UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] Quarterly report pursuant section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2007
[ ] 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 small business issuer as specified in its charter)
Colorado 84-1176672
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation)
641 Lexington Avenue, 17th Floor, New York, New York 10022
(Address of Principal Executive Offices)
212-758-6622
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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: Yes [ ] No [X]
State the shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: On November 13, 2007 there were
8,076,280 Common Shares outstanding.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
BION ENVIRONMENTAL TECHNOLOGIES, INC.
FORM 10-QSB
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated financial statements (unaudited):
Balance sheet ............................................. 3
Statements of operations .................................. 4
Statements of changes in stockholders' equity (deficit) ... 5
Statements of cash flows .................................. 6
Notes to consolidated financial statements ................ 7-21
Item 2. Management's Discussion and Analysis or Plan of Operation .. 22
Item 3. Controls and Procedures .................................... 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 31
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds ................................................... 31
Item 3. Defaults Upon Senior Securities ............................ 31
Item 4. Submission of Matters to a Vote of Security Holders ........ 31
Item 5. Other Information .......................................... 31
Item 6. Exhibits ................................................... 31
Signatures ................................................. 32
2
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2007
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1,078,665
Prepaid rent and expenses 15,928
Deposits and other receivables 11,094
------------
Total current assets 1,105,687
Restricted cash 171,945
Property and equipment, net 72,926
------------
Total assets $ 1,350,558
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 650,635
Accrued payable - affiliate 41,647
2006 Series A convertible promissory notes 749,013
2007 Series A convertible promissory notes 823,679
2007 Series A convertible promissory notes - affiliates 1,016,092
Deferred compensation 375,000
------------
Total current liabilities 3,656,066
------------
Deferred rent 67,339
Convertible notes - affiliates 1,366,740
------------
Total liabilities 5,090,145
------------
Minority interest 73,517
------------
Stockholders' deficit:
Preferred stock, $.01 par value, 10,000 shares authorized, -
no shares issued and outstanding
Common stock, no par value, 100,000,000 shares authorized, -
8,770,079 shares issued, 8,076,280 outstanding
Additional paid-in capital 67,894,233
Accumulated deficit (71,707,337)
------------
Total stockholders' deficit (3,813,104)
------------
Total liabilities and stockholders' deficit $ 1,350,558
See notes to the unaudited consolidated financial statements.
3
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
2007 2006
----------- -----------
Revenue $ - $ -
----------- -----------
Operating expenses:
General and administrative (net of stock-
based compensation of $(116,030) and
$(372,614) (Note 8)) 153,856 (283,995)
Research and development (net of stock-based
compensation of $(350,520) and $(293,156)
(Note 8)) 126,968 108,384
----------- -----------
Total operating expenses 280,824 (175,611)
----------- -----------
(Loss) income from operations (280,824) 175,611
Other (income) and expense:
Interest expense 52,390 28,098
Interest income (4,925) (11,438)
Minority interest 73,517 -
Other, net (Note 9) (1,258,195) -
----------- -----------
(1,137,213) 16,660
----------- -----------
Income before cumulative effect of change in
accounting principle 856,389 158,951
Cumulative effect of change in accounting
principle (Note 6) - (731,386)
----------- -----------
Net income (loss) $ 856,389 $ (572,435)
=========== ===========
Net income (loss) per basic common share:
Before cumulative effect of change in
accounting principle $ 0.11 $ 0.02
Cumulative effect of change in accounting
principle - (0.08)
----------- -----------
Net income (loss) per share $ 0.11 $ (0.06)
=========== ===========
Net income (loss) per diluted common share:
Before cumulative effect of change in
accounting principle $ 0.10 $ 0.02
Cumulative effect of change in accounting
principle - (0.08)
----------- -----------
Net income (loss) per share $ 0.10 $ (0.06)
=========== ===========
Weighted-average number of common shares
outstanding:
Basic 7,932,197 8,625,996
=========== ===========
Diluted 9,300,407 8,625,996
=========== ===========
See notes to the unaudited consolidated financial statements.
4
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
THREE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
Total
Common Stock Additional Accumulated stockholders'
Shares Amount paid-in capital deficit deficit
--------- ------ --------------- ----------- --------------
Balances, July 1, 2007 8,770,079 $ - $67,900,379 $(72,563,726) $(4,663,347)
Vesting of options
for services - - (6,146) - (6,146)
Net income - - - 856,389 856,389
--------- ------ ----------- ------------ -----------
Balances, September 30,
2007 8,770,079 $ - $67,894,233 $(71,707,337) $(3,813,104)
========= ====== =========== ============ ===========
See Notes to unaudited consolidated financial statements.
5
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 856,389 $ (572,435)
Adjustments to reconcile net loss to net
cash used in operating activities:
Cumulative effect of change in accounting
principle - 731,386
Depreciation expense 4,020 764
Accrued interest on convertible notes and debt 52,390 28,099
Stock-based compensation (6,146) 214,966
Decrease in fair value of convertible notes (460,404) (893,505)
Minority interest 73,517 -
Decrease (increase) in prepaid rent and
expenses 3,332 (569)
(Increase) decrease in deposits and other
receivables (7,400) 1,110
Increase (decrease) in accounts payable and
accrued expenses 2,317 (142,219)
Increase in deferred rent 1,366 31,641
Increase in deferred compensation 187,500 187,500
----------- -----------
Net cash provided by (used in) operating
activities 706,881 (413,262)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in restricted cash - (171,945)
Purchase of property and equipment (1,325) (18,758)
----------- -----------
Net cash used in investing activities (1,325) (190,703)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of convertible debt - 545,000
----------- -----------
Net cash provided by financing activities - 545,000
----------- -----------
Net increase (decrease) increase in cash and
cash equivalents 705,556 (58,965)
Cash and cash equivalents at beginning of period 373,109 1,152,199
----------- -----------
Cash and cash equivalents at end of period $ 1,078,665 $ 1,093,234
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest and income taxes $ - $ -
See notes to the unaudited consolidated financial statements.
6
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS:
Organization and business:
Bion Environmental Technologies, Inc. ("Bion" or the "Company") was
incorporated in 1987 in the State of Colorado.
Bion's patented and proprietary technology provides solutions for
environmentally sound clean-up of the waste streams of large-scale animal
farming operations ("confined animal feeding operations" or "CAFO's") (dairy,
cattle feedlot, hogs, etc.) and creates economic opportunities for
development of integrated complexes including alternative renewable energy
production, ethanol production, sustainable animal husbandry and organic
soil/fertilizer and feed production ("Projects" or "Integrated Projects").
Bion's technology also potentially allows direct integration with dairy end-
users (bottling operations, cheese and ice cream plants, etc.) and the end-
users of other CAFO's that can potentially increase the profitability and
quality control of each participant while mitigating the environmental impact
of the entire integrated complex. The Company is in the process of finalizing
engineering, design and economic modeling for dairy and beef applications and
Integrated Projects based on its second-generation technology.
Bion is currently evaluating sites in multiple states and anticipates
selecting a site for its initial Integrated Project during fiscal year 2008.
At present it is probable, but not certain, that development of Bion's
initial Project will take place in St. Lawrence County, New York. Bion is
presently establishing its implementation management team (including
consultants) with the intention of commencing development and construction of
the initial Project during fiscal year 2008. In addition, Bion will seek to
site additional Projects during 2008 and 2009 to create a pipeline of
Projects that will insure significant market share and profitability within
3-5 years (both regionally and nationally). Each Project is expected to
include: a) Bion waste treatment modules, b) processing the CAFO waste stream
from the equivalent of 40,000 (or more) beef and/or dairy cows in modules,
c) while producing renewable energy to replace natural gas or other energy
use within the Project's CAFO modules and ethanol plant, d) solids to be
marketed as feed and/or fertilizer, e) which is integrated with a 40+M
gallon/year ethanol plant (though some smaller projects may be undertaken in
appropriate situations). At the end of the 5-year period, Bion hopes to have
numerous Projects in various stages of development ranging from full
operation to early construction stage.
Through 2001 the Company was primarily an environmental service company
focused on the needs of CAFOs. Thereafter, Bion elected to cease sales of its
first generation systems and focused its activity on development of its
second-generation technology.
7
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS
(CONTINUED):
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 $2,549,000 and $5,173,000 during the years ended June 30, 2007
and 2006, respectively, and net income of approximately $856,000 for the
three months ended September 30, 2007. At September 30, 2007, the Company
has a working capital deficiency and a stockholders' deficit of approximately
$2,550,000 and $3,813,000, 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.
As discussed in Note 9, during September 2007, the Company received net
proceeds of $1,258,000 consisting of $828,000 from litigation settlements and
$430,000 from the release of escrowed funds.
The Company continues to explore sources of additional financing to satisfy
its current operating requirements.
While the Company currently does not face a severe working capital shortage,
it is not currently generating any revenues. The Company will need to obtain
additional capital to fund its operations and technology development, to
satisfy existing creditors and to develop Projects. There is no assurance 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.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Bion Technologies, Inc., BionSoil, Inc. and
Bion Dairy Corporation ("Dairy") and its 57.7% owned subsidiary, Centerpoint
Corporation ("Centerpoint"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
8
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Principles of consolidation (continued):
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, 2007 and the results of operations and cash flows of the
Company for the three months ended September 30, 2007 and 2006. Operating
results for the three months ended September 30, 2007 are not necessarily
indicative of the results that may be expected for the year ending June 30,
2008.
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,
2007.
Earnings (loss) per share:
Basic earning (loss) per share amounts are calculated using the weighted
average number of shares of common stock outstanding during the period.
Diluted earnings (loss) per share assumes the conversion, exercise or
issuance of all potential common stock instruments, such as options or
warrants, unless the effect is to reduce the loss or increase earnings per
share. The following is a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations for the three months
ended September 30, 2007:
Income/ Average
Three months ended September 30, 2007 (loss) 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 38,155 584,779
-------- --------- ------
Net income - diluted $894,544 9,300,408 $ 0.10
======== ========= ======
The following potential shares of common stock and their effect on net income
were excluded from the 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.
9
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Recent accounting pronouncements:
The Company adopted the provisions of Financial Accounting Standards Board
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109 ("FIN 48"), on July 1, 2007. There
were no unrecognized tax benefits and, accordingly, there was no effect on
the Company's financial condition or results of operations as a result of
implementing FIN 48.
The Company files income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. The Company is no longer subject to U.S. federal
and state tax examinations for fiscal years before 2003. Management does not
believe there will be any material changes in our unrecognized tax positions
over the next 12 months.
The Company's policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. As of the
date of adoption of FIN 48, there was no accrued interest or penalties
associated with any unrecognized tax benefits, nor was any interest expense
recognized during the quarter.
3. MINORITY INTEREST OF CENTERPOINT CORPORATION:
In January 2002, Bion purchased a 57.7% majority interest in Centerpoint from
a third party. For the years ended June 30, 2007 and 2006, the losses
applicable to the minority interest in Centerpoint exceeded the minority
interest in the equity capital of Centerpoint, therefore the losses
attributable to the minority interest were charged against the Company's
earnings as there was no obligation of the minority interest to make good on
such losses. During the three months ended September 30, 2007, Centerpoint
had earnings of approximately $569,000, of which the Company utilized
approximately $395,000 to offset minority interest losses previously
absorbed. The remaining $174,000 was allocated between the Company and
Centerpoint's minority interest holders creating a minority interest
liability of $73,517 as of September 30, 2007.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of September 30, 2007:
Research and development equipment $ 305,266
Leasehold improvements 36,594
Furniture 28,932
Computers and office equipment 27,611
----------
398,403
Less accumulated depreciation (325,477)
----------
$ 72,926
==========
Depreciation expense was $4,020 and $764 for the three months ended September
30, 2007 and 2006, respectively.
10
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
5. CONVERTIBLE PROMISSORY NOTES:
2006 Series A Convertible Promissory Notes:
On September 13, 2006, the Company closed the offering of its 2006 Series A
Convertible Promissory Notes, totaling $700,000 (the "2006 Notes"). The
holders of the 2006 Notes earn interest on the unpaid principal balance of
the 2006 Notes at 6%, payable on May 31, 2008, the maturity date of the 2006
Notes. All of the principal and accrued interest under the 2006 Notes shall
be converted into common shares of the Company at the conversion rate of one
share for each $6.00 that is owed under the terms of the 2006 Notes if the
following conditions are met:
A) The closing market price of the Company's shares has been at or above
$7.20 per share for 10 consecutive trading days, and
B) The earliest of the following events:
1) An effective registration allowing public resale of the shares to
be received by the 2006 Note holders upon conversion, or
2) One year after the initial closing date of the offering, and
3) No conversion without an effective registration statement shall
take place until the Company has become a "reporting company" with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934, as amended, which occurred on January 13, 2007.
The 2006 Notes may also be convertible, in whole or in part, into the
Company's common shares at any time at the election of the 2006 Note holders
at a conversion rate of $6.00 per share, which was above the approximate
market price of the Company's common shares at the commitment date of the
offering. For the three months ended September 30, 2007 and 2006, the 2006
Notes accrued interest of $11,039 and $6,168 respectively.
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 are 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 holder and will accrue interest at 6% per annum.
The 2007 Note holders have the option to exchange the 2007 Notes, plus
interest, into 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. The conversion price of the 2007 Notes of
$4.00 per share is above the approximate market price of the Company's common
shares at the commitment date of the offering. The 2007 Notes accrued
interest of $27,116 for the three months ended September 30, 2007.
11
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
6. CONVERTIBLE NOTES - AFFILIATES:
On April 4, 2006 convertible deferred compensation due to the Company's
president, Mark A. Smith, pursuant to an April 2003 deferred compensation
agreement, was exchanged for a promissory note and conversion agreement. The
promissory note and conversion agreement have the same terms and conversion
features as the April 2003 deferred compensation agreement. Under the
agreements, the president earned compensation of $150,000 annually, all of
which has been deferred to date. Sums accrued through March 31, 2006, accrue
interest at 6% per annum, and are convertible into the Company's common stock
at the lower of the current market value at the time of conversion, or $2.00
per share. Through July 1, 2007, conversions could occur by mutual agreement
between the Company and Mr. Smith. The Company may convert the deferred
compensation, in whole or in part, at any date after July 1, 2007 and the
convertible deferred compensation owed the president is mandatorily converted
to common stock of the Company on July 1, 2009. Through June 30, 2006, the
Company accounted for this employee stock-based compensation agreement under
APB 25 and recorded the intrinsic value of the deferred compensation
agreement at each reporting date. On July 1, 2006, the Company adopted the
provisions of SFAS 123(R), which supersedes APB 25. In accordance with SFAS
123(R), outstanding instruments previously classified as liabilities and
measured at intrinsic values, are to be measured initially at fair value with
differences to be recorded as the cumulative effect of a change in accounting
principle. The fair value of deferred compensation owed to Mark A. Smith on
July 1, 2006 was $1,521,609, and the cumulative effect of the change in
accounting principle of $308,870 was recorded. Fair value at July 1, 2006
was calculated using a Black-Scholes option pricing model with the following
assumptions: a dividend yield of zero, a risk-free interest rate of 5.13%,
volatility of 181%, a remaining contractual life of 3 years and a stock price
of $6.40. At September 30, 2007 the fair value of deferred compensation owed
to Mark A. Smith was re-measured as $577,273 and resulted in a credit to
earnings of $194,462 for the three months ended September 30, 2007. Fair
value at September 30, 2007 was calculated utilizing the following
assumptions: a dividend yield of zero, a risk-free interest rate of 3.97%,
volatility of 62%, a remaining contractual life of 1.75 years and a stock
price of $2.20.
On December 31, 2005, convertible deferred compensation payable to Bright
Capital, Ltd. ("Brightcap") for services provided to the Company by Dominic
Bassani, the former general manager of Dairy, between April 1, 2003 and
September 30, 2005 was exchanged for a promissory note and conversion
agreement with the same terms and features as the deferred compensation
agreement. Effective March 31, 2005, Brightcap entered into an agreement to
continue to provide Mr. Bassani's services to the Company through March 31,
2009 and Brightcap earns compensation of $300,000 annually with payment
deferred. Sums accrued through September 30, 2005, accrue interest at 6% per
annum and are convertible into the Company's common stock at the lower of the
current market value at the time of conversion or $2.00 per share. Through
January 1, 2007 conversions could occur by mutual agreement between the
Company and Brightcap. The Company may convert the deferred compensation, in
whole or in part, at any date after January 1, 2007 and, on July 1, 2009, the
Company's obligation owed Brightcap is mandatorily convertible to common
stock of the Company. Through June 30, 2006, the Company accounted for this
employee stock-based compensation agreement under APB 25 and recorded the
12
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
6. CONVERTIBLE NOTES - AFFILIATES (CONTINUED):
intrinsic value of the deferred compensation agreement at each reporting
date. On July 1, 2006, the Company adopted the provisions of SFAS 123(R),
which supersedes APB 25. The fair value of deferred compensation owed to
Brightcap on July 1, 2006 was $2,081,475, and the cumulative effect of the
change in accounting principle of $422,516 was recorded. Fair value at July
1, 2006 was calculated using a Black-Scholes option pricing model with the
following assumptions: a dividend yield of zero, a risk-free interest rate of
5.13%, volatility of 181%, a remaining contractual life of 3 years and a
stock price of $6.40. At September 30, 2007 the fair value of deferred
compensation owed to Brightcap was re-measured as $789,467 and resulted in a
credit to earnings of $265,942 for the three months ended September 30, 2007.
Fair value at September 30, 2007 was calculated utilizing the following
assumptions: a dividend yield of zero, a risk-free interest rate of 3.97%,
volatility of 62%, a remaining contractual life of 1.75 years and a stock
price of $2.20.
Effective September 30, 2006, Mr. Bassani no longer serves in the capacity of
general manager of Dairy. However, he continues to provide services through
Brightcap in the area of strategic planning pursuant to the agreement above.
7. DEFERRED COMPENSATION:
As of July 1, 2006, the Company had also recorded deferred compensation
liabilities of $412,500 for three officers of the Company consisting of
$37,500 to Mark A. Smith, $225,000 to Brightcap, and $150,000 to Salvatore
Zizza, a former officer and director of the Company, who assumed the position
of Chairman and director of Dairy with an annual salary of $300,000. Through
December 31, 2006, an additional $375,000 was accrued ($75,000 to Mark A.
Smith, $150,000 to Brightcap and $150,000 to Savatore Zizza). Effective
January 1, 2007, the Company entered into agreements converting deferred
compensation amounts owed as of December 31, 2006 into promissory notes with
conversion agreements. The notes accrue interest at 6% per annum, with
principal and interest due and payable on January 1, 2009, if not previously
paid. The conversion agreements allow for the conversion of the notes into
shares of the Company's common stock at the equivalent price of the Company's
next private financing in excess of $2,000,000 as follows: a) by the holder
at any time after July 1, 2007; b) by the Company any time after there has
been an effective registration including the shares underlying conversion of
the notes for six months; c) by the holder and the Company by mutual
agreement at any time prior to payment by the Company of outstanding
principal and interest. As of March 31, 2007 the accrued principal and
interest owed under the promissory notes with conversion agreements, $787,500
and $11,521, respectively, in addition to deferred compensation owed for the
three months ended March 31, 2007 ($37,500 to Mark A. Smith, $75,000 to
Brightcap, $75,000 to Salvatore Zizza) were converted to 2007 Series A
Promissory Notes (Note 5).
As of September 30, 2007, the Company owed deferred compensation totaling
$375,000 ($75,000 to Mark A. Smith, $150,000 to Brightcap and $150,000 to
Salvatore Zizza).
13
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
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, 2007 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 SVDM-1 387,343 $ 5.00 July 31, 2008
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 May 31, 2009
Class SVMAS-1A 40,000 $ 3.50 October 11, 2009
Class SVMAS-2 32,500 $ 2.50 September 30, 2009
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 41,667 $ 1.50 June 30, 2009
Class C, D, E 725,000 $ 2.50 April 30, 2015
Class O 100,000 $ 3.00 December 31, 2008
---------
3,684,010
=========
The weighted average exercise for the outstanding warrants is $2.72 and the
weighted average life as of September 30, 2007 is 5.8 years.
Stock options:
Prior to June 2006, the Company had various incentive plans (the "Plans")
that provided for incentive stock options to be granted to selected employees
and directors of the Company, and selected non-employee advisors to the
Company. Effective June 2006, the Company approved the 2006 Consolidated
Incentive Plan (the "2006 Plan"), which consolidated previously reserved
incentive stock options under the Plans into the 2006 Plan. The Company has
reserved 3,200,000 shares, the maximum number of shares of the common stock
of the Company issuable pursuant to the 2006 Plan. 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.
14
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED):
Stock options (continued):
The Company recorded compensation expense related to stock options of
$144,792 and $217,887 for the three months ended September 30, 2007 and 2006,
respectively. During the three months ended September 30, 2007, the Company
granted no options, while 45,000 options were cancelled. During the three
months ended September 30, 2006, the Company granted options to purchase
150,000 shares of the Company's common stock. The fair value of the options
granted during the three months ended September 30, 2006 is estimated on the
grant date using the Black-Scholes option-pricing model with the weighted
average following assumptions:
Volatility 191%
Dividend yield 0%
Risk-free interest rate 4.77%
Expected life (years) 5
The expected volatility was based on the historical price volatility of the
Company's common stock. The dividend yield represents the Company's
anticipated cash dividend on common stock over the expected life of the stock
options. The U.S. Treasury bill rate for the expected life of the stock
options was utilized to determine the risk-free interest rate. The expected
term of stock options represents the period of time the stock options granted
are expected to be outstanding based upon management's estimates.
A summary of option activity under the 2006 Plan for the three months ended
September 30, 2007 is as follows:
Weighted-
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Life Value
--------- -------- ----------- ----------
Outstanding at July 1, 2007 1,833,333 $ 3.33
Granted - -
Exercised - -
Cancelled (45,000) 6.39
Outstanding at September 30, --------- ------- ----- --------
2007 1,788,333 $ 3.25 4.6 $ 29,500
Exercisable at September 30, ========= ======= ===== ========
2007 1,330,000 $ 3.12 3.9 $ 29,500
========= ======= ===== ========
The weighted-average grant-date fair value of options granted during the
three months ended September 30, 2006 was $5.17.
15
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED):
Stock options (continued):
The following table presents information relating to nonvested stock options
as of September 30, 2007:
Weighted Average
Grant-Date
Shares Fair Value
------- ----------------
Nonvested at July 1, 2007 560,833 $ 2.34
Granted - -
Vested (77,500) (3.59)
Cancelled (25,000) (4.89)
------- -------
Nonvested at September 30, 2007 458,333 $ 1.99
======= =======
The total fair value of stock options that vested during the three months
ended September 30, 2007 and 2006 was $277,901 and $193,875, respectively.
The intrinsic value of stock options exercised during the three months ended
September 30, 2007 and 2006 was $0 as there were no options exercised during
these periods. As of September 30, 2007 the Company had $548,672 of
unrecognized compensation cost related to stock options that will be recorded
over a weighted average period of approximately 1.25 years.
The Company has issued options to purchase shares of the Company's common
stock in exchange for services. As of September 30, 2007, non-employee
options represented 630,833 of the 1,788,333 options outstanding under the
Company's 2006 Consolidated Incentive Plan. Of the 630,833 non-employee
options outstanding, 260,833 were fully vested and contained no service
conditions as of September 30, 2007. 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 expense of
$0 and $12,769 for the three months ended September 30, 2007 and 2006,
respectively.
The remaining 370,000 non-employee options outstanding include service
conditions and have graded vesting schedules through May 1, 2009. As of
September 30, 2007, 195,000 of these options 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
based on the market price of the Company's common shares as of the reporting
date. Any subsequent change in fair value is recorded on the measurement
date. The fair value of these options were determined using the Black-
Scholes option-pricing model, using the following assumptions at September
30, 2007; a dividend yield of zero, a risk-free interest rate of 4.96%,
volatility of 162% and an expected life of 7.53 years. Consulting cost in
16
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED):
Stock options (continued):
connection with options that are not fully vested as of September 30, 2007 is
being recognized on a straight-line basis over the requisite service period
for the entire award. Non-cash fair value (credits) charges of ($150,938)
and ($2,921) were recorded as research and development expenses during the
three months ended September 30, 2007 and 2006, respectively.
Stock-based compensation charges/(credits) in operating expenses in the
Company's financial statements for the three months ended September 30, 2007
and 2006 are as follows:
September 30, September 30,
2007 2006
------------- -------------
General and administrative:
Fair value remeasurement of convertible notes
- affiliates (Note 6) $(194,462) $(377,216)
Amortization of expenses prepaid with stock
options granted to non-employees (Note 8) - 4,602
Fair value of stock options expensed under
SFAS 123(R) (Note 8) 78,432 -
--------- ---------
Total $(116,030) $(372,614)
========= =========
Research and development:
Fair value remeasurement of convertible notes
- affiliates (Note 6) $(265,942) $(516,289)
Fair value remeasurement of options with
service conditions (Note 8) (150,938) (2,921)
Amortization of expenses prepaid with stock
options granted to non-employees (Note 8) - 8,167
Fair value of stock options expensed under
SFAS 123 (R) (Note 8) 66,360 217,887
--------- ---------
Total $(350,520) $(293,156)
========= =========
9. LITIGATION SETTLEMENT AND RETURN OF ESCROWED FUNDS:
The Company, its president and Dairy were defendants in a class
action/derivative action lawsuit in Delaware Chancery Court (TCMP#3 Partners,
LLP, et al v. Trident Rowan Group, Inc., et al, Civil Action No. 170-N) (the
"TCMP Litigation") and on August 10, 2007 a settlement was approved.
Pursuant to the settlement, the Company, its president and Dairy paid
$165,000, through insurance, into a settlement fund. As part of the
settlement reached in the TCMP Litigation, the Company, Centerpoint and
certain shareholders of the Company ("Shareholder Class") filed an action
against Comtech Group, Inc. ("Comtech") (formerly known as Trident Rowan
Group, Inc.), OAM S.p.A ("OAM") and others in the Court of Chancery in the
17
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
9. LITIGATION SETTLEMENT AND RETURN OF ESCROWED FUNDS (CONTINUED):
State of Delaware (the "Comtech Litigation"), along with a stipulated
settlement of the litigation. Pursuant to that settlement, Comtech and OAM
agreed to deliver to the Shareholder Class: a) 144,240 shares of the
Company's common stock; b) a warrant to purchase 100,000 shares of the
Company's common stock, and c) 140,000 shares of the common stock of
Centerpoint. It is anticipated that delivery of these securities (net of 10%
attorneys' fees) will take place during the second quarter of fiscal 2008 and
each member of the Shareholder Class will receive the equivalent of
approximately .05 of the Company's shares for each share of the Company's
common shares (split adjusted) owned on January 15, 2002. Additionally,
Comtech and OAM assigned to the Company all of their rights to the proceeds
of an escrow established from the sale of Centerpoint's assets to Aprilia
S.p.A. (the "Aprilia Escrow") and any proceeds from litigation related to the
transaction with Aprilia. On September 18, 2007 the Company received gross
proceeds of $798,210 (net receipts were $159,642 to Centerpoint and $558,747
to Bion, after payment of attorneys' fees of $79,821) from the Aprilia
Escrow. As part of the settlement, one of the other defendants in the
Comtech litigation paid $150,000 into a settlement fund, through insurance,
from which the Company and Centerpoint received $110,000, in aggregate, on
September 10, 2007. As there are no contingencies on the settlement, the
Company recognized the net proceeds of $828,389 as other income for the three
months ended September 30, 2007.
Also on September 18, 2007, Centerpoint received $429,806 from its direct 35%
ownership interest in the Aprilia Escrow which is included in other income as
of September 30, 2007.
10. OPERATING LEASE:
The Company entered into a non-cancellable operating lease commitment for
office space in New York, effective August 1, 2006 and expiring November 30,
2013. In conjunction with the signing of the lease, the Company provided the
lessor with a secured letter of credit in the amount of $171,945, which is
reflected as restricted cash as of September 30, 2007. The Company's
obligations under the lease are partially guaranteed by Salvatore Zizza,
chairman of Bion Dairy. 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 $67,339 as of September 30, 2007. Rent expense, net of sub-
lease rental income was $31,181 and $32,391 for the three months ended
September 30, 2007 and 2006, respectively.
As of September 30, 2007 the Company had prepaid rent relating to its
operating leases of $14,863.
18
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
10. OPERATING LEASE (CONTINUED):
At September 30, 2007, 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
payments Rentals lease payments
Fiscal year: ---------- -------- --------------
Nine months ended June 30:
2008 $ 133,773 $ 42,807 $ 90,966
2009 184,484 59,035 125,449
2010 191,405 61,249 130,156
2011 198,602 63,553 135,049
2012 212,775 68,088 144,687
Thereafter 322,975 103,352 219,623
---------- -------- --------
Total $1,244,014 $398,084 $845,930
========== ======== ========
11. COMMITMENTS AND CONTINGENCIES:
Employment and consulting agreements:
The Company has an employment agreement with its president, Mark A. 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 125,000 options at $2.20 per share,
expiring on December 31, 2011.
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 (Note 8).
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.
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.
19
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Employment and consulting agreements (continued):
Effective June 1, 2007, the Company entered into an employment agreement,
effective through August 31, 2009, with Craig Scott. Mr. Scott was appointed
Vice President of Capital Markets/Investor Relations at an annual salary of
$120,000.
In May 2005 the Company declared contingent deferred stock bonuses of 690,000
shares to its key employees and consultants. The stock bonuses of 492,500
and 197,500 shares are contingent upon the Company's stock price exceeding
$10.00 and $20.00 per share, respectively, and the grantees still being
employed by or providing services to the Company at the time the target
prices are reached.
Joint venture agreement:
In June 2006, the Company entered into an agreement with Fair Oaks Dairy Farm
("FODF") to construct a Bion facility ("Stage I System") at FODF. Bion has
been working with FODF since May 2005 for the purpose of installing a waste
treatment facility at FODF that could become the basis for a future
Integrated Project. The June 2006 agreement contemplates expansion beyond
the initial waste treatment facility. The Stage I System, if constructed,
will initially be used for testing necessary for: a) finalization of design
criteria for permitting and construction of, and b) optimization of renewable
energy production and utilization for the full scale Integrated Projects.
The Company is currently in negotiations toward an amended agreement with
FODF pursuant to which: a) the Company will construct a commercial scale Bion
System designed to handle the waste stream from approximately 3,500-6,200
milking cows ("Initial System") at existing FODF facilities in Indiana which
will incorporate and expand the scope of the Stage I System; and b) when the
Initial System has completed start-up phase and demonstrated environmental
results consistent with the published results achieved at Bion's DeVries
research facility, the Initial System will become the basis of expansion into
an Integrated Project at FODF through development stages including dairy
expansion, construction of additional Bion System modules, including
renewable energy production, solids processing facilities, and construction
of an ethanol plant. It is anticipated that the amended agreement will be
executed during calendar year 2007. Preliminary engineering, design and site
work at FODF has begun pursuant to the existing agreement. However, due to
the inability to resolve certain technical and financial issues, it is
uncertain whether any of these facilities will be constructed. FOFD is owned
and controlled by Michael McCloskey and Timothy Den Dulk who have served as
consultants to the Company since May 2005.
20
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
11. COMPENSATION AND CONTINGENCIES (CONTINUED):
Claims contingency:
In May 2002, Arab Commerce Bank Ltd. ("ACB"), an unaffiliated party, filed a
complaint against the Company in the Supreme Court of the State of New York
regarding $100,000 of the Company's convertible bridge notes ("Bridge Notes")
that were issued to ACB in March 2000. The complaint includes a breach of
contract claim asserting that the Company owes ACB approximately $285,000
plus interest of $121,028 plus interest based on ACB's interpretation of the
terms of the Bridge Notes and subsequent amendments. Effective June 30,
2001, the Company issued ACB 5,034 shares of common stock in full
satisfaction of the Bridge Notes based on the Company's interpretation of the
Bridge Notes, as amended. The Company has filed an answer to the complaint
denying the allegations. No activity has taken place on this lawsuit since
early 2003. The Company believes that the ultimate resolution of this
litigation will not have a material adverse effect on the Company, its
operations or its financial condition.
12. RELATED PARTY TRANSACTIONS:
The Company has an accrued payable of $41,647 to a company controlled by
Salvatore Zizza for rental of office space in 2003.
21
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes to Consolidated Financial
Statements filed with the Company's Form 10-KSB for the year ended June 30,
2007.
BUSINESS OVERVIEW
The Company has been focused on completion of the development of its
second-generation technology which provides solutions for environmentally
sound clean-up of the waste streams of large-scale CAFO's and creates
economic opportunities for integration of renewable energy production,
ethanol production, sustainable animal husbandry and organic soil/fertilizer
and feed production. We believe our technology will also allow development
of Projects that can also directly integrate with dairy (and other CAFO) end-
users and that can potentially increase profitability and quality control of
each participant while mitigating the environmental impact of the entire
integrated complex. The Company is in the process of finalizing engineering,
design and economic modeling for applications and Integrated Projects and
expects to select the site for and commence development of its initial
Integrated Project during its 2008 fiscal year.
The financial statements for the years ended June 30, 2007 and 2006 have
been prepared assuming the Company will continue as a going concern. The
Company has incurred net losses of approximately $2,549,000 and $5,173,000
during the years ended June 30, 2007 and 2006, respectively. At June 30,
2007, the Company had a working capital deficiency and a stockholders'
deficit of approximately $1,219,000 and $4,663,000, respectively. The
financial statements for the three months ended September 30, 2007 and 2006
have also been prepared assuming the Company will continue as a going
concern. The Company has incurred net income (loss) of approximately
$856,000 and ($572,000) during the three month periods ended September 30,
2007 and 2006, respectively. At September 30, 2007, the Company has a
working capital deficiency and a stockholders' deficit of approximately
$2,550,000 and $3,813,000, respectively. The report of the independent
registered public accounting firm on the Company's financial statements as of
and for the year ended June 30, 2007 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 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
22
uncertain and may significantly impact quarterly or annual results of
operations. For all of these policies, management cautions that future
events rarely develop exactly as expected, and the best estimates routinely
require adjustment. Specific risks associated with these critical
accounting policies are described in the paragraphs below.
Revenue Recognition
While the Company has not recognized any operating revenues for the past
two fiscal years, the Company anticipates that future revenues will be
generated from product sales, 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 supercedes 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. Pro forma
disclosure for prior period issuances of share based grants have been made in
the notes to the financial statements and the Company has used the Black-
Scholes option pricing model for determining fair value of stock options
granted. As of September 30, 2007 the Company had $549,000 of unrecognized
compensation cost related to stock options that will be recorded over a
weighted average period of approximately 1.25 years.
23
Cumulative Effect of Change in Accounting Principle
In accordance with SFAF 123(R), outstanding instruments previously
classified as liabilities and measured at intrinsic values, are to be
measured initially at fair value with differences to be recorded as a
cumulative effect of a change in accounting principle. The Company recorded
the cumulative effect of a change in accounting principle of $731,000 due to
the calculation of the fair value of convertible deferred compensation owed
Mark Smith ($1,522,000) and Brightcap ($2,081,000) as of July 1, 2006. The
Company re-measures the fair value of the convertible notes at each reporting
period after July 1, 2006, using a Black-Scholes model approach, and records
any adjustments as non-cash compensation expense in the re-measurement
period. At September 30, 2007, the fair value of deferred compensation owed
Mark Smith and Brightcap was re-measured at $577,000 and $789,000,
respectively, and resulted in a credit to earnings of $194,000 and $266,000,
respectively, for the three months ended September 30, 2007.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Financial Accounting Standards
Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109 ("FIN 48"), on July 1, 2007. There
were no unrecognized tax benefits and, accordingly, there was no effect on
the Company's financial condition or results of operations as a result of
implementing FIN 48.
The Company files income tax returns in the U.S. federal jurisdiction
and various state jurisdictions. The Company is no longer subject to U.S.
federal and state tax examinations for fiscal years before 2003. Management
does not believe there will be any material changes in our unrecognized tax
positions over the next 12 months.
The Company's policy is to recognize interest and penalties accrued on
any unrecognized tax benefits as a component of income tax expense. As of the
date of adoption of FIN 48, there was no accrued interest or penalties
associated with any unrecognized tax benefits, nor was any interest expense
recognized during the quarter.
THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO YEAR ENDED SEPTEMBER 30,
2006
General and Administrative
Total general and administrative expenses increased $438,000 from a
credit of ($284,000) to expense of $154,000 for the three months ended
September 30, 2006 and 2007, respectively.
General and administrative expenses, excluding stock-based compensation
credits of $(116,000) and $(372,000) for the three months ended September 30,
2007 and 2006, respectively, were $270,000 versus $88,000 for the three
months ended September 30, 2007 and 2006, respectively. The increase of
approximately $182,000 was due primarily to higher salary and related payroll
taxes, legal and consulting fees for the three months ended September 30,
2007 over the same period in 2006. The Company had higher salary and payroll
tax costs of approximately $39,000 for the three months ended September 30,
2007 due to the addition of an investor relations manager in June 2007 and
additional salary costs being allocated to general and administrative. Legal
24
fees were $76,000 higher during the three months ended September 30, 2007 due
to the fact that during the three months ended September 30, 2006, the
Company received an insurance reimbursement for legal fees relating to the
Centerpoint litigation that resulted in a credit to legal fees. The Company
incurred higher consulting fees during the three months ended September 30,
2007 of $22,000 as the Company has engaged an investment banking services
company.
General and administrative stock-based compensation for the three months
ended September 30, 2007 and 2006 respectively consist of the following:
Three months Three months
ended ended
September 30, September 30,
2007 2006
------------- -------------
Fair value remeasurement of convertible
notes - affiliates $(194,000) $(377,000)
Amortization of expenses prepaid with
stock options granted to non-employees - 5,000
Fair value of stock options expensed
under SFAS 123(R) 78,000 -
--------- ---------
Total $(116,000) $(372,000)
========= =========
Stock-based compensation expenses increased to ($116,000) for the three
months ended September 30, 2007 from $(372,000) for the three months ended
September 30, 2006. The change in stock-based compensation fair value
adjusted expense relating to the President's convertible deferred
compensation is due to: a) the Company's adoption of SFAS 123(R) which
measures the fair value of the convertible feature of the liability and b)
the decrease in the price of the Company's stock from $3.25 to $2.20 per
share for the three months ended September 30, 2007 versus the decrease from
the $6.40 per share to $5.25 per share for the three months ended September
30, 2006. For the three months ended September 30, 2007 the Company
recognized expense relating to the fair value of stock options for general
and administrative employees of $78,000, while there was no similar expense
during the same period in 2006.
Research and development
Total research and development expenses have increased $19,000 from
$108,000 to $127,000 for the three months ended September 30, 2006 and 2007,
respectively.
Research and development expenses, excluding stock-based compensation
credits of $351,000 and $293,000 for the three months ended September 30,
2007 and 2006, respectively, increased $77,000 from $401,000 to $478,000 for
the three months ended September 30, 2006 and 2007, respectively. Salary and
related payroll tax and benefits costs increased approximately $29,000 for
the three months ended September 30, 2007 due to the addition of a chief
operating officer in September 2006 and increased health insurance costs.
25
Research and development stock-based compensation for the three months
ended September 30, 2007 and 2006 consist of the following:
Three months Three months
ended ended
September 30, September 30,
2007 2006
------------- -------------
Fair value remeasurement of convertible
notes - affiliates $(266,000) $(516,000)
Fair value remeasurement of options with
service conditions (151,000) (3,000)
Amortization of expenses prepaid with
stock options granted to non-employees - 8,000
Fair value of stock options expensed
under SFAS 123 (R) 66,000 218,000
--------- ---------
Total $(351,000) $(293,000)
========= =========
Stock-based compensation credit increased from $293,000 for the three
months ended September 30, 2006 to $351,000 for the same period in 2007. The
change is attributable to Brightcap's convertible deferred compensation, and
compensation costs relating to the Company's options with service conditions
and graded vesting and expensing of stock options for research and
development employees. Stock-based compensation fair value adjusted credit
of $266,000 and $516,000 for the three months ended September 30, 2007 and
2006, respectively, was recorded to re-measure the fair value of Brightcap's
convertible deferred compensation at September 30, 2007 and 2006,
respectively, due, in part, to the decrease in the price of the Company's
stock from $3.25 to $2.20 per share for the three months ended September 30,
2007, compared to the decrease from the $6.40 per share to $5.25 per share
for the three months ended September 30, 2006. Stock-based compensation fair
value adjusted credit of $151,000 and $3,000 was recorded for the three
months ended September 30, 2007 and 2006, respectively for the non-employee
options that include service conditions and have graded vesting schedules.
The decrease is due to the decrease in the stock price from $3.25 per share
at June 30, 2007 to $2.20 per share at September 30, 2007. The Company
recorded stock-based compensation expense of $66,000 and $218,000 under the
provisions of SFAS 123(R)for the three months ended September 30, 2007 and
2006, respectively for options vested to research and development employees.
The expense was higher for the three months ended September 30, 2006 due to
options being issued to the chief operating officer at the time of his hire
date, some of which vested immediately. There were no new grants of options
during the three months ended September 30, 2007.
Income (loss) from Operations
As a result of the factors described above, the income (loss) from
operations was $(281,000) and $176,000 for the three months ended September
30, 2007 and 2006, respectively.
26
Other income (expense)
Other income (expense) was $1,258,000 and $(17,000) for the three months
ended September 30, 2007 and 2006, respectively. Interest expense increased
$24,000 from $28,000 for the three months ended September 30, 2006 to $52,000
for the three months ended September 30, 2007. Interest expense increased
due to the higher debt balances due to the 2006 and 2007 Series A Notes and
higher convertible deferred compensation balances from the prior year. 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 during the three months ended September 30, 2007.
The receipts of the litigation settlement proceeds and the escrowed funds
resulted in a positive net equity position for the Company's 57.7% 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.
Cumulative Effect of Change in Accounting Principle
During the three months ended September 30, 2006, the Company recorded
the cumulative effect of a change in accounting principle of $731,000.
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 APB 25, using the modified
prospective application. In accordance with SFAF 123(R), outstanding
instruments previously classified as liabilities and measured at intrinsic
values, are to be measured initially at fair value with differences to be
recorded as a cumulative effect of a change in accounting principle. The
Company recorded the cumulative effect of a change in accounting principle of
$731,000 due to the calculation of the fair value of convertible deferred
compensation owed Mark Smith and Brightcap as of July 1, 2006. The
cumulative effect of change in accounting principle resulted in a net loss
per common share of $0.08 for the three months ended September 30, 2006.
Net Income (Loss)
As a result of the factors described above, the net income (loss) was
$856,000 and $(572,000) for the three months ended September 30, 2007 and
2006, respectively, representing a $0.17 increase in the net income (loss)
per basic common share from $(0.06) for the three months ended September 30,
2006 to $0.11 for the same period in 2007. Diluted income (loss) per share
was $0.10 and $(0.06) for the three months ended September 30, 2007 and 2006,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2007, the Company had cash and cash equivalents
equal to $1,079,000. 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.
27
Investing Activities
During the three months ended September 30, 2007 the Company used $1,000
of cash for investing activities to purchase property and equipment. The
Company had no other investing activities for the three months ended
September 30, 2007.
Financing Activities
The Company had no financing activities during the three months ended
September 30, 2007.
As of September 30, 2007 the Company has significant debt obligations
consisting primarily of mandatorily convertible notes - affiliates of
$1,367,000, 2006 Series A convertible promissory notes - current of $749,000,
2007 Series A convertible promissory notes - affiliates of 1,016,000, 2007
Series A convertible promissory notes of $824,000 and deferred compensation
of $375,000. 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.
Plan of Operations and Outlook
As of September 30, 2007 the Company had cash and cash equivalents of
$1,078,665. Based on our operating plan, management believes that existing
cash on hand will be sufficient to fund the Company's basic overhead through
the end of the 2008 fiscal year. However, the Company will need to raise
additional capital to execute our business plan discussed below.
The Company currently intends to seek financing of between $5,000,000
and $50,000,000 during fiscal year 2008 in the form of equity and/or debt.
The proceeds would be used to expand and accelerate the development
activities of Bion's initial Integrated Projects and for general corporate
purposes. If we do not receive sufficient funding on a timely basis, it
could have a material adverse effect on our liquidity, financial condition
and business prospects. Additionally, in the event that we receive funding,
it may be on terms that are not favorable to the Company and its
shareholders. There is no assurance that the Company will successfully
complete any financings.
Currently, Bion is focused on using applications of its patented waste
management technology 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 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.
In June 2006, the Company entered into an agreement with Fair Oaks Dairy
Farm ("FODF") to construct a Bion facility ("Stage I System") at FODF. Bion
has been working with FODF since May 2005 for the purpose of installing a
waste treatment facility at FODF that could become the basis for a future
Integrated Project. The June 2006 agreement contemplates expansion beyond
the initial waste treatment facility. The Stage I System, if constructed,
will initially be used for testing necessary for: a) finalization of design
criteria for permitting and construction of, and b) optimization of renewable
28
energy production and utilization for the full scale Integrated Projects. We
are currently in negotiations toward an amended agreement with FODF pursuant
to which: a) the Company will construct a commercial scale Bion System
designed to handle the waste stream from approximately 3500-6200 milking cows
("Initial System") at existing FODF facilities in Indiana which will
incorporate and expand the scope of the Stage I System; and b) when the
Initial System has completed start-up phase and demonstrated environmental
results consistent with the published results achieved at Bion's DeVries
research facility, the Initial System will become the basis of expansion into
an Integrated Project at FODF through development stages including dairy
expansion, construction of additional Bion System modules including renewable
energy production and solids processing facilities and construction of an
ethanol plant. Preliminary engineering, design and site work at FODF began
pursuant to the existing agreement. However, certain technical and financial
issues related to these facilities remain unresolved and it is not currently
possible to predict when, if ever, these facilities will be constructed.
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 2008 fiscal
year. At present it is probable, but not certain, that the initial Integrated
Project will be located in St. Lawrence County, New York. In addition, Bion
intends to choose sites for additional Projects from during 2008 to create a
pipeline of Projects. Management has a 5-year development target (through
calendar year 2013) of approximately 12-25 Integrated Projects. At the end
of the 5-year period, Bion projects that 8-16 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.
Bion is presently establishing its implementation management team with
the intention of commencing development and construction of an initial
Project during fiscal year 2008. Bion will need to continue to hire
additional management and technical personnel as it moves from the technology
re-development phase to the implementation phase during the 2008 calendar
year.
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
$171,945 in connection with the lease. 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) In June 2006, the Company entered into an agreement with Fair Oaks
Dairy Farm ("FODF") to construct a Bion facility ("Stage I System") at FODF.
Bion has been working with FODF since May 2005 for the purpose of installing
a waste treatment facility at FODF that could become the basis for a future
Integrate Project. The June 2006 agreement contemplates expansion beyond the
initial waste treatment facility. The Stage I System, if constructed, will
initially be used for testing necessary for: a) finalization of design
29
criteria for permitting and construction of, and b) optimization of renewable
energy production and utilization for, full scale Integrated Projects. The
estimated cost of Stage I under the June 2006 agreement, including Stage I
System construction and testing operations, is $750,000, which Bion and FODF
have agreed to split equally net of any grants. However, certain technical
and financial issues concerning this facility remain unresolved between Bion
and FODF and, therefore, permitting and construction have not yet commenced.
It is not possible to predict when and if these matters will be resolved or
whether this installation will ever be constructed.
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. 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 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 effective at ensuring that
required information will be disclosed on a timely basis in our reports filed
under the Exchange Act.
(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.
30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There have been no material developments in the legal proceedings
described in our Form 10-SB since the filing of the last amendment to that
registration statement.
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
31.1 Certification of CEO and Principal Financial Officer pursuant
to Rule 13a-14(a) or Rule 15d-14(a).
32.1 Certification of CEO and Principal Financial Officer pursuant
to Section 906 of the Sarbanes- Oxley Act of 2002.
99.1 Extension Agreement between the Company and Mark A. Smith
dated November 7, 2007.
99.2 Non-Qualified Stock Option Agreement dated November 7, 2007
between the Company and Mark A. Smith.
31
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, 2007 By:/s/ Mark A. Smith
Mark A. Smith, President (Chief
Executive Officer) and Interim Chief
Financial Officer (Principal Financial
and Accounting Officer)
32