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 September 30, 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 November 12, 2010, there
were 12,910,824 Common Shares issued and 12,206,518 Common Shares
outstanding.
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated
filed" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
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 ...... 7-20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 29
Item 4. Controls and Procedures .................................... 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 30
Item 1A. Risk Factors................................................ 30
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds ................................................... 30
Item 3. Defaults Upon Senior Securities ............................ 30
Item 4. Submission of Matters to a Vote of Security Holders ........ 30
Item 5. Other Information .......................................... 30
Item 6. Exhibits ................................................... 30
Signatures ................................................. 31
2
PART I. FINANCIAL INFORMATION
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2010 2010
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash $ 716,112 $ 1,026,084
Prepaid rent and expenses 9,268 9,228
Other receivable - affiliate 8,797 8,797
Deposits and other receivables 16,956 11,956
------------ ------------
Total current assets 751,133 1,056,065
------------ ------------
Restricted cash (Note 7) 57,315 57,315
Property and equipment, net (Note 4) 1,125,407 889,251
------------ ------------
Total assets $ 1,933,855 $ 2,002,631
============ ============
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 914,682 $ 675,024
Deferred compensation (Note 5) 169,125 -
------------ ------------
Total current liabilities 1,083,807 675,024
------------ ------------
Deferred compensation (Note 5) - 165,000
Deferred rent (Note 7) 57,851 69,892
------------ ------------
Total liabilities 1,141,658 909,916
------------ ------------
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 6):
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; 22,800
and 18,000 shares issued and outstanding,
respectively; liquidation preference of
$2,327,712 2,031,312 1,605,592
Common stock, no par value, 100,000,000
shares authorized, 12,807,281 and 12,754,850
shares issued, respectively; 12,102,972 and
12,050,521 shares outstanding, respectively - -
Additional paid-in capital 75,600,228 75,484,099
Accumulated deficit (79,465,459) (78,624,862)
------------ ------------
Total Bion's stockholders' deficit (1,833,919) (1,535,171)
------------ ------------
Noncontrolling interest (Note 3) 104,901 106,671
------------ ------------
Total deficit (1,729,018) (1,428,500)
------------ ------------
Total liabilities and deficit $ 1,933,855 $ 2,002,631
============ ============
See notes to unaudited consolidated financial statements.
3
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
2010 2009
------------ ------------
Revenue $ - $ -
------------ ------------
Operating expenses:
General and administrative (including stock-
based compensation (Note 6)) 791,474 900,652
Research and development (including stock-
based compensation (Note 6)) 49,001 72,517
------------ ------------
Total operating expenses 840,475 973,169
------------ ------------
Loss from operations (840,475) (973,169)
------------ ------------
Other expense (income):
Interest expense 4,125 1,515
Interest income (2,233) (2,954)
------------ ------------
1,892 (1,439)
------------ ------------
Net loss (842,367) (971,730)
Net loss attributable to the noncontrolling
interest 1,770 1,171
------------ ------------
Net loss attributable to Bion (840,597) (970,559)
Dividends on preferred stock (118,137) (63,792)
------------ ------------
Net loss applicable to Bion's common
stockholders $ (958,734) $ (1,034,351)
============ ============
Net loss applicable to Bion's common
stockholders per basic and diluted common
share $ (0.08) $ (0.09)
============ ============
Weighted-average number of common shares
outstanding:
Basic 12,080,554 11,605,762
============ ============
Diluted 12,080,554 11,605,762
============ ============
See notes to unaudited consolidated financial statements.
4
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
THREE MONTHS ENDED SEPTEMBER 30, 2010
(UNAUDITED)
Bion's Shareholders
------------------------------------------------------------------- Non-
Series C Additional controll- Total
Preferred Stock Common Stock paid-in Accumulated ing 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 - - - - 95,109 - - 95,109
Issuance of common stock
for services and project
construction services - - 52,451 - 107,907 - - 107,907
Issuance of warrants for
services - - - - 31,250 - - 31,250
Sale of Series C
preferred stock, net 4,800 417,600 - - - - - 417,600
Dividind on Series B
preferred stock - - - - (70,425) - - (70,425)
Dividend on Series C
preferred stock - 8,120 - - (47,712) - - (39,592)
Net loss - - - - - (840,597) (1,770) (842,367)
------ ---------- ---------- ------ ----------- ------------ --------- ------------
Balances, September 30,
2010 22,800 $2,031,312 12,807,281 $ - $75,600,228 $(79,465,459) $ 104,901 $(1,729,018)
====== ========== ========== ====== =========== ============ ========= ===========
See notes to unaudited consolidated financial statements.
5
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
2010 2009
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (842,367) $ (971,730)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation expense 4,261 3,963
Accrued interest on deferred compensation 4,125 -
Stock-based compensation 220,453 412,901
(Increase) decrease in prepaid rent and expenses (40) 3,994
Increase in deposits and other receivable (5,000) -
Increase (decrease) in accounts payable and accrued
expenses 246,738 (81,248)
Decrease in deferred rent (12,041) (540)
------------ -----------
Net cash used in operating activities (383,871) (632,660)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (233,684) (114,835)
------------ -----------
Net cash used in investing activities (233,684) (114,835)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock - 13,153
Proceeds from sale of Series B preferred stock - 595,950
Proceeds from sale of Series C preferred stock 417,600 -
Repayment of loans payable - affiliates - (162,500)
Payment of Series B preferred dividends (70,425) (12,876)
Payment of Series C preferred dividends (39,592) -
------------ -----------
Net cash provided by financing activities 307,583 433,727
------------ -----------
Net decrease in cash (309,972) (313,768)
Cash at beginning of period 1,026,084 1,695,713
------------ -----------
Cash at end of period $ 716,112 $ 1,381,945
============ ===========
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 $ - $ 78,495
Issuance of common stock in exchange for project
construction services 6,733 11,541
Issuance of common stock in exchange for services 7,080 -
Series B preferred stock dividends 70,425 50,915
Series C preferred stock dividends 47,712 -
See notes to unaudited consolidated financial statements.
6
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 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.
7
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 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
("Kreider System"). 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 anticipates that the initial
drawdown/reimbursement from Pennvest pursuant to the Pennvest Loan will be
received in the next 30 days. Bion is in the process of finalizing its
design for 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.
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 $842,000 for the three months ended September 30, 2010. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability or classification of
assets or the amounts and classification of liabilities that may result
should the Company be unable to continue as a going concern. The following
paragraphs describe management's plans with regard to these conditions.
8
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2010
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 net
proceeds to the Company of $1,566,000 after commissions. During the three
months ended September 30, 2010, the Company sold an additional 4,800 shares
of the Company's Series C Preferred shares at $100 per share, which resulted
in the net proceeds to the Company of $417,600.
At September 30, 2010, the Company has a working capital deficit and a total
deficit of approximately $333,000 and $1,729,000 respectively.
The Company continues to explore sources of additional financing to satisfy
its current operating requirements. While the Company currently does not face
a severe working capital shortage, it is not currently generating any
revenues. The Company will need to obtain additional capital to fund its
operations and technology development, to satisfy existing creditors, to
develop Projects and to construct the Kreider Farm facilities. The Company
anticipates that it will seek to raise from $5,000,000 to $50,000,000 (debt
and equity) during the next twelve months. There is no assurance, especially
in the extremely unsettled capital markets that presently exist, that the
Company will be able to obtain the funds that it needs to stay in business,
complete its technology development or to successfully develop its business.
There can be no assurance that funds required during the next twelve months
or thereafter will be generated from operations or that those funds will be
available from external sources such as debt or equity financings or other
potential sources. The lack of additional capital resulting from the
inability to generate cash flow from operations or to raise capital from
external sources would force the Company to substantially curtail or cease
operations and would, therefore, have a material adverse effect on its
business. Further, there can be no assurance that any such required funds, if
available, will be available on attractive terms or that they will not have a
significantly dilutive effect on the Company's existing shareholders. All
of these factors have been exacerbated by the extremely unsettled credit and
capital markets presently existing.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Bion Integrated Projects Group, Inc. (formerly
Bion Dairy Corporation ("Projects Group"), Bion Technologies, Inc., BionSoil,
Inc., Bion Services, 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 September 30, 2010 and the results of operations and cash flows of the
Company for the three months ended September, 2010 and 2009. Operating
results for the three months ended September 30, 2010 are not necessarily
indicative of the results that may be expected for the year ending June 30,
2011.
9
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2010
The unaudited consolidated financial statements should be read in conjunction
with the Company's audited financial statements and footnotes thereto
included in its Annual Report on Form 10-K 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 months ended September 30, 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:
September 30, 2010 September 30, 2009
------------------ ------------------
Warrants 5,592,616 5,290,616
Options 2,620,833 2,170,833
Convertible debt 112,750 333,333
Convertible preferred stock 2,025,641 1,440,255
The following is a reconciliation of the denominators of the basic loss per
share computations for the three months ended September 30, 2010 and 2009:
Three months Three months
ended ended
September 30, September 30,
2010 2009
------------- -------------
Shares issued - beginning of period 12,754,830 12,126,448
Shares held by subsidiaries (Note 6) (704,309) (704,309)
---------- ----------
Shares outstanding - beginning of period 12,050,521 11,422,139
Weighted average shares issued during
the period 30,033 183,623
---------- ----------
Basic weighted average shares -
end of period 12,080,554 11,605,762
========== ==========
Fair value measurements:
The fair value of cash 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.
10
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2010
3. NONCONTROLLING INTEREST OF CENTERPOINT CORPORATION:
The Company owns a 58.9% interest in Centerpoint. During the three months
ended September 30, 2010 and 2009, Centerpoint had losses of approximately
$4,300 and $2,850, respectively. The noncontrolling interest as of September
30, 2010 was $104,901.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
September 30, 2010 June 30, 2010
------------------ -------------
Project construction in progress $1,086,409 $ 845,992
Leasehold improvements 31,336 31,336
Furniture 28,932 28,932
Computers and office equipment 37,139 37,139
---------- ---------
1,183,816 943,399
Less accumulated depreciation (58,409) (54,148)
---------- ---------
$1,125,407 $ 889,251
========== =========
Depreciation expense was $4,261 and $3,963 for the three months ended
September 30, 2010 and 2009, respectively.
5. DEFERRED COMPENSATION:
As of September 30, 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 September 30, 2010, the deferred compensation and accrued
interest total $169,125. Interest expense for the three months ended
September 30, 2010 was $4,125.
6. 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
11
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2010
at a price of $100 per share. The Series B Preferred stock is convertible
for three years from the date of issuance at the option of the holder into
shares of the Company's common stock calculated by dividing the sum of the
$100 per share purchase price plus any accrued and unpaid dividends by $2.00
(the Conversion Rate). The Series B Preferred stock shall be automatically
and mandatorily converted into shares of the Company's common stock at the
Conversion Rate upon each occasion (at least 30 calendar days apart) after a
date of six months subsequent to the initial issuance of the Series B
Preferred stock on which the closing price of the Company's common stock has
been equal 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 are expected to be paid on or about November 16, 2010.
Series C Preferred stock:
During December 2009, the Company authorized the issuance of 60,000 shares of
Series C Preferred stock, which have a par value of $0.01 per share and are
issuable at a price of $100 per share. The Series C Preferred stock is
convertible at the option of the holder at any time from the date of
issuance, into shares of the Company's common stock calculated by dividing
the sum of the $100 per share purchase price plus any accrued and unpaid
dividends by $4.00 (the Conversion Rate), provided the shares have not been
redeemed into common shares by the Company at is sole election. A portion
(up to 100% as calculated below) of each 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
12
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 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 three months ended September 30, 2010, the Company issued 4,800
shares of Series C Preferred stock for cash proceeds of $480,000 (net
proceeds of $417,600 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 are expected to be on or about November 16, 2010.
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 stockholders 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 three months ended September 30, 2010, the Company issued 52,451
shares of the Company's restricted common stock at prices ranging from $1.50
to $2.30 per share for consulting services valued at $99,490, in aggregate,
to various consultants.
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,
13
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2010
the approximate market value on the date of grant, totaling $131,300. The
stock bonuses are subject to vesting and during the three months ended
September 30, 2010, $1,684 was recorded as compensation expense and $6,733
was capitalized as project construction in progress as it directly related to
construction services provided by employees and consultants.
Warrants:
As of September 30, 2010, the Company had the following common stock warrants
outstanding:
Exercise
Number of Shares 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 1-6 45,000 2.25 December 31, 2015
Class NHJRG 1-6 45,000 2.25 December 31, 2015
---------
5,592,616
=========
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 8). 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
14
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2010
warrants. The Company recorded non-cash compensation expense of $20,000
related to the warrant issuance.
From July through September 2010, warrants to purchase 45,000 shares of the
Company's common stock at $2.25 per share were issued pursuant to an
agreement with two consultants. These 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
$11,250 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 September 30, 2010
is 7.7 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.
The Company recorded compensation expense related to employee stock options
of $95,109 and $94,604 for the three months ended September 30, 2010 and
2009, respectively. The Company granted 350,000 and 175,000 options during
the three months ended September 30, 2010 and 2009, respectively. The fair
value of the options granted during the three months ended September 30, 2010
and 2009 were estimated on the grant date using the Black-Scholes option-
pricing model with the following assumptions:
Weighted Weighted
Average Range average Range
September September September September
30, 2010 30, 2010 30, 2009 30, 2009
--------- ---------- --------- ---------
Volatility 96% 95%-102% 99% 99%
Dividend yield - - - -
Risk-free interest rate 0.80% 0.72%-0.81% 1.31% 1.31%
Expected term (years) 3.38 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 three months ended
September 30, 2010 is as follows:
15
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2010
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 350,000 2.29
Exercised - -
Forfeited - -
Expired - -
--------- ------ --- --------
Outstanding at September 30,
2010 2,620,833 $ 2.77 3.7 $800,300
========= ====== === ========
Exercisable at September 30,
2010 2,233,333 $ 2.87 3.2 $603,300
========= ====== === ========
The following table presents information relating to nonvested stock options
as of September 30, 2010:
Weighted
Average
----------------------------
Grant-Date
Options Fair Value
-----------------------------
Nonvested at July 1, 2010 87,500 $ 0.67
Granted 350,000 1.38
Vested (50,000) (1.35)
Forfeited - -
-----------------------------
Nonvested at September 30, 2010 387,500 $1.22
=============================
The total fair value of stock options that vested during the three months
ended September 30, 2010 and 2009 was $50,625 and $108,609, respectively. As
of September 30, 2010, the Company had $413,224 of unrecognized compensation
cost related to stock options that will be recorded over a weighted average
period of less than two years.
Stock-based compensation charges in operating expenses in the Company's
financial statements for the three months ended September 30, 2010 and 2009
are as follows:
16
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2010
Three months Three months
ended ended
September 30, September 30,
2010 2009
------------- -------------
General and administrative:
Fair value remeasurement of options
with service conditions $ - $ 65,261
Fair value of stock bonuses expensed 1,684 37,275
Fair value of stock options expensed 95,109 87,979
-------- ---------
Total $ 96,793 $ 190,515
======== =========
Research and development:
Fair value remeasurement of options
with service conditions $ - $ -
Fair value of stock options expensed - 6,625
-------- ---------
Total $ - $ 6,625
======== =========
7. 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 September 30, 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
$57,851 as of September 30, 2010. Rent expense, net of contractual and
month-to-month sub-lease rental income, was nil and $7,067 for the three
months ended September 30, 2010 and 2009, respectively.
At September 30, 2010, future minimum rental payments due under non-
cancelable leases and future minimum rental payments to be received under
non-cancelable subleases are:
17
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2010
Operating lease Sublease Net operating
Fiscal year: payments rentals lease payments
--------------- -------- --------------
2011 $ 149,403 $ 149,403 $ -
2012 212,775 212,775 -
2013 225,756 225,756 -
2014 97,219 97,219 -
--------- --------- -----
Total $ 685,153 $ 685,153 $ -
========= ========= =====
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.
8. 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 to be paid on
January 1, 2011. In addition Mr. Smith was granted a $20,000 bonus payable
18
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2010
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
5). The Brightcap Agreement also extended the maturity date of Mr. Bassani's
$50,000 promissory note to June 30, 2009 and allowed for the conversion of
the principal and interest, in whole or in part, at the election of Mr.
Bassani, into the Company's restricted common shares at $0.75 per share. The
promissory note was converted on June 30, 2009. On September 30, 2009 the
Company entered into an extension agreement with Brightcap pursuant to which
Mr. Bassani will provide services to the Company through September 30, 2012
for $312,000 annually. In conjunction with the extension agreement, Mr.
Bassani was granted a $60,000 bonus payable in warrants to purchase 600,000
shares of the Company's common stock at a price of $2.50 per share until
January 15, 2019. Mr. Bassani was also granted an extension on the
conversion date of the $175,000 deferred compensation from December 31, 2009
until January 14, 2010.
Effective September 18, 2006, the Company entered into a four-year employment
agreement with Jeremy Rowland whereby Mr. Rowland assumed the position of
Chief Operating Officer of Dairy at an annual salary of $150,000. In June
2008, the employment agreement terms were extended through July 1, 2012. Mr.
Rowland now serves as Chief Operating Officer of the Company's Services Group
subsidiary.
The Company approved an employment agreement contract extension effective
June 30, 2009, with Craig Scott whereby Mr. Scott will continue to act as
Vice President of Capital Markets and Shareholder Relations through December
31, 2010, at an annual salary of $144,000. The Company will have the right
terminate the agreement with 30 days notice commencing December 2009, with no
further liability.
In May 2005 the Company declared contingent deferred stock bonuses of 690,000
shares to its key employees and consultants. The stock bonuses of 492,500
and 197,500 shares are contingent upon the Company's stock price exceeding
$10.00 and $20.00 per share, respectively, and the grantees still being
employed by or providing services to the Company at the time the target
19
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2010
prices are reached. As of September 30, 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.
9. SUBSEQUENT EVENTS:
The Company has evaluated events that occurred subsequent to September 30,
2010 for recognition and disclosure in the consolidated financial statements.
Issuance of Common Stock
From October 1, 2010 through November 12, 2010, the Company issued 27,797
shares of the Company's common shares to various consultants valued at
approximately $72,000.
From October 1, 2010 through November 12, 2010, the Company issued 4,500
shares of its Series C Preferred shares for $450,000, ($391,500 net of
commissions).
From October 1, 2010 through November 12, 2010, the Company issued 75,746
shares of the Company's common shares to investors for net proceeds of
approximately $223,000.
20
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 Bion
Systems to treat KF's dairy and poultry waste streams to reduce nutrient
releases to the environment while generating marketable nutrient credits and
renewable energy. On January 26, 2009 the Board of the Pennsylvania
Infrastructure Investment Authority ('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. Initial construction related
activities including bidding and ordering of equipment commenced during
October 2010. The settlement/closing of the Pennvest loan took place on
November 3, 2010 and the Company anticipates that the initial
drawdown/reimbursement from Pennvest pursuant to the Pennvest Loan will be
received during the next 30 days. 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
21
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 remainder of calendar years 2010-2012 to
create a pipeline of Projects. Management has a 5-year development target
(through calendar year 2016) of approximately 12-24 Integrated Projects. At
the end of that period, Bion projects that 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 working capital surplus and a total deficit of
approximately $381,000 and $1,535,000, respectively. The report of the
independent registered public accounting firm on the Company's consolidated
financial statements as of and for the year ended June 30, 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 $959,000 and $1,034,000 during the three month
periods ended September 30, 2010 and 2009, respectively. At September 30,
2010, the Company has a working capital deficit and a total deficit of
approximately $333,000 and $1,729,000, 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
22
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 fair
values.
THREE MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2009
General and Administrative
Total general and administrative expenses were $791,000 and $901,000 for
the three months ended September 30, 2010 and 2009, respectively.
General and administrative expenses, excluding stock-based compensation
charges of $97,000 and $190,000 for the three months ended September 30, 2010
and 2009, respectively, were $694,000 and $711,000 for the three months ended
September 30, 2010 and 2009, respectively, representing a $17,000 decrease.
23
There were no notable variations in the general and administrative expenses
for the three months ended September 30, 2010 compared to the same period in
the prior year.
General and administrative stock-based compensation for the three months
ended September 30, 2010 and 2009 consists of the following:
Three months Three months
ended ended
September 30, September 30,
2010 2009
------------ -------------
General and administrative:
Fair value remeasurement of options
with service conditions $ - $ 65,000
Fair value of stock options expensed
under ASC 718 95,000 88,000
Fair value of stock bonuses expensed 2,000 37,000
------- --------
Total $97,000 $190,000
======= ========
Stock-based compensation charges decreased from $190,000 to $97,000 for
the three months ended September 30, 2009 and 2010, respectively. The
Company recognized general and administrative expenses of $65,000 for the
three months ended September 30, 2009 due to the remeasurement of options
with service conditions. The options became fully vested during the 2010
fiscal year so no similar expense is present during the three months ended
September 30, 2010. The Company recognized expense relating to the fair
value of stock options for general and administrative employees of $95,000
and $88,000 for the three months ended September 30, 2010 and 2009,
respectively. Compensation expense relating to stock options was higher
during the three months ended September 30, 2010 due to 350,000 options being
granted during that period versus 175,000 options being granted during the
three months ended September 30, 2010. The Company also recognized general
and administrative expenses of $2,000 and $37,000 for the three months ended
September 30, 2010 and 2009, respectively, due to the issuance of stock
bonuses during the three months ended September 30, 2009.
Research and development
Total research and development expenses were $49,000 and $73,000 for the
three months ended September 30, 2010 and 2009, respectively.
Research and development expenses, excluding stock-based compensation
charges of nil and $7,000 for the three months ended September 30, 2010 and
2009 were $49,000 and $66,000, respectively. The primary reason for the
decrease in research and development expenses during the three months ended
September 30, 2010 is due to a decrease in legal fees primarily due to the
utilization of a patent research consultant which reduced overall legal
expenses. Legal fees relating to research and development were $14,000 and
$34,000 for the three months ended September 30, 2010 and 2009, respectively.
Research and development stock-based compensation for the three months
ended September 30, 2010 and 2009 consists of the following:
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Three months Three months
ended ended
September 30, September 30,
2010 2009
------------ -------------
Research and development:
Fair value of stock options expensed
under ASC 718 $ - $7,000
------ ------
Total $ - $7,000
====== ======
Stock-based compensation expense decreased from $7,000 for the three
months ended September 30, 2009 to nil for the three months ended September
30, 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
$840,000 and $973,000 for the three months ended September 30, 2010 and 2009,
respectively.
Other expense (income)
Other expense (income) was $2,000 and $(1,000) for the three months
ended September 30, 2010 and 2009, respectively. Interest expense increased
to $4,000 for the three months ended September 30, 2010 due to the interest
accrued on the deferred compensation owed as of September 30, 2010.
Interest income was $2,000 and $3,000 for the three months ended September
30, 2010 and 2009, respectively.
Net loss attributable to the noncontrolling interest
The net loss attributable to the noncontrolling interest was $2,000 and
$1,000 for the three months ended September 30, 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 $959,000 and $1,034,000 for the three months
ended September 30, 2010 and 2009, respectively, resulting in the net loss
per basic and diluted common share for the three months ended September 30,
2010 and 2009 of $0.08 and $0.09, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements for the three months ended September
30, 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.
25
As of September 30, 2010, the Company had cash and cash equivalents of
approximately $716,000. During the three months ended September 30, 2010, net
cash used in operating activities was $384,000, 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 three months ended September 30, 2010 the Company used
$234,000 for the design and permitting of the KF Project which has been
capitalized as property and equipment.
Financing Activities
During the three months ended September 30, 2010, $418,000 of cash was
provided from the sale of the Company's Series C preferred stock. The
Company used $70,000 and $40,000 for Series B and Series C preferred
dividends payments, respectively.
As of September 30, 2010 the Company has debt obligations consisting of
deferred compensation of $169,000. 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 September 30, 2010, the Company has 38 months remaining
on the lease.
Plan of Operations and Outlook
As of September 30, 2010 the Company had cash and cash equivalents of
approximately $716,000. 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 related activities including bidding and ordering of equipment
commenced during October 2010. The settlement/closing of the Pennvest loan
took place on November 3, 2010 and the Company anticipates that the initial
drawdown/reimbursement from Pennvest will be received in the next 30 days.
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.
26
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 2010-2012 to create a pipeline of
Projects. Management has a 5-year development target (through calendar year
2016) of approximately 12-24 Integrated Projects. At the end of that period,
Bion projects that 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 June 30, 2010. The Company's
27
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. To complete final design
work and all building, zoning and other related pre-construction matters,
substantial capital (equity and/or debt) has been and will continue to be
expended. Additional funds will be expended for construction. Upon
successful construction and operation of the system, the Company anticipates
that it will receive revenue from the sale of nutrient (and other)
environmental credits related to the Kreider system and through sales of
renewable energy generated at the Kreider system. On January 26, 2009 the
Board of the Pennsylvania Infrastructure Investment Authority 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 related activities including
bidding and equipment ordering commenced during October 2010. The initial
settlement/closing of the Pennvest loan took place on November 3, 2010 and
the Company anticipates that the initial drawdown/re-imbursement from
Pennvest pursuant to the Pennvest Loan will be received within 30 days. 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
28
expenses, results of operations, liquidity, capital expenditures or capital
resources.
The following discussion and analysis should be read in conjunction with
the unaudited Consolidated Financial Statements and Notes to Consolidated
Financial Statements filed herein and with the Company's Form 10-K/A for the
year ended June 30, 2010.
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.
29
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 September 30, 2010 the Company sold 0 shares of
restricted common stock for $0 (not including 52,541 shares issued valued at
$99,490, 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 4,800 shares of its
Series C Preferred Stock for $417,600 (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 'Accepted Funding Offer' (base loan agreement)
(without exhibits) with PENNVEST for Kreider Farms
Project Loan -- effective November 3, 2010 (previously
filed)
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
30
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: November 12, 2010 By:/s/ Mark A. Smith
Mark A. Smith, President (Chief
Executive Officer) and Interim Chief
Financial Officer (Principal Financial
and Accounting Officer)
31