UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2010
[ ] Transition report pursuant section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number: 000-19333
BION ENVIRONMENTAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1176672
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)
Box 566/1774 Summitview Way, Crestone, Colorado 81131
(Address of Principal Executive Offices)
212-758-6622
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the issuer has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. NOT APPLICABLE
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. On May 5, 2010, there were
12,752,130 Common Shares issued and 12,047,821 Common Shares outstanding.
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
filed" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
1
BION ENVIRONMENTAL TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated financial statements (unaudited):
Balance sheets ............................................ 3
Statements of operations .................................. 4
Statements of changes in equity (deficit) ................. 5
Statements of cash flows .................................. 6
Notes to unaudited consolidated financial statements ...... 7-23
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 24
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 36
Item 4. Controls and Procedures .................................... 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 37
Item 1A. Risk Factors................................................ 37
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds ................................................... 37
Item 3. Defaults Upon Senior Securities ............................ 37
Item 4. Submission of Matters to a Vote of Security Holders ........ 37
Item 5. Other Information .......................................... 37
Item 6. Exhibits ................................................... 37
Signatures ................................................. 38
2
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2010 2009
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,469,715 $ 1,695,713
Prepaid rent and expenses 5,478 12,217
Other receivable - affiliate 8,797 8,797
Deposits and other receivables 11,956 11,956
------------ ------------
Total current assets 1,495,946 1,728,683
------------ ------------
Restricted cash (Note 8) 57,315 85,973
Property and equipment, net (Note 4) 801,598 477,229
------------ ------------
Total assets $ 2,354,859 $ 2,291,885
============ ============
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 639,388 $ 834,638
Accrued payable - affiliate (Note 7) - 41,647
Loans payable - affiliates (Note 5) - 162,500
Deferred compensation (Note 6) 150,000 175,000
------------ ------------
Total current liabilities 789,388 1,213,785
------------ ------------
Deferred compensation (Note 6) - 150,000
Deferred rent (Note 8) 70,826 73,232
------------ ------------
Total liabilities 860,214 1,437,017
------------ ------------
Series B Redeemable Convertible Preferred
stock, $0.01 par value, 50,000 shares authorized;
28,170 (March 31, 2010) and 21,320 (June 30, 2009)
shares issued and outstanding; liquidation
preference of $2,887,425 (March 31, 2010) and
$2,144,876 (June 30, 2009) 2,521,215 1,867,716
------------ ------------
Deficit (Note 7):
Bion's stockholders' deficit:
Series A Preferred stock, $0.01 par value, 10,000
shares authorized, no shares issued and outstanding - -
Series C Convertible Preferred stock, $0.01 par
value, 60,000 shares authorized; 15,400 (March 31,
2010) and nil (June 30, 2009) shares issued and
outstanding; liquidation preference of $1,559,146 1,358,946 -
Common stock, no par value, 100,000,000 shares
authorized, 12,720,517 (March 31, 2010) and
12,126,448 (June 30, 2009) shares issued; 12,016,208
(March 31, 2010) and 11,422,139 (June 30, 2009)
shares outstanding - -
Additional paid-in capital 75,383,829 74,529,507
Accumulated deficit (77,877,888) (75,654,145)
------------ ------------
Total Bion's stockholders' deficit (1,135,113) (1,124,638)
------------ ------------
Noncontrolling interest (Note 3) 108,543 111,790
------------ ------------
Total equity (1,026,570) (1,012,848)
------------ ------------
Total liabilities and equity $ 2,354,859 $ 2,291,885
============ ============
See notes to consolidated financial statements.
3
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
Three months ended March 31, Nine months ended March 31,
2010 2009 2010 2009
------------ ------------ ------------ ------------
Revenue $ - $ - $ - $ -
Operating expenses:
General and administrative
(including stock-based
compensation (Note 7)) 563,277 780,987 2,073,614 1,569,229
Research and development
(including stock-based
compensation (Note 7)) 53,266 46,438 161,102 393,408
----------- ----------- ----------- -----------
Total operating expenses 616,543 827,425 2,234,716 1,962,637
----------- ----------- ----------- -----------
Loss from operations (616,543) (827,425) (2,234,716) (1,962,637)
----------- ----------- ----------- -----------
Other expense (income):
Interest expense - 2,722 1,515 30,279
Interest income (2,882) 1,109 (9,241) (972)
Forfeiture of deferred compensation - - - (959,184)
Other, net - - - (75,000)
----------- ----------- ----------- -----------
(2,882) 3,831 (7,726) (1,004,877)
----------- ----------- ----------- -----------
Net loss (613,661) (831,256) (2,226,990) (957,760)
Net loss attributable to the
noncontrolling interest 1,184 12,830 3,247 3,134
----------- ----------- ----------- -----------
Net loss attributable to Bion (612,477) (818,426) (2,223,743) (954,626)
Dividends on preferred stock (89,571) - (224,588) -
----------- ----------- ----------- -----------
Net loss applicable to Bion's common
stockholders $ (702,048) $ (818,426) $(2,448,331) $ (954,626)
=========== =========== =========== ===========
Net loss applicable to Bion's common
stockholders per basic common share $ (0.06) $ (0.08) $ (0.21) $ (0.09)
=========== =========== =========== ===========
Net loss applicable to Bion's common
stockholders per diluted common
share $ (0.06) $ (0.08) $ (0.21) $ (0.09)
=========== =========== =========== ===========
Weighted-average number of common
shares outstanding,
Basic 11,942,793 10,723,818 11,763,076 10,501,416
=========== =========== =========== ===========
Diluted 11,942,793 10,723,818 11,763,076 10,501,416
=========== =========== =========== ===========
See notes to consolidated financial statements.
4
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
NINE MONTHS ENDED MARCH 31, 2010
(UNAUDITED)
Bion's Shareholders
------------------------------------------------------------- Non-
Preferred Stock Common Stock Additional control- Total
------------------ ----------------- paid-in Accumulated ing equity/
Shares Amount Shares Amount capital deficit interest deficit
------ ---------- ---------- ------ ----------- ------------- --------- -----------
Balances, July 1, 2009 - $ - 12,126,448 $ - $74,529,507 $(75,654,145) $ 111,790 $(1,012,848)
Vesting and remeasurement
of options for services - - - - 300,807 - - 300,807
Issuance of common stock
for services and project
construction services - - 272,677 - 426,940 - - 426,940
Issuance of warrants for
services - - - - 83,000 - - 83,000
Sale of common stock - - 8,769 - 13,153 - - 13,153
Sale of Series C
preferred stock, net 15,400 1,339,800 - - - - - 1,339,800
Dividend on Series B
preferred stock - - - - (204,642) - - (204,642)
Dividend on Series C
preferred stock - 19,146 - - (19,946) - - (800)
Conversion of debt to
equity - - 315,449 - 255,010 - - 255,010
Cancellation of previously
issued common shares (2,826)
Net loss - - - - - (2,223,743) (3,247) (2,226,990)
------ ---------- ---------- ------ ----------- ------------- --------- -----------
Balances, March 31, 2010 15,400 $1,358,946 12,720,517 $ - $75,383,829 $(77,877,888) $ 108,543 $(1,026,570)
====== ========== ========== ====== =========== ============ ========= ===========
See notes to consolidated financial statements.
5
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
2010 2009
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,226,990) $ (957,760)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation expense 12,531 11,931
Accrued interest on convertible notes
and debt 1,515 30,280
Stock-based compensation 778,249 359,829
Forfeiture of deferred compensation - (959,184)
Decrease in prepaid rent and expenses 6,739 5,654
Decrease in deposits and other receivables - 111
(Decrease) increase in accounts payable and
accrued expenses (158,402) 36,885
(Decrease) increase in deferred rent (2,406) 1,120
Increase in deferred compensation - 441,076
----------- -----------
Net cash used in operating activities (1,588,764) (1,030,058)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in restricted cash 28,658 42,470
Purchase of property and equipment (304,402) -
----------- -----------
Net cash (used in) provided by investing
activities (275,744) 42,470
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 13,153 250,000
Proceeds from sale of Series B preferred stock 595,950 -
Proceeds from sale of Series C preferred stock 1,339,800 -
Repayment of loans payable - affiliates (162,500) -
Payment of Series B preferred dividends (147,093) -
Payment of Series C preferred dividends (800) -
Proceeds from loans payable - affiliates - 102,500
Proceeds from notes payable - affiliates - 165,000
----------- -----------
Net cash provided by financing activities 1,638,510 517,500
----------- -----------
Net decrease in cash and cash equivalents (225,998) (470,088)
Cash and cash equivalents at beginning of year 1,695,713 478,899
----------- -----------
Cash and cash equivalents at end of period $ 1,469,715 $ 8,811
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest and income taxes $ - $ -
Non-cash investing and financing transactions:
Exchange/conversion of debt to common stock $ 255,010 $ 66,076
Issuance of common stock in exchange for
project construction services 32,498 -
See notes to consolidated financial statements.
6
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS:
Organization and nature of business:
Bion Environmental Technologies, Inc. ("Bion" or "We" or the "Company") was
incorporated in 1987 in the State of Colorado.
Bion's patented and proprietary technology provides a comprehensive
environmental solution to a significant source of pollution in US
agriculture, Confined Animal Feeding Operations ("CAFO's"). Bion's technology
produces substantial reductions of both nutrient releases to water and air
emissions including ammonia (which is subsequently re-deposited to the
ground) from livestock waste streams based upon our research to date. Because
Bion's technology reduces the harmful releases and emissions from a CAFO on
which it is utilized, the CAFO can potentially increase its herd
concentration while lowering or maintaining its level of nutrient releases
and atmospheric emissions.
From 2003 through early 2008, the Company primarily focused on completing re-
development of its technology platform and business model. As such, during
that period we elected not to pursue near-term revenue opportunities such as
retrofitting existing CAFO's with our waste management solutions, because
such efforts would have diverted scarce management and financial resources
and negatively impacted our ability to complete: 1) re-development of our
technology for environmentally sound treatment of CAFO waste streams and 2)
development of our integrated technology platform in support of large-scale
sustainable Integrated Projects including renewable energy production.
Bion is now actively pursuing business opportunities in two broad areas: 1)
retrofit and environmental remediation of existing CAFOs to reduce nutrient
(nitrogen and phosphorus) releases and gaseous emissions (ammonia, greenhouse
gases, volatile organic compounds, etc.) in order to clean the air and water
in the surrounding areas (as described below) and 2) development of "closed
loop" Integrated Projects (defined below).
We believe that Bion's technology platform allows the integration of large-
scale CAFO's and their end-product users, renewable energy production from
the CAFO waste stream, on site utilization of the renewable energy generated
and biofuel/ethanol production in an environmentally and economically
sustainable manner while reducing the aggregate capital expense and operating
costs for the entire integrated complex ("Integrated Projects" or
"Projects"). In the context of Integrated Projects, Bion's waste treatment
process, in addition to mitigating polluting releases, generates renewable
energy from cellulosic portions of the CAFO waste stream which renewable
energy can be utilized by integrated facilities including ethanol plants,
CAFO end-product processors (including cheese, ice cream and /or bottling
plants in the case of dairy CAFOs and/or slaughter and/or processing
facilities in the context of beef CAFOs) and/or other users as a natural gas
replacement. Bion is presently involved in the very early development stage
regarding a beef-based Integrated Project in New York and is involved in pre-
development evaluations regarding opportunities for Integrated Projects in
Nebraska (dairy) and elsewhere.
7
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 (CONTINUED)
On September 27, 2008, the Company executed an agreement with Kreider Farms
(and its affiliated entities) (collectively "Kreider") to design, construct
and operate (through its wholly-owned subsidiaries, Bion Services Group, Inc.
("Bion Services") and Bion PA-1 LLC ("LLC") a Bion system to treat the waste
of the milking dairy cows (milkers, dry cows and heifers) at the Kreider
Dairy, located in Mannheim, Pennsylvania. In addition, the agreement provides
for a second phase which will include a renewable energy facility ("REF")
that will treat the cellulosic solid wastes from Phase 1 together with the
waste stream from Kreider's poultry facilities to produce renewable energy
for Bion's waste treatment facility and/or for market sales. The Phase 1
system will be owned and operated by Bion through LLC, in which Kreider will
have the option to purchase a noncontrolling interest. To complete final
design work and all building, zoning and other related pre-construction
matters, substantial capital (equity and/or debt) has been and will continue
to be expended. Additional funds will be expended for construction. Upon
successful construction and operation of these systems, the Company
anticipates that it will earn revenue from the sale of nutrient (and other)
environmental credits related to the Kreider system and through sales of
renewable energy generated by the Kreider systems.
During January 2009, the Board of Pennsylvania Infrastructure Investment
Authority ("Pennvest") approved a loan up to $7.8 million ("Pennvest Loan")
to LLC for development and construction of the Phase 1 System at Kreider.
The Pennvest Loan is structured in phases (pre and post-completion of
permitting/commencement of construction) and Pennvest's disbursements will
take the form of reimbursement of qualified sums expended by LLC. In
connection with the Pennvest Loan, the Company has provided a 'technology
guaranty' regarding nutrient reduction performance of the Kreider System
which will expire when the Kreider System's nutrient reduction performance
has been demonstrated. After substantial unanticipated delays over the fall
and winter of 2009/2010, the Company presently expects to complete the steps
required to finalize the pre-construction phase of the Pennvest loan during
the next 90 days. The Company anticipates that the initial drawdown/
reimbursement from Pennvest pursuant to the Pennvest Loan will also be
received in the next 90 days. Bion is in the process of finalizing its
design for the Phase 1 Kreider System and has commenced the permitting
process. The Pennsylvania Department of Environmental Protection recently
re-certified the nutrient credits for this project. It is anticipated that
construction will commence during the next 120 days and be completed during
the 2010 calendar year.
Going concern and management's plans:
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. The Company has not generated revenues and
has incurred net losses of approximately $1,312,000 and $1,779,000 during the
years ended June 30, 2009 and 2008, respectively, and a net loss of
approximately $2,227,000 for the nine months ended March 31, 2010. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability or classification of
assets or the amounts and classification of liabilities that may result
should the Company be unable to continue as a going concern. The following
paragraphs describe management's plans with regard to these conditions.
8
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 (CONTINUED)
During the nine months ended March 31, 2010, the Company sold 15,400 shares
of the Company's Series C Preferred shares at $100 per share, which resulted
net proceeds to the Company of $1,339,800 after commissions.
During prior periods the Company completed an offering of the Company's
Series B Preferred shares, which as of June 30, 2009 resulted in the issuance
of 21,320 shares at $100 per share resulting in net proceeds to the Company
of $1,854,840. Subsequent to June 30, 2009, the Company issued an additional
6,850 shares resulting in net proceeds to the Company of $595,950.
At March 31, 2010, the Company has a working capital surplus and
stockholders' deficit of approximately $707,000 and $1,135,000, respectively.
The Company continues to explore sources of additional financing to satisfy
its current operating requirements. While the Company currently does not face
a severe working capital shortage, it is not currently generating any
revenues. The Company will need to obtain additional capital to fund its
operations and technology development, to satisfy existing creditors, to
develop Projects and to construct the Kreider Farm facilities. The Company
anticipates that it will seek to raise from $5,000,000 to $50,000,000 (debt
and equity) during the next twelve months. There is no assurance, especially
in the extremely unsettled capital markets that presently exist, that the
Company will be able to obtain the funds that it needs to stay in business,
complete its technology development or to successfully develop its business.
There can be no assurance that funds required during the next twelve months
or thereafter will be generated from operations or that those funds will be
available from external sources such as debt or equity financings or other
potential sources. The lack of additional capital resulting from the
inability to generate cash flow from operations or to raise capital from
external sources would force the Company to substantially curtail or cease
operations and would, therefore, have a material adverse effect on its
business. Further, there can be no assurance that any such required funds, if
available, will be available on attractive terms or that they will not have a
significantly dilutive effect on the Company's existing shareholders. All
of these factors have been exacerbated by the extremely unsettled credit and
capital markets presently existing.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Bion Integrated Projects Group, Inc. (formerly
Bion Dairy Corporation ("Projects Group"), Bion Technologies, Inc., BionSoil,
Inc., Bion Services, LLC and its majority owned subsidiary, Centerpoint
Corporation ("Centerpoint") (Note 3). All significant intercompany accounts
and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The consolidated financial statements reflect all
adjustments (consisting of only normal recurring entries) that, in the
9
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 (CONTINUED)
opinion of management, are necessary to present fairly the financial position
at March 31, 2010 and the results of operations and cash flows of the Company
for the three and nine months ended March 31, 2010 and 2009. Operating
results for the three and nine months ended March 31, 2010 are not
necessarily indicative of the results that may be expected for the year
ending June 30, 2010.
The unaudited consolidated financial statements should be read in conjunction
with the Company's audited financial statements and footnotes thereto
included in its Annual Report on Form 10-K/A for the year ended June 30,
2009.
Loss per share:
Basic loss per share amounts are calculated using the weighted average number
of shares of common stock outstanding during the period. Diluted loss per
share assumes the conversion, exercise or issuance of all potential common
stock instruments, such as options or warrants, unless the effect is to
reduce the loss per share. During the three and nine months ended March 31,
2010, the basic and diluted loss per share is the same, as the impact of
potential dilutive common shares is anti-dilutive.
The following table represents the warrants, options and convertible
securities excluded from the calculation of diluted loss per share:
March 31, 2010 March 31, 2009
-------------- --------------
Warrants 5,302,616 4,421,667
Options 2,190,833 1,995,833
Convertible debt 100,000 515,822
Convertible preferred stock 1,833,499 -
The following is a reconciliation of the denominators of the basic loss per
share computations for the three and nine months ended March 31, 2010 and
2009:
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
March 31, 2010 March 31, 2009 March 31, 2010 March 31, 2009
-------------- -------------- -------------- --------------
Shares issued - beginning
of period 12,455,178 11,226,658 12,126,448 11,070,658
Shares held by subsidiaries
(Note 7) (704,309) (704,309) (704,309) (704,309)
---------- ---------- ---------- ----------
Shares outstanding -
beginning of period 11,750,869 10,522,349 11,422,139 10,366,349
Weighted average shares issued
during the period 191,924 201,469 340,937 135,067
---------- ---------- ---------- ----------
Basic weighted average shares -
end of period 11,942,793 10,723,818 11,763,076 10,501,416
========== ========== ========== ==========
10
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 (CONTINUED)
Fair value of financial instruments
The fair values of cash and cash equivalents and accounts payable
approximates their carrying amounts due to their short-term maturities.
Recent accounting pronouncements
In June 2009, the Financial Accounting Standards Board ("FASB") approved the
FASB Accounting Standards Codification ("the Codification") as the single
source of authoritative nongovernmental Generally Accepted Accounting
Principles ("GAAP"). All existing accounting standard documents, such as
FASB, American Institute of Certified Public Accountants, Emerging Issues
Task Force and other related literature, excluding guidance from the SEC,
have been superseded by the Codification. All other non-grandfathered, non-
SEC accounting literature not included in the Codification has become
nonauthoritative. The Codification did not change GAAP, but instead
introduced a new structure that combines all authoritative standards into a
comprehensive, topically organized online database. The Codification was
effective for interim or annual periods ending after September 15, 2009, and
impacts the Company's financial statements, as all references to
authoritative accounting literature are now referenced in accordance with the
Codification. There have been no changes to the content of the Company's
financial statements or disclosures as a result of implementing the
Codification during the quarter ended September 30, 2009.
As a result of the Company's implementation of the Codification during the
quarter ended September 30, 2009, previous references to new accounting
standards and literature are no longer applicable. In the current quarter
financial statements, the Company provides reference to both new and old
guidance to assist in understanding the impacts of recently adopted
accounting literature, particularly for guidance adopted since the beginning
of the current fiscal year but prior to the Codification.
In December 2007, the FASB issued ASC 810 (formerly - SFAS No. 160),
Consolidation. This standard changes the accounting for non-controlling
(minority) interests in consolidated financial statements, including the
requirements to classify non-controlling interests as a component of
consolidated stockholders' equity, and the elimination of minority interest
accounting in results of operations, with earnings attributable to
noncontrolling interests reported as part of consolidated earnings. Purchases
and sales of noncontrolling interests are to be reported in equity similar to
treasury stock transactions. The standard became effective for the Company on
July 1, 2009. As a result the Company now reports noncontrolling interest as
a component of equity in its consolidated balance sheet and below net (loss)
income in its consolidated statement of operations. In addition, the
provisions of ASC 810 require that minority interest be renamed
noncontrolling interest and that a company present a consolidated net income
measure that includes the amount attributable to such noncontrolling
interests for all periods presented. As required by ASC 810, the Company has
retrospectively applied the presentation to all prior year balances
presented.
11
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 (CONTINUED)
3. NONCONTROLLING INTEREST OF CENTERPOINT CORPORATION:
At March 31, 2010 and June 30, 2009, the Company owns a 58.9% interest in
Centerpoint.
During the three and nine months ended March 31, 2010 and 2009, Centerpoint
had losses of approximately $2,900 and $7,900, and $31,200 and $7,600,
respectively. The noncontrolling interest as of March 31, 2010 was $108,543.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
March 31, 2010 June 30, 2009
-------------- -------------
Research and development equipment $ 305,266 $ 305,266
Project construction in progress 755,748 433,179
Leasehold improvements 31,336 31,336
Furniture 28,932 28,932
Computers and office equipment 40,309 31,680
----------- -----------
1,161,591 830,393
Less accumulated depreciation (359,993) (353,164)
----------- -----------
$ 801,598 $ 477,229
=========== ===========
Depreciation expense was $4,333 and $3,567 for the three months ended March
31, 2010 and 2009, respectively, and $12,531 and $11,931 for the nine months
ended March 31, 2010 and 2009, respectively.
5. LOANS PAYABLE - AFFILIATES:
During the year ended June 30, 2009, Dominic Bassani, Vice-President Special
Project and Strategic Planning for the Projects Group, Mark A. Smith, the
Company's President, and a major shareholder loaned the Company $120,000,
$7,500 and $35,000, respectively, for working capital needs. The loans,
totaling $162,500 as of June 30, 2009, were non-interest bearing and were
repaid in July 2009.
6. DEFERRED COMPENSATION:
As of December 31, 2009, the Company owed Brightcap Capital Ltd.
("Brightcap") for services provided by Mr. Bassani, deferred compensation of
$325,000. The Company entered into the Brightcap Agreement (see Note 9),
whereby the deferred compensation of Brightcap owed as of December 31, 2008
totaling $175,000, was made convertible until December 31, 2009 (subsequently
extended to January 14, 2010) into the Company's restricted common stock, at
Brightcap's option, at a price of $0.75 per share, the fair value of the
shares at the date of the agreement. As the conversion price of $0.75 per
shares approximated the fair value of the shares of common stock at the time
the conversion agreement was entered into, no beneficial conversion feature
existed. Effective January 14, 2010, this obligation was converted into
12
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 (CONTINUED)
233,334 shares of the Company's restricted common stock pursuant to its
terms. The Company entered into another agreement with Brightcap in June
2009, whereby the deferred compensation earned by Brightcap from January 1,
2009 through June 30, 2009, totaling $150,000, was made due July 1, 2010 and
convertible until July 1, 2010 into the Company's restricted common stock, at
Brightcap's option, at a price of $1.50 per share, the fair value of the
shares at the date of the agreement. As the conversion price of $1.50 per
share approximated the fair value of the shares at the time the conversion
agreement was entered into, no beneficial conversion feature existed.
7. STOCKHOLDERS' EQUITY:
Series B Preferred stock:
In March 2009, the Company authorized the issuance of 50,000 shares of Series
B Preferred stock; which have a par value of $0.01 per share and are issuable
at a price of $100 per share. The Series B Preferred stock is convertible
for three years from the date of issuance at the option of the holder into
shares of the Company's common stock calculated by dividing the sum of the
$100 per share purchase price plus any accrued and unpaid dividends by $2.00
(the Conversion Rate). The Series B Preferred stock shall be automatically
and mandatorily converted into shares of the Company's common stock at the
Conversion Rate upon each occasion (at least 30 calendar days apart) after a
date of six months subsequent to the initial issuance of the Series B
Preferred stock on which the closing price of the Company's common stock has
been equal or greater than 150% of the Conversion Rate (initially $3.00) for
twenty consecutive trading days with a reported average daily trading volume
of 10,000 shares or more. The Series B Preferred stock may be redeemable at
the option of the Company after one year from the issuance on 10 days'
written notice, at a price equal to $100 per share plus any accrued unpaid
dividends. During the 10 day period, the holder may elect to convert the
Series B Preferred stock to the Company's common stock at the Conversion
Rate. On the third anniversary of issuance, the Company shall redeem the
outstanding Series B Preferred stock at the price of $100 per share plus any
accrued unpaid dividends. The Series B Preferred stock accrues dividends at
a rate of 2.5% per quarter (10% per year) and shall be earned and accrued or
paid quarterly.
Because the Series B Preferred stock is redeemable in cash at a fixed price
($100 per share plus accrued unpaid dividends) on a fixed date (the third
anniversary of issuance), the Company has classified the Series B Preferred
stock outside of stockholders' equity. Therefore, the Series B Preferred
stock has been recorded at its current redemption value as "temporary equity"
in the accompanying consolidated balance sheet. Dividends on the Series B
Preferred stock are reflected as part of the redemption value with an offset
to reduce additional paid-in capital, and are included in the determination
of net loss applicable to common stockholders.
During the nine months ended March 31, 2010, the Company concluded the
offering of Series B Preferred stock and issued 6,850 shares of Series B
Preferred stock for cash proceeds of $685,000 (net proceeds of $595,950 after
commissions).
13
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 (CONTINUED)
The Company declared dividends on July 29, 2009, for the Series B Preferred
stockholders with a record date of June 30, 2009, totaling $12,876, which
were paid on August 15, 2009. The Company declared dividends on October 28,
2009 for the Series B Preferred stockholders with a record date of September
30, 2009 totaling $63,792, which were paid on November 16, 2009. The Company
declared dividends on February 1, 2010 for the Series B Preferred
stockholders with a record date of December 31, 2009, totaling $70,425,
which were paid on February 16, 2010. The Company declared dividends on
April 27, 2010 for the Series B Preferred stockholders with a record date of
March 31, 2010, totaling $70,425; which are expected to be paid on May 17,
2010.
Series C Preferred stock:
During December 2009, the Company authorized the issuance of 60,000 shares of
Series C Preferred stock, which have a par value of $0.01 per share and are
issuable at a price of $100 per share. The Series C Preferred stock is
convertible at the option of the holder at any time from the date of
issuance, into shares of the Company's common stock calculated by dividing
the sum of the $100 per share purchase price plus any accrued and unpaid
dividends by $4.00 (the Conversion Rate), provided the shares have not been
redeemed into common shares by the Company at is sole election. A portion
(up to 100% as calculated below) of each shares of Series C Preferred stock
shall be automatically and mandatorily converted into shares of the Company's
common stock at the Conversion Rate upon each occasion (at least 30 calendar
days apart) after a date of six months subsequent to the initial issuance of
the Series C Preferred stock on which the closing price of the Company's
common stock has been equal or greater than 150% of the Conversion Rate
(initially $6.00) for twenty consecutive trading days with a reported average
daily trading volume of 10,000 shares or more. On each occasion for
mandatory conversion as set forth above, a sufficient portion of the
outstanding shares of Series C Preferred stock shall be prorata converted so
that the holders of the Series C Preferred stock receive an aggregate number
of shares of the Company's restricted common stock equal to 7.5 times the
average reported daily volume of trading in the Company's publicly traded
common stock for the applicable twenty day period and each outstanding share
shall thereafter be proportionately reduced in its rights to represent the
effect of the partial conversions. The Series C Preferred stock accrues
dividends at a rate of 2.5% per quarter (10% per year) and shall be earned
and accrued or paid quarterly.
Dividends on the Series C Preferred stock are reflected as part of the
redemption value with an offset to reduce additional paid-in capital, and are
included in the determination of net loss applicable to common stockholders.
During the nine months ended March 31, 2010, the Company issued 15,400 shares
of Series C Preferred stock for cash proceeds of $1,540,000 (net proceeds of
$1,339,800 after commissions).
The Company declared dividends on February 1, 2010 for the Series C Preferred
stockholders with a record date of December 31, 2009 totaling $800, which
were paid on February 16, 2010. The Company declared dividends on April 27,
2010 for the Series C Preferred stockholders with a record date of March 31,
2010 totaling $19,146; which are expected to be paid on May 17, 2010.
14
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 (CONTINUED)
Common stock:
Holders of common stock are entitled to one vote per share on all matters to
be voted on by common stockholders. In the event of liquidation, dissolution
or winding up of the Company, the holders of common stock are entitled to
share in all assets remaining after liabilities have been paid in full or set
aside and the rights of any outstanding preferred stock have been satisfied.
Common stock has no preemptive, redemption or conversion rights. The rights
of holders of common stock are subject to, and may be adversely affected by,
the rights of the holders of any outstanding series of preferred stock or any
series of preferred stock the Company may designate in the future.
In January 2009, pursuant to the Smith Agreement (Note 9), the Company issued
200,000 shares of the Company's restricted common stock at $0.75 per share as
prepayment of Mr. Smith's calendar year 2009 base compensation of $150,000.
As of March 31, 2010, the shares are fully vested and the Company has
recorded $150,000 as compensation expense.
From July 2009 through March 2010, the Company issued 142,677 shares of the
Company's restricted common stock at prices ranging from $1.01 to $2.25 per
share for consulting services valued at $245,890 to various consultants.
During September 2009, the Company issued 8,769 shares of the Company's
restricted common stock at $1.50 per share for cash proceeds of $13,153.
In September 2009, the Company issued 55,530 shares of the Company's
restricted common stock in conversion and satisfaction of the Company's
accrued payable of $41,647 to a company controlled by Mr. Salvatore Zizza,
the former Chairman of the Projects Group. The shares were issued pursuant to
an agreement whereby Mr. Zizza had the option to convert the payable into
common shares of the company at $0.75 per share at any time prior to the
obligation being paid by the Company.
In September 2009, the Company issued 24,565 shares of the Company's
restricted common stock in satisfaction of accounts payable of $36,848. The
shares were valued at $1.50 per share which approximated the market value at
the time of the issuance.
In October 2009, the Company issued 2,020 shares of the Company's restricted
common stock in satisfaction of accrued interest on convertible loans payable
from affiliates totaling $1,515. The shares were valued at $0.75 per share
which approximated the market value at the date of loan payable agreements.
In January 2010, the Company issued 233,334 shares of the Company's
restricted common stock in conversion and satisfaction of deferred
compensation owed Brightcap totaling $175,000. The shares were issued
pursuant to an agreement whereby Brightcap had the option to convert the
deferred compensation into common shares of the Company at $0.75 per share,
the approximate market value of the shares at the time of the agreement (Note
6).
In July 2009, the Company issued 130,000 common shares of the Company as
stock bonuses to certain key employees and a consultant at $1.01 per share,
15
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 (CONTINUED)
the approximate market value on the date of grant, totaling $131,300. The
stock bonuses are subject to vesting and during the nine months ended March
31, 2010, $73,552 was recorded as compensation expense and $32,498 was
capitalized as project construction in progress as it directly related to
construction services provided by employees and consultants.
During March 2010, the Company cancelled 2,826 of its previously issued
common shares that were deemed undeliverable pursuant to the terms of a 2007
class action litigation settlement.
Warrants:
As of March 31, 2010, the Company had the following common stock warrants
outstanding:
Number of Shares Exercise Price Expiration Date
---------------- -------------- ----------------
Class SVDB 1-6 800,000 $ 3.00 December 31, 2018
Class DB-1 600,000 1.00 December 31, 2018
Class DB-1A 1,000,000 0.75 December 31, 2018
Class A 1-3 600,000 2.50 December 31, 2018
Class SVMAS-1 67,500 3.50 December 31, 2018
Class SVMAS-1A 40,000 3.50 December 31, 2018
Class SVMAS 2-3 72,500 2.50 December 31, 2018
Class SVB 1-4 125,000 2.50 December 31, 2018
Class SVC 1-5 125,000 4.25 December 31, 2018
Class SV-SEI 1-2 32,292 1.50 December 31, 2012
Class C,D,E 275,000 2.50 April 30, 2015
Class O 100,000 3.00 December 31, 2018
Class DM 150,000 3.00 December 31, 2011
Class MAS 80,000 2.50 December 31, 2018
Class MAS-1 A-K 300,000 0.75 December 31, 2018
Class GK 20,000 2.00 March 31, 2011
Class TO-1 15,000 0.75 December 31, 2018
Class BW 10,000 2.20 June 15, 2012
Class Z 1-3 53,324 1.25 December 31, 2018
Class NCC-1 25,000 2.00 May 31, 2014
Class DB-2 600,000 2.50 January 15, 2019
Class MAS 4-1 200,000 2.50 January 15, 2019
Class NH-1 12,000 2.25 February 17, 2013
----------
5,302,616
==========
In September 2009, warrants to purchase 600,000 and 200,000 shares of the
Company's common stock at $2.50 per share were issued pursuant to various
extension agreements with Mr. Bassani and Mr. Smith, respectively (Note 9).
The warrants were determined to have a fair value of $0.10 per warrant and
expire on January 15, 2019. The value placed upon the warrants to purchase
common stock at $2.50 per share was determined to be $0.10 per warrant based
on factors including the evaluation of the Company's value as of the date of
the issuances, consideration of the Company's limited liquid resources and
business prospects, the market price of the Company's stock in its mostly
16
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 (CONTINUED)
inactive public market, the concurrent sales of restricted common stock at
$1.50 per share, and the historical valuation and purchases of the Company's
warrants. The Company recorded non-cash compensation of $80,000 related to
the warrant issuances.
In February 2010, warrants to purchase 12,000 shares of the Company's common
stock at $2.25 per share were issued pursuant to an agreement with a
consultant. The warrants were determined to have a fair value of $0.25 per
warrant and expire on February 17, 2013. The value placed upon the warrants
to purchase common stock at $2.25 per share was determined to be $0.25 per
warrant based on factors including the evaluation of the Company's value as
of the date of the issuances, consideration of the Company's limited liquid
resources and business prospects, the market price of the Company's stock in
its mostly inactive public market and the historical valuation and purchases
of the Company's warrants. The Company recorded non-cash compensation of
$3,000 related to the warrant issuances.
The weighted average exercise price for the outstanding warrants is $2.03,
and the weighted average remaining contractual life as of March 31, 2010 is
8.3 years.
Stock options:
The Company's 2006 Consolidated Incentive Plan (the "2006 Plan"), as amended,
provides for the issuance of options to purchase up 6,000,000 shares of the
Company's common stock. Terms of exercise and expiration of options granted
under the 2006 Plan may be established at the discretion of the Board of
Directors, but no option may be exercisable for more than ten years.
In May and June of 2008, the Board of Directors, in an effort to retain key
employees and consultants, approved the modifications of certain options to
certain employees and consultants. The modifications included the reduction
of the exercise price of certain options below the fair market value on the
date of grant, modifications to the vesting terms and extension of the expiry
dates. As a result of the modifications, the Company recorded incremental
compensation expense of $83,428, which was recognized at June 30, 2008 and
approximately $282,000 of additional compensation is being recognized over a
weighted average period of approximately 2 years.
The Company recorded compensation expense related to employee stock options
of $40,899 and $58,086 for the three months ended March 31, 2010 and 2009,
respectively and $208,976 and $205,083 for the nine months ended March 31,
2010 and 2009, respectively. The Company granted 195,000 and 75,000 options
during the nine months ended March 31, 2010 and 2009, respectively. The fair
value of the options granted during the nine months ended March 31, 2010 and
2009 were estimated on the grant date using the Black-Scholes option-pricing
model with the following assumptions:
17
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 (CONTINUED)
Weighted Weighted
average Range average Range
March 31, March 31, March 31, March 31,
2010 2010 2009 2009
--------- ----------- --------- -----------
Volatility 100% 99%-104% 99% 73%-151%
Dividend yield - - - -
Risk-free interest rate 1.29% 1.12%-1.31% 1.97% 1.63%-2.64%
Expected term (years) 2.5 2.5 4 3-6
The expected volatility was based on the historical price volatility of the
Company's common stock. The dividend yield represents the Company's
anticipated cash dividend on common stock over the expected term of the stock
options. The U.S. Treasury bill rate for the expected term of the stock
options was utilized to determine the risk-free interest rate. The expected
term of stock options represents the period of time the stock options granted
are expected to be outstanding based upon management's estimates.
A summary of option activity under the 2006 Plan for the nine months ended
March 31, 2010 is as follows:
Weighted
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price Life Value
--------- --------- ----------- ---------
Outstanding at July 1, 2009 1,995,833 $ 3.01 4.3 $ -
Granted 195,000 1.38 4.3
Exercised - -
Forfeited - -
Expired - -
--------- -------- --- --------
Outstanding at March 31, 2010 2,190,833 $ 2.87 3.6 $255,750
========= ======== === ========
Exercisable at March 31, 2010 2,070,083 $ 2.90 3.6 $210,750
========= ======== === ========
The following table presents information relating to nonvested stock options
as of March 31, 2010:
Weighted Average
Grant-Date
Options Fair Value
--------- ----------------
Nonvested at July 1, 2009 203,749 $ 1.31
Granted 195,000 0.60
Vested (278,749) (1.09)
Forfeited - -
-------- ------
Nonvested at March 31, 2010 120,000 $ 0.65
======== ======
18
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 (CONTINUED)
The total fair value of stock options that vested during the nine months
ended March 31, 2010 and 2009 was $302,750 and $245,189, respectively. As of
March 31, 2010, the Company had $57,708 of unrecognized compensation cost
related to stock options that will be recorded over a weighted average period
of less than one year.
The Company has issued options to non-employees to purchase shares of the
Company's common stock in exchange for services. As of March 31, 2010, non-
employee options represented 595,833 of the 2,190,833 options outstanding
under the 2006 Plan. Of the 595,833 non-employee options outstanding, 92,500
were fully vested and contained no service conditions as of March 31, 2010.
These non-employee options were valued using the Black-Scholes option-pricing
model. The fully vested options have been fully amortized on the straight-
line method and resulted in no expense being recorded for the nine months
ended March 31, 2010 and 2009.
The remaining 503,333 non-employee options outstanding include service
conditions and have graded vesting schedules through November 30, 2009. As
of March 31, 2010, all of the 503,333 options that included service
conditions are fully vested. Generally for these agreements, the measurement
date of the services occurs when the options vest. Recognition of
compensation cost for reporting periods prior to the measurement date is
based on the then current fair value of the options as of each of the interim
reporting dates. Any subsequent change in fair value is recorded on the
measurement date. The fair value of these options was determined using the
Black-Scholes option-pricing model using the following assumptions at
November 30, 2009; a dividend yield of zero, risk-free interest rates of
3.21%, volatility of 158%, and an expected life of 8.5 years. Non-cash
fair value charges/(credits) of zero and $137,200 were recorded as expense
during the three months ended March 31, 2010 and 2009, respectively and
$91,831 and $(72,415) for the nine months ended March 31, 2010 and 2009,
respectively.
Stock-based compensation charges in operating expenses in the Company's
financial statements for the three and nine months ended March 31, 2010 and
2009 are as follows:
19
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 (CONTINUED)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
March 31, 2010 March 31, 2009 March 31, 2010 March 31, 2009
-------------- -------------- -------------- --------------
General and administrative:
Fair value remeasurement of
options with service conditions $ - $137,200 $ 91,831 $(137,875)
Fair value of stock bonuses
expensed 1,683 - 63,341 -
Fair value of stock options
expensed 40,899 58,086 202,351 172,454
------- -------- -------- ---------
Total $42,582 $195,286 $357,523 $ 34,579
======= ======== ======== =========
Research and development:
Fair value remeasurement of
options with service conditions $ - $ - $ - $ 65,460
Fair value of stock bonuses
expensed - - 10,211 -
Fair value of stock options
expensed - - 6,625 32,630
------- -------- -------- ---------
Total $ - $ - $ 16,836 $ 98,090
======= ======== ======== =========
8. OPERATING LEASE:
The Company entered into a non-cancellable operating lease commitment for
office space in New York, effective August 1, 2006 and expiring November 30,
2013. In conjunction with the signing of the lease, the Company provided the
lessor with a secured letter of credit. As of March 31, 2010, the Company
has reflected $57,315 as restricted cash related to the secured letter of
credit. The Company's obligations under the lease are partially guaranteed
by Mr. Salvatore Zizza, a former officer and director of the Company. The
Company has entered into two separate agreements to sub-lease approximately
32% of the Company's lease obligation, and the tenants have also agreed to
reimburse the Company for leasehold improvements and furnishings. Because
the lease contains an escalation clause, the Company is recognizing rent
under the straight-line method resulting in an average monthly rent expense
of $15,820. The Company is also recognizing the sub-lease rental income from
its tenants under the straight-line method, with a monthly average of $5,250.
The difference between the straight-line method, and the actual lease
payments has resulted in a deferred rent liability of $70,826 as of March 31,
2010. Rent expense net of contractual and month to month sub-lease rental
income was $1,838 and $5,122 for the three months ended March 31, 2010 and
2009, respectively and $20,509 and $35,830 for the nine months ended March
31, 2010 and 2009, respectively.
At March 31, 2010, future minimum rental payments due under non-cancelable
leases and future minimum rental payments to be received under non-cancelable
subleases are:
20
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 (CONTINUED)
Operating lease Net operating
payments Sublease rentals lease payments
--------------- ---------------- --------------
Fiscal year:
Three months ending June 30, 2010 $ 47,996 $ 15,359 $ 32,637
2011 198,602 63,553 135,049
2012 212,775 68,088 144,687
2013 225,756 72,242 153,514
2014 97,219 31,110 66,109
-------- -------- --------
Total $782,348 $250,352 $531,996
======== ======== ========
Effective January 1, 2009, Mr. Zizza entered into a Master Sublease with the
Company pursuant to which Mr. Zizza became a sublessee and for a one year
initial period, made all payments pursuant to the lease and managed the lease
premises. Rental payments from existing sub-tenants are being deposited into
a Company bank account such that Mr. Zizza utilizes those funds towards the
monthly lease payment. During November 2009, Mr. Zizza exercised his option
to continue the Master Sublease for the entire term of the lease. Mr. Zizza
fulfilled his obligations under the Master Sublease during the one-year
initial period and in January 2010, he received the funds from the release of
the restricted cash securing the Company's letter of credit of $28,658.
Since Mr. Zizza exercised the option to continue the Master Sublease for the
entire term of the lease, Mr. Zizza will be entitled to the balance of
restricted funds securing the letter of credit of approximately $57,000 if he
fulfills his obligations pursuant to the Master Sublease.
9. COMMITMENTS AND CONTINGENCIES:
Employment and consulting agreements:
On January 11, 2009, the Company and Mr. Smith entered into the Smith
Agreement whereby Mr. Smith agreed to continue to hold positions of Director,
President and General Counsel of the Company and its subsidiaries at an
annual salary of $150,000. Pursuant to the Smith Agreement, Mr. Smith was
granted a $37,500 bonus in the form of a warrant (and extension of
outstanding warrants previously issued to Mr. Smith), immediately vested, to
purchase 300,000 shares of the Company's common stock at $0.75 per share
until December 31, 2018, and Mr. Smith agreed to accept pre-payment of his
calendar year 2009 base compensation of $150,000 in the form of 200,000
restricted shares of Company common stock at a price of $0.75 per share. In
addition, Mr. Smith converted his deferred compensation as of December 31,
2008 into shares of the Company's common stock. On September 30, 2009, the
Company and Mr. Smith entered into an extension agreement whereby Mr. Smith
will continue to hold his current position in the Company through a date no
later than December 31, 2010. Commencing January 1, 2010, Mr. Smith is paid
a monthly salary of $16,000 in addition to a cash bonus of $15,000 paid in
January 2010. In addition Mr. Smith was granted a $20,000 bonus payable in
warrants to purchase 200,000 shares of the Company's common stock at a price
of $2.50 per share until January 15, 2019.
21
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 (CONTINUED)
Effective March 31, 2005, an agreement with Brightcap, through which the
services of Dominic Bassani are provided, was extended through March 31,
2009. Under the terms of the agreement, Brightcap will be paid $300,000
annually for Mr. Bassani's services. On January 11, 2009, the Company
entered in the Brightcap Agreement, which extends Mr. Bassani's services
under the terms of the March 31, 2005 agreement for up to an additional six
months. In addition, Mr. Bassani was granted a bonus of $125,000 in the form
of a) warrant, immediately vested, to purchase 1,000,000 shares of the
Company's common stock at $0.75 per share until December 31, 2018 and b) the
extension of all warrants previously issued to either Brightcap or Mr.
Bassani, now held by their donees, to December 31, 2018. The Brightcap
Agreement also required that upon the consummation of the next financing
received by the Company in excess of $1,000,000 net proceeds, the Company
would no longer defer compensation earned by Brightcap, rather it will be
paid in cash. Since July 2009, Brightcap has been paid in cash. The
Brightcap Agreement granted Brightcap the right to convert its existing
deferred compensation as of December 31, 2008 of $175,000 into 233,334 shares
of the Company's common stock at a price of $0.75 per share until December
31, 2009 which right was extended to January 14, 2010, on which date the
conversion took place (Note 6 and 7). The Brightcap Agreement also extended
the maturity date of Mr. Bassani's $50,000 promissory note to June 30, 2009
and allowed for the conversion of the principal and interest, in whole or in
part, at the election of Mr. Bassani, into the Company's restricted common
shares at $0.75 per share. The promissory note was converted on June 30,
2009. On September 30, 2009 the Company entered into an extension agreement
with Brightcap pursuant to which Mr. Bassani will provide services to the
Company through September 30, 2012 for $312,000 annually. In conjunction
with the extension agreement, Mr. Bassani was granted a $60,000 bonus payable
in warrants to purchase 600,000 shares of the Company's common stock at a
price of $2.50 per share until January 15, 2019. Mr. Bassani was also
granted an extension on the conversion date of the $175,000 deferred
compensation from December 31, 2009 until January 14, 2010.
Effective September 18, 2006, the Company entered into a four-year employment
agreement with Jeremy Rowland whereby Mr. Rowland assumed the position of
Chief Operating Officer of Dairy at an annual salary of $150,000. In June
2008, the employment agreement terms were extended through July 1, 2012. Mr.
Rowland now serves as Chief Operating Officer of the Company's Services Group
subsidiary.
The Company approved an employment agreement contract extension effective
June 30, 2009, with Craig Scott whereby Mr. Scott will continue to act as
Vice President of Capital Markets and Shareholder Relations through December
31, 2010, at an annual salary of $144,000. The Company will have the right
terminate the agreement with 30 days notice commencing December 2009, with no
further liability.
In May 2005 the Company declared contingent deferred stock bonuses of 690,000
shares to its key employees and consultants. The stock bonuses of 492,500
and 197,500 shares are contingent upon the Company's stock price exceeding
$10.00 and $20.00 per share, respectively, and the grantees still being
employed by or providing services to the Company at the time the target
prices are reached. As of March 31, 2010, 442,500 shares remain outstanding
22
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2010 (CONTINUED)
due to the expiry of 165,000 and 82,500 shares, to be issued when and if the
Company's stock price exceeds $10.00 and $20.00 per share, respectively.
In May 2008, the Company approved 250,000 stock options to certain employees
that will be granted upon the execution of new employment agreements.
Claims contingency:
In May 2002, Arab Commerce Bank Ltd. ("ACB"), an unaffiliated party, filed a
complaint against the Company in the Supreme Court of the State of New York
regarding $100,000 of the Company's convertible bridge notes ("Bridge Notes")
that were issued to ACB in March 2000. The complaint includes a breach of
contract claim asserting that the Company owes ACB approximately $285,000
plus interest of $121,028 plus interest based on ACB's interpretation of the
terms of the Bridge Notes and subsequent amendments. Effective June 30,
2001, the Company issued ACB 5,034 shares of common stock in full
satisfaction of the Bridge Notes based on the Company's interpretation of the
Bridge Notes, as amended. The Company has filed an answer to the complaint
denying the allegations. No activity has taken place on this lawsuit since
early 2003. The Company believes that the ultimate resolution of this
litigation will not have a material adverse effect on the Company, its
operations or its financial condition.
10. SUBSEQUENT EVENTS:
The Company has evaluated events that occurred subsequent to March 31, 2010
for recognition and disclosure in our financial statements and notes to our
financial statements.
Issuance of Common Stock
During April 2010, the Company has issued 29,227 common shares to consultants
for services valued at approximately $66,000.
In April 2010, the board of directors granted 80,000 options to three
employees and a director. The options were immediately vested and have an
exercise price of $2.25 per option and expire on December 31, 2015.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the unaudited Consolidated Financial Statements and Notes to Consolidated
Financial Statements filed herein and with the Company's Form 10-K/A for the
year ended June 30, 2009.
BUSINESS OVERVIEW
For several years, the Company focused on completion of the development
of its second-generation technology which provides a comprehensive
environmental solution to a significant source of pollution in U.S.
agriculture, Confined Animal Feeding Operations ("CAFO's"), which development
is now substantially complete. Currently, Bion is focused on using
applications of its patented waste management technology to pursue two main
business opportunities: 1) environmental retrofit and remediation of the
waste streams of existing CAFOs in selected markets; and 2) to develop
Integrated Projects which will include large CAFOs, such as large dairies,
beef cattle feed lots and hog farms, with Bion waste treatment System modules
processing the aggregate CAFO waste stream from the equivalent of 40,000 or
more beef and/or dairy cows (or the waste stream equivalent of other species)
while producing solids to be utilized for renewable energy production (and
potentially to be marketed as feed and/or fertilizer), integrated with an
ethanol plant capable of producing 40 (or more) million gallons of ethanol
per year and/or with CAFO end product processors.
The Company has commenced actively pursuing the opportunity presented by
environmental retrofit and remediation of the waste streams of existing
CAFOs. The first commercial activity in this area is an agreement with
Kreider Farms ("KF") in Pennsylvania to design, construct and operate Bion
Systems to treat KF's dairy and poultry waste streams to reduce nutrient
releases to the environment while generating marketable nutrient credits and
renewable energy. On January 26, 2009 the Board of the Pennsylvania
Infrastructure Investment Authority approved a $7.8 million loan to Bion PA
1, LLC, a wholly-owned subsidiary of the Company, for the initial stage of
Bion's Kreider Farms project. After substantial unanticipated delays over the
fall and winter, the Company presently anticipates that the steps required to
finalize the pre-construction phase of the Pennvest Loan will be completed
during the next 90 days and that the initial drawdown/re-imbursement from
Pennvest pursuant to the Pennvest Loan will be received shortly thereafter.
The Company has commenced permitting for this project and anticipates that
construction of this project will commence during the next 120 days and that
the project will be operational during the current calendar year. The
Pennsylvania Department of Environmental Protection recently re-certified the
nutrient credits for this project.
Additionally, we believe that Bion's technology platform allows the
integration of large-scale CAFO's and their end-product users, renewable
energy production from the CAFO waste stream, on site utilization of the
renewable energy generated and biofuel/ethanol production in an
environmentally and economically sustainable manner while reducing the
aggregate capital expense and operating costs for the entire integrated
complex ("Integrated Projects" or "Projects"). In the context of Integrated
24
Projects, Bion's waste treatment process, in addition to mitigating polluting
releases, generates renewable energy from cellulosic portions of the CAFO
waste stream which renewable energy can be utilized by integrated facilities
including ethanol plants, CAFO end-product processors (including cheese, ice
cream and /or bottling plants in the case of dairy CAFOs and/or slaughter
and/or processing facilities in the context of beef CAFOs) and/or other users
as a natural gas replacement. Note that an integrated ethanol plant's main
by-product, called distillers grain, can be added to the feed of the animals
in wet form thereby lowering the capital expenditures, operating, marketing
and shipping costs and energy usage of the ethanol production process. In
such cases, the ethanol plant would act as a feed mill for the integrated
CAFO, thus reducing the CAFO's feeding costs and generating revenue to the
ethanol plant, and also provides a market for the renewable energy that
Bion's System produces from the CAFO waste stream. Thus, such Bion Integrated
Projects can be denominated "closed loop". Bion, as developer of and
participant in Integrated Projects, anticipates that it will share in the
cost savings and revenue generated from these activities.
Bion is currently working with local, state and federal officials with
regard to regulatory and legislative initiatives and with such parties and
potential industry participants to evaluate sites in multiple states. The
Company has tentatively selected the Town of Schroeppel, Oswego County, New
York for its initial Integrated Project and anticipates optioning land in
that area during the current year or soon thereafter (although other
locations in upstate New York and in other states are also under review). In
addition, Bion intends to choose sites for additional Projects during the
remainder of calendar years 2010-2012 to create a pipeline of Projects.
Management has a 5-year development target (through calendar year 2016) of
approximately 12-24 Integrated Projects. At the end of that period, Bion
projects that 8 or more of these Integrated Projects will be in full
operation in 3-8 states, and the balance would be in various stages ranging
from partial operation to early permitting stage. No Integrated Project has
been developed to date.
The financial statements for the years ended June 30, 2009 and 2008 have
been prepared assuming the Company will continue as a going concern. The
Company has incurred net losses of approximately $1,312,000 and $1,779,000
during the years ended June 30, 2009 and 2008, respectively. At June 30,
2009, the Company had a working capital surplus and stockholders' deficit of
approximately $515,000 and $1,125,000, respectively. The financial
statements for the three and nine months ended March 31, 2010 and 2009 have
also been prepared assuming the Company will continue as a going concern.
The Company has incurred net losses of approximately $614,000 and $2,227,000
during the three and nine month periods ended March 31, 2010, respectively.
At March 31, 2010, the Company has a working capital surplus and
stockholders' deficit of approximately $707,000 and $1,135,000, respectively.
The report of the independent registered public accounting firm on the
Company's consolidated financial statements as of and for the year ended June
30, 2009 includes a "going concern" explanatory paragraph which means that
the accounting firm has expressed substantial doubt about the Company's
ability to continue as a going concern. Management's plans with respect to
these matters are described in this section and in our consolidated financial
Statements (and notes thereto), and this material does not include any
adjustments that might result from the outcome of this uncertainty. There is
25
no guarantee that we will be able to raise the funds or raise further capital
for the operations planned in the near future.
CRITICAL ACCOUNTING POLICIES
Management has identified the following policies below as critical to
our business and results of operations. Our reported results are impacted by
the application of the following accounting policies, certain of which
require management to make subjective or complex judgments. These judgments
involve making estimates about the effect of matters that are inherently
uncertain and may significantly impact quarterly or annual results of
operations. For all of these policies, management cautions that future
events rarely develop exactly as expected, and the best estimates routinely
require adjustment. Specific risks associated with these critical
accounting policies are described in the paragraphs below.
Revenue Recognition
While the Company has not recognized any operating revenues for the past
two fiscal years, the Company anticipates that future revenues will be
generated from product sales, credit sales, technology license fees, annual
waste treatment fees and/or direct ownership interests in Integrated
Projects. The Company expects to recognize revenue from product sales when
there is persuasive evidence that an arrangement exists, when title has
passed, the price is fixed or determinable, and collection is reasonably
assured. The Company expects that technology license fees will be generated
from the licensing of Bion's Systems. The Company anticipates that it will
charge its customers a non-refundable up-front technology license fee, which
will be recognized over the estimated life of the customer relationship. In
addition, any on-going technology license fees will be recognized as earned
based upon the performance requirements of the agreement. Annual waste
treatment fees will be recognized upon receipt. Revenues, if any, from the
Company's interest in Projects will be recognized when the entity in which
the Project has been developed recognizes such revenue.
Compensation Cost for Options with Service Conditions and Graded Vesting
Schedules
The Company has issued non-employee options that include service
conditions and have graded vesting schedules. Generally for these
arrangements, the measurement date of the services occurs when the options
vest. Recognition of compensation cost for reporting periods prior to the
measurement date is based on the then current fair value of the options.
Fair value of the options is determined using a Black-Scholes option-pricing
model. Any subsequent changes in fair value will be recorded on the
measurement date. Compensation cost in connection with options that are not
fully vested is being recognized on a straight-line basis over the requisite
service period for the entire award.
Stock-based compensation
The Company follows the provisions of ASC 718 (formerly SFAS 123(R)),
which generally requires that share-based compensation transactions be
26
accounted and recognized in the statement of income based upon their fair
values.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, FASB approved the FASB Accounting Standards Codification
("the Codification") as the single source of authoritative nongovernmental
GAAP. All existing accounting standard documents, such as FASB, American
Institute of Certified Public Accountants, Emerging Issues Task Force and
other related literature, excluding guidance from the Securities and Exchange
Commission ("SEC"), have been superseded by the Codification. All other non-
grandfathered, non-SEC accounting literature not included in the Codification
has become nonauthoritative. The Codification did not change GAAP, but
instead introduced a new structure that combines all authoritative standards
into a comprehensive, topically organized online database. The Codification
was effective for interim or annual periods ending after September 15, 2009,
and impacts the Company's financial statements, as all future references to
authoritative accounting literature are now referenced in accordance with the
Codification. There have been no changes to the content of the Company's
financial statements or disclosures as a result of implementing the
Codification during the quarter ended September 30, 2009.
As a result of the Company's implementation of the Codification during
the quarter ended September 30, 2009, previous references to new accounting
standards and literature are no longer applicable. In the current quarter
financial statements, the Company provides reference to both new and old
guidance to assist in understanding the impacts of recently adopted
accounting literature, particularly for guidance adopted since the beginning
of the current fiscal year but prior to the Codification.
In December 2007, the FASB issued ASC 810 (formerly - SFAS No. 160),
"Consolidation". The standard changes the accounting for non-controlling
(minority) interests in consolidated financial statements, including the
requirements to classify non-controlling interests as a component of
consolidated stockholders' equity, and the elimination of minority interest
accounting in results of operations, with earnings attributable to non-
controlling interests reported as part of consolidated earnings. Purchases
and sales of non-controlling interests are to be reported in equity similar
to treasury stock transactions. The standard became effective for the Company
on July 1, 2009. As a result the Company now reports noncontrolling interest
as a component of equity in its consolidated balance sheet and below net
(loss) income in its consolidated statement of operations. In addition, the
provisions of ASC 810 require that minority interest be renamed
noncontrolling interest and that a company present a consolidated net income
measure that includes the amount attributable to such noncontrolling
interests for all periods presented. As required by ASC 810, the Company has
retrospectively applied the presentation to all prior year balances
presented.
27
THREE MONTHS ENDED MARCH 31, 2010 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 2009
General and Administrative
Total general and administrative expenses were $563,000 and $781,000 for
the three months ended March 31, 2010 and 2009, respectively.
General and administrative expenses, excluding stock-based compensation
charges of $43,000 and $195,000 for the three months ended March 31, 2010 and
2009, respectively, were $520,000 and $586,000 for the three months ended
March 31, 2010 and 2009, respectively. While there was a small decrease in
general and administrative expenses for the period, there were some
variations of note. Salaries and related payroll tax expense were
approximately $173,000 and $235,000 for the three months ended March 31, 2010
and 2009, respectively. The decrease in salaries and related payroll taxes
is due to the fact that approximately $45,000 of salary and payroll tax cost
was capitalized as a direct cost of the KF project. Consulting costs were
approximately $152,000 and $270,000 for the three months ended March 31, 2010
and 2009, respectively, with the decrease being attributable to the absence
of a $125,000 bonus given to a key consultant in the third quarter 2009.
Legal expenses for the three months ended March 31, 2010 and 2009 were
approximately $112,000 and $22,000, respectively. Legal fees were higher
during the third quarter of fiscal year 2010 due to the hiring of an
additional law firm to pursue federal legislative initiatives related to
development of our Integrated Projects and remediation business opportunities
in addition to ongoing work related to our Kreider projects.
General and administrative stock-based compensation for the three months
ended March 31, 2010 and 2009 consist of the following:
Three months Three months
ended ended
March 31, 2010 March 31, 2009
-------------- --------------
General and administrative:
Fair value remeasurement of options
with service conditions $ - $ 137,000
Fair value of stock options expensed
under ASC 718 41,000 58,000
Fair value of stock bonuses expensed 2,000 -
-------- ---------
Total $ 43,000 $ 195,000
======== =========
Stock-based compensation charges decreased from $195,000 to $43,000 for
the three months ended March 31, 2009 and 2010, respectively. For the three
months ended March 31, 2010 and 2009, the Company recognized as general and
administrative expense, zero and $137,000, respectively, for the
remeasurement of options with service conditions. The decrease is due to the
vesting of these options during the second quarter of fiscal year 2010 and
therefore no additional expense will be recorded. For the three months ended
March 31, 2010 the Company recognized expense relating to the fair value of
28
stock options for general and administrative employees of $41,000, compared
to $58,000 for the three months ended March 31, 2009. Compensation expense
relating to stock options was lower during the quarter ended March 31, 2010
due to fewer options being awarded during the fiscal year 2010. The Company
also recognized general and administrative expenses of $20,000 due to the
vesting of stock bonuses during the quarter ended March 31, 2010 which have
vesting periods over a year.
Research and development
Total research and development expenses were $53,000 and $46,000 for the
three months ended March 31, 2010 and 2009, respectively.
Research and development expenses were slightly higher primarily due to
legal fees which were $27,000 and $3,000 for the three months ended March 31,
2010 and 2009, respectively. The higher legal fees were due to patent work
performed on a new patent during the quarter ended March 31, 2010. Higher
legal fees were offset by salary and payroll related taxes of $25,000 and
$40,000 for the three months ended March 31, 2010 and 2009, respectively.
The decrease is due to the expensing of previous research and development
employees to general and administrative and the capitalization of salaries
for the KF project.
Loss from Operations
As a result of the factors described above, the loss from operations was
$617,000 and $827,000 for the three months ended March 31, 2010 and 2009,
respectively.
Other expense (income)
Other expense (income) was $(3,000) and $4,000 for the three months
ended March 31, 2010 and 2009, respectively. Interest expense decreased to
zero for the three months ended March 31, 2010 from $3,000 for the three
months ended March 31, 2009. Interest expense decreased as there was no
interest bearing debt during the three months ended March 31, 2010. Interest
income was $3,000 and $(1,000) for the three months ended March 31, 2010 and
2009, respectively.
Net loss attributable to the noncontrolling interest
The net loss attributable to the noncontrolling interest was $1,000 and
$13,000 for the three months ended March 31, 2010 and 2009, respectively.
Net loss attributable to Bion's common stockholders
As a result of the factors described above, the net loss attributable to
Bion's common stockholders was $612,000 and $818,000 for the three months
ended March 31, 2010 and 2009, respectively, representing a $0.02 decrease in
the net loss per basic and diluted common share for the three months ended
March 31, 2010 and 2009 of $0.06 and $0.08, respectively.
29
NINE MONTHS ENDED MARCH 31, 2010 COMPARED TO THE NINE MONTHS ENDED MARCH 31,
2009
General and Administrative
Total general and administrative expenses were $2,074,000 and $1,569,000
for the nine months ended March 31, 2010 and 2009, respectively.
General and administrative expenses, excluding stock-based compensation
charges of $358,000 and $34,000 for the nine months ended March 31, 2010 and
2009, respectively, were $1,716,000 and $1,535,000 for the nine months ended
March 31, 2010 and 2009, respectively, representing an $182,000 increase.
Legal expenses for the nine months ended March 31, 2010 and 2009 were
approximately $389,000 and $16,000, respectively. Legal fees were higher
during the nine months ended March 31, 2010 due to the hiring of an
additional law firm to pursue federal legislative initiatives related to
development of our Integrated Projects and remediation business opportunities
in addition to ongoing work related to our Kreider projects. Legal costs for
the mine months ended March 31, 2009 were lower due to insurance
reimbursements of legal costs relating to the Centerpoint litigation. The
Company also expensed $53,000 in investor relations related costs due to the
increase in shareholders and investing activities. Higher legal and investor
relations expenses were partially offset by reduced salary and payroll
expenses of $491,000 and $590,000 for the nine months ended March 31, 2010
and 2009, respectively. The decrease in salaries and related payroll taxes
is due to the fact that approximately $146,000 of salary and payroll tax cost
was capitalized as a direct cost of the KF project.
General and administrative stock-based compensation for the nine months
ended March 31, 2010 and 2009 consist of the following:
Nine months Nine months
ended ended
March 31, 2010 March 31, 2009
-------------- --------------
General and administrative:
Fair value remeasurement of options
with service conditions $ 92,000 $(138,000)
Fair value of stock options expensed
under ASC 718 202,000 172,000
Fair value of stock bonuses expensed 64,000 -
--------- ---------
Total $ 358,000 $ 34,000
========= =========
Stock-based compensation charges increased from $34,000 to $358,000 for
the nine months ended March 31, 2009 and 2010, respectively. The Company
recognized as general and administrative expenses/(credits) of $92,000 and
$(138,000) for the remeasurement of options with service conditions. The
increase is due primarily to remeasurement of options with service conditions
and to stock bonuses issued during the nine months ended March 31, 2009. For
the nine months ended March 31, 2010 the Company recognized expense relating
to the fair value of stock options for general and administrative employees
30
of $202,000, compared to $172,000 for the nine months ended March 31, 2009.
Compensation expense relating to stock options was higher during the nine
months ended March 31, 2010 due to 195,000 options being granted during the
period versus 75,000 options being issued during the same period in the prior
fiscal year. The Company also recognized general and administrative expenses
of $64,000 due to the issuance of stock bonuses during the nine months ended
March 31, 2010 which have vesting periods over a year.
Research and development
Total research and development expenses were $161,000 and $393,000 for
the nine months ended March 31, 2010 and 2009, respectively.
Research and development expenses, excluding stock-based compensation
charges of $17,000 and $98,000 for the nine months ended March 31, 2010 and
2009 were $144,000 and $295,000, respectively. The primary reason for the
decrease in research and development expenses during the nine months ended
March 31, 2010 is due to the shift in the Company's focus from research and
development to pre-commercial and commercial activities related to its next
generation technology applications, therefore costs of various employees and
consultants (and their related activities) that were previously incurred as
research and development expense are now allocated to general and
administrative expense. Salary and payroll related taxes were $75,000 and
$188,000 for the nine months ended March 31, 2010 and 2009, respectively, and
the decrease is due to the expensing of previous research and development
employees to general and administrative expense and the capitalization
salaries for the KF project.
Research and development stock-based compensation for the nine months
ended March 31, 2010 and 2009 consist of the following:
Nine months Nine months
ended ended
March 31, 2010 March 31, 2009
-------------- --------------
Research and development:
Fair value remeasurement of options
with service conditions $ - $ 65,000
Fair value of stock bonuses expensed 10,000 -
Fair value of stock options expensed
under ASC 718 7,000 33,000
-------- --------
Total $ 17,000 $ 98,000
======== ========
Stock-based compensation expense decreased from $98,000 for the nine
months ended March 31, 2009 to $17,000 for the same period in fiscal year
2010. The decrease is due to expensing options issued to employees who in
the prior year were deemed to be research and development and in the fiscal
year 2009 were primarily allocated to general and administrative.
31
Loss from Operations
As a result of the factors described above, the loss from operations was
$2,235,000 and $1,963,000 for the nine months ended March 31, 2010 and 2009,
respectively.
Other expense (income)
Other expense (income) was $(8,000) and $(1,005,000) for the nine months
ended March 31, 2010 and 2009, respectively. Interest expense decreased to
$2,000 for the nine months ended March 31, 2010 from $30,000 for the nine
months ended March 31, 2009. Interest expense decreased due to lower
interest bearing debt during the nine months ended March 31, 2010. Interest
income was $9,000 and $1,000 for the nine months ended March 31, 2010 and
2009, respectively, and the increase is due to higher interest bearing cash
deposits due to proceeds from the sale of Preferred Series B and C shares.
For the nine months ended March 31, 2009, the Company recognized other income
of $1,034,000 due to the forfeiture of deferred compensation relating the
cancellation of Mr. Zizza's Notes of $959,000 and a $75,000 settlement with
the Company's directors and officers liability insurance providers.
Net loss attributable to the noncontrolling interest
The net loss attributable to the noncontrolling interest was $3,000 for
both the nine months ended March 31, 2010 and 2009, respectively.
Net loss attributable to Bion's common stockholders
As a result of the factors described above, the net loss attributable to
Bion's common stockholders was $2,448,000 and $955,000 for the nine months
ended March 31, 2010 and 2009, respectively, representing a $0.12 increase in
the net loss per basic and diluted common share for the nine months ended
March 31, 2010 and 2009 of $0.21 and $0.09, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements for the nine months ended March 31,
2010 have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments in
the normal course of business. The Report of our Independent Registered
Public Accounting Firm on the Company's financial statements as of and for
the year ended June 30, 2009 includes a "going concern" explanatory paragraph
which means that the auditors stated that conditions exist that raise
substantial doubt about the Company's ability to continue as a going concern.
As of March 31, 2010, the Company had cash and cash equivalents of
approximately $1,470,000. During the nine months ended March 31, 2010, net
cash used in operating activities was $1,589,000, primarily consisting of
cash operating expenses. As previously noted, the Company is currently not
generating revenue and accordingly has not generated cash flows from
operations. The Company does not anticipate generating sufficient revenues
to offset operating and capital costs for a minimum of two to five years.
While there are no assurances that the Company will be successful in its
efforts to develop and construct its Projects and market its Systems, it is
32
certain that the Company will require significant funding from external
sources. Given the unsettled state of the current credit and capital markets,
there is no assurance the Company will be able to raise the funds it needs on
reasonable terms.
Investing Activities
During the nine months ended March 31, 2010 the Company used $304,000
for the purchase of property and equipment and the design and permitting of
the KF Project which has been capitalized as property and equipment. Cash of
$29,000 was provided due to the release of restricted funds during the nine
months ended March 31, 2010.
Financing Activities
During the nine months ended March 31, 2010, $13,000 of cash was
provided from the sale of the Company's restricted common stock, $596,000 was
provided from the sale of the Company's Series B preferred stock and
$1,340,000 was provided from the sale of the Company's Series C preferred
stock. The Company used $163,000 for the repayment of loans payable to
affiliates and $147,000 and $1,000 was paid for Series B and Series C
preferred dividends, respectively.
As of March 31, 2010 the Company has significant debt obligations
consisting primarily of deferred compensation of $150,000. In addition, the
Company entered into an 88-month operating lease for office space in New York
City in August 2006, with an average monthly lease expense of $15,820. As of
March 31, 2010, the Company has 43 months remaining on the lease.
Plan of Operations and Outlook
As of March 31, 2010 the Company had cash and cash equivalents of
approximately $1,470,000. While the Company currently does not face a severe
working capital shortage, it is not currently generating any revenues. The
Company will need to obtain additional capital to fund its operations and
technology development, to satisfy existing creditors, to develop Projects
and to construct the KF facilities. In January 2009, the Board of
Pennsylvania Infrastructure Investment Authority approved a $7.8 million loan
to the Company for the initial stage of the KF Project. The Company
anticipates it will finalize the documentation for this loan during the next
90 days and intends to permit and construct this project during the 2010
calendar year.
The Company anticipates that it will seek to raise from $5,000,000 to
$50,000,000 (debt and equity) during the next twelve months. There is no
assurance, especially in the extremely unsettled capital markets that
presently exist, that the Company will be able to obtain the funds that it
needs to stay in business, complete its technology development or to
successfully develop its business.
There can be no assurance that funds required during the next twelve
months or thereafter will be generated from operations or that those funds
will be available from external sources such as debt or equity financings or
other potential sources. The lack of additional capital resulting from the
33
inability to generate cash flow from operations or to raise capital from
external sources would force the Company to substantially curtail or cease
operations and would, therefore, have a material adverse effect on its
business. Further, there can be no assurance that any such required funds, if
available, will be available on attractive terms or that they will not have a
significantly dilutive effect on the Company's existing shareholders. All
of these factors have been exacerbated by the extremely unsettled credit and
capital markets presently existing.
Currently, Bion is focused on using applications of its patented waste
management technology to pursue two main business opportunities: 1) to
develop Integrated Projects which will include large CAFOs, such as large
dairies, beef cattle feed lots and hog farms, with Bion waste treatment
System modules processing the aggregate CAFO waste stream from the equivalent
of 40,000 or more beef and/or dairy cows (or the waste stream equivalent of
other species) while producing solids to be utilized for renewable energy
production (and potentially to be marketed as feed and/or fertilizer),
integrated with an ethanol plant capable of producing 40 (or more) million
gallons of ethanol per year and/or integrated with CAFO end product
processors, and 2) environmental retrofit and remediation of the waste
streams of existing CAFOs in selected markets.
Bion is currently working with local, state and federal officials with
regard to regulatory and legislative initiatives and with such parties and
potential industry participants to evaluate sites in multiple states and
anticipates selecting a site for its initial Integrated Project during the
2010 fiscal year. The Company has tentatively selected the Town of
Schroeppel, Oswego County, New York for its initial Project and anticipates
optioning land in that area during the 2010 fiscal year or soon thereafter
(although other locations in upstate New York and in other states are also
under review). At present it is possible, but not certain, that the initial
Integrated In addition, Bion intends to choose sites for additional Projects
during the remainder of calendar years 2010-2012 to create a pipeline of
Projects. Management has a 5-year development target (through calendar year
2016) of approximately 12-24 Integrated Projects. At the end of that period,
Bion projects that 8 or more of these Integrated Projects will be in full
operation in 3-8 states, and the balance would be in various stages ranging
from partial operation to early permitting stage. No Integrated Project has
been developed to date.
The Company has also commenced actively pursuing the opportunity
presented by environmental retrofit and remediation of the waste streams of
existing CAFOs in selected markets. The first commercial activity in this
area is the agreement with KF in Pennsylvania.
CONTRACTUAL OBLIGATIONS
We have the following material contractual obligations (in addition to
employment and consulting agreements with management and employees):
1) The Company executed a non-cancelable operating lease for office
space in New York City effective August 1, 2006 and extending to November 30,
2013. The average monthly rent expense under the lease is $15,820. The
Company has provided the lessor with a letter of credit in the amount of
34
$57,315 in connection with the lease as of March 31, 2010. The Company's
obligations under the lease are partially guaranteed by Salvatore Zizza,
former Chairman of Bion Projects. The Company has entered into sub-leases
with non-affiliated parties for approximately 32% of the obligations under
the lease. Effective January 1, 2009, Mr. Zizza entered into a Master
Sublease with the Company pursuant to which Mr. Zizza became a sublessee and
for a one year initial period, made all payments pursuant to the lease and
managed the lease premises. Rental payments from existing sub-tenants are
being deposited into a Company bank account such that Mr. Zizza utilizes
those funds towards the monthly lease payment. During November 2009, Mr.
Zizza exercised his option to continue the Master Sublease for the entire
period of the lease. Mr. Zizza fulfilled his obligations under the Master
Sublease during the one year initial period and in January 2010; he received
the funds from the release from the Company's letter of credit of $28,658.
Since Mr. Zizza exercised the option to continue the Master Sublease for the
entire term of the lease, Mr. Zizza will be entitled to the balance of funds
held under the letter of credit of approximately $57,000 if he fulfills his
obligations pursuant to the Master Sublease.
2) On September 27, 2008, the Company executed an agreement with
Kreider Farms (and its affiliated entities) (collectively "Kreider") to
design, construct and operate, through its wholly-owned subsidiaries, Bion
Services Group, Inc. ("Bion Services") and Bion PA-1 LLC ("LLC"), a Bion
system to treat the waste of the dairy cows (milkers, dry cows and heifers)
at the Kreider Dairy, located in Mannheim, Pennsylvania. In addition, the
agreement provides for a second phase which will include a renewable energy
facility that will treat cellulosic solid wastes from Phase 1 together with
the waste stream from Kreider's poultry facilities to produce renewable
energy for Bion's waste treatment facility and/or for market sales. The
system will be owned and operated by Bion through LLC, in which Kreider will
have the option to purchase a minority interest. To complete final design
work and all building, zoning and other related pre-construction matters,
substantial capital (equity and/or debt) has been and will continue to be
expended. Additional funds will be expended for construction. Upon
successful construction and operation of the system, the Company anticipates
that it will receive revenue from the sale of nutrient (and other)
environmental credits related to the Kreider system and through sales of
renewable energy generated at the Kreider system. On January 26, 2009 the
Board of the Pennsylvania Infrastructure Investment Authority (PENNVEST)
approved a $7.8 million loan to Bion for "the construction of a livestock
waste treatment facility at Kreider Farms..." for the Phase 1 dairy portion
of the Kreider Farms projects. The Company anticipates that the steps
required to finalize the pre-construction phase of the Pennvest Loan will be
completed during the next 90 days and that the initial drawdown/reimbursement
from Pennvest pursuant to the Pennvest Loan will be received shortly
thereafter.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements (as that term is
defined in Item 303 of Regulation S-K) that are reasonably likely to have a
current or future material effect on our financial condition, revenue or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures.
The term "disclosure controls and procedures" is defined in Rules 13a-
15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). This term refers to the controls and procedures of a company
that are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded,
processed, summarized, and reported within the required time periods. Our
Chief Executive Officer and Principal Financial Officer has evaluated the
effectiveness of the design and operations of our disclosure controls and
procedures as of the end of the period covered by this quarterly report, and
has concluded that, as of that date, our disclosure controls and procedures
were not effective at ensuring that required information will be disclosed on
a timely basis in our reports filed under the Exchange Act, as a result of
the material weakness in internal control over financial reporting discussed
in Item 9(A) of our Form 10-K/A for the year ended June 30, 2009.
(b) Changes in Internal Control over Financial Reporting.
No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
36
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There have been no material developments in the legal proceedings
described in our Form 10-K since filing.
ITEM 1A. RISK FACTORS.
Not Applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the quarter ended March 31, 2010 the Company sold 0 shares of
restricted common stock for $0 (not including 268,165 shares issued valued at
$251,320, in aggregate, to certain consultants and/or employees for services
and/or in conversion of outstanding convertible debt obligations). These
shares were issued in reliance on the exemption in Section 4(2) of the
Securities Act of 1933. In addition the Company sold 10,750 shares of its
Series C Preferred Stock for $935,250 (net of commissions and offering
expenses). The proceeds were used for working capital purposes. These shares
were issued in reliance on the exemptions provided by Regulation D of the
Securities Act of 1933. Additional shares of restricted common stock were
issued in connection with compensation and other matters. These shares were
issued in reliance on the exemptions provided by Regulation D and/or Section
4(2) of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable
ITEM 6. EXHIBITS.
Exhibit No. Description
31.1 Certification of CEO and Principal Financial Officer pursuant
to Rule 13a-14(a) or Rule 15d-14(a) - Filed herewith
electronically
32.1 Certification of CEO and Principal Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 -
Filed herewith electronically
37
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
BION ENVIRONMENTAL TECHNOLOGIES, INC.
Date: May 5, 2010 By: /s/ Mark A. Smith
Mark A. Smith, President (Chief
Executive Officer) and Interim Chief
Financial Officer (Principal Financial
and Accounting Officer)
38