuable commodity, have a meaningful heating value, and have comparable contaminant levels to the primary fuel being supplemented.  We have and will continue to seek any required new determinations as may be necessary under this new non-waste requirement as we have in the past.  The N-Viro Fuel technology, utilizing an alkaline/heat process to produce a fuel product, still satisfies requirements of the USEPA 40 CFR part 503 regulations and is a safe product usable for agriculture as well as for energy production. 

Our 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 likely candidate to qualify for certain economic incentives that may be granted to alternative energy technologies, and 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.

**N-Viro Process Facilities**

Florida N-Viro, LP, a processing facility and now wholly-owned subsidiary we acquired effective January 1, 2007, has been in continuous operation since 1995 in Florida.  The facility is located in Volusia County and presently processes regional biosolids for multiple communities and maintains contracts with Altamonte Springs, Bunnell, New Smyrna Beach, Palm Coast, Port Orange, the Tohopekaliga Water Authority and Volusia County.  Additionally, the company works with other regional biosolids management companies and has worked with other municipalities with short-term and interim agreements.

Florida N-Viro derives revenue from several sources.  Each municipal customer compensates N-Viro for the processing of their waste materials.  Florida N-Viro also receives revenue from utilizing the alkaline products produced by regional power utilities, including Cedar Bay Generating, through a supply agreement with Headwaters Corporation and Jacksonville Electric Authority.  We have also been successful in marketing our N-Viro Soil to local agricultural markets.

Our Volusia County facility operates under and is regulated by a permit issued by the Florida Department of Environmental Protection.  We believe we have a satisfactory operating history and positive relationship with the regulatory agencies.  We lease the processing facility from Volusia County and renewed our five year contract and lease agreement for the third time in 2010.  Florida N-Viro represented 94% of our total revenue in 2012.

Our first N-Viro processing facility was located in Toledo, Ohio and was managed by us through a series of renewals of a contract management agreement with the City of Toledo from our inception through November 2011 

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when the existing contract was not renewed.  Revenue generated from and related to the Toledo operation accounted for about 17% of our total revenue in 2011.  Under this contract, we processed Toledo's wastewater biosolids and sold the resulting N-Viro Soil product to the agricultural market throughout Northwest Ohio.  

**The N-Viro Process**

The N-Viro Soil Process involves mixing wastewater residuals (sludge) proportionally with an alkaline admixture and then subjecting the mixture to a controlled period of storage, mechanical turning and/or accelerated drying.  The N-Viro Process stabilizes and pasteurizes the wastewater residuals, reduces odors to acceptable levels, neutralizes or immobilizes various constituents and generates N-Viro SoilTM, a product which has a granular appearance similar to soil and has multiple agricultural uses.  N-Viro and its licensees have successfully marketed and distributed all N-Viro Soil product produced for beneficial reuse.

The alkaline products used in all N-Viro Processes consist of by-products from the cement or lime industry and certain fly ashes from coal-fired systems used in electric power generation.  The particular admixture that is used usually depends upon economics and availability in local markets.  We are a distributor of alkaline admixtures for others.  We also work with established by-product marketers to identify and utilize available materials.  We generally charge a mark-up over our cost for alkaline admixtures sold to third parties.

Our original N-Viro Process was enhanced in the 1990’s with the addition of advanced mechanical drying known as the N-Viro BioDry process.  BioDry had been successfully implemented in five plants operating in Canada.

**Sales and Marketing of N-Viro Process**

We market our technologies principally through internal sales efforts.  All domestic sales and marketing are controlled by management.  The primary focus of our marketing efforts is towards the full commercialization of our N-Viro FuelTM technologies.

The N-Viro Fuel market requires us to work within two different and unique regulatory segments.  First, our N-Viro Fuel facilities must satisfy biosolids permit requirements for the 40 CFR Part 503 regulations.  Second, the finished fuel product must comply with each individual power generator’s emission permit requirements and must qualify as a non-waste fuel.  To satisfy the air permitting requirements in the power generation facilities, N-Viro has procured, permitted, constructed and operated a mobile facility to produce N-Viro Fuel on a commercial full-scale basis.  We will continue to introduce this mobile facility to different municipalities and power generation plants to demonstrate the regulatory and power effectiveness of our process with our ultimate goal being to permit, build, own and operate permanent N-Viro Fuel processing facilities.  We can provide no assurance of our ability to negotiate long-term arrangements from the mobile facility’s performance.

**International Sales and Marketing.  **In certain countries outside the United States, we have sold or licensed the N-Viro Process through agents.  In their respective territories, the agents marketed licenses for the N-Viro Processes, served as distributors of alkaline admixture, oversee quality control of the installed N-Viro facilities, enforced the terms of the license agreements with licensees and marketed N-Viro Soil.  In general, the agents have paid one-time, up-front fees to us for the rights to market or use the N-Viro Process in their respective territories.  Typically, the agreements with the agents provide for us to receive a portion of the up-front license fees, ongoing royalty fees paid by the licensees, a portion of the proceeds from the distribution and resale of alkaline admixture and the sale of N-Viro Soil.  Agents have total responsibility and control over the marketing and contracts for N-Viro technology, subject only to license models or minimum agreements with us.

The following table sets forth our Agent and the territorial rights of that Agent:

Agent

Territory

CRM Technologies

Israel, Greece and Eastern Europe

In an effort to expand facility development internationally, on November 6, 2012 we entered into a Joint Development Agreement with Hong Heng Energy (HK) Co., LTD, headquartered in Fuzhou, Fujian, China.  This agreement calls for the parties to jointly identify and develop facilities in China.  These efforts are ongoing.

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**Earnings Variation Due to Business Cycles and Seasonal Factors**.  Our operating results can experience quarterly or annual variations due to business cycles, seasonality and other factors.  During the last fiscal quarter of 2012, approximately 97% of our revenue was from management-run operations, 1% from other domestic third party agreements and 2% from foreign agreements or research and development grants.  Sales of the N-Viro technology are affected by general fluctuations in the business cycles in the United States and worldwide, instability of economic conditions and interest rates, as well as other factors.

**Risks of Doing Business in Other Countries**.  We conduct a very small amount of business in markets outside the United States, and expect to continue  these endeavors as well as to expand our international presence through new development.  In addition to the risk of currency fluctuations, the risks associated with conducting business outside the United States include: social, political and economic instability; slower payment of invoices; underdeveloped infrastructure; underdeveloped legal systems; and nationalization.  We have not entered into any currency swap agreements which may reduce these risks.  We may enter into such agreements in the future if it is deemed necessary to do so.  We cannot predict the full impact of this economic instability, but it could have a material adverse effect on revenues and profits especially if international development activities result in increased international business.

**Research and Development**

We continue to investigate methods to shorten drying time, improve the N-Viro Fuel process, substitute various other materials for use as alkaline admixtures and improve the quality and attractiveness of N-Viro Fuel to a variety of end-users.  We see opportunities to improve the efficiency of our process through the utilization of alterative heat sources such as methane, waste heat solid fuel and gasification technologies, as viable alternatives to the use of natural gas for process drying.

In 2007 we performed a full scale test of the N-Viro Fuel product at the T.B. Simon Power Plant located on the campus of Michigan State University.  The successful results of this first full test encouraged us to focus primarily on the development of the N-Viro Fuel technology.  In September 2011, we performed a multiple day 10% N-Viro Fuel test with a Pennsylvania power producer, utilizing our mobile facility for the production of the test fuel.  This test was successful as it demonstrated that N-Viro Fuel did not adversely effect boiler operation, did not cause anegative impact on resulting ash and did not exceed stack air emissions.  This successful test is expected to be followed by a 20% test in 2013 with full stack monitoring to allow for full permitting at that site for the use of N-Viro Fuel.

**Patents and Proprietary Rights**

**Processing Biosolids Patents**

We have several patents and licenses relating to the treatment and processing of biosolids.  While there is no one single patent that is alone material to our business, we believe that our aggregate patents are important to our prospects for future success.  We cannot be certain, however, that future patent applications will successfully be issued as patents, or that any already issued patents will give us a competitive advantage.  It is also possible that our patents could be successfully challenged or circumvented by competitors or other parties.  In addition, we cannot assure that our treatment processes do not infringe on patents held by third-parties or their proprietary rights.  We are not aware of any such infringement.

**N-Viro Fuel Patents**

We hold several patents relating to N-Viro Fuel.  In the N-Viro Fuel process, waste products, which can include domestic sewage sludge, manures and other materials, are treated with mineral by-products, dried by a mechanical dryer, and converted into a renewable fuel that can be used as a substitute for coal in coal-fired boilers and kilns.  We are actively marketing the N-Viro Fuel process in response to the national policy encouraging both alternative energy generation as well as attaining the highest and best reuse of waste materials.

Some early N-Viro patents were developed jointly with the former Medical College of Ohio, now under the name of the University of Toledo ("UT").  Because of the joint development of early N-Viro patents with UT, we agreed the licensing of these early patents would generate a royalty payable by us to UT.  We also agreed with UT that claims to the traditional N-Viro Soil process was one-quarter of one percent (1/4%) of technical revenues until 

5

expiration of those patents.  UT rights to BioBlend and certain other N-Viro technologies range from 2% to 4% of technical revenues derived from these newer technologies.  Cumulative royalties paid to UT through December 31, 2012 were approximately $65,000, and no amount was expensed during any of the years 2008 through 2012.  UT has no claim to the N-Viro Fuel technologies or process.

In addition, we make use of our trade secrets or "know-how" developed in the course of our experience in the marketing of our services.  To the extent that we rely upon trade secrets, unpatented know-how and the development of improvements in establishing and maintaining a competitive advantage in the market for our services, we can provide no assurance that such proprietary technology will remain a trade secret or that others will not develop substantially equivalent or superior technologies to compete with our services.

**Industry Overview**

Under the Part 503 Regulations, landfills, surface disposal and incineration remain permissible sludge management alternatives, but these conventional disposal options have become subject to more stringent regulatory standards.  The vast majority of states have enacted site restrictions and/or other management practices governing the disposal of sludge in landfills or surface disposal.  Amendments to the Clean Air Act governing incineration and disposal of residual ash also impose stricter air emission standards for incineration in general, and the Part 503 Regulations impose additional specific pollutant limits for sludge to be incinerated and for the resulting air emissions.

Surface disposal of sludge involves the placement of sludge on the land, often at a dedicated site for disposal purposes.  The Part 503 Regulations subject surface disposal to increased regulation by requiring, among other things, run-off and leachate collection systems, methane monitoring systems and monitoring of, and limits on, pollutant levels.  In addition, sludge placed in a surface disposal site are often required to meet certain standards with respect to pathogen levels relating to coliform or salmonella bacteria counts ("Class B" pathogen levels), levels of various pollutants, including metals, and elimination of attractiveness to pests, such as insects and rodents.

Land application for beneficial use involves the application of sludge or sludge-based products, for non-disposal purposes, including agricultural, silvicultural and horticultural uses and for land reclamation.  Under the Part 503 Regulations, N-Viro Soil is a product that meets certain stringent standards.  "Class A" pathogen levels”, levels of various pollutants, including metals, and elimination of attractiveness to pests, such as insects and rodents, are considered by the EPA to be "exceptional quality" products.  The Class A pathogen levels are significantly more stringent than the Class B pathogen levels.  

"Exceptional quality" products are treated by the USEPA as safe products, thereby exempting these products from many federal restrictions on their use.  All N-Viro products that are produced according to N-Viro Process specifications meet the pollutant concentration limits and other standards set forth in the Part 503 Regulations, and therefore qualify as an "exceptional quality" product that exceeds the USEPA's standards for unrestricted use.

**Competition**

We are in direct and indirect competition with other businesses, including disposal and other wastewater sludge treatment businesses, some of which are larger and more firmly established and may have greater marketing and development budgets and capital resources than us.  There can be no assurance that we will be able to maintain a competitive position in the sludge treatment industry.

We compete against companies in a highly competitive market and have fewer resources than many of those companies.  Our business competes within and outside the United States principally on the basis of pricing, reliability of our services provided, product quality, specifications and technical support.  Competitive pressures and other factors could cause us to lose market share or could result in decreases in prices, either of which could have a material adverse effect on our financial position and results of operation.

**Environmental Regulation**

Various environmental protection laws have been enacted and amended during recent decades in response to public concern over the environment.  Our operations and those of our licensees are subject to these evolving laws and the implementing regulations.  The primary United States environmental laws which we believe may be applicable to 

6

the N-Viro Process and the land application of N-Viro SoilTM include Resource Conservation and Recovery Act (“RCRA”), the Federal Water Pollution Control Act of 1972 (“Clean Water Act”), the Comprehensive Environmental Response, Compensation, and Liability Act, (“CERCLA”) and the Pollution Prevention Act of 1990 (“PPA”).  These laws regulate the management and disposal of wastes, control the discharge of pollutants into the water, provide for the investigation and remediation of contaminated land and groundwater resources and establish a pollution prevention program.  In addition, various states have implemented environmental protection laws that are similar to the applicable federal laws.  States also may require, among other things, permits to construct N-Viro facilities and to sell and/or use N-Viro SoilTM.  There can be no assurance that any such permits will be issued.

*The Part 503 Regulations*.  Historically, sludge management has involved either disposal, principally by landfilling, incineration, ocean dumping and surface disposal, or land application for beneficial use.  Sewage sludge and the use and disposal thereof are regulated under the Clean Water Act.  In 1993, the U.S. Environmental Protection Agency (“EPA”) published the Part 503 Regulations under the Clean Water Act, implementing the EPA's "exceptional quality" program.  These regulations establish sludge use and disposal standards applicable to public and privately-owned wastewater treatment plants in the United States, including publicly-owned treatment works, or POTWs.  Under the Part 503 Regs, sludge products that meet certain stringent standards are considered to be "exceptional quality" (“Class A”) products and are not subject to federal restrictions on agricultural use or land application.  N-Viro SoilTM is an "exceptional quality" product.  Lower quality sludge products are subject to federal restrictions governing, among other items, the type and location of application, the volume of application and the cumulative application levels for certain pollutants.  Agricultural application of these lower quality sludges in bulk amounts also requires an EPA permit.  Agricultural and land applications of all sludge and sludge products, including N-Viro SoilTM and other "exceptional quality" products, are typically subject to state and local regulation and, in most cases, require a permit.
In order to ensure compliance with the Part 503 Regs, we review the results of regular testing of sludge required by the EPA to be conducted by wastewater treatment plants, and it reviews tests of N-Viro SoilTM produced at N-Viro facilities on a periodic basis.  In general, we do not license or permit the ongoing use of the N-Viro Process to treat any sludge that may not be processed into an "exceptional quality" sludge product.  Although N-Viro SoilTM exceeds the current federal standards imposed by the EPA for unrestricted agricultural use and land application, state and local authorities are authorized under the Clean Water Act to impose more stringent requirements than those promulgated by the EPA.  Most states require permits for land application of sludge and sludge based products and several states have regulations for certain pollutants that impose more stringent numerical concentration limits than the federal rules.

*The Resource Conservation and Recovery Act.*  RCRA regulates all phases of hazardous waste generation, management and disposal.  Waste is subject to regulation as a hazardous waste under RCRA if it is a solid waste specifically listed as a hazardous waste by the EPA or exhibits a defined hazardous characteristic.  Although domestic sewage and mixtures of domestic sewage and other wastes that pass through a sewer system to a POTW are specifically exempted from the definition of solid waste, once treated by the POTW, the sewage sludge is considered a solid waste.  Although neither the alkaline admixture nor wastewater sludge used in the N-Viro Process are presently regulated as hazardous waste under RCRA, states may impose restrictions that are more stringent than federal regulations.  Accordingly, the raw materials used in the N-Viro Process may be regulated under some state hazardous waste laws as "special wastes," in which case specific storage and record keeping requirements may apply.

*The Comprehensive Environmental Response, Compensation and Liability Act of 1980*.  CERCLA imposes strict, joint and several liability upon owners and operators of facilities where a release of hazardous substances has occurred, upon parties who generated hazardous substances into the environment that were released at such facilities and upon parties who arranged for the transportation of hazardous substances to such facilities.  We believe the N-Viro Process poses little risk of releasing hazardous substances into the environment that presently could result in liability under CERCLA.

*Other Environmental Laws*.  The Pollution Prevention Act of 1990 establishes pollution prevention as a national objective, naming it a primary goal wherever feasible.  The act states that where pollution cannot be prevented, materials should be recycled in an environmentally safe manner.  Additional laws or regulations impacting use or negatively classifying products like those produced by N-Viro are also a possibility.  We believe that the N-Viro Process contributes to pollution prevention by providing an alternative to disposal.

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*State Regulations*.  State regulations typically require an N-Viro facility to obtain a permit for the sale of N-Viro SoilTM for agricultural use, and may require a site-specific permit by the user of N-Viro SoilTM.  In addition, in some jurisdictions, state and/or local authorities have imposed permit requirements for, or have prohibited, the land application or agricultural use of sludge products, including "exceptional quality" sludge products.  Certain of our licensees operate in jurisdictions that require permits and have been able to obtain them for the N-Viro product.  There can be no assurance that any such permits will be issued or that any further attempts to require permits for, or to prohibit, the land application or agricultural use of sludge products will not be successful. 

In addition, many states enforce landfill restrictions for non-hazardous sludge.  These regulations typically require a permit to sell or use sludge products as landfill cover material.  There can be no assurance that N-Viro facilities or landfill operators will be able to obtain required permits. 

Environmental impact studies may be required in connection with the development of future N-Viro facilities.  Such studies are generally time consuming and may create delays in the construction process.  In addition, unfavorable conclusions reached in connection with such a study could result in termination of or expensive alterations to the N-Viro facility being developed.

The costs of compliance are typically borne by our licensees, except in the case of direct sludge processing into a facility.  Normally this cost is not material to us in relation to the total contract revenue.

**Employees**

As of December 31, 2012, we had eighteen (18) employees.  Four of our employees were engaged in sales and marketing; two were in finance and administration and twelve were in operations.  We consider our relationship with our employees to be satisfactory.

**Current Developments**

We are currently in discussions with several companies in the cement and fuel/power generation industries for the development and commercialization of the patented N-Viro FuelTM technology.  There can be no assurance that these discussions will be successful.  We continue to focus on the development of regional biosolids processing facilities.  Currently we are in negotiations with several privatization firms to permit and develop independent, regional facilities and for international facility development.

**Securities and Exchange Commission**

As a public company, we are required to file periodic reports, as well as other information, with the Securities and Exchange Commission (SEC) within established deadlines.  Any document we file with the SEC may be viewed or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  Additional information regarding the Public Reference Room can be obtained by calling the SEC at (800) SEC-0330.  Our SEC filings are also available to the public through the SEC’s web site located at www.sec.gov.

We maintain a corporate Web site at www.nviro.com, on which investors may access free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q and amendments to those reports as soon as is reasonably practicable after furnishing such material with the SEC.  In addition, we will voluntarily provide electronic or paper copies of our filings free of charge upon request to James K. McHugh, our Chief Financial Officer, at (419) 535-6374 or via e-mail to jmchugh@nviro.com.  We also intend to avail ourselves of the ability to use social media to communicate with the public within the guidelines announced by the SEC in a release dated April 2, 2013.

**Item 1A.**

**Risk Factors**

**We have a history of losses and there can be no assurances regarding if and when we will achieve profitability.  If we are unable to achieve profitable operations, we may need to raise additional capital to continue our operations, which may not be available on commercially reasonable terms or at all, and which may dilute our stockholders.**

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Since 2000, we have experienced net losses and we have not been consistently profitable on an annual basis.  For the years ended December 31, 2012 and 2011, we incurred net losses of $1.63 million and $1.64 million, respectively.  We believe our history of net losses is primarily due to our inability to add enough new sources of revenue to replace decreasing business from existing sources of revenue and, more recently, through a shift of our business toward lower margin products and services.  Further, for the years ended December 31, 2012 and 2011, we experienced higher than expected expenditures for stock-related fees and compensation in addition to a decrease in gross revenue.  Additionally, in the fourth quarter of 2012 we recorded a large expense for a withdrawal liability from a pension fund that was funded by us for the benefit of our former employees at our City of Toledo operation.  To achieve profitability, we must accomplish numerous objectives, including growth in our business, the development of new products and commercial relationships, and decreasing our costs.  We can not foresee with any certainty whether we will be able to achieve these objectives in the future.  Accordingly, we may not generate sufficient net revenue to achieve profitability.

**Failure to maintain effective internal controls could have a material adverse effect on our business, operating results and stock price.**

We have evaluated and will continue to evaluate our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires an annual management assessment of the design and effectiveness of our internal controls over financial reporting.  We have previously identified a material weakness in our internal controls over financial reporting due to a lack of personnel to sufficiently monitor and process transactions.  Due to our continuing lack of financial resources to hire and train accounting and financial personnel, we have not yet remedied this material weakness.  At the beginning of 2012, as part of continued cost-cutting measures, we laid off one of our financial personnel that reported directly to the Chief Financial Officer.  While we are not aware of any material errors to date, our inability to maintain the adequate internal controls may result in a material error in our financial statements.  Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud.  If we experience a material error in our financial statements or if we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.

**Compliance with environmental laws and regulations may reduce, delay or prevent our realization of license revenues and/or facility revenue.**

Our operations and our licensees and their operations are subject to increasingly strict environmental laws and regulations, including laws and regulations governing the emission, discharge, disposal and transportation of certain substances and related odor.  Wastewater treatment plants and other plants at which our biosolids products or processes may be implemented are usually required to have permits, registrations and/or approvals from state and/or local governments for the operation of such facilities.  Some facilities using our processes require air, wastewater, storm water, biosolids processing, use or siting permits, registrations or approvals.  These licensees may not be able to maintain or renew their current permits or registrations or to obtain new permits or registrations.  The process of obtaining a required permit or registration can be lengthy and expensive.  They may not be able to meet applicable regulatory or permit requirements, and therefore may be subject to related legal or judicial proceedings that could have a materially adverse effect on our income derived from these facilities.

Any of the permits, registrations or approvals noted above, or related applications may be subject to denial, revocation or modification, or challenge by a third party, under various circumstances.  In addition, if new environmental legislation or regulations are enacted or existing legislation or regulations are amended or are enforced differently, these facilities may be required to obtain additional, or modify existing, operating permits, registrations or approvals.

Maintaining, modifying or renewing current permits or registrations or obtaining new permits or registrations after new environmental legislation or regulations are enacted or existing legislation or regulations are amended or enforced differently may be subject to public opposition or challenge.  Much of this public opposition and challenge, as well as related complaints, relates to odor issues, even when a facility is operated in compliance with odor requirements and even though they have worked hard to minimize odor from their operations.  Public misperceptions about the business and any related odor could influence the governmental process for issuing such permits or 

9

registrations or for responding to any such public opposition or challenge.  Community groups could pressure local municipalities or state governments to implement laws and regulations which could increase our costs of their operations that in turn could have a material and adverse effect on our business and financial condition.

**Our ability to grow our revenues and operations may be limited by competition.**

We provide a variety of technology and services relating to the treatment of wastewater residuals.  We are in direct and indirect competition with other businesses that provide some or all of the same services including regional residuals management companies and national and international water and wastewater operations/privatization companies, technology suppliers, municipal solid waste companies and farming operations.  Many of these competitors are larger and have significantly greater capital resources.

We derive a substantial portion of our revenue from services provided under municipal contracts, and many of these are subject to competitive bidding.  We also intend to bid on additional municipal contracts, however, and may not be the successful bidder.  In addition, some of our contracts will expire in the future and those contracts may not be renewed or may be renewed on less attractive terms.  In 2011, we experienced just this possibility with respect to existing and material contracts in Toledo, Ohio and Seminole County, Florida, both of which were not renewed, albeit for different reasons.  If we are not able to replace revenues from contracts lost through competitive bidding or from the renegotiation of existing contracts with other revenues within a reasonable time period, the lost revenue could have a material and adverse effect on our business, financial condition and results of operation.

**Our customer contracts may be terminated prior to the expiration of their term.**

A substantial portion of our revenue is derived from services provided under contracts and agreements with existing licensees and customers.  Some of these contracts, especially those contracts with large municipalities, provide for termination of the contract by the customer after giving relative short notice (in some cases as little as ten days).  In addition, some of these contracts may contain liquidated damages clauses, which may or may not be enforceable in the event of early termination of the contracts.  If one or more of these contracts are terminated prior to the expiration of its term, and we are not able to replace revenues from the terminated contract or receive liquidated damages pursuant to the terms of the contract, the lost revenue could have a material and adverse effect on our business, financial condition and results of operations.

**A significant amount of our business comes from a limited number of customers and our revenue and profits could decrease significantly if we lost one or more of them as customers.  Further, the agreement with our (then) second largest customer expired in November 2011, and our failure to renew that agreement has had a material adverse effect on our business, financial conditions and results of operations.**

Our business depends on providing services to a limited number of customers.  One or more of these customers may stop contracting for services from us or may substantially reduce the amount of services we provide them.  Any cancellation, deferral or significant reduction in the services we provide these principal customers or a significant number of smaller customers could seriously harm our business and financial condition.  For the years ended December 31, 2012 and 2011, our largest customer accounted for approximately 33% and 22% of our revenues, respectively.  For the years ended December 31, 2012 and 2011, our top three customers accounted for approximately 60% and 55%, respectively, of our revenues.  Our sludge processing agreement with the City of Toledo, Ohio, which was our largest customer for many years through 2010 and represented approximately 17% of our revenues in 2011, was not renewed at the end of 2011.  Our failure to renew that agreement has had a material adverse effect on our business, financial conditions and results of operations.  Also at the end of 2011, we were notified by a Florida customer that represented approximately 6% of our 2011 gross revenue they were ending our services, effective January 2012.  Additionally, regional economic considerations have made the supply of admixtures used in our processes more difficult to acquire due to coal-burning facilities operating less or not at all for unusually long periods of time.

**The current economic downturn may cause us to experience delays of payment from our customers.**

Our accounts receivable are derived primarily from municipal or local governments.  Although our collection history has been good, from time to time a customer may not pay us on a timely basis because of adverse market conditions.  In light of the current economic downturn, we may experience larger than expected delays in receiving 

10

payments on our accounts receivable.  Given our history of losses and our limited cash resources, any significant payment delay by one of our customers, may force us to delay payment to our creditors, which may have a material and adverse effect on our business, financial condition and results of operations.

**We are affected by unusually adverse weather conditions.**

Our present business is adversely affected by unusual weather conditions and unseasonably heavy rainfall which can temporarily reduce the availability of land application sites in close proximity to our operations.  In addition, revenues and operational results are adversely affected during months of inclement weather which limits the amount of land application that can be performed.  Long periods of adverse weather could have a material negative effect on our business and financial condition.  For example, our Daytona Florida operation is sometimes affected by unusually adverse weather conditions by lowering the demand for N-Viro Soil(TM) distribution to the local agricultural community.

**Fuel cost variation could adversely affect our operating results and expenses.**

The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including demand for oil and gas, actions by OPEC and other oil and gas producers, and war in oil producing countries.  Because fuel is needed for the trucks that transport the processing materials and supplies for our operations and customers, price escalations or reductions in the supply of fuel could increase our operating expenses and have a negative impact on the results of operations.  We are not always able to pass through all or part of the increased fuel costs due to the terms of certain customers' contracts and the inability to negotiate such pass through costs in a timely manner.

**We are highly dependent on the services of our management team, the loss of any of whom may have a material adverse effect on our business and financial condition.**

In 2010 we entered into employment agreements with our Chief Executive Officer, Timothy Kasmoch, our Executive Vice President and Chief Counsel, Robert Bohmer and our Chief Financial Officer, James McHugh, each of which contains non-compete and other provisions.  The laws of each state differ concerning the enforceability of non-competition agreements.  We cannot predict with certainty whether or not a court will enforce a non-compete covenant in any given situation based on the facts and circumstances at that time.  If one of our key executive officers were to leave our employ and the courts refused to enforce the non-compete covenant, we might be subject to increased competition, which could have a material and adverse effect on our business and financial condition.

**Our intellectual property may be misappropriated or subject to claims of infringement.**

We attempt to protect our intellectual property rights through a combination of patent, trademark, and trade secret laws, as well as the use of non-disclosure and licensing agreements.  Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business and financial condition.

Our competitors, many of whom have substantially greater resources and have made substantial investments in competing technologies, may have applied for or obtained, or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to offer services.

We also rely on unpatented proprietary technology.  It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology.  If we are unable to maintain the proprietary nature of our technologies, we could be materially adversely affected.

**There is only a limited trading market for our common stock, and it is possible that you may not be ab**le **to sell your shares easily.
There is currently only a limited trading market for our common stock.  Our common stock trades on the OTCQB, which is one of the quotation services for SEC-registered and reporting companies that trade over the 

11

counter ("OTC Markets"), under the symbol “NVIC”, with limited trading volume.  We cannot assure you that a trading market will exist for our common stock.

**We have never paid dividends on our shares of common stock.**

We have not paid any cash dividends on our common stock heretofore, and we have no present intention of paying any cash dividends for the foreseeable future.  Any determination to pay dividends in the future will be at the discretion of the board of directors.

**Volatility in the trading price of our common stock could negatively impact the price of our common stock, and may eliminate a source of our potential revenue from exercises of stock options and stock purchase warrants.**

During the period from January 1, 2011 through March 22, 2013, our common stock closing price fluctuated between a high of $3.25 and a low of $0.42.  The trading price of our common stock could be subject to wide fluctuations in response to many factors, some of which are beyond our control, including general economic conditions, the thinly-traded nature of our common stock and the outlook of analysts and investors on our industry.  Further, significant market fluctuations may adversely affect the trading price of our common stock.  Over the past several years, we have relied on, in part, private placements of stock, exercises of stock options by current and former officers and directors, and, exercises of stock purchase warrants by investors for operating cash.  Wide fluctuations in the price of our common stock or a stock price that is not significantly above the exercise price of outstanding stock options or warrants, would likely reduce future exercises of stock options or warrants, and which would reduce or eliminate a historic source of cash for our operations.

**Item 2.**

**Properties**

Our executive and administrative offices are located in Toledo, Ohio.  Through April 2011, we operated under a month to month lease at our former location.  The total rental expense for this former location included in the statements of operations for the twelve months ended December 31, 2011 was $12,850.  In April 2011, we signed a 68 month lease with a new lessor in Toledo, Deerpoint Development Company, Ltd (“Deerpoint”).  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 for the current location included in the statements of operations for the twelve months ended December 31, 2012 is approximately $38,600.  In late 2012 we negotiated a stock for rent deal with Deerpoint, issuing them 12,000 shares of our stock at a discounted price of $0.88 per share in exchange for three months rent, resulting in net additional expense of approximately $1,200 above the contracted amount, but saving us $9,342 of cash.  We also lease various office equipment on a month-to-month basis.

In October 2010, we began to lease property in Emlenton, Pennsylvania under a lease with A-C Valley Industrial Park, for one year.  The total rental expense included in the statements of operations for the twelve months ended December 31, 2012 and 2011 is $12,000 and $23,000, respectively.  After September 2011 we have been operating under a month-to-month lease at this location for one-half the rate under the original lease agreement.

In June 2009, we began to maintain an office in West Unity, Ohio under a lease with D&B Colon Leasing, LLC, for one year.  In June 2010, we renewed the lease for an additional year through May 31, 2011, and are currently operating under a month to month lease.  The total rental expense included in the statements of operations for each of the twelve months ended December 31, 2012 and 2011 is $30,000.

We maintain 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 years ending December 31, 2013 and 2014 is $48,000 and $12,000, respectively.  The total rental expense included in the statements of operations for each of the twelve months ended December 31, 2012 and 2011 is $48,000.

We also leased other processing equipment at our Florida location which began in February 2008 under a three-year lease.  The total rental expense included in the statements of operations for the twelve months ended December 31, 2011 is approximately $3,900.  In February 2011, we purchased the equipment through a financing arrangement with an equipment leasing company.

12

Management believes that all of our properties are adequately covered by insurance.

**Item 3.**

**Legal Proceedings**

We were not a party to any legal proceedings in 2012.

In February 2013 our Board of Directors received a letter from counsel on behalf of one of our stockholders, 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 interplay between 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 anticipate the process of reviewing the awards will be complete in April or May 2013, and a satisfactory resolution will be reached avoiding any potential legal proceedings.  If the stockholder elects to proceed even after the Special Committee and the Board conclude the process outlined above, in that instance we would vigorously defend against such action.

**Item 4.**

**Mine Safety Disclosures**

None.

13

**PART II**

**Item 5.**

**Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities**

**Market Information**

Our shares of Common Stock are quoted on the OTCQB, which is one of the quotation services for SEC-registered and reporting companies that trade over the counter ("OTC Markets"), under the symbol “NVIC”.  The prices quoted below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.  The closing price range per share of the Common Stock since January 1, 2011, was as follows:

Quarter

High

Low

First 2011

$3.25

$1.50

Second 2011

$2.75

$1.45

Third 2011

$2.45

$1.50

Fourth 2011

$2.00

$1.01

First 2012

$1.69

$1.00

Second 2012

$1.44

$0.90

Third 2012

$1.45

$0.70

Fourth 2012

$1.05

$0.42

Our stock price closed at $1.55 per share on March 25, 2013.
**Holders**

As of March 25, 2013, the number of holders of record of our Common Stock was approximately 176.

**Dividends**

We have never paid dividends with respect to our Common Stock.  Payment of dividends is within the discretion of our Board of Directors and would depend, among other factors, on our earnings, capital requirements and our operating and financial condition.

**Recent Sales of Unregistered Securities**

None.

**Item 6.**

**Selected Financial Data**

As a smaller reporting company we are not required to provide this information under Item 301 of Regulation S-K.

14

**Item 7.**

**Management's Discussion and Analysis of Financial Condition and Results of Operations**

**Overview**

The following is a discussion of our results of operations and financial position for the periods described below, and should be read in conjunction with our Financial Statements and Supplementary Data appearing elsewhere in this Form 10-K.  The discussion includes various forward-looking statements about our markets, products, services and our results.  These statements are based on certain assumptions that we consider reasonable.  Our actual results may differ materially from these indicated forward-looking statements.  Please see “Cautionary Statement with Respect to Forward-Looking Comments” and “Risk Factors” elsewhere in this annual report on Form 10-K.

The following table sets forth, as a percentage of total revenues for the periods presented, revenues related to each of (i) technology fees, (ii) facility management, (iii) products and services:

            For the Year Ended December 31,

 

**2012**

**2011**

Technology fees

    2.5%

    0.1%

Facility management

  66.5%

  68.3%

Products and services

  31.0%

  31.6%

 Totals

 100.0%

 100.0%

Technology fee revenue is defined as:  royalty revenue, which represent ongoing amounts received from licensees for continued use of the N-Viro Process and are typically based on volumes of sludge processed;  license and territory fees, which represent non-recurring payments for the right to use the N-Viro Process in a specified geographic area or at a particular N-Viro facility;  and research and development revenue, which represent payments from federal and state agencies awarded to us to fund ongoing site-specific research utilizing the N-Viro technology.

Facility management revenues are recognized under contracts where we manage the N-Viro Process ourselves to treat sludge, pursuant to a fixed price contract.

Product and service revenue is defined as:  alkaline admixture revenue, which represent ongoing payments from licensees arising from the sale and distribution of alkaline admixture by us to N-Viro facilities;  service fee revenue for the management of alkaline admixture, which represent fees charged by us to manage and sell the alkaline admixture on behalf of a third party customer;  N-Viro SoilTM sales, which represent revenue received from sales of N-Viro Soilsold by us;  commissions earned on sales of equipment to an N-Viro facility;  rental of equipment to a licensee or agent;  and equipment sales, which represent the price charged for equipment held for subsequent sale.

Our policy is to record the revenues payable to us pursuant to agency and license agreements when we have fulfilled our obligations under the relevant contract, i.e., when earned, except when it pertains to a foreign license agreement.  In the case of foreign licenses, revenue is recorded when cash is received and when we have fulfilled our obligations under the relevant foreign license agreement.  The exception to this is our current agreement with our agent, CRM Technologies, and our Israeli customer, Dan-Viro, in which we have fulfilled our obligations under the contract and record revenues when earned, as they are a proven and reliable payor.

15

**Results of Operations**

The following tables set forth, for the periods presented, (i) certain items in the Combined Statement of Operations, (ii) the percentage change of each such item from period to period and (iii) each such item as a percentage of total revenues in each period presented.

(Dollars in thousands)

Year Ended December 31, 2012

*Period to Period Percentage Change*

Year Ended December 31, 2011

**Combined Statement of**

 

 

 

**    Operations Data:**

 

 

 

 

 

 

 

Revenues

$         3,583

 (35.9%)

$         5,594

 

 

 

 

Cost of revenues

3,006

 (34.1%)

4,561

 

 

 

 

Gross profit 

577

 (44.1%)

1,033

 

 

 

 

Operating expenses

 2,283

(35.1%)

 3,516

 

 

 

 

 

(1,706)

 *

(2,483)

 

 

 

 

Other income (expense)

67

 (92.0%)

843

 

 

 

 

Loss before income taxes

(1,639)

 *

(1,640)

 

 

 

 

Federal and state income taxes

-

 *

-

 

 

 

 

**Net loss**

**$       (1,639)**

** *******

**$       (1,640)**

**Percentage of Revenues:**

 

 

 

 

 

 

 

Revenues

100.0%

 

100.0%

 

 

 

 

Cost of revenues

83.9

 

81.5

 

 

 

Gross profit

16.1

 

18.5

 

 

 

Operating expenses

63.7

 

62.8

 

 

 

 

(47.6)

 

(44.3)

 

 

 

 

Other income (expense)

1.9

 

15.1

 

 

 

Loss before income taxes

(45.7)

 

(29.2)

 

 

 

 

Federal and state income taxes

-

 

-

 

 

 

**Net loss**

**(45.7%)**

** **

**(29.2%)**

*

Period to period percentage change comparisons have only been calculated for positive numbers.

16

**Comparison of Year Ended December 31, 2012 with Year Ended December 31, 2011**

Our overall revenue decreased $2,011,000, or 36%, to $3,583,000 for the year ended December 31, 2012 from $5,594,000 for the year ended December 31, 2011.  The net decrease in revenue was due primarily to the following:

a)  Sales of alkaline admixture decreased $46,000 from the same period ended in 2011 – this decrease was the result of a decrease in demand with our Midwestern customers;

b)  Revenue from the service fees for the management of alkaline admixture decreased $540,000 from the same period ended in 2011 – this decrease was attributed primarily to our Florida-area customers, which decreased $322,000 compared to the same period in 2011 and secondarily to the loss of the Toledo operation, which had accounted for $206,000; and

c)  Our processing revenue, including facility management revenue, showed a net decrease of $1,464,000 over the same period ended in 2011.  This was primarily from our Florida operation, which showed a decrease of $764,000 in facility management and product revenue from 2011, and secondarily from the loss of the Toledo operation which accounted for $728,000 of the decrease.  This decrease in the Florida operation was mainly the loss of the Orange County Utilities contract that began in December 2010 and ended in March 2011, and the loss of the Seminole County contract at the end of 2011.  These two contracts accounted for $717,000 of the processing revenue decrease.  Offsetting these decreases was an increase in royalty revenue of $47,000 from 2011 to 2012, which is all attributable to the processing start up of our Israeli licensee Dan-Viro; and

d)  Our license fee revenue increased $41,000 over the same period ended in 2011, which was $-0-.  This increase was attributed directly from our Israeli agent, CRM Technologies.

Our gross profit decreased $456,000, or 44%, to $577,000 for the year ended December 31, 2012 from $1,033,000 for the year ended December 31, 2011, and the gross profit margin decreased to 16.1% from 18.5% for the same periods.  The decrease from the prior year in both gross profit and gross profit margin are due primarily to three sources of operations in 2012:

1.

A decrease in total revenue and gross margin from our Florida operation.  The total revenue attributable to Florida in 2012 was $3,353,000, a decrease of $1,089,000 from 2011.  This revenue was generated at a gross margin of 15%, down from 20% in 2011.  Florida contributed $526,000 of gross profit, a decrease of $343,000 over the same period in 2011.  A majority of this decrease in Florida’s gross profit was from the decreased revenue from sludge management fees, which are realized at a higher margin than other sources of revenue as a result of economies of scale on sludge handled at the facility.

2.

A decrease in total revenue and gross profit from our Toledo operation.  The total revenue attributable to Toledo was $15,000, a decrease of $935,000 from 2011.  For both years, this revenue was generated at a gross margin of approximately 36%.  The Toledo operation contributed $5,000 of gross profit, which was a decrease of $334,000 of gross profit over the same period in 2011.

3.

Offsetting the two decreases above was a reduction in the gross loss from our Pennsylvania fuel pilot facility, which sustained a gross loss of $30,000 for 2012, a decrease in the gross loss of $201,000 from 2011.

Our operating expenses decreased $1,232,000, or 35%, to $2,283,000 for the year ended December 31, 2012 from $3,516,000 for the year ended December 31, 2011.  The decrease was primarily due to a decrease of $1,002,000 in payroll and related costs, a decrease of $453,000 in director costs, an increase in the gain on the sale of fixed assets of $129,000 and a decrease of $63,000 in office and travel-related costs, partially offset by an increase in pension withdrawal expense of $413,000 and an increase of $30,000 in consulting fees and expenses.  Of the total net decrease of $1,425,000 in employee related, director and consulting costs, $1,122,000 were non-cash costs.  Therefore, for the year ended December 31, 2012, actual cash outlays in these combined categories decreased by a total of $303,000 over the same period in 2011.

17

As a result of the foregoing factors, we recorded an operating loss of $1,706,000 for the year ended December 31, 2012 compared to an operating loss of $2,483,000 for the year ended December 31, 2011, a decrease in the loss of $777,000.

Our net nonoperating income (expense) decreased by $776,000 to net nonoperating income of $67,000 for the year ended December 31, 2012 from net nonoperating income of $843,000 for the similar period in 2011.  The decrease in net nonoperating income was primarily due to a decrease of $720,000 from the gain recorded on warrants issued whose value and number of shares outstanding had decreased during the period, a $59,000 decrease in the gain from liabilities extinguished, a decrease of $33,000 in the gain associated with debentures issued in previous periods, offset by an increase of $44,000 in amortization of the stock discount on convertible debentures issued.

For the years ended December 31, 2012 and 2011, 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 $927,000 at December 31, 2012, compared to a working capital deficit of $597,000 at December 31, 2011, resulting in a decrease in working capital of $330,000.  Current assets at December 31, 2012 included cash and cash equivalents of $262,000 (including restricted cash of $209,000), which is an increase of $9,000 from December 31, 2011.  The net negative change in working capital from December 31, 2011 was primarily from a $357,000 increase to short-term liability of the convertible debenture liability payable in July 2013and a decrease in the net deferred current asset of $15,000 for amortization of common stock and warrants given pursuant to consulting contracts entered into during 2010 and 2011, offset by an increase of $42,000 in the change in short-term assets over liabilities.

In 2012 our cash flow used by operating activities was $38,000, a decrease of $371,000 from 2011.  The components of the decrease in cash flow used by operating activities from 2011 was principally due to a $1,169,000 decrease in stock warrants and stock options issued for fees and services, a decrease of $239,000 in trade accounts receivable, a decrease of $256,000 in depreciation and amortization, a $129,000 increase in the gain on sale of fixed assets, a decrease of $24,000 in the investment in Mahoning Valley N-Viro and a decrease of $11,000 in debenture discount amortization, offset by an increase of $720,000 in the market price of derivatives issued, an increase of $411,000 in pension withdrawal payable, an increase of $250,000 in trade accounts payable, a decrease in prepaid and other assets of $54,000 and an increase of $20,000 in the provision for bad debt allowance.

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 2006 to 2012, the percentage of combined revenues generated from our owned and operated facilities was:  2006 – 46%;  2007 – 77%;  2008 – 94%;  2009 – 95%;  2010 – 96%;  2011 – 96%;  2012 – 94%.  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 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 2012 we renewed our 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 December 31, 2012) 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 2012, it was renewed with a new maturity date of August 15, 2013.  Two certificates of deposit totaling $141,805 from the Bank are held as a condition of maintaining the line of credit.  At December 31, 2012, we had $30,000 of borrowing capacity under the credit facility.

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 the Company for the benefit of its former employees at its City of Toledo operation.  The Notice demands a payment of $412,576, 

18

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.  As of the balance sheet date, we have accrued this liability and recognized the expense.  Under advisement from counsel we are not at this time planning on contesting or otherwise taking legal action to reduce or eliminate this liability as we have determined the cost of such actions would exceed the low likelihood of a reduction in the liability.

In August 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 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.  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, 2013 and it is now due April 30, 2013.  We expect to extend the Note on or before the due date but pay the Note in full during 2013.

From the beginning of 2006 through 2012, we have borrowed a total of $1,677,100 from ten lenders to purchase processing and automotive equipment.  As of December 31, 2012, a total of eight term notes are outstanding, ranging from 6.2% to 10.9% interest for terms ranging three to five years, monthly payments totaling approximately $18,000 and all secured by equipment.  The total amount owed on all equipment-secured notes as of December 31, 2012 was approximately $212,000 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 we 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 fifteen investors holding Debentures totaling $365,000 elected to replace them with new ones that now mature at June 30, 2013 but are not payable until the 10th business day of July.  All other features of the “expired” Debentures remained the same in the replacement ones, except for the new maturity date.  Of the four investors totaling $355,000 who did not replace their existing Debentures with new ones, two investors totaling $215,000 had their Debentures repaid; one investor converted $50,000 into unregistered common stock (at June 30, 2011) and one holding $90,000 of Debentures has not made a final decision.  As of December 31, 2012, we held $455,000 of Debentures.

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 twelve months ended December 31, 2012 and 2011 was $-0- and $52,326, respectively.

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 is required to be amortized as a period expense over the next eight quarters the Debentures are scheduled to be outstanding.  Amortization expense for each of the twelve months ended December 31, 2012 and 2011 was $16,368 and $8,184, respectively.

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 

19

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 renewed our line of credit until August 2013, 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 97% 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.

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 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.

**Off-Balance Sheet Arrangements**

At December 31, 2012, 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 Consolidated Balance Sheets.

**Critical accounting policies, estimates and assumptions**

In preparing financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  The following are the significant estimates and assumptions made in preparation of the financial statements: 

Non-domestic license and territory fees – We do not recognize revenue on any non-domestic license or territory fee contracts until the cash is received, assuming all other tests of revenue recognition are met.  Canada and Israel are excluded from this definition of non-domestic.

20

Allowance for Doubtful Accounts – We estimate losses for uncollectible accounts based on the aging of the accounts receivable and the evaluation and the likelihood of success in collecting the receivable.  The balance of the allowance at December 31, 2012 and 2011 is $90,000 and $70,000, respectively.

Property and Equipment/Long-Lived Assets – Property and equipment is reviewed for impairment.  The carrying amount of an asset (group) is considered impaired if it exceeds the sum of our estimate of the undiscounted future cash flows expected to result from the use and eventual disposition of the asset (group), excluding interest charges.  Property, machinery and equipment are stated at cost less accumulated depreciation.  We believe the carrying amount is not impaired based upon estimated future cash flows.

Intangible Assets – Intangible assets deemed to have indefinite lives are tested for impairment by comparing the fair value with its carrying value.  Significant estimates used in the determination of fair value include estimates of future cash flows.  As required under current accounting standards, we test for impairment when events and circumstances indicate that the assets might be impaired and the carrying value of those assets may not be recoverable.

Income Taxes – We assume the deductibility of certain costs in income tax filings and estimate the recovery of deferred income tax assets, all of which is fully reserved.
New Accounting Standards – The Financial Accounting Standards Board, or FASB, has issued the following new accounting and interpretations, which may be applicable in the future to us:

There are no Accounting Standards Updates expected to have a significant effect on the Company’s consolidated financial position or results of operations.

Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.

**Item 7A.**

**Quantitative and Qualitative Disclosures About Market Risk**

As a smaller reporting company we are not required to provide this information under Item 305 of Regulation S-K.

21

**Item 8.**

**Financial Statements and Supplementary Data**

**Index to Financial Statements**

Page

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

F-1

 

 

FINANCIAL STATEMENTS

 

     CONSOLIDATED BALANCE SHEETS

F-2 - F-3

     CONSOLIDATED STATEMENTS OF OPERATIONS

F-4

     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

F-5

     CONSOLIDATED STATEMENTS OF CASH FLOWS

F-6

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-7 - F-23

22

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors

N-Viro International Corporation

We have audited the accompanying consolidated balance sheets of N-Viro International Corporation (a Delaware Corporation) and Subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting.  Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of N-Viro International Corporation and Subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company’s recurring losses, negative cash flow from operations and net working capital deficiency raise substantial doubt about its ability to continue as a going concern.  Management’s plans as to these matters are also discussed in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/  UHY LLP

UHY LLP

Farmington Hills, Michigan

April 15, 2013

1

N-VIRO INTERNATIONAL CORPORATION

 

 

 

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

December 31, 2012 and 2011

 

 

 

 

 

 

2012

 

2011

**ASSETS**

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

  Cash and cash equivalents:

 

 

 

    Unrestricted

 $ 52,625 

 

 $ 44,498 

    Restricted

  209,181 

 

  208,510 

  Receivables, net:

 

 

 

    Trade

  283,380 

 

  416,192 

    Other

  17,182 

 

  18,073 

  Deferred costs - stock and warrants issued for services

  343,480 

 

  358,476 

  Prepaid expenses and other assets

  78,849 

 

  97,155 

      Total current assets

  984,697 

 

  1,142,904 

 

 

 

 

Property and Equipment, Net

  993,971 

 

  1,327,320 

 

 

 

 

Deferred costs - stock and warrants issued for services - long-term

280,872 

 

188,536 

 

 

 

 

Intangible and Other Assets, Net

78,969 

 

91,800 

 

 

 

 

TOTAL ASSETS

 $ 2,338,509 

 

 $ 2,750,560 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

2

N-VIRO INTERNATIONAL CORPORATION

 

 

 

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

December 31, 2012 and 2011

 

 

 

 

 

 

2012

 

2011

**LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)**

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

  Current maturities of long-term debt

 $ 188,902 

 

 $ 277,190 

  Note Payable - related party

  200,000 

 

  200,000 

  Convertible debentures, net of discount

446,816 

 

90,000 

  Line of credit

370,000 

 

300,000 

  Accounts payable

597,426 

 

833,068 

  Pension plan withdrawal liability

27,003 

 

  - 

  Accrued liabilities

81,343 

 

39,798 

      Total current liabilities

1,911,490 

 

1,740,056 

 

 

 

 

Long-term debt, less current maturities

92,014 

 

211,716 

Pension plan withdrawal liability - long-term

384,291 

 

  - 

Fair value of warrant liability

  - 

 

12,196 

Convertible debentures - long-term, net of discount

  - 

 

  340,447 

 

 

 

 

        Total liabilities

2,387,795 

 

2,304,415 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY (DEFICIT)

 

 

 

  Preferred stock, $.01 par value, Authorized - 2,000,000 shares

 

 

 

    Issued - -0- shares in 2012 and 2011

  - 

 

  - 

  Common stock, $.01 par value

 

 

 

    Authorized - 35,000,000 shares

 

 

 

    Issued - 6,664,087 shares in 2012 and 6,191,420 shares in 2011

66,641 

 

61,914 

  Additional paid-in capital

28,630,416 

 

26,883,156 

  Accumulated deficit

(28,061,453)

 

(25,814,035)

 

635,604 

 

1,131,035 

 

 

 

 

  Less treasury stock, at cost, 123,500 shares

684,890 

 

684,890 

        Total stockholders' equity (deficit)

(49,286)

 

446,145 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 $ 2,338,509 

 

 $ 2,750,560 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

3

 

 

 

 

 

N-VIRO INTERNATIONAL CORPORATION

 

 

 

 

 

 

                                                  CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

                                                  Years Ended December 31, 2012 and 2011

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

 

 

 

 

 

REVENUES

 $ 3,583,155 

 

 $ 5,593,665 

 

 

 

 

 

 

COST OF REVENUES

3,006,140 

 

4,560,852 

 

 

 

 

 

 

GROSS PROFIT

577,015 

 

1,032,813 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

  Selling, general and administrative

2,283,314 

 

3,515,617 

 

 

 

 

 

 

OPERATING LOSS

(1,706,299)

 

(2,482,804)

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

  Gain on extinguishment of liabilities

158,175 

 

217,342 

 

  Gain on fair value change of warrants issued

12,196 

 

732,280 

 

  Interest income

1,486 

 

1,073 

 

  Gain on debt modification (debentures)

  - 

 

32,737 

 

  Amortization of discount on convertible debentures

(16,368)

 

(60,510)

 

  Interest expense

(87,998)

 

(79,911)

 

 

67,491 

 

843,011 

 

 

 

 

 

 

LOSS BEFORE INCOME TAXES

(1,638,808)

 

(1,639,793)

 

 

 

 

 

 

  Federal and state income taxes

  - 

 

  - 

 

 

 

 

 

 

NET LOSS

($1,638,808)

 

($1,639,793)

 

 

 

 

 

 

Basic and diluted loss per share

($0.26)

 

($0.27)

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

  6,218,623 

 

  5,988,077 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

4

N-VIRO INTERNATIONAL CORPORATION

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Years Ended December 31, 2012 and 2011

 

 

 

 

 

 

 

 

 

 

 

Note

Additional

 

 

 

 

Shares of

Common

Receivable for

Paid-in

Accumulated

Treasury

 

 

Common Stock

Stock ($)

Common Stock ($)

Capital ($)

Deficit ($)

Stock ($)

Total ($)

 

 

 

 

 

 

 

 

BALANCE - JANUARY 1, 2011

6,062,214 

$60,622 

($300,000)

$24,548,644 

($23,881,836)

($684,890)

($257,460)

 

 

 

 

 

 

 

 

  Net loss

  - 

  - 

  - 

  - 

(1,639,793)

  - 

(1,639,793)

  Deemed dividend on extension of stock warrants

  - 

  - 

  - 

132,642 

(132,642)

  - 

  - 

  Cancellation of common stock and Note Receivable on Agreement termination - net

(120,000)

(1,200)

300,000 

(282,310)

  - 

  - 

16,490 

  Extension of stock warrants

  - 

  - 

  - 

26,236 

  - 

  - 

26,236 

  Share-based compensation expense

  - 

  - 

  - 

1,781,842 

  - 

  - 

1,781,842 

  Exercise of stock options

515 

5 

  - 

979 

  - 

  - 

984 

  Exercise of stock warrants

800 

8 

  - 

7 

  - 

  - 

15 

  Purchase of stock warrants

  - 

  - 

  - 

169,765 

(159,764)

  - 

10,001 

  Conversion of debentures to stock

27,028 

270 

  - 

49,690 

  - 

  - 

49,960 

  Issuance of common stock

220,863 

2,209 

  - 

455,661 

  - 

  - 

457,870 

 

 

 

 

 

 

 

 

BALANCE - DECEMBER 31, 2011

6,191,420 

61,914 

  - 

26,883,156 

(25,814,035)

(684,890)

446,145 

 

 

 

 

 

 

 

 

  Net loss

  - 

  - 

  - 

  - 

(1,638,808)

  - 

(1,638,808)

  Deemed dividend on extension of stock warrants

  - 

  - 

  - 

608,610 

(608,610)

  - 

  - 

  Share-based compensation expense

399,963 

4,000 

  - 

1,052,927 

  - 

  - 

1,056,927 

  Exercise of stock warrants

704 

7 

  - 

978 

  - 

  - 

985 

  Issuance of common stock

72,000 

720 

  - 

84,745 

  - 

  - 

85,465 

 

 

 

 

 

 

 

 

BALANCE - DECEMBER 31, 2012

6,664,087 

$66,641 

 $ - 

$28,630,416 

($28,061,453)

($684,890)

($49,286)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

5

N-VIRO INTERNATIONAL CORPORATION

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

Years Ended December 31, 2012 and 2011

 

 

 

 

2012

 

2011

 

Cash Flows From Operating Activities

 

 

 

 

   Net loss

($1,638,808)

 

($1,639,793)

 

   Adjustments to reconcile net loss to net cash from operating activities:

 

 

 

 

      Depreciation and amortization

283,651 

 

539,744 

 

      Amortization of debenture stock discount

16,368 

 

27,773 

 

      Issuance of stock, stock options and warrants for services

1,047,085 

 

2,215,615 

 

      Loss on investment in Mahoning Valley N-Viro

146 

 

24,279 

 

      Provision for bad debts

20,000 

 

0 

 

      Gain on the sale of fixed assets

(152,632)

 

(23,978)

 

      Increase in fair value of warrants issued

(12,196)

 

(732,280)

 

   Changes in Operating Assets and Liabilities

 

 

 

 

      Decrease (increase) in trade receivables

112,812 

 

351,852 

 

      Decrease (increase) in prepaid expenses and other assets

50,445 

 

(3,437)

 

      Increase (decrease) in pension withdrawal liability

411,294 

 

0 

 

      Increase (decrease) in accounts payable and accrued liabilities

(176,034)

 

(426,396)

 

            Net cash (used) provided by operating activities

(37,869)

 

333,379 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

   Proceeds from sale of property and equipment

217,056 

 

56,405 

 

   Increase to notes receivable, net

(17,183)

 

0 

 

   Increases from restricted cash

(671)

 

(1,045)

 

   Purchases of intangible assets

(7,500)

 

0 

 

   Purchases of property and equipment

(8,606)

 

(357,384)

 

            Net cash provided (used) in investing activities

183,096 

 

(302,024)

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

   Borrowings under long-term debt

162,320 

 

418,037 

 

   Borrowings from related party - short-term

0 

 

200,000 

 

   Net (cost) proceeds from issuance of common stock in private placement

(95)

 

96,850 

 

   Proceeds from stock warrant transactions

0 

 

87,021 

 

   Proceeds from stock options exercised

985 

 

984 

 

   Net advances (repayments) on line-of-credit

70,000 

 

(64,000)

 

   Repayments of convertible debentures

0 

 

(265,000)

 

   Principal payments on long-term obligations

(370,310)

 

(497,861)

 

            Net cash used by financing activities

(137,100)

 

(23,969)

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

8,127 

 

7,386 

 

 

 

 

 

 

Cash and Cash Equivalents - Beginning

44,498 

 

37,112 

 

 

 

 

 

 

Cash and Cash Equivalents - Ending

$52,625 

 

$44,498 

 

 

 

 

 

 

Supplemental disclosure of cash flows information:

 

 

 

 

        Cash paid during the year for interest

$110,373 

 

$129,818 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

6

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

**Note 1.**

**Operations and Summary of Significant Accounting Policies**

The following is a summary of certain accounting policies followed in the preparation of these financial statements.  The policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements:

A.

Nature of Business – The Company owns and licenses the N-Viro Process, a patented technology to treat and recycle wastewater sludges and other bio-organic wastes, utilizing certain alkaline by-products produced by the cement, lime, electric utilities and other industries.  Revenue and the related accounts receivable are due from companies acting as independent agents or licensees, principally municipalities.

B.

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

C.

Principles of Consolidation – The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.

D.

Going Concern - 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 $927,000 at December 31, 2012, and has incurred negative cash flow from operating activities for the year ended December 31, 2012.  Moreover, while the Company renewed its line of credit for one year until August 2013, 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.  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 we further modified all outstanding warrants to enhance their exercisability.  In addition, the Company’s operations in Florida, which now represent approximately 97% of the Company’s 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.

E.

Cash and Cash Equivalents – The Company has cash on deposit primarily in one financial institution which, at times, may be in excess of FDIC insurance limits.

For purposes of the statements of cash flows, the Company considers all certificates of deposit with initial maturities of 90 days or less to be cash equivalents.

Restricted cash consists of:  two certificates of deposit and corresponding accrued interest which are held as collateral against the Company's line-of-credit; one certificate of deposit and corresponding accrued interest which is held as collateral with a performance bond on behalf of one of the Company’s licensees; one certificate of deposit and corresponding accrued interest which is held as collateral on behalf of the Florida Department of Agriculture for the Company’s soil distribution license.

F.

Accounts Receivable – The Company extends unsecured credit to customers under normal trade agreements, which require payment within 30 days.  Accounts greater than 90 days past due amounted to $80,106 and $67,344 of receivables for the years ended December 31, 2012 and 2011, respectively.  The Company's policy is not to accrue and record interest income on past due trade receivables.  The Company does bill the customer finance charges on past due accounts and records the interest income when collected.

7

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

**Note 1.**

**Operations and Summary of Significant Accounting Policies (Continued)**

Credit is generally granted on an unsecured basis.  Periodic credit evaluations of customers are conducted and appropriate allowances are established.

Management estimates an allowance for doubtful accounts, which was $90,000 and $70,000 as of December 31, 2012 and 2011, respectively.  The estimate is based upon management’s review of delinquent accounts and an assessment of the Company’s historical evidence of collections.

G.

Property and Equipment – Property, machinery and equipment are stated at cost less accumulated depreciation.  Depreciation has been computed primarily by the straight-line method over the estimated useful lives of the assets.  Generally, useful lives are five to fifteen years.  Leasehold improvements are capitalized and amortized over the lesser of the life of the lease or the estimated useful life of the asset.  Depreciation expense amounted to $269,215 and $514,748 in 2012 and 2011, respectively.  Management has reviewed property and equipment for impairment when events and circumstances indicate that the assets might be impaired and the carrying values of those assets may not be recoverable.  Management believes the carrying amount is not impaired based upon estimated future cash flows.

H.

Intangible Assets – Patent costs and territory rights are recorded at cost and then amortized by the straight-line method over their estimated useful lives (periods ranging from one and one-half to seventeen years; weighted-average amortization periods for patents/related intangibles and territory rights were 14.1 and 14.2 years at December 31, 2012 and 2011, respectively).  Amortization expense amounted to $14,438 and $23,276 in 2012 and 2011, respectively.  Estimated amortization expense, based on these patent costs and territory rights at December 31, 2012, for each of the ensuing five years is as follows: 2013 - $11,000;  2014 - $11,000;  2015 - $11,000; 2016 - $9,000; 2017 - $7,000.  Management has reviewed intangible assets for impairment when events and circumstances indicate that the assets might be impaired and the carrying values of those assets may not be recoverable.

The Company has capitalized the cost of acquiring certain customer licenses and contracts as part of the acquisition of Florida N-Viro on December 31, 2006.  Amortization expense amounted to $3,219 in 2012 and $1,719 in 2011.  Estimated amortization expense, based on these capitalized license and contracts at December 31, 2012, for each of the ensuing five years is as follows:  2013 - $1,700;  2014 - $1,700;  2015 - $1,700; 2016 - $500; 2017 - $-0-.

I.

Revenue Recognition – Facility management revenue and royalty fees are recognized under contracts where the Company or licensees utilize the N-Viro Process to treat sludge, either pursuant to a fixed-price contract or based on volumes of sludge processed.  Revenue is recognized as services are performed.

Alkaline admixture sales, alkaline admixture management service revenue and N-Viro SoilTM revenue are recognized upon shipment.

License and territory fees are generated by selling the right to market or use the N-Viro Process in a specified territory.  The Company's policy is to record revenue for the license agreements when all material services relating to the revenue have been substantially performed, conditions related to the contract have been met and no material contingencies exist.  We do not recognize revenue on any non-domestic license or territory fee contracts until the cash is received, assuming all other tests of revenue recognition are met.  Canada and Israel are excluded from this definition of non-domestic.  Research and development revenue is recognized as work is performed to the contracting entity in accordance with the contract.

The Company records the amount of shipping and handling costs billed to customers as a reduction to cost of sales.  The cost incurred for shipping and handling has been included in the cost of sales.

8

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

**Note 1.**

**Operations and Summary of Significant Accounting Policies (Continued)**

J.

Loss Per Common Share – Loss per common share has been computed on the basis of the weighted-average number of common shares outstanding during each period presented.  For the years ended December 31, 2012 and 2011, the effects of 2,905,981 and 2,924,985 stock options outstanding, respectively, 1,619,585 and 1,444,585 warrants to purchase common stock, respectively, and, debentures that are convertible to 227,500 shares of common stock are excluded from the diluted per share calculation because they would be antidilutive.

K.

Stock Options – The Company records share-based compensation expense using a fair-value based method of measurement that results in compensation costs for essentially all awards of stock-based compensation to employees.  Compensation costs are recognized over the requisite period or periods that services are rendered.

L.

New Accounting Standards – There are no Accounting Standards Updates expected to have a significant effect on the Company’s consolidated financial position or results of operations.

M.

Income Taxes – Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.  Income tax expense is the tax payable or refundable for the current period plus or minus the change during the period in deferred tax assets and liabilities.

The accounting for uncertain tax positions requires the Company to evaluate each income tax position using a two step process which includes a determination as to whether it is more likely than not that the income tax position will be sustained, based upon technical merit and upon examination by the taxing authorities. At December 31, 2012 and 2011, there were no uncertain tax positions that required accrual.  None of the Company’s federal or state income tax returns are currently under examination by the Internal Revenue Service (“IRS”) or state authorities.  However, fiscal years 2009 and later remain subject to examination by the IRS and respective states.

N.

Supplemental Disclosure of Non-Cash Activity:

 

 

2012

 

2011

 

 

 

Newport Coast Securities - value of stock issued on agreement

 $ 104,000 

 

 $            - 

 

 

 

Equiti-trend Advisors, LLC - value of stock issued on agreement

  75,000 

 

  - 

 

 

 

Burnham Hill Consulting - commission not due on cancellation of VC Energy agreement

  - 

 

  18,000 

 

 

 

SAMI - value of stock and warrants issued on public relations agreement

  421,300 

 

  210,307 

 

 

 

Rakgear - value of stock issued on consulting agreement

  - 

 

  73,000 

 

 

 

 

 $ 600,300 

 

 $ 301,307 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

O.

Segment Information – During 2012, 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.

9

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

**Note 2.**

**Balance Sheet Data**

**Property and equipment (at cost):**

 

 

2012

 

2011

 

 

 

Buildings and leasehold improvements

 $ 290,129 

 

 $ 290,129 

 

 

 

Equipment

  2,734,755 

 

  3,169,055 

 

 

 

Furniture, fixtures and computers

  62,683 

 

  63,838 

 

 

 

 

  3,087,567 

 

  3,523,022 

 

 

 

Less accumulated depreciation

  2,093,596 

 

  2,195,702 

 

 

 

 

 $ 993,971 

 

 $ 1,327,320 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Deferred costs:**

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 both of the years ended December 31, 2012 and 2011, the charge to earnings was approximately $101,500.

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 the years ended December 31, 2012 and 2011, the charge to earnings was approximately $95,200 and $99,200, 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 will take a non-cash charge to earnings of $421,300 starting in 2013, over a 36 month period.

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 years ended December 31, 2012 and 2011, the charge to earnings was approximately $99,000 and $223,000, 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 years ended December 31, 2012 and 2011, the charge to earnings was approximately $63,000 and $10,000, respectively.

10

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

**Note 2.**

**Balance Sheet Data (Continued)**

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 ratably during the subsequent three month period for these shares.  In July 2012, 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 of $104,000 ratably during the subsequent three month period.

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 year ended December 31, 2012, the charge to earnings was approximately $60,500.

The following is a summary of Deferred Costs – stock and warrants issued for services as of December 31:

 

 

2012

 

2011

 

 

 

Deferred costs - Rakgear, Inc., less accumulated

 

 

 

 

 

 

amortization (2012 - $73,000;  2011 - $10,139)

 $            - 

 

 $ 62,861 

 

 

 

 

 

 

 

 

 

 

Deferred costs - SAMI, less accumulated

 

 

 

 

 

 

amortization (2012 - $401,664;  2011 - $204,931)

  609,836 

 

  385,269 

 

 

 

 

 

 

 

 

 

 

Deferred costs - Equiti-trend Advisors, less accumulated

 

 

 

 

 

 

amortization (2012 - $60,484;  2011 - $-0-)

  14,516 

 

  - 

 

 

 

 

 

 

 

 

 

 

Deferred costs - SLD Capital, less accumulated

 

 

 

 

 

 

amortization (2012 - $334,400;  2011 - $235,518)

  - 

 

  98,882 

 

 

 

 

 $ 624,352 

 

 $ 547,012 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Intangible and Other Assets, Net:**

The following is a summary of Intangible and Other Assets, Net as of December 31:

 

 

2012

 

2011

 

 

 

Patents and related intangibles, less accumulated

 

 

 

 

 

 

amortization (2012 - $115,127;  2011 - $103,908)

 $ 53,362 

 

 $ 64,581 

 

 

 

 

 

 

 

 

 

 

Customer list, less accumulated amortization

 

 

 

 

 

 

(2012 - $58,584;  2011 - $55,365)

  11,672 

 

  7,390 

 

 

 

 

 

 

 

 

 

 

Other

  13,935 

 

  19,829 

 

 

 

 

 $ 78,969 

 

 $ 91,800 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

**Note 2.**

**Balance Sheet Data (Continued)**

**Accrued liabilities:**

 

 

2012

 

2011

 

 

 

Accrued payroll and employee benefits

 $ 31,818 

 

 $ 29,062 

 

 

 

Sales tax payable

  82 

 

  - 

 

 

 

Deferred compensation payable

  38,440 

 

  - 

 

 

 

Interest payable

  11,003 

 

  10,735 

 

 

 

 

 $ 81,343 

 

 $ 39,797 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Note 3.**

**Pledged Assets, Line-of-Credit and Long-Term Debt**

During 2012 the Company renewed the 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 December 31, 2012) plus 0.75%, but in no event less than 5.00%, and secured by a first lien on all the Company’s assets (except equipment).  In August 2012, it was renewed with a new maturity date of August 15, 2013.  Two certificates of deposit totaling $141,805 from the Bank are held as a condition of maintaining the line of credit.  At December 31, 2012, the Company had $30,000 of borrowing capacity under the credit facility.
Long-term debt at December 31, 2012 and 2011 is as follows:

 

 

2012

 

2011

 

 

 

Notes payable - banks

 $ 130,044 

 

 $ 209,527 

 

 

 

Notes payable - equipment vendors

  125,872 

 

  279,379 

 

 

 

Pension plan withdrawal liability

  411,294 

 

  - 

 

 

 

Note payable - stockholder

  25,000 

 

  - 

 

 

 

Convertible debentures, net of discount of $8,184 in 2012 and $24,553 in 2011

  446,816 

 

  430,447 

 

 

 

 

  1,139,026 

 

  919,353 

 

 

 

Less current maturities

  662,721 

 

  367,190 

 

 

 

 

 $ 476,305 

 

 $ 552,163 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During 2012, the Company borrowed a total of $137,320 from two lenders to purchase insurance policies for general, property and directors & officers’ insurance coverage during the year.  A total of two term notes were issued, ranging from 6% to 6.6% interest for a term not more than one year, monthly payments totaling $14,122 and each are unsecured.  The total amount owed on these notes as of December 31, 2012 was approximately $41,400 and these notes are expected to be paid in full on the applicable maturity date, the last of which is August 2013.

From the beginning of 2006 through 2012, the Company has borrowed a total of $1,677,100 from ten lenders to purchase processing and automotive equipment.  As of December 31, 2012, a total of eight term notes are outstanding, ranging from 6.2% to 10.9% interest for terms ranging three to five years, monthly payments totaling approximately $18,000 and all secured by equipment.  The total amount owed on all equipment-secured notes as of December 31, 2012 was approximately $212,000 and all notes are expected to be paid in full on the applicable maturity date, the last of which is in March 2016.

12

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

**Note 3.**

**Pledged Assets, Line-of-Credit and Long-Term Debt (Continued)**

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 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 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 fifteen investors holding Debentures totaling $365,000 elected to replace them with new ones that now mature at June 30, 2013 but are not payable until the 10th business day of July.  All other features of the “expired” Debentures remained the same in the replacement ones, except for the new maturity date.  Of the four investors totaling $355,000 who did not replace their existing Debentures with new ones, two investors totaling $215,000 had their Debentures repaid; one investor converted $50,000 into unregistered common stock (at June 30, 2011) and one holding $90,000 of Debentures has not made a final decision.  As of December 31, 2012, the Company held $455,000 of Debentures.

Because the fair market value of the Company’s 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 twelve months ended December 31, 2012 and 2011 was $-0- and $52,326, respectively.

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 is required to be amortized as a period expense over the next eight quarters the Debentures are scheduled to be outstanding.  Amortization expense for each of the twelve months ended December 31, 2012 and 2011 was $16,368 and $8,184, respectively.

Approximate aggregate maturities of long-term debt for the years ending December 31 are as follows:  2013 - $663,000;  2014 - $75,000;  2015 - $52,000;  2016 - $29,000;  2017 - $18,000.

 

13

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

 

**Note 4.**

**Related Party Transactions (Continued)**

In August 2011, the Company borrowed $200,000 with a Promissory Note payable to a related party 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.  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, 2013, and is now due April 30, 2013.  The Company expects to extend the Note on or before the due date but pay the Note in full during 2013.

During the year ended December 31, 2010 the Company advanced funds for operating capital of $9,000 to its joint venture limited liability company, Mahoning Valley N-Viro.  Mahoning Valley N-Viro is owned 50% by the Company and 50% by SouthSide Environmental Group of Struthers, Ohio.  As no financial activity occurred in Mahoning Valley N-Viro during 2010 and 2011 and the outlook unlikely of having future operations, the Company determined that the total $24,325 loaned by the Company to date would not be repaid and wrote down the investment to a net realizable value of zero as of December 31, 2011.

Also during 2012 and 2011, the Company paid Terri Kasmoch, the spouse of President and Chief Executive Officer Timothy Kasmoch, as an employee for business development, web site and company media marketing and stock promotion efforts for the Company.  From February 2012 through her ending employment date of October 31, 2012, Ms. Kasmoch participated with the executives of the Company in reducing the payroll paid her by 10% and deferring this to a future date.  Effective November 1, 2012, Ms. Kasmoch resigned from employment from the Company.

During 2011, the Company rented and purchased equipment from, and contracted for, repair services with Tri-State Garden Supply dba Gardenscape, a company owned and managed by the extended family of the Company’s Chief Executive Officer, Timothy Kasmoch.

The following table summarizes these payments for 2012 and 2011 and the balance to each of any monies owed as of December 31, 2012:

 

Payee

Year

Gross Payroll

Rental, Equipment + Repairs

**Total**

*Account payable bal. at December 31*

 

Terri Kasmoch

2012

 $43,333 

 $-  

**$43,333 **

*** $3,900 ***

 

Terri Kasmoch

2011

  52,000 

  - 

**52,000 **

*  - *

 

Gardenscape

2011

  - 

2,714 

**2,714 **

*  - *

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Note 5.**

**Equity Transactions**

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 at a price of $2.50 per share, issued VC Energy 200,000 warrants exercisable at $2.75 per share, and also granted VC Energy an option to acquire another 400,000 shares of the Company’s unregistered common stock at a price of $2.50 per share, and 400,000 warrants exercisable at $2.75 per share.

In September 2010, the Company executed Amendment Number 1, effective September 15, 2010 (the “Amendment”) to the Purchase Agreement with VC Energy.  The purpose of the Amendment was to modify certain of the purchase terms in the Purchase Agreement, and VC Energy exercised its option to 

14

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

**Note 5.**

**Equity Transactions (continued)**

purchase 200,000 shares of the Company’s common stock for $500,000 which VC Energy paid for by delivering its unsecured promissory note to the Company for $500,000, payable in installments over a 12 month period, with the first $200,000 of such installments due bi-weekly between September 30, 2010 and December 30, 2010 and the final $300,000 due September 15, 2011.  The promissory note provided for acceleration in the event of default and a default interest rate of 8% per annum.  The Company also delivered 200,000 warrants to purchase shares of its common stock at an exercise price of $2.50 per share.  Under the Amendment, the Company transferred all 200,000 shares and 200,000 warrants to an Escrow Agent, and the shares and warrants were to be released ratably to VC Energy as installments payments due the Company were received.  VC Energy made all installment payments due through December 2010, and the escrow agent delivered 80,000 shares and 80,000 warrants to VC Energy, with the remaining shares and warrants continuing to be held by the escrow agent.  In addition, VC Energy’s option to purchase the remaining 200,000 shares of the Company’s common stock was extended to December 31, 2010 and then a second time to March 1, 2011, on the same terms as the original Purchase Agreement.  VC Energy did not exercise the purchase option for the additional 200,000 shares on or before March 1, 2011.  At each extension date, the Company recorded a deemed dividend for the increase in value of the purchase option as a reduction to Accumulated Deficit and an increase to the Additional Paid In Capital accounts.

In August 2011, the Company and VC Energy signed a Termination Agreement and terminated the License and Development Agreement dated June 29, 2010, the Promissory Note dated September 15, 2010 and the Escrow Agreement dated September 15, 2010.  Included in these agreements was VC Energy’s option to purchase the unpaid balance of 120,000 shares of the Company’s common stock for $300,000.  All other agreements between the Company and VC Energy remain in force, except to the extent the provisions contained in them are inconsistent with the terms and conditions of the Termination Agreement.  In September 2011, the Company cancelled the 120,000 shares of common stock that were returned by operation of the Termination Agreement.

In April 2012, the Company and VC Energy terminated the remaining agreements in effect, and VC Energy waived certain provisions regarding the remaining warrants held, including the removal of the “down-round” provision, and subsequently assigned those warrants to other, non-VC Energy holders.  As a result, the Company was no longer be required to account for the future changes in the Company’s 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 the 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 December 31, 2012, 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 twelve months ended December 31, 2012 and 2011, the Company recorded a gain of $12,196 and $732,280, respectively, on the revaluation and partial cancellation from the two issuances of the warrants to the end of the period. which include the gain from the cancellation of 120,000 warrants as a result of the Termination Agreement.

In 2010 through 2012, the Company issued stock warrants and shares of unregistered Common Stock to Strategic Asset Management, Inc., (“SAMI”), as compensation for services rendered by SAMI to the Company under a Financial Public Relations Agreement, effective as of December 15, 2010.  More details of this Agreement are contained in Note 2.

15

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

**Note 5.**

**Equity Transactions (continued)**

In November 2011, the Company issued 50,000 shares of unregistered common stock to Rakgear, Inc. for business consulting services.  More details of this Agreement are contained in Note 2.

In February 2012, the Company issued 15,000 shares of unregistered common stock to Financial Insights, for investor relations services.  In July 2012, Financial Insights returned all of these shares of common stock to the Company as part of an agreement.  More details of this Agreement are contained in Note 2.

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.  More details of this Agreement are contained in Note 2.

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 over a six month period.  More details of this Agreement are contained in Note 2.

During 2011 we sold a total of 70,863 shares of unregistered restricted stock to five non-beneficial owners for total gross cash proceeds of $112,400.  These proceeds were all used for operating expenses.  Simultaneously and subject to the same terms and conditions, we issued a total of 64,263 warrants to two non-beneficial owners to acquire shares of our common stock at a price above the purchase price each owner paid for our common stock, which was the fair market value of the stock on the date of each transaction.  In all instances the shares and the warrants issued and sold were in a private offering transaction pursuant to an exemption under Section 4(2) of the Securities Act of 1933 for transactions by an issuer not involving a public offering.

Also during 2011, the Convertible Debentures matured, fifteen investors elected to replace their Debentures with new ones, two investors had theirs repaid and one investor converted $50,000 into 25,000 shares of unregistered common stock.  The amount of Debentures outstanding at the end of 2012 and 2011 was $455,000, convertible at $2.00 per share or 227,500 shares.  More details on these transactions can be found in Note 3.

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 2011 from the 2010 Plan at the approximate market value of the stock at date of grant, as defined in each of the plans.

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 is taking a charge to earnings totaling approximately $2,358,000 through March 2014.  For each of the years ended December 31, 2012 and 2011, this charge was $471,539.

16

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

**Note 5.**

**Equity Transactions (continued)**

In August 2011, the Company granted 500,000 stock options to its Chief Executive Officer, Timothy Kasmoch.  The options are for a period of ten years, are pursuant to the 2010 Plan, are exercisable at $1.63 and vest immediately.  To reflect the value of the stock options granted, the Company took an immediate charge to earnings during the third quarter of 2011 totaling approximately $720,000.

More information on these equity transactions is contained in this Form 10-K under Item 11, “Executive Compensation”.

During the year ended December 31, 2012, the Company granted stock options totaling 45,000 shares, for 25,000 and 20,000 shares in April and November, respectively, exclusive of the officers, to all outside directors.  All options granted are for a period of ten years.  The options became fully vested six months after the date of grant, and were priced, pursuant to the 2010 Plan, at $1.12 and $0.88, respectively, for a total expense of approximately $47,000, expensed ratably in 2012 and 2013 over each subsequent six-month period.  More information on these equity transactions is contained in this Form 10-K under Item 10, “Directors, Executive Officers and Corporate Governance”.

During the year ended December 31, 2011, the Company granted stock options totaling 180,000 shares, exclusive of the officers, to all outside directors.  All options granted are for a period of ten years.  The options became fully vested six months after the date of grant, and were priced, pursuant to the 2010 Plan, at $1.78 for a total expense of approximately $321,000, expensed ratably and fully in 2011 over the subsequent six-month period.  More information on these equity transactions is contained in this Form 10-K under Item 10, “Directors, Executive Officers and Corporate Governance”.

The following summarizes the stock options activity for the years ended December 31, 2012 and 2011:

 

 

2012

 

 

2011

 

 

 

 

Shares

Weighted Average Exercise Price

 

Shares

Weighted Average Exercise Price

 

 

Outstanding, beginning of year

2,924,985 

 $ 2.44 

 

2,273,300 

 $ 2.67 

 

 

Granted

45,000 

 $ 1.01 

 

680,000 

 $ 1.67 

 

 

Exercised

(704)

 $ 1.42 

 

(515)

 $ 1.94 

 

 

Expired/forfeited during the year

(63,300)

 $ 2.50 

 

(27,800)

 $ 1.71 

 

 

Outstanding, end of year

  2,905,981 

 $ 2.42 

 

  2,924,985 

 $ 2.44 

 

 

 

 

 

 

 

 

 

 

Eligible for exercise at end of year

  2,519,981 

 $ 2.32 

 

  2,360,985 

 $ 2.26 

 

 

 

 

 

 

 

 

 

 

Weighted average fair value per option for

 

 

 

 

 

 

 

options granted during the year

 $ 1.01 

 

 

 $ 1.67 

 

 

 

 

 

 

 

 

 

 

 

Options expected to vest over the life of the Plan

  2,905,981 

 

 

  2,924,985 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

**Note 5.**

**Equity Transactions (continued)**

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 term and the expected forfeiture rate of the option.  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:

 

 

Year Ended December 31,

 

 

2012

2011

Expected dividend yield

0.00%

0.00%

Weighted average volatility

2.5%

2.0%

Risk free interest rate

1.6 - 2.0%

2.1 - 3.2%

Expected term (in years)

7 

5 

 

 

 

 

In August 2011, an automatic extension of time was granted to certain warrant holders of record of N-Viro International Corporation warrants to exercise their respective warrants.  All other terms of the warrant remained in place, other than the expiration date.

In March 2012, the Company automatically extended the expiration date of the warrants by one (1) year to two warrant holders, 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 both were extended to March 2013.  Additional information is available in the Form 8-K filed by the Company on March 27, 2012.

In April 2012, the Company modified all Company warrants whose expiration date was before December 31, 2015, by extending that expiration date to December 31, 2015, and to modify all Company warrants, regardless of their expiration date, by reducing the exercise price to $1.00.  All other terms and conditions of each class of warrant remain unchanged.  Additional information is available in the Form 8-K filed by the Company on April 19, 2012.

For all of the extensions, the incremental fair value associated with the extension of the warrant expiration dates has been determined using the Black-Scholes model and has been recorded as a deemed dividend to common stockholders in the accompanying Statement of Stockholders’ Equity (Deficit).  For the years ended December 31, 2012 and 2011, the deemed dividend was $608,610 and $132,642, respectively.

**Note 6.**

**Revenue and Major Customers**

For the years ended December 31, 2012 and 2011, the Company’s largest customer accounted for approximately 33% and 22% of our revenues, respectively.  For the years ended December 31, 2012 and 2011, the top three customers accounted for approximately 60% and 55%, respectively, of the Company’s revenues.  Florida operations accounted for approximately 94% and 80% of consolidated revenue during the years ended December 31, 2012 and 2011, respectively.  The accounts receivable balance due (which are unsecured) for these three Florida customers at December 31, 2012 and 2011 was approximately $124,000 and $286,000, respectively.

18

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

**Note 6.**

**Revenue and Major Customers (continued)**

The sludge processing agreement with the City of Toledo, Ohio, who was the Company’s largest customer for many years through 2010 and represented approximately 17% of the consolidated revenues in 2011, was not renewed at the end of 2011.  The City of Toledo’s failure to renew that agreement has had a material adverse effect on the Company’s business, financial conditions and results of operations.  Also at the end of 2011, the Company was notified by a Florida customer, Seminole County Utilities, who represented $353,000, or approximately 6% of the 2011 consolidated gross revenue, they were terminating the agreement, effective January 2012.  Another Florida customer, Orange County Utilities, provided approximately $367,000 or 7% of the consolidated gross revenue in 2011, but the agreement began December 2010 and ended March 2011.

Additionally, economic considerations have made the supply of admixtures used in our processes more difficult to acquire due to coal-burning facilities operating less or not at all, primarily from the decrease in natural gas prices in the commercial marketplace.

A substantial portion of the Company's revenue is derived from services provided under contracts and agreements with existing licensees.  Some of these contracts, especially those contracts with large municipalities, provide for termination of the contract by the customer after giving relatively short notice (in some cases as little as ten days).  In addition, some of these contracts contain liquidated damages clauses, which may or may not be enforceable in the event of early termination of the contracts.  If one or more of these contracts are terminated prior to the expiration of its term, and 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 7.**

**Commitments and Contingencies**

On March 17, 2010, the Company and Timothy R. Kasmoch, the President and Chief Executive Officer, entered into an Employment Agreement for a five-year term.  Mr. Kasmoch is to receive an annual base salary of $150,000, subject to an annual discretionary increase.  In addition, Mr. Kasmoch is eligible for an annual cash bonus and was granted stock options from the Company’s Second Amended and Restated 2004 Stock Option Plan.  Generally, the Agreement may be terminated by the Company with or without cause or by the Employee for any reason.

On March 17, 2010, the Company and Robert W. Bohmer, the Executive Vice President and General Counsel, entered into an Employment Agreement for a five-year term.  Mr. Bohmer is to receive an annual base salary of $150,000, subject to an annual discretionary increase.  In addition, Mr. Bohmer is eligible for an annual cash bonus and was granted stock options from the Company’s Second Amended and Restated 2004 Stock Option Plan.  Generally, the Agreement may be terminated by the Company with or without cause or by the Employee for any reason.

On March 17, 2010, the Company and James K. McHugh, the Chief Financial Officer, Secretary and Treasurer, entered into an Employment Agreement for a five-year term.  Mr. McHugh is to receive an annual base salary of $125,000, subject to an annual discretionary increase.  In addition, Mr. McHugh is eligible for an annual cash bonus and was granted stock options from the Company’s Second Amended and Restated 2004 Stock Option Plan.  Generally, the Agreement may be terminated by the Company with or without cause or by the Employee for any reason.

19

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

**Note 7.**

**Commitments and Contingencies (continued)**

The Company’s executive and administrative offices are located in Toledo, Ohio.  Through April 2011, the Company operated under a month to month lease at its former location.  The total rental expense for this former location included in the statements of operations for the year ended December 31, 2011 was approximately $12,800.  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 for this current location included in the statements of operations for the year ended December 31, 2012 and 2011 is approximately $38,600 and $15,600, 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 the years ended December 31, 2012 and 2011 is $12,000 and $23,000, 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 year ended December 31, 2012 and 2011 is $30,000.

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 years ended December 31, 2012 and 2011 is $48,000.

The Company also leased processing equipment at its Florida location which began in February 2008 under a three-year lease.  The total rental expense included in the statements of operations for the years ended December 31, 2012 and 2011 is approximately $-0- and $3,900, respectively.  In February 2011, the Company purchased the equipment through a financing arrangement with an equipment leasing company.

Management believes that all of the Company’s 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.

20

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

**Note 8.**

**Income Tax Matters**

The composition of the deferred tax assets and liabilities at December 31, 2012 and 2011 is as follows:

 

 

2012

 

2011

 

 

 

Gross deferred tax liabilities:

 

 

 

 

 

 

     Property and equipment and intangible assets

($     48,700)

 

($     19,200)

 

 

 

Gross deferred tax assets:

 

 

 

 

 

 

     Loss carryforwards

4,795,300 

 

4,350,300 

 

 

 

     Loss (gain) on market price of derivatives

  - 

 

4,100 

 

 

 

     Section 754 basis step up

85,700 

 

107,100 

 

 

 

     Allowance for doubtful accounts

30,600 

 

23,800 

 

 

 

     Other

500 

 

500 

 

 

 

 

 

 

 

 

 

 

Less valuation allowance

(4,863,400)

 

(4,466,600)

 

 

 

 

 

 

 

 

 

 

 

 $              - 

 

 $              - 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The income tax provisions differ from the amount of income tax determined by applying the U.S. Federal income tax rate to pre-tax income from continuing operations for the years ended December 31, 2012 and 2011 and are as follows:

 

 

2012

 

2011

 

Computed "expected" tax credit

($   557,200)

 

($   557,500)

 

State taxes, net of federal tax benefit

  - 

 

  - 

 

(Decrease) increase in income taxes resulting from:

 

 

 

 

     Change in valuation allowance

396,800 

 

171,800 

 

     Nondeductible stock options and warrants

174,800 

 

568,400 

 

     Derivative adjustment - permanent

  - 

 

(205,400)

 

     Other

(14,400)

 

22,700 

 

 

 

 

 

 

 

 $                - 

 

 $               - 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The net operating losses available at December 31, 2012 to offset future taxable income total approximately $14,100,000 and expire principally in years 2018 - 2032.  Approximately $435,000 will expire if not used to offset taxable income for the 2013 tax year.

21

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

**Note 9.**

**Fair Value Measurements and Disclosures**

The Company has adopted the provisions of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) related to nonfinancial assets and liabilities on a prospective basis.  ASC820 establishes the authoritative definition of fair value, sets out a framework for measuring fair value and expands the required disclosures about fair value measurement.  The valuation techniques required by ASC 820 are based on observable and unobservable inputs using the following three-tier hierarchy:

·

Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

·

Level 2 – Inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or inputs that are observable for assets or liabilities, either directly or indirectly, through market corroboration.

·

Level 3 – Inputs are unobservable inputs based on the Company’s own assumptions.

The following table summarizes the basis used to measure assets and liabilities at fair value on a recurring basis in the balance sheet:

 

 

Level 1

Level 2

Level 3

**Total**

 

 

 

 

 

 

 

 

 as of December 31, 2012

 

Warrants

  - 

  - 

  - 

**  - **

 

 

 

 

 

 

 

 

 as of December 31, 2011

 

Warrants

  - 

  - 

($12,196)

**($12,196)**

 

 

 

 

 

 

 

 

 

 

 

 

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 assets for the year ended December 31, 2012:

Balance, beginning of year

($12,196)

 

 

Gain on market price change of warrants issued

12,196

 

 

Balance, end of year

$        -0-

**Note 10.**

**Subsequent Events**

In January 2013, the Company extended the $200,000 Promissory Note payable to a related party of Timothy Kasmoch, the Company’s President and Chief Executive Officer, for an additional three months.  Additional details of this Note are provided in Note 4, Related Party Transactions.

In January 2013, the Company contracted with Webracadabra Internet Works, LLC, dba Oregon Resource Innovations, for financial consulting services to be performed for six months, and issued 70,000 shares of unregistered common stock.  To reflect the entire value of the stock issued, the Company expects to take a non-cash charge to earnings of $70,000 ratably over the subsequent six months through July 2013, the ending date of the agreement.

22

N-VIRO INTERNATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

**Note 10.**

**Subsequent Events (continued)**

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 April 2013, the Company issued 150,000 shares of unregistered common stock and 150,000 warrants to purchase unregistered common stock to Rakgear, Inc., for financial consulting services to be performed for one year.  To reflect the entire value of the stock and warrants issued, the Company expects to take a non-cash charge to earnings of approximately $488,000 ratably over the subsequent 12 months through March 2014, the ending date of the agreement.

In February 2013, the Company’s Board of Directors received a letter from counsel on behalf of one of our stockholders, 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 interplay between 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 anticipate the process of reviewing the awards will be complete in April or May 2013, and a satisfactory resolution will be reached avoiding any potential legal proceedings.  If the stockholder elects to proceed even after the Special Committee and the Board conclude the process outlined above, in that instance the Company would vigorously defend against such action.

23

**Item 9.**

**Changes in and Disagreements with Accountants on Accounting and Financial Disclosure**

None

**Item 9A.**

**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, 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.

**Management’s Annual Report on Internal Control over Financial Reporting**

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as set forth in Internal Control - Integrated Framework.  Based on our evaluation, our principal executive officer and our principal financial officer concluded that our internal controls over financial reporting were not effective as of December 31, 2012 for the reasons described below.

23

We lack personnel in accounting and financial staff to sufficiently monitor and process financial transactions in an efficient and timely manner.  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 lacked sufficient technical expertise, reporting standards and written policies and procedures.  Specifically, controls were not effective to ensure that significant non-routine transactions, accounting estimates, and other adjustments were appropriately reviewed, analyzed and monitored by competent accounting staff on a timely basis.

We continue to develop and implement a remediation plan to address the material weakness.  To date, our remediation efforts have included adoption of an expense reimbursement policy and the hiring of an employee to assist in the financial area of our business.  However, due to our continuing lack of financial resources to hire and train accounting and financial personnel, we have not yet fully remedied this material weakness.

During the quarter ended December 31, 2012, there were no material changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

While we are not aware of any material errors to date, our inability to maintain the adequate internal controls may result in a material error in our financial statements.  Further, because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements.  It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met.  In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

This annual report does not include an audit or attestation report of our registered public accounting firm regarding our internal control over financial reporting because the attestation report requirement has been removed for “smaller reporting companies” under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

**Item 9B.**

**Other Information**

None

24

**PART III**

**Item 10.**

**Directors, Executive Officers and Corporate Governance**

**DIRECTORS OF THE COMPANY**

Currently the Board is currently composed of three Class I Directors: Carl Richard, Joseph H. Scheib and Mark D. Hagans; and three Class II Directors: James H. Hartung, Timothy R. Kasmoch and Thomas L. Kovacik (whose terms will expire upon the election and qualification of directors at the annual meetings of stockholders to be held in 2013 and 2014, respectively).  At each annual meeting of stockholders, directors will be elected for a full term of two years to succeed those directors whose terms are expiring.

The following table sets forth the names and ages of our directors.

Name

Age

Position

Mark D. Hagans

46

Class I Director*

James H. Hartung

70

Class II Director, Chairman of the Board

Timothy R. Kasmoch

51

Class II Director, President and Chief Executive Officer

Thomas L. Kovacik

65

Class II Director

Carl Richard

86

Class I Director*

Joseph H. Scheib

56

Class I Director*

_____________

* Directors with terms expiring in 2013.

**Mark D. Hagans** is an attorney and partner with the law firm of Plassman, Rupp, Hagans & Newton, of Archbold, Ohio, and his practice focuses on corporation, taxation and banking law.  Mr. Hagans serves on numerous Boards of directors, including the Fulton County Health Center, where he is presently the Treasurer and chair of the Finance Committee.  Mr. Hagans earned his law degree from the University of Toledo.  Mr. Hagans has served as our director since December 2006 and is a member of the Board's Audit, Finance and Technology Committees.  Mr. Hagans’ experience as a lawyer and businessman enables him to bring valuable resources to the Board.

**James H. Hartung** is the former President and Chief Executive Officer of the Toledo-Lucas County (Ohio) Port Authority, a position he held from 1994 until 2008.  Mr. Hartung has served as our Director since January 2006 and is a member of the Board's Compensation and Nominating Committees. ** **Mr. Hartung presently also serves as the Chairman of the Board/Executive Vice-President at Seasnake World Wide Marketing LLC, a marketing concern commercializing the Seasnake shipping system for the marine transportation of liquid, dry bulk, break-bulk and inter-modal container cargo; and is actively engaged in maritime/economic development consulting in domestic and international markets for Port Development Solutions, LLC, where he serves as Managing Director/Partner.  Mr. Hartung’s qualifications to serve as a director and our Chairman of the Board consist of several years experience as a businessman, as an organizational leader and community organizer, and in dealings with local government and related agencies that enable him to bring valuable insights to the Board.

**Timothy R. Kasmoch** has been our President and Chief Executive Officer since February 2006 and a director since January 2006.  Previously, Mr. Kasmoch held various positions including Vice President of a privately held soil management company, that provided trucking and equipment services to us in the past, where he led the composting division to extract the highest value possible from organic feedstock into marketable products for the lawn and garden industry and helped them achieve record expansion in the 1990’s.  Mr. Kasmoch pursued the acquisition of an international soil mining company and as their President, focused on creating value through continuous improvements that balanced financial measures with quality and customer service.  Mr. Kasmoch is a member of the Board’s Finance and Technology Committees.  His qualifications to serve as our director consist of being active in the area of soil management and conservation for over twenty years and bringing extensive experience in 

25

environmental management, operations and strategic planning.  He is the only “insider” on the Board and strongly encourages open communication with all Company stakeholders.

**Thomas L. Kovacik** is the Executive Director of Transportation Advocacy Group of Northwest Ohio (“TAGNO”), a strategic planning organization working with local and Ohio transportation and economic development officials, and the President of Kovacik Consulting, a business consulting company.  Mr. Kovacik was previously employed by us from 1992 to 1995 as President of Great Lakes N-Viro, at the time one of our divisions.  Mr. Kovacik has also held various positions with local government, including Chief Operating Officer and Safety Director for the City of Toledo, utilities and environmental companies, and earned a masters degree from Bowling Green State University in Geochemistry.  Mr. Kovacik has served as our Director since December 2006, and is a member of the Board’s Compensation and Technology Committees.  Mr. Kovacik’s qualifications to serve as a director of the Company consist of his experience in the environmental, government and utilities industries, and his prior position with us as a divisional president.  His strength in strategic planning and transactional experience offers a unique perspective to the Board.

**Carl Richard**is the former Executive Vice-President of P.R. Transportation, a trucking company that was located in Toledo, Ohio, and was a consultant to us from January 2006 to April 2007.  Mr. Richard served as Vice-President of C.A. Transportation from 1988 through 2000 and as Vice-President of R.O.S.S. Investments, a real estate holding company, from 1980 through 2000.  Mr. Richard has served as our director since December 2004 and is a member of the Board’s Nominating Committee.  Mr. Richard’s qualifications to serve as a director of the Company consist of his extensive experience in the transportation and trucking industry.

**Joseph H. Scheib** has been the Controller for Verity Financial Group, Inc., a holding company for Verity Asset Management, Inc. and Verity Investments, Inc., a Registered Investment Advisor and a Registered Broker-Dealer, respectively, since June 2011.  Mr. Scheib was the Chief Financial Officer of Broad Street Software Group, a comprehensive software technology company located in Edenton, North Carolina, a position he held from 2003 until 2010.  From May 2000 until February 2003, Mr. Scheib was the Financial Operation Principal/Compliance Officer of Triangle Securities, LLC of Raleigh, North Carolina, an asset management, brokerage and investment banking firm.  Mr. Scheib is a graduate of East Carolina University with a degree in accounting.  Mr. Scheib has served as our Director since December 2004, and is a member of the Board’s Audit, Finance and Nominating Committees.  Mr. Scheib’s qualifications to serve as a director of the Company consist of his strong financial and asset management experience and serving the Company in a financial oversight role as the Chair of the Audit Committee.  Given his extensive knowledge and experience in finance, Mr. Scheib has been determined to be an audit committee financial expert by the Board.

**Key Relationships**

None

**CORPORATE GOVERNANCE AND BOARD MATTERS**

**Our Board of Directors**

Our business, property and affairs are managed under the direction of our Board.  We have determined that the Company’s interests are best served by having a Chairman of the Board who is independent of the management of the Company because it is our view this inherently strengthens board independence in dealing with issues that closely involve management.  Our Chief Executive Officer has responsibility for setting our strategic direction and the day-to-day leadership and performance, while the Chairman of the Board has a greater focus on long-range Company goals and plans and governance of our Board of Directors.  This balance between the two positions enables Mr. Kasmoch to focus on the operational and strategic challenges we presently face, with Mr. Hartung providing board leadership on matters of governance and management oversight.

Our Board, as a whole, has the responsibility for risk oversight of management.  The role of our Board of Directors is to oversee the President and Chief Executive Officer, the Executive Vice President and the Chief 

26

Financial Officer in the operation of the Company, including management's establishment and implementation of appropriate practices and policies with respect to areas of potentially significant risk to us.  Our Board considers risks to the Company as part of the strategic planning process and thorough review of compliance issues in committees of our Board, as appropriate.  While the Board has the ultimate oversight responsibility for such risk management process, various committees of the Board are structured to oversee specific risks in the areas covered by their respective assignments such as audits or compensation.  In addition, our Board may retain, on such terms as determined by the Board and in its sole discretion, independent legal, financial and other consultants and advisors to advise and assist the Board in fulfilling its oversight responsibilities.  Currently, there are no such consultants in any category assisting or advising the Company.
Management is responsible for N-Viro’s day-to-day risk management, and the entire Board’s role is to engage in informed oversight.  Our Chief Executive Officer is a member of the Board of Directors, and our Chief Financial Officer and Executive Vice President/General Counsel regularly attend Board meetings, which helps facilitate discussions regarding risk between the Board and our senior management, as well as the exchange of risk-related information or concerns between the Board and the senior management.  The Board believes Mr. Kasmoch’s service as Chief Executive Officer and on the Board is appropriate because it bridges a critical gap between our management and the Board, enabling the Board to benefit from management’s perspective on our business while the Board performs its oversight function.

The Company’s philosophy about diversity among its Board members is discussed below under “Nominating Committee.”

**Meetings of the Board of Directors**  

Our Board held six meetings during 2012, consisting of two regular meeting and four special meetings.  Each director attended 100% of the aggregate number of meetings held by the Board of Directors and the Committees of the Board of Directors on which he served, except Mr. Scheib who did not attend one of the regular Board meetings.  It is the policy of the Company that members of the Board attend the annual stockholder meeting.  Failure to attend the annual stockholder meeting without good reason is a factor the Nominating Committee and Board will consider in determining whether or not to renominate a current Board member.  All members of the Board serving at the time attended the 2012 Annual Meeting, except Mr. Scheib.

**Shareholder Communications with the Board**

We encourage stockholder communications with directors.  Stockholders may communicate with a particular director, all directors or the Chairman of the Board by mail or courier addressed to him or the entire Board in care of James K. McHugh, Corporate Secretary, N-Viro International Corporation, 2254 Centennial Road, Toledo, OH  43617.  All correspondence should be in a sealed envelope marked “Confidential” and will be forwarded unopened to the director as appropriate.

**Board Independence**

Although we are not subject to the listing requirements of any stock exchange, we are committed to a board in which a majority of our members consist of independent directors, as defined under the NASDAQ rules.  The Board has reviewed the independence of its members, applying the NASDAQ standards and considering other commercial, legal, accounting and familial relationships between the directors and us.  The Board has determined that all of the directors and director nominees are independent other than Mr. Kasmoch, who is not an independent director by virtue of his current position as our President and Chief Executive Officer.

**Code of Ethics**

We have adopted a Code of Ethics which covers the Chief Executive Officer and Chief Financial Officer, which is administered and monitored by the Audit Committee of the Board.  A copy of the Code of Ethics is attached as Exhibit 14.1 to this Annual Report on Form 10-K for the year ended December 31, 2012, and is posted on our web site at www.nviro.com.

27

**Committees of the Board of Directors**

The Board has the following standing committees:  the Audit Committee, the Compensation Committee, the Finance Committee, the Nominating Committee and the Technology Committee.  The composition and function of each Committee is set forth below:

**Director**

**Audit**

**Compensation**

**Nominating**

**Finance**

**Technology**

Mark D. Hagans

X

 

 

X*

X

James H. Hartung

 

X

X

 

 

Timothy R. Kasmoch

 

 

 

X

X*

Thomas L. Kovacik

 

X*

 

 

X

Carl Richard

 

 

X

 

 

Joseph H. Scheib

X*

 

X*

X

 

*  Committee Chair

**Audit Committee**

Our Audit Committee consisted of Messrs. Scheib and Hagans.  In accordance with our Audit Committee Charter, each of the Audit Committee members must be “independent” as determined under the NASDAQ rules.  The Audit Committee currently is not subject to, and does not follow, the independence criteria set forth in Section 10A of the Securities Exchange Act 1934, as amended.  The Board has determined that each of the directors who serve on the Audit Committee are “independent” under the NASDAQ rules, meaning that none of them has a relationship with us that may interfere with their independence from us and our management.  Further, the Board has determined that Mr. Scheib qualifies as a “financial expert” as defined by the Securities and Exchange Commission (the "SEC").

The Audit Committee recommends the appointment of the outside auditor, oversees our accounting and internal audit functions and reviews and approves the terms of transactions between us and related party entities.  During 2012, the Audit Committee met two times.  The Audit Committee has retained UHY LLP to conduct the audit for the year ended December 31, 2013.  The Audit committee is governed by a written charter, a copy of which was attached to the Proxy Statement for our annual meeting held on June 8, 2007.

**Compensation Committee**

The Compensation Committee determines officers’ salaries and bonuses and administers the grant of stock options pursuant to our stock option plans.  The Compensation Committee does not have a written charter.  The Compensation Committee consisted of Messrs. Kovacik and Hartung.  The Compensation Committee met two times during 2012.

The Board has determined that all of the members of the committee are “independent” as determined under the NASDAQ standards.

**Finance Committee**

The Finance Committee, consisting of Messrs. Hagans, Kasmoch and Scheib, assists in monitoring our cash flow requirements and approves any internal or external financing or leasing arrangements.  The Finance Committee does not have a written charter.  The Finance Committee met one time during 2012.

**Nominating Committee**

The Nominating Committee, consisting of Messrs. Scheib, Richard and Hartung, considers and recommends to the Board qualified candidates for election as Board members, and establishes and periodically 

28

reviews criteria for selection of directors.  The Nominating Committee does not have a written charter.  The Nominating Committee met one time during 2012.

The Board has determined that all of the members of the committee are “independent” as determined under the NASDAQ standards.

The Nominating Committee will consider candidates recommended by stockholders, directors, officers, third-party search firms and other sources for nomination as a director.  The Committee considers the needs of the Board and evaluates each director candidate in light of, among other things, the candidate’s qualifications.  Recommended candidates must be of the highest character and integrity, free of any conflicts of interest and possess the ability to work collaboratively with others, and have the time to devote to Board activities.  All candidates will be reviewed in the same manner, regardless of the source of the recommendation.  Presently, the Nominating Committee does not consider diversity as a characteristic in its selection of candidates except to the extent that the Nominating Committee seeks to expand the range of categories of experience and relationships in different aspects of the waste management process the Company requires for the different foci of its business and potential contacts with sources of business opportunity for the Company.

The Nominating Committee will consider all stockholder recommendations of proposed director nominees, if such recommendations are timely received under applicable SEC regulations and include all of the information required to be included as set forth in the By-Laws.  To be considered “timely received,” recommendations must be received in writing at our principal executive offices, at N-Viro International Corporation, 2254 Centennial Road, Toledo, OH  43617, Attention: Chairman, Nominating Committee, c/o James K. McHugh, Corporate Secretary, no later than February 20, 2014.

All candidates recommended by stockholders should be independent and possess substantial and significant experience which would be of value to us in the performance of the duties of a director.  In addition, any stockholder director nominee recommendation must include, at a minimum, the following information:  the stockholder’s name; address; the number and class of shares owned; the candidate’s biographical information, including name, residential and business address, telephone number, age, education, accomplishments, employment history (including positions held and current position), and current and former directorships; and the stockholder’s opinion as to whether the stockholder recommended candidate meets the definitions of “independent” under the NASDAQ standards.  In addition, the recommendation letter must provide the information that would be required to be disclosed in the solicitation of proxies for election of directors under federal securities laws.  The stockholder must include the candidate’s statement that he/she meets these requirements; is willing to promptly complete the Questionnaire required of all officers, directors and candidates for nomination to the Board; will provide such other information as the Committee may reasonably request; consents to serve on the Board if elected; and a statement whether such candidate, if elected, intends to tender, promptly following such person’s election or re-election, an irrevocable resignation effective upon such person’s failure to receive the required vote for re-election at the next meeting at which such person would face re-election.

**Compensation of Directors**

Our Board of Directors has approved the payment of cash compensation to non-employee directors in exchange for their service on the Board.  The amount of cash compensation to be received by each non-employee director is $1,000 per regular meeting attended during each calendar year, and $500 per special meeting attended.  Our Board of Directors generally has two meetings per calendar year.  The Directors are reimbursed for out-of-pocket expenses incurred in attending meetings of the Board of Directors or any committees thereof.  During 2012, the Board voluntarily waived the cash compensation for the regular and the special meetings, but received unregistered common stock in lieu of cash for attendance at the regular meetings.

Under our current stock option plan, the N-Viro International Corporation 2010 Stock Option Plan (“2010 Plan”), each non-employee Director automatically receives a grant of options to purchase 5,000 shares of Common Stock for each regular meeting attended, and an option to purchase 2,500 shares of Common Stock for each special meeting attended, subject to a maximum of 30,000 options in any calendar year.  During 2012, the Board voluntarily waived the grant of options for all of the special meetings.

29

Directors who are our employees do not receive any additional compensation for serving as Directors.  Directors who are our consultants do not receive any additional cash compensation for serving as Directors, but do receive stock options per the provisions of the 2010 Plan.

See “Certain Relationships and Related Transactions” for additional compensation to directors.

**DIRECTOR COMPENSATION**

 

 

 

 

 

 

 

 

 

 

Fees

Fees

 

Non-Equity

Non-Qualified

Non-Qualified

 

 

 

Earned or

Earned or

 

Incentive

Incentive

Deferred

All

 

 

Paid in

Paid in

Option

Plan

Plan

Compensation

Other

 

Name

Cash

 Stock (1)

Awards

Compensation

Compensation

Earnings

Compensation

**Total**

Joseph Scheib

  $ - 

  $ 1,000 

  $ 5,990 

  - 

  - 

  - 

  - 

**  $   6,990 **

Carl Richard

  - 

  2,000 

  10,288 

  - 

  - 

  - 

  - 

**  12,288 **

James Hartung

  - 

  2,000 

  10,288 

  - 

  - 

  - 

  - 

**  12,288 **

Mark Hagans

  - 

  2,000 

  10,288 

  - 

  - 

  - 

  - 

**  12,288 **

Thomas Kovacik

  - 

  2,000 

  10,288 

  - 

  - 

  - 

  - 

**  12,288 **

Timothy Kasmoch

  - 

  - 

  - 

  - 

  - 

  - 

  - 

**  - **

 

 $ - 

 $ 9,000 

 $ 47,142 

 $ - 

 $ - 

 $ - 

 $ - 

** $ 56,142 **

 

 

 

 

 

 

 

 

 

(1)

Represents $1,000 per regular meeting attended, paid in unregistered common stock at the equivalent value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**EXECUTIVE OFFICERS OF THE COMPANY**

Executive officers of the Company are appointed by the Board of Directors and hold office at the pleasure of the Board.  Set forth below is biographical and other information on the current executive officers of the Company.  Mr. Kasmoch also serves as a member of the Board and his biographical information is set forth above under the caption “Directors of the Company.”

Name

Age

Position

Timothy R. Kasmoch

51

President and Chief Executive Officer

Robert W. Bohmer

43

Executive Vice-President and General Counsel

James K. McHugh

54

Chief Financial Officer, Secretary and Treasurer

**Robert W. Bohmer** has been our Executive Vice-President and General Counsel since July 2007.  From 1996 until joining the Company, Mr. Bohmer had been a partner with the law firm of Watkins, Bates and Carey, LLP, Toledo, Ohio.  From 2005 through June 2007, Mr. Bohmer had served as general outside counsel to the Company.

**James K. McHugh** has served as our Chief Financial Officer, Secretary and Treasurer since January 1997.  Prior to that date, Mr. McHugh served the Company in various financial positions since April 1992, and was a key member of the team that took the Company public in 1993.

**SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons who own beneficially more than ten percent (10%) of the shares of our Common Stock, to file reports of ownership and changes of ownership with the Securities and Exchange Commission, or SEC.  Copies of all filed reports are required to be furnished to us pursuant to Section 16(a).  Based solely on the reports received by us and on written representations from reporting persons, we believe that the current directors and executive officers complied with all applicable filing requirements during the fiscal year ended December 31, 2012, with the following exceptions:

30

Mark Hagans was late filing a Form 4 (Statement of Changes of Beneficial Ownership of Securities) in connection with two separate sales of Common Stock on the open market that occurred between May 15 and May 18, 2012.  The Form 4 was filed on May 22, 2012.

Carl Richard was late filing a Form 4 in connection with two separate purchases of Common Stock on the open market that occurred between November 28 and November 30, 2012.  The Form 4 was filed on December 4, 2012.

**Item 11.**

**Executive Compensation**

**Compensation of Executive Officers**

The following table presents the total compensation paid to our Chief Executive Officer, Executive Vice President and Chief Financial Officer during 2012 and 2011.  There were no other executive officers who were serving at the end of 2012 or 2011 and whose total compensation exceeded $100,000.

**SUMMARY COMPENSATION TABLE**

 

 

 

 

 

 

 

Non-Equity

Nonqualified

 

 

 

 

 

 

 

 

 

Incentive

Deferred

All

 

 

Name and Principal

 

 

 

Stock

Option

Plan

Compensation

Other

 

 

Position

Year

Salary (3)

Bonus

Awards (4)

Awards (5)

Compensation

Earnings

Compensation

**Total**

 

 

 

 

 

 

 

 

 

 

 

 

**Timothy R. Kasmoch**

2012

  $150,000 

 $ - 

 $ - 

  $249,015 

 $ - 

$ - 

  $53,533 

** $  452,548 **

 

President and CEO (1)

2011

  150,000 

  - 

  27,233 

  969,115 

  - 

  - 

  57,525 

**  1,203,873 **

 

 

 

 

 

 

 

 

 

 

 

 

**Robert W. Bohmer**

2012

  150,000 

  - 

  - 

  169,542 

  - 

  - 

  - 

**  319,542 **

 

Exec. VP and Gen'l Counsel

2011

  150,000 

  - 

  27,233 

  169,542 

  - 

  - 

  - 

**  346,775 **

 

 

 

 

 

 

 

 

 

 

 

 

**James K. McHugh**

2012

  125,000 

  - 

  - 

  52,982 

  - 

  - 

  399 

**  178,381 **

 

Chief Financial Officer (2)

2011

  125,000 

  - 

  27,233 

  52,982 

  - 

  - 

  399 

**  205,614 **

 

 

 

 

 

 

 

 

 

 

 

(1)

For the “All Other Compensation” column, Mr. Kasmoch’s spouse was compensated in cash as an employee during 2012 and 2011 for $43,333 and $52,000, respectively, until her resignation effective October 31, 2012.  Additionally, Mr. Kasmoch was compensated in cash for the use of his personal vehicle for $10,200 and $5,525 for 2012 and 2011, respectively.  Approximately 10% of the 2012 amounts for both Mr. and Mrs. Kasmoch have been deferred and are expected to be paid in 2013.

(2)

For the “All Other Compensation” column, Mr. McHugh is taxed on the imputed benefit of a life insurance policy that benefits his personal beneficiary for one-half the face value of the policy and N-Viro International Corporation for the other one-half.

(3)

Starting in February 2012, all officers listed, in addition to Mr. Kasmoch’s spouse, voluntarily deferred 10% of their gross salary.  In December 2012, each officer elected to be paid approximately $2,500 of their deferred balance in unregistered common stock of the Company.  The balance of deferred compensation continues to be accrued and is expected to be paid in 2013.

(4)

The amounts included in the Stock Awards column include the aggregate fair value of stock warrants granted in 2011 computed in accordance with FASB ASC Topic 718.  We use the Black-Scholes model to measure the grant date fair value of stock warrants.

(5)

The amounts included in the Option Awards column include the aggregate fair value of options granted and/or expensed in the fiscal year computed in accordance with FASB ASC Topic 718.  We continue to use the Black-Scholes model to measure the grant date fair value of stock options.  For a discussion of the valuation assumptions used to value the options, see Note 5 to our Consolidated Financial Statements included in this annual report on Form 10-K for the fiscal year ended December 31, 2012.

31

**OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END**

 

OPTION AWARDS

 

 

 

 

 

 

 

 

 

 

 

 

Equity

Equity

 

 

 

Equity

 

 

 

 

Incentive

Incentive

 

 

 

Incentive

 

 

 

 

Plan Awards:

Plan Awards:

 

 

 

Plan

 

 

 

Market

# Unearned

Market or

 

# of

# of

Awards:

 

 

# of

Value of

Shares,

Payout Value

 

Securities

Securities

# Securities

 

 

Shares or

Shares or

Units or

of Unearned

 

Underlying

Underlying

Underlying

 

 

Units of

Units of

Other Rights

Shares, Units

 

Unexercised

Unexercised

Unexercised

Option

Option

Stock That

Stock That

That Have

or Other Rights

 

Options

Options

Unearned

Exercise

Expiration

Have Not

Have Not

Not

That Have

Name

Exercisable

Unexercisable

Options

Price

Date

Vested

Vested ($)

Vested

Not Vested ($)

Timothy R. Kasmoch

  250,000 

  - 

  - 

 $ 2.00 

12/30/16

  - 

 $ -   

  - 

 $ -   

Timothy R. Kasmoch

  2,500 

  - 

  - 

 $ 1.70 

2/15/16

  - 

 $ -   

  - 

 $ -   

Timothy R. Kasmoch

  25,000 

  - 

  - 

 $ 1.94 

7/11/19

  - 

 $ -   

  - 

 $ -   

Timothy R. Kasmoch

  243,000 

  - 

  - 

 $ 2.23 

7/22/19

  - 

 $ -   

  - 

 $ -   

Timothy R. Kasmoch

  376,000 

  94,000 

  - 

 $ 3.27 

3/18/20

  - 

 $ -   

  - 

 $ -   

Timothy R. Kasmoch

  500,000 

  - 

  - 

 $ 1.63 

8/10/21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Robert W. Bohmer

  100,000 

  - 

  - 

 $ 2.80 

6/13/17

  - 

 $ -   

  - 

 $ -   

Robert W. Bohmer

  25,000 

  - 

  - 

 $ 1.94 

7/11/19

  - 

 $ -   

  - 

 $ -   

Robert W. Bohmer

  168,000 

  - 

  - 

 $ 2.23 

7/22/19

  - 

 $ -   

  - 

 $ -   

Robert W. Bohmer

  256,000 

  64,000 

  - 

 $ 3.27 

3/18/20

  - 

 $ -   

  - 

 $ -   

 

 

 

 

 

 

 

 

 

 

James K. McHugh

  12,000 

  - 

  - 

 $ 2.10 

11/11/14

  - 

 $ -   

  - 

 $ -   

James K. McHugh

  50,000 

  - 

  - 

 $ 2.00 

12/31/16

  - 

 $ -   

  - 

 $ -   

James K. McHugh

  25,000 

  - 

  - 

 $ 1.94 

7/11/19

  - 

 $ -   

  - 

 $ -   

James K. McHugh

  68,000 

  - 

  - 

 $ 2.23 

7/22/19

  - 

 $ -   

  - 

 $ -   

James K. McHugh

  80,000 

  20,000 

  - 

 $ 3.27 

3/18/20

  - 

 $ -   

  - 

 $ -   

 

 

 

 

 

 

 

 

 

 

All options awards were made granted under the Company's current stock option plan described under the caption "Equity Compensation Plan Information."

**Employment Agreements**

Effective March 17, 2010, we entered into an Employment Agreement (the “Agreement”) with Mr. Timothy R. Kasmoch as our President and Chief Executive Officer, commencing February 26, 2010.  The Agreement is for a five-year term commencing on February 26, 2010 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 our Board of Directors.  In addition, Mr. Kasmoch 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 Board of Directors review of Mr. Kasmoch's performance.  The Agreement also provides for a stock option grant of 470,000 options that vest over a five year period, pursuant to the Second Amended and Restated 2004 Stock Option Plan.  While employed with the Company, the Agreement allows Mr. Kasmoch to engage in other limited business activities that are not competitive with and do not involve the Company, subject to the prior disclosure to the Company’s Audit Committee.  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.  A copy of this employment agreement was attached to a Form 8-K as Exhibit 10.1, filed by us on March 19, 2010.

Effective March 17, 2010, we entered into an Employment Agreement (the “Agreement”) with Mr. Robert W. Bohmer as our Executive Vice President and General Counsel, commencing February 26, 2010.  The Agreement is for a five-year term commencing on February 26, 2010 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 

32

provides that Mr. Bohmer is to receive an annual base salary of $150,000, subject to an annual increase at the discretion of our Board of Directors.  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 a stock option grant of 320,000 options that vest over a five year period, pursuant to the Second Amended and Restated 2004 Stock Option Plan.  While employed with the Company, the Agreement allows Mr. Bohmer to engage in other limited business activities that are not competitive with and do not involve the Company, subject to the prior disclosure to the Company’s Audit Committee.  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.  A copy of this employment agreement was attached to a Form 8-K as Exhibit 10.1, filed by us on March 19, 2010.

Effective March 17, 2010, we entered into an Employment Agreement (the “Agreement”) with James K. McHugh to serve as the Company’s Chief Financial Officer commencing February 26, 2010.  The Agreement is for a five-year term commencing on February 26, 2010 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 a stock option grant of 100,000 shares that vest over a five year period, pursuant to the Second Amended and Restated 2004 Stock Option Plan.  While employed with the Company, the Agreement allows Mr. McHugh to engage in other limited business activities that are not competitive with and do not involve the Company, subject to the prior disclosure to the Company’s Audit Committee.  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.  A copy of this employment agreement was attached to a Form 8-K as Exhibit 10.1, filed by us on March 19, 2010.

**Equity Compensation Plan Information**

We maintain three stock option plans (two are able to issue new grants) for directors, executive officers and key employees or outside subcontractors.  The most recent plan (“2010 Plan”) was approved by the stockholders in August 2010.  The 2010 Plan authorizes the Board of Directors or a committee thereof, to grant awards of incentive stock options and non-qualified stock options for up to a maximum of 5,000,000 shares of Common Stock.  For all of the plans, the total number of options granted and outstanding as of March 25, 2013 was 2,905,981, and the number of options available for future issuance was 4,355,275.  Currently, all of the plans are administered by the Board of Directors via a committee.

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**Item 12.**

**Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters**

We had outstanding 6,765,611shares of Common Stock, $.01 par value per share, or the Common Stock, on March 25, 2013, which constitutes the only class of our outstanding voting securities.

**Five Percent Stockholders**

As of March 25, 2013, the following were the only persons known to us to own beneficially more than 5% of the outstanding shares of Common Stock:

Title of Class

Name and Address of Beneficial Owner

Amount and Nature of Beneficial Ownership

Percentage of Outstanding Shares of Common Stock

Common Stock

Cooke Family Trust

90 Grande Brook Circle, #1526

Wakefield, Rhode Island  02879

627,717 (1)

9.3%

Common Stock

VC Energy I, LLC

3900 Paradise Road, Suite U

Las Vegas, NV  89169

800,000 (2)

11.2%

Common Stock

Joseph Giulii

7030 Cardin Road

Philadelphia, PA  19128

427,672 (3)

6.3%

1.

The shares attributed to the Cooke Family Trust include 627,267 shares owned beneficially and 450 in Common Stock warrants exercisable to purchase an equal number of shares of Common Stock.  This information was derived from the Schedule 13D Amendment #5 filed on May 10, 2010.

2.

The shares attributed to VC Energy I, LLC include 400,000 shares owned beneficially and 400,000 in Common Stock warrants exercisable to purchase an equal number of shares of Common Stock.  This information was derived from the Schedule 13G filed on July 8, 2010.

3.

The shares attributed to Joseph Giulii include 362,672 shares owned beneficially and 65,000 in Common Stock warrants exercisable to purchase an equal number of shares of Common Stock.  This information was derived from the Schedule 13G filed on January 17, 2013.

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**Security Ownership of Management**

The following table sets forth, as of March 25, 2013, unless otherwise specified, certain information with respect to the beneficial ownership of our shares of Common Stock by each person who is our director, a nominee for the Board, each of the Named Executive Officers, and by our directors and executive officers as a group.  Unless otherwise noted, each person has voting and investment power, with respect to all such shares, based on 6,765,611shares of Common Stock outstanding on the record date.  Pursuant to the rules of the SEC, shares of Common Stock which a person has the right to acquire within 60 days of the date hereof pursuant to the exercise of stock warrants or stock options are deemed to be outstanding for the purpose of computing the percentage ownership of such person but are not deemed outstanding for the purpose of computing the percentage ownership of any other person.

Title of Class

Name of Beneficial Owner

Amount and Nature of Beneficial Ownership

1

Percent of Class

Common Stock

Mark D. Hagans

106,054

2

1.54%

Common Stock

James H. Hartung

122,779

3

1.78%

Common Stock

Timothy R. Kasmoch

1,577,878

4

19.17%

Common Stock

Thomas L. Kovacik

114,529

5

1.67%

Common Stock

Carl Richard

464,873

6

6.63%

Common Stock

Joseph H. Scheib

313,653

7

4.52%

Common Stock

Robert W. Bohmer

575,388

8

7.84%

Common Stock

James K. McHugh

272,450

9

3.88%

Common Stock

All directors and executive officers as a group (8 persons)

3,547,604

10

36.20%

 

 

 

 

 

1.

Except as otherwise indicated, all shares are directly owned with voting and investment power held by the person named.

2.

Represents 6,869 shares of Common Stock owned by Mr. Hagans, 79,185 shares issuable upon exercise of options which are currently exercisable at prices ranging from $0.88 to $3.90 per share and 20,000 unregistered shares issuable upon exercise of warrants which are currently exercisable at a price of $1.00 per share.

3.

Represents 3,843 shares of Common Stock owned by Mr. Hartung, 88,046 shares issuable upon exercise of options which are currently exercisable at prices ranging from $0.88 to $3.90 per share and 30,890 unregistered shares issuable upon exercise of warrants which are currently exercisable at a price of $1.00 per share.

4.

Represents 103,378 unregistered shares and 8,000 registered shares of Common Stock owned by Mr. Kasmoch, 70,000 unregistered shares issuable upon exercise of warrants which are currently exercisable at a price of $1.00 per share and 1,396,500 shares issuable upon exercise of options which are currently exercisable at prices ranging from $1.63 to $3.27 per share.

5.

Represents 3,029 shares of Common Stock owned by Mr. Kovacik, 91,500 shares issuable upon exercise of options which are currently exercisable at prices ranging from $0.88 to $3.90 per share and 20,000 unregistered shares issuable upon exercise of warrants which are currently exercisable at a price of $1.00 per share.

6.

Represents 222,434 shares of Common Stock owned by Mr. Richard, 100,000 shares issuable upon exercise of options which are currently exercisable at prices ranging from $0.70 to $3.90 per share and 142,439 unregistered shares issuable upon exercise of warrants which are currently exercisable at a price of $1.00 per share.

7.

Represents 143,103 shares of Common Stock owned by Mr. Scheib, 96,250 shares issuable upon exercise of options which are currently exercisable at prices ranging from $0.70 to $3.90 per share and 74,300 unregistered shares issuable upon exercise of warrants which are currently exercisable at a price of $1.00 per share.

8.

Represents 6,388 shares of Common Stock owned by Mr. Bohmer, 549,000 shares issuable upon exercise of options which are currently exercisable at prices ranging from $1.94 to $3.27 per share and 20,000 unregistered shares issuable upon exercise of warrants which are currently exercisable at a price of $1.00 per share.

9.

Represents 17,450 shares of Common Stock owned by Mr. McHugh, 235,000 shares issuable upon exercise of options which are currently exercisable at prices ranging from $1.94 to $3.27 per share and 20,000 unregistered shares issuable upon exercise of warrants which are currently exercisable at a price of $1.00 per share.

10.

Represents 514,494 shares of Common Stock owned by the directors and officers, 2,635,481 shares issuable upon exercise of options which are currently exercisable at prices ranging from $0.70 to $3.90 per share and a total of 397,629 unregistered shares issuable upon exercise of warrants which are currently exercisable at a price of $1.00 per share.
35

**Item 13.**

**Certain Relationships and Related Transactions and Director Independence**

During 2012 and 2011, we paid Terri Kasmoch, the spouse of President and Chief Executive Officer Timothy Kasmoch, as an employee for business development, web site and company media marketing and stock promotion efforts for the Company.  For more detail, see Footnote 4 to the Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data” in this Form 10-K.

**Director Independence**

Although we are not subject to the listing requirements of any stock exchange, we are committed to a board in which a majority of our members consist of independent directors, as defined under the NASDAQ rules.  The Board has reviewed the independence of its members, applying the NASDAQ standards and considering other commercial, legal, accounting and familial relationships between the directors and us.  The Board has determined that all of the directors and director nominees are independent other than Mr. Kasmoch, who is not an independent director by virtue of his current position as our Chief Executive Officer.

**Item 14.**

**Principal Accountant Fees and Services**

**Audit Fees**

Audit services of UHY LLP (“UHY”) included the audit of our annual financial statements for 2012 and 2011, and services related to quarterly filings with the SEC through the reporting period ended September 30 in each of those years.  Fees for these services totaled approximately $69,400 for 2012 and $68,500 for 2011.

**Audit Related Fees**

There were no fees billed for the years ended December 31, 2012 and December 31, 2011 for assurance and related services by UHY that are reasonably related to the performance of the audit or review of our financial statements.

**Tax Fees**

There were no fees billed for the years ended December 31, 2012 and December 31, 2011 for professional services rendered by UHY for tax compliance, tax advice, and tax planning.

**All Other Fees**

There were no fees billed for the years ended December 31, 2012 and December 31, 2011 for assistance on accounting related matters.

Although the Audit Committee Charter does not explicitly require it, the Audit Committee approves all engagements of outside auditors before any work is begun on the engagement.

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**PART IV**

**Item 15.**

**Exhibits, Financial Statement Schedules**

Exhibit 

No. 

Description

10.1

Commercial Line of Credit Agreement and Note dated October 15, 2008, between N-Viro International Corporation and Monroe Bank + Trust  (incorporated by reference to Exhibit 99.1 to Form 8-K filed October 27, 2008).

10.2

Employment Agreement, dated March 17, 2010 between Timothy R. Kasmoch and N-Viro International Corporation (incorporated by reference to Exhibit 10.1 to Form 8-K filed March 19, 2010)

10.3

Employment Agreement, dated March 17, 2010 between Robert W. Bohmer and N-Viro International Corporation (incorporated by reference to Exhibit 10.2 to Form 8-K filed March 19, 2010)

10.4

Employment Agreement, dated March 17, 2010 between James K. McHugh and N-Viro International Corporation (incorporated by reference to Exhibit 10.3 to Form 8-K filed March 19, 2010)

10.5

The N-Viro International Corporation 2004 Stock Option Plan (incorporated by reference to Form S-8 filed December 20, 2004).*

10.6

The N-Viro International Corporation Amended and Restated 2004 Stock Option Plan (incorporated by reference to the Proxy Statement on Schedule 14A filed May 14, 2008).*

10.7

The N-Viro International Corporation Second Amended and Restated 2004 Stock Option Plan (incorporated by reference to the Definitive Proxy Statement on Schedule 14A filed July 13, 2009).*

10.8

The N-Viro International Corporation 2010 Stock Option Plan (incorporated by reference to the Definitive Proxy Statement on Schedule 14A filed June 23, 2010).*

14.1

Code of Ethics of the Company.

21.1

List of subsidiaries of the Company.#

23.1

Consent of UHY LLP.

24.1

Power(s) of Attorney.#

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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32.1

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document #

101.SCH

XBRL Taxonomy Extension Schema #

101.CAL

XBRL Taxonomy Extension Calculation Linkbase #

101.LAB

XBRL Taxonomy Extension Label Linkbase #

101.PRE

XBRL Taxonomy Extension Presentation Linkbase #

101.DEF

XBRL Taxonomy Definition Linkbase Document #

#

Only included in Form 10-K filed electronically with the Securities and Exchange Commission.

*

Indicates a management contract or compensatory plan or arrangement.

38

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

**N-VIRO INTERNATIONAL CORPORATION**

Dated: April 16, 2013

By: /s/  Timothy R. Kasmoch

Timothy R. Kasmoch, Chief Executive Officer and President

(Principal Executive Officer)

**POWER OF ATTORNEY**

Know all persons by these presents, that each person whose signature appears below constitutes and appoints James K. McHugh his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Dated: April 16, 2013

/s/  Timothy R. Kasmoch

/s/  James K. McHugh

Timothy R. Kasmoch, Chief Executive Officer,

James K. McHugh

President and Director

Chief Financial Officer, Secretary and Treasurer

(Principal Executive Officer)

(Principal Financial Officer)

/s/  James H. Hartung*

/s/  Mark D. Hagans*

James H. Hartung, Director & Chairman of the Board

Mark D. Hagans, Director

/s/  Joseph H. Scheib*

/s/  Thomas L. Kovacik*

Joseph H. Scheib, Director

Thomas L. Kovacik, Director

/s/  Carl Richard*

Carl Richard, Director

* by James K. McHugh, Attorney-In-Fact

39**