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 December 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 February 10, 2011, there
were 13,191,087 Common Shares issued and 12,486,778 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
filer" 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]
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 ...... 7-22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 33
Item 4. Controls and Procedures .................................... 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 35
Item 1A. Risk Factors................................................ 35
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds ................................................... 35
Item 3. Defaults Upon Senior Securities ............................ 35
Item 4. Submission of Matters to a Vote of Security Holders ........ 35
Item 5. Other Information .......................................... 35
Item 6. Exhibits ................................................... 35
Signatures ................................................. 37
PART I. FINANCIAL INFORMATION
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2010 2010
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash $ 903,110 $ 1,026,084
Prepaid rent and expenses 6,825 9,228
Other receivable - affiliate 8,797 8,797
Deposits and other receivables 11,956 11,956
------------- -------------
Total current assets 930,688 1,056,065
------------- -------------
Restricted cash (Notes 5 and 8) 82,315 57,315
Property and equipment, net (Note 4) 2,455,679 889,251
------------- -------------
Total assets $ 3,468,682 $ 2,002,631
============= =============
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 1,957,087 $ 675,024
Line of credit (Note 5) 683,510 -
Deferred compensation (Note 6) 173,250 -
------------- -------------
Total current liabilities 2,813,847 675,024
------------- -------------
Deferred compensation (Note 6) - 165,000
Deferred rent (Note 8) 53,586 69,892
------------- -------------
2,867,433 909,916
------------- -------------
Series B Redeemable Convertible Preferred
stock, $0.01 par value, 50,000 shares
authorized; 28,170 shares issued and
outstanding; liquidation preference of
$2,887,425 2,521,215 2,521,215
------------- -------------
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; 32,150
and 18,000 shares issued and outstanding,
respectively; liquidation preference of
$3,281,212 2,863,262 1,605,592
Common stock, no par value, 100,000,000
shares authorized, 12,913,231 and 12,754,830
shares issued, respectively; 12,208,922 and
12,050,521 shares outstanding, respectively - -
Additional paid-in capital 77,721,713 75,484,099
Accumulated deficit (82,608,519) (78,624,862)
------------- -------------
(2,023,544) (1,535,171)
------------- -------------
Noncontrolling interest (Note 3) 103,578 106,671
------------- -------------
Total deficit (1,919,966) (1,428,500)
------------- -------------
Total liabilities and deficit $ 3,468,682 $ 2,002,631
============= =============
See notes to unaudited consolidated financial statements.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010 AND 2009
(UNAUDITED)
Three months ended Six months ended
December 31, December 31,
2010 2009 2010 2009
------------- ------------- ------------- -------------
Revenue $ - $ - $ - $ -
------------- ------------- ------------- -------------
Operating expenses:
General and administrative (including
stock-based compensation (Note 7)) 3,088,192 609,685 3,879,666 1,510,337
Research and development (including
stock-based compensation (Note 7)) 51,956 35,319 100,957 107,836
------------- ------------- ------------- -------------
Total operating expenses 3,140,148 645,004 3,980,623 1,618,173
------------- ------------- ------------- -------------
Loss from operations (3,140,148) (645,004) (3,980,623) (1,618,173)
------------- ------------- ------------- -------------
Other expense (income):
Interest expense 4,997 - 9,122 1,515
Interest income (762) (3,405) (2,995) (6,359)
------------- ------------- ------------- -------------
4,235 (3,405) 6,127 (4,844)
------------- ------------- ------------- -------------
Net loss (3,144,383) (641,599) (3,986,750) (1,613,329)
Net loss attributable to the
noncontrolling interest 1,323 892 3,093 2,063
------------- ------------- ------------- -------------
Net loss attributable to Bion (3,143,060) (640,707) (3,983,657) (1,611,266)
Dividends on preferred stock (136,637) (71,225) (254,774) (135,017)
------------- ------------- ------------- -------------
Net loss applicable to Bion's common
stockholders $ (3,279,697) $ (711,932) $ (4,238,431) $ (1,746,283)
============= ============= ============= =============
Net loss applicable to Bion's common
Stockholders per basic and diluted
common share $ (0.27) $ (0.06) $ (0.35) $ (0.15)
============= ============= ============= =============
Weighted-average number of common
shares outstanding:
Basic 12,178,602 11,744,697 12,129,578 11,675,229
============= ============= ============= =============
Diluted 12,178,602 11,744,697 12,129,578 11,675,229
============= ============= ============= =============
See notes to unaudited consolidated financial statements.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
SIX MONTHS ENDED DECEMBER 31, 2010
(UNAUDITED)
Bion's Shareholders
-------------------------------------------------------------------
Series C Addi-
Preferred Stock Common Stock tional Noncon- Total
------------------ ------------------ paid-in Accumulated trolling equity/
Shares Amount Shares Amount capital deficit interest (deficit)
------ ---------- ---------- ------ ------------ ------------- --------- ------------
Balances, July 1, 2010 18,000 $1,605,592 12,754,830 $ - $75,484,099 $(78,624,862) $106,671 $(1,428,500)
Vesting of options for
services - - - - 2,032,035 - - 2,032,035
Issuance of common
stock for services and
project construction
services - - 82,655 - 194,654 - - 194,654
Sale of common stock - - 75,746 - 223,200 - - 223,200
Issuance of warrants
for services - - - - 42,500 - - 42,500
Sale of Series C
preferred stock,
net 14,150 1,231,050 - - - - - 1,231,050
Dividend on Series B
preferred stock - - - - (140,850) - - (140,850)
Dividend on Series C
preferred stock - 26,620 - - (113,925) - - (87,305)
Net loss - - - - - (3,983,657) (3,093) (3,986,750)
------ ---------- ---------- ------ ------------ ------------- --------- ------------
Balances, December 31,
2010 32,150 $2,863,262 12,913,231 $ - $77,721,713 $(82,608,519) $103,578 $(1,919,966)
====== ========== ========== ====== ============ ============= ========= ============
See notes to unaudited consolidated financial statements.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2010 AND 2009
(UNAUDITED)
2010 2009
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,986,750) $ (1,613,329)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation expense 8,424 8,198
Accrued interest on deferred compensation 8,250 1,515
Stock-based compensation 2,248,641 656,348
Decrease in prepaid rent and expenses 2,404 4,539
Increase (decrease) in accounts payable
and accrued expenses 1,289,144 (120,214)
Decrease in deferred rent (16,306) (933)
------------- -------------
Net cash used in operating activities (446,193) (1,063,876)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in restricted cash (25,000) 28,658
Purchase of property and equipment (1,561,386) (237,310)
------------- -------------
Net cash used in investing activities (1,586,386) (208,652)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 223,200 13,153
Proceeds from sale of Series B preferred stock - 595,950
Proceeds from sale of Series C preferred stock 1,231,050 404,550
Proceeds from line of credit 683,510 -
Repayment of loans payable - affiliates - (162,500)
Payment of Series B preferred dividends (140,850) (76,668)
Payment of Series C preferred dividends (87,305) -
------------- -------------
Net cash provided by financing activities 1,909,605 774,485
------------- -------------
Net decrease in cash (122,974) (498,043)
Cash at beginning of period 1,026,084 1,695,713
------------- -------------
Cash at end of period $ 903,110 $ 1,197,670
============= =============
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 $ - $ 80,010
Issuance of common stock in exchange for
project construction services 13,467 25,764
Issuance of common stock in exchange for
services 7,080 -
Series B preferred stock dividends 140,850 -
Series C preferred stock dividends 113,924 -
See notes to unaudited consolidated financial statements.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 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 (defined below) 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.
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
Pennsylvania (beef and/or dairy), Nebraska (dairy) and elsewhere.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010
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
previous year, on August 12, 2010 the Company received its permit for
construction of the Phase I Kreider System. Initial construction- related
activities, including bidding and ordering of equipment, commenced during
October 2010. The closing/settlement of the Pennvest Loan took place on
November 3, 2010, and the Company received the initial drawdown/reimbursement
from Pennvest pursuant to the Pennvest Loan on January 6, 2011 of
approximately $1,727,000 and another drawdown on January 26, 2011 of
$873,000, which will be used to reduce current obligations of the Company
related to the Kreider project. The terms of the Pennvest Loan provide for
funding of $7,754,000, to be repaid by interest-only payments for three
years, followed by an additional ten-year amortization of principal. The
Pennvest loan accrues interest at 2.547% for years 1 through 5 and 3.184% for
years 6 through maturity. The Pennvest Loan is collateralized by a pledge of
all revenues generated from the project, including, but not limited to,
nutrient tax credits and by-product sales. In addition, in consideration for
the excess credit risk associated with the project, Pennvest is entitled to
participate in the profits from the project calculated on a net cash flow
basis, as defined. Bion is in the process of constructing the Phase 1
Kreider System. The Pennsylvania Department of Environmental Protection
recently re-certified the nutrient credits for this project. It is
anticipated that construction will be completed and operations will commence
during the spring of 2011.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010
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 $2,976,000 and $1,318,000 during the
years ended June 30, 2010 and 2009, respectively, and a net loss of
approximately $3,987,000 for the six months ended December 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.
During the year ended June 30, 2010, the Company sold 18,000 shares of the
Company's Series C Preferred shares at $100 per share, which resulted in net
proceeds to the Company of $1,566,000 after commissions. During the six
months ended December 31, 2010, the Company sold an additional 14,150 shares
of the Company's Series C Preferred shares at $100 per share, which resulted
in net proceeds to the Company of $1,231,050. Also during the six months
ended December 31, 2010, the Company sold 75,746 shares of its common stock
for proceeds of $223,200.
At December 31, 2010, the Company has a working capital deficit and a total
deficit of approximately $1,883,000 and $2,024,000, 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.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010
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, Bion PA-1 LLC, Bion PA-2 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
opinion of management, are necessary to present fairly the financial position
at December 31, 2010 and the results of operations and cash flows of the
Company for the three and six months ended December 31, 2010 and 2009.
Operating results for the three and six months ended December 31, 2010 are
not necessarily indicative of the results that may be expected for the year
ending June 30, 2011.
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 for the year ended June 30, 2010.
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 six months ended December
31, 2010 and 2009, 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:
December 31, 2010 December 31, 2009
----------------- -----------------
Warrants 5,637,616 5,290,616
Options 3,370,833 2,190,833
Convertible debt 115,500 333,334
Convertible preferred stock 2,264,016 1,676,613
The following is a reconciliation of the denominators of the basic loss per
share computations for the three and six months ended December 31, 2010 and
2009:
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2010 2009 2010 2009
----------- ----------- ----------- -----------
Shares issued - beginning
of period 12,807,281 12,418,086 12,754,830 12,126,448
Shares held by subsidiaries
(Note 7) (704,309) (704,309) (704,309) (704,309)
----------- ----------- ----------- -----------
Shares outstanding -
beginning of period 12,102,972 11,713,777 12,050,521 11,422,139
Weighted average shares
issued during the period 75,630 30,920 79,057 253,090
----------- ----------- ----------- -----------
Basic weighted average
shares - end of period 12,178,602 11,744,697 12,129,578 11,675,229
=========== =========== =========== ===========
Fair value measurements:
The fair value of cash, line of credit and accounts payable approximates
their carrying amounts due to their short-term maturities. The fair value of
the redeemable preferred stock approximates its carrying value due to the
dividends accrued on the preferred stock which are reflected as part of the
redemption value.
3. NONCONTROLLING INTEREST OF CENTERPOINT CORPORATION:
The Company owns a 58.9% interest in Centerpoint. During the three and six
months ended December 31, 2010 and 2009, Centerpoint had losses of
approximately $3,200 and $7,500 and $2,200 and $5,000, respectively. The
noncontrolling interest as of December 31, 2010 was $103,578.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31, 2010 June 30, 2010
----------------- --------------
Project construction in progress 2,221,494 845,992
Equipment 199,350 -
Leasehold improvements 31,336 31,336
Furniture 28,932 28,932
Computers and office equipment 37,139 37,139
----------- -----------
2,518,251 943,399
Less accumulated depreciation (62,572) (54,148)
----------- -----------
$2,455,679 $ 889,251
=========== ===========
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010
Depreciation expense was $4,163 and $4,235 for the three months ended
December 31, 2010 and 2009, respectively, and $8,424 and $8,198 for the six
months ended December 31, 2010 and 2009, respectively. As of December 31,
2010, the Company had commitments of $462,435 for the purchase of equipment
related to the Kreider Farms project which will be consummated by spring of
2011.
5. LINE OF CREDIT:
In December 2010, the Company entered into a loan and security agreement with
a lender whereby the lender extended a credit facility of up to $1,500,000 in
interim financing for the purchase of equipment and payment of construction
costs at the Kreider Dairy covered under the Pennvest Loan. The credit
facility bears interest at the prime rate published in the Wall Street
Journal plus 2% and requires a $25,000 interest reserve account. The credit
facility is collateralized by the Pennvest loan proceeds and subject to
certain debt covenants and conditions regarding the terms of the credit
facility. Should the Company default on the line of credit and not remedy
the default within 10 days of notice from the lender, the principal and
interest shall be payable immediately. The maturity date of the line of
credit is January 5, 2012. For the three and six months ended December 31,
2010, the Company recorded interest expense of $872 related to the line of
credit.
6. DEFERRED COMPENSATION:
As of December 31, 2010, the Company owed Brightcap Capital Ltd.
("Brightcap") for services provided by Mr. Bassani, deferred compensation of
$150,000. The Company entered into an 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. During
June 2010, the Company entered into an extension agreement with Brightcap
pursuant to which the maturity date and the conversion date of the deferred
compensation were extended to July 1, 2011. As consideration for the
extension, an additional $15,000 principal was added to the obligation and
the deferred compensation accrues interest commencing July 1, 2010 at 10% per
annum. As of December 31, 2010, the deferred compensation and accrued
interest total $173,250. Interest expense for the three and six months ended
December 31, 2010 was $4,125 and $8,250, respectively.
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
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010
(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 to 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 with
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 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.
The Company declared dividends on July 31, 2010 for the Series B Preferred
stockholders with a record date of June 30, 2010, totaling $70,425; which
were paid on August 16, 2010.
The Company declared dividends on November 12, 2010 for the Series B
Preferred stockholders with a record date of September 30, 2010, totaling
$70,425; which were paid on November 16, 2010.
The Company declared dividends on January 1, 2011 for the Series B Preferred
stockholders with a record date of December 31, 2010, totaling $70,425, which
are expected to be paid on or about February 15, 2011.
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 share 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
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010
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 six months ended December 31, 2010, the Company issued 14,150
shares of Series C Preferred stock for cash proceeds of $1,415,000 (net
proceeds of $1,231,050 after commissions).
The Company declared dividends on July 31, 2010 for the Series C Preferred
stockholders with a record date of June 30, 2010 totaling $39,592; which were
paid on August 16, 2010.
The Company declared dividends on November 12, 2010 for the Series C
Preferred stockholders with a record date of September 30, 2010 totaling
$47,712; which were paid on November 16, 2010.
The Company declared dividends on January 1, 2011 for the Series C Preferred
stockholders with a record date of December 31, 2010 totaling $66,212, which
are expected to be paid on or about February 15, 2011.
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 holders 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.
Centerpoint holds 704,309 shares of the Company's common stock. These shares
of the Company's common stock held by Centerpoint are for the benefit of its
shareholders without any beneficial interest. The Company accounts for these
shares similar to treasury stock.
During the six months ended December 31, 2010, the Company issued 82,655
shares of the Company's restricted common stock at prices ranging from $1.50
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010
to $3.00 per share for consulting services valued at $177,820, in aggregate,
to various consultants.
During the six months ended December 31, 2010, the Company sold 75,746 of the
Company's common stock for proceeds of $223,200.
On December 31, 2010, the Company declared stock bonuses to certain key
employees and a consultant at $2.90 per share, the approximate market value
on the date of the grant totaling $536,500 for services performed through
December 31, 2010. The Company recorded non-cash compensation expense of
$536,500 during the six months ended December 31, 2010. In January 2011,
185,000 shares of the Company's common stock were issued to satisfy the stock
bonuses.
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,
the approximate market value on the date of grant, totaling $131,300. The
stock bonuses are subject to vesting and during the six months ended December
31, 2010, $3,367 was recorded as compensation expense and $13,467 was
capitalized as project construction in progress as it directly related to
construction services provided by employees and consultants.
Warrants:
As of December 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 MAS 5-1 200,000 2.00 January 15, 2019
Class NH-1 12,000 2.25 February 17, 2013
Class NHJSG 1-9 67,500 2.25 December 31, 2015
Class NHJRG 1-9 67,500 2.25 December 31, 2015
----------
5,637,616
==========
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010
In July 2010, warrants to purchase 200,000 shares of the Company's common
stock at $2.00 per share were issued pursuant to an extension agreement with
Mr. Smith (Note 9). These warrants were determined to have a fair value of
$0.10 per warrant and expire on January 15, 2019. The fair value of these
warrants was determined to be $0.10 per warrant based on factors including
the evaluation of the Company's fair value as of the date of the issuance,
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 expense of $20,000
related to the warrant issuance.
From July through December 2010, warrants to purchase 90,000 shares of the
Company's common stock at $2.25 per share were issued pursuant to an
agreement with two consultants. The warrants were determined to have a fair
value of $0.25 per warrant and expire on December 31, 2015. The fair value
of these warrants was determined to be $0.25 per warrant based on factors
including the evaluation of the Company's fair 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 expense of
$22,500 related to the warrant issuances.
The weighted-average exercise price for the outstanding warrants is $2.04,
and the weighted-average remaining contractual life as of December 31, 2010
is 7.5 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 December 2010, the Board of Directors, in an effort to retain key
employees and consultants, approved the modification of certain options to
certain employees and consultants resulting in the extension of certain
expiry dates. As a result of the modifications, the Company recorded
incremental non-cash compensation expense of $1,276,203 for the six months
ended December 31, 2010 and approximately $13,000 of additional non-cash
compensation will be recognized over a weighted average period of
approximately 1 year.
The Company recorded compensation expense related to employee stock options
of $1,936,926 and $73,473 for the three months ended December 31, 2010 and
2009, respectively, and $2,032,035 and $168,077 for the six months ended
December 31, 2010 and 2009, respectively. The Company granted 1,100,000 and
195,000 options during the six months ended December 31, 2010 and 2009,
respectively. The fair value of the options granted during the six months
ended December 31, 2010 and 2009 were estimated on the grant date using the
Black-Scholes option-pricing model with the following assumptions:
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010
Weighted Weighted
Average Range Average Range
December December December December
31, 2010 31, 2010 31, 2009 31, 2009
-------- -------- -------- --------
Volatility 96% 95%-102% 100% 99%-104%
Dividend yield - - - -
Risk-free interest rate 0.81% 0.72%-0.81% 1.29% 1.12%-1.31%
Expected term (years) 3.46 2.67-3.5 2.5 2.5
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 six months ended
December 31, 2010 is as follows:
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price Life Value
--------- -------- ----------- ----------
Outstanding at July 1, 2010 2,270,833 $ 2.85 $ 81,250
Granted 1,100,000 2.84
Exercised - -
Forfeited - -
Expired - -
--------- -------- ----------- ----------
Outstanding at December 31,
2010 3,370,833 $ 2.84 4.2 $1,194,750
========= ========= =========== ==========
Exercisable at December 31,
2010 2,595,833 $ 2.87 3.4 $ 999,750
========= ========= =========== ==========
The following table presents information relating to nonvested stock options
as of December 31, 2010:
Weighted-Average
Grant-Date
Options Fair Value
---------- ----------------
Nonvested at July 1, 2010 87,500 $ 0.67
Granted 1,100,000 1.79
Vested (412,500) (1.70)
Forfeited - -
---------- -----------------
Nonvested at December 31, 2010 775,000 $ 1.72
========== =================
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010
The total fair value of stock options that vested during the six months ended
December 31, 2010 and 2009 was $701,750 and $264,438, respectively. As of
December 31, 2010, the Company had $1,783,924 of unrecognized compensation
cost related to stock options that will be recorded over a weighted average
period of approximately one year.
Stock-based compensation charges in operating expenses in the Company's
financial statements for the three and six months ended December 31, 2010 and
2009 are as follows:
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2010 2009 2010 2009
----------- ----------- ----------- -----------
General and administrative:
Fair value remeasurement of
options with service
conditions $ - $ 26,571 $ - $ 91,831
Fair value of stock bonuses
expensed 538,183 29,418 539,867 61,658
Change in fair value from
modification of option terms 1,276,203 - 1,276,203 -
Fair value of stock options
expensed 660,071 73,473 755,180 161,452
----------- ----------- ----------- -----------
Total $2,474,457 $ 129,462 $2,571,250 $ 314,941
=========== =========== =========== ===========
Research and development:
Fair value remeasurement of
options with service
conditions $ - $ - $ - $ -
Fair value of stock bonuses
expensed - 5,176 - 10,211
Fair value of stock options
expensed 652 - 652 6,625
----------- ----------- ----------- -----------
Total $ 652 $ 5,176 $ 652 $ 16,836
=========== =========== =========== ===========
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010
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 December 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 three separate agreements to sub-lease approximately
100% 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
$17,242. The difference between the straight-line method, and the actual
lease payments has resulted in a deferred rent liability of $53,586 as of
December 31, 2010. Rent expense net of contractual and month-to- month sub-
lease rental income, was nil and $8,753 for the three months ended December
31, 2010 and 2009, respectively, and nil and $12,971 for the six months ended
December 31, 2010 and 2009, respectively.
At December 31, 2010, future minimum rental payments due under non-cancelable
leases and future minimum rental payments to be received under non-cancelable
subleases are:
Operating lease Net operating
Fiscal year: payments Sublease rentals lease payments
------------ --------------- ---------------- --------------
2011 $ 99,602 $ 99,602 $ -
2012 212,775 212,775 -
2013 225,756 225,756 -
2014 97,219 97,219 -
-------- -------- ------
Total $635,352 $635,352 $ -
======== ======== ======
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.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010
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. Effective July 27, 2010 the
Company 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, 2011. Commencing September 1, 2010, Mr. Smith is paid a monthly
salary of $19,000 in addition to a cash bonus of $20,000 that was paid in
January 2011. 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 $2.00 per share until January 15, 2019.
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 was 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). 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
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010
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.
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
January 1, 2011 with Craig Scott whereby Mr. Scott will continue to act as
Vice President of Capital Markets and Shareholder Relations through December
31, 2011, at an annual salary of $144,000.
Effective January 1, 2011, the Company entered into an employment agreement
with Bill O'Neill, pursuant to which Mr. O'Neill will act as Chief Executive
Officer and director of the Company for a period of four years and will be
paid $300,000 annually. The agreement also granted Mr. O'Neill 750,000
options to purchase common shares of the Company at an exercise price of
$3.10 per share, of which 300,000 options were immediately vested and the
remaining 450,000 options will vest quarterly over the course of employment
agreement. The options expire on January 15, 2018.
Effective January 1, 2011, the Company entered into an employment agreement
with Edward Schafer pursuant to which for a period of three years, Mr.
Schafer will provide senior management services to the Company on an
approximately 75% full time basis, initially as Executive Vice Chairman and
as a director. Compensation for Mr. Schafer's services will initially be at
an annual rate of $250,000, which will consist of $150,000 in cash
compensation and $100,000 payable in the Company's common stock. Commencing
the month following the first calendar month end after the Company has
completed an equity financing in excess of $3,000,000 (net of commissions and
other offering expenses), Mr. Schafer's compensation shall be at an annual
rate of $225,000, all of which shall be payable in cash. However, the
transition to all cash compensation shall take place no later than July 1,
2011. Mr. Schafer was also granted 200,000 options effective January 1, 2011
exercisable at $3.00 per option until January 15, 2018.
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 December 31, 2010, 442,500 shares remain
outstanding, 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.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010
10. SUBSEQUENT EVENTS:
The Company has evaluated events that occurred subsequent to December 31,
2010 for recognition and disclosure in the financial statements and notes to
the financial statements.
Issuance of Common Stock
From January 1, 2011 through February 10, 2011, the Company has issued 26,856
shares of the Company's common shares to various consultants and an employee
valued at approximately $81,000.
From January 1, 2011 through February 10, 2011 the Company has issued 66,000
shares of the Company's common shares to investors for net proceeds of
approximately $165,000.
From January 1, 2011 through February 10, 2011, the Company has granted
350,000 options to purchase the Company's common stock to employees.
Effective January 1, 2011 the Company declared a deferred stock bonus of
50,000 shares to Mr. Smith. The stock bonus is contingent upon the Company's
stock price exceeding $10.00 and does not require that Mr. Smith remains
employed by the Company.
From January 1, 2011 through February 10, 2011, the Company has received
reimbursements of approximately $2,600,000 pursuant to the Pennvest Loan.
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 for the
year ended June 30, 2010.
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 recovering cellulosic biomass 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 a Bion
system 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 ('Pennvest') 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 past year, on August 12, 2010, the Company received a permit for
construction of the Phase 1 Kreider system. Construction activities
commenced during November 2010. The settlement/closing of the Pennvest loan
took place on November 3, 2010 and the Company received the initial
drawdown/reimbursement from Pennvest pursuant to the Pennvest Loan on January
6, 2011 of approximately $1,726,000 and another drawdown of approximately
$873,000 on January 26, 2011. The Company believes that the construction
will be completed and the project will be operational during the spring of
2011. The Pennsylvania Department of Environmental Protection recently re-
certified the nutrient credits for this project.
Additionally, we believe that Bion's technology platform will allow 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. 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 believes that its initial Integrated Project will be located in
upstate New York and anticipates optioning land in that area during the
current fiscal year or soon thereafter (although locations in other states
are also under review). In addition, Bion intends to choose sites for
additional Projects during the calendar years 2011-2012 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 5 or more of these Integrated Projects will be in
full operation in 3-5 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, 2010 and 2009 have
been prepared assuming the Company will continue as a going concern. The
Company has incurred net losses of approximately $2,976,000 and $1,318,000
during the years ended June 30, 2010 and 2009, respectively. At June 30,
2010, the Company had a total deficit of approximately $1,535,000. 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, 2010
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. The Company has incurred net losses
attributable to Bion stockholders' of approximately $4,238,000 and $1,746,000
during the six month periods ended December 31, 2010 and 2009, respectively.
At December 31, 2010, the Company has a working capital deficit and a total
deficit of approximately $1,883,000 and $2,024,000, respectively.
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 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 Accounting Standards Codification
718, which generally requires that share-based compensation transactions be
accounted and recognized in the statement of income based upon their grant
date fair values.
THREE MONTHS ENDED DECEMBER 31, 2010 COMPARED TO THE THREE MONTHS ENDED
DECEUMBER 31, 2009
General and Administrative
Total general and administrative expenses were $3,088,000 and $610,000
for the three months ended December 31, 2010 and 2009, respectively.
General and administrative expenses, excluding stock-based compensation
charges of $2,474,000 and $129,000 for the three months ended December 31,
2010 and 2009, respectively, were $614,000 and $481,000 for the three months
ended December 31, 2010 and 2009, respectively, representing a $133,000
increase. Consulting costs increased from $100,000 for the three months
ended December 31, 2009 to $213,000 for the three months ended December 31,
2010 due to additional consultants utilized for strategic planning for the
Kreider project, a consultant for the development of future projects and
various consultants for fund raising and lobbying efforts. During the three
months ended December 31, 2010, the Company incurred $30,000 in fees related
to securing a line of credit for equipment and construction advances at the
KF project. This expense was not present in the prior period.
General and administrative stock-based compensation for the three months
ended December 31, 2010 and 2009 consists of the following:
Three Months Three Months
Ended Ended
December 31, December 31,
2010 2009
------------ ------------
General and administrative:
Fair value remeasurement of options
With service conditions $ - $ 26,000
Change in fair value from modification
of option terms 1,276,000
Fair value of stock options expensed
under ASC 718 660,000 73,000
Fair value of stock bonuses expensed 538,000 30,000
---------- ---------
Total $2,474,000 $ 129,000
========== =========
Stock-based compensation charges increased to $2,474,000 from $129,000
for the three months ended December 31, 2010 and 2009, respectively. The
Company recognized expense relating to the fair value of stock options for
general and administrative employees of $660,000 and $73,000 for the three
months ended December 31, 2010 and 2009, respectively. Compensation expense
relating to stock options was higher during the three months ended December
31, 2010 primarily due to $1,276,000 of non-cash compensation being
recognized due to the modification of certain key employee and consultant
options. The Company also granted 750,000 options during the three months
ended December 31, 2010 versus 20,000 options granted during the three months
ended December 31, 2009 which resulted in $660,000 and $73,000 of non-cash
compensation expense for the three months ended December 31, 2010 and 2009,
respectively. The Company also recognized general and administrative
expenses of $538,000 and $30,000 due to the vesting of stock bonuses during
the three months ended December 31, 2010 and 2009, respectively.
Research and development
Total research and development expenses were $52,000 and $35,000 for the
three months ended December 31, 2010 and 2009, respectively.
Research and development expenses, excluding stock-based compensation
charges of $1,000 and $5,000 for the three months ended December 31, 2010 and
2009 were $51,000 and $30,000, respectively. The primary reason for the
increase in research and development expenses during the three months ended
December 31, 2010 is due to an increase in legal fees due to increased patent
activity during the quarter. Legal fees relating to research and development
were $26,000 and $1,000 for the three months ended December 31, 2010 and
2009, respectively.
Research and development stock-based compensation for the three months
ended December 31, 2010 and 2009 consists of the following:
Three Months Three Months
Ended Ended
December 31, December 31,
2010 2009
------------ ------------
Research and development:
Fair value of stock options expensed
under ASC 718 $ 1,000 $ 5,000
-------- --------
Total $ 1,000 $ 5,000
======== ========
Stock-based compensation expense decreased from $5,000 for the three
months ended December 31, 2009 to $1,000 for the three months ended December
31, 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 2011 were primarily allocated to general and administrative
and/or capitalized as part of the KF Project.
Loss from Operations
As a result of the factors described above, the loss from operations was
$3,140,000 and $645,000 for the three months ended December 31, 2010 and
2009, respectively.
Other expense (income)
Other expense (income) was $4,000 and $(3,000) for the three months
ended December 31, 2010 and 2009, respectively. Interest expense increased
to $5,000 for the three months ended December 31, 2010 due to the interest
accrued on the deferred compensation owed as of December 31, 2010 and
interest on the newly acquired line of credit. Interest income was $1,000
and $3,000 for the three months ended December 31, 2010 and 2009,
respectively.
Net loss attributable to the noncontrolling interest
The net loss attributable to the noncontrolling interest was $1,000 for
both of the three months ended December 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 $3,280,000 and $712,000 for the three months
ended December 31, 2010 and 2009, respectively, resulting in the net loss per
basic and diluted common share for the three months ended December 31, 2010
and 2009 of $0.27 and $0.06, respectively.
SIX MONTHS ENDED DECEMBER 31, 2010 COMPARED TO THE SIX MONTHS ENDED DECEMBER
31, 2009
General and Administrative
Total general and administrative expenses were $3,880,000 and $1,510,000
for the six months ended December 31, 2010 and 2009, respectively.
General and administrative expenses, excluding stock-based compensation
charges of $2,571,000 and $315,000 for the six months ended December 31, 2010
and 2009, respectively, were $1,308,000 and $1,195,000 for the six months
ended December 31, 2010 and 2009, respectively, representing a $113,000
increase. Consulting costs increased from $307,000 for the six months ended
December 31, 2009 to $427,000 for the six months ended December 31, 2010 due
to additional consultants utilized for strategic planning for the Kreider
project, a consultant for the development of future projects and various
consultants for fund raising and lobbying efforts. Partially offsetting the
increased consulting costs was a $33,000 reduction in investor relations
related costs.
General and administrative stock-based compensation for the six months
ended December 31, 2010 and 2009 consist of the following:
Six Months Six Months
Ended Ended
December 31, December 31,
2010 2009
------------ ------------
General and administrative:
Fair value remeasurement of options
with service conditions $ - $ 92,000
Change in fair value from modification
of option terms 1,276,000
Fair value of stock options expensed
under ASC 718 755,000 161,000
Fair value of stock bonuses expensed 540,000 62,000
----------- ---------
Total $ 2,571,000 $ 315,000
=========== =========
Stock-based compensation charges increased to $2,571,000 from $315,000
for the six months ended December 31, 2010 and 2009, respectively.
Compensation expense relating to stock options was $755,000 and $161,000
during the six months ended December 31, 2010 and 2009, respectively, due to
1,100,000 and 195,000 options granted during the six months ended December
31, 2010 and 2009, respectively. Additionally, compensation expense relating
to stock options was higher during the six months ended December 31, 2010
primarily due to $1,276,000 of non-cash compensation being recognized due to
the modification of certain key employee and consultant options. The Company
also recognized general and administrative expenses of $540,000 and $62,000
due to the vesting of stock bonuses during the six months ended December 31,
2010 and 2009, respectively.
Research and development
Total research and development expenses were $101,000 and $108,000 for
the six months ended December 31, 2010 and 2009, respectively.
Research and development expenses, excluding stock-based compensation
charges of $1,000 and $17,000 for the six months ended December 31, 2010 and
2009, respectively, were $100,000 and $91,000, respectively. The primary
reason for the slight decrease in research and development expenses during
the six months ended December 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.
Research and development stock-based compensation for the six months
ended December 31, 2010 and 2009 consist of the following:
Six Months Six Months
Ended Ended
December 31, December 31,
2010 2009
------------ ------------
Research and development:
Fair value remeasurement of options
with service conditions $ - $ 10,000
Fair value of stock options expensed
under ASC 718 1,000 7,000
------- --------
Total $ 1,000 $ 17,000
======= ========
Stock-based compensation expense decreased from $17,000 for the six
months ended December 31, 2009 to $1,000 for the same period in fiscal year
2011. 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.
Loss from Operations
As a result of the factors described above, the loss from operations was
$3,981,000 and $1,618,000 for the six months ended December 31, 2010 and
2009, respectively.
Other expense and (income)
Other expense and (income) was $6,000 and $(5,000) for the six months
ended December 31, 2010 and 2009, respectively. Interest expense increased
to $9,000 for the six months ended December 31, 2010 from $2,000 for the six
months ended December 31, 2009. Interest expense increased due to the
interest accrued on the deferred compensation balance as of December 31, 2010
and interest associated with the Company's new line of credit. Interest
income was $3,000 and $6,000 for the six months ended December 31, 2010 and
2009, respectively and the difference is primarily due to lower interest
rates.
Net loss (income) attributable to the noncontrolling interest
The net loss (income) attributable to the noncontrolling interest was
$3,000 and $2,000 for the six months ended December 31, 2010 and 2009,
respectively.
Net loss attributable to Bion's stockholders
As a result of the factors described above, the net loss attributable to
Bion's stockholders was $4,238,000 and $1,746,000 for the six months ended
December 31, 2010 and 2009, respectively, representing a $0.20 increase in
the net loss per basic and diluted common share for the six months ended
December 31, 2010 and 2009 from $0.15 to $0.35, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements for the six months ended December 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, 2010 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.
Operating Activities
As of December 31, 2010, the Company had cash and cash equivalents of
approximately $903,000. During the six months ended December 31, 2010, net
cash used in operating activities was $446,000, 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
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 six months ended December 31, 2010 the Company used
$1,561,000 for the design, permitting and preliminary construction of the KF
Project which has been capitalized as property and equipment. Also during
the six months ended December 31, 20101, the Company was required to maintain
an interest reserve bank account of $25,000 associated with its line of
credit.
Financing Activities
During the six months ended December 31, 2010, $1,231,000 and $223,000
of cash was provided from the sale of the Company's Series C preferred stock
and the Company's common stock, respectively. Cash of $684,000 was provided
from a line of credit the Company utilized during the six months ended
December 31, 2010. The Company used $141,000 and $87,000 for Series B and
Series C preferred dividends payments, respectively.
As of December 31, 2010 the Company has debt obligations consisting of
deferred compensation of $173,000 and a line of credit payable of $684,000.
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. The Company has entered into sub-lease agreements with three
separate parties which fully covers the lease expense. As of December 31,
2010, the Company has 35 months remaining on the lease.
Plan of Operations and Outlook
As of December 31, 2010 the Company had cash and cash equivalents of
approximately $903,000. 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 received
a permit for construction of the KF Project on August 12, 2010. Initial
construction commenced during November 2010. The settlement/closing of the
Pennvest loan took place on November 3, 2010 and the Company received the
initial drawdown/reimbursement from Pennvest on January 6, 2011. From
January 1, 2011 through February 10, 2011, the Company has received
reimbursements of approximately $2,600,000 pursuant to the Pennvest Loan.
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, finance its Projects and other activities,
continue its technology development and/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.
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 upstate New York for
its initial Project and anticipates optioning land in that area during the
2011 fiscal year or soon thereafter (although locations other states are also
under review). In addition, Bion intends to choose sites for additional
Projects during the calendar years 2011-2012 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 5 or more of these Integrated Projects will be in full
operation in 3-5 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
$57,315 in connection with the lease as of December 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 100% 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. Funds were expended 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. Substantial additional funds are being
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 in connection with the second
phase (largely poultry manure) of the Kreider project. On January 26, 2009
the Board of the Pennsylvania Infrastructure Investment Authority 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. After substantial unanticipated delays over the past
year, on August 12, 2010, the Company received a permit for construction of
the Phase 1 Kreider System. Initial construction commenced during November
2010. The initial settlement/closing of the Pennvest loan took place on
November 3, 2010 and the Company received the initial drawdown/re-imbursement
from Pennvest pursuant to the Pennvest Loan on January 6, 2011. The Company
believes the $7.8 million loan from Pennvest will be sufficient to fund the
anticipated construction costs and that the construction will be completed
and the project will be operational during the spring of 2011. The
Pennsylvania Department of Environmental Protection recently re-certified the
nutrient credits for this project.
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.
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 for the year ended June 30, 2010.
(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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not involved in any material legal proceedings at this
time.
ITEM 1A. RISK FACTORS.
Not Applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the quarter ended December 31, 2010 the Company sold 75,746
shares of restricted common stock for $223,199.90 (not including 30,202
shares issued, valued at $78,330, 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
9,350 shares of its Series C Preferred Stock for $813,450 (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
10.1 Short Form of Agreement with William O'Neill (incorporated by
reference to Exhibit 10.1 as filed in Registrant's Form 8-K
dated November 11, 2010)
10.2 Resume of William O'Neill (incorporated by reference to Exhibit
10.2 as filed in Registrant's Form 8-K dated November 11, 2010)
10.3 Loan and Security Agreement with MileStone Bank (without
exhibits/attachments) (incorporated by reference to Exhibit 10.1
as filed in Registrant's Form 8-K dated December 4, 2010)
10.4 O'Neill Employment Agreement (dated December 22, 2010)
(incorporated by reference to Exhibit 10.1 as filed in
Registrant's Form 8-K dated December 20, 2010)
10.5 Schafer Employment Agreement (dated December 21, 2010)
(incorporated by reference to Exhibit 10.2 as filed in
Registrant's Form 8-K dated December 20, 2010)
10.6 Biography of Edward T. Schafer (incorporated by reference to
Exhibit 10.3 as filed in Registrant's Form 8-K dated
December 20, 2010)
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
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: February 11, 2011 By:/s/ Mark A. Smith
Mark A. Smith, President (Chief
Executive Officer) and Interim Chief
Financial Officer (Principal Financial
and Accounting Officer)