Equity Transactions

12 Months Ended

Dec. 31, 2011

Equity Transactions [Abstract]

Equity Transactions

Note 5.                  Equity Transactions

In January 2010, the Company executed a Placement Agent Agreement, or the Agreement, with Burnham Hill Partners of New York, NY, or BHP.  The Company engaged BHP as its placement agent in connection with the issuance of debt or equity securities through a transaction exempt from registration for a term of six months from the date of the Agreement.  For its services, the Company issued BHP 10,000 shares of the Company's unregistered common stock.  The shares were issued in a private transaction pursuant to an exemption under Section 4(2) of the Securities Act of 1933.  If the Company had secured a financing placement through BHP, the Company would have issued common stock placement warrants equal to 8% of the number of common stock shares issued in the financing, for a term of seven years and would have been exercisable at 120% of the price paid per share by the investors.  The Company accounted for this transaction by recording a deferred current asset of $30,000 that was amortized ratably over the subsequent six month period the services were rendered in 2010.

In December 2010, the Company issued 110,000 shares of unregistered Common Stock to SLD Capital Corporation (“SLD”), as compensation for services rendered by SLD to the Company under a Consulting Agreement, effective as of December 10, 2010.  The agreement is for a term of eighteen months from the effective date.  More details of this Agreement are contained in Note 2.

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 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, totaling $150,387 in 2010.

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 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, 2011, the Company has recorded a liability of $12,196 to reflect the fair value of the outstanding warrants.  The Company will be 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, 2011 and 2010, the Company recorded a gain of $732,280 and a loss of $140,326, respectively, on the revaluation and partial cancellation from the two issuances of the warrants to the end of the period, which includes the gain in 2011 from the cancellation of 120,000 warrants as a result of the Termination Agreement.

In December 2010, the Company issued 150,000 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.  The agreement is for a term of two years from the effective date.  More details of this Agreement are contained in Note 2.

In August 2011, the Company issued 100,000 shares of common stock to SAMI for additional services performed in connection with the December 2010 consulting agreement.  To reflect the entire value of the stock issued, the Company is taking a charge to earnings of $150,000 through December 2013, the ending date of the consulting agreement.  For the twelve months ended December 31, 2011, the charge to earnings was $52,100.  The Company also granted 100,000 stock warrants in connection with this transaction.  All the warrants are exercisable over a five year term, vest immediately and were priced at a premium over the fair market value of the Company's common stock as of the date of the grant, or $1.65 per warrant.  To reflect the entire value of the stock warrants granted, the Company is taking a charge to earnings totaling approximately $136,000 through December 2013.  For the twelve months ended December 31, 2011, the charge to earnings was approximately $47,100.

In November 2011, the Company issued 50,000 shares of unregistered common stock to Rakgear, Inc. for business consulting services.  To reflect the entire value of the stock issued, the Company is taking a non-cash charge to earnings of $73,000 ratably through December 2013, the ending date of the agreement.  For the twelve months ended December 31, 2011, the charge to earnings was approximately $10,000.

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 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 2011 from the 2010 Plan and in 2010 from the 2004 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 the years ended December 31, 2011 and 2010, this charge was $471,539 and $844,840, respectively.

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, 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”.

During the year ended December 31, 2010, the Company granted additional stock options totaling 175,000 shares, exclusive of the officers:  90,000 options to outside directors, 10,000 options to an outside director acting in his capacity as a consultant and 75,000 options to three employees.  All options granted are for a period of ten years.  The options granted in 2010 to the directors became fully vested six months after the date of grant, and were priced, pursuant to the 2004 Plan, at a weighted average price of $3.08 for a total expense of approximately $209,000, expensed ratably over the subsequent six-month period.  The options granted to the consultant vested immediately and were priced, pursuant to the 2004 Plan, at $3.53 for a total expense of approximately $31,400, expensed immediately.  More information on these equity transactions is contained in this Form 10-K under Item 10, “Directors, Executive Officers and Corporate Governance”.

The options granted in 2010 to the three employees vested twenty percent 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.  All of the options are exercisable at $1.89 per share and were granted pursuant to the 2004 Plan and are intended as Incentive Stock Options.

The following summarizes the stock options activity for the years ended December 31, 2011 and 2010:

	2011		2010
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
Outstanding, beginning of year	2,273,300	$2.67	1,279,825	$2.24
Granted	680,000	$1.67	1,065,000	$3.16
Exercised	(515)	$1.94	(54,125)	$1.91
Expired/forfeited during the year	(27,800)	$1.71	(17,400)	$3.75
Outstanding, end of year	2,924,985	$2.44	2,273,300	$2.67
Eligible for exercise at end of year	2,360,985	$2.26	1,501,300	$2.41
Weighted average fair value per option for options granted during the year	$1.67		$3.16
Options expected to vest over the life of the Plan	2,924,985		2,273,300

The Company records compensation expense for stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes valuation model. The Company uses historical data among other factors to estimate the expected price volatility, the expected option term and the expected forfeiture rate.  The risk-free rate is based on the U.S. Treasury yield curve in effect at the date of grant for the expected term of the option.

The following assumptions were used to estimate the fair value of options granted:

	Year Ended December 31,
	2011	2010
Expected dividend yield	0.00%	0.00%
Weighted average volatility	203.4%	73.7%
Risk free interest rate	2.1 - 3.2%	2.5 - 3.6%
Expected term (in years)	5	7

On two occasions during 2010, all holders of N-Viro International Corporation warrants were granted an automatic extension of time to exercise their respective warrants.  On one more occasion in August 2011, an automatic extension of time was granted to certain warrant holders of record to exercise their respective warrants.  For all of the extensions, all other terms of the warrant remained in place, other than the expiration date.  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, 2011 and 2010, the deemed dividend was $132,642 and $461,467 respectively.