UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year ended: June 30, 2010
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: _____ to ____
Commission File No. 000-19333
BION ENVIRONMENTAL TECHNOLOGIES, INC.
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(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-1176672
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(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication No.)
Box 566/1774 Summitview Way, Crestone, Colorado 81131
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (212) 758-6622
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None N/A
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] YES [ X ] NO
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ] YES [ X ] NO
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 has submitted electronically
and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). N/A
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ X ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). [ ] YES [ X ] NO
The aggregate market value of the approximately 6,500,000 shares of voting
stock held by non-affiliates of the Registrant as of December 31, 2009
approximated $13.9 million. As of September 17, 2010, the Registrant had
12,807,281 shares of common stock issued and 12,102,972 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
2
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (and the documents incorporated herein by
reference) contain forward-looking statements, within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), that involve substantial risks and
uncertainties. Forward-looking statements generally can be identified by the
use of forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "project," "predict," "plan," "believe" or
"continue" or the negative thereof or variations thereon or similar
terminology. The expectations reflected in forward-looking statements may
prove to be incorrect.
Important factors that could cause actual results to differ materially from
our expectations include, but are not limited to, the following:
* changes in political, legal, regulatory and economic climates;
* changes in the public's perceptions of large scale livestock
agriculture/CAFOs, environmental protection and other related issues;
* industry risks, including environmental related problems;
* the ability of the Company to implement its business strategy;
* the Company's limited financial and management resources and ability to
raise additional needed funds and/or hire needed personnel;
* the extent of the Company's success in the development and operation of
Integrated Projects and retrofit/remediation of existing livestock
facilities;
* engineering, mechanical or technological difficulties with operational
equipment including potential mechanical failure or under-performance of
equipment;
* operating variances from expectations;
* the substantial capital expenditures required for construction of the
Company's proposed CAFO retrofit projects and Integrated Projects and the
related need to fund such capital requirements through commercial banks
and/or public or private securities markets;
* the need to develop and re-develop technology and related applications;
* dependence upon key personnel;
* the limited liquidity of the Company's equity securities;
* operating hazards attendant to the environmental clean-up, CAFO and
renewable energy production, food processing and biofuel industries;
* seasonal and climatic conditions;
* availability and cost of material and equipment;
* delays in anticipated permit approval and/or start-up dates;
* availability of capital in the current 'distressed' financial markets;
* the strength and financial resources of the Company's competitors; and
* general economic conditions, including the recent recession and its
affects on the national and international capital markets.
We do not undertake, and specifically disclaim any obligation, to
publicly release the results of any revisions that may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
3
PART I
ITEM 1. BUSINESS.
GENERAL
Bion Environmental Technologies, Inc.'s ("Bion," "Company," "We," "Us,"
or "Our") 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 is "comprehensive" in that it surpasses current environmental
regulations for 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,
a CAFO (existing or to be developed) can potentially increase its herd
concentration while lowering or maintaining its level of nutrient releases
and atmospheric emissions.
During 2008 the Company reorganized its management team to pursue its
business plan through two operating subsidiaries in order to focus on its two
related but distinct business opportunities: 1) Bion Services Group. Inc.
('Services Group') will utilize Bion's technology to provide environmental
waste treatment (often with renewable energy production from the waste
stream) for existing livestock facilities through retrofit of pre-existing
facilities; and 2) Bion Integrated Projects Group, Inc. ('Projects Group')
will utilize Bion's patented technology to develop new, state-of-the-art,
'closed loop' livestock/renewable energy facilities integrated with related
agriculture activities such as food processing and biofuels production in
Integrated Projects (as defined below). Services Group will also provide its
services and utilize its personnel to support the activities of Projects
Group.
Services Group is proceeding with its initial projects at Kreider Farms
in Pennsylvania as described below. Projects Group is moving forward with
pre-development activities for its initial Integrated Project in upstate New
York and preliminary work on other potential projects.
We believe that Bion's technology platform creates the opportunity to
profitably integrate 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 Project(s)" or "Project(s)"). In the context of
Integrated Projects, Bion's waste treatment technology, in addition to
mitigating polluting releases to water and emissions to air, will generate
cellulosic biomass from portions of the CAFO waste stream from which
renewable energy can be produced to 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 replacement
for fossil fuel energy or sold to unrelated purchasers. 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 potentially lowering the
capital expenditures, operating, marketing and shipping costs and energy
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usage of the ethanol production process. Thus, integrated ethanol plants
will act as a feed mill for the CAFO, thereby reducing the CAFO's feeding
costs and both lowering costs and generating revenue to the ethanol plant(s),
and also provide a market for the renewable energy from the cellulosic
biomass that Bion's System (defined below) modules produce from the CAFO
waste stream. As such, Bion Integrated Projects can be denominated "closed
loop". Bion, as developer of, and a participant in, its Integrated Projects,
anticipates that it will share in the cost savings and revenue generated from
these (and other) benefits of integrated activities.
From fiscal 2004 through early 2008, the Company primarily focused its
activities on completing re-development of its technology platform and
refining its business model. As such, we elected not to pursue near term
revenue opportunities such as retrofitting existing CAFO's with our first
generation (and transitional versions) 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, 2)
development of our integrated technology platform in support of large-scale
sustainable Integrated Projects and 3) finalizing a business model to
commercially utilize our technology. During mid-2008, with the substantial
completion of the technology/business model re-development process, Bion
commenced simultaneous pursuit of both retrofit/remediation and Integrated
Project development opportunities based on its patented and proprietary waste
handling/renewable energy technology ("Bion System" or "System") and its
technology platform based on its core technology.
The Company is now focusing its efforts on both the CAFO
retrofit/remediation market and on development and operation of Integrated
Projects. The Integrated Projects development opportunity is being primarily
pursued through our Projects Group subsidiary which will focus on development
of numerous Integrated Projects in multiple states. The CAFO/environmental
retrofit/remediation opportunity is being pursued primarily through our
Services Group subsidiary which will also provide design, engineering and
construction and project management services to Projects Group. We
anticipate that most projects undertaken by the Company in which we retain
ownership interests (whether retrofit or Integrated Projects) will be pursued
through 'special purpose' subsidiaries. Bion PA 1 LLC, through which we are
developing the Bion System required by Phase 1 of the Kreider project, is the
first of such entities.
The Company's consolidated financial statements for the years ended June
30, 2010 and 2009 included herein have been prepared assuming the Company
will continue as a going concern. The Company has not recorded any revenue
from operations for either of the years ended June 30, 2010 or June 30, 2009.
The Company has incurred net losses of approximately $2,976,000 and
$1,318,000 during the years ended June 30, 2010 and 2009, respectively. The
Company had a working capital surplus and stockholders' deficit,
respectively, of approximately $381,000 and $1,535,000 as of June 30, 2010.
The report of the independent registered public accounting firm on the
Company's consolidated financial statements as of and for the years ended
June 30, 2010 and June 30, 2009 includes a "going concern" explanatory
paragraph, which means that there are factors that raise substantial doubt
about the Company's ability to continue as a going concern.
5
PRINCIPAL PRODUCTS AND SERVICES
Currently, Bion is focused on using applications of its patented waste
management technology to pursue two large opportunities: 1) retrofit and
environmental remediation of existing CAFOs (pursued through Services Group)
and 2) development of Integrated Projects (pursued through Projects Group).
Bion's Services Group, building upon our redeveloped technology and
Bion's 15 years' of experience providing waste treatment services to the
livestock industry with its first generation technology applications, is
pursuing the opportunity related to retrofit and environmental remediation of
existing CAFOs. Our technology has evolved and been upgraded over the last
five years to meet changing standards and requirements. Bion's re-developed
technology platform creates a potentially profitable business opportunity to
provide waste treatment services and systems and/or renewable energy
production capability to existing large livestock operations - of which there
are many and potentially to smaller facilities through aggregation of waste
streams. Early candidates for these solutions include individual CAFO
facilities that face impending regulatory action, CAFOs that wish to expand
or relocate, and operations located in regions that suffer severe and
immediate environmental issues, such as the Chesapeake Bay watershed or the
San Joaquin Valley, where financial incentives are (or may become) available
that encourage voluntary reductions of nutrient releases and/or atmospheric
emissions from agricultural sources. The Company's Kreider Farms projects in
Pennsylvania in the Chesapeake Bay watershed represent the Company's first
new endeavors in this market segment. These installations, if and when
completed, will reduce nitrogen releases and ammonia emissions from the dairy
and poultry waste streams to generate tradable nutrient reduction credits as
part of a nutrient credit trading program through the PA Department of
Environmental Protection. Phase 2 of the Kreider project, which is in its
early development and permitting phase, will treat the recovered cellulosic
solids from Kreider's dairy waste and the waste stream from Kreider's poultry
operations to generate renewable energy and tradable credits.
Bion's Projects Group is pursuing the opportunity related to development
of Integrated Projects which will include large CAFOs (such as large dairies,
beef cattle feed lots and/or hog farms) with Bion waste treatment System
modules processing the aggregate CAFO waste stream from the equivalent of
20,000 to 80,000 (or more) beef or dairy cows (or the waste stream equivalent
of other species) while recovering cellulosic biomass to be utilized for
renewable energy production (and possibly solids to be marketed as feed
and/or fertilizer), integrated with CAFO end product users/processing
facilities and/or a biofuel/ethanol plant capable of producing 40 million to
100 (or more) million gallons of ethanol per year. Such Integrated Projects
will involve multiple CAFO modules of 10,000 or more beef or dairy cows (or
waste stream equivalent of other species) with waste treatment modules on a
single site and/or on sites within an approximately 30 mile radius. Bion
believes its technology platform will allow integration of large-scale CAFO's
with end product processors and/or ethanol production together with renewable
energy production from cellulosic biomass recovered from the waste streams
and on-site energy utilization in a 'closed loop' manner that will reduce the
capital expenditures and operating costs for the entire Integrated Project
and each component facility. Some Projects may be developed from scratch
while others may be developed in geographic proximity of existing
participating CAFOs, ethanol plants and/or end product processors.
6
During the 2008 fiscal year, Bion began pre-development work on an
Integrated Project planned to include a large-scale beef cattle finishing
operation, a beef processing facility and an ethanol production facility to
be located in upstate New York. Progress has been made in the pre-development
process and the Company currently believes there is a significant likelihood
that we will option land in Oswego County, New York and move into the
development process during the current fiscal year. In addition to the
upstate New York beef cattle project, Bion has been working with various
local and state agencies in Nebraska regarding potential development of a
large scale integrated dairy/cheese Integrated Project (which would be
integrated with one or more existing ethanol plant(s)). The Company has also
begun discussions with various state and regional agencies in Pennsylvania
regarding a large scale beef Integrated Project. These projects are in very
early pre-development stages and may never progress to actual development or
may be developed after other projects not yet under active consideration.
Bion is currently working with local, state and federal officials and/or
with potential industry participants to evaluate opportunities and/or sites
for additional Projects and/or System installations in multiple states
including without limitation New York, Nebraska, Pennsylvania, California,
Indiana and other states. The Company anticipates selecting a site for its
initial Integrated Project (and possibly additional Integrated Projects)
during the current fiscal year. Bion intends to commence development of its
initial Integrated Project during the current fiscal year by optioning land
and beginning the permitting process.
In addition, Bion intends to choose sites for additional Projects
through fiscal years 2011-12 to create a pipeline of Projects. Management has
a 5-year development target (through fiscal year 2016) of approximately 12-24
Integrated Projects. At the end of the 5-year period, Bion projects that 5-
12 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 development stage. No Integrated Project has been developed to date.
As part of our minor functional re-structuring to pursue the two
opportunities set forth herein, during October 2008 we re-deployed our
management/technology team roughly as follows: 1) our President, Mark A.
Smith, serves as President of Services Group, the activities of which are
under the direct supervision of Jeremy Rowland, its Chief Operating Officer,
James Morris, our Chief Technology Officer and George Bloom, our Chief
Engineering Officer; and 2) Mark A. Smith serves as President of Projects
Group supervising the activities of Services Group personnel in this area and
Dominic Bassani, our Director-Special Projects and Strategic Planning (who
also consults to the Services Group and other Bion entities).
The Company's successful accomplishment of its business activities is
dependent upon many factors (see 'Forward-Looking Statements' above)
including without limitation the following, none of which can be assured at
this date:
* Successful development and completion of the first Project to
demonstrate the operation of a fully integrated, environmentally
compliant, Bion-based CAFO/ethanol Project at a profitable level; and
7
* Our ability to raise sufficient funds to allow us to finance our
activities; and
* Regulatory and enforcement policies at the Federal, State and local
levels.
INDUSTRY BACKGROUND
The traditional business model for CAFO's, regardless of livestock type,
has relied on a combination of: 1) a passive environmental regulatory regime,
and 2) access to a relatively unlimited supply of cheap land and water to
serve as the basis for "environmental" treatment of animal waste. Such land
and water resources have now become significantly more expensive while
ongoing consolidation of the CAFO industry has produced substantially
increased and more concentrated waste streams. At the same time, regulatory
scrutiny of, and public concern about, the environmental impact from CAFO's
has intensified greatly.
Agricultural runoff (including re-deposition of nitrogen from ammonia
off-gassing) is the largest water pollution problem in the United States.
Over-application of animal waste to cropland has resulted in manure nutrients
polluting surface and ground water systems, adversely impacting water quality
throughout the country including the Chesapeake Bay, the Great Lakes and the
Gulf of Mexico 'Dead Zone'. Clean-up initiatives for the Chesapeake Bay, the
Great Lakes and elsewhere are requiring the expenditure of substantial sums
of money to reduce excess nutrient pollution. In each such case, agriculture
in general and CAFO's in particular have been identified among the main
contributors of pollution. CAFO's are also significant emitters of
pollutants to air, with dairy CAFO's having been identified as the largest
contributor to airborne ammonia and other polluting gases in the San Joaquin
Valley and elsewhere and among the largest contributors to nutrient pollution
of the Chesapeake Bay. Note that a substantial volume of the nitrogen
released to the atmosphere from CAFO waste streams as ammonia and other
nitrogen gases emitted by CAFOs is then re-deposited to the ground and then
adds to nitrogen pollution of surface and ground water systems. Bion believes
that its patented and proven technology offers the only comprehensive
solution to the environmental impacts of these concentrated livestock waste
streams.
We believe Bion's technology can enable increased CAFO herd
concentration that is both economically and environmentally sustainable
because the technology removes nutrients from the waste streams generated by
animal operations at the source while dramatically reducing atmospheric
emissions. The resulting herd concentration potentially creates reduced
marginal costs for the CAFOs. More importantly, it results in a core Bion
technology platform that integrates environmental treatment and renewable
energy production and utilization with ethanol production thereby creating
the Company's Integrated Projects business opportunity.
Bion's technology platform and the resulting herd concentration, in
turn, potentially provide the opportunity to integrate a number of revenue
generating operations while maximizing the realized value of the renewable
energy production. The Bion Integrated Project model will access diversified
revenue streams through a balanced integration of herd and technologies to
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provide a hedge of the commodity risks associated with any of the separate
enterprises. We believe that Bion's Integrated Projects may generate
revenues and profits from one or more of the following items:
* Waste processing and technology licensing fees;
* Fees related to permanently integrated utilization of the wet
distiller grains, which are a by-product of ethanol production;
* Renewable energy production from the cellulosic biomass recovered
from the livestock waste streams combined with utilization of the
energy produced within the Integrated Projects;
* Ethanol production cost savings; and
* Various "environmental" credits.
Exactly what fees and revenues accrue to Bion will depend on the nature
of Bion's participation in each Integrated Project and on negotiations with
other participants in such Projects. If Bion is simply the operator of its
waste System within an Integrated Project that it develops, it would probably
generate revenue from: a) waste processing and technology licensing fees
charged to the CAFO, b) sales of renewable energy to the ethanol plant and/or
other facilities, c) fees related to the utilization of the wet distillers
grain made possible by the integration, d) fees for its "developer" role,
and/or e) sales of the fertilizer and/or other products generated from the
waste treatment process. If Bion also participates in the ownership and/or
operation of the ethanol plant, it would further generate revenue from sales
of ethanol and sales of feed products to the CAFO. Sales of distillers grain
as feed products generally represent 14-20% of the total revenues of an
ethanol plant if there is an available market for the distillers grain. If
Bion participates in the ownership and/or operation of the integrated CAFO
(and its facilities), we will also generate revenues from the sale of the
CAFO's end products. While it is possible that Bion would have a uniform
ownership interest throughout a Project, it is likely that in many cases Bion
will have differing ownership interests (from 0% to 100%) in each component
of an Integrated Project.
We believe that our technology platform and the proposed Projects do not
involve significant technology risk. Our waste handling technology is
modular and scalable, has been utilized efficiently in the past and has been
verified by peer-reviewed data. The other Project components required for an
integrated operation, such as CAFO facilities, ethanol plants and solids
separation, drying and combustion/gasification equipment, all consist of
available and fully-tested processes and equipment that do not pose any
experimental challenges once properly sized, selected and installed. It is
Bion's ability to integrate the component parts in a balanced proportion with
large CAFO herds and ethanol production in an environmentally sustainable
manner that creates this unique economic opportunity. Bion has a patent
pending relating to the Bion integration model described herein.
Bion has identified three primary market opportunities to potentially
develop Integrated Projects depending on the facilities that exist in a given
geographic region:
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Existing Processing: Our technology enables newly-permitted livestock
herds to be located near existing beef or dairy processing plants. A
dedicated herd with Bion environmental treatment will potentially create
the opportunity for the processor to brand finished products as being
'environmentally-responsible,' 'Green,' or 'locally-grown,' as well as
provide single sourcing for inputs resulting in improved food safety,
security and accountability. Locating the herd in close proximity to the
existing processing plant will likely substantially reduce its transpor-
tation costs and carbon footprint and the processing plant can purchase
and utilize the renewable energy Bion produces from the cellulosic
biomass recovered by Bion from the CAFO wastes.
Existing Ethanol: Newly-permitted livestock herds can be located near
existing ethanol plants that are struggling in the current economic
environment. In Bion's closed-loop livestock/ethanol model, a corn
ethanol plant serves as a feed mill for the livestock herd, the ethanol
plant(s) provides its distiller grain co-product to supplement the
herd's ration, eliminating the ethanol plant's traditional costs to dry,
market and ship its distiller grains. The ethanol plant(s) becomes an
onsite/local consumer of the renewable energy generated from the herd's
waste that replaces all of the remaining fossil fuel requirements of the
ethanol plant. Efficiency can be significantly increased since
integration enables three 'shots' at the corn: first ethanol is produced
from it, then it is fed to the cows, then renewable energy is produced
from the leftover cellulosic biomass extracted from the livestock waste
stream. Integration with Bion's technology platform has the potential
to more than triple the energy efficiency of corn ethanol production,
improving the generally-accepted net energy balance of 1.4 to 1 to
approximately 3.5-5 to 1 range (based on the Argonne National
Laboratories GREET model assessment of a similar integrated, closed-loop
project) -- similar to the efficiency targets publicly discussed for
future cellulosic ethanol production--and thereby greatly reduce the
carbon footprint.
Greenfield Projects: Bion will develop new state-of-the-art Projects in
selected locations that maximize economic advantages of the Projects'
partners. Bion's partners in these Projects will potentially realize
increased productivity and profits by capitalizing on the operational
and resource efficiencies of integration as described elsewhere herein.
Additionally, the facilities and processes of Greenfield Project
participants will be optimized to provide the greatest benefit to the
Project as a cooperative enterprise. Further market advantages may
result from strategic location, such as proximity to high-value product
markets, product branding, and economic development incentives,
subsidies and tax credits.
Although we have developed the structure and basic design work related
to Integrated Projects, we have not yet actually developed or operated an
Integrated Project. Further, we have not completed the development of all of
the System applications that will be necessary to address all targeted
markets (such as swine, poultry, etc.) and all geographic areas and we
anticipate a continuing need for the development of additional applications
and more efficient integration.
10
The basic integration in a fully integrated Project will probably
include:
* An ethanol plant and CAFO combination sized to balance the distillers
grain by-product of the ethanol production with the feed requirements
of the CAFO herd and to meet or exceed the energy needs of the
ethanol plant with the renewable energy produced by Bion from the
CAFO waste stream. Beyond the production of ethanol, the ethanol
facility will function as a feed mill for the CAFO herd which will
utilize the spent grain from ethanol production in its feed ration,
materially reducing the operating expenses (energy and
transportation) and capital expenditure requirements (for items such
as dryers) and increasing the net energy efficiency of ethanol
production;
* Additionally, the ethanol plant is potentially a source of waste heat
(which, if not productively utilized, would increase ethanol
production costs for required disposal) to be used to maintain
temperatures throughout the co-located Bion System. In colder
climates, additional uses of this waste heat will potentially include
heating some of the CAFO or other integrated facilities;
* Processing, drying and combusting/gasifying the recovered cellulosic
biomass portion of the CAFO's manure stream to produce heat used for
solids drying and to replace natural gas usage by the ethanol
production process and other co-located facilities;
* Drying and processing of the fine solids portion of the CAFO's waste
stream (if any) into a value-added, marketable, organic fertilizer
and/or high protein feed product ingredients; and
* Co-located end-product production facilities (cheese and/or other
dairy processors, beef processing facilities, etc.) that will
utilize the output of the CAFO and consume renewable energy produced
from the CAFO waste stream.
In order to implement this plan, Bion will need to work with CAFO's,
ethanol producers and/or end-product processors to generate multi-party
agreements pursuant to which the Integrated Projects will be developed and
which will provide that at least the following take place: a) the CAFO and
ethanol plant (and other facilities) agree to locate in geographic proximity
to each other, b) Bion licenses, constructs and operates its System to
process the CAFO's waste stream and produces renewable energy and other
products from the waste stream, c) the CAFO agrees to purchase and utilize
the wet distillers grain by-product of the ethanol plant in its feed ration
and d)the ethanol plant and/or end product facilities agree to purchase and
utilize the renewable energy produced by Bion from the CAFO waste stream in
the place of natural gas or other energy purchases. These agreements could
be in the form of joint ventures, in which all parties share the cost and
ownership of all facilities in the Integrated Project (in negotiated uniform
or varied manners across the various facilities), or in other forms of multi-
party agreements including agreements pursuant to which Bion would bear the
cost of construction of its System and the owners of the CAFO and the ethanol
plant would bear the cost of construction of the CAFO facilities and ethanol
plant, respectively, and negotiated contractual arrangements would set forth
11
the terms of transfer of products (wet distillers grain, combustible dried
solids, etc.), energy and dollars among the parties.
CORPORATE BACKGROUND
The Company is a Colorado corporation organized on December 31, 1987.
Our principal executive offices are located at the residence of our president
at 1774 Summitview Way, Crestone, Colorado 81131. Our primary telephone
number is 212-758-6622. We have no additional offices at this time.
DEVELOPMENT OF OUR BUSINESS
Substantially all of our business and operations to date has been
conducted through wholly owned subsidiaries, Bion Technologies, Inc. (a
Colorado corporation organized September 20, 1989), Bion Integrated Projects
Group, Inc. ("Projects Group") (formerly Bion Dairy Corporation ("Bion
Dairy") through August 2008 and originally Bion Municipal, Inc., a Colorado
corporation organized July 23, 1999) and Bion Services Group, Inc. ("Services
Group") (formerly Bion International, Inc., a Colorado corporation organized
July 23, 1999) and BionSoil, Inc. (a currently inactive Colorado corporation
organized June 3, 1996). Bion is also the parent of Dairy Parks, LLC (an
inactive Delaware entity organized July 25, 2001), Bion PA 1 LLC (a Colorado
entity organized August 14, 2008) and Bion PA 2 LLC (a Colorado entity
organized June 24, 2010). In January 2002, Bion entered into a series of
transactions whereby the Company became a 57.7% (now 58.9%) owner of
Centerpoint Corporation (a Delaware corporation organized August 9, 1995)
("Centerpoint").
Although we have been conducting business since 1989, we determined that
we needed to redefine how we could best utilize our technology during 2003.
From 2003 through early 2008, we primarily worked on technology improvements
and applications and in furtherance of our business model of Integrated
Project development. During 2008 we re-commenced pursuing active commercial
transactions involving installation of our Systems for CAFO waste treatment
and related environmental remediation and initiation of development of our
initial Integrated Projects.
Our original systems were wastewater treatment systems for dairy farms
and food processing plants. The basic design was modified in late 1994 to
create Nutrient Management Systems ("NMS") that produced organic soil
products as a byproduct of remediation of the waste stream when installed on
large dairy or swine farms. Through June 30, 2002, we sold and subsequently
installed, in the aggregate, approximately 30 of these first generation
systems in 7 states, of which we believe approximately 10 are still in
operation in 3 states. We discontinued marketing of our first generation NMS
systems during fiscal year 2002 and turned control of the first generation
systems over to the farms on which they were installed over the following two
years. We were unable to produce a business model based on the first
generation technology that would generate sufficient revenues to create a
profitable business. While continuing to market and operate the first
generation systems, during the second half of calendar year 2000, we began to
focus our activities on developing the next generation of the Bion
technology. We no longer operate or own any of the first generation NMS
systems.
12
As a result of our research and development efforts, the core of our
current technology was re-developed during fiscal years 2001-2004. We
designed and tested Systems that use state-of-the-art, computerized, real-
time monitoring and system control with the potential to be remotely accessed
for both reporting requirements and control functions. These Systems are
smaller, faster and require less capital per animal than our first generation
NMS systems. The initial versions of our new generation of Bion Systems was
designed to harvest solids used to produce organic fertilizer and soil
amendments or additives (the "BionSoil(R) products") in a few weeks as
compared to six to twelve months with our first generation systems.
During 2003-4 we designed, installed and began testing a commercial
scale, second generation Bion System as a temporary modification or retrofit
to a waste lagoon on a 1,250 milking cow dairy farm in Texas known as the
DeVries Dairy. In December 2004, Bion published an independently peer-
reviewed report, a copy of which may be found on our website,
www.biontech.com, with data from the DeVries project demonstrating a
reduction in nutrients (nitrogen and phosphorus) of approximately 75% and air
emissions of approximately 95%. More specifically, those published results
indicated that on a whole farm basis, the Bion System produced a 74%
reduction of nitrogen and a 79% reduction of phosphorus. The air results
show that the Bion System limited emissions as follows: (in pounds per 1,400
pound dairy cow per year):
* Ammonia 0.20
* Hydrogen Sulfide 0.56
* Volatile Organic Compounds 0.08
* Nitrogen Oxides 0.17
These emissions represented a reduction from published baselines of 95%-99%.
Through 2007 the demonstration project at the DeVries Dairy in Texas
also provided Bion with the opportunity to explore mechanisms to best
separate the processed manure into streams of coarse and fine solids, with
the coarse cellulosic solids/biomass supporting generation of renewable
energy and the fine solids potentially becoming the basis of organic
fertilizer products and/or a high protein animal feed ingredients. On-going
research was also carried out on various aspects of nutrient releases and
atmospheric emissions.
Bion discontinued operation of the DeVries demonstration research system
during 2008.
During 2005-2008, Bion focused on completing development of its
technology platform and business model. As such, we did not pursue near term
revenue opportunities such as retrofitting existing CAFO's with interim
versions of our waste management solutions, because such efforts would have
diverted scarce management and financial resources and negatively impacted
our ability to complete development of an integrated technology platform in
support of large-scale sustainable Integrated Projects.
We are currently pursuing two large market opportunities: 1) retrofit
and environmental remediation of existing CAFOs and 2) development of
Integrated Projects as described above.
13
We believe significant retrofit opportunities exist that will enable us
to generate additional future revenue streams from Bion's technology. The
initial retrofit opportunities we are pursuing are related to the existing
clean-up program for the Chesapeake Bay ('Chesapeake Bay Program' or 'CB
Program').
Chesapeake Bay Watershed: Kreider Farms Projects
The urgency and priority of the Chesapeake Bay Program was made clear
with President Obama's 2009 Executive Order concerning clean-up of the
Chesapeake Bay and the appointment of Chuck Fox by EPA Secretary Lisa Jackson
to act as a "czar" for CB cleanup efforts. In May 2010, EPA published their
overall strategy for remediating the Chesapeake Bay, and they have committed
to reducing nitrogen and phosphorus flows to the Bay sufficiently to enable
60% of the Bay watershed segments to meet water quality standards by 2025.
Today, 89 of the 92 Bay and tidal watershed segments are not in compliance
with water quality standards (97% out of compliance). EPA and associated
state agencies have also committed to short term 2 year compliance milestones
to enhance accountability and corrective actions, along with a host of
definable and measurable goals, enhanced partnerships, and major
environmental initiatives. Prior EPA documents defined the overall mission
as requiring an approximately 140 million pound annual reduction from
existing nitrogen (N) loading to the Chesapeake Bay (an approximately 44%
reduction from 315 million pounds of N per year to 175 million pounds of N
per year) by 2025 and the Company believes that in order to meet the current
goals the reduction will need to be that large (or larger) within that time
period (or a shorter period). Importantly, the timetable for compliance
appears to have been shortened which will likely require significantly
greater annual N reductions in earlier years for Pennsylvania, Maryland and
Virginia. As a result, Bion believes that its long term opportunity related
to the Chesapeake Bay clean-up has potentially been significantly expanded
and accelerated.
During 2008 Bion executed an agreement to install a Bion System at the
Kreider Dairy in Lancaster County, Pennsylvania to reduce nitrogen (including
ammonia emissions which are re-deposited as nitrogen from the atmosphere) and
phosphorus in the farm's effluent. Bion undertook this project due in large
part to Pennsylvania's nutrient credit trading program, which was established
to provide cost-effective reductions of the excess flow of nutrients
(nitrogen and phosphorus) into the Chesapeake Bay watershed. Bion worked
extensively with the Pennsylvania Department of Environmental Protection
('PADEP') over the past year to establish a nutrient credit calculation/
verification methodology that is appropriate to Bion's proven technology and
recognizes its 'multi-media' (both water and atmospheric) approach to
nutrient reductions. Pennsylvania's nutrient credit trading program allows
for voluntary credit trading between a 'non-point source' (such as a dairy or
other agricultural sources) and a 'point source' polluter, such as a
municipal waste water treatment plant or a housing development. For example,
pursuant to this program, Bion can reduce the nutrients from an existing
dairy (below its baseline discharge levels) much more cost-effectively than a
municipal wastewater treatment plant can reduce nutrients to meet its
baseline. The municipal facility can purchase credits from Bion to offset its
nutrient discharges, rather than spending significantly more money to make
the plant upgrades necessary to achieve its own reductions.
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During May 2008, the PADEP approved Bion's protocols to determine how
many tradable nutrient (nitrogen and phosphorus) credits Bion will receive
for nutrient reductions achieved through installation of its comprehensive
dairy waste management technology in Phase 1 of the Kreider project pursuant
to Pennsylvania's efforts under the Chesapeake Bay Program mandates (with
Phase 2 being the integration of the treatment system with Kreider's poultry
manure and the development of a renewable energy production facility). During
April 2010, the PADEP issued an amended certification. The DEP's approval
enables the certification of credits both for ammonia air emission reductions
as well as significantly reducing the leaching and runoff potential of land
applied nutrients. The PADEP has certified the proposed System at Kreider
dairy for 107 nitrogen and 13 phosphorus credits (each credit represents an
annual pound of reduction) for each of the 1,200 dairy cows (subject to
testing and verification after operations have been stabilized).
During August 2010, Bion PA 1, LLC received a permit from the PADEP to
authorize the construction of the Bion Nutrient Management Facility
('System') at Kreider Dairy Farm. Design and engineering work is underway
and the Company will soon commence pre-construction activities including
ordering of equipment for the System and execution of various related
agreements. It is anticipated that construction will commence on the System
in the next 45 days and that the System will become operational by Spring
2011.
During January 2009 the Board of the Pennsylvania Infrastructure
Investment Authority ('Pennvest') approved a loan of up to $7.8 million to
Bion PA 1, LLC, a wholly-owned subsidiary of the Company, for development and
construction of the Kreider Nutrient Management Facility at Kreider Dairy
Farm ('Kreider System') of Bion's Kreider Farms projects ('Pennvest Loan').
The Pennvest Loan is structured in phases (pre- and post-completion of
design/construction bids) and Pennvest's disbursements will take the form of
reimbursement of qualified sums expended by Bion PA 1, LLC. In connection
with the Pennvest Loan the Company has provided a 'technology guaranty'
regarding nutrient reduction performance of the Kreider System which
'technology guaranty' will expire when the Kreider System's nutrient
reduction performance has been demonstrated. The Company anticipates that the
initial settlement/closing of the Pennvest Loan will take place within 30-45
days and that Bion will submit its initial request for drawdown/reimbursement
to Pennvest shortly thereafter. It is anticipated that the initial
drawdown/re-imbursement from Pennvest pursuant to the Pennvest Loan will be
received within approximately 60-90 days.
Bion's agreements with Kreider Farms provide for a second phase which
will expand the initial system to treat the waste from the Kreider dairy
support herd, treat the waste from Kreider's approximately 4.6 million
chickens and construct a renewable energy production facility that will
generate renewable energy through the combustion/gasification of the poultry
wastes and the cellulosic biomass captured by Bion in the Phase 1 System
('Kreider Renewable Energy Facility'). This opportunity will be pursued
through Bion PA 2, LLC. During August 2010 the Company filed its application
for nutrient credits with the PADEP related to the Kreider Renewable Energy
Facility. Bion will work with the PADEP to finalize credit protocols related
to the Kreider Renewable Energy Facility which will generate renewable energy
from the dairy solids/biomass produced in the Kreider Phase 1 System and
poultry waste from Kreider's poultry operations (and possibly other poultry
15
operations in the region). The review process to clarify certain issues is
under way. The Company does not yet have financing in place for the Kreider
Renewable Energy Facility.
Bion anticipates that the Kreider System and Kreider Renewable Energy
Facility will generate revenue from sale of nutrient credits, renewable
energy and, in time, credits for the reduction of greenhouse gas emissions.
Bion estimates that treatment of Kreider's combined dairy and poultry waste
will ultimately produce approximately 1.0-1.5 million (or more) tradable
nutrient credits annually, with the potential of additional nutrient credits
to be generated from the treatment of waste from other livestock operations
located in the area.
Note that a 2008 independent study commissioned by the Pennsylvania
State Senate estimates that capital costs of $1.4 billion plus $60 million
annual operating costs (which yields an amortized average cost of
approximately $28 per lb nitrogen reduction per year) will be required to
upgrade the municipal wastewater treatment plants in Pennsylvania to meet the
initial standards then in place to meet programmatic mandates set by the
Chesapeake Bay Program (which mandates appear to have been increased and
accelerated). Bion anticipates that it will be able to profitably sell
nutrient credits from its Kreider facilities (and subsequent projects) for an
annual total cost in the range of $6-$10 per lb - roughly the equivalent of
the projected municipal wastewater upgrade annual operating costs alone -
thereby creating potential saving to Pennsylvania ratepayers of most of the
$1.4 billion capital cost required for wastewater treatment plant nitrogen
reduction upgrades, if Bion's technology were utilized to offset all of the
required nitrogen reductions (which is not likely) under the Pennsylvania
portion of the Chesapeake Bay Program.
Bion estimates that the overall market opportunity for Bion in the
Chesapeake Bay watershed is large and of long duration. While regulatory and
enforcement policy is still evolving and, therefore, the impact of those
future policies upon Bion's operations cannot be precisely predicted and/or
fully quantified, Bion believes that the tremendous difference between its
cost to remove nutrients from a concentrated livestock manure waste stream
and the cost required for reduction of nutrients from diluted conventional
waste water and storm water treatment technologies makes it reasonable to
believe that Bion's potential profitability from these projects should be
significant. Based on the aggregate size of livestock operations in the
Chesapeake Bay watershed, Bion believes that the potential market for
reductions in nitrogen loadings to the Chesapeake Bay watershed from
livestock can be reasonably anticipated to increase tenfold (or more) to
total in excess of 75 million (or more) pounds annually (including airborne
ammonia) over the next decade with certified tradable nutrient credits
potentially generated equaling 50% to 60% of that aggregate required nitrogen
reduction. Bion hopes to capture some significant portion of the work related
to this clean-up mandate (which portion cannot be reasonably estimated at
this time).
Bion also believes that it is reasonable to assume that the Chesapeake
Bay Program strategies developed by US EPA and various state regulatory
agencies to address the issue of excess nitrogen loadings to the Chesapeake
Bay watershed clean-up will be subsequently applied to deal with the much
larger nutrient pollution problems of the Mississippi River Basin that are a
16
primary cause of the 'Dead Zone' in the Gulf of Mexico and similar problems
in the Great Lakes and elsewhere. We believe that Bion will potentially have
large business opportunities for utilization of its technology as efforts to
clean up such polluted areas develop but such opportunities are not
quantifiable at this time.
Integrated Projects
Bion's remains focused on implementation of its integrated technology
platform as the basis for development of its large-scale Integrated Projects.
Bion will pursue this opportunity through our Projects Group subsidiary (and
project specific subsidiaries/entities) which will act as the developer and
manager of, and a direct participant in and/or owner of components of, the
Projects. As such, Bion will:
* locate, secure and develop appropriate sites;
* negotiate agreements with both input providers and, in certain
instances, end-product users;
* secure required permits and other approvals based upon clear
standards that establish acceptable environmental operating
parameters for each component of the Integrated Projects;
* manage construction and operation of the Projects; and
* provide its waste treatment services to CAFO operators in the
Projects for a fee while producing renewable energy for on-site use
(including sale to the integrated biofuel and/or end product
facilities) and/or third party sale, and, possibly, fine solids
products for sale.
In turn, the CAFO operator will use the wet distiller grains from the
ethanol plant as a feed component for the herd at a long-term competitive
price. The CAFO facilities, which will be subject to permits imposing
standards limiting their emissions and releases, can be owned either by the
CAFO operator or by an independent third party finance source and
subsequently leased to the CAFO operator. The CAFO operator will be
responsible to provide its herd and operate the CAFO.
In some instances, Bion will own direct interests in the CAFO herd,
ethanol plant, end-product user and/or the related facilities in addition to
its ownership interest in the Bion System.
During fiscal 2008 Bion began pre-development work on an Integrated
Project comprised of a large-scale beef cattle finishing operation and an
ethanol production facility to be located in upstate New York. Bion was
initially focused on St. Lawrence County but more recently has explored
opportunities in other nearby upstate regions including Oswego County which
has an existing ethanol production facility. No final decision has yet been
made as to where (if anywhere) the initial New York State Project will be
located. Bion believes its proposed closed loop upstate New York Integrated
Projects will have substantial competitive advantages due to the overall
scale and gains in resource efficiency, branding opportunities, and proximity
to a market consisting of 50 million people within a 350 mile radius as well
17
as export potential through the St. Lawrence Seaway. Bion's current
preliminary plans call for Phase 1 of this Project to include approximately
72,000 beef cattle with a dedicated slaughter and cooking (further
processing) facility and an ethanol plant (existing or newly constructed)
integrated with the herd. Bion anticipates that renewable energy produced
from the cellulosic biomass that Bion's technology recovers from the
livestock waste stream will replace most (if not all) of the fossil fuel
needs of the ethanol production and other integrated facilities. Bion
estimates that the basic capital expense for the NYS project will be not less
than $200 million and that the Project, if developed, will result in the
creation of 350 to 400 (or more) permanent long term jobs. Note that this
Project has not yet emerged from the pre-development phase, no land or
permits for the Project have been acquired and Bion has no commitments from
anyone related to financing or participation in this Project and that no such
Project has yet been developed by Bion (or others). This project is currently
in the pre-development phase. However, Bion anticipates that it may option
land and commence the actual development phase during the current fiscal
year.
In addition to the NYS beef cattle Project described above, Bion has
been working with various local and state agencies in Nebraska, Pennsylvania
and elsewhere to develop a large scale integrated beef and/or dairy/cheese
Integrated Projects that would require capital expense estimated to be in the
range of $120 million to in excess of $750 million and would potentially
generate 300 or more jobs for beef-based projects and 700 to 850 full time
permanent jobs for dairy/cheese based projects. A dairy/cheese-based
Project would integrate multiple, newly constructed, very large-scale dairy
complexes with a new dedicated milk processing/cheese production facility
and, most likely, one or more existing ethanol production facilities.
Preliminary plans under discussion involve up to 80,000 milking cows
(requiring approximately 140,000 total head including the dairy support herd
and steers) to be located on several satellite farms with waste treated by
Bion's technology to assure environmental compliance and to produce renewable
energy for use in the integrated facilities to replace fossil fuel
requirements. Bion has been involved in discussions regarding such a
dairy/cheese project with Nebraska state development officials, as well as a
large cheese producer/distributor and major dairy industry participants.
Additionally, Bion has been involved in discussions related to a beef-based
Project with Pennsylvania state development officials. Note that these
Projects have not yet emerged from the early pre-development phase, no land
or permits for either of these Projects has been acquired and Bion has no
commitments from anyone related to financing or participation in such
Projects and that no such Project has yet been developed by Bion (or others).
These projects are in very early stages.
In addition, Bion has had preliminary discussions with several
nationally- and internationally-known food producers, processors, and
distributors, regarding use of its technology to develop Projects which
integrate new livestock herds with both existing and new processing
facilities in order to improve their economic efficiencies, reduce
environmental impacts and carbon footprint, produce branding opportunities
and address food-safety concerns.
At present it is not possible to determine whether any of the Projects
referred to above will move to the development phase, will actually be
18
developed and constructed, or precisely what, if any, the economic returns
and/or profitability for such Integrated Projects (and/or for Bion in
connection therewith) will be due to the pre-development stage of each
Project and numerous unknown variables related to future financing and
partnering terms, as well as the availability of existing and proposed
economic development incentive plans for which such Projects may qualify.
However, Bion strongly believes that the economic efficiencies of these
closed loop Integrated Projects will potentially increase the annual returns
by 5 percentage points (or more) over the existing dairy/livestock/food
industry metrics. In basic commodity businesses such as food products and
ethanol production, such an increase, if realized, represents a very
significant economic advantage which Bion believes will result in
advantageous financing terms and in clearly superior profitability for its
Integrated Projects.
RECENT FINANCINGS
SERIES B CONVERTIBLE PREFERRED STOCK (2009)
On July 29, 2009 the Company concluded a private offering in which we
sold 28,170 shares of its Series B Convertible Preferred Shares ('Series B
Preferred Shares') and received net proceeds of approximately $2,450,000
after commissions and offering expenses. The Company sold 21,320 Series B
Preferred Shares through June 30, 2009 for net proceeds of approximately
$1,854,840 with the balance sold thereafter. The Series B Preferred Shares
pay a dividend of 2.5% per quarter (pro-rated), are convertible into our
common shares at $2.00 per share and will be redeemed at 3 years if not
previously converted.
SERIES C CONVERTIBLE PREFERRED STOCK (2010)
During April 2010 the Company concluded a private offering in which we
sold 15,400 shares of its Series C Convertible Preferred Shares ('Series C
Preferred Shares') and received net proceeds of approximately $1,339,800
after commissions and offering expenses. The Company sold 2,600 Series C
Preferred Shares through June 30, 2010 in a second offering for net proceeds
of approximately $226,200. Through final closing on September 17, 2010 an
additional 4,800 shares of Series C Preferred Stock were sold for net
proceeds of approximately $417,600 for total net proceeds of approximately
$643,800 from the sale of 7,400 shares of Series C Preferred Stock in the
second offering. The Company has 22,800 shares of Series C Preferred Stock
outstanding as of this date. The Series C Preferred Shares pay a dividend of
2.5% per quarter (pro-rated), are convertible into our common shares at $4.00
per share and will be redeemed at 3 years if not previously converted. The
Company has the right to call for the redemption of the Preferred Shares one
year after the issuance of the initial Series C Preferred Shares and, if Bion
initiates such a call for redemption, the holders of the Preferred Shares
have the right to convert the Preferred Shares to common stock prior to such
redemption.
SALES OF COMMON STOCK DURING 2009 and 2010 FISCAL YEARS
During the fiscal year ended June 30, 2009 the Company sold 446,667
shares, in aggregate, of its restricted common stock for $380,000 of cash
(net proceeds). Additionally the Company issued 290,343 shares of its
19
restricted common stock, in aggregate, for $177,370 of services. The Company
also issued 318,780 shares, in aggregate, of its restricted common stock in
conversion of $239,083 of its debt to equity.
During the fiscal year ended June 30, 2010 the Company sold 8,769
shares, in aggregate, of its restricted common stock for $13,153 of cash (net
proceeds). Additionally the Company issued 306,990 shares of its restricted
common stock, in aggregate, for $511,527 of services. The Company also issued
315,449 shares, in aggregate, of its restricted common stock in conversion of
$255,010 of its debt to equity.
COMPETITION
There are a significant number of competitors in the waste treatment
industry who are working on animal related pollution issues. This competition
is increasing with the growing governmental and public concern focused on
pollution due to CAFO wastes. Waste treatment lagoons which depend on
anaerobic microorganisms ("anaerobic lagoons") are the most common
traditional treatment process for animal waste on large farms within the
swine and dairy industries. Additionally, many beef feedlots, poultry
facilities and dairy farms simply scrape and accumulate manure for later
field application. Both lagoon and scrape/pile manure storage approaches are
coming under increasing regulatory pressure due to associated odor, nutrient
management and water quality issues and are facing possible phase-out in some
states. Although we believe that Bion has the most economically and
technologically viable solution for the current problems, other alternative
(though partial) solutions do exist including, for example, synthetic lagoon
covers (which are placed on the top of the water in the lagoon to trap the
gases), methane digesters (a tank which uses anaerobic microorganisms to
break down the waste to produce methane), multistage anaerobic lagoons and
solids separators (processes which separate large solids from fine solids).
Additionally, many efforts are underway to develop and test new technologies.
Our ability to compete is dependent upon our ability to obtain required
approvals and permits from regulatory authorities and upon our ability to
introduce and market our Systems in the appropriate industry and geographic
segments.
There is also extensive competition in the livestock, ethanol
production, biomass renewable energy, organic soil amendment/fertilizer/
organic fertilizer and feed ingredient markets. There are many companies
that are already selling products to satisfy demand in the sectors of these
markets we are trying to enter. Many of these companies have established
marketing and sales organizations and customer commitments, are supporting
their products with advertising, sometimes on a national basis, and have
developed brand name recognition and customer loyalty in many cases.
Additionally, a number of companies, including without limitation, Panda
Ethanol, E3 BioFuels and Prime BioSolutions, are, or have in the past,
pursued, with limited success to date, the development of various forms of
"closed loop" projects which combine CAFOs and ethanol plants and utilize the
CAFO waste stream to produce energy for the ethanol plant and the CAFO herd
to consume the distillers grain by-product of the ethanol production. While
a very limited number of entities (including those named above) have
announced projects and/or solutions that sound similar to the Company's
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Integrated Projects with limited success to date, there appear to be
significant differences including without limitation, the use of technology
that is based on either manure 'gasification' or capturing methane from the
waste stream using anaerobic digesters (ADs), which technologies do not
reduce polluting nutrient releases and/or gaseous emissions in the manner or
to the extent that Bion's technology reduces such negative environmental
impacts. Further, although ADs do produce methane that can be used to
replace some or all of the natural gas requirement of an ethanol plant, the
AD process produces only about one third of the energy per animal that Bion
believes will be produced by its technology platform from the biomass
extracted from the CAFO waste stream based on Bion's internal analysis. None
of the technologies of which the Company is aware appear to represent
solutions to the nutrient and atmospheric environmental problems of CAFOs
addressed by Bion's technology, or have any independent data supporting
claimed environmental benefits, and, therefore, the Company believes that
their potential projects will be limited to locations in which CAFOs have
already been permitted and limited to the existing CAFO size.
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
In our Integrated Projects business, we will most likely be dependent
upon one or a few major customers/partners/joint venturers since a limited
number of Integrated Projects will be developed. We anticipate initially
developing, owning interests in, and operating only one or a few fully
Integrated Projects commencing during fiscal 2011, and, thereafter,
developing a limited number of Projects at a time. Thus, at least for the
near future, our revenues will be dependent on a few major Projects or
customers.
PATENTS
We are the sole owner of four currently active United States patents
(numbered below), one Australian patent, one Canadian patent, one patent from
Mexico and one New Zealand patent:
1* U.S. Patent No. 6,689,274, Low Oxygen Waste Bioconversion System,
expires November 2020.
2* U.S. Patent No. 6,908,495, extension of Low Oxygen Waste
Bioconversion System, expires June 2023.
3* U.S. Patent No. 7,431,839 - 10/7/08: Low Oxygen Biologically
Mediated Nutrient Removal; expires December 2021.
4* U.S. Patent No. 7,575, 685 - 8/18/09: Low Oxygen Biologically
Mediated Nutrient Removal." expires November 2023.
* Australian Patent No. 2002227224, Low Oxygen Organic Waste
Bioconversion System; expires November 8, 2021.
* Canadian Patent No. 1,336,623, Aqueous Stream Treatment Process,
expires August 2012.
* New Zealand Patent No. 526,342, Low Oxygen Organic Waste
Bioconversion System, expires November 8, 2021.
* Mexican Patent No. 240,124, Low Oxygen Organic Waste Bioconversion
System, expires November 8, 2021.
* Mexican Patent No. 263,375, Low Oxygen Organic Waste Bioconversion
System, expires November 8, 2028.
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US Pending:
-----------
On November 3, 2006, we filed a patent application titled
"Environmentally Compatible Integrated Food and Energy Production System."
The application number is 11/592,511.
On August 17, 2009, we filed a patent application titled "Low Oxygen
Biologically Mediated Nutrient Removal." The application number is
12/542,122.
On February 25, 2010, we filed a patent application titled "Method for
Treating Nitrogen in Waste Streams." The application number is 12/713,011.
Canadian Pending:
-----------------
On November 8, 2001, we filed a patent application titled "Low Oxygen
Organic Waste Bioconversion System." The application number is 2428417.
First office action received on April 9, 2010.
On April 18, 2005, we filed a patent application titled "Low Oxygen
Biologically Mediated Nutrient Removal." The application number is 2503166.
First office action received on August 31, 2010.
European Union Pending:
-----------------------
On November 8, 2001, we filed a patent application titled "Low Oxygen
Organic Waste Bioconversion System." The application number is 1993586.5.
First office action received on June 8, 2010.
In addition to such factors as innovation, technological expertise and
experienced personnel, we believe that a strong patent position is
increasingly important to compete effectively in the businesses on which we
are focused. It is likely that we will file applications for additional
patents in the future. There is, however, no assurance that any such patents
will be granted.
It may become necessary or desirable in the future for us to obtain
patent and technology licenses from other companies relating to technologies
that may be employed in future products or processes. To date, we have not
received notices of claimed infringement of patents based on our existing
processes or products, but due to the nature of the industry, we may receive
such claims in the future.
We generally require all of our employees and consultants, including our
management, to sign a non-disclosure and invention assignment agreements upon
employment with us.
RESEARCH AND DEVELOPMENT
During the years ended June 30, 2010 and June 30, 2009, respectively, we
expended approximately $194,000 and $357,000 (including non-cash stock-based
compensation expenditures) on research and development activities related to
our technology platform applications in support of large-scale, economically
and environmentally sustainable Integrated Projects and remediation
activities. Bion's main efforts were directed at further refinement of our
22
technology and its applications. In addition, substantial research and
development activity was focused on design and refinement of all aspects of
the technology and integration engineering related to the energy balances,
renewable energy production and on-site utilization, related to Integrated
Project issues and our business model. Research activities have focused on
factors related to renewable energy production from CAFO waste including
coarse solid recovery, drying and use for renewable energy production, as
well as fine solids recovery, drying and utilization as fertilizer and/or
animal feed. The sums expended on research and development were focused on
substantially the same areas as in the prior year but were reduced compared
to the years prior to 2009 due to the fact that during the 2009 fiscal year a
greater portion of the Company's activities were focused on commercialization
and business development based on our technology.
Environmental Protection/Regulation
In regard to development of Projects, we will be subject to extensive
environmental regulations related to CAFO's and ethanol production. To the
extent that we are a provider of systems and services to others that result
in the reduction of pollution, we are not under direct enforcement or
regulatory pressure. However, we are involved in CAFO waste treatment and
are impacted by environmental regulations in at least four different ways:
* Our marketing and sales success depends, to a substantial degree,
on the pollution clean-up requirements of various governmental
agencies, from the Environmental Protection Agency (EPA) at
the federal level to state and local agencies;
* Our System design and performance criteria must be responsive to
the changes in federal, state and local environmental agencies'
effluent and emission standards and other requirements;
* Our System installations and operations require governmental permits
and/or other approvals in many jurisdictions; and
* To the extent we own or operate Integrated Projects including
CAFO facilities and ethanol plants, those facilities will be
subject to environmental regulations.
EMPLOYEES
As of September 15, 2010, we had 12 employees and primary consultants,
10 of whom are performing services for the Company on a full-time basis and 2
of whom (Jeff Kappel and Edward Schafer) provide consulting services to the
Company on a part-time basis at this time. Our future success depends in
significant part on the continued service of our key technical and senior
management personnel. The competition for highly qualified personnel is
intense, and there can be no assurance that we will be able to retain our key
managerial and technical employees or that we will be able to attract and
retain additional highly qualified technical and managerial personnel in the
future. None of our employees is represented by a labor union, and we
consider our relations with our employees to be good. None of our employees
is covered by "key person" life insurance.
23
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
The Company maintains its corporate office at Box 566/1774 Summitview
Way, Crestone, Colorado 81131, the office of its president, and its main
corporate telephone number is: (212) 758-6622. The Company remains
responsible for its former corporate offices at 641 Lexington Ave, New York,
New York 10022 which are currently subleased to Mr. Salvatore Zizza, former
Chairman and director of the Company's Integrated Projects subsidiary. These
offices are leased pursuant to a non-cancellable operating lease that became
effective on August 1, 2006 and expires on November 30, 2013. The average
monthly rental for the balance of the term of the lease is $15,820. The
master sub-lease with Mr. Zizza, presently not an affiliate of the Company,
presently pays the Company's entire obligations under this lease through
November 30, 2013.
The Company holds four currently active United States patents, one
Canadian patent, two patents from Mexico, one patent from Australia and one
New Zealand patent as described above. Three U.S. patent applications have
been filed and are pending and one application is pending in each of Canada
and the European Union.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently involved in any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a) Market Information
Our common stock is quoted on the Over-The-Counter Electronic Bulletin
Board under the symbol "BNET." The following quotations reflect inter dealer
prices, without retail mark up, markdown or commissions and may not represent
actual transactions.
2009 2010
-------------- -------------
Fiscal Year Ended June 30, High Low High Low
-------------------------- ---- ----- ----- -----
First Fiscal Quarter $2.74 $1.72 $2.72 $0.85
Second Fiscal Quarter $2.10 $0.55 $2.77 $1.62
Third Fiscal Quarter $1.25 $0.64 $2.27 $1.54
Fourth Fiscal Quarter $1.90 $0.76 $2.39 $1.20
(b) Holders
The number of holders of record of our common stock at August 31, 2010
was approximately 1,650. Many of our shares of common stock are held by
brokers and other institutions on behalf of stockholders, so we are unable to
estimate the number of stockholders represented by these record holders.
The transfer agent for our common stock is Corporate Stock Transfer,
Inc., 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209.
(c) Dividends
We have never paid any cash dividends on our common stock. Our board of
directors does not intend to declare any cash dividends in the foreseeable
future, but instead intends to retain earnings, if any, for use in our
business operations. The payment of dividends, if any, in the future is
within the discretion of the board of directors and will depend on our future
earnings, if any, our capital requirements and financial condition, and other
relevant factors.
During fiscal year 2009 the Company paid an aggregate dividend of
$12,877 on Series B Preferred Stock which was outstanding during the year.
During fiscal year 2010 the Company paid an aggregate dividend of $275,067
and $59,538, respectively, on shares of Series B Preferred Stock and Series C
Preferred Stock which were outstanding during the year.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
In June 2006 the Company adopted its 2006 Consolidated Incentive Plan,
as amended ("Plan"), which terminated all prior plans and merged them into
the Plan. The Plan was ratified by the Company's shareholders in October
2006. Under the Plan, Directors may grant Options, Stand Alone Stock
25
Appreciation Rights ("SAR's"), shares of Restricted Stock, shares of Phantom
Stock and Stock Bonuses with respect to a number of Common Shares that in the
aggregate does not exceed 6,000,000 shares. The maximum number of Common
Shares for which Incentive Awards, including Incentive Stock Options, may be
granted to any one Participant shall not exceed 500,000 shares in any one
calendar year; and the total of all cash payments to any one participant
pursuant to the Plan in any calendar year shall not exceed $500,000.
2,803,333 Options have been granted and are outstanding under the Plan (as
amended), including all options granted under prior merged plans, 250,000
options to certain employees that will be granted upon the execution of new
employment agreements, 232,500 options to certain employees that have expired
but will be extended upon the execution of new employment agreements and
50,000 options granted on August 31, 2010. Of the 2,803,333 options,
2,233,333 are vested as of September 1, 2010. Additionally, 465,000 shares of
Contingent Stock Bonuses (none of which are vested) and 150,000 shares of
Stock Bonuses have been granted under the Plan, of which 80,000 are vested as
of September 1, 2010.
Equity Compensation Plan Information
The following table summarizes share and exercise price information
about the Company's equity compensation plans as of June 30, 2010:
--------------------------------------------------------------------------------------
Number of
Number of securi- securities remain-
ties to be issued Weighted-average ing available for
upon exercise of exercise price of future issuance
outstanding options, outstanding options, under equity
warrants and rights warrants and rights compensation plans
Plan Category (a) (b) (c)
--------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 2,270,833 $2.85 3,729,167
--------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders - - -
--------------------------------------------------------------------------------------
Total 2,270,833 $2.85 3,729,167
--------------------------------------------------------------------------------------
(e) Recent Sales of Unregistered Securities:
During April 2010 the Company concluded a private offering in which we
sold 15,400 shares of our Series C Convertible Preferred Shares ('Series C
Preferred Shares')and received net proceeds of approximately $1,339,800 after
commissions and offering expenses. The Company sold 2,600 Series C Preferred
Shares through the June 30, 2010 interim closing of the second offering for
net proceeds of approximately $226,200 in a second offering. Through final
closing on September 17, 2010, an additional 4,800 shares of Series C
Preferred Stock were sold for net proceeds of approximately $417,600 for
total net proceeds of approximately $643,800 from the sale 7,400 shares of
26
Series C Preferred Stock in the second offering. The Company has 22,800
shares of Series C Preferred Stock outstanding as of this date.
The Series C Preferred Shares were sold to accredited investors under Rule
506 of Regulation D under the Securities Act of 1933, as amended. The Series
C Preferred Shares pay a dividend of 2.5% per quarter (pro-rated), are
convertible into our common shares at $4.00 per share, may be redeemed by the
Company commencing one year after the initial sale in each offering and will
be redeemed at 3 years if not previously converted.
During the fiscal year ended June 30, 2010 the Company sold 8,769
shares, in aggregate, of its restricted common stock for $13,153 of cash (net
proceeds). Additionally the Company issued 306,990 shares of its restricted
common stock, in aggregate, for $511,527 of services. The Company also issued
315,449 shares, in aggregate, of its restricted common stock in conversion of
$255,010 of its debt to equity. In all of these transactions the Company
relied on the exemptions in Section 4(2) of the Securities Act of 1933, as
amended, and/or under Rule 506 of Regulation D under the Securities Act of
1933, as amended.
On July 29, 2009 the Company concluded a private offering in which we
sold 28,170 shares of its Series B Convertible Preferred Shares ('Series B
Preferred Shares')and received net proceeds of approximately $2,450,000 after
commissions and offering expenses. The Series B Preferred Shares were sold to
accredited investors under Rule 506 of Regulation D under the Securities Act
of 1933, as amended. The Company sold 21,320 Series B Preferred Shares
through June 30, 2009 for net proceeds of approximately $1,854,840 with the
balance sold thereafter. The Series B Preferred Shares pay a dividend of 2.5%
per quarter (pro-rated), are convertible into our common shares at $2.00 per
share and will be redeemed at 3 years if not previously converted.
During the fiscal year ended June 30, 2009 the Company sold 446,667
shares, in aggregate, of its restricted common stock for $380,000 of cash
(net proceeds). Additionally the Company issued 290,343 shares of its
restricted common stock, in aggregate, for $177,370 of services. The Company
also issued 318,780 shares, in aggregate, of its restricted common stock in
conversion of $239,083 of its debt to equity. In all of these transactions
the Company relied on the exemptions in Section 4(2) of the Securities Act of
1933, as amended, and/or under Rule 506 of Regulation D under the Securities
Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA.
N/A
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Included in ITEM 8 are the audited Consolidated Financial Statements for
the fiscal years ended June 30, 2010 and 2009 ("Financial Statements").
Statements made in this Form 10-K that are not historical or current
facts, which represent the Company's expectations or beliefs including, but
not limited to, statements concerning the Company's operations, performance,
financial condition, business strategies, and other information, involve
substantial risks and uncertainties. The Company's actual results of
27
operations, most of which are beyond the Company's control, could differ
materially. These statements often can be identified by the use of terms
such as "may," "will," "expect," "believe," anticipate," "estimate," or
"continue" or the negative thereof. We wish to caution readers not to place
undue reliance on any such forward looking statements, which speak only as of
the date made. Any forward looking statements represent management's best
judgment as to what may occur in the future. However, forward looking
statements are subject to risks, uncertainties and important factors beyond
our control that could cause actual results and events to differ materially
from historical results of operations and events and those presently
anticipated or projected.
These factors include adverse economic conditions, entry of new and
stronger competitors, inadequate capital, unexpected costs, failure to gain
product approvals in the United States (or particular states) or foreign
countries and failure to capitalize upon access to new markets. Additional
risks and uncertainties that may affect forward looking statements about
Bion's business and prospects include the possibility that a competitor will
develop a more comprehensive or less expensive environmental solution, delays
in market awareness of Bion and our Systems, or possible delays in Bion's
development of Projects and failure of marketing strategies, each of which
could have an immediate and material adverse effect by placing us behind our
competitors. Bion disclaims any obligation subsequently to revise any forward
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated
events.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes to Consolidated Financial
Statements filed with this Report.
BUSINESS OVERVIEW
For several years, the Company focused on completion of the development
of its second-generation technology which provides a comprehensive
environmental solution to a significant source of pollution in U.S.
agriculture, Confined Animal Feeding Operations ("CAFO's"), which development
is now substantially complete. Currently, Bion is focused on using
applications of its patented waste management technology to pursue two main
business opportunities: 1) environmental retrofit and remediation of the
waste streams of existing CAFOs in selected markets; and 2) to develop
Integrated Projects which will include large CAFOs, such as large dairies,
beef cattle feed lots and hog farms, with Bion waste treatment System modules
processing the aggregate CAFO waste stream from the equivalent of 40,000 or
more beef and/or dairy cows (or the waste stream equivalent of other species)
while recovering cellulosic biomass to be utilized for renewable energy
production (and potentially to be marketed as feed and/or fertilizer),
integrated with an ethanol plant capable of producing 40 (or more) million
gallons of ethanol per year and/or with CAFO end product processors.
The Company has commenced actively pursuing the opportunity presented by
environmental retrofit and remediation of the waste streams of existing
CAFOs. The first commercial activity in this area is an agreement with
Kreider Farms ("KF") in Pennsylvania to design, construct and operate Bion
Systems to treat KF's dairy and poultry waste streams to reduce nutrient
28
releases to the environment while generating marketable nutrient credits and
renewable energy. On January 26, 2009 the Board of the Pennsylvania
Infrastructure Investment Authority ('Pennvest') approved a $7.8 million
loan to Bion PA 1, LLC, a wholly-owned subsidiary of the Company, for the
initial stage of Bion's Kreider Farms project. After substantial
unanticipated delays over the past year, on August 12, 2010, the Company
received a permit for construction of the Phase 1 Kreider System.
Construction related activities and equipment ordering are expected to
commence during the next 30-45 days. The Company anticipates that the
initial settlement/closing of the Pennvest loan will take place during the
next 30 days and that we will submit our initial drawdown/reimbursement
request to Pennvest shortly thereafter. The Company presently anticipates
that the initial drawdown/reimbursement from Pennvest pursuant to the
Pennvest Loan will be received during the next 60-90 days. The Company
believes that the construction will be completed and the project will be
operational by Spring 2011. The Pennsylvania Department of Environmental
Protection recently re-certified the nutrient credits for this project.
Additionally, we believe that Bion's technology platform will allow the
integration of large-scale CAFO's and their end-product users, renewable
energy production from the CAFO waste stream, on site utilization of the
renewable energy generated and biofuel/ethanol production in an
environmentally and economically sustainable manner while reducing the
aggregate capital expense and operating costs for the entire integrated
complex ("Integrated Projects" or "Projects"). In the context of Integrated
Projects, Bion's waste treatment process, in addition to mitigating polluting
releases, generates renewable energy from cellulosic portions of the CAFO
waste stream which renewable energy can be utilized by integrated facilities
including ethanol plants, CAFO end-product processors (including cheese, ice
cream and/or bottling plants in the case of dairy CAFOs and/or slaughter
and/or processing facilities in the context of beef CAFOs) and/or other users
as a natural gas replacement. Note that an integrated ethanol plant's main
by-product, called distillers grain, can be added to the feed of the animals
in wet form thereby lowering the capital expenditures, operating, marketing
and shipping costs and energy usage of the ethanol production process. In
such cases, the ethanol plant would act as a feed mill for the integrated
CAFO, thus reducing the CAFO's feeding costs and generating revenue to the
ethanol plant, and also provides a market for the renewable energy that
Bion's System produces from the CAFO waste stream. Thus, such Bion Integrated
Projects can be denominated "closed loop". Bion, as developer of and
participant in Integrated Projects, anticipates that it will share in the
cost savings and revenue generated from these activities.
Bion is currently working with local, state and federal officials with
regard to regulatory and legislative initiatives and with such parties and
potential industry participants to evaluate sites in multiple states. The
Company has tentatively selected the Town of Schroeppel and Oswego County,
New York for its initial Integrated Project and anticipates optioning land in
that area during the current fiscal year or soon thereafter (although other
locations in upstate New York and in other states are also under review). In
addition, Bion intends to choose sites for additional Projects during the
remainder of calendar years 2010-2012 to create a pipeline of Projects.
Management has a 5-year development target (through calendar year 2016) of
approximately 12-24 Integrated Projects. At the end of that period, Bion
projects that 5 or more of these Integrated Projects will be in full
29
operation in 3-6 states, and the balance would be in various stages ranging
from partial operation to early permitting stage. No Integrated Project has
been developed to date.
The financial statements for the years ended June 30, 2010 and 2009 have
been prepared assuming the Company will continue as a going concern. The
Company has incurred net losses of approximately $2,976,000 and $1,318,000
during the years ended June 30, 2010 and 2009, respectively. At June 30,
2010, the Company had a working capital surplus and stockholders' deficit of
approximately $381,000 and $1,535,000, respectively. The report of the
independent registered public accounting firm on the Company's consolidated
financial statements as of and for the year ended June 30, 2010 includes a
"going concern" explanatory paragraph which means that the accounting firm
has expressed substantial doubt about the Company's ability to continue as a
going concern. Management's plans with respect to these matters are
described in this section and in our consolidated financial statements (and
notes thereto), and this material does not include any adjustments that might
result from the outcome of this uncertainty. There is no guarantee that we
will be able to raise the funds or raise further capital for the operations
planned in the near future.
CRITICAL ACCOUNTING POLICIES
Management has identified the following policies below as critical to
our business and results of operations. Our reported results are impacted by
the application of the following accounting policies, certain of which
require management to make subjective or complex judgments. These judgments
involve making estimates about the effect of matters that are inherently
uncertain and may significantly impact quarterly or annual results of
operations. For all of these policies, management cautions that future
events rarely develop exactly as expected, and the best estimates routinely
require adjustment. Specific risks associated with these critical accounting
policies are described in the paragraphs below.
Revenue Recognition
While the Company has not recognized any operating revenues for the past
two fiscal years, the Company anticipates that future revenues will be
generated from product sales, credit sales, technology license fees, annual
waste treatment fees and/or direct ownership interests in Integrated
Projects. The Company expects to recognize revenue from product sales when
there is persuasive evidence that an arrangement exists, when title has
passed, the price is fixed or determinable, and collection is reasonably
assured. The Company expects that technology license fees will be generated
from the licensing of Bion's Systems. The Company anticipates that it will
charge its customers a non-refundable up-front technology license fee, which
will be recognized over the estimated life of the customer relationship. In
addition, any on-going technology license fees will be recognized as earned
based upon the performance requirements of the agreement. Annual waste
treatment fees will be recognized upon receipt. Revenues, if any, from the
Company's interest in Projects will be recognized when the entity in which
the Project has been developed recognizes such revenue.
30
Compensation Cost for Options with Service Conditions and Graded Vesting
Schedules
The Company has issued non-employee options that include service
conditions and have graded vesting schedules. Generally for these
arrangements, the measurement date of the services occurs when the options
vest. Recognition of compensation cost for reporting periods prior to the
measurement date is based on the then current fair value of the options.
Fair value of the options is determined using a Black-Scholes option-pricing
model. Any subsequent changes in fair value will be recorded on the
measurement date. Compensation cost in connection with options that are not
fully vested is being recognized on a straight-line basis over the requisite
service period for the entire award.
Stock-based compensation
The Company follows the provisions of Accounting Standards Codification
718, which generally requires that share-based compensation transactions be
accounted and recognized in the statement of income based upon their fair
values.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued a new accounting standard which provides
guidance that, among other things, requires a qualitative rather than
quantitative analysis to determine the primary beneficiary of a variable
interest entity ("VIE"), which amends previous guidance for consideration of
related party relationships in the determination of the primary beneficiary
of a VIE, amends certain guidance for determining whether an entity is a VIE,
requires continuous assessments of whether an enterprise is the primary
beneficiary of a VIE, and requires enhanced disclosures about an enterprise's
involvement with a VIE. The adoption of this guidance (effective for the
Company July 1, 2010) is not expected to have a material impact on the
Company's consolidated financial statements.
In May 2009, the FASB established general standards for accounting and
disclosure of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. The
pronouncement required the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date, whether that date
represents the date the financial statements were issued or were available to
be issued. In February 2010, the FASB amended this standard. As a result,
the Company is no longer required to disclose in the financial statements
that the Company has evaluated subsequent events or disclose the date through
which subsequent events have been evaluated.
YEAR ENDED JUNE 30, 2010 COMPARED TO THE YEAR ENDED JUNE 30, 2009
General and Administrative
Total general and administrative expenses were $2,778,000 and $1,960,000
for the years ended June 30, 2010 and 2009, respectively.
General and administrative expenses, excluding stock-based compensation
charges of $464,000 and $25,000 for the years ended June 30, 2010 and 2009,
31
respectively, were $2,314,000 and $1,935,000 for the years ended June 30,
2010 and 2009, respectively, representing a $379,000 increase. Legal
expenses for the years ended June 30, 2010 and 2009 were approximately
$535,000 and $138,000, respectively. Legal fees were higher during the year
ended June 30, 2010 due to the hiring of an additional law firm to pursue
federal legislative initiatives related to development of our Integrated
Projects and remediation business opportunities in addition to ongoing work
related to our Kreider projects. Legal costs for the year ended June 30, 2009
were lower due to insurance reimbursements of legal costs relating to the
Centerpoint litigation. Accounting and tax fees were approximately $127,000
and $100,000 for the years ended June 30, 2010 and 2009, respectively. The
increase in accounting and tax fees for the fiscal year 2010 is attributable
to the costs associated with the preparation of three years of federal and
state tax returns. The Company also expensed $54,000 and $1,000 for the
years ended June 30, 2010 and 2009, respectively, in investor relations
related costs due to the increase in shareholders and investing activities
during the current fiscal year. Partially offsetting the higher legal,
accounting and tax and investor relations fees described above are reduced
salary and payroll expenses of $672,000 and $703,000 for the years ended June
30, 2010 and 2009, respectively. The decrease in salaries and related
payroll taxes is due to the fact that approximately $189,000 of salary and
payroll tax cost was capitalized as a direct cost of the KF project.
General and administrative stock-based compensation for the years ended
June 30, 2010 and 2009 consist of the following:
Year ended Year ended
June 30, 2010 June 30, 2009
------------- -------------
General and administrative:
Fair value remeasurement of options with
service conditions $ 92,000 $(184,000)
Fair value of stock options expensed under
ASC 718 307,000 209,000
Fair value of stock bonuses expensed 65,000 -
---------- ---------
Total $ 464,000 $ 25,000
========== =========
Stock-based compensation charges increased from $25,000 to $464,000 for
the years ended June 30, 2009 and 2010, respectively. The Company recognized
general and administrative expenses/(credits) of $92,000 and $(184,000) for
the remeasurement of options with service conditions. The increase is due to
the remeasurement of options with service conditions and changes in the fair
value of the options during the years ended June 30, 2009 and 2010. For the
year ended June 30, 2010 the Company recognized expense relating to the fair
value of stock options for general and administrative employees of $307,000,
compared to $209,000 for the year ended June 30, 2009. Compensation expense
relating to stock options was higher during the year ended June 30, 2010 due
to 275,000 options being granted during the year versus 75,000 options being
issued during the prior fiscal year. The Company also recognized general and
administrative expenses of $65,000 due to the issuance of stock bonuses
during the year ended June 30, 2010 which have vesting periods over a year.
There was no similar expense in the 2009 fiscal year.
32
Research and development
Total research and development expenses were $194,000 and $357,000 for
the years ended June 30, 2010 and 2009, respectively.
Research and development expenses, excluding stock-based compensation
charges of $17,000 and $118,000 for the years ended June 30, 2010 and 2009
were $177,000 and $239,000, respectively. The primary reason for the
decrease in research and development expenses during the year ended June 30,
2010 is due to the shift in the Company's focus from research and development
to pre-commercial and commercial activities related to its next generation
technology applications, therefore costs of various employees and consultants
(and their related activities) that were previously incurred as research and
development expense are now allocated to general and administrative expense.
Salary and payroll related taxes were $98,000 and $130,000 for the years
ended June 30, 2010 and 2009, respectively, and the decrease is due to the
expensing of previous research and development employees to general and
administrative expense and the capitalization salaries for the KF project.
Research and development stock-based compensation for the year ended
June 30, 2010 and 2009 consist of the following:
Year ended Year ended
June 30, 2010 June 30, 2009
------------- -------------
Research and development:
Fair value remeasurement of options with
service conditions $ - $ 65,000
Fair value of stock bonuses expensed 10,000 -
Fair value of stock options expensed
under ASC 718 7,000 53,000
-------- --------
Total $ 17,000 $118,000
======== ========
Stock-based compensation expense decreased from $118,000 for the year
ended June 30, 2009 to $17,000 for the fiscal year 2010. The decrease is due
to expensing options issued to employees who in the prior year were deemed to
be research and development and in the fiscal year 2010 were primarily
allocated to general and administrative and/or capitalized as part of the KF
Project.
Loss from Operations
As a result of the factors described above, the loss from operations was
$2,972,000 and $2,317,000 for the years ended June 30, 2010 and 2009,
respectively.
Other expense (income)
Other expense (income) was $4,000 and $(999,000) for the years ended
June 30, 2010 and 2009, respectively. Interest expense decreased to $2,000
for the years ended June 30, 2010 from $38,000 for the year ended June 30,
2009. Interest expense decreased due to lower interest bearing debt during
the year ended June 30, 2010. Interest income was $13,000 and $2,000 for the
33
years ended June 30, 2010 and 2009, respectively, and the increase is due to
higher interest bearing cash deposits due to proceeds from the sale of
Preferred Series B and C shares during the 2010 fiscal year. For the year
ended June 30, 2009, the Company recognized other income of $1,034,000 due to
the forfeiture of deferred compensation relating the cancellation of Mr.
Zizza's Notes of $959,000 and a $75,000 settlement with the Company's
directors and officers' liability insurance providers. For the year ended
June 30, 2010, the Company record $15,000 loss on extinguishment of debt due
to the modification the terms of a deferred compensation agreement.
Net loss attributable to the noncontrolling interest
The net loss attributable to the noncontrolling interest was $5,000 and
$6,000 for the years ended June 30, 2010 and 2009, respectively.
Net loss attributable to Bion's common stockholders
As a result of the factors described above, the net loss attributable to
Bion's common stockholders was $3,305,000 and $1,325,000 for the years ended
June 30, 2010 and 2009, respectively, resulting in the net loss per basic and
diluted common share for the years ended June 30, 2010 and 2009 of $0.28 and
$0.12, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements for the year ended June 30, 2010 have
been prepared on a going concern basis, which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course
of business. The Report of our Independent Registered Public Accounting Firm
on the Company's financial statements as of and for the year ended June 30,
2010 includes a "going concern" explanatory paragraph which means that the
auditors stated that conditions exist that raise substantial doubt about the
Company's ability to continue as a going concern.
As of June 30, 2010, the Company had cash and cash equivalents of
approximately $1,026,000. During the year ended June 30, 2010, net cash used
in operating activities was $2,084,000, 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 year ended June 30, 2010 the Company used $390,000 for the
purchase of property and equipment and the design and permitting of the KF
Project which has been capitalized as property and equipment. Cash of
$29,000 was provided due to the release of restricted funds during the year
ended June 30, 2010.
34
Financing Activities
During the year ended June 30, 2010, $13,000 of cash was provided from
the sale of the Company's restricted common stock, $596,000 was provided from
the sale of the Company's Series B preferred stock and $1,566,000 was
provided from the sale of the Company's Series C preferred stock. The Company
used $163,000 for the repayment of loans payable to affiliates and $218,000
and $20,000 was paid for Series B and Series C preferred dividends,
respectively.
As of June 30, 2010 the Company has significant debt obligations
consisting primarily of deferred compensation of $165,000. In addition, the
Company entered into an 88-month operating lease for office space in New York
City in August 2006, with an average monthly lease expense of $15,820. As of
June 30, 2010, the Company has 40 months remaining on the lease.
Plan of Operations and Outlook
As of June 30, 2010 the Company had cash and cash equivalents of
approximately $1,026,000. While the Company currently does not face a severe
working capital shortage, it is not currently generating any revenues. The
Company will need to obtain additional capital to fund its operations and
technology development, to satisfy existing creditors, to develop Projects
and to construct the KF facilities. In January 2009, the Board of
Pennsylvania Infrastructure Investment Authority approved a $7.8 million loan
to the Company for the initial stage of the KF Project. The Company received
a permit for construction of the KF Project on August 12, 2010. The Company
anticipates that construction related activities and equipment ordering
commenced will commence during the next 30-45 days. The Company anticipates
that the initial settlement/closing of the Pennvest loan will take place
within 30 days and that we will submit our initial drawdown/reimbursement
request shortly thereafter. The Company anticipates that the initial
drawdown/reimbursement from Pennvest will be received within 60-90 days.
The Company anticipates that it will seek to raise from $5,000,000 to
$50,000,000 (debt and equity) during the next twelve months. There is no
assurance, especially in the extremely unsettled capital markets that
presently exist, that the Company will be able to obtain the funds that it
needs to stay in business, finance its Projects and other activities,
continue its technology development and/or to successfully develop its
business.
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.
35
Currently, Bion is focused on using applications of its patented waste
management technology to pursue two main business opportunities: 1) to
develop Integrated Projects which will include large CAFOs, such as large
dairies, beef cattle feed lots and hog farms, with Bion waste treatment
System modules processing the aggregate CAFO waste stream from the equivalent
of 40,000 or more beef and/or dairy cows (or the waste stream equivalent of
other species) while producing solids to be utilized for renewable energy
production (and potentially to be marketed as feed and/or fertilizer),
integrated with an ethanol plant capable of producing 40 (or more) million
gallons of ethanol per year and/or integrated with CAFO end product
processors, and 2) environmental retrofit and remediation of the waste
streams of existing CAFOs in selected markets.
Bion is currently working with local, state and federal officials with
regard to regulatory and legislative initiatives and with such parties and
potential industry participants to evaluate sites in multiple states and
anticipates selecting a site for its initial Integrated Project during the
2010 fiscal year. The Company has tentatively selected the Town of Schroeppel
and Oswego County, New York for its initial Project and anticipates optioning
land in that area during the 2011 fiscal year or soon thereafter (although
other locations in upstate New York and in other states are also under
review). At present it is possible, but not certain, that the initial
Integrated In addition, Bion intends to choose sites for additional Projects
during the calendar years 2010-2012 to create a pipeline of Projects.
Management has a 5-year development target (through calendar year 2016) of
approximately 12-24 Integrated Projects. At the end of that period, Bion
projects that 6 or more of these Integrated Projects will be in full
operation in 3-6 states, and the balance would be in various stages ranging
from partial operation to early permitting stage. No Integrated Project has
been developed to date.
The Company has also commenced actively pursuing the opportunity
presented by environmental retrofit and remediation of the waste streams of
existing CAFOs in selected markets. The first commercial activity in this
area is the agreement with KF in Pennsylvania.
CONTRACTUAL OBLIGATIONS
We have the following material contractual obligations (in addition to
employment and consulting agreements with management and employees):
1) The Company executed a non-cancelable operating lease for office
space in New York City effective August 1, 2006 and extending to November 30,
2013. The average monthly rent expense under the lease is $15,820. The
Company has provided the lessor with a letter of credit in the amount of
$57,315 in connection with the lease as of June 30, 2010. The Company's
obligations under the lease are partially guaranteed by Salvatore Zizza,
former Chairman of Bion Projects. The Company has entered into sub-leases
with non-affiliated parties for approximately 32% of the obligations under
the lease. Effective January 1, 2009, Mr. Zizza entered into a Master
Sublease with the Company pursuant to which Mr. Zizza became a sublessee and
for a one year initial period, made all payments pursuant to the lease and
managed the lease premises. Rental payments from existing sub-tenants are
being deposited into a Company bank account such that Mr. Zizza utilizes
36
those funds towards the monthly lease payment. During November 2009, Mr.
Zizza exercised his option to continue the Master Sublease for the entire
period of the lease. Mr. Zizza fulfilled his obligations under the Master
Sublease during the one year initial period and in January 2010; he received
the funds from the release from the Company's letter of credit of $28,658.
Since Mr. Zizza exercised the option to continue the Master Sublease for the
entire term of the lease, Mr. Zizza will be entitled to the balance of funds
held under the letter of credit of approximately $57,000 if he fulfills his
obligations pursuant to the Master Sublease.
2) On September 27, 2008, the Company executed an agreement with
Kreider Farms (and its affiliated entities) (collectively "Kreider") to
design, construct and operate, through its wholly-owned subsidiaries, Bion
Services Group, Inc. ("Bion Services") and Bion PA-1 LLC ("LLC"), a Bion
system to treat the waste of the dairy cows (milkers, dry cows and heifers)
at the Kreider Dairy, located in Mannheim, Pennsylvania. In addition, the
agreement provides for a second phase which will include a renewable energy
facility that will treat cellulosic solid wastes from Phase 1 together with
the waste stream from Kreider's poultry facilities to produce renewable
energy for Bion's waste treatment facility and/or for market sales. The
system will be owned and operated by Bion through LLC, in which Kreider will
have the option to purchase a minority interest. To complete final design
work and all building, zoning and other related pre-construction matters,
substantial capital (equity and/or debt) has been and will continue to be
expended. Additional funds will be expended for construction. Upon
successful construction and operation of the system, the Company anticipates
that it will receive revenue from the sale of nutrient (and other)
environmental credits related to the Kreider system and through sales of
renewable energy generated at the Kreider system. On January 26, 2009 the
Board of the Pennsylvania Infrastructure Investment Authority approved a $7.8
million loan to Bion for "the construction of a livestock waste treatment
facility at Kreider Farms..." for the Phase 1 dairy portion of the Kreider
Farms projects. After substantial unanticipated delays over the past year,
on August 12, 2010, the Company received a permit for construction of the
Phase 1 Kreider System. Construction related activities and equipment
ordering commenced shortly thereafter. The Company anticipates that the
initial settlement/closing of the Pennvest loan will take place during the
next 30-45 days and that we will submit our initial drawdown/ reimbursement
request to Pennvest shortly thereafter. The Company presently anticipates
that the initial drawdown/re-imbursement from Pennvest pursuant to the
Pennvest Loan will be received during the next 60-90 days. The Company
believes the $7.8 million loan from Pennvest will be sufficient to fund the
anticipated construction costs and that the construction will be completed
and the project will be operational during the Spring of 2011. The
Pennsylvania Department of Environmental Protection recently re-certified the
nutrient credits for this project.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements (as that term is
defined in Item 303 of Regulation S-K) that are reasonably likely to have a
current or future material effect on our financial condition, revenue or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements are set forth on pages F-1 through
F-27 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
As of June 30, 2010, under the supervision and with the participation of
the Company's Chief Executive Officer and Principal Financial Officer (the
same person), management has evaluated the effectiveness of the design and
operations of the Company's disclosure controls and procedures. Based on
that evaluation, the Chief Executive Officer and Principal Financial Officer
concluded that the Company's disclosure controls and procedures were not
effective as of June 30, 2010 as a result of the material weakness in
internal control over financial reporting discussed below.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting that
occurred during the last fiscal quarter covered by this report that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in the
Securities Exchange Act of 1934 Rule 13a-15(f). Our Chief Executive Officer
and Principal Financial Officer (the same person) conducted an evaluation of
the effectiveness of our internal control over financial reporting based on
the framework in Internal Control - Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO
Framework").
Based on this evaluation, management has concluded that our internal
control over financial reporting was not effective as of June 30, 2010. Our
Chief Executive Officer and Principal Financial Officer concluded we have a
material weakness due to lack of segregation of duties. Our size has
prevented us from being able to employ sufficient resources to enable us to
have an adequate level of supervision and segregation of duties within our
internal control system. There is one person involved in the processing of
the Company's accounting and banking transactions and a single person with
overall supervision and review of the cash disbursements and receipts and the
overall accounting process. Therefore while there are some compensating
38
controls in place, it is difficult to ensure effective segregation of
accounting duties. While we strive to segregate duties as much as
practicable, there is an insufficient volume of transactions to justify
additional full time staff. As a result of this material weakness, we have
implemented remediation procedures whereby in May 2006 we engaged an outside
accounting and consulting firm with SEC and US GAAP experience to assist us
with the preparation of our financial statements, evaluation of complex
accounting issues and the implementation of systems to improve controls and
review procedures over all financial statement and account balances. We
believe that this outside consultant's review improved our disclosure
controls and procedures. If this review is effective throughout a period of
time, we believe it will help remediate the segregation of duties material
weakness. However, we may not be able to fully remediate the material
weakness unless we hire more staff. We will continue to monitor and assess
the costs and benefits of additional staffing.
This annual report does not include an attestation report of the
Company's independent registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to
attestation by the Company's independent registered public accounting firm
pursuant to rules of the SEC that permit the Company to provide only
management's report on internal control in this annual report.
ITEM 9B. OTHER INFORMATION
None.
39
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Our directors, executive officers and significant employees/consultants,
along with their respective ages and positions are as follows:
Name Age Position
---- --- --------
Director and Officers:
Mark A. Smith 60 President, General Counsel, Interim Chief
Financial Officer and Director
Jon Northrop 67 Secretary and Director
Significant Employees:
Jeremy Rowland 47 Chief Operating Officer of Services Group
James W. Morris 60 Chief Technology Officer
George W. Bloom 61 Chief Engineering Officer
Dominic Bassani 64 Director-Special Projects and Strategic
Planning of Projects Group and Full Time
Consultant to Bion
Mark A. Smith (60) has been President, General Counsel, interim Chief
Financial Officer and a director of Bion Environmental Technologies, Inc.
since late March 2003. Since that time, he has also served as sole director,
President and General Counsel of Bion's wholly-owned subsidiaries including
Project Group and Services Group. Since mid-February 2003, Mr. Smith has
served as sole director and President and General Counsel of Bion's majority-
owned subsidiary, Centerpoint Corporation. Previously, from May 21, 1999
through January 31, 2002, Mr. Smith served as a director of Bion. From July
23, 1999, when he became President of Bion, until mid-2001 when he ceased to
be Chairman, Mr. Smith served in senior positions with Bion on a consulting
basis. Additionally, Mr. Smith was the president of RSTS Corporation prior
to its acquisition of Bion Technologies, Inc. in 1992. Mr. Smith received a
Juris Doctor Degree from the University of Colorado School of Law, Boulder,
Colorado (1980) and a BS from Amherst College, Amherst, Massachusetts (1971).
Mr. Smith has engaged in the private practice of law in Colorado since 1980.
In addition, Mr. Smith has been active in running private family companies,
Stonehenge Corporation (until 1994) and LoTayLingKyur, Inc. (1994-2002).
Until returning to Bion during March 2003, Mr. Smith had been in retirement
with focus on charitable work and spiritual retreat.
Jon Northrop (67) has served as our Secretary and a Director since March
of 2003. Since September 2001 he has been self employed as a consultant with
a practice focused on business buyer advocacy. Mr. Northrop is one of our
founders and served as our Chief Executive Officer and a Director from our
inception in September 1989 until August 2001. Before founding Bion
Technologies, Inc., he served in a wide variety of managerial and executive
40
positions. He was the Executive Director of Davis, Graham & Stubbs, one of
Denver's largest law firms, from 1981 to 1989. Prior to his law firm
experience, Mr. Northrop worked at Samsonite Corporation's Luggage Division
in Denver, Colorado, for over 12 years. His experience was in all aspects of
manufacturing, systems design and implementation, and planning and finance,
ending with three years as the Division's Vice President, Finance. Mr.
Northrop has a bachelor's degree in Physics from Amherst College, Amherst,
Massachusetts (1965), an MBA in Finance from the University of Chicago,
Chicago, Illinois (1969), and spent several years conducting post graduate
research in low energy particle physics at Case Institute of Technology,
Cleveland, Ohio. Jon Northrop is the brother of Jere Northrop.
George W. Bloom (56), Bion's Chief Engineering Officer, has been with
Bion since December 2000 and served as Chief Operating Officer since January
15, 2002 of our Bion Technologies, Inc. subsidiary until our 2008 functional
reorganization. From 1986 through December 2000, Mr. Bloom was employed by
Woodard & Curran, Inc., an environmental engineering and science-consulting
firm, where he held the position of Chief Engineer of the Municipal Business
Center at the time of his departure. Mr. Bloom is a registered professional
engineer with over twenty years of environmental engineering and consulting
experience specializing in the planning, design, construction and operation
of waste treatment facilities. Mr. Bloom is responsible at Bion for
oversight of the planning, design and construction of waste treatment systems
and solids processing facilities. He has his BS in Environmental Science from
Cornell University.
Jeremy Rowland (47) joined Bion on September 18, 2006 and presently
serves as Chief Operating Officer of Services Group. Prior to joining Bion,
he worked for URS Corporation, a major national engineering/consulting firm,
for 16 years where he developed and lead URS's efforts in the renewable
energy marketplace. Mr. Rowland has eighteen years experience in multi-
disciplinary energy and environmental project development and management
throughout the U.S. and overseas. Mr. Rowland's areas of expertise include
renewable energy project development, distributed generation (mostly combined
heat/power), large-scale power plant developments, and strategic energy
management. Mr. Rowland earned his MS in Environmental Science in 1987 and
his BS in Forest Ecology in 1985 from Southern Illinois University, School of
Agriculture Science.
James W. Morris (60) has served as Bion's Chief Technology Officer since
February 2002 and is co-inventor of portions of the Bion Process. Prior to
joining Bion, Dr. Morris provided the Company with technical assistance and
technical advice for over two years as a consultant. Other consulting work
included eight years acting as the Senior Technical Consultant for a large
environmental consulting firm and the formation of James W. Morris &
Associates, Inc. that allowed him to serve clients ranging from small
commercial establishments, to municipalities and corporations, as well as a
sub consultant to several larger engineering firms. Dr. Morris is a licensed
professional engineer in Maine and Vermont with more than 30 years of
engineering experience. Over a twelve-year period he performed research and
taught graduate and undergraduate engineering as a member of the faculties of
Cornell University, the University of Manitoba and the University of Vermont.
He earned his BSCE and MSCE at Tennessee Technological University and a Ph.D.
in Environmental Quality/Agricultural Engineering from Cornell University.
He is a member of the American Society of Civil Engineers, Water Environment
41
Federation, Institute of Food Technologists, American Society of Agricultural
Engineers, Agricultural Engineering Society, Aquacultural Engineering Society
and American Water Works Association, Tau Beta Phi (Engineering honor
society), Chi Epsolon (Civil Engineering honor society) and is a member of
Sigma Xi, The Scientific Research Society of North America.
Dominic Bassani (64), a full-time consultant to the Company, served as
the General Manager of Bion's Projects Group subsidiary from April 2003
through September 2006. Since September 15, 2008 he has served as Director-
Special Projects and Strategic Planning of our Projects Group subsidiary. He
has been an investor in and consultant to Bion since December 1999. He is an
independent investor and since 1990 has owned and operated Brightcap, a
management consulting company that provides management services to early
stage technology companies. He was a founding investor in 1993 in Initial
Acquisition Corp. that subsequently merged in 1995 with Hollis Eden Corp.
(HEPH), a biotech company specializing in immune response drugs. From early
1998 until June 1999 he was a consultant to Internet Commerce Corp. (now
EasyLink Services International Corporation) (ESIC), a leader in business-to-
business transactions using the Internet. He is presently an investor in
numerous private and public companies primarily in technology related
businesses. From 1980 until 1986, Mr. Bassani focused primarily on providing
management reorganization services to manufacturing companies and in
particular to generic pharmaceutical manufacturers and their financial
sponsors.
Family Relationships
There are currently no family relationships among our Directors and
Executive Officers.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our officers and directors,
and stockholders owning more than ten percent of a registered class of our
equity securities, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission. The Company is not aware of any
persons who failed to timely file reports under this section.
Involvement in Legal Proceedings
To the best of our knowledge, during the past five years, none of the
following occurred with respect to our directors or executive officers:
(1) any bankruptcy petition filed by or against any business of which
one of them was a general partner or executive officer either at the time of
the bankruptcy or within two years prior to that time;
(2) any conviction in a criminal proceeding or being subject to a
pending criminal proceeding (excluding traffic violations and other minor
offenses).
(3) being subject to any order, judgment or decree of any court of
competent jurisdiction, permanently or temporarily inquiring, barring,
suspending or otherwise limiting involvement in any type of business,
securities or banking activities, and
42
(4) being found by a court of competent jurisdiction, the SEC or the
CFTC to have violated Federal or state securities or commodities laws.
Audit Committee
The Company has no audit committee and is not now required to have one,
or an audit committee financial expert.
Code of Ethics
To date, the Company has not adopted a code of business conduct and
ethics applicable to its officers, directors or accounting officer.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid to, or accrued for,
each of our current and former executive officers during each of our last two
fiscal years and the compensation paid to, or accrued for, each of our
significant employees and consultants for the same period.
Non-
Equity Non-
Incen- Qualified
tive Deferred
Plan Compen- Other
Fiscal Stock Option Compen- sation Compen-
Name and Principal Position Year Salary(1) Bonus Awards Awards(2) sation Earnings sation Total
--------------------------- ------ --------- -------- ------- --------- ------ --------- ------- ---------
Mark A. Smith (3) 2010 $171,000 $ 35,000 $ - $ 46,750 $ - $ - $ - $252,750
President and Interim Chief 2009 $150,000 $ 37,500 $ - $ 7,750 $ - $ - $ - $195,250
Financial Officer since
March 25, 2003, Director
Brightcap/Dominic Bassani(4) 2010 $309,000 $ 60,000 $ - $ - $ - $ - $ - $369,000
VP-Special Projects & 2009 $300,000 $125,000 $ - $ - $ - $ - $ - $425,000
Strategic Planning
George W. Bloom (5) 2010 $150,000 - $16,833 $ - $ - $ - $ - $166,833
Chief Operating Officer 2009 $150,000 - $ - $ - $ - $ - $ - $150,000
Bion Technologies
James W. Morris (5) 2010 $150,000 $ - $21,042 $ - $ - $ - $ - $171,042
Chief Technology Officer 2009 $150,000 $ 2,500 $ - $ - $ - $ - $ - $152,500
Bion Technologies
Jeremy Rowland 2010 $150,000 $ - $16,833 $118,345 $ - $ - $ - $285,178
Chief Operating Officer 2009 $150,000 $ - $ - $178,867 $ - $ - $ - $328,867
of Services Group
Salvatore J. Zizza (6) 2010 $ - $ - $ - $ - $ - $ - $ - $ -
Chairman and Director of 2009 $150,000 $ - $ - $ - $ - $ - $ - $150,000
Projects Group
______________________________
(1) Includes compensation paid by Bion Technologies, Inc. and our wholly owned subsidiaries.
(2) Reflects the dollar amount expensed by the Company during the applicable fiscal year for financial
statement reporting purposes pursuant to ASC 718.
43
(3) Effective July 27, 2010, Mr. Smith has agreed to provide services to Bion and subsidiaries through
December 31, 2011, at an annual salary of $228,000 commencing September 1, 2010. Mr. Smith's previous
agreement dated September 30, 2009 increased is monthly salary from $12,500 commencing January 1, 2010.
In January 2009 Mr. Smith agreed to accept 88,102 shares of the Company's common stock in exchange for
his deferred salary of $66,076 for the period from July 1, 2008 to December 31, 2008 and also
accepted 200,000 shares of the Company's common stock as payment for his calendar year 2009 salary of
$150,000.
(4) On September 30, 2009 the Company entered into an extension agreement with Brightcap for services
provided to the Company by Dominic Bassani at an annual consulting fee of $312,000 for services
provided through September 30, 2012.
(5) Stock awards and options were issued subject to execution of a new employment agreement which as
of June 30, 2010, has not been finalized.
(6) Mr. Zizza was working for the Company at an annual compensation rate of $300,000 prior to his
resignation on December 31, 2008.
Employment Agreements
Effective March 31, 2007 Mark A. Smith, our President, agreed to serve
as President, General Counsel and as a Director of the Company and its
subsidiaries until December 31, 2007 for compensation at an annual rate of
$150,000. The amount deferred through June 30, 2007 under this arrangement is
$37,500 which sum has been accrued on a non-convertible and non-interest
bearing basis. Amounts accrued prior to April 1, 2006 in the amount of
$401,954 (principal and accrued interest) are represented by a convertible
promissory note bearing interest at the rate of 6% per annum and convertible
after July 1, 2007 into the Company's common stock at the lower of the
current market value at the time of conversion, or $2.00 per share. The note
is mandatorily convertible on July 1, 2009. On March 31, 2007, Mr. Smith
agreed to accept $151,645 of the Company's 2007 Series A Convertible Notes
("Series A Notes") in exchange for his deferred compensation for the period
from January 1, 2007 through March 31, 2007 and the Company's promissory note
issued on January 1, 2007 for Mr. Smith's deferred compensation from April 1,
2006 through December 31, 2006. As of May 31, 2008, the Company entered into
an extension agreement with Mr. Smith through December 31, 2009 (part of
which period may consist of consulting) which allowed for the conversion of
deferred compensation accrued through June 30, 2008 of $179,280 into 89,640
common shares of the Company. On January 11, 2009, the Company and Mr. Smith
entered into an agreement pursuant to which Mr. Smith will continue to hold
positions of Director, President and General Counsel of the Company and its
subsidiaries. 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 of $66,076 into 88,102 shares of the Company's common stock
at $.75 per share. On September 30, 2009, the Company and Mr. Smith entered
into an extension agreement whereby Mr. Smith agreed to continue to hold his
current position in the Company through a date no later than December 31,
2010. Commencing January 1, 2010, Mr. Smith was paid a monthly salary of
$16,000 in addition to a cash bonus of $15,000 paid in January 2010. In
addition Mr. Smith was granted a $20,000 bonus payable in warrants to
purchase 200,000 shares of the Company's common stock at a price of $2.50 per
44
share until January 15, 2019. Effective on July 27, 2010, the Company
executed another extension agreement with Mr. Smith pursuant to which he
agreed to extend his service to the Company through a date no later than
December 31, 2011 at a salary of $19,000 per month. In connection therewith
the Company granted MAS a cash bonus of $20,000 payable on January 1, 2011,
and a bonus of $20,000 payable in the form of 200,000 warrants exercisable to
purchase the Company's restricted stock at a price of $2.00 per share until
January 15, 2019.
Dominic Bassani, full-time consultant to the Company and Director-
Special Projects and Strategic Planning of Projects Group, agreed, through
Brightcap, to serve as a consultant to Bion and Projects Group until March
31, 2009 for compensation of $300,000 per year. Amounts accrued prior to
September 30, 2005 in the amount of $549,704 (principal and accrued interest)
are represented by a convertible promissory note bearing interest at the rate
of 6% per annum and convertible after July 1, 2007 into the Company's common
stock at the lower of the current market value at the time of conversion or
$2.00 per share. The note was mandatorily convertible on July 1, 2009. On
March 31, 2007 Brightcap agreed to accept $455,486 of the Company's Series A
Notes in exchange for its deferred compensation for the period from January
1, 2007 through March 31, 2007 and the Company's promissory notes issued on
January 1, 2007 for its deferred compensation owed by Bion on December 31,
2006. The amount deferred through June 30, 2007 under this arrangement was
$75,000 which sum is accrued on a non-convertible and non-interest bearing
basis. 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. As of June 30,
2008 the Company owed Brightcap deferred compensation of $25,000. On January
11, 2009, the Company entered in an agreement which extends Mr. Bassani's
services under the terms of the March 31, 2005 agreement to September 30,
2009. 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. Pursuant to the
agreement the Company no longer defers compensation earned by Brightcap and
since July 2009, Brightcap has been paid in cash. The agreement granted
Brightcap the right, at its sole election, 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 extended the maturity date of Mr. Bassani's then
outstanding $50,000 promissory note to June 30, 2009 and allowed for the
conversion of the principal and interest, in whole or in part, at the
election of Mr. Bassani, into the Company's restricted common shares at $0.75
per share. The promissory note was converted on June 30, 2009. Brightcap's
$150,000 deferred compensation for the period from January 1, 2009 through
June 30, 2010 is now due on July 1, 2010 and Brightcap has the right to
convert this obligation, in whole or in part, to the Company's common stock
at $1.50 per share until June 30, 2010. On September 30, 2009 the Company
entered into an extension agreement with Brightcap pursuant to which Mr.
Bassani will provide services to the Company through September 30, 2012 for
$312,000 annually. In conjunction with the extension agreement, Mr. Bassani
was granted a $60,000 bonus payable in warrants to purchase 600,000 shares of
45
the Company's common stock at a price of $2.50 per share until January 15,
2019. Mr. Bassani was also granted an extension on the conversion date of the
$175,000 deferred compensation from December 31, 2009 until January 14, 2010.
Effective June 30, 2010 Dominic Bassani, Director-Strategic Planning and
Special Projects of our Bion Integrated Projects Group, Inc. subsidiary and
full-time consultant to the Company, extended the maturity date of the
$150,000 convertible obligation due to him to July 1, 2011. In connection
with the extension, Mr. Bassani received a $15,000 bonus which was added to
the principal of the obligation and the obligation was made interest bearing
at a 10% annual simple interest rate. The obligation continues to be
convertible into the Company's restricted common stock at a price of $1.50
per share.
Effective September 18, 2006, Bion entered into a four-year employment
agreement with Jeremy Rowland. Under the terms of the agreement, Mr. Rowland
serves as Services Group's Chief Operating Officer at a salary of $150,000
per year. 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 30, 2009, Mr. Craig Scott, the Company's VP-Capital
Markets and Shareholder Relations, agreed to extend the term of his agreement
with the Company pursuant to which Mr. Scott acts as Vice President of
Capital Markets and Shareholder Relations through December 31, 2010, at an
annual salary of $144,000. The Company has granted Mr. Scott options (with
vesting conditions) to purchase 100,000 shares of the Company's common stock
at a price of $1.25 per share through June 30, 2014. The Company has the
right terminate the agreement with 30 days notice commencing December 2009
with no further liability.
Other Agreements
In May 2005, Bion declared Contingent Stock Bonuses of 690,000 shares,
in aggregate, to its key employees and consultants. On September 1, 2010
Contingent Stock Bonuses of 327,500 and 115,000 shares remained outstanding
and are contingent upon the Company's stock price exceeding $10.00 and $20.00
per share, respectively, and the grantees still being employed by or
providing services to the Company at the time the target prices are reached.
Effective July 1, 2009, the Company has made grants of stock bonuses
aggregating 150,000 shares, which grants are split among all of the Company's
core employees and consultants (including a severance grant to a former
consultant) other than Mr. Bassani and Mark A. Smith, the Company's
President, pursuant to the Company's 2006 Consolidated Incentive Plan, as
amended. These stock bonuses have various conditions regarding vesting.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth the number of shares of common stock
covered by outstanding stock option awards that are exercisable and
unexercisable, and the number of shares of common stock covered by unvested
restricted stock awards for each of our named executive officers as of June
30, 2009.
46
Option Awards Stock Awards
------------------------------------------------ -----------------------------------------
Equity
Equity Incentive
Incentive Plan
Plan Awards:
Number Market Awards: Market or
Equity of Value Number of Payout
Incentive Shares of Unearned Value of
Number of Number of Plan or Shares Shares, Unearned
Securities Securities Awards: Units of or Units or Shares,
Underly- Underly- Number of Stock Units of Other Units
ing Un- ing Un- Securities Option That Stock Rights or Other
exercised exercised Underlying Exer- Option Have That That Rights
Options(#) Option(#) Unexercised cise Expir- Not Have Have Not That
Exercis- Unexer- Unearned Price ation Vested Not Vested Have Not
Name able cisable Options(#) ($) Date (#) Vested (3) Vested
--------------------------------------------------------------------- ----------------------------------------
Mark A. Smith 20,000 - - $2.00 2012 - - - -
Mark A. Smith 10,000 - - $2.50 2015 - - - -
Mark A. Smith 12,500 - - $4.25 2012 - - - -
Mark A. Smith 50,000 - - $5.00 2012 - - - -
Mark A. Smith 12,500 - - $5.50 2012 - - - -
Mark A. Smith 100,000 - - $4.25 2012 - - - -
Mark A. Smith 125,000 - - $2.20 2012 - - - -
Mark A. Smith 70,000 - - $2.50 2013 - - - -
Mark A. Smith 25,000 - - $1.00 2014 - - - -
Mark A. Smith 25,000 - - $1.25 2014 - - - -
Mark A. Smith 25,000 - - $2.25 2015 - - - -
Brightcap/
Dominic Bassani - - - - - - - 250,000 375,000
George W. Bloom 100,000 - - $2.50 2015 - - 75,000 112,500
George W. Bloom(1) 100,000 - - $3.00 2012 - - - -
James W. Morris 100,000 - - $2.50 2015 - - 75,000 112,500
James W. Morris(1) 100,000 - - $3.00 2012 - - - -
Jeremy Rowland(2) 150,000 - - $3.00 2012 - - - -
Jeremy Rowland(2) 31,250 18,750 - $3.00 2012 - - - -
Salvatore J. Zizza 7,500 - - $5.00 2012 - - - -
_________________
(1) Options have been approved subject to the execution of a new employment agreement which as of June 30, 2010
has not been finalized.
(2) Common share purchase options to acquire 150,000 shares of common stock at $3.00 per share were granted on
May 31, 2008 in connection with the signing of a new employment agreement. These options vest over a two year
period (1/8 each quarter) from the grant date anniversary. Common share purchase options to acquire 50,000
shares of common stock at $3.00 per share were granted on May 31, 2008. These options vest over a four year
period (1/8 each six months) from the grant date anniversary.
(3) During May 2005 the Company's Board of Directors approved the issuance of deferred stock bonuses to its key
employees and consultants. The stock bonuses are contingent upon the Company's stock price exceeding $10 and
$20 per shares for 20 consecutive trading days and the grantees still being employed or providing services to
the Company at the time the target prices are reached.
Director Compensation
Members of the Board of Directors do not currently receive any cash
compensation for their services as Directors, but are entitled to be
47
reimbursed for their reasonable expenses in attending meetings of the Board.
However, it is the Company's intention to begin to pay cash compensation to
Board members at some future date.
DIRECTOR COMPENSATION
The following table sets forth certain information regarding the
compensation paid to directors during the fiscal year ended June 30, 2010:
--------------------------------------------------------------------------------------------------
Non-equity Nonqualified
Fees earned Option Incentive Deferred
or paid in Stock Awards Plan Compen- Compensation All Other
Name Cash($) Awards($) ($)(1) sation($) Earnings($) Compensation($) Total($)
--------------------------------------------------------------------------------------------------
Jon Northrop(2) - - 23,375 - - - 23,375
Jere Northrop
(3)(4) 9,000 - 19,125 - - - 28,125
______________
(1) Reflects the dollar amount expensed by the Company during the applicable fiscal year for
financial statement reporting purposes pursuant to ASC 718.
(2) Includes 50,000 shares that Mr. Jon Northrop is entitled to purchase through stock options
granted on July 1, 2009 and April 1, 2010, all of which are exercisable.
(3) Includes 45,000 shares that Mr. Jere Northrop is entitled to purchase through stock options
granted on July 1, 2009 and October 1, 2010, all of which are exercisable.
(4) Includes consulting fees paid to Mr. Jere Northrop during fiscal year 2010.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
At September 1, 2010, the Company had issued 12,803,840 shares of its
common stock, of which 12,099,531 are outstanding (the balance of 704,309
shares are owned by Centerpoint, the Company's majority owned subsidiary).
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of September 11, 2009 by:
* each person that is known by us to beneficially own more than
5% of our common stock;
* each of our directors;
* each of our executive officers and significant employees; and
* all our executive officers, directors and significant employees
as a group.
Under the rules of the Securities and Exchange Commission, beneficial
ownership includes voting or investment power with respect to securities and
includes the shares issuable under stock options that are exercisable within
48
sixty (60) days of September 1, 2010. Those shares issuable under stock
options are deemed outstanding for computing the percentage of each person
holding options but are not deemed outstanding for computing the percentage
of any other person. The percentage of beneficial ownership schedule is
based upon 12,099,531 shares outstanding as of September 1, 2010. The
address for those individuals for which an address is not otherwise provided
is c/o Bion Environmental Technologies, Box 566/1774 Summitview, Crestone,
Colorado 81131. To our knowledge, except as indicated in the footnotes to
this table and pursuant to applicable community property laws, the persons
named in the table have sole voting power and investment power with respect
to all shares of common stock listed as owned by them.
Shares of Common Stock
Beneficially Owned
----------------------------------
Percent of
Class Entitled
Name and Address Number Outstanding to Vote
---------------- --------- ----------- --------
Centerpoint Corporation (1) 704,309 5.5% -
Box 566/1774 Summitview
Crestone, Colorado 81131
Dominic Bassani (2) 5,040,366 32.2% 33.7%
64 Village Hills Drive
Dix Hills, NY 11746
Chris-Dan, LLC (3) 1,055,692 8.2% 8.7%
c/o Dominic Bassani
64 Village Hills Drive
Dix Hills, NY 11746
Bright Capital, Ltd. (4) 1,522,725 11.4% 12.1%
c/o Dominic Bassani
64 Village Hills Drive
Dix Hills, NY 11746
Bright Capital, Ltd. Defined 785,501 6.1% 6.5%
Benefit Pension Plan (5)
c/o Dominic Bassani
64 Village Hills Drive
Dix Hills, NY 11746
Anthony Orphanos (6) 1,285,033 10.0% 10.6%
c/o Carret Asset Management
40 West 57th Street
New York, NY 10019
Danielle Christine Bassani (7) 614,000 4.6% 4.8%
c/o Dominic Bassani
64 Village Hills Drive
Dix Hills, NY 11746
Mark A. Smith (8) 1,963,835 14.4% 15.2%
Jon Northrop (9) 329,809 2.5% 2.7%
49
Jeremy Rowland (10) 220,000 1.7% 1.8%
James Morris (11) 325,000 2.5% 2.7%
George Bloom (12) 322,112 2.4% 2.6%
All executive officers, directors
and significant employees as
a group (6 persons) 8,201,122 47.0% 49.0%
__________________
(1) Centerpoint Corporation is currently majority owned by the Company. Under
Colorado law, Centerpoint Corporation is not entitled to vote these shares unless
otherwise ordered by a court. These shares of common stock may be distributed to the
shareholders of Centerpoint Corporation at a future date pursuant to a dividend
declared during July 2004. The shares distributed to Bion, if any, will be cancelled
immediately upon receipt.
(2) Includes 24,517 shares and 2,200,000 shares underlying warrants held directly by
Mr. Bassani; 237,224 shares and 500,000 shares underlying warrants held by Bright
Capital, Ltd. ("Brightcap") of which Mr. Bassani is the owner; 785,501 shares owned by
the Bright Capital Ltd. Defined Benefit Pension Plan of which Mr. Bassani is the
beneficiary; 1,055,692 shares held by Chris-Dan, LLC of which Mr. Bassani is owner;
25,000 shares underlying warrants held by Mr. Bassani's wife; and 10,050 shares and
44,382 shares held in IRA accounts of Mr. Bassani and his wife, respectively. Also
includes 110,000 shares issuable to Mr. Bassani related to convertible deferred
compensation and 48,000 shares owned by Mr. Bassani's daughter, Danielle Bassani. Mr.
Bassani has also been granted 250,000 shares of contingent stock bonuses that are not
included in this calculation. Mr. Bassani disclaims ownership of 566,000 shares
underlying warrants held by The Danielle Christine Bassani Trust, which is separately
itemized herein. Mr. Bassani's adult daughter, who lives with him, is the beneficiary
of the Danielle Christine Bassani Trust and Mr. Bassani is not one of the trustees of
the trust. Mr. Bassani further disclaims beneficial ownership of shares and warrants
owned by various other family members, none of whom live with him or are his
dependents, and such shares are not included in this calculation.
(3) Represents 1,055,692 shares held directly by Chris-Dan, LLC, which is owned by
Dominic Bassani.
(4) Represents 237,224 shares held directly by Bright Capital, Ltd. and 500,000
shares underlying warrants held by Bright Capital, Ltd.; and 785,501 shares owned by
the Bright Capital, Ltd. Defined Benefit Pension Plan. Dominic Bassani owns Bright
Capital, Ltd. and is the beneficiary of its Defined Benefit Pension Plan.
(5) Represents 785,501 shares held directly by the Bright Capital, Ltd. Defined
Benefit Pension Plan. Dominic Bassani is the beneficiary of this Pension Plan.
(6) Includes 433,563 shares held directly by Mr. Orphanos plus 25,500 and 10,000
shares, respectively, underlying warrants and options held directly by Mr. Orphanos;
130,263 shares held jointly with his wife; and 685,707 shares held in an IRA. Not
included are 566,000 shares underlying warrants held by the Danielle Christine Bassani
Trust, of which Mr. Orphanos is a co-trustee and 1,687,561 common shares owned by
certain clients of Mr. Orphanos, over which Mr. Orphanos exercises discretionary
authority (which shares include: a) 785,501 shares owned by the Bright Capital Ltd.
Defined Benefit Pension Plan of which Mr. Bassani is the beneficiary; b) 24,517 shares
held by Mr. Bassani personally; c) 54,432 shares owned by IRAs for Mr. Bassani and/or
his wife; and 48,000 shares owned by Danielle Bassani). Mr. Orphanos disclaims
beneficial ownership of the shares listed in the preceding sentences because he has no
pecuniary interest in the shares.
50
(7) Represents 566,000 shares underlying warrants held by The Danielle Christine
Bassani Trust, Anthony Orphanos and Donald Codignotto, trustees and 48,000 shares
owned by Danielle Bassani, beneficiary of the trust.
(8) Includes 905,064 shares held directly by Mark A. Smith; 500,000 shares underlying
options held directly by Mr. Smith; 325,000 shares underlying warrants held directly
by Mr. Smith; 20,834 shares held jointly with his wife; 70,256 shares held by his
wife; and 142,681 shares of common stock held by LoTayLingKyur Foundation which is
controlled by Mr. Smith. Does not include shares and warrants owned by various family
members of which Mr. Smith disclaims beneficial ownership. Mr. Smith is also the
President of Centerpoint, although shares owned by Centerpoint are not entitled to a
vote while held by Centerpoint.
(9) Includes 108,466 shares held directly by Jon Northrop; 16,464 shares owned by Jon
Northrop's wife; 9,265 shares owned jointly by Jon Northrop and his wife; options to
purchase 170,000 shares held by Jon Northrop; and 20,730 shares owned by a family
trust, 3,513 shares held by the Harley Northrop Family Foundation and 1,371 shares
owned by the Harley Northrop Charitable Remainder UniTrust. Does not include shares
owned by the adult children of Jon Northrop.
(10) Mr. Rowland holds 20,000 shares (of which 10,000 are subject to vesting
conditions not yet met) and options to purchase 200,000 shares.
(11) Mr. Morris holds 25,000 shares and options to purchase 300,000 shares (all
subject to vesting conditions not yet met) Mr. Morris has also been granted 75,000
shares of contingent stock bonus that are not included in this calculation.
(12) Mr. Bloom holds 22,112 shares (20,000 subject to vesting conditions not yet met)
and options to purchase 300,000 shares (all subject to vesting conditions not yet
met). Mr. Bloom has also been granted 75,000 shares of contingent stock bonus that are
not included in this calculation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Other than the employment/consulting agreements, deferred compensation
arrangements and conversions of debt described above in Item 1 Business and
Item 11 Executive Compensation, there are no related party transactions
except that:
The Company executed a non-cancellable operating lease for office
space in New York City effective August 1, 2006 and extending to November 30,
2013. The average monthly rent under the lease is $15,820. The Company
provided the lessor with a letter of credit in the amount of $128,443 in
connection with the lease which reduces over the term of the release. The
Company's obligations under the lease are partially guaranteed by Salvatore
Zizza, former Chairman of Projects Group. Effective January 1, 2009, Mr.
Zizza entered into a Master Sublease with the Company pursuant to which Mr.
Zizza became a sublessee and, for a one year initial period, became
responsible to make all payments pursuant to the lease and manage the lease
premises. Rental payments from existing sub-tenants are being deposited into
a Company bank account and Mr. Zizza has utilized such funds as partial
funding of the monthly lease payments. Subsequently, Mr. Zizza exercised his
option to continue the Master Sublease for the entire period of the lease.
Mr. Zizza fulfilled his obligations under the Master Sublease during the one
year initial period and, therefore, he received the funds from the next
release from restricted funds securing the Company's letter of credit
51
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 approximately $57,000 balance of restricted funds securing the letter
of credit.
No directors of the Company are considered to be independent directors.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
AUDIT FEES
In December 2005, the Company engaged GHP Horwath, P.C. as its
independent registered public accounting firm. The aggregate fees billed for
each of the last two fiscal years ended June 30, 2009 and June 30, 2010 by
GHP Horwath, P.C. for professional services rendered for the audit of the
Company's annual financial statements and reviews of interim financial
statements included in the Company's quarterly reports on Form 10-Q (and
related matters) were $58,520 and $61,400, respectively.
AUDIT RELATED FEES
There were no fees billed by GHP Horwath, P.C. for audit-related fees in
each of the last two fiscal years ended June 30, 2009 and June 30, 2010.
TAX FEES
The aggregate fees billed for tax services rendered by GHP Horwath, P.C.
for tax compliance and related services for the two fiscal years ended June
30, 2009 and June 30, 2010 were $373 and $24,300, respectively.
ALL OTHER FEES
None.
AUDIT COMMITTEE PRE-APPROVAL POLICY
Under provisions of the Sarbanes-Oxley Act of 2002, the Company's
principal accountant may not be engaged to provide non-audit services that
are prohibited by law or regulation to be provided by it, and the Board of
Directors (which serves as the Company's audit committee) must pre-approve
the engagement of the Company's principal accountant to provide audit and
permissible non-audit services. The Company's Board has not established any
policies or procedures other than those required by applicable laws and
regulations.
52
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION AND LOCATION
------- ------------------------
3.1 Articles of Incorporation. (1)
3.2 Bylaws. (1)
10.1 Subscription Agreement dated January 10, 2002 between Bion
Environmental Technologies, Inc and Centerpoint Corporation
regarding issuance of stock in exchange for cash and claims
regarding Aprilia. (1)
10.2 Agreement dated March 15, 2002 and effective January 15, 2002
between Bion Environmental Technologies, Inc. and Centerpoint
Corporation regarding purchase of warrant and management
agreement. (1)
10.3 Agreement dated February 12, 2003 between Bion Environmental
Technologies, Inc. and Centerpoint Corporation canceling
provisions of the Subscription Agreement by and between Bion
Environmental Technologies, Inc. and Centerpoint Corporation. (1)
10.4 Promissory Note and Security Agreement between Bion
Environmental Technologies, Inc. and Bright Capital, LLC. (1)
10.5 First Amendment to Lease between Bion Environmental
Technologies, Inc. and Pan Am Equities Corp. (1)
10.6 Agreement between Bion Environmental Technologies, Inc. and
Bergen Cove. (1)
10.7 Agreement between Bion Environmental Technologies, Inc. and
David Mitchell dated April 7, 2003. (1)
10.8 Letter Agreement with Bright Capital, Ltd. (1)
10.9 Agreement with OAM, S.p.A. dated May 2003. (1)
10.10 Amended Agreement with Centerpoint Corporation dated
April 23, 2003. (1)
10.11 Form of Series A Secured Convertible Notes issued in August 2003.
(1)
10.12 Financing Documents for Bion Dairy Corporation. (1)
10.13 Form of Class SV/DB Warrant. (1)
53
10.14 Form of Class SV/DM Warrant. (1)
10.15 Form of Series A* Secured Convertible Notes issued in April 2004.
(1)
10.16 Form of Series B Secured Convertible Notes issued in Spring 2004.
(1)
10.17 Form of Series B* Secured Convertible Notes issued in June 2004.
(1)
10.18 Form of Series C Notes issued in September 2005. (1)
10.19 Form of 2006 Series A Convertible Promissory Notes issued in
September 2006. (1)
10.20 Form of Non-Disclosure Agreement used by the Company. (1)
10.21 Promissory Note and Conversion Agreement between Bion
Environmental Technologies, Inc. and Mark A. Smith related to
deferred compensation. (1)
10.22 Promissory Note and Conversion Agreement between Bion
Environmental Technologies, Inc. and Bright Capital, Ltd.
related to deferred compensation. (1)
10.23 Employment agreement with Mark A. Smith. (1)
10.24 Employment agreement with Salvatore Zizza. (1)
10.25 Employment agreement with Bright Capital, Ltd. (1)
10.26 Employment agreement with Jeff Kapell. (1)
10.27 Employment agreement with Jeremy Rowland. (1)
10.28 Office lease at 641 Lexington Avenue, 17th Floor, New York. (1)
10.29 2006 Consolidated Incentive Plan. (1)
10.30 Memo to Dominic Bassani & Bright Capital, Ltd. dated October 16,
2006 regarding Change in Title/Status of DB/Amendment to
Brightcap Agreement. (1)
10.31 Letter Agreement between Bion Dairy Corporation and Fair Oaks
Dairy Farms dated June 19, 2006. (2)
10.32 Waiver and Release Agreement with Ardour Capital Investments,
LLC. (2)
10.33 Promissory Note and Conversion Agreement for Mark Smith, dated
January 1, 2007. (2)
10.34 Promissory Note and Conversion Agreement for Salvatore Zizza,
dated January 1, 2007. (2)
54
10.35 Promissory Note and Conversion Agreement for Bright Capital,
Ltd., dated January 1, 2007. (2)
10.36 Extension Agreement dated March 31, 2007 between the Company
and Mark A Smith. (3)
10.37 Form of Note dated March 31, 2007 in the amount of $151,645.89
in favor of Mark A. Smith. (3)
10.38 Form of Note dated March 31, 2007 in the amount of $379,389.04
in favor of Salvatore Zizza. (3)
10.39 Form of Note dated March 31, 2007 in the amount of $455.486.30
in favor of Bright Capital, Ltd. (3)
10.40 Stipulation and Agreement of Compromise and Release dated May 21,
2007 between Centerpoint Corporation, Bion Environmental
Technologies, Richard Anderson and Joseph Foglia, as Plaintiffs,
and Comtech Group, Inc., OAM S.p.A., Invested Ernst & Company and
others as Defendants. (4)
10.41 Stipulation and Agreement of Compromise, Settlement and Release
dated May 15, 2007 between TCMP3 Partners, LLP as Plaintiff and
Bion Environmental Technologies, Inc. and Bion Dairy Corporation,
among others, as Defendants. (4)
10.42 Stipulation and Agreement of Compromise, Settlement and Release as
to Certain Defendants dated May 15, 2007 between TCMP3 Partners,
LLP as Plaintiff and certain defendants other than Bion
Environmental Technologies, Inc. and Bion Dairy Corporation. (4)
10.43 Letter of Intent dated August 18, 2007 between Bion Environmental
Technologies, Inc. and Evergreen Farm, Inc. (5)
10.44 Memorandum of Understanding with Kreider Farms. (6)
10.45 Subscription Agreement from Bright Capital, Ltd. (7)
10.46 Amendment to 2006 Consolidated Incentive Plan. (7)
10.47 Agreement between the Company and Mark A. Smith dated May 31,
2008. (7)
10.48 2007 Series AB Convertible Promissory Note. (8)
10.49 Promissory Note between Bion Environmental Technologies,
Inc. and Salvatore Zizza. (9)
10.50 Promissory Note between Bion Environmental Technologies,
Inc. and Dominic Bassani. (9)
10.51 Agreement between Jeff Kapell and Bion dated November 1,
2008. (10)
55
10.52 Agreement Between David Mager and Bion dated November 1,
2008. (10)
10.53 Promissory Note between Anthony Orphanos and Bion dated October
30, 2008, Guaranteed by Dominic Bassani. (10)
10.54 Addendum to Settlement Agreement and Release Stipulation
from Bion, Bion Dairy and Mark Smith dated October 31,
2008. (10)
10.55 Kreider Farms Agreement (September 25, 2008): REDACTED. (11)
10.56 Agreement between Salvatore Zizza and Bion effective December
31, 2008. (12)
10.57 Amendment #3 to 2006 Consolidated Incentive Plan. (12)
10.58 Agreement between Bright Capital, Ltd. and Dominic Bassani and
Bion effective January 11, 2009. (13)
10.59 Agreement between Mark A. Smith and Bion effective January 12,
2009. (13)
10.60 Orphanos Extension Agreement dated January 13, 2009. (13)
10.61 Articles of Amendment including Statement of Designation and
Determination of Preferences of Series B Convertible
Preferred Stock. (14)
10.62 Lease Agreement between Ronald Kreider and Kreider
Farms and Bion PA 1 LLC dated June 26, 2009. (15)
10.63 Capitalization Agreement between Bion Companies and
Bion PA 1 LLC dated June 30, 2009. (15)
10.64 Zizza Notice re Master Sublease Option Exercise (November 20,
2009). (16)
10.65 Town of Schroeppel resolution (December 10, 2009). (16)
10.66 Articles of Amendment including Statement of Designation and
Determination of Preferences of Series C Convertible
Preferred Stock. (17)
10.67 Extension Agreement with Mark A. Smith. (18)
10.68 Agreement with Edward Schafer. (18)
21 Subsidiaries of the Registrant. (1)
23.1 Consent of GHP Horwath, P.C., Independent Registered Public
Accounting Firm - Filed herewith electronically.
56
31.1 Certification of Chief Executive Officer and Principal Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
- Filed herewith electronically.
32.1 Certification of Chief Executive Officer and Principal Financial
Officer Pursuant to Section 18 U.S.C. Section 1350 - Filed
herewith electronically.
_______________
(1) Filed with Form 10SB12G on November 14, 2006.
(2) Filed with Form 10SB12G/A on February 1, 2007.
(3) Filed with Form 8-K on April 3, 2007.
(4) Filed with Form 8-K on August 13, 2007.
(5) Filed with Form 8-K on August 22, 2007.
(6) Filed with Form 8-K on February 27, 2008.
(7) Filed with Form 8-K on June 3, 2008.
(8) Filed with Form 8-K on June 19, 2008.
(9) Filed with Form 8-K on September 30, 2008.
(10) Filed with Form 8-K on November 13, 2008.
(11) Filed with September 30, 2008 Form 10-Q on November 14, 2008.
(12) Filed with Form 8-K on January 6, 2009.
(13) Filed with Form 8-K on January 15, 2009.
(14) Filed with March 31, 2009 Form 10-Q on May 14, 2009.
(15) Filed with Form 8-K on July 2, 2009.
(16) Filed with Form 8-K on December 15, 2009.
(17) Filed with December 31, 2009 Form 10-Q on February 9, 2010.
(18) Filed with Form 8-K on August 18, 2010.
(b) FINANCIAL STATEMENT SCHEDULES.
Our consolidated financial statements being filed as part of this Form
10-K are filed on Item 8 of this Form 10-K. All other schedules for which
provision is made in the applicable accounting regulations of the Securities
and Exchange Commission are not required under the related instructions or
are inapplicable, and therefore have been omitted.
57
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
CONTENTS
Consolidated financial statements:
Report of independent registered public accounting firm ........ F-2
Balance sheets ................................................. F-3
Statements of operations ....................................... F-4
Statements of changes in equity (deficit) ...................... F-5
Statements of cash flows ....................................... F-6
Notes to consolidated financial statements ..................... F-7 - F-27
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Bion Environmental Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Bion
Environmental Technologies, Inc. and subsidiaries ("the Company") as of June
30, 2010 and 2009, and the related consolidated statements of operations,
changes in equity (deficit) and cash flows for each of the years then ended.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bion
Environmental Technologies, Inc. and subsidiaries as of June 30, 2010 and
2009, and the results of their operations and cash flows for each of the
years then ended, in conformity with accounting principles generally accepted
in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has not
generated revenue and has suffered recurring losses from operations. These
factors raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also discussed in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As discussed in Note 2 to the consolidated financial statements, during
fiscal year 2010, the Company adopted the provisions of a new accounting
standard relating to noncontrolling interests.
/S/ GHP HORWATH, P.C.
Denver, Colorado
September 21, 2010
F-2
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2010 2009
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,026,084 $ 1,695,713
Prepaid rent and expenses 9,228 12,217
Other receivable - affiliate 8,797 8,797
Deposits and other receivables 11,956 11,956
------------ ------------
Total current assets 1,056,065 1,728,683
------------ ------------
Restricted cash (Note 10) 57,315 85,973
Property and equipment, net (Note 4) 889,251 477,229
------------ ------------
Total assets $ 2,002,631 $ 2,291,885
============ ============
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities
Accounts payable and accrued expenses $ 675,024 $ 834,638
Accrued payable - affiliate (Note 7) - 41,647
Loans payable - affiliates (Note 5) - 162,500
Deferred compensation (Note 6) - 175,000
------------ ------------
Total current liabilities 675,024 1,213,785
------------ ------------
Deferred compensation (Note 6) 165,000 150,000
Deferred rent (Note 10) 69,892 73,232
------------ ------------
Total liabilities 909,916 1,437,017
------------ ------------
Series B Redeemable Convertible Preferred
stock, $.01 par value, 50,000 shares
authorized, 28,170 and 21,320 shares issued
and outstanding, respectively; liquidation
preference of $2,887,425 and $2,144,876,
respectively 2,521,215 1,867,716
------------ ------------
Deficit (Note 7):
Bion's stockholders' deficit:
Series A Preferred stock, $0.01 par value,
10,000 shares authorized, no shares issued
and outstanding - -
Series C Convertible Preferred stock, $0.01
par value, 60,000 shares authorized; 18,000
and nil shares issued and outstanding,
respectively; liquidation preference of
$1,839,592 1,605,592 -
Common stock, no par value, 100,000,000
shares authorized, 12,754,830 and 12,126,448
shares issued, respectively; 12,050,521 and
11,422,139 shares outstanding, respectively - -
Additional paid-in capital 75,484,099 74,529,507
Accumulated deficit (78,624,862) (75,654,145)
------------ ------------
Total Bion's stockholders' deficit (1,535,171) (1,124,638)
------------ ------------
Noncontrolling interest (Note 3) 106,671 111,790
------------ ------------
Total deficit (1,428,500) (1,012,848)
------------ ------------
Total liabilities and deficit $ 2,002,631 $ 2,291,885
============ ============
See notes to consolidated financial statements.
F-3
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2010 AND 2009
2010 2009
------------ ------------
Revenue $ - $ -
------------ ------------
Operating expenses:
General and administrative (including stock-
based compensation (Note 7)) 2,777,871 1,959,810
Research and development (including stock-
based compensation (Note 7)) 194,381 357,331
------------ ------------
Total operating expenses 2,972,252 2,317,141
------------ ------------
Loss from operations (2,972,252) (2,317,141)
------------ ------------
Other expense and (income):
Interest expense 1,515 38,401
Interest income (12,931) (1,773)
Forfeiture of deferred compensation - (959,184)
Extinguishment of liabilities (Notes 6 and 8) 15,000 (1,826)
Other, net - (75,000)
------------ ------------
3,584 (999,382)
------------ ------------
Net loss (2,975,836) (1,317,759)
Net loss attributable to the noncontrolling
interest 5,119 5,902
------------ ------------
Net loss attributable to Bion (2,970,717) (1,311,857)
Dividends on preferred stock (334,605) (12,876)
------------ ------------
Net loss applicable to Bion's common
stockholders $ (3,305,322) $ (1,324,733)
============ ============
Net loss applicable to Bion's common
stockholders per basic common share $ (0.28) $ (0.12)
============ ============
Net loss applicable to Bion's common
stockholders per diluted common share $ (0.28) $ (0.12)
============ ============
Weighted-average number of common shares
outstanding,
Basic 11,833,673 10,684,962
============ ============
Diluted 11,833,673 10,684,962
============ ============
See notes to consolidated financial statements.
F-4
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 2010 AND 2009
Bion's Shareholders'
------------------------------------------------------------------- Non-
Series C Additional controll- Total
Preferred Stock Common Stock paid-in Accumulated ing equity/
Shares Amount Shares Amount capital deficit interest (deficit)
------ ---------- ---------- ------ ----------- ------------- --------- ------------
Balances, June 30, 2008 - $ - 11,070,658 $ - $73,422,195 $(74,342,288) $117,692 $ (802,401)
Vesting and remeasurement
of options for services - - - - 143,153 - - 143,153
Issuance of common stock
for services - - 290,343 - 177,370 - - 177,370
Issuance of warrants for
services - - - - 180,582 - - 180,582
Sale of common stock - - 446,667 - 380,000 - - 380,000
Dividends on Series B
preferred stock - - - - (12,876) - - (12,876)
Conversion of debt to
equity - - 318,780 - 239,083 - - 239,083
Net loss - - - - - (1,311,857) (5,902) (1,317,759)
------ ---------- ---------- ------ ----------- ------------- -------- -----------
Balances, June 30, 2009 - - 12,126,448 - 74,529,507 (75,654,145) 111,790 (1,012,848)
------ ---------- ---------- ------ ----------- ------------- -------- -----------
Vesting and remeasurement
of options for services - - - - 405,257 - - 405,257
Issuance of common stock
for services and project
construction services - - 306,990 - 511,527 - - 511,527
Issuance of warrants for
services - - - - 104,250 - - 104,250
Sale of common stock - - 8,769 - 13,153 - - 13,153
Sale of Series C pre-
ferred stock, net 18,000 1,566,000 - - - - - 1,566,000
Dividends on Series B
preferred stock - - - - (275,067) - - (275,067)
Dividends on Series C
preferred stock - 39,592 - - (59,538) - - (19,946)
Conversion of debt to
equity - - 315,449 - 255,010 - - 255,010
Cancellation of pre-
viously issued common
shares - - (2,826) - - - - -
Net loss - - - - - (2,970,717) (5,119) (2,975,836)
------ ---------- ---------- ------ ----------- ------------ -------- -----------
Balances, June 30, 2010 18,000 $1,605,592 12,754,830 $ - $75,484,099 $(78,624,862) $106,671 $(1,428,500)
====== ========== ========== ====== =========== ============ ======== ===========
See notes to consolidated financial statements.
F-5
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2010 AND 2009
2010 2009
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,975,836) $ (1,317,759)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation expense 16,886 15,454
Accrued interest on convertible notes and debt 16,515 33,069
Stock-based compensation 981,803 493,188
Forfeiture of deferred compensation - (959,184)
Decrease in prepaid rent and expenses 2,989 4,830
Increase in deposits and other receivables - (8,685)
(Decrease) increase in accounts payable and
accrued expenses (122,766) 266,827
(Decrease) increase in deferred rent (3,340) 1,367
Increase in deferred compensation - 516,076
------------ ------------
Net cash used in operating activities (2,083,749) (954,817)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in restricted cash 28,658 42,470
Purchase of property and equipment (389,677) (433,179)
------------ ------------
Net cash used in investing activities (361,019) (390,709)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 13,153 380,000
Proceeds from sale of Series B preferred stock 595,950 1,854,840
Proceeds from sale of Series C preferred stock 1,566,000 -
Repayment of loans payable - affiliates (162,500) -
Payment of Series B preferred dividends (217,518) -
Payment of Series C preferred dividends (19,946) -
Proceeds from loans payable - affiliates - 162,500
Proceeds from notes payable - affiliates - 165,000
------------ ------------
Net cash provided by financing activities 1,775,139 2,562,340
------------ ------------
Net (decrease) increase in cash and cash
equivalents (669,629) 1,216,814
Cash and cash equivalents at beginning of year 1,695,713 478,899
------------ ------------
Cash and cash equivalents at end of year $ 1,026,084 $ 1,695,713
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest and income taxes $ - $ -
Non-cash investing and financing transactions:
Exchange/conversion of debt to common stock $ 255,010 $ 239,083
Issuance of common stock in exchange for
project construction services 39,231 -
Series B preferred stock dividends 57,546 -
See notes to consolidated financial statements.
F-6
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 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 including ammonia (which is subsequently re-deposited to the
ground) from livestock waste streams based upon our research to date. Because
Bion's technology reduces the harmful releases and emissions from a CAFO on
which it is utilized, the CAFO can potentially increase its herd
concentration while lowering or maintaining its level of nutrient releases
and atmospheric emissions.
From 2003 through early 2008, the Company primarily focused on completing re-
development of its technology platform and business model. As such, during
that period we elected not to pursue near-term revenue opportunities such as
retrofitting existing CAFO's with our waste management solutions, because
such efforts would have diverted scarce management and financial resources
and negatively impacted our ability to complete: 1) re-development of our
technology for environmentally sound treatment of CAFO waste streams and 2)
development of our integrated technology platform in support of large-scale
sustainable Integrated Projects (defined below) including renewable energy
production.
Bion is now actively pursuing business opportunities in two broad areas: 1)
retrofit and environmental remediation of existing CAFOs to reduce nutrient
(nitrogen and phosphorus) releases and gaseous emissions (ammonia, greenhouse
gases, volatile organic compounds, etc.) in order to clean the air and water
in the surrounding areas (as described below) and 2) development of "closed
loop" Integrated Projects.
We believe that Bion's technology platform allows the integration of large-
scale CAFO's and their end-product users, renewable energy production from
the CAFO waste stream, on site utilization of the renewable energy generated
and biofuel/ethanol production in an environmentally and economically
sustainable manner while reducing the aggregate capital expense and operating
costs for the entire integrated complex ("Integrated Projects" or
"Projects"). In the context of Integrated Projects, Bion's waste treatment
process, in addition to mitigating polluting releases, generates renewable
energy from cellulosic portions of the CAFO waste stream which renewable
energy can be utilized by integrated facilities including ethanol plants,
CAFO end-product processors (including cheese, ice cream and/or bottling
plants in the case of dairy CAFOs and/or slaughter and/or processing
facilities in the context of beef CAFOs) and/or other users as a natural gas
replacement. Bion is presently involved in the very early development stage
regarding a beef-based Integrated Project in New York and is involved in pre-
development evaluations regarding opportunities for Integrated Projects in
Nebraska (dairy) and elsewhere.
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.
F-7
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
("Bion Services") and Bion PA-1 LLC ("LLC")) a Bion system to treat the waste
of the milking dairy cows (milkers, dry cows and heifers) at the Kreider
Dairy, located in Mannheim, Pennsylvania. In addition, the agreement provides
for a second phase which will include a renewable energy facility ("REF")
that will treat the cellulosic solid wastes from Phase 1 together with the
waste stream from Kreider's poultry facilities to produce renewable energy
for Bion's waste treatment facility and/or for market sales. The Phase 1
system will be owned and operated by Bion through LLC, in which Kreider will
have the option to purchase a noncontrolling interest. To complete final
design work and all building, zoning and other related pre-construction
matters, substantial capital (equity and/or debt) has been and will continue
to be expended. Additional funds will be expended for construction. Upon
successful construction and operation of these systems, the Company
anticipates that it will earn revenue from the sale of nutrient (and other)
environmental credits related to the Kreider system and through sales of
renewable energy generated by the Kreider systems.
During January 2009, the Board of Pennsylvania Infrastructure Investment
Authority ("Pennvest") approved a loan up to $7.8 million ("Pennvest Loan")
to LLC for development and construction of the Phase 1 System at Kreider.
The Pennvest Loan is structured in phases (pre and post-completion of
permitting/commencement of construction) and Pennvest's disbursements will
take the form of reimbursement of qualified sums expended by LLC. In
connection with the Pennvest Loan, the Company has provided a 'technology
guaranty' regarding nutrient reduction performance of the Kreider System
which will expire when the Kreider System's nutrient reduction performance
has been demonstrated. After substantial unanticipated delays over the
summer, fall and winter of 2009 and spring of 2010, on August 12, 2010 the
Company received its permit for construction of the Phase I Kreider System.
The Company anticipates that initial construction related activities and
ordering of equipment will commence within 30 days. The Company anticipates
that the initial closing/settlement of the Pennvest Loan will take place
within 30-45 days. The Company will submit its initial
drawdown/reimbursement request to Pennvest shortly thereafter and anticipates
that the initial drawdown/reimbursement from Pennvest pursuant to the
Pennvest Loan will be received in the next 60-90 days. Bion is in the
process of finalizing its design for the Phase 1 Kreider System. The
Pennsylvania Department of Environmental Protection recently re-certified the
nutrient credits for this project. It is anticipated that construction will
be completed and operations commenced during the spring of 2011.
Going concern and management's plans:
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. The Company has not generated revenues and
has incurred net losses of approximately $2,976,000 and $1,318,000 during the
years ended June 30, 2010 and 2009, respectively. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability or classification of assets or the
amounts and classification of liabilities that may result should the Company
be unable to continue as a going concern. The following paragraphs describe
management's plans with regard to these conditions.
During the year ended June 30, 2010, the Company sold 18,000 shares of the
Company's Series C Preferred shares at $100 per share, which resulted net
proceeds to the Company of $1,566,000 after commissions. Through final
F-8
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
closing on September 17, 2010, an additional 4,800 shares of Series C
Preferred Stock were sold for net proceeds of approximately $417,600 for
total net proceeds of approximately $643,800 from the sale of 7,400 shares of
Series C Preferred Stock in a second offering. The Company has 22,800 shares
of Series C Preferred Stock outstanding as of this date.
During the year ended June 30, 2009, the Company completed an offering of the
Company's Series B Preferred shares, which resulted in the issuance of 21,320
shares at $100 per share resulting in net proceeds to the Company of
$1,854,840. During the year ended June 30, 2010, the Company issued an
additional 6,850 shares resulting in net proceeds to the Company of $595,950.
At June 30, 2010, the Company has a working capital surplus and stockholders'
deficit of approximately $381,000 and $1,535,000, respectively.
The Company continues to explore sources of additional financing to satisfy
its current operating requirements. While the Company currently does not face
a severe working capital shortage, it is not currently generating any
revenues. The Company will need to obtain additional capital to fund its
operations and technology development, to satisfy existing creditors, to
develop Projects and to construct the Kreider Farm facilities. The Company
anticipates that it will seek to raise from $5,000,000 to $50,000,000 (debt
and equity) during the next twelve months. There is no assurance, especially
in the extremely unsettled capital markets that presently exist, that the
Company will be able to obtain the funds that it needs to stay in business,
complete its technology development or to successfully develop its business.
There can be no assurance that funds required during the next twelve months
or thereafter will be generated from operations or that those funds will be
available from external sources such as debt or equity financings or other
potential sources. The lack of additional capital resulting from the
inability to generate cash flow from operations or to raise capital from
external sources would force the Company to substantially curtail or cease
operations and would, therefore, have a material adverse effect on its
business. Further, there can be no assurance that any such required funds, if
available, will be available on attractive terms or that they will not have a
significantly dilutive effect on the Company's existing shareholders. All
of these factors have been exacerbated by the extremely unsettled credit and
capital markets presently existing.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Bion Integrated Projects Group, Inc. (formerly
Bion Dairy Corporation ("Projects Group"), Bion Technologies, Inc., BionSoil,
Inc., Bion Services, LLC and its majority owned subsidiary, Centerpoint
Corporation ("Centerpoint") (Note 3). All significant intercompany accounts
and transactions have been eliminated in consolidation.
Property and equipment:
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
generally three to ten years. The Company capitalizes all direct costs and
all indirect incrementally identifiable costs related to the design and
F-9
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
construction of its Integrated Projects. The Company reviews its property
and equipment for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Management believes that no impairment exists at June 30, 2010.
Income taxes:
The Company recognizes deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their tax bases, as
well as net operating losses.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets or liabilities of a change in tax rates is recognized in the
period in which the tax change occurs. A valuation allowance is provided to
reduce the deferred tax assets by 100%, since the Company believes that at
this time it is more likely than not that the deferred tax asset will not be
realized.
The Company files income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. The Company is no longer subject to U.S. federal
and state tax examinations for fiscal years before 2005. Management does not
believe there will be any material changes in the Company's unrecognized tax
positions over the next 12 months.
The Company's policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. As of June
30, 2010, there were no penalties or accrued interest amounts associated with
any unrecognized tax benefits, nor was any interest expense recognized during
the years ended June 30, 2010 and 2009.
Cash and cash equivalents:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Loss per share:
Basic loss per share amounts are calculated using the weighted average number
of shares of common stock outstanding during the period. Diluted loss per
share assumes the conversion, exercise or issuance of all potential common
stock instruments, such as options or warrants, unless the effect is to
reduce the loss per share. During the years ended June 30, 2010 and 2009,
the basic and diluted loss per share is the same, as the impact of potential
dilutive common shares is anti-dilutive.
The following table represents the warrants, options and convertible
securities excluded from the calculation of diluted loss per share:
F-10
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
June 30, 2010 June 30, 2009
------------- -------------
Warrants 5,347,616 4,490,616
Options 2,270,833 1,995,833
Convertible debt 110,000 388,864
Convertible preferred stock 1,903,611 1,072,438
The following is a reconciliation of the denominators of the basic loss per
share computations for the years ended June 30, 2010 and 2009:
Year ended Year ended
June 30, 2010 June 30, 2009
------------- -------------
Shares issued - beginning of period 12,126,448 11,070,658
Shares held by subsidiaries (Note 7) (704,309) (704,309)
---------- ----------
Shares outstanding - beginning of
period 11,422,139 10,366,349
Weighted average shares issued
during the period 411,534 318,613
---------- ----------
Basic weighted average shares -
end of period 11,833,673 10,684,962
========== ==========
Fair value measurements:
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date in the principal or most advantageous
market. The Company uses a fair value hierarchy that has three levels of
inputs, both observable and unobservable, with use of the lowest possible
level of input to determine fair value.
Level 1 - quoted prices (unadjusted) in active markets for identical assets
or liabilities;
Level 2 - observable inputs other than Level 1, quoted prices for similar
assets or liabilities in active markets, quoted prices for identical or
similar assets and liabilities in markets that are not active, and model-
derived prices whose inputs are observable or whose significant value drivers
are observable; and
Level 3 - assets and liabilities whose significant value drivers are
unobservable.
Observable inputs are based on market data obtained from independent sources,
while unobservable inputs are based on the Company's market assumptions.
Unobservable inputs require significant management judgment or estimation.
In some cases, the inputs used to measure an asset or liability may fall into
different levels of the fair value hierarchy. In those instances, the fair
value measurement is required to be classified using the lowest level of
input that is significant to the fair value measurement. Such determination
requires significant management judgment.
F-11
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
The fair value of cash and cash equivalents and accounts payable approximates
their carrying amounts due to their short-term maturities. The fair value of
the redeemable preferred stock approximates its carrying value due to the
dividends accrued on the preferred stock which are reflected as part of the
redemption value.
Stock-based compensation:
The Company recognizes the cost of employee services received in exchange for
an award of equity instruments in the financial statements and the cost is
measured based on the grant date fair value of the award. The stock option
compensation expense is recognized over the period during which an employee
is required to provide service in exchange for the award (the requisite
service period). The Company utilizes the Black-Scholes option-pricing model
to determine fair value. Key assumptions of the Black-Scholes option-pricing
model include applicable volatility rates, risk-free interest rates and the
instrument's expected remaining life. These assumptions require significant
management judgment.
The Company has issued non-employee options that include service conditions
and have graded vesting schedules. Generally for these arrangements, the
measurement date of the services occurs when the options vest. Recognition
of compensation cost for reporting periods prior to the measurement date is
based on the then current fair value of the options. Fair value of the
options is determined using a Black-Scholes option-pricing model. Any
subsequent changes in fair value will be recorded on the measurement date.
Compensation cost in connection with options that are not fully vested is
being recognized on a straight-line basis over the requisite service period
for the entire award.
Use of estimates:
In preparing the Company's consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentrations of credit risk:
The Company's financial instruments that are exposed to concentrations of
credit risk consist of cash and cash equivalents. The Company's cash and
cash equivalents are in demand deposit accounts placed with federally insured
financial institutions and selected brokerage accounts. Such deposit accounts
at times may exceed federally insured limits. The Company has not
experienced any losses on such accounts.
Comprehensive income (loss):
For the years ended June 30, 2010 and 2009, there was no difference between
net loss and comprehensive loss.
F-12
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
Revenue recognition:
While the Company has not reported any revenues for the years ended June 30,
2010 and 2009, the Company anticipates that future revenues will be generated
from product sales and technology license fees. The Company expects to
recognize revenue from product sales when there is persuasive evidence that
an arrangement exits, 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
integrated system. 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.
Codification of US Generally Accepted Accounting Principles:
In June 2009, the Financial Accounting Standards Board ("FASB") approved the
FASB Accounting Standards Codification ("the Codification") as the single
source of authoritative nongovernmental Generally Accepted Accounting
Principles ("GAAP"). All existing accounting standard documents, such as
FASB, American Institute of Certified Public Accountants, Emerging Issues
Task Force and other related literature, excluding guidance from the SEC,
have been superseded by the Codification. All other non-grandfathered, non-
SEC accounting literature not included in the Codification has become non-
authoritative. The Codification did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The Codification was effective for
interim or annual periods ending after September 15, 2009, and impacts the
Company's consolidated financial statements, as all references to
authoritative accounting literature are now referenced in accordance with the
Codification. There have been no changes to the content of the Company's
consolidated financial statements or disclosures as a result of implementing
the Codification during the quarter ended September 30, 2009.
As a result of the Company's implementation of the Codification during the
year ended June 30, 2010, previous references to new accounting standards and
literature are no longer applicable.
Noncontrolling interests:
On July 1, 2009, the Company adopted the new accounting and reporting
standard for ownership interests in subsidiaries held by parties other than
the parent ("noncontrolling interest") issued by the FASB. In accordance
with the standard, the Company changed the reporting of noncontrolling
interests on the face of the consolidated financial statements to separately
classify noncontrolling interests within the equity section of the
consolidated balance sheets and to separately report the amounts attributable
to controlling and noncontrolling interests in the consolidated statements of
operations for all periods presented. The standard also requires that the
noncontrolling interest continues to be attributed its share of losses even
if that attribution results in a deficit noncontrolling interest balance.
F-13
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
Recent accounting pronouncements:
In June 2009, the FASB issued a new accounting standard which provides
guidance that, among other things, requires a qualitative rather than
quantitative analysis to determine the primary beneficiary of a variable
interest entity ("VIE"), which amends previous guidance for consideration of
related party relationships in the determination of the primary beneficiary
of a VIE, amends certain guidance for determining whether an entity is a VIE,
requires continuous assessments of whether an enterprise is the primary
beneficiary of a VIE, and requires enhanced disclosures about an enterprise's
involvement with a VIE. The adoption of this guidance (effective for the
Company July 1, 2010) is not expected to have a material impact on the
Company's consolidated financial statements.
In May 2009, the FASB established general standards for accounting and
disclosure of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. The
pronouncement required the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date, whether that date
represents the date the financial statements were issued or were available to
be issued. In February 2010, the FASB amended this standard. As a result, the
Company is no longer required to disclose in the financial statements that
the Company has done so or disclose the date through which subsequent events
have been evaluated.
3. NONCONTROLLING INTEREST OF CENTERPOINT CORPORATION:
For the years ended June 30, 2010 and 2009, the Company owns a 58.9% interest
in Centerpoint.
During the years ended June 30, 2010 and 2009, Centerpoint had losses of
approximately $12,500 and $14,400, respectively. The noncontrolling interest
as of June 30, 2010 was $106,671.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
June 30, 2010 June 30, 2009
------------- -------------
Research and development equipment $ - $ 305,266
Project construction in progress 845,992 433,179
Leasehold improvements 31,336 31,336
Furniture 28,932 28,932
Computers and office equipment 37,139 31,680
-------- ---------
943,399 830,393
Less accumulated depreciation (54,148) (353,164)
-------- ---------
$889,251 $ 477,229
======== =========
Depreciation expense was $16,886 and $15,454 for the years ended June 30,
2010 and 2009, respectively.
F-14
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
5. LOANS PAYABLE - AFFILIATES:
During the year ended June 30, 2009, Dominic Bassani, Vice-President Special
Projects and Strategic Planning for the Projects Group, Mark A. Smith, the
Company's President, and a major shareholder loaned the Company $120,000,
$7,500 and $35,000, respectively, for working capital needs. The loans,
totaling $162,500 as of June 30, 2009, were non-interest bearing and were
repaid in July 2009.
6. DEFERRED COMPENSATION:
As of December 31, 2009, the Company owed Brightcap Capital Ltd.
("Brightcap") for services provided by Mr. Bassani, deferred compensation of
$325,000. The Company entered into the Brightcap Agreement (see Note 12),
whereby the deferred compensation of Brightcap owed as of December 31, 2008
totaling $175,000, was made convertible until December 31, 2009 (subsequently
extended to January 14, 2010) into the Company's restricted common stock, at
Brightcap's option, at a price of $0.75 per share, the fair value of the
shares at the date of the agreement. As the conversion price of $0.75 per
shares approximated the fair value of the shares of common stock at the time
the conversion agreement was entered into, no beneficial conversion feature
existed. Effective January 14, 2010, this obligation was converted into
233,334 shares of the Company's restricted common stock pursuant to its
terms. The Company entered into another agreement with Brightcap in June
2009, whereby the deferred compensation earned by Brightcap from January 1,
2009 through June 30, 2009, totaling $150,000, was made due July 1, 2010 and
convertible until July 1, 2010 into the Company's restricted common stock, at
Brightcap's option, at a price of $1.50 per share, the fair value of the
shares at the date of the agreement. As the conversion price of $1.50 per
share approximated the fair value of the shares at the time the conversion
agreement was entered into, no beneficial conversion feature existed. During
June 2010, the Company entered into an extension agreement with Brightcap
pursuant to which the maturity date and the conversion date of the deferred
compensation were extended to July 1, 2011. As consideration for the
extension, an additional $15,000 principal was added to the obligation which
as of June 30, 2010 totals $165,000 and the deferred compensation accrues
interest commencing July 1, 2010 at 10% per annum. The debt modification was
deemed significant, as the difference in the cash flows is greater than 10%,
and resulted in a constructive extinguishment of debt. Accordingly, the
Company recorded a loss on extinguishment of debt in the amount of $15,000,
which represented the additional fair value given to Brightcap for extending
the maturity date.
7. STOCKHOLDERS' EQUITY:
Series B Preferred stock:
In March 2009, the Company authorized the issuance of 50,000 shares of Series
B Preferred stock; which have a par value of $0.01 per share and are issuable
at a price of $100 per share. The Series B Preferred stock is convertible
for three years from the date of issuance at the option of the holder into
shares of the Company's common stock calculated by dividing the sum of the
$100 per share purchase price plus any accrued and unpaid dividends by $2.00
(the Conversion Rate). The Series B Preferred stock shall be automatically
and mandatorily converted into shares of the Company's common stock at the
Conversion Rate upon each occasion (at least 30 calendar days apart) after a
date of six months subsequent to the initial issuance of the Series B
F-15
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
Preferred stock on which the closing price of the Company's common stock has
been equal or greater than 150% of the Conversion Rate (initially $3.00) for
twenty consecutive trading days with a reported average daily trading volume
of 10,000 shares or more. The Series B Preferred stock may be redeemable at
the option of the Company after one year from the issuance on 10 days'
written notice, at a price equal to $100 per share plus any accrued unpaid
dividends. During the 10 day period, the holder may elect to convert the
Series B Preferred stock to the Company's common stock at the Conversion
Rate. On the third anniversary of issuance, the Company shall redeem the
outstanding Series B Preferred stock at the price of $100 per share plus any
accrued unpaid dividends. The Series B Preferred stock accrues dividends at
a rate of 2.5% per quarter (10% per year) and shall be earned and accrued or
paid quarterly.
Because the Series B Preferred stock is redeemable in cash at a fixed price
($100 per share plus accrued unpaid dividends) on a fixed date (the third
anniversary of issuance), the Company has classified the Series B Preferred
stock outside of stockholders' equity. Therefore, the Series B Preferred
stock has been recorded at its current redemption value as "temporary equity"
in the accompanying consolidated balance sheet. Dividends on the Series B
Preferred stock are reflected as part of the redemption value with an offset
to reduce additional paid-in capital, and are included in the determination
of net loss applicable to common stockholders.
During the year ended June 30, 2009, the Company sold 21,320 shares of the
Company's Series B Preferred shares at $100 per share which resulted in net
proceeds to the Company of $1,854,840. During the year ended June 30, 2010,
the Company concluded the offering of Series B Preferred stock and issued
6,850 shares of Series B Preferred stock for cash proceeds of $685,000 (net
proceeds of $595,950 after commissions).
The Company declared dividends on July 29, 2009, for the Series B Preferred
stockholders with a record date of June 30, 2009, totaling $12,876, which
were paid on August 15, 2009. The Company declared dividends on October 28,
2009 for the Series B Preferred stockholders with a record date of September
30, 2009 totaling $63,792, which were paid on November 16, 2009. The Company
declared dividends on February 1, 2010 for the Series B Preferred
stockholders with a record date of December 31, 2009, totaling $70,425, which
were paid on February 16, 2010. The Company declared dividends on April 27,
2010 for the Series B Preferred stockholders with a record date of March 31,
2010, totaling $70,425; which were paid on May 17, 2010. The Company
declared dividends on July 31, 2010 for the Series B Preferred stockholders
with a record date of June 30, 2010, totaling $70,425; which were paid on
August 16, 2010.
Series C Preferred stock:
During December 2009, the Company authorized the issuance of 60,000 shares of
Series C Preferred stock, which have a par value of $0.01 per share and are
issuable at a price of $100 per share. The Series C Preferred stock is
convertible at the option of the holder at any time from the date of
issuance, into shares of the Company's common stock calculated by dividing
the sum of the $100 per share purchase price plus any accrued and unpaid
dividends by $4.00 (the Conversion Rate), provided the shares have not been
redeemed into common shares by the Company at is sole election. A portion
(up to 100% as calculated below) of each share of Series C Preferred stock
shall be automatically and mandatorily converted into shares of the Company's
F-16
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
common stock at the Conversion Rate upon each occasion (at least 30 calendar
days apart) after a date of six months subsequent to the initial issuance of
the Series C Preferred stock on which the closing price of the Company's
common stock has been equal or greater than 150% of the Conversion Rate
(initially $6.00) for twenty consecutive trading days with a reported average
daily trading volume of 10,000 shares or more. On each occasion for
mandatory conversion as set forth above, a sufficient portion of the
outstanding shares of Series C Preferred stock shall be prorata converted so
that the holders of the Series C Preferred stock receive an aggregate number
of shares of the Company's restricted common stock equal to 7.5 times the
average reported daily volume of trading in the Company's publicly traded
common stock for the applicable twenty day period and each outstanding share
shall thereafter be proportionately reduced in its rights to represent the
effect of the partial conversions. The Series C Preferred stock accrues
dividends at a rate of 2.5% per quarter (10% per year) and shall be earned
and accrued or paid quarterly.
Dividends on the Series C Preferred stock are reflected as part of the
redemption value with an offset to reduce additional paid-in capital, and are
included in the determination of net loss applicable to common stockholders.
During the year ended June 30, 2010, the Company issued 18,000 shares of
Series C Preferred stock for cash proceeds of $1,800,000 (net proceeds of
$1,566,000 after commissions).
The Company declared dividends on February 1, 2010 for the Series C Preferred
stockholders with a record date of December 31, 2009 totaling $800, which
were paid on February 16, 2010. The Company declared dividends on April 27,
2010 for the Series C Preferred stockholders with a record date of March 31,
2010 totaling $19,146; which were paid on May 17, 2010. The Company declared
dividends on July 31, 2010 for the Series C Preferred stockholders with a
record date of June 30, 2010 totaling $39,592; which were paid on August 16,
2010.
Common stock:
Holders of common stock are entitled to one vote per share on all matters to
be voted on by common stockholders. In the event of liquidation, dissolution
or winding up of the Company, the holders of common stock are entitled to
share in all assets remaining after liabilities have been paid in full or set
aside and the rights of any outstanding preferred stock have been satisfied.
Common stock has no preemptive, redemption or conversion rights. The rights
of holders of common stock are subject to, and may be adversely affected by,
the rights of the holders of any outstanding series of preferred stock or any
series of preferred stock the Company may designate in the future.
Centerpoint holds 704,309 shares of the Company's common stock. These shares
of the Company's common stock held by Centerpoint are for the benefit of its
shareholders without any beneficial interest. The Company accounts for these
shares similar to treasury stock.
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 12), the Company
issued 200,000 shares of the Company's restricted common stock at $0.75 per
F-17
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
share as prepayment of Mr. Smith's calendar year 2009 base compensation of
$150,000. As of June 30, 2010, the shares are fully vested and the Company
has recorded $150,000 as compensation expense.
From November 2008 through February 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 two of its employees.
During January 2009 through June 2009, the Company issued 69,009 shares of
the Company's restricted common stock ranging from $0.75 to $1.50 per share
for consulting services valued at $86,370 to various consultants.
During June 2009, the Company issued 80,000 and 33,334 shares of the
Company's restricted common stock at $1.00 and $1.50 per share, respectively,
for cash proceeds of $80,000 and $50,000, respectively.
On June 30, 2009 the Company issued 69,692, 69,703 and 91,283 shares of the
Company's restricted common stock to Mr. Zizza, Mr. Bassani and a major
shareholder, respectively, under terms of convertible promissory notes of
$52,268, $52,277 and $68,462, respectively, at $0.75 per share.
During the year ended June 30, 2010, the Company issued 176,990 shares of the
Company's restricted common stock at prices ranging from $1.01 to $2.25 per
share for consulting services valued at $397,060, in aggregate, to various
consultants.
In July 2009, the Company issued 130,000 common shares of the Company as
stock bonuses to certain key employees and a consultant at $1.01 per share,
the approximate market value on the date of grant, totaling $131,300. The
stock bonuses are subject to vesting and during the year ended June 30, 2010,
$75,236 was recorded as compensation expense and $39,231 was capitalized as
project construction in progress as it directly related to construction
services provided by employees and consultants.
During September 2009, the Company issued 8,769 shares of the Company's
restricted common stock at $1.50 per share for cash proceeds of $13,153.
In September 2009, the Company issued 55,530 shares of the Company's
restricted common stock in conversion and satisfaction of the Company's
accrued payable of $41,647 to a company controlled by Mr. Salvatore Zizza,
the former Chairman of the Projects Group. The shares were issued pursuant to
an agreement whereby Mr. Zizza had the option to convert the payable into
common shares of the Company at $0.75 per share at any time prior to the
obligation being paid by the Company.
In September 2009, the Company issued 24,565 shares of the Company's
restricted common stock in satisfaction of accounts payable of $36,848. The
shares were valued at $1.50 per share which approximated the market value at
the time of the issuance.
In October 2009, the Company issued 2,020 shares of the Company's restricted
common stock in satisfaction of accrued interest on convertible loans payable
from affiliates totaling $1,515. The shares were valued at $0.75 per share
which approximated the market value at the date of loan payable agreements.
In January 2010, the Company issued 233,334 shares of the Company's
restricted common stock in conversion and satisfaction of deferred
F-18
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
compensation owed Brightcap totaling $175,000. The shares were issued
pursuant to an agreement whereby Brightcap had the option to convert the
deferred compensation into common shares of the Company at $0.75 per share,
the approximate market value of the shares at the time of the agreement (Note
6).
During March 2010, the Company cancelled 2,826 of its previously issued
common shares that were deemed undeliverable pursuant to the terms of a 2007
class action litigation settlement.
Warrants:
As of June 30, 2010, the Company had the following common stock warrants
outstanding:
Number of Shares Exercise Price Expiration Date
---------------- -------------- ---------------
Class SVDB 1-6 800,000 $ 3.00 December 31, 2018
Class DB-1 600,000 1.00 December 31, 2018
Class DB-1A 1,000,000 0.75 December 31, 2018
Class A 1-3 600,000 2.50 December 31, 2018
Class SVMAS-1 67,500 3.50 December 31, 2018
Class SVMAS-1A 40,000 3.50 December 31, 2018
Class SVMAS 2-3 72,500 2.50 December 31, 2018
Class SVB 1-4 125,000 2.50 December 31, 2018
Class SVC 1-5 125,000 4.25 December 31, 2018
Class SV-SEI 1-2 32,292 1.50 December 31, 2012
Class C,D,E 275,000 2.50 April 30, 2015
Class O 100,000 3.00 December 31, 2018
Class DM 150,000 3.00 December 31, 2011
Class MAS 80,000 2.50 December 31, 2018
Class MAS-1 A-K 300,000 0.75 December 31, 2018
Class GK 20,000 2.00 March 31, 2011
Class TO-1 15,000 0.75 December 31, 2018
Class BW 10,000 2.20 June 15, 2012
Class Z 1-3 53,324 1.25 December 31, 2018
Class NCC-1 25,000 2.00 May 31, 2014
Class DB-2 600,000 2.50 January 15, 2019
Class MAS 4-1 200,000 2.50 January 15, 2019
Class NH-1 12,000 2.25 February 17, 2013
Class NHJSG 1-3 22,500 2.25 December 31, 2015
Class NHJRG 1-3 22,500 2.25 December 31, 2015
---------
5,347,616
=========
In September 2009, warrants to purchase 600,000 and 200,000 shares of the
Company's common stock at $2.50 per share were issued pursuant to various
extension agreements with Mr. Bassani and Mr. Smith, respectively (Note 12).
The warrants were determined to have a fair value of $0.10 per warrant and
expire on January 15, 2019. The value placed upon the warrants to purchase
common stock at $2.50 per share was determined to be $0.10 per warrant based
on factors including the evaluation of the Company's value as of the date of
the issuances, consideration of the Company's limited liquid resources and
business prospects, the market price of the Company's stock in its mostly
inactive public market, the concurrent sales of restricted common stock at
F-19
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
$1.50 per share, and the historical valuation and purchases of the Company's
warrants. The Company recorded non-cash compensation of $80,000 related to
the warrant issuances.
In February 2010, warrants to purchase 12,000 shares of the Company's common
stock at $2.25 per share were issued pursuant to an agreement with a
consultant. The warrants were determined to have a fair value of $0.25 per
warrant and expire on February 17, 2013. The value placed upon the warrants
to purchase common stock at $2.25 per share was determined to be $0.25 per
warrant based on factors including the evaluation of the Company's value as
of the date of the issuances, consideration of the Company's limited liquid
resources and business prospects, the market price of the Company's stock in
its mostly inactive public market and the historical valuation and purchases
of the Company's warrants. The Company recorded non-cash compensation of
$3,000 related to the warrant issuances.
From April through June 2010, warrants to purchase 45,000 shares of the
Company's common stock at $2.25 per share were issued pursuant to an
agreement with two consultants. The warrants were determined to have a fair
value of $0.25 per warrant and expire on December 31, 2015. The value placed
upon the warrants to purchase common stock at $2.25 per share was determined
to be $0.25 per warrant based on factors including the evaluation of the
Company's value as of the date of the issuances, consideration of the
Company's limited liquid resources and business prospects, the market price
of the Company's stock in its mostly inactive public market and the
historical valuation and purchases of the Company's warrants. The Company
recorded non-cash compensation of $11,250 related to the warrant issuances.
The weighted average exercise price for the outstanding warrants is $2.03,
and the weighted average remaining contractual life as of June 30, 2010 is 8
years.
Stock options:
The Company's 2006 Consolidated Incentive Plan (the "2006 Plan"), as amended,
provides for the issuance of options to purchase up to 6,000,000 shares of
the Company's common stock. Terms of exercise and expiration of options
granted under the 2006 Plan may be established at the discretion of the Board
of Directors, but no option may be exercisable for more than ten years.
In May and June of 2008, the Board of Directors, in an effort to retain key
employees and consultants, approved the modifications of certain options to
certain employees and consultants. The modifications included the reduction
of the exercise price of certain options below the fair market value on the
date of grant, modifications to the vesting terms and extension of the expiry
dates. As a result of the modifications, the Company recorded incremental
compensation expense of $83,428, which was recognized at June 30, 2008 and
approximately $282,000 of additional compensation is being recognized over a
weighted average period of approximately 2 years.
The Company recorded compensation expense related to employee stock options
of $313,426 and $262,092 for the years ended June 30, 2010 and 2009,
respectively. The Company granted 275,000 and 75,000 options during the
years ended June 30, 2010 and 2009, respectively. The fair value of the
options granted during the years ended June 30, 2010 and 2009 were estimated
on the grant date using the Black-Scholes option-pricing model with the
following assumptions:
F-20
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
Weighted Range Weighted Range
Average June 30, Average June 30,
June 30, 2010 2010 June 30, 2009 2009
------------------------ ------------------------
Volatility 99% 97.5%-104% 99% 72%-151%
Dividend yield - - - -
Risk-free interest rate 1.41% 1.12%-1.70% 1.97% 1.63%-2.64%
Expected term (years) 2.61 2.5-2.88 4 3-6
The expected volatility was based on the historical price volatility of the
Company's common stock. The dividend yield represents the Company's
anticipated cash dividend on common stock over the expected term of the stock
options. The U.S. Treasury bill rate for the expected term of the stock
options was utilized to determine the risk-free interest rate. The expected
term of stock options represents the period of time the stock options granted
are expected to be outstanding based upon management's estimates.
A summary of option activity under the 2006 Plan for the two years ended June
30, 2010 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 June 30, 2009 1,995,833 3.01 4.3 -
Granted 275,000 1.63
Exercised - -
Forfeited - -
Expired - -
---------------------------------------------
Outstanding at June 30, 2010 2,270,833 $ 2.85 3.4 $81,250
=============================================
Exercisable at June 30, 2010 2,183,333 $ 2.88 3.4 $68,750
=============================================
The following table presents information relating to nonvested stock options
as of June 30, 2010:
F-21
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
Weighted Average
Options Grant-Date Fair Value
----------------------------------
Nonvested at July 1, 2009 203,749 $ 1.31
Granted 275,000 0.82
Vested (391,249) (1.10)
Forfeited - -
----------------------------------
Nonvested at June 30, 2010 87,500 $ 0.67
==================================
The total fair value of stock options that vested during the years ended June
30, 2010 and 2009 was $428,700 and $491,877, respectively. As of June 30,
2010, the Company had $43,708 of unrecognized compensation cost related to
stock options that will be recorded over a weighted average period of less
than one year.
The Company has issued options to non-employees to purchase shares of the
Company's common stock in exchange for services. As of June 30, 2010, non-
employee options represented 595,833 of the 2,270,833 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 June 30, 2010.
These non-employee options were valued using the Black-Scholes option-pricing
model. The fully vested options have been fully amortized on the straight-
line method and resulted in no expense being recorded for the years ended
June 30, 2010 and 2009.
The remaining 503,333 non-employee options outstanding include service
conditions and have graded vesting schedules through November 30, 2009. As
of June 30, 2010, all of the 503,333 options that included service conditions
are fully vested. Generally for these agreements, the measurement date of
the services occurs when the options vest. Recognition of compensation cost
for reporting periods prior to the measurement date is based on the then
current fair value of the options as of each of the interim reporting dates.
Any subsequent change in fair value is recorded on the measurement date.
The fair value of these options was determined using the Black-Scholes
option-pricing model using the following assumptions at November 30, 2009; a
dividend yield of zero, risk-free interest rates of 3.21%, volatility of
158%, and an expected life of 8.5 years. Non-cash fair value
charges/(credits) of $91,831 and $(118,939) were recorded for the years ended
June 30, 2010 and 2009, respectively.
Stock-based compensation charges in operating expenses in the Company's
financial statements for the years ended June 30, 2010 and 2009 are as
follows:
F-22
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
Year ended Year ended
June 30, 2010 June 30, 2009
-----------------------------
General and administrative:
Fair value remeasurement of options
with service conditions $ 91,831 $(184,400)
Fair value of stock bonuses expensed 65,024 -
Fair value of stock options expensed 306,801 209,262
-----------------------------
Total $463,656 $ 24,862
=============================
Research and development:
Fair value remeasurement of options
with service conditions $ - $ 65,461
Fair value of stock bonuses expensed 10,211 -
Fair value of stock options expensed 6,625 52,830
-----------------------------
Total $ 16,836 $ 118,291
=============================
8. EXTINGUISHMENT OF LIABILITIES:
During the year ended June 30, 2009, the Company recognized other income due
to the extinguishment of liabilities of $1,826 resulting from the
derecognition of certain accounts payable. These accounts payable, which
related to business activities of the Company discontinued during the 2003
and 2004 fiscal years, were outstanding for 2-6 years and the vendors had
made no attempts to collect these amounts from the Company over the past
several years. The extinguishment of liabilities was recorded after a review
of the statute of limitations in the various states in which the original
liability was incurred.
9. INCOME TAXES:
The reconciliation between the expected federal income tax benefit computed
by applying the Federal statutory rate to loss before income taxes and the
actual benefit for taxes on loss for the years ended June 30, 2010 and 2009
are as follows:
2010 2009
-------------------------
Expected income tax benefit at statutory
rate $(1,103,000) $(486,000)
Permanent differences 5,000 4,000
Expiration of net operating losses 273,000 732,000
Change in valuation allowance 825,000 (250,000)
-------------------------
Income tax benefit $ - $ -
=========================
The Company has net operating loss carry-forwards ("NOLs") for tax purposes
of approximately $41,767,000 as of June 30, 2010. These NOLs expire on
various dates through 2030.
The utilization of the NOLs may be limited under Section 382 of the Internal
Revenue Code.
F-23
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
The Company's deferred tax assets for the years ended June 30, 2010 and 2009,
are estimated as follows:
2010 2009
--------------------------
NOLs - noncurrent $15,871,000 $15,118,000
Stock-based compensation - current 364,000 183,000
Deferred compensation - noncurrent 182,000 291,000
--------------------------
16,417,000 15,592,000
Valuation allowance (16,417,000) (15,592,000)
--------------------------
Net deferred tax assets $ - $ -
==========================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The Company has provided a valuation allowance of 100% of its net deferred
tax asset due to the uncertainty of generating future profits that would
allow for the realization of such deferred tax assets.
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 June 30, 2010, the Company has
reflected $57,315 as restricted cash related to the secured letter of credit.
The Company's obligations under the lease are partially guaranteed by Mr.
Salvatore Zizza, a former officer and director of the Company. The Company
has entered into three separate agreements to sub-lease approximately 100% of
the Company's lease obligation, and the tenants have also agreed to reimburse
the Company for leasehold improvements and furnishings. Because the lease
contains an escalation clause, the Company is recognizing rent under the
straight-line method resulting in an average monthly rent expense of $15,820.
The Company is also recognizing the sub-lease rental income from its tenants
under the straight-line method, with a monthly average of $15,820. The
difference between the straight-line method, and the actual lease payments
has resulted in a deferred rent liability of $69,892 as of June 30, 2010.
Rent expense net of contractual and month to month sub-lease rental income
was $19,815 and $33,083 for the years ended June 30, 2010 and 2009,
respectively.
At June 30, 2010, future minimum rental payments due under non-cancelable
leases and future minimum rental payments to be received under non-cancelable
subleases are:
F-24
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
Fiscal year: Operating lease Sublease Net operating
payments rentals lease payments
-------------------------------------------
2011 $198,602 $198,602 $ -
2012 212,775 212,775 -
2013 225,756 225,756 -
2014 97,219 97,219 -
-------------------------------------------
Total $734,352 $734,352 $ -
===========================================
Effective January 1, 2009, Mr. Zizza entered into a Master Sublease with the
Company pursuant to which Mr. Zizza became a sublessee and for a one year
initial period, made all payments pursuant to the lease and managed the lease
premises. Rental payments from existing sub-tenants are being deposited into
a Company bank account such that Mr. Zizza utilizes those funds towards the
monthly lease payment. During November 2009, Mr. Zizza exercised his option
to continue the Master Sublease for the entire term of the lease. Mr. Zizza
fulfilled his obligations under the Master Sublease during the one-year
initial period and in January 2010, he received the funds from the release of
the restricted cash securing the Company's letter of credit of $28,658.
Since Mr. Zizza exercised the option to continue the Master Sublease for the
entire term of the lease, Mr. Zizza will be entitled to the balance of
restricted funds securing the letter of credit of approximately $57,000 if he
fulfills his obligations pursuant to the Master Sublease.
11. 401(k) PLAN:
Effective December 1, 2001, the Company adopted the Bion Technologies, Inc.
401(k) Profit Sharing Plan and Trust (the "401(k) Plan"), a defined
contribution retirement plan for the benefit of its employees. The 401(k)
Plan is currently a salary deferral only plan and at this time the Company
does not match employee contributions. The 401(k) is open to all employees
over 21 years of age and no service requirement is necessary.
12. COMMITMENTS AND CONTINGENCIES:
Employment and consulting agreements:
On January 11, 2009, the Company and Mr. Smith entered into the Smith
Agreement whereby Mr. Smith agreed to continue to hold positions of Director,
President and General Counsel of the Company and its subsidiaries at an
annual salary of $150,000. Pursuant to the Smith Agreement, Mr. Smith was
granted a $37,500 bonus in the form of a warrant (and extension of
outstanding warrants previously issued to Mr. Smith), immediately vested, to
purchase 300,000 shares of the Company's common stock at $0.75 per share
until December 31, 2018, and Mr. Smith agreed to accept pre-payment of his
calendar year 2009 base compensation of $150,000 in the form of 200,000
restricted shares of Company common stock at a price of $0.75 per share. In
addition, Mr. Smith converted his deferred compensation as of December 31,
2008 into shares of the Company's common stock. On September 30, 2009, the
Company and Mr. Smith entered into an extension agreement whereby Mr. Smith
will continue to hold his current position in the Company through a date no
later than December 31, 2010. Commencing January 1, 2010, Mr. Smith is paid
a monthly salary of $16,000 in addition to a cash bonus of $15,000 paid in
January 2010. In addition Mr. Smith was granted a $20,000 bonus payable in
warrants to purchase 200,000 shares of the Company's common stock at a price
F-25
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
of $2.50 per share until January 15, 2019. Effective July 27, 2010 the
Company entered into an extension agreement whereby Mr. Smith will continue
to hold his current position in the Company through a date no later than
December 31, 2011. Commencing September 1, 2010, Mr. Smith is paid a monthly
salary of $19,000 in addition to a cash bonus of $20,000 to be paid on
January 1, 2011. In addition Mr. Smith was granted a $20,000 bonus payable
in warrants to purchase 200,000 shares of the Company's common stock at a
price of $2.00 per share until January 15, 2019.
Effective March 31, 2005, an agreement with Brightcap, through which the
services of Dominic Bassani are provided, was extended through March 31,
2009. Under the terms of the agreement, Brightcap will be paid $300,000
annually for Mr. Bassani's services. On January 11, 2009, the Company
entered in the Brightcap Agreement, which extends Mr. Bassani's services
under the terms of the March 31, 2005 agreement for up to an additional six
months. In addition, Mr. Bassani was granted a bonus of $125,000 in the form
of a) warrant, immediately vested, to purchase 1,000,000 shares of the
Company's common stock at $0.75 per share until December 31, 2018 and b) the
extension of all warrants previously issued to either Brightcap or Mr.
Bassani, now held by their donees, to December 31, 2018. The Brightcap
Agreement also required that upon the consummation of the next financing
received by the Company in excess of $1,000,000 net proceeds, the Company
would no longer defer compensation earned by Brightcap, rather it will be
paid in cash. Since July 2009, Brightcap has been paid in cash. The
Brightcap Agreement granted Brightcap the right to convert its existing
deferred compensation as of December 31, 2008 of $175,000 into 233,334 shares
of the Company's common stock at a price of $0.75 per share until December
31, 2009 which right was extended to January 14, 2010, on which date the
conversion took place (Note 6 and 7). The Brightcap Agreement also extended
the maturity date of Mr. Bassani's $50,000 promissory note to June 30, 2009
and allowed for the conversion of the principal and interest, in whole or in
part, at the election of Mr. Bassani, into the Company's restricted common
shares at $0.75 per share. The promissory note was converted on June 30,
2009. On September 30, 2009 the Company entered into an extension agreement
with Brightcap pursuant to which Mr. Bassani will provide services to the
Company through September 30, 2012 for $312,000 annually. In conjunction
with the extension agreement, Mr. Bassani was granted a $60,000 bonus payable
in warrants to purchase 600,000 shares of the Company's common stock at a
price of $2.50 per share until January 15, 2019. Mr. Bassani was also
granted an extension on the conversion date of the $175,000 deferred
compensation from December 31, 2009 until January 14, 2010.
Effective September 18, 2006, the Company entered into a four-year employment
agreement with Jeremy Rowland whereby Mr. Rowland assumed the position of
Chief Operating Officer of Dairy at an annual salary of $150,000. In June
2008, the employment agreement terms were extended through July 1, 2012. Mr.
Rowland now serves as Chief Operating Officer of the Company's Services Group
subsidiary.
The Company approved an employment agreement contract extension effective
June 30, 2009, with Craig Scott whereby Mr. Scott will continue to act as
Vice President of Capital Markets and Shareholder Relations through December
31, 2010, at an annual salary of $144,000. The Company will have the right
terminate the agreement with 30 days notice commencing December 2009, with no
further liability.
F-26
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
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 June 30, 2010, 442,500 shares remain outstanding
due to the expiry of 165,000 and 82,500 shares, to be issued when and if the
Company's stock price exceeds $10.00 and $20.00 per share, respectively.
In May 2008, the Company approved 250,000 stock options to certain employees
that will be granted upon the execution of new employment agreements.
Litigation:
The Company is currently not involved in any material litigation.
13. SUBSEQUENT EVENTS:
The Company has evaluated events that occurred subsequent to June 30, 2010
for recognition and disclosure in our financial statements and notes to our
financial statements.
From July 1, 2010 through September 17, 2010 the Company has issued 52,451
shares of the Company's common shares to various consultants valued at
approximately $99,000.
On August 31, 2010, the board of directors granted 50,000 options that vested
on September 1, 2010, with an exercise price of $2.50 per option and expire
on December 31, 2015.
From July 1, 2010 through final closing on September 17, 2010, an additional
4,800 shares of Series C Preferred Stock were sold for net proceeds of
approximately $417,600 for total net proceeds of approximately $643,800 from
the sale 7,400 shares of Series C Preferred Stock in a second offering of
Series C Preferred Stock. The Company has 22,800 shares of Series C Preferred
Stock outstanding as of this date.
F-27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned thereunder duly authorized.
BION ENVIRONMENTAL TECHNOLOGIES, INC.
Dated: September 21, 2010 By:/s/ Mark A. Smith
Mark A. Smith, President (Chief
Executive Officer) and Interim Chief
Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ Mark A. Smith President, General Counsel, September 21, 2010
Mark A. Smith Interim Chief Financial
Officer and Director
/s/ Jon Northrop Secretary and Director September 21, 2010
Jon Northrop