UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2008
[ ] 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)
641 Lexington Avenue, 17th Floor, New York, New York 10022
(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 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
to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court. NOT APPLICABLE
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. On November 13, 2008, there
were 11,070,658 Common Shares issued and 10,366,349 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. 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 ...... 7-21
Item 2. Management's Discussion and Analysis or Plan of Operation .. 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 32
Item 4. Controls and Procedures .................................... 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 33
Item 1A. Risk Factors................................................ 33
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds ................................................... 33
Item 3. Defaults Upon Senior Securities ............................ 33
Item 4. Submission of Matters to a Vote of Security Holders ........ 33
Item 5. Other Information .......................................... 33
Item 6. Exhibits ................................................... 33
Signatures ................................................. 35
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2008 2008
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 88,391 $ 478,899
Prepaid rent and expenses 7,550 9,130
Deposits and other receivables 11,957 12,068
------------ ------------
Total current assets 107,898 500,097
------------ ------------
Restricted cash (Note 9) 128,443 128,443
Property and equipment, net (Note 4) 55,217 59,504
------------ ------------
Total assets $ 291,558 $ 688,044
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 553,557 $ 567,811
Accrued payable - affiliate (Note 11) 41,647 41,647
Notes payable - affiliates (Note 6) 100,058 -
Deferred compensation (Note 7) 128,576 25,000
------------ ------------
Total current liabilities 823,838 634,458
------------ ------------
2007 Series A convertible promissory notes -
affiliates (Note 5) 871,012 784,122
Deferred rent (Note 9) 72,491 71,865
------------ ------------
Total liabilities 1,767,341 1,490,445
------------ ------------
Minority interest (Note 3) 131,586 117,692
------------ ------------
Stockholders' deficit (Note 8):
Preferred stock, $.01 par value, 10,000
shares authorized, no shares issued and
outstanding - -
Common stock, no par value, 100,000,000
shares authorized, 11,070,658 shares
issued, 10,366,349 outstanding - -
Additional paid-in capital 73,665,312 73,422,195
Accumulated deficit (75,272,681) (74,342,288)
------------ ------------
Total stockholders' deficit (1,607,369) (920,093)
------------ ------------
Total liabilities and stockholders'
deficit $ 291,558 $ 688,044
============ ============
See notes to consolidated financial statements.
3
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
2008 2007
------------ ------------
Revenue $ - $ -
Operating expenses:
General and administrative (including stock-
based compensation (Note 8)) 629,675 153,856
Research and development (including stock-
based compensation (Note 8)) 276,340 126,968
------------ ------------
Total operating expenses 906,015 280,824
------------ ------------
Loss from operations (906,015) (280,824)
------------ ------------
Other expense (income):
Interest expense 11,948 52,390
Interest income (1,464) (4,925)
Minority interest (Note 3) 13,894 73,517
Other, net - (1,258,195)
------------ ------------
24,378 (1,137,213)
------------ ------------
Net (loss) income $ (930,393) $ 856,389
============ ============
Net (loss) income per basic common share
(Note 2) $ (0.09) $ 0.11
============ ============
Net (loss) income per diluted common
share (Note 2) $ (0.09) $ 0.10
============ ============
Weighted-average number of common shares
outstanding (Note 2):
Basic 10,366,349 7,932,197
============ ============
Diluted 10,366,349 9,300,407
============ ============
See notes to consolidated financial statements.
4
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
THREE MONTHS ENDED SEPTEMBER 30, 2008
(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 of options
for services - - 243,117 - 243,117
Net loss - - - (930,393) (930,393)
---------- ------ ----------- ------------ -----------
Balances, September 30,
2008 11,070,658 $ - $73,665,312 $(75,272,681) $(1,607,369)
========== ====== =========== ============ ===========
See notes to consolidated financial statements.
5
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
2008 2007
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (930,393) $ 856,389
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation expense 4,287 4,020
Accrued interest on convertible notes and debt 11,948 52,390
Stock-based compensation 243,117 (6,146)
Decrease in fair value of convertible notes - (460,404)
Minority interest 13,894 73,517
Decrease in prepaid rent and expenses 1,580 3,332
Decrease (increase) in deposits and other
receivables 111 (7,400)
(Decrease) increase in accounts payable and
accrued expenses (14,254) 2,317
Increase in deferred rent 626 1,366
Increase in deferred compensation 178,576 187,500
---------- -----------
Net cash (used) provided in operating
activities (490,508) 706,881
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment - (1,325)
---------- -----------
Net cash used in investing activities - (1,325)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - affiliates 100,000 -
---------- -----------
Net cash provided by financing activities 100,000 -
---------- -----------
Net (decrease) increase in cash and cash
equivalents (390,508) 705,556
Cash and cash equivalents at beginning of year 478,899 373,109
---------- -----------
Cash and cash equivalents at end of year $ 88,391 $ 1,078,665
========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest and income taxes $ - $ -
See notes to consolidated financial statements.
6
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
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.
Bion's technology produces 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.
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.
Since the beginning of calendar year 2008, with the substantial completion of
the technology/business model development process, Bion has begun to
simultaneously pursue both retrofit/remediation and Integrated Projects
opportunities.
7
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
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 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 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. 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.
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 $930,000 for the
three months ended September 30, 2008. At September 30, 2008, the Company
has a working capital deficiency and a stockholders' deficit of approximately
$716,000 and $1,607,000, 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.
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.
8
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S
PLANS (CONTINUED):
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
September 30, 2008 and the results of operations and cash flows of the
Company for the three months ended September 30, 2008 and 2007. Operating
results for the three months ended September 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending June 30,
2009.
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.
9
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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. For the three months ended September 30, 2008 the effect the
conversion/exchange of outstanding convertible promissory notes as well as
outstanding options and warrants on basic loss per share would have been
anti-dilutive. The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations for the
three months ended September 30, 2007:
Average
Three months ended September 30, 2007 Income Shares EPS
------------------------------------- -------- --------- -----
Net income - basic $856,389 7,932,197 $0.11
Effect of dilutive securities:
Stock options and warrants - 783,432
6% convertible debt 38,155 584,778
-------- --------- ------
Net income - diluted $894,544 9,300,407 $0.10
======== ========= =====
The following potential shares of common stock and their effect on net income
were excluded from the September 30, 2007 diluted EPS calculations because
their effect would have been anti-dilutive:
a) The 370,000 non-employee options with service conditions and 544,500
stock options with exercise prices ranging from $3.50 to $7.00.
b) The convertible notes - affiliates of $1,366,740 convertible into 482,946
common shares.
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
10
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent accounting pronouncements (continued)
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 Company did not apply the
fair value option to any of its outstanding instruments, and therefore, SFAS
159 did not have an 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
THREE MONTHS ENDED SEPTEMBER 30, 2008
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent accounting pronouncements (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.
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 months ended September 30, 2008 and 2007, Centerpoint had
earnings of approximately $33,800 and $569,000, respectively. Centerpoint's
minority interest holders have a minority interest of $131,586 as of
September 30, 2008.
12
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of September 30, 2008:
Research and development equipment $ 305,266
Leasehold improvements 31,336
Furniture 28,932
Computers and office equipment 31,680
---------
397,214
Less accumulated depreciation (341,997)
---------
$ 55,217
=========
Depreciation expense was $4,287 and $4,020 for the three months ended
September 30, 2008 and 2007, respectively.
5. 2007 SERIES A CONVERTIBLE PROMISSORY NOTES:
In March and April 2007, the Company sold $800,000 of its 2007 Series A
Convertible Notes (the "2007 Notes") for cash proceeds. In addition the
Company issued 2007 Notes to affiliates totaling $986,521 in exchange for
promissory notes with convertible features and deferred compensation (Note
7). The 2007 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 2007 Note holders, and accrue interest at 6% per annum.
The 2007 Note holders also had the option to exchange the 2007 Notes, plus
interest, for securities substantially identical to securities the Company
sells 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 2007 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 raises $3,000,000 or more.
On May 31, 2008 all of the non-affiliate 2007 Note holders converted their
2007 Notes totaling $856,737 including accrued interest into 428,369
restricted common shares of the Company. Also on May 31, 2008, 2007 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.
13
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
5. 2007 SERIES A CONVERTIBLE PROMISSORY NOTES (CONTINUED):
On June 18, 2008 the remaining affiliated holder of the outstanding 2007
Notes increased the principal of his 2007 Note, maturing on July 1, 2013, by
$375,000 to $784,122, which represents deferred compensation accrued 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
accrues. As of September 30, 2008, the total principal and interest on the
2007 Note totaled $871,012. The conversion price of the remaining 2007 Note
is $4.00 per share, which is above the approximate market price of the
Company's common shares at the commitment date. This remaining Note is
subject to certain risks of forfeiture and/or cancellation.
The 2007 Notes accrued interest of $11,890 and $27,116 for the three months
ended September 30, 2008 and 2007, respectively.
6. PROMISSORY NOTES PAYABLE - AFFILIATES:
During September 2008, Mr. Zizza and Dominic Bassani, Vice-President -
Special Projects and Strategic Planning for the Projects Group, 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 are payable on or before February 1, 2009.
7. 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 2007 Series A 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. 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.
As of September 30, 2008 the Company owed Brightcap and Mr. Smith deferred
compensation of $100,000 and $28,576, respectively.
14
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
8. 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.
Warrants:
As of September 30, 2008 the Company had the following common stock warrants
outstanding:
Number of Exercise
Shares Price Expiration Date
----------- ----------- -------------------
Class SVDB 1-6 800,000 $ 3.00 July 31, 2013
Class DB-1 600,000 $ 1.00 January 31, 2014
Class A 1-3 600,000 $ 2.50 May 14, 2015
Class SVMAS-1 67,500 $ 3.50 December 31, 2011
Class SVMAS-1A 40,000 $ 3.50 December 31, 2011
Class SVMAS-2 32,500 $ 2.50 December 31, 2011
Class SVMAS-3 40,000 $ 2.50 September 30, 2015
Class SVB 1-3 50,000 $ 2.50 April 30, 2015
Class SVB-4 75,000 $ 2.50 April 30, 2015
Class SVC 1-5 125,000 $ 4.25 December 31, 2012
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 725,000 $ 2.50 April 30, 2015
Class O 100,000 $ 3.00 December 31, 2010
Class DM 150,000 $ 3.00 December 31, 2011
Class MAS 80,000 $ 2.50 July 1, 2012
Class GK 20,000 $ 2.00 March 31, 2011
Class BW 10,000 $ 2.20 June 15, 2012
---------
3,556,667
=========
The weighted average exercise price for the outstanding warrants is $2.47 and
the weighted average remaining contractual life as of September 30, 2008 is
5.39 years.
15
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
8. STOCKHOLDERS' EQUITY:
Stock options:
Effective June 2006, the Company approved the 2006 Consolidated Incentive
Plan (the "2006 Plan"), which consolidated previously reserved incentive
stock options plans into the 2006 Plan. On May 31, 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 3,200,000 to 4,200,000
shares. Terms of exercise and expiration of options granted under the 2006
Plan may be established at the discretion of the Board of Directors, but no
option may be exercisable for more than ten years.
The Company recorded compensation expense related to employee stock options
of $62,929 and $144,792 for the three months ended September 30, 2008 and
2007, respectively. The Company granted no options during the three months
ended September 30, 2008 and 2007, respectively. During the three months
ended September 30, 2008 and 2007, 208,000 and 45,000 options expired,
respectively.
A summary of option activity under the 2006 Plan for the three months ended
September 30, 2008 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 - -
Exercised - -
Forfeited - -
Expired (208,000) 3.03
--------- -------- --- --------
Outstanding at September 30,
2008 1,975,333 $ 3.06 4.8 $ 13,250
========= ======== === ========
Exercisable at September 30,
2008 1,442,834 $ 3.01 4.7 $ 13,250
========= ======== === ========
16
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
8. STOCKHOLDERS' EQUITY (CONTINUED):
Stock options (continued):
The following table presents information relating to nonvested stock options
as of September 30, 2008:
Weighted Average
Grant-Date
Options Fair Value
-------- ----------------
Nonvested at July 1, 2008 562,916 $ 1.29
Granted - -
Vested (30,417) (2.26)
Forfeited - -
------- -------
Nonvested at September 30, 2008 532,499 $ 1.24
======= =======
The total fair value of stock options that vested during the three months
ended September 30, 2008 and 2007 was $68,864 and $277,901, respectively.
The intrinsic value of stock options exercised during the three months ended
September 30, 2008 and 2007 was $0 as there were no options exercised during
these periods. As of September 30, 2008 the Company had $349,597 of
unrecognized compensation cost related to stock options that will be recorded
over a weighted average period 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 September 30, 2008,
non-employee options represented 597,833 of the 1,975,333 options outstanding
under the 2006 Plan. Of the 597,833 non-employee options outstanding, 94,500
were fully vested and contained no service conditions as of September 30,
2008. 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 three months ended
September 30, 2008 and 2007.
The remaining 503,333 non-employee options outstanding include service
conditions and have graded vesting schedules through November 30, 2009. As
of September 30, 2008, 262,500 of these options including service conditions
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
17
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
8. STOCKHOLDERS' EQUITY (CONTINUED):
Stock options (continued):
option-pricing model, using the following assumptions at September 30, 2008;
a dividend yield of zero, risk-free interest rates of 3.4% to 3.91%,
volatility of 153% to 168% and an expected life of 6.6 to 9.7 years.
Consulting cost in connection with options that are not fully vested as of
September 30, 2008 is being recognized on a straight-line basis over the
requisite service period for the entire award. Non-cash fair value
charges/(credits) of $180,188 and $(150,938) were recorded as expense during
the three months ended September 30, 2008 and 2007, respectively.
Stock-based compensation charges/(credits) in operating expenses in the
Company's financial statements for the three months ended September 30, 2008
and 2007 are as follows:
Three months Three months
ended ended
September 30, September 30,
2008 2007
------------- -------------
General and administrative:
Fair value remeasurement of convertible
notes - affiliates $ - $ (194,462)
Fair value remeasurement of options
with service conditions 114,728 -
Fair value of employee stock options
expensed under SFAS 123(R) 38,049 78,432
--------- ----------
Total $ 152,777 $ (116,030)
========= ==========
Research and development:
Fair value remeasurement of convertible
notes - affiliates $ - $ (265,942)
Fair value remeasurement of options
with service conditions 65,460 (150,938)
Fair value of stock options expensed
under SFAS 123 (R) 24,880 66,360
--------- ----------
Total $ 90,340 $ (350,520)
========= ==========
18
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
9. OPERATING LEASE:
The Company entered into a non-cancellable operating lease commitment for
office space in New York, effective August 1, 2006 and expiring November 30,
2013. In conjunction with the signing of the lease, the Company provided the
lessor with a secured letter of credit. As of September 30, 2008 the Company
has reflected $128,443 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. 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
$72,491 as of September 30, 2008. Rent expense, net of contractual and
month to month sub-lease rental income was $15,354 and $31,181 for the three
months ended September 30, 2008 and 2007, respectively.
At September 30, 2008, 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
------------ --------------- --------- --------------
Nine months ended June 30, 2009 $ 138,780 $ 44,409 $ 94,371
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 $1,064,537 $340,651 $723,886
========== ======== ========
19
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
10. 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 and granted Mr. Smith options to purchase 125,000 shares of
the Company's common stock at $2.20 per share, expiring on December 31, 2011.
On May 31, 2008, an agreement was reached whereby Mr. Smith will 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 will provide
services to the Company in a consulting capacity at his current compensation.
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.
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 salary of $300,000. Commencing June 2008, Mr. Zizza's compensation
will be added to the principal of his 2007 Notes as accrued.
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. The Company
anticipates that Mr. Kapell will perform consulting services for the Company
from time-to-time.
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.
20
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
10. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Employment and consulting agreements (continued):
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.
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.
11. RELATED PARTY TRANSACTIONS:
The Company has an accrued payable of $41,647 as of September 30, 2008, to a
company controlled by Salvatore Zizza for rental of office space in 2003.
12. SUBSEQUENT EVENT:
On October 31, 2008 the Company entered into an agreement with its insurance
company pursuant to which the Company will receive a final $75,000
reimbursement for legal expenses in connection with the class action
litigations settled during 2007.
21
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
The Company has been 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"). 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.
During the past six months, 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 the recently announced agreement with Kreider Farms in Pennsylvania.
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
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. The ethanol plant thereby acts 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.
22
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 fiscal
year. At present it is possible, but not certain, that the initial Integrated
Project will be located in St. Lawrence County, New York (although other
locations in New York and other states are also under review). In addition,
Bion intends to choose sites for additional Projects during the remainder of
calendar years 2008 and 2009 to create a pipeline of Projects. Management has
a 5-year development target (through calendar year 2014) 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 construction 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 months ended September 30, 2008 and 2007 have also
been prepared assuming the Company will continue as a going concern. The
Company has incurred net (loss) income of approximately ($930,000) and
$856,000 during the three month periods ended September 30, 2008 and 2007,
respectively. At September 30, 2008, the Company has a working capital
deficiency and a stockholders' deficit of approximately $716,000 and
$1,607,000, 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
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.
23
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, technology license fees, annual waste treatment
fees and 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.
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
24
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 Company did not
apply the fair value option to any of its outstanding instruments, and
therefore, SFAS 159 did not have an 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
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
25
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.
THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2007
General and Administrative
Total general and administrative expenses increased $476,000 from
$154,000 to $630,000 for the three months ended September 30, 2007 and 2008,
respectively.
General and administrative expenses, excluding stock-based compensation
charges/(credits) of $153,000 and $(116,000) for the three months ended
September 30, 2008 and 2007, respectively, were $477,000 versus $270,000 for
the three months ended September 30, 2008 and 2007, respectively. The
primary reason for the increase in general and administrative expenses during
the three months ended September 30, 2008 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 $134,000 and $45,000 for the three months ended September
30, 2008 and 2007, respectively, and the increase is due to the expensing of
previous research and development employees to general and administrative
expense. Consulting expense increased from $26,000 to $188,000 for the three
months ended September 30, 2007 and 2008, 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
three months ended September 30, 2008. Accounting and tax costs increased
from $37,000 for the three months ended September 30, 2007 to $60,000 during
the same period in fiscal year 2009, due to higher year end audit costs and
tax related expenses. Offsetting the increased salary, consulting and
accounting and tax expenses were lower legal costs for the three months ended
September 30, 2008 due to an insurance reimbursement of Centerpoint related
legal fees of $37,000 and lower general corporate fees. The Company also
incurred lower rent expense, $15,000 and $31,000 for the three months ended
September 30, 2008 and 2007, respectively, due to additional sub-tenant month
to month rentals during the three months ended September 30, 2008.
26
General and administrative stock-based compensation for the three years
ended September 30, 2008 and 2007 consist of the following:
Three months Three months
ended ended
September 30, September 30,
2008 2007
------------- -------------
Fair value remeasurement of
convertible notes - affiliates $ - $(194,000)
Fair value remeasurement of options
with service conditions 115,000 -
Fair value of stock options expensed
under SFAS 123(R) 38,000 78,000
--------- ---------
Total $ 153,000 $(116,000)
========= =========
Stock-based compensation charges/(credits) increased to $153,000 for the
three months ended September 30, 2008 from $(116,000) for the three months
ended September 30, 2007. The change in stock-based compensation fair value
adjusted expense relating to the President's convertible deferred
compensation is primarily due to the fact his note was converted in December
2007, therefore no remeasurement was required for the three months ended
September 30, 2008. For the three months ended September 30, 2008 the
Company recognized expense relating to the fair value of stock options for
general and administrative employees of $38,000, compared to $78,000. The
Company also recognized as general and administrative expenses $115,000 for
the remeasurement of options with service conditions due to the reallocation
of research and development related costs.
Research and development
Total research and development expenses have increased $149,000 from
$127,000 to $276,000 for the three months ended September 30, 2007 and 2008,
respectively.
Research and development expenses, excluding stock-based compensation
charges/(credits) of $90,000 and $(351,000) for the three months ended
September 30, 2008 and 2007, respectively, were $186,000 and $478,000 for the
three months ended September 30, 2008 and 2007, respectively. The primary
reason for the decrease in research and development expenses during the three
months ended September 30, 2008 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
$102,000 and $181,000 for the three months ended September 30, 2008 and 2007,
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 $147,000 to $13,000 for the three months
ended September 30, 2007 and 2008, respectively, due to the shift from
research and development to general and administrative.
27
Research and development stock-based compensation for the three months
ended September 30, 2008 and 2007 consist of the following:
Three months Three months
ended ended
September 30, September 30,
2008 2007
------------- -------------
Fair value remeasurement of convertible
notes - affiliates $ - $(266,000)
Fair value remeasurement of options with
service conditions 65,000 (151,000)
Fair value of stock options expensed
under SFAS 123 (R) 25,000 66,000
--------- ---------
Total $ 90,000 $(351,000)
======== =========
Stock-based compensation changes/(credits) increased from $(351,000) for
the three months ended September 30, 2007 to $90,000 for the same period in
2008. Stock-based compensation fair value adjusted credits of $(266,000) for
the three months ended September 30, 2007, were recorded to re-measure the
fair value of Brightcap's convertible deferred compensation. There was no
similar charge for the three months ended September 30, 2008 as the note was
converted at May 31, 2008. The Company recorded stock-based compensation
expense of $25,000 and $66,000 under the provisions of SFAS 123(R) for the
three months ended September 30, 2008 and 2007, 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 2008 were partially allocated
to general and administrative. The Company also recognized as research and
development expenses $65,000 for the remeasurement of options with service
conditions for the three months ended September 30, 2008 versus a credit of
($151,000) for the same period in the prior year. The increase is due to
modifications of a portion of the options with service condition during
fiscal year 2008 which shortened the vesting period, resulting in the
recognition of additional expense.
Loss from Operations
As a result of the factors described above, the loss from operations was
$906,000 and $280,000 for the three months ended September 30, 2008 and 2007,
respectively.
Other expense and (income)
Other expense and (income) was $24,000 and $(1,137,000) for the three
months ended September 30, 2008 and 2007, respectively. Interest expense
decreased $40,000 from $52,000 for the three months ended September 30, 2007
to $12,000 for the three months ended September 30, 2008. Interest expense
decreased due to the lower debt balances on the 2006 and 2007 Series A Notes
for the three months ended September 30, 2008. For the three months ended
September 30, 2007, 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
28
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 $74,000 minority interest
expense of Centerpoint for the three months ended September 30, 2007 while
for the three months ended September 30, 2008 the amount was $14,000.
Net (loss) income
As a result of the factors described above, the net (loss) income was
($930,000) and $856,000 for the three months ended September 30, 2008 and
2007, respectively, representing a $0.20 decrease in the net loss per basic
and a $0.19 decrease in the net loss per diluted common share, respectively,
for the three months ended September 30, 2008 and 2007, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2008, the Company had cash and cash equivalents
equal to $88,000. During the three months ended September 30, 2008, net cash
used in operating activities was $491,000, primarily consisting of cash
operating expenses. As previously noted, the Company is currently not
generating revenue and accordingly has not generated cash flows from
operations. The Company does not anticipate generating sufficient revenues
to offset operating and capital costs for a minimum of two to five years.
While there are no assurances that the Company will be successful in its
efforts to develop and construct its Projects and market its Systems, it is
certain that the Company will require significant funding from external
sources. Given the unsettled state of the current credit and capital markets,
there is no assurance the Company will be able to raise the funds it needs on
reasonable terms.
Investing Activities
During the three months ended September 30, 2008 the Company used no
cash for investing activities.
Financing Activities
During the three months ended September 30, 2008, $100,000 of cash was
provided by financing activities from short-term promissory notes -
affiliates.
As of September 30, 2008 the Company has significant debt obligations
consisting primarily of 2007 Series A convertible promissory notes -
affiliates of $871,000, deferred compensation of $129,000 and promissory
notes - affiliates of $100,000. 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.
2007 Series A Convertible Promissory Notes:
During March and April 2007, the Company sold $800,000 of its 2007
Series A Convertible Notes (the "2007 Notes"). In addition the Company issued
2007 Notes totaling $986,521 in exchange for promissory notes with
convertible features and deferred compensation. The 2007 Notes were
convertible into shares of the Company's common stock at $4.00 per share
until maturity on July 1, 2008, at the election of the 2007 Note holder, and
29
will accrue interest at 6% per annum. The 2007 Note holders also had the
option to exchange the 2007 Notes, plus interest, for securities
substantially identical to securities the Company sells in any offering prior
to the completion of an offering in which the Company raises less than
$3,000,000. The Company has the right to require the 2007 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 raises $3,000,000 or
more.
On May 31, 2008 all of the non-affiliate 2007 Note holders converted
their 2007 Notes totaling $856,737 including accrued interest into 428,369
restricted common shares of the Company. Also on May 31, 2008, 2007 Notes to
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 2007
Notes increased the principal of his 2007 Note by $375,000 to $784,000 which
represents deferred compensation earned through June 30, 2008. The holder,
Salvatore Zizza, agreed to add his future compensation from the Company to
his 2007 Note as it accrues. As of September 30, 2008, the total principal
and interest on the 2007 Note totaled $871,012. The conversion price of the
remaining 2007 Note of $4.00 per share was above the approximate market price
of the Company's common shares at the commitment date of the offering. This
remaining Note is subject to certain risks of forfeiture and or cancellation.
Plan of Operations and Outlook
As of September 30, 2008 the Company had cash and cash equivalents of
approximately $88,000. 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.
30
Currently, Bion is focused on using applications of its patented waste
management technology to pursue two main business opportunities: 1) to
develop Integrated Projects which will include large CAFOs, such as large
dairies, beef cattle feed lots and hog farms, with Bion waste treatment
System modules processing the aggregate CAFO waste stream from the equivalent
of 40,000 or more beef and/or dairy cows (or the waste stream equivalent of
other species) while producing solids to be utilized for renewable energy
production (and potentially to be marketed as feed and/or fertilizer),
integrated with an ethanol plant capable of producing 40 (or more) million
gallons of ethanol per year and/or integrated with CAFO end product
processors, and 2) environmental retrofit and remediation of the waste
streams of existing CAFOs in selected markets.
Bion is currently working with local, state and federal officials and
with potential industry participants to evaluate sites in multiple states and
anticipates selecting a site for its initial Project during the 2009 fiscal
year. At present it is possible, but not certain, that the initial Integrated
Project will be located in St. Lawrence County, New York (although other
locations in New York and other states are also under review). In addition,
Bion intends to choose sites for additional Projects during the remainder of
calendar years 2008 and 2009 to create a pipeline of Projects. Management has
a 5-year development target (through calendar year 2014) 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 construction 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 recently announced 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
$128,443 in connection with the lease as of June 30, 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.
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
31
waste treatment facility through the combustion of the cellulose captured in
the Bion process. The system will be owned and operated by Bion through 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. 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.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements (as that term is
defined in Item 303 of Regulation S-K) that are reasonably likely to have a
current or future material effect on our financial condition, revenue or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures.
The term "disclosure controls and procedures" is defined in Rules 13a-
15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). This term refers to the controls and procedures of a company
that are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded,
processed, summarized, and reported within the required time periods. Our
Chief Executive Officer and Principal Financial Officer has evaluated the
effectiveness of the design and operations of our disclosure controls and
procedures as of the end of the period covered by this quarterly report, and
has concluded that, as of that date, our disclosure controls and procedures
were not effective at ensuring that required information will be disclosed on
a timely basis in our reports filed under the Exchange Act, as a result of
the material weakness in internal control over financial reporting discussed
in Item 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.
32
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.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable
ITEM 6. EXHIBITS.
Exhibit No. Description
10.1 Kreider Farms Agreement (September 25, 2008): REDACTED - Filed
herewith electronically
10.2 Promissory Note between Bion Environmental Technologies, Inc.
and Salvatore Zizza - Incorporated by reference to Exhibit 10.1
to the Registrant's Form 8-K dated September 27, 2008
10.3 Promissory Note between Bion Environmental Technologies, Inc.
and Dominic Bassani - Incorporated by reference to Exhibit 10.2
to the Registrant's Form 8-K dated September 27, 2008
10.4 Kreider Press Release dated September 29, 2008 - Incorporated
by reference to Exhibit 99.1 to the Registrant's Form 8-K dated
September 27, 2008
10.5 Patent Press Release dated September 25, 2008 - Incorporated by
reference to Exhibit 99.2 to the Registrant's Form 8-K dated
September 27, 2008
10.6 Agreement between Jeff Kapell and Bion dated November 1, 2008 -
Incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K dated October 30, 2008
33
10.7 Agreement Between David Mager and Bion dated November 1, 2008 -
Incorporated by reference to Exhibit 10.2 to the Registrant's
Form 8-K dated October 30, 2008
10.8 Promissory Note between Anthony Orphanos and Bion dated
October 30, 2008, Guaranteed by Dominic Bassani - Incorporated by
reference to Exhibit 10.3 to the Registrant's Form 8-K dated
October 30, 2008
10.9 Addendum to Settlement Agreement and Release Stipulation
from Bion, Bion Dairy and Mark Smith dated October 31, 2008 -
Incorporated by reference to Exhibit 10.4 to the Registrant's
Form 8-K dated October 30, 2008
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
34
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
BION ENVIRONMENTAL TECHNOLOGIES, INC.
Date: November 14, 2008 By:/s/ Mark A. Smith
Mark A. Smith, President (Chief
Executive Officer) and Interim Chief
Financial Officer (Principal Financial
and Accounting Officer)
35