UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2008
[ ] Transition report pursuant section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number: 000-19333
BION ENVIRONMENTAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1176672
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)
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212-758-6622
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the issuer has filed all documents and reports to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. NOT APPLICABLE
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On November 13, 2008, there were 11,070,658 Common Shares issued and 10,366,349 Common Shares outstanding.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filed" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]
BION ENVIRONMENTAL TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated financial statements (unaudited):
Balance sheets ............................................ 3
Statements of operations .................................. 4
Statements of changes in stockholders' deficit ............ 5
Statements of cash flows .................................. 6
Notes to unaudited consolidated financial statements ...... 7-21
Item 2. Management's Discussion and Analysis or Plan of Operation .. 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 32
Item 4. Controls and Procedures .................................... 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 33
Item 1A. Risk Factors................................................ 33
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds ................................................... 33
Item 3. Defaults Upon Senior Securities ............................ 33
Item 4. Submission of Matters to a Vote of Security Holders ........ 33
Item 5. Other Information .......................................... 33
Item 6. Exhibits ................................................... 33
Signatures ................................................. 35
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2008 2008
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 88,391 $ 478,899
Prepaid rent and expenses 7,550 9,130
Deposits and other receivables 11,957 12,068
------------ ------------
Total current assets 107,898 500,097
------------ ------------
Restricted cash (Note 9) 128,443 128,443
Property and equipment, net (Note 4) 55,217 59,504
------------ ------------
Total assets $ 291,558 $ 688,044
============ ============
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 553,557 $ 567,811
Accrued payable - affiliate (Note 11) 41,647 41,647
Notes payable - affiliates (Note 6) 100,058 -
Deferred compensation (Note 7) 128,576 25,000
------------ ------------
Total current liabilities 823,838 634,458
------------ ------------
2007 Series A convertible promissory notes -
affiliates (Note 5) 871,012 784,122
Deferred rent (Note 9) 72,491 71,865
------------ ------------
Total liabilities 1,767,341 1,490,445
------------ ------------
Minority interest (Note 3) 131,586 117,692
------------ ------------
Stockholders' deficit (Note 8):
Preferred stock, $.01 par value, 10,000
shares authorized, no shares issued and
outstanding - -
Common stock, no par value, 100,000,000
shares authorized, 11,070,658 shares
issued, 10,366,349 outstanding - -
Additional paid-in capital 73,665,312 73,422,195
Accumulated deficit (75,272,681) (74,342,288)
------------ ------------
Total stockholders' deficit (1,607,369) (920,093)
------------ ------------
Total liabilities and stockholders'
deficit $ 291,558 $ 688,044
============ ============
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See notes to consolidated financial statements.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
2008 2007
------------ ------------
Revenue $ - $ -
Operating expenses:
General and administrative (including stock-
based compensation (Note 8)) 629,675 153,856
Research and development (including stock-
based compensation (Note 8)) 276,340 126,968
------------ ------------
Total operating expenses 906,015 280,824
------------ ------------
Loss from operations (906,015) (280,824)
------------ ------------
Other expense (income):
Interest expense 11,948 52,390
Interest income (1,464) (4,925)
Minority interest (Note 3) 13,894 73,517
Other, net - (1,258,195)
------------ ------------
24,378 (1,137,213)
------------ ------------
Net (loss) income $ (930,393) $ 856,389
============ ============
Net (loss) income per basic common share
(Note 2) $ (0.09) $ 0.11
============ ============
Net (loss) income per diluted common
share (Note 2) $ (0.09) $ 0.10
============ ============
Weighted-average number of common shares
outstanding (Note 2):
Basic 10,366,349 7,932,197
============ ============
Diluted 10,366,349 9,300,407
============ ============
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See notes to consolidated financial statements.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
THREE MONTHS ENDED SEPTEMBER 30, 2008
(UNAUDITED)
Total
Common Stock Additional Accumulated stockholders'
Shares Amount paid-in capital deficit deficit
---------- ------ --------------- ------------- --------------
Balances, July 1, 2008 11,070,658 $ - $73,422,195 $(74,342,288) $ (920,093)
Vesting of options
for services - - 243,117 - 243,117
Net loss - - - (930,393) (930,393)
---------- ------ ----------- ------------ -----------
Balances, September 30,
2008 11,070,658 $ - $73,665,312 $(75,272,681) $(1,607,369)
========== ====== =========== ============ ===========
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See notes to consolidated financial statements.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
2008 2007
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (930,393) $ 856,389
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation expense 4,287 4,020
Accrued interest on convertible notes and debt 11,948 52,390
Stock-based compensation 243,117 (6,146)
Decrease in fair value of convertible notes - (460,404)
Minority interest 13,894 73,517
Decrease in prepaid rent and expenses 1,580 3,332
Decrease (increase) in deposits and other
receivables 111 (7,400)
(Decrease) increase in accounts payable and
accrued expenses (14,254) 2,317
Increase in deferred rent 626 1,366
Increase in deferred compensation 178,576 187,500
---------- -----------
Net cash (used) provided in operating
activities (490,508) 706,881
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment - (1,325)
---------- -----------
Net cash used in investing activities - (1,325)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - affiliates 100,000 -
---------- -----------
Net cash provided by financing activities 100,000 -
---------- -----------
Net (decrease) increase in cash and cash
equivalents (390,508) 705,556
Cash and cash equivalents at beginning of year 478,899 373,109
---------- -----------
Cash and cash equivalents at end of year $ 88,391 $ 1,078,665
========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest and income taxes $ - $ -
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See notes to consolidated financial statements.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS:
Organization and nature of business:
Bion Environmental Technologies, Inc. ("Bion" or "We" or the "Company") was incorporated in 1987 in the State of Colorado.
Bion's patented and proprietary technology provides a comprehensive environmental solution to a significant source of pollution in US agriculture, Confined Animal Feeding Operations ("CAFO's"). Bion's technology produces substantial reductions of both nutrient releases to water and air emissions from livestock waste streams based upon our research to date. Because Bion's technology reduces the harmful emissions from a CAFO on which it is utilized, the CAFO can increase its herd concentration while lowering or maintaining its level of nutrient releases and atmospheric emissions.
Bion's technology produces business opportunities in two broad areas: 1) retrofit and environmental remediation of existing CAFOs (described below) and 2) development of "closed loop" Integrated Projects (defined below).
We believe that Bion's technology platform allows the integration of large- scale CAFO's and their end-product users, renewable energy production from the CAFO waste stream, on site utilization of the renewable energy generated and biofuel/ethanol production in an environmentally and economically sustainable manner while reducing the aggregate capital expense and operating costs for the entire integrated complex ("Integrated Projects" or "Projects"). In the context of Integrated Projects, Bion's waste treatment process, in addition to mitigating polluting releases, generates renewable energy from portions of the CAFO waste stream which renewable energy can be utilized by integrated ethanol plants, CAFO end-product processors (including cheese, ice cream and /or bottling plants in the case of dairy CAFOs and/or slaughter and/or processing facilities in the context of beef CAFOs) and/or other users as a natural gas replacement.
Since 2002, the Company has focused on completing development of its technology platform and business model. As such, we elected not to pursue near term revenue opportunities such as retrofitting existing CAFO's with our waste management solutions, because such efforts would have diverted scarce management and financial resources and negatively impacted our ability to complete: 1) re-development of our technology for environmentally sound treatment of CAFO waste streams and 2) development of our integrated technology platform in support of large-scale sustainable Integrated Projects.
Since the beginning of calendar year 2008, with the substantial completion of the technology/business model development process, Bion has begun to simultaneously pursue both retrofit/remediation and Integrated Projects opportunities.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS (CONTINUED):
On September 27, 2008, the Company executed an agreement with Kreider Farms (and its affiliated entities) (collectively "Kreider") to design, construct and operate, through its wholly-owned subsidiary, Bion Services Group, Inc. ("Bion Services"), a Bion system to treat the waste of the dairy cows (milkers, dry cows and heifers) at the Kreider Dairy, located in Mannheim, Pennsylvania. In addition, the agreement provides for an integrated renewable energy facility that will provide energy for Bion's waste treatment facility through the combustion of the cellulose captured in the Bion process. The system will be owned and operated by Bion through a new entity to be formed and initially 100% owned by Bion Services, in which Kreider will have the option to purchase a minority interest. Upon completion of final design work and resolution of all building, zoning and other related pre-construction matters, it will be necessary to raise substantial capital (equity and/or debt) to construct and operate the Kreider system, which may be difficult to do on reasonable terms due to the current unsettled condition of the capital markets. Upon successful construction and operation of the system, the Company anticipates that it will receive revenue from the sale of nutrient (and other) environmental credits related to the Kreider system and through sales of renewable energy generated at the Kreider system.
Going concern and management's plans:
The consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred net losses of approximately $1,779,000 and $2,549,000 during the years ended June 30, 2008 and 2007, respectively, and a net loss of approximately $930,000 for the three months ended September 30, 2008. At September 30, 2008, the Company has a working capital deficiency and a stockholders' deficit of approximately $716,000 and $1,607,000, respectively. These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. The following paragraphs describe management's plans with regard to these conditions.
The Company continues to explore sources of additional financing to satisfy its current operating requirements.
The Company currently faces a severe working capital shortage and it is not currently generating any revenues. The Company will need to obtain additional capital to fund its operations and technology development, to satisfy existing creditors and to develop Projects. The Company anticipates that it will seek to raise from $3,000,000 to $50,000,000 (debt and equity) during the next twelve months. There is no assurance, especially in the extremely unsettled capital markets that presently exist, that the Company will be able to obtain the funds that it needs to stay in business, complete its technology development or to successfully develop its business.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS (CONTINUED):
There can be no assurance that funds required during the next twelve months or thereafter will be generated from operations or that those funds will be available from external sources such as debt or equity financings or other potential sources. The lack of additional capital resulting from the inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on its business. Further, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significantly dilutive effect on the Company's existing shareholders. All of these factors have been exacerbated by the extremely unsettled credit and capital markets presently existing.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Bion Integrated Projects Group, Inc. (formerly Bion Dairy Corporation ("Projects Group"), Bion Technologies, Inc., BionSoil, Inc., Bion Services Group, Inc., and its majority owned subsidiary, Centerpoint Corporation ("Centerpoint") (Note 3). All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. The consolidated financial statements reflect all adjustments (consisting of only normal recurring entries) that, in the opinion of management, are necessary to present fairly the financial position at September 30, 2008 and the results of operations and cash flows of the Company for the three months ended September 30, 2008 and 2007. Operating results for the three months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending June 30, 2009.
The unaudited consolidated financial statements should be read in conjunction with the Company's audited financial statements and footnotes thereto included in its Annual Report on Form 10-KSB for the year ended June 30, 2008.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Earnings (loss) per share:
Basic earnings (loss) per share amounts are calculated using the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share assumes the conversion, exercise or issuance of all potential common stock instruments, such as options or warrants, unless the effect is to reduce the loss or increase earnings per share. For the three months ended September 30, 2008 the effect the conversion/exchange of outstanding convertible promissory notes as well as outstanding options and warrants on basic loss per share would have been anti-dilutive. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three months ended September 30, 2007:
Average
Three months ended September 30, 2007 Income Shares EPS
------------------------------------- -------- --------- -----
Net income - basic $856,389 7,932,197 $0.11
Effect of dilutive securities:
Stock options and warrants - 783,432
6% convertible debt 38,155 584,778
-------- --------- ------
Net income - diluted $894,544 9,300,407 $0.10
======== ========= =====
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The following potential shares of common stock and their effect on net income were excluded from the September 30, 2007 diluted EPS calculations because their effect would have been anti-dilutive:
a) The 370,000 non-employee options with service conditions and 544,500 stock options with exercise prices ranging from $3.50 to $7.00.
b) The convertible notes - affiliates of $1,366,740 convertible into 482,946 common shares.
Recent accounting pronouncements
During October 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements ("SFAS 157"). This statement does not require any new fair value measurements but provides guidance on how to measure fair value and clarifies the definition of fair value under accounting principles generally accepted in the United States of America. The statement also requires new disclosures about the extent to which fair value measurements in financial statements are based on quoted market prices, market-corroborated inputs, or
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent accounting pronouncements (continued)
unobservable inputs that are based on management's judgments and estimates. This statement was effective for the Company on July 1, 2008 for all financial assets and liabilities. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Dates of FASB Statement No. 157 (the "FSP"). The FSP amends SFAS 157 to delay its effective date for non- financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually). For items within its scope, the FSP defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. As it relates to financial assets and liabilities, the adoption of SFAS 157 did not have an impact on the Company's consolidated financial statements. The Company is still in the process of evaluating the impact that SFAS 157 will have on its non-financial assets and liabilities.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115 ("SFAS 159"). This statement permits entities to choose to measure eligible items at fair value at specified election dates. SFAS 159 was effective for the Company on July 1, 2008. The Company did not apply the fair value option to any of its outstanding instruments, and therefore, SFAS 159 did not have an impact on the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations ("SFAS 141R"). SFAS 141R continues to require the purchase
method of accounting to be applied to all business combinations, but it
significantly changes the accounting for certain aspects of business
combinations. Under SFAS 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS 141R will
change the accounting treatment for certain specific acquisition related
items including: (1) expensing acquisition related costs as incurred; (2)
valuing non-controlling interests at fair value at the acquisition date; and
(3) expensing restructuring costs associated with an acquired business. SFAS
141R also includes a substantial number of new disclosure requirements. SFAS
141R is to be applied prospectively to business combinations for which the
acquisition date is on or after July 1, 2009 for the Company. The Company
does not expect that the adoption of SFAS 141R will have an impact on its
consolidated financial statements unless the Company enters into business
acquisitions in the future.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent accounting pronouncements (continued)
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements ("SFAS 160"). SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary (minority interest) is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and separate from the parent company's equity. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated statement of operations, of the amounts of consolidated net income attributable to the parent and to the non- controlling interest. This statement is effective for the Company on July 1, 2009. The Company is currently evaluating the effect the adoption of this statement may have on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133 ("SFAS 161"). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities by requiring that the objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The statement is effective for the Company on January 1, 2009. The Company does not expect that the adoption of SFAS 161 will have an impact on its consolidated financial statements.
3. MINORITY INTEREST OF CENTERPOINT CORPORATION:
In January 2002, Bion purchased a 57.7% majority interest in Centerpoint from a third party. On April 30, 2008, Centerpoint received and cancelled 126,000 shares of its previously outstanding common stock in connection with a litigation settlement, which increased Bion's ownership from 57.7% to 58.9%.
During the three months ended September 30, 2008 and 2007, Centerpoint had earnings of approximately $33,800 and $569,000, respectively. Centerpoint's minority interest holders have a minority interest of $131,586 as of September 30, 2008.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of September 30, 2008:
Research and development equipment $ 305,266
Leasehold improvements 31,336
Furniture 28,932
Computers and office equipment 31,680
---------
397,214
Less accumulated depreciation (341,997)
---------
$ 55,217
=========
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Depreciation expense was $4,287 and $4,020 for the three months ended September 30, 2008 and 2007, respectively.
5. 2007 SERIES A CONVERTIBLE PROMISSORY NOTES:
In March and April 2007, the Company sold $800,000 of its 2007 Series A
Convertible Notes (the "2007 Notes") for cash proceeds. In addition the
Company issued 2007 Notes to affiliates totaling $986,521 in exchange for
promissory notes with convertible features and deferred compensation (Note
7). The 2007 Notes were convertible into shares of the Company's common
stock at the price of $4.00 per share until maturity on July 1, 2008, or at
the election of the 2007 Note holders, and accrue interest at 6% per annum.
The 2007 Note holders also had the option to exchange the 2007 Notes, plus
interest, for securities substantially identical to securities the Company
sells in any offering prior to the completion of an offering in which the
Company raises less than $3,000,000. The Company had the right to require
the 2007 Notes (principal plus interest) be converted into its common shares
at the lesser of $4.00 per share or the price of an offering in which the
Company raises $3,000,000 or more.
On May 31, 2008 all of the non-affiliate 2007 Note holders converted their 2007 Notes totaling $856,737 including accrued interest into 428,369 restricted common shares of the Company. Also on May 31, 2008, 2007 Notes held by affiliates totaling $650,427 including accrued interest were converted into 325,214 common shares of the Company. These Notes were converted at a price of $2.00 per share, the price at which the Company sold common stock during the same period.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
5. 2007 SERIES A CONVERTIBLE PROMISSORY NOTES (CONTINUED):
On June 18, 2008 the remaining affiliated holder of the outstanding 2007 Notes increased the principal of his 2007 Note, maturing on July 1, 2013, by $375,000 to $784,122, which represents deferred compensation accrued through June 30, 2008. The holder, Salvatore Zizza, Chairman of Projects Group, agreed to add his future compensation from the Company to his Note as it accrues. As of September 30, 2008, the total principal and interest on the 2007 Note totaled $871,012. The conversion price of the remaining 2007 Note is $4.00 per share, which is above the approximate market price of the Company's common shares at the commitment date. This remaining Note is subject to certain risks of forfeiture and/or cancellation.
The 2007 Notes accrued interest of $11,890 and $27,116 for the three months ended September 30, 2008 and 2007, respectively.
6. PROMISSORY NOTES PAYABLE - AFFILIATES:
During September 2008, Mr. Zizza and Dominic Bassani, Vice-President - Special Projects and Strategic Planning for the Projects Group, loaned the Company $50,000 each under separate promissory notes. Under the terms of the promissory notes, which allow for additional monies to be loaned, the notes bear interest at 8% per annum and are payable on or before February 1, 2009.
7. DEFERRED COMPENSATION:
The Company accrued $750,000 ($150,000 to Mr. Smith, $300,000 to Brightcap Capital Ltd. ("Brightcap") for services provided by Mr. Bassani, and $300,000 to Mr. Zizza) as deferred compensation during each of the years ended June 30, 2008 and 2007. During fiscal year 2007 the Company entered into agreements converting deferred compensation amounts totaling $975,000 into promissory notes with conversion agreements. Accrued principal and interest owed under the promissory notes with conversion agreements of Mr. Smith and Brightcap were converted to 2007 Series A Promissory Notes in March 2007 (Note 5).
During fiscal year 2008, the Company entered into an agreement with Brightcap converting deferred compensation of $350,000 owed as of May 31, 2008 into a promissory note with a conversion agreement. The convertible note plus accrued interest totaling $350,805 was exchanged for 175,403 common shares at $2.00 per share of the Company on June 15, 2008. In addition, the Company entered into an extension agreement with Mr. Smith which allowed for the conversion of deferred compensation accrued through June 30, 2008 of $179,280 into 89,640 common shares of the Company at $2.00 per share. Also during fiscal year 2008, the Company mutually agreed with Mr. Zizza to convert his deferred compensation earned through June 30, 2008 of $375,000, and his ongoing compensation as it accrues to additional principal to his 2007 Note.
As of September 30, 2008 the Company owed Brightcap and Mr. Smith deferred compensation of $100,000 and $28,576, respectively.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
8. STOCKHOLDERS' EQUITY:
Common stock:
Holders of common stock are entitled to one vote per share on all matters to be voted on by common stockholders. In the event of liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to share in all assets remaining after liabilities have been paid in full or set aside. Common stock has no preemptive, redemption or conversion rights. The rights of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of any other series of preferred stock the Company may designate in the future.
Warrants:
As of September 30, 2008 the Company had the following common stock warrants outstanding:
Number of Exercise
Shares Price Expiration Date
----------- ----------- -------------------
Class SVDB 1-6 800,000 $ 3.00 July 31, 2013
Class DB-1 600,000 $ 1.00 January 31, 2014
Class A 1-3 600,000 $ 2.50 May 14, 2015
Class SVMAS-1 67,500 $ 3.50 December 31, 2011
Class SVMAS-1A 40,000 $ 3.50 December 31, 2011
Class SVMAS-2 32,500 $ 2.50 December 31, 2011
Class SVMAS-3 40,000 $ 2.50 September 30, 2015
Class SVB 1-3 50,000 $ 2.50 April 30, 2015
Class SVB-4 75,000 $ 2.50 April 30, 2015
Class SVC 1-5 125,000 $ 4.25 December 31, 2012
Class SV-SEI 1-2 32,292 $ 1.50 December 31, 2012
Class SV-SEI 3-4 9,375 $ 1.50 June 30, 2009
Class C, D, E 725,000 $ 2.50 April 30, 2015
Class O 100,000 $ 3.00 December 31, 2010
Class DM 150,000 $ 3.00 December 31, 2011
Class MAS 80,000 $ 2.50 July 1, 2012
Class GK 20,000 $ 2.00 March 31, 2011
Class BW 10,000 $ 2.20 June 15, 2012
---------
3,556,667
=========
|
The weighted average exercise price for the outstanding warrants is $2.47 and the weighted average remaining contractual life as of September 30, 2008 is 5.39 years.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
8. STOCKHOLDERS' EQUITY:
Stock options:
Effective June 2006, the Company approved the 2006 Consolidated Incentive Plan (the "2006 Plan"), which consolidated previously reserved incentive stock options plans into the 2006 Plan. On May 31, 2008 the 2006 Plan was amended to increase the maximum number of shares of the common stock of the Company issuable pursuant to the 2006 Plan from 3,200,000 to 4,200,000 shares. Terms of exercise and expiration of options granted under the 2006 Plan may be established at the discretion of the Board of Directors, but no option may be exercisable for more than ten years.
The Company recorded compensation expense related to employee stock options of $62,929 and $144,792 for the three months ended September 30, 2008 and 2007, respectively. The Company granted no options during the three months ended September 30, 2008 and 2007, respectively. During the three months ended September 30, 2008 and 2007, 208,000 and 45,000 options expired, respectively.
A summary of option activity under the 2006 Plan for the three months ended September 30, 2008 is as follows:
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price Life Value
--------- -------- ----------- ---------
Outstanding at July 1, 2008 2,183,333 $ 3.06 4.6 $ 7,950
Granted - -
Exercised - -
Forfeited - -
Expired (208,000) 3.03
--------- -------- --- --------
Outstanding at September 30,
2008 1,975,333 $ 3.06 4.8 $ 13,250
========= ======== === ========
Exercisable at September 30,
2008 1,442,834 $ 3.01 4.7 $ 13,250
========= ======== === ========
|
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
8. STOCKHOLDERS' EQUITY (CONTINUED):
Stock options (continued):
The following table presents information relating to nonvested stock options as of September 30, 2008:
Weighted Average
Grant-Date
Options Fair Value
-------- ----------------
Nonvested at July 1, 2008 562,916 $ 1.29
Granted - -
Vested (30,417) (2.26)
Forfeited - -
------- -------
Nonvested at September 30, 2008 532,499 $ 1.24
======= =======
|
The total fair value of stock options that vested during the three months ended September 30, 2008 and 2007 was $68,864 and $277,901, respectively. The intrinsic value of stock options exercised during the three months ended September 30, 2008 and 2007 was $0 as there were no options exercised during these periods. As of September 30, 2008 the Company had $349,597 of unrecognized compensation cost related to stock options that will be recorded over a weighted average period 1.5 years.
The Company has issued options to non-employees to purchase shares of the Company's common stock in exchange for services. As of September 30, 2008, non-employee options represented 597,833 of the 1,975,333 options outstanding under the 2006 Plan. Of the 597,833 non-employee options outstanding, 94,500 were fully vested and contained no service conditions as of September 30, 2008. These non-employee options were valued using the Black-Scholes option- pricing model. The fully vested options have been fully amortized on the straight-line method and resulted in no expense for the three months ended September 30, 2008 and 2007.
The remaining 503,333 non-employee options outstanding include service conditions and have graded vesting schedules through November 30, 2009. As of September 30, 2008, 262,500 of these options including service conditions were fully vested. Generally for these agreements, the measurement date of the services occurs when the options vest. In accordance with Emerging Issues Task Force ("EITF") Issue No. 96-18, recognition of compensation cost for reporting periods prior to the measurement date is based on the then current fair value of the options as of each of the interim reporting dates. Any subsequent change in fair value is recorded on the measurement date. The fair value of these options was determined using the Black-Scholes
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
8. STOCKHOLDERS' EQUITY (CONTINUED):
Stock options (continued):
option-pricing model, using the following assumptions at September 30, 2008; a dividend yield of zero, risk-free interest rates of 3.4% to 3.91%, volatility of 153% to 168% and an expected life of 6.6 to 9.7 years. Consulting cost in connection with options that are not fully vested as of September 30, 2008 is being recognized on a straight-line basis over the requisite service period for the entire award. Non-cash fair value charges/(credits) of $180,188 and $(150,938) were recorded as expense during the three months ended September 30, 2008 and 2007, respectively.
Stock-based compensation charges/(credits) in operating expenses in the Company's financial statements for the three months ended September 30, 2008 and 2007 are as follows:
Three months Three months
ended ended
September 30, September 30,
2008 2007
------------- -------------
General and administrative:
Fair value remeasurement of convertible
notes - affiliates $ - $ (194,462)
Fair value remeasurement of options
with service conditions 114,728 -
Fair value of employee stock options
expensed under SFAS 123(R) 38,049 78,432
--------- ----------
Total $ 152,777 $ (116,030)
========= ==========
Research and development:
Fair value remeasurement of convertible
notes - affiliates $ - $ (265,942)
Fair value remeasurement of options
with service conditions 65,460 (150,938)
Fair value of stock options expensed
under SFAS 123 (R) 24,880 66,360
--------- ----------
Total $ 90,340 $ (350,520)
========= ==========
|
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
9. OPERATING LEASE:
The Company entered into a non-cancellable operating lease commitment for office space in New York, effective August 1, 2006 and expiring November 30, 2013. In conjunction with the signing of the lease, the Company provided the lessor with a secured letter of credit. As of September 30, 2008 the Company has reflected $128,443 as restricted cash related to the secured letter of credit. The Company's obligations under the lease are partially guaranteed by Mr. Zizza. The Company has entered into two separate agreements to sub- lease approximately 32% of the Company's lease obligation and the tenants have also agreed to reimburse the Company for leasehold improvements and furnishings. Because the lease contains an escalation clause, the Company is recognizing rent under the straight-line method resulting in an average monthly rent expense of $15,820. The Company is also recognizing the sub- lease rental income from its tenants under the straight-line method, with a monthly average of $5,250. The difference between the straight-line method, and the actual lease payments have resulted in a deferred rent liability of $72,491 as of September 30, 2008. Rent expense, net of contractual and month to month sub-lease rental income was $15,354 and $31,181 for the three months ended September 30, 2008 and 2007, respectively.
At September 30, 2008, future minimum rental payments due under non- cancelable leases and future minimum rental payments to be received under non-cancelable subleases are:
Operating lease Sublease Net operating
Fiscal year: payments rentals lease payments
------------ --------------- --------- --------------
Nine months ended June 30, 2009 $ 138,780 $ 44,409 $ 94,371
2010 191,405 61,249 130,156
2011 198,602 63,553 135,049
2012 212,775 68,088 144,687
2013 225,756 72,242 153,514
Thereafter 97,219 31,110 66,109
---------- -------- --------
Total $1,064,537 $340,651 $723,886
========== ======== ========
|
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
10. COMMITMENTS AND CONTINGENCIES:
Employment and consulting agreements:
The Company had an employment agreement with its president, Mr. Smith, through December 31, 2007 providing $150,000 per year compensation. On November 7, 2007, the Company extended the employment agreement through December 31, 2008 and granted Mr. Smith options to purchase 125,000 shares of the Company's common stock at $2.20 per share, expiring on December 31, 2011. On May 31, 2008, an agreement was reached whereby Mr. Smith will continue his services as president through December 31, 2008 and effective January 1, 2009 (or March 31, 2009 at the latest) through December 31, 2009, he will provide services to the Company in a consulting capacity at his current compensation.
Effective March 31, 2005, an agreement with Brightcap, through which the services of Dominic Bassani, are provided, was extended through March 31, 2009. Under the terms of the agreement, Brightcap will be paid $300,000 annually for Mr. Bassani's services.
Effective May 1, 2005, the Company entered into a four-year consulting/employment agreement with a former officer and director of the Company, Salvatore Zizza. As of January 1, 2006, the former officer and director assumed the position of Chairman and director of Dairy, with an annual salary of $300,000. Commencing June 2008, Mr. Zizza's compensation will be added to the principal of his 2007 Notes as accrued.
Effective May 1, 2005, the Company entered into a four-year consulting/ employment agreement with Jeff Kapell. Under the terms of the agreement, Mr. Kapell provided part-time services to the Company through March 2006. In April 2006, Mr. Kapell was appointed Dairy's Vice President-Renewables at a salary of $120,000 per year. In June 2008, the employment agreement terms were extended through July 1, 2012. Mr. Kapell left the employ of the Company effective November 1, 2008 by mutual agreement. The Company anticipates that Mr. Kapell will perform consulting services for the Company from time-to-time.
Effective September 18, 2006, the Company entered into a four-year employment agreement with Jeremy Rowland whereby Mr. Rowland assumed the position of Chief Operating Officer of Dairy at an annual salary of $150,000. In June 2008, the employment agreement terms were extended through July 1, 2012. Mr. Rowland now serves as Chief Operating Officer of the Company's Services Group subsidiary.
Effective June 1, 2007, the Company entered into an employment agreement, effective through August 31, 2009, with Craig Scott whereby Mr. Scott was appointed Vice President of Capital Markets/Investor Relations at an annual salary of $120,000.
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2008
10. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Employment and consulting agreements (continued):
In May 2005 the Company declared contingent deferred stock bonuses of 690,000 shares to its key employees and consultants. The stock bonuses of 492,500 and 197,500 shares are contingent upon the Company's stock price exceeding $10.00 and $20.00 per share, respectively, and the grantees still being employed by or providing services to the Company at the time the target prices are reached.
In May 2008, the Company approved 250,000 stock options to certain employees that will be granted upon the execution of new employment agreements.
Claims contingency:
In May 2002, Arab Commerce Bank Ltd. ("ACB"), an unaffiliated party, filed a complaint against the Company in the Supreme Court of the State of New York regarding $100,000 of the Company's convertible bridge notes ("Bridge Notes") that were issued to ACB in March 2000. The complaint includes a breach of contract claim asserting that the Company owes ACB approximately $285,000 plus interest of $121,028 plus interest based on ACB's interpretation of the terms of the Bridge Notes and subsequent amendments. Effective June 30, 2001, the Company issued ACB 5,034 shares of common stock in full satisfaction of the Bridge Notes based on the Company's interpretation of the Bridge Notes, as amended. The Company has filed an answer to the complaint denying the allegations. No activity has taken place on this lawsuit since early 2003. The Company believes that the ultimate resolution of this litigation will not have a material adverse effect on the Company, its operations or its financial condition.
11. RELATED PARTY TRANSACTIONS:
The Company has an accrued payable of $41,647 as of September 30, 2008, to a company controlled by Salvatore Zizza for rental of office space in 2003.
12. SUBSEQUENT EVENT:
On October 31, 2008 the Company entered into an agreement with its insurance company pursuant to which the Company will receive a final $75,000 reimbursement for legal expenses in connection with the class action litigations settled during 2007.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the Unaudited Consolidated Financial Statements and Notes to Consolidated Financial Statements filed herein and with the Company's Form 10-KSB for the year ended June 30, 2008.
BUSINESS OVERVIEW
The Company has been focused on completion of the development of its second-generation technology which provides a comprehensive environmental solution to a significant source of pollution in U.S. agriculture, Confined Animal Feeding Operations ("CAFO's"). Currently, Bion is focused on using applications of its patented waste management technology to pursue two main business opportunities: 1) to develop Integrated Projects which will include large CAFOs, such as large dairies, beef cattle feed lots and hog farms, with Bion waste treatment System modules processing the aggregate CAFO waste stream from the equivalent of 40,000 or more beef and/or dairy cows (or the waste stream equivalent of other species) while producing solids to be utilized for renewable energy production (and potentially to be marketed as feed and/or fertilizer), integrated with an ethanol plant capable of producing 40 (or more) million gallons of ethanol per year and/or with CAFO end product processors, and 2) environmental retrofit and remediation of the waste streams of existing CAFOs in selected markets.
During the past six months, the Company has commenced actively pursuing the opportunity presented by environmental retrofit and remediation of the waste streams of existing CAFOs. The first commercial activity in this area is the recently announced agreement with Kreider Farms in Pennsylvania.
Additionally, we believe that Bion's technology platform allows the integration of large-scale CAFO's and their end-product users, renewable energy production from the CAFO waste stream, on site utilization of the renewable energy generated and biofuel/ethanol production in an environmentally and economically sustainable manner while reducing the aggregate capital expense and operating costs for the entire integrated complex ("Integrated Projects" or "Projects"). In the context of Integrated Projects, Bion's waste treatment process, in addition to mitigating polluting releases, generates renewable energy from portions of the CAFO waste stream which renewable energy can be utilized by integrated ethanol plants, CAFO end-product processors (including cheese, ice cream and /or bottling plants in the case of dairy CAFOs and/or slaughter and/or processing facilities in the context of beef CAFOs) and/or other users as a natural gas replacement. Note that an integrated ethanol plant's main by-product, called distillers grain, can be added to the feed of the animals in wet form thereby lowering the capital expenditures, operating, marketing and shipping costs and energy usage of the ethanol production process. The ethanol plant thereby acts as a feed mill for the CAFO, thus reducing the CAFO's feeding costs and generating revenue to the ethanol plant, and also provides a market for the renewable energy that Bion's System produces from the CAFO waste stream. Thus, such Bion Integrated Projects can be denominated "closed loop". Bion, as developer of and participant in Integrated Projects, anticipates that it will share in the cost savings and revenue generated from these activities.
Bion is currently working with local, state and federal officials and with potential industry participants to evaluate sites in multiple states and anticipates selecting a site for its initial Project during the 2009 fiscal year. At present it is possible, but not certain, that the initial Integrated Project will be located in St. Lawrence County, New York (although other locations in New York and other states are also under review). In addition, Bion intends to choose sites for additional Projects during the remainder of calendar years 2008 and 2009 to create a pipeline of Projects. Management has a 5-year development target (through calendar year 2014) of approximately 12- 25 Integrated Projects. At the end of the 5-year period, Bion projects that 8 or more of these Integrated Projects will be in full operation in 3-8 states, and the balance would be in various stages ranging from partial operation to early construction stage. No Integrated Project has been developed to date.
The financial statements for the years ended June 30, 2008 and 2007 have been prepared assuming the Company will continue as a going concern. The Company has incurred net losses of approximately $1,779,000 and $2,549,000 during the years ended June 30, 2008 and 2007, respectively. At June 30, 2008, the Company had a working capital deficiency and a stockholders' deficit of approximately $134,000 and $920,000, respectively. The financial statements for the three months ended September 30, 2008 and 2007 have also been prepared assuming the Company will continue as a going concern. The Company has incurred net (loss) income of approximately ($930,000) and $856,000 during the three month periods ended September 30, 2008 and 2007, respectively. At September 30, 2008, the Company has a working capital deficiency and a stockholders' deficit of approximately $716,000 and $1,607,000, respectively. The report of the independent registered public accounting firm on the Company's consolidated financial statements as of and for the year ended June 30, 2008 includes a "going concern" explanatory paragraph which means that the accounting firm has expressed substantial doubt about the Company's ability to continue as a going concern. Management's plans with respect to these matters are described in this section and in our consolidated financial statements, and this material does not include any adjustments that might result from the outcome of this uncertainty. There is no guarantee that we will be able to raise the funds or raise further capital for the operations planned in the near future.
CRITICAL ACCOUNTING POLICIES
Management has identified the following policies below as critical to our business and results of operations. Our reported results are impacted by the application of the following accounting policies, certain of which require management to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact quarterly or annual results of operations. For all of these policies, management cautions that future events rarely develop exactly as expected, and the best estimates routinely require adjustment. Specific risks associated with these critical accounting policies are described in the paragraphs below.
Revenue Recognition
While the Company has not recognized any operating revenues for the past two fiscal years, the Company anticipates that future revenues will be generated from product sales, technology license fees, annual waste treatment fees and direct ownership interests in Integrated Projects. The Company expects to recognize revenue from product sales when there is persuasive evidence that an arrangement exists, when title has passed, the price is fixed or determinable, and collection is reasonably assured. The Company expects that technology license fees will be generated from the licensing of Bion's Systems. The Company anticipates that it will charge its customers a non-refundable up-front technology license fee, which will be recognized over the estimated life of the customer relationship. In addition, any on-going technology license fees will be recognized as earned based upon the performance requirements of the agreement. Annual waste treatment fees will be recognized upon receipt. Revenues, if any, from the Company's interest in Projects will be recognized when the entity in which the Project has been developed recognizes such revenue.
Compensation Cost for Options with Service Conditions and Graded Vesting Schedules
The Company has issued non-employee options that include service conditions and have graded vesting schedules. Generally for these arrangements, the measurement date of the services occurs when the options vest. In accordance with Emerging Issues Task Force Issue No. 96-18, recognition of compensation cost for reporting periods prior to the measurement date is based on the then current fair value of the options. Fair value of the options is determined using a Black-Scholes option-pricing model. Any subsequent changes in fair value will be recorded on the measurement date. Compensation cost in connection with options that are not fully vested is being recognized on a straight-line basis over the requisite service period for the entire award.
Stock-based compensation
On July 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised), "Share-Based Payment" ("SFAS 123(R)"), which supersedes Accounting Principles Board Opinion No. 25 ("APB 25"), and generally requires that share-based compensation transactions be accounted and recognized in the statement of income based on their fair values. The Company adopted SFAS 123(R)using the modified prospective application under which all share based awards granted on or after the adoption date and modifications, repurchases or cancellation of prior awards made after the adoption date shall be accounted for under SFAS 123(R). The modified prospective application does not require the Company to restate prior period's financial results to reflect the adoption.
RECENT ACCOUNTING PRONOUNCEMENTS
During October 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements ("SFAS 157"). This statement does not require any new fair value measurements but provides guidance on how to measure fair value and clarifies the definition of fair value under accounting principles
generally accepted in the United States of America. The statement also requires new disclosures about the extent to which fair value measurements in financial statements are based on quoted market prices, market-corroborated inputs, or unobservable inputs that are based on management's judgments and estimates. This statement was effective for the Company on July 1, 2008 for all financial assets and liabilities. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Dates of FASB Statement No. 157 (the "FSP"). The FSP amends SFAS 157 to delay its effective date for non- financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually). For items within its scope, the FSP defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. As it relates to financial assets and liabilities, the adoption of SFAS 157 did not have an impact on the Company's consolidated financial statements. The Company is still in the process of evaluating the impact that SFAS 157 will have on its non-financial assets and liabilities.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115 ("SFAS 159"). This statement permits entities to choose to measure eligible items at fair value at specified election dates. SFAS 159 was effective for the Company on July 1, 2008. The Company did not apply the fair value option to any of its outstanding instruments, and therefore, SFAS 159 did not have an impact on the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations ("SFAS 141R"). SFAS 141R continues to require the purchase
method of accounting to be applied to all business combinations, but it
significantly changes the accounting for certain aspects of business
combinations. Under SFAS 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS 141R will
change the accounting treatment for certain specific acquisition related
items including: (1) expensing acquisition related costs as incurred; (2)
valuing non-controlling interests at fair value at the acquisition date; and
(3) expensing restructuring costs associated with an acquired business. SFAS
141R also includes a substantial number of new disclosure requirements. SFAS
141R is to be applied prospectively to business combinations for which the
acquisition date is on or after July 1, 2009 for the Company. The Company
does not expect that the adoption of SFAS 141R will have an impact on its
consolidated financial statements unless the Company enters into business
acquisitions in the future.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements ("SFAS 160"). SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary (minority interest) is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and separate from the parent company's equity. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated statement of operations, of the amounts of consolidated net income attributable to the parent and to
the non-controlling interest. This statement is effective for the Company on July 1, 2009. The Company is currently evaluating the effect the adoption of this statement may have on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133 ("SFAS 161"). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities by requiring that the objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The statement is effective for the Company on January 1, 2009. The Company does not expect that the adoption of SFAS 161 will have an impact on its consolidated financial statements.
THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2007
General and Administrative
Total general and administrative expenses increased $476,000 from $154,000 to $630,000 for the three months ended September 30, 2007 and 2008, respectively.
General and administrative expenses, excluding stock-based compensation charges/(credits) of $153,000 and $(116,000) for the three months ended September 30, 2008 and 2007, respectively, were $477,000 versus $270,000 for the three months ended September 30, 2008 and 2007, respectively. The primary reason for the increase in general and administrative expenses during the three months ended September 30, 2008 is due to the shift in the Company's focus from research and development to pre-commercial and commercial business activities related to its next generation technology applications, therefore costs of various employees and consultants (and their activities) that were previously incurred as research and development expense are now allocated to general and administrative expense. Salary and payroll related taxes were $134,000 and $45,000 for the three months ended September 30, 2008 and 2007, respectively, and the increase is due to the expensing of previous research and development employees to general and administrative expense. Consulting expense increased from $26,000 to $188,000 for the three months ended September 30, 2007 and 2008, respectively due to the Company's shift from research and development to general and administrative described above and additional lobbying and public relations consulting during the three months ended September 30, 2008. Accounting and tax costs increased from $37,000 for the three months ended September 30, 2007 to $60,000 during the same period in fiscal year 2009, due to higher year end audit costs and tax related expenses. Offsetting the increased salary, consulting and accounting and tax expenses were lower legal costs for the three months ended September 30, 2008 due to an insurance reimbursement of Centerpoint related legal fees of $37,000 and lower general corporate fees. The Company also incurred lower rent expense, $15,000 and $31,000 for the three months ended September 30, 2008 and 2007, respectively, due to additional sub-tenant month to month rentals during the three months ended September 30, 2008.
General and administrative stock-based compensation for the three years ended September 30, 2008 and 2007 consist of the following:
Three months Three months
ended ended
September 30, September 30,
2008 2007
------------- -------------
Fair value remeasurement of
convertible notes - affiliates $ - $(194,000)
Fair value remeasurement of options
with service conditions 115,000 -
Fair value of stock options expensed
under SFAS 123(R) 38,000 78,000
--------- ---------
Total $ 153,000 $(116,000)
========= =========
|
Stock-based compensation charges/(credits) increased to $153,000 for the three months ended September 30, 2008 from $(116,000) for the three months ended September 30, 2007. The change in stock-based compensation fair value adjusted expense relating to the President's convertible deferred compensation is primarily due to the fact his note was converted in December 2007, therefore no remeasurement was required for the three months ended September 30, 2008. For the three months ended September 30, 2008 the Company recognized expense relating to the fair value of stock options for general and administrative employees of $38,000, compared to $78,000. The Company also recognized as general and administrative expenses $115,000 for the remeasurement of options with service conditions due to the reallocation of research and development related costs.
Research and development
Total research and development expenses have increased $149,000 from $127,000 to $276,000 for the three months ended September 30, 2007 and 2008, respectively.
Research and development expenses, excluding stock-based compensation charges/(credits) of $90,000 and $(351,000) for the three months ended September 30, 2008 and 2007, respectively, were $186,000 and $478,000 for the three months ended September 30, 2008 and 2007, respectively. The primary reason for the decrease in research and development expenses during the three months ended September 30, 2008 is due to the shift in the Company's focus from research and development to pre-commercial and commercial activities related to its next generation technology applications, therefore costs of various employees and consultants (and their related activities)that were previously incurred as research and development expense are now allocated to general and administrative expense. Salary and payroll related taxes were $102,000 and $181,000 for the three months ended September 30, 2008 and 2007, respectively, and the decrease is due to the expensing of previous research and development employees to general and administrative. Consulting expenses also decreased significantly, from $147,000 to $13,000 for the three months ended September 30, 2007 and 2008, respectively, due to the shift from research and development to general and administrative.
Research and development stock-based compensation for the three months ended September 30, 2008 and 2007 consist of the following:
Three months Three months
ended ended
September 30, September 30,
2008 2007
------------- -------------
Fair value remeasurement of convertible
notes - affiliates $ - $(266,000)
Fair value remeasurement of options with
service conditions 65,000 (151,000)
Fair value of stock options expensed
under SFAS 123 (R) 25,000 66,000
--------- ---------
Total $ 90,000 $(351,000)
======== =========
|
Stock-based compensation changes/(credits) increased from $(351,000) for the three months ended September 30, 2007 to $90,000 for the same period in 2008. Stock-based compensation fair value adjusted credits of $(266,000) for the three months ended September 30, 2007, were recorded to re-measure the fair value of Brightcap's convertible deferred compensation. There was no similar charge for the three months ended September 30, 2008 as the note was converted at May 31, 2008. The Company recorded stock-based compensation expense of $25,000 and $66,000 under the provisions of SFAS 123(R) for the three months ended September 30, 2008 and 2007, respectively for options vested to research and development employees. The decrease is due to expensing options issued to employees who in the prior year were deemed to be research and development and in the fiscal year 2008 were partially allocated to general and administrative. The Company also recognized as research and development expenses $65,000 for the remeasurement of options with service conditions for the three months ended September 30, 2008 versus a credit of ($151,000) for the same period in the prior year. The increase is due to modifications of a portion of the options with service condition during fiscal year 2008 which shortened the vesting period, resulting in the recognition of additional expense.
Loss from Operations
As a result of the factors described above, the loss from operations was $906,000 and $280,000 for the three months ended September 30, 2008 and 2007, respectively.
Other expense and (income)
Other expense and (income) was $24,000 and $(1,137,000) for the three months ended September 30, 2008 and 2007, respectively. Interest expense decreased $40,000 from $52,000 for the three months ended September 30, 2007 to $12,000 for the three months ended September 30, 2008. Interest expense decreased due to the lower debt balances on the 2006 and 2007 Series A Notes for the three months ended September 30, 2008. For the three months ended September 30, 2007, the Company recognized other income of $1,258,000 due to the receipts of $828,000 from litigation settlements and $430,000 from release of previously escrowed funds owed to Centerpoint. The receipts of
the litigation settlement proceeds and the escrowed funds resulted in a positive net equity position for the Company's majority held subsidiary, Centerpoint, which resulted in the recording of the $74,000 minority interest expense of Centerpoint for the three months ended September 30, 2007 while for the three months ended September 30, 2008 the amount was $14,000.
Net (loss) income
As a result of the factors described above, the net (loss) income was ($930,000) and $856,000 for the three months ended September 30, 2008 and 2007, respectively, representing a $0.20 decrease in the net loss per basic and a $0.19 decrease in the net loss per diluted common share, respectively, for the three months ended September 30, 2008 and 2007, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2008, the Company had cash and cash equivalents equal to $88,000. During the three months ended September 30, 2008, net cash used in operating activities was $491,000, primarily consisting of cash operating expenses. As previously noted, the Company is currently not generating revenue and accordingly has not generated cash flows from operations. The Company does not anticipate generating sufficient revenues to offset operating and capital costs for a minimum of two to five years. While there are no assurances that the Company will be successful in its efforts to develop and construct its Projects and market its Systems, it is certain that the Company will require significant funding from external sources. Given the unsettled state of the current credit and capital markets, there is no assurance the Company will be able to raise the funds it needs on reasonable terms.
Investing Activities
During the three months ended September 30, 2008 the Company used no cash for investing activities.
Financing Activities
During the three months ended September 30, 2008, $100,000 of cash was provided by financing activities from short-term promissory notes - affiliates.
As of September 30, 2008 the Company has significant debt obligations consisting primarily of 2007 Series A convertible promissory notes - affiliates of $871,000, deferred compensation of $129,000 and promissory notes - affiliates of $100,000. The Company has entered into an 88-month operating lease for office space in New York City, with an average monthly lease expense of $15,820.
2007 Series A Convertible Promissory Notes:
During March and April 2007, the Company sold $800,000 of its 2007 Series A Convertible Notes (the "2007 Notes"). In addition the Company issued 2007 Notes totaling $986,521 in exchange for promissory notes with convertible features and deferred compensation. The 2007 Notes were convertible into shares of the Company's common stock at $4.00 per share until maturity on July 1, 2008, at the election of the 2007 Note holder, and
will accrue interest at 6% per annum. The 2007 Note holders also had the option to exchange the 2007 Notes, plus interest, for securities substantially identical to securities the Company sells in any offering prior to the completion of an offering in which the Company raises less than $3,000,000. The Company has the right to require the 2007 Notes (principal plus interest) be converted into its common shares at the lesser of $4.00 per share or the price of an offering in which the Company raises $3,000,000 or more.
On May 31, 2008 all of the non-affiliate 2007 Note holders converted their 2007 Notes totaling $856,737 including accrued interest into 428,369 restricted common shares of the Company. Also on May 31, 2008, 2007 Notes to affiliates totaling $650,427 including accrued interest were converted into 325,214 common shares of the Company. These Notes were converted at a price of $2.00 per share, the price at which the Company sold common stock during the same period.
On June 18, 2008 the remaining affiliated holder of the outstanding 2007 Notes increased the principal of his 2007 Note by $375,000 to $784,000 which represents deferred compensation earned through June 30, 2008. The holder, Salvatore Zizza, agreed to add his future compensation from the Company to his 2007 Note as it accrues. As of September 30, 2008, the total principal and interest on the 2007 Note totaled $871,012. The conversion price of the remaining 2007 Note of $4.00 per share was above the approximate market price of the Company's common shares at the commitment date of the offering. This remaining Note is subject to certain risks of forfeiture and or cancellation.
Plan of Operations and Outlook
As of September 30, 2008 the Company had cash and cash equivalents of approximately $88,000. Based on our operating plan, management believes that existing cash on hand will not be sufficient to fund the Company's basic overhead through the end of the 2009 fiscal year.
The Company currently faces a severe working capital shortage and it is not currently generating any revenues. The Company will need to obtain additional capital to fund its operations and technology development, to satisfy existing creditors and to develop Projects. The Company anticipates that it will seek to raise from $3,000,000 to $50,000,000 (debt and equity) during the next twelve months. There is no assurance, especially in the extremely unsettled capital markets that presently exist, that the Company will be able to obtain the funds that it needs to stay in business, complete its technology development or to successfully develop its business.
There can be no assurance that funds required during the next twelve months or thereafter will be generated from operations or that those funds will be available from external sources such as debt or equity financings or other potential sources. The lack of additional capital resulting from the inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on its business. Further, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significantly dilutive effect on the Company's existing shareholders. All of these factors have been exacerbated by the extremely unsettled credit and capital markets presently existing.
Currently, Bion is focused on using applications of its patented waste management technology to pursue two main business opportunities: 1) to develop Integrated Projects which will include large CAFOs, such as large dairies, beef cattle feed lots and hog farms, with Bion waste treatment System modules processing the aggregate CAFO waste stream from the equivalent of 40,000 or more beef and/or dairy cows (or the waste stream equivalent of other species) while producing solids to be utilized for renewable energy production (and potentially to be marketed as feed and/or fertilizer), integrated with an ethanol plant capable of producing 40 (or more) million gallons of ethanol per year and/or integrated with CAFO end product processors, and 2) environmental retrofit and remediation of the waste streams of existing CAFOs in selected markets.
Bion is currently working with local, state and federal officials and with potential industry participants to evaluate sites in multiple states and anticipates selecting a site for its initial Project during the 2009 fiscal year. At present it is possible, but not certain, that the initial Integrated Project will be located in St. Lawrence County, New York (although other locations in New York and other states are also under review). In addition, Bion intends to choose sites for additional Projects during the remainder of calendar years 2008 and 2009 to create a pipeline of Projects. Management has a 5-year development target (through calendar year 2014) of approximately 12- 25 Integrated Projects. At the end of the 5-year period, Bion projects that 8 or more of these Integrated Projects will be in full operation in 3-8 states, and the balance would be in various stages ranging from partial operation to early construction stage. No Integrated Project has been developed to date.
The Company has also commenced actively pursuing the opportunity presented by environmental retrofit and remediation of the waste streams of existing CAFOs in selected markets. The first commercial activity in this area is the recently announced agreement with Kreider Farms in Pennsylvania.
CONTRACTUAL OBLIGATIONS
We have the following material contractual obligations (in addition to employment and consulting agreements with management and employees):
1) The Company executed a non-cancelable operating lease for office space in New York City effective August 1, 2006 and extending to November 30, 2013. The average monthly rent expense under the lease is $15,820. The Company has provided the lessor with a letter of credit in the amount of $128,443 in connection with the lease as of June 30, 2008. The Company's obligations under the lease are partially guaranteed by Salvatore Zizza, Chairman of Bion Dairy. The Company has entered into sub-leases with non- affiliated parties for approximately 32% of the obligations under the lease.
2) On September 27, 2008, the Company executed an agreement with Kreider Farms (and its affiliated entities) (collectively "Kreider") to design, construct and operate, through its wholly-owned subsidiary, Bion Services Group, Inc. ("Bion Services"), a Bion system to treat the waste of the dairy cows (milkers, dry cows and heifers) at the Kreider Dairy, located in Mannheim, Pennsylvania. In addition, the agreement provides for an integrated renewable energy facility that will provide energy for Bion's
waste treatment facility through the combustion of the cellulose captured in the Bion process. The system will be owned and operated by Bion through a new entity to be formed and initially 100% owned by Bion Services, in which Kreider will have the option to purchase a minority interest. Upon completion of final design work and resolution of all building, zoning and other related pre-construction matters, it will be necessary to raise substantial capital (equity and/or debt) to construct and operate the Kreider system, which may be difficult to do on reasonable terms due to the current unsettled condition of the capital markets. Upon successful construction and operation of the system, the Company anticipates that it will receive revenue from the sale of nutrient (and other) environmental credits related to the Kreider system and through sales of renewable energy generated at the Kreider system.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures.
The term "disclosure controls and procedures" is defined in Rules 13a- 15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized, and reported within the required time periods. Our Chief Executive Officer and Principal Financial Officer has evaluated the effectiveness of the design and operations of our disclosure controls and procedures as of the end of the period covered by this quarterly report, and has concluded that, as of that date, our disclosure controls and procedures were not effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act, as a result of the material weakness in internal control over financial reporting discussed in Item 8A(T) of our Form 10-KSB for the year ended June 30, 2008.
(b) Changes in Internal Control over Financial Reporting.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There have been no material developments in the legal proceedings described in our Form 10-KSB since filing.
ITEM 1A. RISK FACTORS.
Not Applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable
ITEM 6. EXHIBITS.
Exhibit No. Description
10.1 Kreider Farms Agreement (September 25, 2008): REDACTED - Filed
herewith electronically
10.2 Promissory Note between Bion Environmental Technologies, Inc.
and Salvatore Zizza - Incorporated by reference to Exhibit 10.1
to the Registrant's Form 8-K dated September 27, 2008
10.3 Promissory Note between Bion Environmental Technologies, Inc.
and Dominic Bassani - Incorporated by reference to Exhibit 10.2
to the Registrant's Form 8-K dated September 27, 2008
10.4 Kreider Press Release dated September 29, 2008 - Incorporated
by reference to Exhibit 99.1 to the Registrant's Form 8-K dated
September 27, 2008
10.5 Patent Press Release dated September 25, 2008 - Incorporated by
reference to Exhibit 99.2 to the Registrant's Form 8-K dated
September 27, 2008
10.6 Agreement between Jeff Kapell and Bion dated November 1, 2008 -
Incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K dated October 30, 2008
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10.7 Agreement Between David Mager and Bion dated November 1, 2008 - Incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K dated October 30, 2008
10.8 Promissory Note between Anthony Orphanos and Bion dated October 30, 2008, Guaranteed by Dominic Bassani - Incorporated by reference to Exhibit 10.3 to the Registrant's Form 8-K dated October 30, 2008
10.9 Addendum to Settlement Agreement and Release Stipulation from Bion, Bion Dairy and Mark Smith dated October 31, 2008 - Incorporated by reference to Exhibit 10.4 to the Registrant's Form 8-K dated October 30, 2008
31.1 Certification of CEO and Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) - Filed herewith electronically
32.1 Certification of CEO and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Filed herewith electronically
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BION ENVIRONMENTAL TECHNOLOGIES, INC.
Date: November 14, 2008 By:/s/ Mark A. Smith
Mark A. Smith, President (Chief
Executive Officer) and Interim Chief
Financial Officer (Principal Financial
and Accounting Officer)
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EXHIBIT 10.1
BION ENVIRONMENTAL TECHNOLOGIES, INC.
641 Lexington Avenue, 17th Floor, New York, NY 10022
tel: 212-758-6622 fax: 212-758-7733
THIS AGREEMENT is made effective the 25 day of September, 2008 by, between and among Ronald Kreider ('K') and Kreider Farms ('KF') (collectively K and KF are 'Kreider') and Bion Environmental Technologies, Inc. ('B') and Bion PA 1 LLC ('LLC') (collectively B and LLC are 'Bion')
WHEREAS the parties entered into a Memorandum of Understanding executed February 20, 2008 ('MOU'); and
WHEREAS Bion has, at its sole expense, pursuant to MOU, engaged in activities
including without limitation, i) work with various Pennsylvania local and
state governmental entities including PA DEP, PENNVEST, Town of Manheim and
various other entities and associations related to design and installation of
a Bion waste treatment and renewable energy generation system at: a) the KF
dairy location in Manheim ('Manheim Facility') and, b) potential renewable
energy production and/or support facilities at the other KF poultry locations
(Mt.'s Joy / Donegal; Pleasant; Middletown) for the collection and
transportation of poultry manure plus c) possible renewable energy production
and/or support facilities at other locations(collectively 'System') and ii)
the establishment of protocols, methodologies and certifications related to:
A) nutrient credits (for nitrogen and phosphorus reductions produced by the
System) ('Credits'); B) potential sale of such Credits; and C) the
production, utilization on site and potential for sale on the grid of
electricity produced by the renewable energy to be generated by the System;
AND WHEREAS Kreider and Bion each desire that Bion construct and operate the System at KF facilities (with initial components at the Manheim Facility and possibly additional facilities at other Kreider locations and/or locations not owned by Kreider) on the terms and conditions set forth in this Agreement,
NOW THEREFORE, in consideration of the mutual covenants and conditions hereinafter set forth, Kreider and Bion do hereby agree as follows in order to proceed with the design, construction and operation the System:
1) LLC, will design, permit, construct, finance, own and operate (directly and/or through bonded contractors) the System, subject to permitting, construction and other conditions successfully completed on the timeline set forth below. The Manheim Facility portion of the System will be as generally described at Exhibit A hereto, subject to final design and permitting changes, which System shall be developed and operated as follows:
* Confidential material has been omitted pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission.
b) Be operated by LLC pursuant to a license of B's proprietary and patented technology ('Technology') which will be granted to LLC, for which license to LLC, *;
c) LLC will endeavor to treat the maximum amount of waste feasible (collectable) from the existing herd at the Manheim Facility in the initial System components located at the Manheim Facility, which currently includes of approximately *
d) LLC shall initially treat the solids produced by the System from the dairy waste stream at the Manheim Facility, and, in the future, based upon completion of permitting and nutrient methodology approvals from the PA DEP, the poultry wastes from poultry at the Manheim Facility and/or other Kreider facilities as set forth at Exhibit B through the renewable energy production portion of the System ('Renewable Energy Production Facilities') to generate heat/power. With appropriate concern for 'bio-security', the Renewable Energy Production Facility may be located at: i) the Manheim Facility, ii) other Kreider facility locations, and/or iii) other locations not owned by Kreider, as mutually agreed, PROVIDED, HOWEVER, at least some Energy Production Facility will be located at the Manheim Facility to maintain temperature and/or to provide needed heat for the Bion waste treatment modules of the System located at the Manheim Facility, and
e) For all purposes of this Agreement, System shall include Bion waste treatment modules and the Renewable Energy Generation Facility at the Manheim Facility , in their initial forms and as altered during the Term, plus all other facilities constructed by Bion on Kreider facilities or elsewhere pursuant to this Agreement;
f) Operate the System such that dairy waste and poultry litter is removed, stored and treated in a timely manner in accordance with accepted husbandry practices and regulatory requirements.
2) It shall be the responsibility of Bion to establish protocols for the System and to obtain state and other approvals related to the System and any Nutrient Credits or renewable energy generated thereby related to treatment of either or both of dairy and/or poultry wastes from Kreider facilities, which Credits shall be the sole property of LLC, all of which activities shall be at the expense of LLC;
3) Kreider acknowledges that:
a) Bion has received approval from the PA DEP to generate approximately 125 nitrogen and 16 phosphorus credits per dairy cow waste stream treated at the Manheim Facility based on its Technology and the data and methodology protocols developed by Bion, which shall be incorporated into the System and its operations; and
* Confidential material has been omitted pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission.
b) Bion will develop (and file with PA DEP) similar protocols and methodologies * as well as secure air permits for the renewable energy system;
c) * the combustion testing of the poultry litter and the dairy solids. These total costs are presently estimated by Bion to be in the range of *; and
d) Bion's waste treatment process contains valuable patented and proprietary intellectual property and access to the System and data from the System needs to be deliberate and managed to protect the value of this intellectual property.
4) Kreider shall cooperate with Bion in connection with each of the activities set forth at paragraphs 1), 2) and 3) above, which cooperation shall include, without limitation:
a) Actions documenting LLC's ownership of the System and facilitating LLC's (or its agents/contractors) design, financing, construction and operation of the System from the date of this Agreement through a date 20 years after the second anniversary of the date on which full scale treatment of the dairy waste from the Manheim Facility in the System begins ('Term') (consistent with the Kreider purchase option set forth below): i) which Term may be extended by the written agreement of the parties hereto; *; and iii) further provided, that as to the Term related to processing poultry litter, for each Kreider poultry facility, the 20 year period shall commence concurrent with the commencement of operations of the dairy waste treatment facility.
b) Provision of the dairy waste from the Manheim Facility to LLC for treatment in the System, which dairy wastes shall be provided in a state and manner consistent with Exhibit C;
c) *
d) *
e) Kreider will fully support, as required, the processing and execution of permitting, construction and financing documents (including grant applications) for the System (and each portion thereof), provided, however, that Kreider will have no liability under such documents. Kreider participation in these activities will be proactively minimized to extent feasible.
f) Kreider's participation in the process of data collection and other activities related to validation and/or sale of the Credits generated by the System (and each portion thereof);
* Confidential material has been omitted pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission.
g) Provision of access to the System, which access shall be controlled by Bion (Bion will not unreasonably withhold access to KF as it relates to its regulatory requirements), and each component thereof, at each Kreider facility on which any System component is placed, which site access will be available to all persons designated by Bion, including without limitation: i) Bion personnel, contractors, agents, and guests ii) representatives of regulatory agencies and other branches of the State of Pennsylvania and other governmental (and quasi governmental) entities; and iii) others as jointly agreed.
h) Grant by Kreider to LLC of cost-free site lease(s) and easement(s) as required to efficiently construct and operate: i) initial components of the System at Manheim (which shall include a Dairy waste treatment facility and an energy facility with at least minimum capacity to process the Dairy manure and poultry litter from Kreider's Manheim poultry complex, including sufficient energy to meet the System components' needs for temperature maintenance and process heat requirements; and, at maximum size, large enough to process waste and produce renewable energy from all dairy waste and poultry litter from all of Kreider's facilities), and ii) other components of the System at Kreider poultry facilities and/or other Kreider locations for the entire Term; iii) should any such site proposed and/or selected by Kreider for a System component be deemed unsuitable by Bion, Bion and Kreider will work together to identify suitable site(s)on Kreider facilities; provided, however, iv) Bion may locate some System components on locations not owned by Kreider; and v) due to bio-security concerns, no manure or litter obtained from non-Kreider sources shall be processed stored or used at facilities located on Kreider property without previous written permission from Kreider.
i) Kreider will provide LLC with a timely advance notice of all
proposed changes at the Kreider facilities which may affect LLC's operation
of the System, including without limitation material changes in the ration,
census of animals (dairy and poultry, increase or decrease), use of chemicals
* etc; except as specified in paragraph 4b above, "timely" will normally be
one week. Nothing herein shall preclude Kreider from continuing the husbandry
practices and procedures currently employed, nor other customary industry
husbandry practices. Should Bion in the future request a modification of
such practices, which would negatively impact Kreider's profitability,
Kreider shall be entitled to reasonable compensation for such loss.
5) Kreider shall purchase from LLC the electricity (or power in other mutually agreeable usable forms) generated by LLC in the Renewable Energy Production Facility at a price equal to utility rates going forward and adjusted periodically as set forth at Exhibit D; LLC will be responsible for any excess costs of usage and related demand charges over and above normal charges to Kreider from third party utilities incurred by KF as a result of LLC's inability to provide electricity at any given time. Payment for energy purchases will be made by Kreider to LLC on a monthly basis.
* Confidential material has been omitted pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission.
7) Bion will make available to Kreider, for its re-use related to its dairy production related to the System, any 'green tag(s)' that Bion may secure during the Term; provided, however, that:
a) Kreider will be solely responsible for all fees, if any, due the environmental organization that sponsors such 'green tag(s)';
b) Bion will not charge KF for such 'green tag' utilization; and
c) Kreider must agree to maintain all standards, etc. related to such 'green tag(s)';
8) The Confidentiality and Proprietary Information Agreement already executed by Kreider shall remain in full force and effect for the entire Term (plus two years) and shall be treated as if incorporated in this agreement in its entirety.
9) This Agreement may be terminated at the option of either party if all necessary approvals for construction of the Dairy waste treatment portion of the System are not obtained within 18 months of the effective date of this Agreement or if construction of the initial System components at the Manheim Facility is not substantially complete within 24 months of the effective date. In the event of such termination, neither party shall have any continuing responsibility to the other, except that such termination will have no effect on confidentiality agreements in effect at that time.
10) Miscellaneous:
a) This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns and any person acquiring, whether by merger, consolidation, liquidation, purchase of assets or otherwise, all or substantially all of a party's equity or assets and business.
b) It is the intention of the parties hereto that this Agreement and the performance hereunder and all suits and special proceedings connected herewith be construed in accordance with and pursuant to the laws of the State of Pennsylvania and that in any action, special proceeding or other proceeding that may be brought arising out of, in connection with, or by reason of this Agreement, the laws of the State of Pennsylvania shall be applicable and shall govern to the exclusion of the law of any other forum, without regard to the jurisdiction in which any action or special proceeding may be instituted.
c) Any claim or controversy, which arises out of or relates to this Agreement, or breach of it, shall be settled by arbitration.
d) Should any party hereto waive breach of any provision of this Agreement, that waiver shall not operate or be construed as a waiver of any further breach of this Agreement.
e) In the event that any one or more of the provisions of this Agreement or any portions there under is determined to be invalid, illegal, or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.
f) This Agreement shall constitute the entire agreement between the parties hereto and oral modifications of the Agreement shall have no effect. This Agreement may be altered only by a written agreement signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought.
Bion Environmental Technologies, Inc.
By: /s/ MAS 9/27/08
Mark A. Smith, President
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Bion PA 1 LLC
By: /s/ MAS 9/27/08
Mark A. Smith, Manager
'Kreider'
By: /s/ Ronald E. Kreider
Ronald Kreider, individually and as
controlling shareholder/partner of all
entities defined as Kreider and/or Kreider
Farms herein, including without limitation,
Noah A. Kreider & Sons, a partnership, all of
which shall be bound by the signature above.
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Exhibit 31.1
SECTION 302 CERTIFICATION
I, Mark A. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bion Environmental Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
(a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 14, 2008 /s/ Mark A. Smith Mark A. Smith Chief Executive Officer and Principal Financial Officer |
Exhibit 32.1
CERTIFICATION OF CEO AND CFO PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Form 10-Q of Bion Environmental Technologies, Inc., a company duly formed under the laws of Colorado (the "Company"), for the quarter ended September 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Mark A. Smith, President (Chief Executive Officer) and Interim Chief Financial Officer (Principal Accounting Officer) of the Company, hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
November 14, 2008 /s/ Mark A. Smith
Mark A. Smith
Chief Executive Officer and
Principal Financial Officer
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This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 has been provided to Bion Environmental Technologies, Inc. and will be retained by Bion Environmental Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.