UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2009
[ ] Transition report pursuant section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number: 000-19333
BION ENVIRONMENTAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1176672
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)
Box 566/1774 Summitview Way, Crestone, Colorado 81131
(Address of Principal Executive Offices)
212-758-6622
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the issuer has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. NOT APPLICABLE
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. On May 13, 2009, there were
11,778,644 Common Shares issued and 11,074,335 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 stockholders' deficit ............ 5
Statements of cash flows .................................. 6
Notes to unaudited consolidated financial statements ...... 7-25
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 39
Item 4. Controls and Procedures .................................... 39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 40
Item 1A. Risk Factors................................................ 40
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds ................................................... 40
Item 3. Defaults Upon Senior Securities ............................ 40
Item 4. Submission of Matters to a Vote of Security Holders ........ 40
Item 5. Other Information .......................................... 40
Item 6. Exhibits ................................................... 41
Signatures ................................................. 42
-2-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2009 2008
------------ -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,811 $ 478,899
Prepaid expenses 3,476 9,130
Deposits and other receivables 11,957 12,068
------------ ------------
Total current assets 24,244 500,097
------------ ------------
Restricted cash (Note 10) 85,973 128,443
Property and equipment, net (Note 4) 47,573 59,504
------------ ------------
Total assets $ 157,790 $ 688,044
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 604,696 $ 567,811
Accrued payable - affiliate (Note 12) 41,647 41,647
Loans payable - affiliates (Note 6) 102,500 -
Notes payable - affiliates (Note 7) 170,218 -
Deferred compensation (Note 8) 250,000 25,000
------------ ------------
Total current liabilities 1,169,061 634,458
------------ ------------
Convertible promissory notes - affiliates
(Note 5) - 784,122
Deferred rent (Note 10) 72,985 71,865
------------ ------------
Total liabilities 1,242,046 1,490,445
------------ ------------
Minority interest (Note 3) 114,558 117,692
------------ ------------
Stockholders' deficit (Note 9):
Series A Preferred stock, $0.01 par value,
10,000 shares authorized, no shares issued
and outstanding - -
Series B Preferred stock, $0.01 par value,
50,000 shares authorized, no shares issued
and outstanding - -
Common stock, no par value, 100,000,000
shares authorized, 11,726,307 and 11,070,658
shares issued, respectively, 11,021,998 and
10,366,349 outstanding, respectively - -
Additional paid-in capital 74,098,100 73,422,195
Accumulated deficit (75,296,914) (74,342,288)
------------ ------------
Total stockholders' deficit (1,198,814) (920,093)
------------ ------------
Total liabilities and stockholders'
deficit $ 157,790 $ 688,044
============ ============
See notes to unaudited consolidated financial statements.
-3-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
Three months ended March 31, Nine months ended March 31,
2009 2008 2009 2008
----------- ------------ ----------- -----------
Revenue $ - $ - $ - $ -
Operating expenses:
General and administrative
(including stock-based
compensation (Note 9)) 780,987 237,847 1,569,229 546,434
Research and development
(including stock-based
compensation (Note 9)) 46,438 573,721 393,408 1,245,389
----------- ---------- ----------- -----------
Total operating expenses 827,425 811,568 1,962,637 1,791,823
----------- ---------- ----------- -----------
Loss from operations (827,425) (811,568) (1,962,637) (1,791,823)
----------- ---------- ----------- -----------
Other expense (income):
Interest expense 2,722 47,251 30,279 150,870
Interest income 1,109 (4,530) (972) (19,899)
Minority interest (Note 3) (12,830) (12,935) (3,134) 113,930
Forfeiture of deferred
compensation (Note 5) - - (959,184) -
Other, net - - (75,000) (1,258,195)
----------- ---------- ----------- -----------
(8,999) 29,786 (1,008,011) (1,013,294)
----------- ---------- ----------- -----------
Net loss $ (818,426) $ (841,354) $ (954,626) $ (778,529)
=========== ========== =========== ===========
Net loss per basic and
diluted common share $ (0.08) $ (0.10) $ (0.09) $ (0.10)
=========== ========== =========== ===========
Weighted-average number of
common shares outstanding,
basic and diluted 10,723,818 8,351,030 10,501,416 8,197,170
=========== ========== =========== ===========
See notes to unaudited consolidated financial statements.
-4-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED MARCH 31, 2009
(UNAUDITED)
Total
Common Stock Additional Accumulated stockholders'
Shares Amount paid-in capital deficit deficit
---------- ------ --------------- ------------- --------------
Balances, July 1, 2008 11,070,658 $ - $ 73,422,195 $(74,342,288) $ (920,093)
Vesting and remeasure-
ment of options for
services (Note 9) - - 132,669 - 132,669
Issuance of common
stock for services
(Note 9) 234,214 - 63,160 - 63,160
Issuance of warrants
for services (Note 9) - 164,000 - 164,000
Sale of common stock
(Note 9) 333,333 - 250,000 - 250,000
Conversion of debt to
equity (Note 9) 88,102 - 66,076 - 66,076
Net loss - - - (954,626) (954,626)
---------- ----- ------------ ------------ -----------
Balances, March 31,
2009 11,726,307 $ - $ 74,098,100 $(75,296,914) $(1,198,814)
========== ===== ============ ============ ===========
See notes to consolidated financial statements.
-5-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
2009 2008
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (954,626) $(778,529)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation expense 11,931 12,160
Accrued interest on convertible notes and debt 30,280 150,870
Stock-based compensation 359,829 363,683
Forfeiture of deferred compensation (959,184) -
Decrease in fair value of convertible notes - (548,104)
Minority interest (3,134) 113,930
Decrease in prepaid expenses 5,654 18,524
Decrease (increase) in deposits and other
receivables 111 (5,101)
Increase (decrease) in accounts payable and
accrued expenses 36,885 (27,411)
Increase in deferred rent 1,120 4,510
Increase in deferred compensation 441,076 554,280
----------- ---------
Net cash used in operating activities (1,030,058) (141,188)
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in restricted cash 42,470 43,502
Proceeds from refund of property and equipment - 5,258
Purchase of property and equipment - (3,078)
----------- ---------
Net cash provided by investing activities 42,470 45,682
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 250,000 -
Proceeds from loans payable - affiliates 102,500 -
Proceeds from notes payable - affiliates 165,000 -
----------- ---------
Net cash provided by financing activities 517,500 -
----------- ---------
Net decrease in cash and cash equivalents (470,088) (95,506)
Cash and cash equivalents at beginning of year 478,899 373,109
----------- ---------
Cash and cash equivalents at end of year $ 8,811 $ 277,603
=========== =========
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 $ 66,076 $ 538,509
=========== =========
See notes to unaudited consolidated financial statements.
-6-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009
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 from livestock waste streams based upon our research to date.
Because Bion's technology reduces the harmful emissions from a CAFO on which
it is utilized, the CAFO can increase its herd concentration while lowering
or maintaining its level of nutrient releases and atmospheric emissions.
Since 2002, the Company has focused on completing development of its
technology platform and business model. As such, 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. Bion is now actively pursuing business opportunities in two broad
areas: 1) retrofit and environmental remediation of existing CAFOs (described
below) and 2) development of "closed loop" Integrated Projects (defined
below).
We believe that Bion's technology platform allows the integration of
large-scale CAFO's and their end-product users, renewable energy production
from the CAFO waste stream, on site utilization of the renewable energy
generated and biofuel/ethanol production in an environmentally and
economically sustainable manner while reducing the aggregate capital expense
and operating costs for the entire integrated complex ("Integrated Projects"
or "Projects"). In the context of Integrated Projects, Bion's waste treatment
process, in addition to mitigating polluting releases, generates renewable
energy from portions of the CAFO waste stream which renewable energy can be
utilized by integrated 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 evaluating
opportunities for development of Integrated Projects in New York, Nebraska
and elsewhere.
-7-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS
(CONTINUED):
On September 27, 2008, the Company executed an agreement with Kreider
Farms (and its affiliated entities) (collectively "Kreider") to design,
construct and operate, through its wholly-owned subsidiaries, Bion Services
Group, Inc. ("Bion Services") and Bion PA 1, LLC ('LLC'), a Bion system to
treat the waste of the milking dairy cows (milkers, dry cows and heifers) at
the Kreider Dairy, located in Mannheim, Pennsylvania. In addition, the
agreement provides for a renewable energy facility ("REF") that will provide
energy for Bion's waste treatment facility and/or for market sales through
the combustion of the cellulose captured in the Bion process. The system will
be owned and operated by Bion through LLC, a new entity to be formed and
initially 100% owned by Bion Services, in which Kreider will have the option
to purchase a minority interest. Additionally, the agreement may expand the
REF component to include treatment of Kreider's poultry wastes. Upon
completion of final design work and resolution of all building, zoning and
other related pre-construction matters, substantial capital (equity and/or
debt) will be expended. Upon successful construction and operation of the
system, 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 at the Kreider system.
On January 26, 2009, the Board of the Pennsylvania Infrastructure
Investment Authority approved a $7.8 million loan to Bion PA 1, LLC for the
initial stage of Bion's Kreider Farms project. The Company anticipates that
it will be able to complete the steps required to finalize this loan and
commence this project during the current fiscal year.
Going concern and management's plans:
The consolidated financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred net losses
of approximately $1,779,000 and $2,549,000 during the years ended June 30,
2008 and 2007, respectively, and a net loss of approximately $955,000 for the
nine months ended March 31, 2009. At March 31, 2009, the Company has a
working capital deficiency and a stockholders' deficit of approximately
$1,145,000 and $1,199,000, respectively. 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.
The Company continues to explore sources of additional financing to
satisfy its current operating requirements.
-8-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS
(CONTINUED):
The Company currently faces a severe working capital shortage and 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 and to develop Projects. The Company anticipates
that it will seek to raise from $3,000,000 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 Group, Inc., 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. 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 March 31, 2009 and the results of operations and cash flows of the Company
for the three and nine months ended March 31, 2009 and 2008. Operating
results for the three and nine months ended March 31, 2009 are not
necessarily indicative of the results that may be expected for the year
ending June 30, 2009.
-9-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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-KSB for the year ended June
30, 2008.
Earnings (loss) per share:
Basic earnings (loss) per share amounts are calculated using the
weighted average number of shares of common stock outstanding during the
period. Diluted earnings (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 or increase earnings per
share. The following is a reconciliation of the denominators of the basic
earnings per share computations for the three and nine months ended March 31,
2009 and 2008 (a reconciliation of the numerators and denominators of the
diluted earnings per share for the three and nine months ended March 31, 2009
and 2008 is not included as they are anti-dilutive):
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2009 2008 2009 2008
---------- ---------- ---------- ----------
Shares issued - beginning of period 11,226,658 9,044,829 11,070,658 8,770,079
Shares held by subsidiaries (Note 9) (704,309) (693,799) (704,309) (693,799)
---------- ---------- ---------- ---------
Shares outstanding - beginning of
period 10,522,349 8,351,030 10,366,349 8,076,280
Weighted average shares issued
during the period 201,469 - 135,067 120,890
---------- --------- ---------- ---------
Basic weighted average shares -
end of period 10,723,818 8,351,030 10,501,416 8,197,170
========== ========= ========== =========
-10-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent accounting pronouncements
During October 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair
Value Measurements ("SFAS 157"). This statement does not require any new
fair value measurements but provides guidance on how to measure fair value
and clarifies the definition of fair value under accounting principles
generally accepted in the United States of America. The statement also
requires new disclosures about the extent to which fair value measurements in
financial statements are based on quoted market prices, market-corroborated
inputs, or unobservable inputs that are based on management's judgments and
estimates. This statement was effective for the Company on July 1, 2008 for
all financial assets and liabilities. In February 2008, the FASB issued FASB
Staff Position No. FAS 157-2, Effective Dates of FASB Statement No. 157 (the
"FSP"). The FSP amends SFAS 157 to delay its effective date for non-
financial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a
recurring basis (that is, at least annually). For items within its scope,
the FSP defers the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. As it
relates to financial assets and liabilities, the adoption of SFAS 157 did not
have an impact on the Company's consolidated financial statements. The
Company is still in the process of evaluating the impact that SFAS 157 will
have on its non-financial assets and liabilities.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of
FASB Statement No. 115 ("SFAS 159"). This statement permits entities to
choose to measure eligible items at fair value at specified election dates.
SFAS 159 was effective for the Company on July 1, 2008. The adoption of SFAS
159 did not have a material impact on the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations ("SFAS 141R"). SFAS 141R continues to require the purchase
method of accounting to be applied to all business combinations, but it
significantly changes the accounting for certain aspects of business
combinations. Under SFAS 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS 141R will
change the accounting treatment for certain specific acquisition related
items including: (1) expensing acquisition related costs as incurred; (2)
valuing non-controlling interests at fair value at the acquisition date; and
(3) expensing restructuring costs associated with an acquired business. SFAS
141R also includes a substantial number of new disclosure requirements. SFAS
141R is to be applied prospectively to business combinations for which the
acquisition date is on or after July 1, 2009 for the Company. The Company
does not expect that the adoption of SFAS 141R will have an impact on its
consolidated financial statements unless the Company enters into business
acquisitions in the future.
-11-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
In December 2007, the FASB issued SFAS No. 160, Non-controlling
Interests in Consolidated Financial Statements ("SFAS 160"). SFAS 160
establishes new accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary (minority interest)
is an ownership interest in the consolidated entity that should be reported
as equity in the consolidated financial statements and separate from the
parent company's equity. Among other requirements, this statement requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. It also
requires disclosure, on the face of the consolidated statement of operations,
of the amounts of consolidated net income attributable to the parent and to
the non-controlling interest. This statement is effective for the Company on
July 1, 2009. The Company is currently evaluating the effect the adoption of
this statement may have on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB
Statement No. 133 ("SFAS 161"). SFAS 161 changes the disclosure requirements
for derivative instruments and hedging activities by requiring that the
objectives for using derivative instruments be disclosed in terms of
underlying risk and accounting designation. The statement is effective for
the Company on January 1, 2009. The Company does not expect that the
adoption of SFAS 161 will have an impact on its consolidated financial
statements.
In June 2008, the FASB ratified Emerging Issues Task Force ("EITF")
Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity's Own Stock ("EITF 07-5"). EITF 07-5 is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Paragraph 11(a) of SFAS
No. 133 - specifies that a contract that would otherwise meet the definition
of a derivative but is both (a) indexed to the Company's own stock and (b)
classified in stockholders' equity in the statement of financial position
would not be considered a derivative financial instrument. EITF 07-5 provides
a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer's own stock and
thus able to qualify for the SFAS No. 133 paragraph 11(a) scope exception.
This statement is effective for the Company on July 1, 2009. The Company is
currently evaluating the effect the adoption of this statement may have on
its consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position ("FSP") SFAS 107-1
and Accounting Principles Board ("APB") 28-1, Interim Disclosures about Fair
Value of Financial Instruments ("FSP 107-1"), which will require that the
fair value disclosures required for all financial instruments within the
scope of SFAS 107, Disclosures about Fair Value of Financial Instruments, be
included in interim financial statements. This FSP also requires entities to
disclose the method and significant assumptions used to estimate the fair
value of financial instruments on an interim and annual basis and to
highlight any changes from prior periods. FSP 107-1 will be effective for
interim periods ending after June 15, 2009. The adoption of FSP 107-1 is not
expected to have a material impact on the Company's financial statements.
-12-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
3. MINORITY INTEREST OF CENTERPOINT CORPORATION:
In January 2002, Bion purchased a 57.7% majority interest in Centerpoint
from a third party. On April 30, 2008, Centerpoint received and cancelled
126,000 shares of its previously outstanding common stock in connection with
a litigation settlement, which increased Bion's ownership from 57.7% to
58.9%.
During the three and nine months ended March 31, 2009 and 2008,
Centerpoint had (losses) earnings of approximately $(31,200) and $(7,600),
and $(30,300) and $664,700, respectively. Centerpoint's minority interest
holders have a minority interest of $114,558 as of March 31, 2009.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of March 31, 2009:
Research and development equipment $ 305,266
Leasehold improvements 31,336
Furniture 28,932
Computers and office equipment 31,680
-----------
397,214
Less accumulated depreciation (349,641)
-----------
$ 47,573
===========
Depreciation expense was $3,567 and $4,094 for the three months ended
March 31, 2009 and 2008, respectively, and $11,931 and $12,160 for the nine
months ended March 31, 2009 and 2008, respectively.
5. CONVERTIBLE PROMISSORY NOTES:
In March and April 2007, the Company sold $800,000 of its Convertible
Notes (the "Notes") for cash proceeds. In addition, the Company issued Notes
to affiliates totaling $986,521 in exchange for promissory notes with
convertible features and deferred compensation (Note 8). The Notes were
convertible into shares of the Company's common stock at the price of
$4.00 per share until maturity on July 1, 2008, or at the election of the
Note holders, and accrued interest at 6% per annum. The Note holders also
had the option to exchange the Notes, plus interest, for securities
substantially identical to securities the Company sold in any offering prior
to the completion of an offering in which the Company raises less than
$3,000,000. The Company had the right to require the Notes (principal plus
interest) be converted into its common shares at the lesser of $4.00 per
share or the price of an offering in which the Company raised $3,000,000 or
more.
-13-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
5. CONVERTIBLE PROMISSORY NOTES (CONTINUED):
On May 31, 2008, all of the non-affiliate Note holders, at their
election per the terms of their original Notes, converted their Notes
totaling $856,737 including accrued interest into 428,369 restricted common
shares of the Company. Also on May 31, 2008, Notes held by affiliates
totaling $650,427 including accrued interest were converted into 325,214
common shares of the Company. These Notes were converted at a price of $2.00
per share, the price at which the Company sold common stock during the same
period.
On June 18, 2008, the remaining affiliated holder of the outstanding
Notes increased the principal of his Note, maturing on July 1, 2013, by
$375,000 to $784,122, which represented the potential deferred compensation
(subject to forfeiture) through June 30, 2008. The holder, Salvatore Zizza,
Chairman of Projects Group, agreed to add his future compensation from the
Company to his Note as it accrued. As of December 31, 2008, the principal
and interest on the Note totaled $959,184. Pursuant to an agreement dated
December 19, 2008, (the "Zizza Agreement" see Note 11), Mr. Zizza agreed to
no longer provide services to the Company effective December 31, 2008. In
conjunction with the Zizza Agreement, Mr. Zizza's Note was returned to the
Company on December 31, 2008 and it was cancelled, which resulted in the
Company's recognition of income due to forfeiture of deferred compensation of
$959,184. The deferred compensation underlying the convertible note had not
yet vested at the date the Note was cancelled. In addition, the Note was
subject to certain risks of forfeiture and/or cancellation.
The Notes accrued interest of $27,626 for the three months ended March
31, 2008 and $25,062 and $82,262 for the nine months ended March 31, 2009 and
2008, respectively.
6. LOANS PAYABLE - AFFILIATES:
As of March 31, 2009, Dominic Bassani, Vice-President Special Project
and Strategic Planning for the Projects Group, Mark A. Smith, the
Company's President, and a major shareholder have loaned the Company $60,000,
$7,500 and $35,000, respectively, for working capital needs. The loans are
non-interest bearing and will be repaid when the Company has adequate cash.
7. PROMISSORY NOTES PAYABLE - AFFILIATES:
During September 2008, Mr. Zizza and Mr. Bassani loaned the Company
$50,000 each under separate promissory notes. Under the terms of the
promissory notes, which allow for additional monies to be loaned, the notes
bear interest at 8% per annum and were payable on or before February 1, 2009.
Pursuant to the Zizza Agreement (Note 11) and the Brightcap Agreement (Note
11), the terms of the promissory notes were amended to allow for the
conversion of the interest and principal of the notes, in whole or in part,
into shares of the Company's restricted common stock at a price of $0.75 per
share, which was equal to the fair value at the date of the agreements.
The maturity dates of the Zizza and Bassani promissory notes were extended to
June 30, 2009.
-14-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
7. PROMISSORY NOTES PAYABLE - AFFILIATES (CONTINUED):
During October 2008, a major shareholder loaned the Company $65,000
under a promissory note. Under the terms of the promissory note, which
allows for additional monies to be loaned, the note bears interest at 8% per
annum and was payable on or before March 1, 2009. In January 2009, an
agreement was reached whereby the maturity of the $65,000 promissory note was
extended to June 30, 2009 in consideration of a) at the election by the note
holder, the ability to convert the principal and interest into the Company's
restricted common stock at $0.75 per share, the fair value of the shares, at
any date prior to repayment and b) the issuance of a warrant to purchase
15,000 shares of the Company's common stock at $0.75 per share until December
31, 2018. The modification of the debt was not materially different from the
original debt and there were no beneficial conversion features present with
the modification.
The promissory notes had accrued interest expense of $5,218 as of March
31, 2009.
8. DEFERRED COMPENSATION:
The Company accrued $750,000 ($150,000 to Mr. Smith, $300,000 to
Brightcap Capital Ltd. ("Brightcap") for services provided by Mr. Bassani,
and $300,000 to Mr. Zizza) as deferred compensation during each of the years
ended June 30, 2008 and 2007. During fiscal year 2007 the Company entered
into agreements converting deferred compensation amounts totaling $975,000
into promissory notes with conversion agreements. Accrued principal and
interest owed under the promissory notes with conversion agreements of Mr.
Smith and Brightcap were converted to Convertible Promissory Notes in March
2007 (Note 5).
During fiscal year 2008, the Company entered into an agreement with
Brightcap converting deferred compensation of $350,000 owed as of May 31,
2008 into a promissory note with a conversion agreement. The convertible
note plus accrued interest totaling $350,805 was exchanged for 175,403 common
shares at $2.00 per share of the Company on June 15, 2008. In addition, the
Company entered into an extension agreement with Mr. Smith which allowed for
the conversion of deferred compensation accrued through June 30, 2008 of
$179,280 into 89,640 common shares of the Company at $2.00 per share. The
Company was in the process of a private placement offering of common shares
at $2.00 per share around the time that Brightcap and Mr. Smith converted
their deferred compensation into common shares of the Company at $2.00 per
share. In addition to the fact that third parties were buying common shares
of the Company for cash at $2.00 per share, the quoted market price of the
shares at the time was approximately $2.00 per share. Therefore, $2.00 was
deemed to be the fair value. As the conversion price of $2.00 per share
approximated the fair value of the shares at the time the conversion
agreement was entered into, no beneficial conversion feature existed. Also
during fiscal year 2008, the Company mutually agreed with Mr. Zizza to
convert his deferred compensation earned through June 30, 2008 of $375,000,
and his ongoing compensation as it accrues to additional principal to his
2007 Note. Mr. Zizza's 2007 Note was cancelled on December 31, 2008 (see
Note 11).
-15-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
8. DEFERRED COMPENSATION (CONTINUED):
As of March 31, 2009 the Company owed Brightcap deferred compensation of
$250,000. The Company entered into the Brightcap Agreement (see Note 11),
whereby the deferred compensation of Brightcap owed as of December 31, 2008
totaling $175,000, was made convertible until December 31, 2009 into the
Company's restricted common stock, at Brightcap's option, at a price of $0.75
per share, the fair value of the shares at the date of the agreement. As the
conversion price of $0.75 per shares approximated the fair value of the
shares at the time the conversion agreement was entered into, no beneficial
conversion feature existed.
9. STOCKHOLDERS' EQUITY:
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. 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 other series of
preferred stock the Company may designate in the future.
As a result of dividends declared in July 2004, Centerpoint holds
693,799 shares of the Company's common stock for the benefit of its
shareholders without any beneficial interest. The Company accounts for these
shares similar to treasury stock.
As a result of Company common shares being distributed pursuant to a
settlement in April 2008, Centerpoint holds 10,510 shares of the Company's
common stock for the benefit of its shareholders without any beneficial
interest. The Company accounts for these shares similar to treasury stock.
From November 2008 through March 2009, the Company issued 333,333 shares
of the Company's restricted common stock at $0.75 per share for cash proceeds
of $250,000.
In January 2009, pursuant to the Smith Agreement (Note 11), the Company
issued 200,000 shares of the Company's restricted common stock at $0.75 per
share as prepayment of Mr. Smith's calendar year 2009 base compensation of
$150,000. The shares are forfeitable if services are not performed and fully
vest through December 2009. Through March 31, 2009, the Company has recorded
$37,500 as compensation expense and $112,500 remains to be expensed through
December 2009. Also during January 2009, the Company issued 88,102 shares of
the Company's restricted common stock at $0.75 per share for deferred
compensation owed Mr. Smith at December 31, 2008 of $66,076.
During January and February 2009, the Company issued 12,880 of its
restricted common stock at $0.75 per share for consulting services valued at
$9,660.
-16-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED):
In March 2009, the Company issued 21,334 shares of the Company's
restricted common stock at $0.75 per share for services valued at $16,000 to
its employees.
Warrants:
As of March 31, 2009, the Company had the following common stock
warrants outstanding:
Number of Exercise
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 SV-SEI 3-4 9,375 $ 1.50 June 30, 2009
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
---------
4,421,667
=========
During December 2008, 450,000 warrants were cancelled pursuant to the
terms of the Zizza Agreement (see Note 11).
In January 2009, warrants to purchase 1,000,000 and 300,000 shares of
the Company's common stock at $0.75 per share were issued pursuant to various
agreements with Mr. Bassani and Mr. Smith, respectively (Note 11). The
warrants were determined to have a fair value of $0.10 per warrant and expire
on December 31, 2018. The value placed upon the warrants to purchase common
stock at $0.75 per share was determined to be $0.10 per warrant based on
factors including the evaluation of the Company's value as of the date of the
-17-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED):
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, the concurrent sales of restricted common stock at
$0.75 per share, and the historical valuation and purchases of the Company's
warrants. Additionally, 2,000,000 and 610,000 warrants originally issued to
Mr. Bassani and Mr. Smith, respectively, were extended to December 31, 2018.
The Company recorded non-cash compensation of $130,000 and $32,500 related to
the warrant issuances and extensions, respectively.
In January 2009, warrants to purchase 15,000 shares of the Company's
common stock at $0.75 per share were issued in consideration for the
extension of the promissory note owed to a major shareholder of the Company
(see Note 7). The warrants were valued at $0.10 per warrant, as described
above, and expire on December 31, 2018. The Company recorded non-cash
compensation of $1,500 related to the warrant issue.
The weighted average exercise price for the outstanding warrants is
$1.96 and the weighted average remaining contractual life as of March 31,
2009 is 9.2 years.
Stock options:
Effective June 2006, the Company approved the 2006 Consolidated
Incentive Plan (the "2006 Plan"), which consolidated previous incentive stock
options plans into the 2006 Plan. On November 28, 2008, the 2006 Plan was
amended to increase the maximum number of shares of the common stock of the
Company issuable pursuant to the 2006 Plan from 4,200,000 to 6,000,000 shares
and to increase the maximum grant of stock options to a single
employee/consultant from 500,000 to 1,000,000 options during a twelve month
period. Terms of exercise and expiration of options granted under the 2006
Plan may be established at the discretion of the Board of Directors, but no
option may be exercisable for more than ten years.
In May and June of 2008, the Board of Directors, in an effort to retain
key employees and consultants, approved the modifications of certain options
to certain employees and consultants. The modifications included the
reduction of the exercise price of certain options below the fair market
value on the date of grant, modifications to the vesting terms and extension
of the expiry dates. As a result of the modifications, pursuant to SFAS
123(R) "Share-Based Payment", the Company recorded incremental compensation
expense of $83,428, which was recognized at June 30, 2008 and approximately
$282,000 of additional compensation will be recognized over a weighted
average period of approximately 2 years.
-18-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED):
The Company recorded compensation expense related to employee stock
options of $58,086 and $78,925 for the three months ended March 31, 2009 and
2008, respectively, and $205,083 and $443,891 for the nine months ended March
31, 2009 and 2008, respectively. The Company granted 75,000 and 145,000
options during the nine months ended March 31, 2009 and 2008, respectively.
During the nine months ended March 31, 2009 and 2008, 262,500 and 45,000
options expired, respectively.
A summary of option activity under the 2006 Plan for the nine months
ended March 31, 2009 is as follows:
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price Life Value
--------- -------- ----------- ---------
Outstanding at July 1, 2008 2,183,333 $ 3.06 4.6 $ 7,950
Granted 75,000 1.00
Exercised - -
Forfeited - -
Expired (262,500) 2.83
--------- ------ ----- ---------
Outstanding at March 31, 2009 1,995,833 $ 3.01 4.5 $ 18,750
========= ====== ===== =========
Exercisable at March 31, 2009 1,583,334 $ 2.98 4.5 $ 18,750
========= ====== ===== =========
The following table presents information relating to nonvested stock
options as of March 31, 2009:
Weighted Average
Grant-Date
Options Fair Value
---------- ----------------
Nonvested at July 1, 2008 562,916 $ 1.29
Granted 75,000 0.32
Vested (225,417) (1.09)
Forfeited - -
-------- ------
Nonvested at March 31, 2009 412,499 $ 1.22
======== ======
-19-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED):
The total fair value of stock options that vested during the nine months
ended March 31, 2009 and 2008 was $245,189 and $443,950, respectively. The
intrinsic value of stock options exercised during the nine months ended March
31, 2009 and 2008 was zero as there were no options exercised during these
periods. As of March 31, 2009 the Company had $231,693 of unrecognized
compensation cost related to stock options that will be recorded over a
weighted average period of 1.5 years.
The Company has issued options to non-employees to purchase shares of
the Company's common stock in exchange for services. As of March 31, 2009,
non-employee options represented 595,833 of the 1,995,833 options outstanding
under the 2006 Plan. Of the 595,833 non-employee options outstanding, 92,500
were fully vested and contained no service conditions as of March 31, 2009.
These non-employee options were valued using the Black-Scholes option-pricing
model. The fully vested options have been fully amortized on the straight-
line method and resulted in no expense for the nine months ended March 31,
2009 and 2008.
The remaining 503,333 non-employee options outstanding include service
conditions and have graded vesting schedules through November 30, 2009. As
of March 31, 2009, 312,500 of these options included service conditions that
were fully vested. Generally for these agreements, the measurement date of
the services occurs when the options vest. In accordance with Emerging
Issues Task Force ("EITF") Issue No. 96-18, recognition of compensation cost
for reporting periods prior to the measurement date is based on the then
current fair value of the options as of each of the interim reporting dates.
Any subsequent change in fair value is recorded on the measurement date.
The fair value of these options was determined using the Black-Scholes
option-pricing model, using the following assumptions at March 31, 2009; a
dividend yield of zero, risk-free interest rates of 1.98% to 2.71%,
volatility of 149% to 154% and an expected life of 6.1 to 9.5 years.
Consulting cost in connection with options that are not fully vested as of
March 31, 2009 is being recognized on a straight-line basis over the
requisite service period for the entire award. Non-cash fair value
charges/(credits) of $137,200 and $(10,062) were recorded within expense
during the three months ended March 31, 2009 and 2008, respectively and
$(72,415) and $(80,208) for the nine months ended March 31, 2009 and 2008,
respectively.
-20-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED):
Stock-based compensation charges/(credits) in operating expenses in the
Company's financial statements for the three and nine months ended March 31,
2009 and 2008 are as follows:
Three Three Nine Nine
months months months months
ended ended ended ended
March March March March
31, 2009 31, 2008 31, 2009 31, 2008
--------- --------- --------- ---------
General and administrative:
Fair value remeasurement of
convertible notes - affiliates $ - $ - $ - $(237,383)
Fair value remeasurement of
options with service conditions 137,200 - (137,875) -
Fair value of stock options
expensed under SFAS 123(R) 58,086 16,331 172,454 244,776
-------- --------- --------- ---------
Total $195,286 $ 16,331 $ 34,579 $ 7,393
======== ========= ========= =========
Research and development:
Fair value remeasurement of
convertible notes - affiliates $ - $ 50,856 $ - $(310,721)
Fair value remeasurement of
options with service conditions - (10,062) 65,460 (80,208)
Fair value of stock options
expensed under SFAS 123(R) - 62,594 32,630 199,115
-------- --------- --------- ---------
Total $ - $ 103,388 $ 98,090 $(191,814)
======== ========= ========= =========
10. OPERATING LEASE:
The Company entered into a non-cancellable operating lease commitment
for office space in New York, effective August 1, 2006 and expiring November
30, 2013. In conjunction with the signing of the lease, the Company provided
the lessor with a secured letter of credit. As of March 31, 2009, the
Company has reflected $85,973 as restricted cash related to the secured
letter of credit. The Company's obligations under the lease are partially
guaranteed by Mr. Zizza. The Company has entered into two separate
agreements to sub-lease approximately 32% of the Company's lease obligation
and the tenants have also agreed to reimburse the Company for leasehold
improvements and furnishings. Because the lease contains an escalation
clause, the Company is recognizing rent under the straight-line method
resulting in an average monthly rent expense of $15,820.
-21-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
10. OPERATING LEASE (CONTINUED):
The Company is also recognizing the sub-lease rental income from its tenants
under the straight-line method, with a monthly average of $5,250. The
difference between the straight-line method, and the actual lease payments
have resulted in a deferred rent liability of $72,985 as of March 31, 2009.
Rent expense, net of contractual and month to month sub-lease rental income
was $5,122 and $16,553 and $35,830 and $72,887 for the three and nine months
ended March 31, 2009 and 2008, respectively.
At March 31, 2009, future minimum rental payments due under non-
cancelable leases and future minimum rental payments to be received under
non-cancelable subleases are:
Operating lease Sublease Net operating
Fiscal year: payments rentals lease payments
------------ --------------- --------- --------------
Three months ending June 30,
2009 $ 46,260 $ 14,803 $ 31,457
2010 191,405 61,249 130,156
2011 198,602 63,553 135,049
2012 212,775 68,088 144,687
2013 225,756 72,242 153,514
Thereafter 97,219 31,110 66,109
-------- -------- --------
Total $972,017 $311,045 $660,972
======== ======== ========
Effective January 1, 2009, Mr. Zizza has entered into a Master Sublease
with the Company whereby Mr. Zizza will become a subleasee and will, for a
one year initial period, make all payments pursuant to the lease and manage
the lease premises. Rental payments from existing sub-tenants will be
deposited into a Company bank account such that Mr. Zizza will have use of
those funds towards the monthly lease payment. Mr. Zizza will have the
option on or before November 15, 2009 to continue the Master Sublease for the
entire period of the lease. If Mr. Zizza fulfills his obligations under the
Master Sublease during the one year initial period, he shall receive the
funds from the next release from the Company's letter of credit approximating
$28,000. If Mr. Zizza exercises 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.
-22-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES:
Employment and consulting agreements:
The Company had an employment agreement with its president, Mr. Smith,
through December 31, 2007 providing $150,000 per year compensation. On
November 7, 2007, the Company extended the employment agreement through
December 31, 2008. On May 31, 2008, an agreement was reached whereby Mr.
Smith would continue his services as president through December 31, 2008 and
effective January 1, 2009 (or March 31, 2009 at the latest) through December
31, 2009, he would provide services to the Company in a consulting capacity
at his current compensation. On January 11, 2009, the Company and Mr. Smith
entered into the Smith Agreement whereby Mr. Smith will continue to hold
positions of Director, President and General Counsel of the Company and its
subsidiaries. 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 (See Note 9).
Effective March 31, 2005, an agreement with Brightcap, through which the
services of Dominic Bassani, are provided, was extended through March 31,
2009. Under the terms of the agreement, Brightcap will be paid $300,000
annually for Mr. Bassani's services. On January 11, 2009, the Company
entered in the Brightcap Agreement, which extends Mr. Bassani's services
under the terms of the March 31, 2005 agreement for up to an additional six
months. In addition, Mr. Bassani was granted a bonus of $125,000 in the form
of a) warrant, immediately vested, to purchase 1,000,000 shares of the
Company's common stock at $0.75 per share until December 31, 2018 and b) the
extension of all warrants previously issued to either Brightcap or Mr.
Bassani, now held by their donees, to December 31, 2018. The Brightcap
Agreement also requires that upon the consummation of the next financing
received by the Company in excess of $1,000,000 net proceeds, the Company
will no longer defer compensation earned by Brightcap, rather it will be paid
in cash and the Brightcap Agreement grants 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. The Brightcap Agreement also extends the maturity
date of Mr. Bassani's $50,000 promissory note to June 30, 2009 and allows 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.
Effective May 1, 2005, the Company entered into a four-year
consulting/employment agreement with a former officer and director of the
Company, Salvatore Zizza. As of January 1, 2006, the former officer and
director assumed the position of Chairman and director of Dairy, with an
annual
-23-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
salary of $300,000. Pursuant to an agreement dated December 19, 2008, Mr.
Zizza will no longer provide services to the Company as of December 31, 2008
and the following terms were agreed upon (and subsequently effected): a) Mr.
Zizza's 600,000 warrants were returned to the Company and the Company
reissued a certificate to Mr. Zizza representing 150,000 warrants with no
changes in the terms and conditions of the original warrants, b) all options
owned by Mr. Zizza shall vest on the existing schedule, c) the Company
canceled the 2007 Series AB Convertible Promissory Note owned by Mr. Zizza
which represented accrued deferred compensation from the Company (see Note
5), d) the $50,000 promissory note owed to Mr. Zizza remains outstanding and
has been amended to include the right of Mr. Zizza to convert the principal
and interest, in whole or part, into the Company's common stock at a price of
$0.75 per share at any date prior to the repayment of the Company (see Note
7), e) the Company's existing accrued payable of $41,647 to Mr. Zizza
remains a valid obligation of the Company with the additional right of Mr.
Zizza to convert the accrued payable, in whole or in part, into the Company's
restricted common stock at a price of $0.75 per share (see Note 12) and f)
the Company entered into a Master Sublease as described in Note 10.
Effective May 1, 2005, the Company entered into a four-year
consulting/employment agreement with Jeff Kapell. Under the terms of the
agreement, Mr. Kapell provided part-time services to the Company through
March 2006. In April 2006, Mr. Kapell was appointed Dairy's Vice President-
Renewables at a salary of $120,000 per year. In June 2008, the employment
agreement terms were extended through July 1, 2012. Mr. Kapell left the
employ of the Company effective November 1, 2008 by mutual agreement. Mr.
Kapell has performed consulting services for the Company since November 2008.
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.
Effective June 1, 2007, the Company entered into an employment
agreement, effective through August 31, 2009, with Craig Scott whereby Mr.
Scott was appointed Vice President of Capital Markets/Investor Relations at
an annual salary of $120,000.
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, 2008, 422,500 shares remain
outstanding due to the expiry of 125,000 and 62,500 shares to be issued when
and if the Company's stock price exceeds $10.00 and $20.00 per share,
respectively.
-24-
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2009 (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
In May 2008, the Company approved 250,000 stock options to certain
employees that will be granted upon the execution of new employment
agreements.
Claims contingency:
In May 2002, Arab Commerce Bank Ltd. ("ACB"), an unaffiliated party,
filed a complaint against the Company in the Supreme Court of the State of
New York regarding $100,000 of the Company's convertible bridge notes
("Bridge Notes") that were issued to ACB in March 2000. The complaint
includes a breach of contract claim asserting that the Company owes ACB
approximately $285,000 plus interest of $121,028 plus interest based on ACB's
interpretation of the terms of the Bridge Notes and subsequent amendments.
Effective June 30, 2001, the Company issued ACB 5,034 shares of common stock
in full satisfaction of the Bridge Notes based on the Company's
interpretation of the Bridge Notes, as amended. The Company has filed an
answer to the complaint denying the allegations. No activity has taken place
on this lawsuit since early 2003. The Company believes that the ultimate
resolution of this litigation will not have a material adverse effect on the
Company, its operations or its financial condition.
12. RELATED PARTY TRANSACTIONS:
The Company has an accrued payable of $41,647 as of March 31, 2009, to a
company controlled by Mr. Zizza for rental of office space in 2003. Pursuant
to the Zizza Agreement, Mr. Zizza has the option to convert the payable into
common shares of the Company's stock at $0.75 per share at any time prior to
the obligation being paid by the Company.
13. SUBSEQUENT EVENTS:
On April 29, 2009, the Company amended its Articles of Incorporation to
designate the preferences of a class of 50,000 shares of Series B Convertible
Preferred Stock ("B Stock") with a par value of $0.01 per share. Each Series
B Preferred Stock, once issued, accrues quarterly dividends at a rate of 2.5%
per quarter and is convertible into the Company's common stock at $2.00 per
share. As of May 13, the Company has issued 4,005 shares of its Series B
Preferred shares for gross proceeds of $400,500 and in addition has received
$115,000 in subscriptions for 1,150 shares of the Company's Series B
Preferred shares.
-25-
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-KSB for the
year ended June 30, 2008.
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) to develop Integrated Projects which will include
large CAFOs, such as large dairies, beef cattle feed lots and hog farms, with
Bion waste treatment System modules processing the aggregate CAFO waste
stream from the equivalent of 40,000 or more beef and/or dairy cows (or the
waste stream equivalent of other species) while producing solids to be
utilized for renewable energy production (and potentially to be marketed as
feed and/or fertilizer), integrated with an ethanol plant capable of
producing 40 (or more) million gallons of ethanol per year and/or with CAFO
end product processors, and 2) environmental retrofit and remediation of the
waste streams of existing CAFOs in selected markets.
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 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 28, 2009 the Board of the Pennsylvania Infrastructure
Investment Authority approved a $7.8 million loan to Bion PA 1, LLC, a
wholly-owned subsidiary of the Company, for the initial stage of Bion's
Kreider Farms project. The Company anticipates that it will be able to
complete the steps required to finalize this loan and commence permitting and
construction of this project during the current fiscal year.
Additionally, we believe that Bion's technology platform allows the
integration of large-scale CAFO's and their end-product users, renewable
energy production from the CAFO waste stream, on site utilization of the
renewable energy generated and biofuel/ethanol production in an
environmentally and economically sustainable manner while reducing the
aggregate capital expense and operating costs for the entire integrated
complex ("Integrated Projects" or "Projects"). In the context of Integrated
Projects, Bion's waste treatment process, in addition to mitigating polluting
releases, generates renewable energy from portions of the CAFO waste stream
which renewable energy can be utilized by integrated 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
-26-
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 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 and
with potential industry participants to evaluate sites in multiple states and
anticipates selecting a site for its initial Project during the 2009 calendar
year. At present it is possible, but not certain, that the initial Integrated
Project will be located in upstate New York (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 2009-2010 to
create a pipeline of Projects. Management has a 5-year development target
(through calendar year 2015) of approximately 12-25 Integrated Projects. At
the end of the 5-year period, Bion projects that 8 or more of these
Integrated Projects will be in full operation in 3-8 states, and the balance
would be in various stages ranging from partial operation to early permitting
stage. No Integrated Project has been developed to date.
The financial statements for the years ended June 30, 2008 and 2007 have
been prepared assuming the Company will continue as a going concern. The
Company has incurred net losses of approximately $1,779,000 and $2,549,000
during the years ended June 30, 2008 and 2007, respectively. At June 30,
2008, the Company had a working capital deficiency and a stockholders'
deficit of approximately $134,000 and $920,000, respectively. The financial
statements for the three and nine months ended March 31, 2009 and 2008 have
also been prepared assuming the Company will continue as a going concern.
The Company has incurred net losses of approximately $818,000 and $955,000
for the three and nine month periods ended March 31, 2009, respectively. At
March 31, 2009, the Company has a working capital deficiency and a
stockholders' deficit of approximately $1,145,000 and $1,199,000,
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, 2008 includes a "going concern" explanatory paragraph
which means that the accounting firm has expressed substantial doubt about
the Company's ability to continue as a going concern. Management's plans
with respect to these matters are described in this section and in our
consolidated financial statements, and 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
-27-
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. In accordance with Emerging Issues Task Force Issue No. 96-18,
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
On July 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123 (Revised), "Share-Based
Payment" ("SFAS 123(R)"), which supersedes Accounting Principles Board
Opinion No. 25 ("APB 25"), and generally requires that share-based
compensation transactions be accounted and recognized in the statement of
income based on their fair values. The Company adopted SFAS 123(R)using the
modified prospective application under which all share based awards granted
on or after the adoption date and modifications, repurchases or cancellation
of prior awards made after the adoption date shall be accounted for under
SFAS 123(R). The modified prospective application does not require the
Company to restate prior period's financial results to reflect the adoption.
-28-
RECENT ACCOUNTING PRONOUNCEMENTS
During October 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair
Value Measurements ("SFAS 157"). This statement does not require any new
fair value measurements but provides guidance on how to measure fair value
and clarifies the definition of fair value under accounting principles
generally accepted in the United States of America. The statement also
requires new disclosures about the extent to which fair value measurements in
financial statements are based on quoted market prices, market-corroborated
inputs, or unobservable inputs that are based on management's judgments and
estimates. This statement was effective for the Company on July 1, 2008 for
all financial assets and liabilities. In February 2008, the FASB issued FASB
Staff Position No. FAS 157-2, Effective Dates of FASB Statement No. 157 (the
"FSP"). The FSP amends SFAS 157 to delay its effective date for non-
financial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a
recurring basis (that is, at least annually). For items within its scope,
the FSP defers the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. As it
relates to financial assets and liabilities, the adoption of SFAS 157 did not
have an impact on the Company's consolidated financial statements. The
Company is still in the process of evaluating the impact that SFAS 157 will
have on its non-financial assets and liabilities.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of
FASB Statement No. 115 ("SFAS 159"). This statement permits entities to
choose to measure eligible items at fair value at specified election dates.
SFAS 159 was effective for the Company on July 1, 2008. The adoption of SFAS
159 did not have a material impact on the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations ("SFAS 141R"). SFAS 141R continues to require the purchase
method of accounting to be applied to all business combinations, but it
significantly changes the accounting for certain aspects of business
combinations. Under SFAS 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS 141R will
change the accounting treatment for certain specific acquisition related
items including: (1) expensing acquisition related costs as incurred; (2)
valuing non-controlling interests at fair value at the acquisition date; and
(3) expensing restructuring costs associated with an acquired business. SFAS
141R also includes a substantial number of new disclosure requirements. SFAS
141R is to be applied prospectively to business combinations for which the
acquisition date is on or after July 1, 2009 for the Company. The Company
does not expect that the adoption of SFAS 141R will have an impact on its
consolidated financial statements unless the Company enters into business
acquisitions in the future.
In December 2007, the FASB issued SFAS No. 160, Non-controlling
Interests in Consolidated Financial Statements ("SFAS 160"). SFAS 160
establishes new accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary (minority interest)
is an ownership interest in the consolidated entity that should be reported
-29-
as equity in the consolidated financial statements and separate from the
parent company's equity. Among other requirements, this statement requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. It also
requires disclosure, on the face of the consolidated statement of operations,
of the amounts of consolidated net income attributable to the parent and to
the non-controlling interest. This statement is effective for the Company on
July 1, 2009. The Company is currently evaluating the effect the adoption of
this statement may have on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB
Statement No. 133 ("SFAS 161"). SFAS 161 changes the disclosure requirements
for derivative instruments and hedging activities by requiring that the
objectives for using derivative instruments be disclosed in terms of
underlying risk and accounting designation. The statement is effective for
the Company on January 1, 2009. The Company does not expect that the
adoption of SFAS 161 will have an impact on its consolidated financial
statements.
In June 2008, the FASB ratified Emerging Issues Task Force ("EITF")
Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity's Own Stock ("EITF 07-5"). EITF 07-5 is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Paragraph 11(a) of SFAS
No. 133 - specifies that a contract that would otherwise meet the definition
of a derivative but is both (a) indexed to the Company's own stock and (b)
classified in stockholders' equity in the statement of financial position
would not be considered a derivative financial instrument. EITF 07-5 provides
a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer's own stock and
thus able to qualify for the SFAS No. 133 paragraph 11(a) scope exception.
This statement is effective for the Company on July 1, 2009. The Company is
currently evaluating the effect the adoption of this statement may have on
its consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position ("FSP") SFAS 107-1
and Accounting Principles Board ("APB") 28-1, Interim Disclosures about Fair
Value of Financial Instruments ("FSP 107-1"), which will require that the
fair value disclosures required for all financial instruments within the
scope of SFAS 107, Disclosures about Fair Value of Financial Instruments, be
included in interim financial statements. This FSP also requires entities to
disclose the method and significant assumptions used to estimate the fair
value of financial instruments on an interim and annual basis and to
highlight any changes from prior periods. FSP 107-1 will be effective for
interim periods ending after June 15, 2009. The adoption of FSP 107-1 is not
expected to have a material impact on the Company's financial statements.
THREE MONTHS ENDED MARCH 31, 2009 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 2008
General and Administrative
Total general and administrative expenses increased from $238,000 to
$781,000 for the three months ended March 31, 2008 and 2009, respectively.
-30-
General and administrative expenses, excluding stock-based compensation
charges of $195,000 and $16,000 for the three months ended March 31, 2009 and
2008, respectively, were $586,000 versus $222,000 for the three months ended
March 31, 2009 and 2008, respectively. The primary reason for the increase
in general and administrative expenses excluding stock-based compensation
during the three months ended March 31, 2009 is due to the shift in the
Company's focus from research and development to pre-commercial and
commercial business activities related to its next generation technology
applications, therefore costs of various employees and consultants (and their
activities) that were previously incurred as research and development expense
are now allocated to general and administrative expense. Salary and payroll
related taxes were $160,000 and $45,000 for the three months ended March 31,
2009 and 2008, respectively, and the increase is due to the expensing of
previous research and development employees to general and administrative
expense. Consulting expense increased from $50,000 to $70,000 for the three
months ended March 31, 2008 and 2009, respectively due to the Company's shift
from research and development to general and administrative described above
and additional legal, lobbying and public relations consulting during the
three months ended March 31, 2009. Compensation costs related to the
Company's president and vice-president increased from $38,000 for the three
months ended March 31, 2008 to $275,000 for the three months ended March 31,
2009 due to the shift from research and development costs to general and
administrative and bonuses awarded of $38,000 and $125,000, respectively,
during the three months ended March 31, 2009.
General and administrative stock-based compensation for the three years
ended March 31, 2009 and 2008 consist of the following:
Three months Three months
ended ended
March 31, March 31,
2009 2008
------------- -------------
Fair value remeasurement of options
with service conditions $ 137,000 $ -
Fair value of stock options expensed
under SFAS 123(R) 58,000 16,000
--------- --------
Total $ 195,000 $ 16,000
========= ========
Stock-based compensation charges increased to $195,000 for the three
months ended March 31, 2009 from $16,000 for the three months ended March 31,
2008. The Company recognized as general and administrative expenses $137,000
for the remeasurement of options with service conditions due to the
reallocation of research and development related costs and the increase in
the fair value of the options from approximately $0.91 to $0.97 per share to
approximately $1.14 to $1.22 per share during the three months ended March
31, 2009. For the three months ended March 31, 2009 the Company recognized
expense relating to the fair value of stock options for general and
administrative employees of $58,000, compared to $16,000 for the three months
ended March 31, 2008.
-31-
Research and development
Total research and development expenses have decreased $528,000 from
$574,000 to $46,000 for the three months ended March 31, 2008 and 2009,
respectively.
Research and development expenses, excluding stock-based compensation
charges of zero and $103,000 for the three months ended March 31, 2009 and
2008, respectively, were $46,000 and $471,000 for the three months ended
March 31, 2009 and 2008, respectively. The primary reason for the decrease
in research and development expenses during the three months ended March 31,
2009 is due to the shift in the Company's focus from research and development
to pre-commercial and commercial activities related to its next generation
technology applications, therefore costs of various employees and consultants
(and their related activities) that were previously incurred as research and
development expense are now allocated to general and administrative expense.
Salary and payroll related taxes were $40,000 and $188,000 for the three
months ended March 31, 2009 and 2008, respectively, and the decrease is due
to the expensing of previous research and development employees to general
and administrative. Consulting expenses also decreased significantly, from
$150,000 to zero for the three months ended March 31, 2008 and 2009,
respectively, due to the shift from research and development to general and
administrative.
Research and development stock-based compensation for the three months
ended March 31, 2009 and 2008 consist of the following:
Three months Three months
ended ended
March 31, March 31,
2009 2008
------------- -------------
Fair value remeasurement of convertible
notes - affiliates $ - $ 51,000
Fair value remeasurement of options with
service conditions - (10,000)
Fair value of stock options expensed
under SFAS 123 (R) - 62,000
--------- ---------
Total $ - $ 103,000
========= =========
Stock-based compensation charges decreased from $103,000 for the three
months ended March 31, 2008 to zero for the same period in fiscal year 2009.
Stock-based compensation fair value adjusted credits of $51,000 for the three
months ended March 31, 2008, were recorded to re-measure the fair value of
Brightcap's convertible deferred compensation. There was no similar charge
for the three months ended March 31, 2009 as the note was converted at May
31, 2008. The Company recorded stock-based compensation expense of $62,000
under the provisions of SFAS 123(R) for the three months ended March 31, 2008
for options vested to research and development employees, while no similar
expense occurred for the three months ended March 31, 2009 due to the
reallocation to general and administration. The Company also recognized as
research and development credits of $(10,000) for the remeasurement of
-32-
options with service conditions for the three months ended March 31, 2008
while no expense was recognized for the three months ended March 31, 2009 due
to the allocation of such expenses to general and administrative expenses.
Loss from Operations
As a result of the factors described above, the loss from operations was
$827,000 and $812,000 for the three months ended March 31, 2009 and 2008,
respectively.
Other expense and (income)
Other expense and (income) was $(9,000) and $30,000 for the three months
ended March 31, 2009 and 2008, respectively. Interest expense decreased
$44,000 from $47,000 for the three months ended March 31, 2008 to $3,000 for
the three months ended March 31, 2009. Interest expense decreased for the
three months ended March 31, 2009 due to lower debt balances compared to the
same period in the prior year as the 2006 and 2007 Series A Notes were
settled in fiscal year 2008.
Net loss
As a result of the factors described above, the net loss was $818,000
and $841,000 for the three months ended March 31, 2009 and 2008,
respectively, representing a $0.02 decrease in the net loss per basic and
diluted common share for the three months ended March 31, 2009 and 2008,
respectively.
NINE MONTHS ENDED MARCH 31, 2009 COMPARED TO THE NINE MONTHS ENDED MARCH 31,
2008
General and Administrative
Total general and administrative expenses increased from $546,000 to
$1,569,000 for the nine months ended March 31, 2008 and 2009, respectively.
General and administrative expenses, excluding stock-based compensation
charges of $34,000 and $7,000 for the nine months ended March 31, 2009 and
2008, respectively, were $1,535,000 versus $539,000 for the nine months ended
March 31, 2009 and 2008, respectively. The primary reason for the increase
in general and administrative expenses excluding stock-based compensation
during the nine months ended March 31, 2009 is due to the shift in the
Company's focus from research and development to pre-commercial and
commercial business activities related to its next generation technology
applications, therefore costs of various employees and consultants (and their
activities) that were previously incurred as research and development expense
are now allocated to general and administrative expense. Salary and payroll
related taxes were $440,000 and $135,000 for the nine months ended March 31,
2009 and 2008, respectively, and the increase is due to the expensing of
previous research and development employees to general and administrative
expense. Consulting expense increased from $83,000 to $339,000 for the nine
months ended March 31, 2008 and 2009, respectively due to the Company's shift
from research and development to general and administrative described above
and additional lobbying and public relations consulting during the nine
-33-
months ended March 31, 2009. Legal costs increased $66,000 for the nine
months ended March 31, 2009 due to the fact during the nine months ended
March 31, 2008 insurance reimbursements for the Centerpoint litigation of
$133,000 were received. The Company also incurred lower rent expense,
$36,000 and $73,000 for the nine months ended March 31, 2009 and 2008,
respectively, due to additional sub-tenant month to month rentals during the
nine months ended March 31, 2009
General and administrative stock-based compensation for the nine years
ended March 31, 2009 and 2008 consist of the following:
Nine months Nine months
ended ended
March 31, March 31,
2009 2008
------------- -------------
Fair value remeasurement of
convertible notes - affiliates $ - $(237,000)
Fair value remeasurement of options
with service conditions (138,000) -
Fair value of stock options expensed
under SFAS 123(R) 172,000 245,000
--------- ---------
Total $ 34,000 $ 8,000
========= =========
Stock-based compensation charges increased to $34,000 for the nine
months ended March 31, 2009 from $8,000 for the nine months ended March 31,
2008. The change in stock-based compensation fair value adjusted expense
relating to the President's convertible deferred compensation of $(237,000)
is primarily due to the fact his note was converted in December 2007,
therefore no remeasurement was required for the nine months ended March 31,
2009. For the nine ended March 31, 2009 the Company recognized expense
relating to the fair value of stock options for general and administrative
employees of $172,000, compared to $245,000 for the nine months ended March
31, 2008. The Company also recognized as general and administrative expenses
$(138,000) for the remeasurement of options with service conditions due to
the reallocation of research and development related costs and the decrease
in the fair value of the options from approximately $2.06 per share to
approximately $1.22 per share during the nine months ended March 31, 2009.
Research and development
Total research and development expenses have decreased $852,000 from
$1,245,000 to $393,000 for the nine months ended March 31, 2008 and 2009,
respectively.
Research and development expenses, excluding stock-based compensation
charges/(credits) of $98,000 and $(192,000) for the nine months ended March
31, 2009 and 2008, respectively, were $295,000 and $1,437,000 for the nine
months ended March 31, 2009 and 2008, respectively. The primary reason for
the decrease in research and development expenses during the nine months
ended March 31, 2009 is due to the shift in the Company's focus from research
and development to pre-commercial and commercial activities related to its
-34-
next generation technology applications, therefore costs of various employees
and consultants (and their related activities) that were previously incurred
as research and development expense are now allocated to general and
administrative expense. Salary and payroll related taxes were $188,000 and
$546,000 for the nine months ended March 31, 2009 and 2008, respectively, and
the decrease is due to the expensing of previous research and development
employees to general and administrative. Consulting expenses also decreased
significantly, from $449,000 to $16,000 for the nine months ended March 31,
2008 and 2009, respectively, due to the shift from research and development
to general and administrative.
Research and development stock-based compensation for the nine months
ended March 31, 2009 and 2008 consist of the following:
Nine months Nine months
ended ended
March 31, March 31,
2009 2008
------------- -------------
Fair value remeasurement of convertible
notes - affiliates $ - $(311,000)
Fair value remeasurement of options with
service conditions 65,000 (80,000)
Fair value of stock options expensed
under SFAS 123 (R) 33,000 199,000
-------- ---------
Total $ 98,000 $(192,000)
======== =========
Stock-based compensation charges/(credits) increased from $(192,000) for
the nine months ended March 31, 2008 to $98,000 for the same period in fiscal
year 2009. Stock-based compensation fair value adjusted credits of
$(311,000) for the nine months ended March 31, 2008, were recorded to re-
measure the fair value of Brightcap's convertible deferred compensation.
There was no similar charge for the nine months ended March 31, 2009 as the
note was converted at May 31, 2008. The Company recorded stock-based
compensation expense of $33,000 and $199,000 under the provisions of SFAS
123(R) for the nine months ended March 31, 2009 and 2008, respectively for
options vested to research and development employees. 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. The Company also recognized as research and
development credits of $(80,000) for the remeasurement of options with
service conditions for the nine months ended March 31, 2008 while $65,000 was
expensed for the nine months ended March 31, 2009 due to the allocation of
such expenses to general and administrative expenses.
Loss from Operations
As a result of the factors described above, the loss from operations was
$1,963,000 and $1,792,000 for the nine months ended March 31, 2009 and 2008,
respectively.
-35-
Other expense and (income)
Other expense and (income) was $(1,008,000) and $(1,013,000) for the
nine months ended March 31, 2009 and 2008, respectively. Interest expense
decreased $121,000 from $151,000 for the nine months ended March 31, 2008 to
$30,000 for the nine months ended March 31, 2009. Interest expense decreased
for the nine months ended March 31, 2009 due to lower interest bearing debt
balances as the 2006 and 2007 Series A Notes were settled in fiscal year
2008. For the nine months ended March 31, 2009, the Company recognized other
income of $1,034,000 due to the forfeiture of deferred compensation relating
the cancellation of Mr. Zizza's Notes of $959,000 and a $75,000 settlement
with the Company's director's and officer's liability insurance providers.
For the nine months ended March 31, 2008, the Company recognized other income
of $1,258,000 due to the receipts of $828,000 from litigation settlements and
$430,000 from release of previously escrowed funds owed to Centerpoint. The
receipts of the litigation settlement proceeds and the escrowed funds
resulted in a positive net equity position for the Company's majority held
subsidiary, Centerpoint, which resulted in the recording of the $114,000
minority interest expense of Centerpoint for the nine months ended March 31,
2008 while for the nine months ended March 31, 2009 the amount was $(3,000).
Net loss
As a result of the factors described above, the net loss was $955,000
and $779,000 for the nine months ended March 31, 2009 and 2008, respectively,
representing a $0.01 decrease in the net loss per basic and diluted common
share for the nine months ended March 31, 2009 and 2008, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2009, the Company had cash and cash equivalents equal to
$9,000. During the nine months ended March 31, 2009, net cash used in
operating activities was $1,030,000, 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 one 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 nine months ended March 31, 2009 the Company provided $42,000
of cash due to the release of restricted cash related to the New York office
operating lease.
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Financing Activities
During the nine months ended March 31, 2009, $165,000 of cash was
provided by financing activities from short-term promissory notes -
affiliates, $250,000 of cash was provided from the sale of the Company's
restricted common stock and $102,500 of cash was provided from short-term
loans - affiliates.
As of March 31, 2009 the Company has significant debt obligations
consisting primarily of deferred compensation of $250,000, loans payable -
affiliates of $102,500, and promissory notes - affiliates of $170,000. In
addition, the Company has entered into an 88-month operating lease for office
space in New York City, with an average monthly lease expense of $15,820.
Subsequent to March 31, 2009, the Company received $405,000 for the issuance
of 4,050 shares of its Series B Preferred stock and $115,000 in subscriptions
for 1,150 shares of its Series B Preferred stock.
Plan of Operations and Outlook
As of March 31, 2009 the Company had cash and cash equivalents of
approximately $9,000. Based on our operating plan, management believes that
existing cash on hand will not be sufficient to fund the Company's basic
overhead through the end of the 2009 fiscal year.
The Company currently faces a severe working capital shortage and 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 and to develop Projects. The Company anticipates
that it will seek to raise from $3,000,000 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.
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
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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 and
with potential industry participants to evaluate sites in multiple states and
anticipates selecting a site for its initial Project during the 2009 calendar
year. At present it is possible, but not certain, that the initial Integrated
Project will be located in upstate New York (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 2009-2010 to
create a pipeline of Projects. Management has a 5-year development target
(through calendar year 2015) of approximately 12-25 Integrated Projects. At
the end of the 5-year period, Bion projects that 8 or more of these
Integrated Projects will be in full operation in 3-8 states, and the balance
would be in various stages ranging from partial operation to early permitting
stage. No Integrated Project has been developed to date.
The Company has also commenced actively pursuing the opportunity
presented by environmental retrofit and remediation of the waste streams of
existing CAFOs in selected markets. The first commercial activity in this
area is the agreement with Kreider Farms 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
$85,973 in connection with the lease as of December 31, 2008. The Company's
obligations under the lease are partially guaranteed by Salvatore Zizza,
Chairman of Bion Dairy. The Company has entered into sub-leases with non-
affiliated parties for approximately 32% of the obligations under the lease.
Effective January 1, 2009, Mr. Zizza has entered into a Master Sublease with
the Company whereby Mr. Zizza will become a sublessee and will, for a one
year initial period, make all payments pursuant to the lease and manage the
lease premises. Rental payments from existing sub-tenants will be deposited
into a Company bank account such that Mr. Zizza will have use of those funds
towards the monthly lease payment. Mr. Zizza will have the option on or
before November 15, 2009 to continue the Master Sublease for the entire
period of the lease. If Mr. Zizza fulfills his obligations under the Master
Sublease during the one year initial period, he shall receive the funds from
the next release from the Company's letter of credit approximating $28,000.
If Mr. Zizza exercises 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.
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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 subsidiary, Bion
Services Group, Inc. ("Bion Services"), 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 an
integrated renewable energy facility that will provide energy for Bion's
waste treatment facility through the combustion of the cellulose captured in
the Bion process. The system will be owned and operated by Bion through Bion
PA 1, LLC, a new entity initially 100% owned by the Company, in which Kreider
will have the option to purchase a minority interest. Upon completion of
final design work and resolution of all building, zoning and other related
pre-construction matters, it will be necessary to raise substantial capital
(equity and/or debt) to construct and operate the Kreider system, which may
be difficult to do on reasonable terms due to the current unsettled condition
of the capital markets. Upon successful construction and operation of the
system, the Company anticipates that it will receive revenue from the sale of
nutrient (and other) environmental credits related to the Kreider system and
through sales of renewable energy generated at the Kreider system. On January
26, 2009 the Board of the Pennsylvania Infrastructure Investment Authority
(PENNVEST) approved a $7.8 million loan to Bion for "the construction of a
livestock waste treatment facility at Kreider Farms..." for the dairy portion
of the Kreider Farms project. Definitive agreements regarding this loan have
not yet been executed.
3) The Company issued 200,000 shares of its restricted stock in January
2009 as prepayment for Mark Smith's calendar year 2009 salary of $150,000,
which the Company will expense as it is earned. As of March 31, 2009, the
Company has $112,500 of expense to recognize through December 31, 2009.
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
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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 8A(T) of our Form 10-KSB for the year ended June 30, 2008.
(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.
There have been no material developments in the legal proceedings
described in our Form 10-KSB since filing.
ITEM 1A. RISK FACTORS.
Not Applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the quarter ended March 31, 2009 the Company sold 193,333 shares
of restricted common stock for $145,000 (not including shares issued to
certain consultants and/or employees for services). The proceeds were used
for working capital purposes. Additional shares of restricted common stock
were issued in connection with compensation and other matters. See Notes to
Financial Statements included herein.
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
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ITEM 6. EXHIBITS.
Exhibit No. Description
3.3 Articles of Amendment including Statement of Designation and
Determination of Preferences of Series B Convertible
Preferred Stock - Filed herewith electronically
10.1 Agreement between Bright Capital, Ltd. and Dominic Bassani and
Bion effective January 11, 2009 - Incorporated by reference
to Exhibit 10.1 Registrant's Form 8-K dated January 12, 2009
10.2 Agreement between Mark A. Smith and Bion effective January 12,
2009 - Incorporated by reference to Exhibit 10.2 Registrant's
Form 8-K dated January 12, 2009
10.3 Orphanos Extension Agreement dated January 13, 2009 -
Incorporated by reference to Exhibit 10.3 Registrant's Form 8-K
dated January 12, 2009
10.4 Description of Engineers Services with Primus Builders, Inc.
dated April 23, 2009 - Filed herewith electronically
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
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
BION ENVIRONMENTAL TECHNOLOGIES, INC.
Date: May 14, 2009 By:/s/ Mark A. Smith
Mark A. Smith, President (Chief
Executive Officer) and Interim Chief
Financial Officer (Principal Financial
and Accounting Officer)
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