SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 OR THE TRANSITION PERIOD FROM _______ TO _______
Commission file number 0-19333
Bion Environmental Technologies, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-1176672
----------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 East 50th Street 10th Floor N.Y., N.Y. 10022
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 758-6622
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No___
The number of shares outstanding of registrant's classes of common stock, as
of November 9, 2001: Common Stock, No Par Value, 13,303,815.
Transitional Small Business Disclosure Format (Check one): Yes ___ No X
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheet as of September 30, 2001
(unaudited) F-1 - F-2
Unaudited Consolidated Statements of Operations for
the Three Months Ended September 30, 2001 and 2000 F-3
Unaudited Consolidated Statement of Changes in
Stockholders' Deficit for the Three Months Ended
September 30, 2001 F-4
Unaudited Consolidated Statements of Cash Flows for
the Three Months Ended September 30, 2001 and 2000 F-5 - F-6
Notes to Unaudited Consolidated Financial Statements F-7 - F-20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 3-6
PART II - Other Information
Items 1 - 6 6-8
Index to Exhibits 8
Reports on Form 8-K 8
Signature Page 9
2
Bion Environmental Technologies, Inc. and
Subsidiaries
Consolidated Balance Sheets
September 30,
2001
(Unaudited)
------------
Assets
Current:
Cash and cash equivalents $ 407,875
Accounts receivable, less allowance of $2,000
for possible losses 8,065
Prepaid expenses 23,081
---------
Total current assets 439,021
---------
Property and equipment:
Furniture and equipment 339,414
Computer equipment 75,845
Leasehold Improvement 30,174
---------
445,433
Less accumulated depreciation 281,415
---------
Net property and equipment 164,018
---------
Other assets:
Note receivable 54,812
Patents, net of accumulated amortization of $22,385 32,561
Deposits and other 135,859
---------
Total other assets 223,232
---------
Total Assets $ 826,271
=========
See accompanying notes to unaudited consolidated financial statements.
F-1
Bion Environmental Technologies, Inc. and
Subsidiaries
Consolidated Balance Sheets
September 30,
2001
(Unaudited)
------------
Liabilities and Stockholders' Deficit
Current:
Accounts payable $ 177,139
Convertible bridge notes payable (Note 3) 6,441,191
Notes payable, related parties - current (Note 4, Note 5) 2,351,521
Common stock to be issued 144,167
Current portion of capital lease obligations 7,600
Accrued expenses 45,467
-----------
Total current liabilities 9,167,085
-----------
Long-term liabilities:
Notes payable, related parties (Note 4) 2,795,803
Long-term portion of capital lease obligations 2,684
-----------
Total long-term liabilities 2,798,487
-----------
Total liabilities 11,965,572
-----------
Commitments and contingencies
Stockholders' deficit:
Common stock, no par value, 100,000,000 shares authorized,
13,153,831 and 13,062,324 shares issued and outstanding 30,475,020
Accumulated deficit (41,614,321)
-----------
Total stockholders' deficit (11,139,301)
-----------
Total Liabilities and Stockholders' Deficit $ 826,271
============
See accompanying notes to unaudited consolidated financial statements.
F-2
Bion Environmental Technologies, Inc. and
Subsidiaries
Unaudited Consolidated Statements of Operations
Three Months Ended September 30, 2001 2000
------------------------------- ------------ ------------
Revenues:
Soil sales $ 13,003 $ 17,652
------------ ------------
Total revenues 13,003 17,652
------------ ------------
Cost of goods and services sold:
Soil sales 119,090 80,807
------------ ------------
Total cost of goods sold 119,090 80,807
------------ ------------
Gross loss (106,087) (63,155)
------------ ------------
Expenses:
General and administrative (including $218,231
and $2,449,253, non-cash, respectively) 846,009 3,171,654
Research and development 213,467 382,319
------------ ------------
Total expenses 1,059,476 3,553,973
------------ ------------
Loss from operations (1,165,563) (3,617,128)
------------ ------------
Other income (expense):
Interest expense (including $1,118,718 and
$681,853, non-cash, respectively) (1,119,214) (683,102)
Interest income 9,198 41,953
Other income (expense), net 41,358 (6,799)
------------ ------------
Total other expense (1,068,658) (647,948)
------------ ------------
Net loss and comprehensive loss $ (2,234,221) $ (4,265,076)
============ ============
Loss per common share $ (.17) $ (.34)
============ ============
Weighted-average number of common shares outstanding,
basic and diluted 13,068,391 12,568,076
============ ============
See accompanying notes to unaudited consolidated financial statements.
F-3
Bion Environmental Technologies, Inc. and
Subsidiaries
Unaudited Consolidated Statement of Changes in Stockholders' Deficit
Non-
Recourse Deferred Unearned Total
Three Months Ended Common Stock Promissory Consulting Compen- Accumulated Stockholders'
September 30, 2001 Shares Amount Note Expense sation Deficit Deficit
---------------------------------------------------------------------------------------------------------------------------------
Balance, July 1, 2001 13,062,324 $30,218,337 $ - $ - $ - $(39,380,100) $(9,161,763)
Exercise of stock options (Note 6) 41,177 70,000 70,000
Issuance of stock options
and warrants for
consulting services (Note 6) 77,412 77,412
Issuance of stock for
Convertible bridge note (Note 6) 50,330 112,740 112,740
Adjustment for variable options (3,469) (3,469)
Net loss for the quarter ended
September 30, 2001 - - - - - (2,234,221) (2,234,221)
---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2001 13,153,831 30,475,020 - - - (41,614,321) (11,139,301)
=================================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
F-4
Bion Environmental Technologies, Inc. and
Subsidiaries
Unaudited Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Three Months Ended September 30, 2001 2000
------------------------------------------------ -------------- --------------
Operating activities:
Net loss $ (2,234,221) $ (4,265,076)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 19,640 18,482
Issuance of options and warrants for consulting services 77,412 -
Issuance of stock for services 144,167 -
Issuance of convertible bridge note for management fee - 60,000
Issuance of note payable for interest expense 341,505 249,462
Beneficial value of warrants exchanged for
common stock - 2,173,460
Amortization of debt discounts 777,213 431,785
Amortization of deferred consulting expense - 192,961
Adjustment for variable options (3,469) -
Issuance of options and warrants for consulting
services - 22,832
Changes in operating assets and liabilities:
Accounts receivable and work-in-progress 13,673 18,042
Note receivable (54,812) -
Prepaid expenses and other (14,635) (112,170)
Accrued interest receivable - (11,183)
Accounts payable (33,334) 12,108
Accrued liabilities 10,195 (3,597)
-------------- --------------
Net cash used in operating activities (956,666) (1,212,894)
-------------- --------------
F-5
Bion Environmental Technologies, Inc. and
Subsidiaries
Unaudited Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Three Months Ended September 30, 2001 2000
------------------------------------------------ -------------- --------------
Investing activities:
Refund of equipment returned - 1,447
-------------- --------------
Net cash used in investing activities - 1,447
-------------- --------------
Financing activities:
Issuance of stock for Note receivable 70,000 -
Payments on note receivable - (60,000)
Payments on capital lease obligations (5,857) (9,528)
-------------- --------------
Net cash provided by (used in) financing activities 64,143 (69,528)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (892,523) (1,280,975)
Cash and cash equivalents, beginning of period 1,300,398 2,604,933
-------------- --------------
Cash and cash equivalents, end of period $ 407,875 $ 1,323,958
============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 495 $ 1,249
Supplemental disclosure of non-cash financing activities:
Issuance of stock for convertible bridge note 112,740 -
Warrants issued in connection with related party note
payable - 349,924
=============== ==============
See accompanying notes to unaudited consolidated financial statements.
F-6
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. Accounting Policies
The accompanying unaudited financial statements and disclosures reflect all
adjustments (all of which are normal recurring adjustments) in the ordinary
course of business, which in the opinion of management are necessary for a
fair presentation of the results of operations and financial position, and
cash flow. The results of operations for the periods indicated are not
necessarily indicative of the results for a full year. It is suggested that
these condensed financial statements be read in conjunction with the audited
financial statements and accompanying notes for the year ended June 30, 2001.
Basic earnings (loss) per share are calculated as income (loss) available to
common stockholders divided by the weighted average number of common shares
outstanding. Diluted earnings per share are calculated as income (loss)
divided by weighted average number of common shares and the assumed conversion
of common stock equivalents. Common stock options and warrants were not
included in diluted loss per share for the three months ended September 30,
2001 and 2000, as the effect was antidilutive.
2. Liquidity
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. Our independent CPA issued an opinion on
our June 30, 2001 financial statements, which included a paragraph emphasizing
the Company's ability to continue as a going concern. The Company incurred
losses totaling $2,234,221 during the three months ended September 30, 2001
(including non-cash interest expense and other non-cash expenses of $1,118,718
and $218,231, respectively) and has a history of losses that has resulted in
an accumulated deficit of $41,614,321 at September 30, 2001.
During the years ended June 30, 2001 and 2000, the Company successfully
obtained external financing through private placements of debt and equity and
the sale of its warrants. The Company also received financing from affiliated
companies (see Note 5). The Company continues to explore sources of
additional financing to satisfy its current operational requirements, and is
currently attempting to place additional private placements of debt and equity
under the most favorable terms available.
There can be no assurance that any funds required during the next twelve
months or thereafter can be generated from operations or that if such required
funds are not internally generated that 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
F-7
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
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.
To enhance the Company's longer term prospects, as a result of our research
and development efforts during the last two years, the second generation of
our Bion Nutrient Management System (NMS(R)) has been developed. We intend to
undertake further NMS research and development which will incur additional
expenditures through fiscal year 2002 and will be focused on: 1) system
acceleration in order to further increase capacity and lower costs; 2)
integration of the Bion NMS System with a methane digestion system in order to
create additional revenue streams from the sale of electricity and natural
gas; 3) finalization of commercial designs for application in our second
generation NMS systems; and 4) possibly a clean water recycling loop. We also
have an ongoing research program related to our BionSoil(R) and Bion
Fertilizer product lines. Management's decision to pursue these efforts is
the result of both the increasing environmental and regulatory pressure on
large dairy and swine farms and positive results of limited market tests of
BionSoil(R) products. There can be no assurance that the next generation Bion
NMS system design or the BionSoil(R) program will be successful or that
sufficient capital will be available to fund operations.
As noted earlier, there is 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 asset carrying amounts or the amounts and classification of
liabilities that may result should the Company be unable to continue as a
going concern.
3. Convertible Bridge Notes Payable
On June 8, 2001 the Company completed a private offering of unsecured
convertible bridge notes payable in the principal amount of $2,527,218.
In connection with the sale of the Notes, the Company issued stock purchase
warrants exercisable for the purchase of up to 758,138 shares of the Company's
common stock at $1.50 per share through December 31, 2004. The warrants were
originally valued at $737,809 using the Black Scholes option-pricing model and
are being amortized as additional interest expense over the term of the Notes.
Additional 2001 Notes have been issued to the Trust Under Deferred
Compensation Plan for D2CO, LLC in lieu of payment for monthly management
fees. For the period of April 2001 to June 30, 2001, $41,667 per month were
issued.
F-8
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
The Company recorded interest expense on the 2001 Notes of $63,700 for the
three months ending September 30, 2001, which was added to the balance of the
notes. Interest expense of $396,987 was also recorded during the three months
ended September 30, 2001 for the amortization of the discount. The
unamortized discount at September 30, 2001 of a total of approximately
$926,302 will be amortized to interest expense through April 30, 2002.
On April 13, 2000 the Company completed a private offering of unsecured
convertible bridge notes payable (the "2000 Notes") in the principal amount of
$4,095,000.
The balance of the 2000 Notes totaling a principal of $3,995,000 for a current
total, net of discount, of $4,207,821 and including accrued interest of
$622,012 at September 30, 2001 is included in current convertible bridge notes
with interest accruing at 10% per annum due on April 30, 2002.
One note holder of the 2000 Notes, with an original principal in the amount of
$100,000, elected not to extend the due date. This note, with an outstanding
balance of $112,740 including accrued interest as of June 30, 2001, was
converted into 50,330 shares of the Company's common stock on September 24,
2001.
In connection with the sale of the 2000 Notes, the Company issued stock
purchase warrants exercisable for the purchase of up to 1,213,500 shares of
the Company's common stock at $1.50 per share through December 31, 2004. The
warrants were originally valued at $1,110,118 using the Black Scholes
option-pricing model and are being amortized as additional interest expense
over the term of the 2000 Notes.
The Company recorded interest expense on the 2000 Notes of $100,696 and
$103,217 for the three months ending September 30, 2001 and September 30,
2000, which was added to the balance of the notes. Interest expense of
$178,578 and $230,137 was also recorded during the three months ended
September 30, 2001 and September 30, 2000 for the amortization of the
discount. The unamortized discount at September 30, 2001 of a total of
approximately $409,185 will be amortized to interest expense through April 30,
2002.
Of the 2001 and 2000 Notes issued, three directors purchased a total of
$204,928 and $100,000 was purchased by D2 Co., LLC (Note 5). An additional
$271,000 for management fees and accrued interest has been added to the
balance of the 2000 D2 Convertible Bridge Note; management fees and accrued
interest of $133,333 has been added to the balance of the 2000 Convertible
Bridge Note for the Trust Under Deferred Compensation Plan for D2CO, LLC; and
management fees and accrued interest of $130,208 has been added to the balance
of the 2001 Convertible Bridge Note for the Trust Under Deferred Compensation
Plan for D2CO, LLC.
F-9
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
4. Notes Payable, Related Parties
Notes payable, related parties, consisted of the following:
September 30, 2001
Unsecured notes payable to Mark A. Smith -
Rollover IRA, Kelly Smith - Rollover IRA
and Dublin Holding, Ltd., entities controlled
by a stockholder/director, principal amount of
$3,075,798 plus accrued interest of $728,241,
net of unamortized warrant discount of
$1,008,236. All outstanding principal and
accrued interest due is immediately
convertible into shares of the Company's
common stock at a price of $1.80 per share.
Upon certain events the company may convert
these notes into the number of shares into
which they would be convertible upon maturity at
a price of the lower of $1.80 or the conversion
price of the convertible bridge notes. During
the three months ended September 30, 2001,
the Company amortized $201,648 of the
discount to interest expense. All outstanding
principal and interest, computed at 1% per
month, is due and payable on or before
December 31, 2002. $ 2,795,803
Unsecured notes payable to a stockholder,
principal amount of $308,114 plus accrued
interest of $86,669. All outstanding principal
and interest, computed at 1% per month, is due
and payable on or before April 30, 2002.
The outstanding principal and accrued interest
due, is convertible into shares of the
Company's common stock at a price of $1.80
per share. Upon certain events the company may convert
these notes prior to maturity at the lower
of $1.80 or the conversion price of the convertible
bridge notes. 394,784
F-10
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Unsecured notes payable to various stockholders,
principal amount of $1,121,911 plus accrued
interest of $307,101. All outstanding principal
and accrued interest at 1% per month is due
and payable on or before April 30, 2002.
The outstanding principal and accrued interest
due, is convertible into shares of the
Company's common stock at a price of $2.25
per share, under certain agreed upon conditions.
Upon certain events the company may convert
these notes prior to maturity at the lower
of $2.25 or the conversion price of the convertible
bridge notes. 1,429,012
Unsecured notes payable to Southview,
principal amount of $500,000 plus accrued
interest of $27,725. All outstanding principal
and accrued interest at .67% per month is due
upon completion of financing to the Company
and is therefore classified as short term. 527,725
---------------
Total notes payable - related parties 5,147,324
Less current maturities - Note payable related parties 2,351,521
---------------
Total long-term debt - related parties $ 2,795,803
===============
Note: Total notes payable - related parties excludes convertible bridge
notes payable to related parties (see Note 3).
F-11
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
5. Related Party Transactions
The Company's equity and notes payable transactions with stockholders and
other related parties are included in Notes 3 and 4, respectively.
In December 1999 the Company entered into a three year agreement for
management and consulting services with D2 Co., LLC ("D2"). The agreement
required total annual consideration of $240,000 payable in common stock of
Bion or cash, at the option of the Company. In January 2000, D2 agreed to add
the monthly fees to the balance of their convertible bridge notes payable
(Note 3). As of September 30, 2001 compensation of $271,000 has been added to
the balance of the 2000 D2 Convertible Bridge Note; compensation of $133,333
has been added to the balance of the 2000 Convertible Bridge Note for the
Trust Under Deferred Compensation Plan for D2CO, LLC; and compensation of
$130,208 has been added to the balance of the 2001 Convertible Bridge Note for
the Trust Under Deferred Compensation Plan for D2CO, LLC.
On September 6, 2001, the Company entered into an agreement with D2,
Southview, Inc. and Atlantic Partners, LLC, all of which are affiliates of
David Mitchell, the Company's President and CEO (collectively "D2") in which,
among other things, the Company agreed to:
* provide that certain compensation to D2 be paid in a deferred manner to
the Deferred Trust under the Deferred Compensation Plan to D2 Co., LLC.
* amend certain Southview warrants ("SV1" and "SV2") so that upon earlier
of (i) completion of financing or series of financings large enough to
"trigger" the conversion of the Company's outstanding Bridge Notes and
2001 Convertible Notes (collectively "CV Notes") into the Company's
common stock; or (ii) conversion of the CV Notes into the Company's
common stock on April 29, 2002, the outstanding Class SV1 and SV2
Warrants owned by D2 will be adjusted ("Adjusted Warrants") so that D2
owns Adjusted Warrants to purchase a number of shares of the Company's
Common Stock equal to 20% of the "fully-diluted" outstanding shares.
As partial consideration for Bion agreeing to the adjustment to the
warrants, Southview agreed to extend the term of the outstanding
promissory note (due July 31, 2001 with a balance of $521,039 including
accrued interest) so that such promissory note could be repaid from the
proceeds of a new financing.
On August 1, 2001 Mark Smith and certain entities controlled by him which own
shares of our Common Stock (the "Smith Shares") entered into a voting
agreement that gives David Mitchell, our President and CEO, the power to vote
all of the Smith Shares as to most matters, but Mr. Smith will still have the
right to vote the Smith Shares with respect to a sale of substantially all of
our assets or a merger. The voting agreement is purely contractual and is not
a formal voting trust.
F-12
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
In addition, Mr. Smith and certain entities that he controls entered into a
separate agreement with us which imposes certain restrictions on the sale and
transfer of the Smith Shares and amends the respective terms of five
convertible promissory notes payable to Dublin Holding, Ltd, the Mark A. Smith
Rollover IRA and the Kelly Smith Rollover IRA to provide that all five of
these notes will be automatically and fully converted (with all principal and
accrued interest calculated as if they had been held to maturity) into shares
of our Common Stock upon the conversion of our outstanding Convertible Bridge
Notes and 2001 Convertible Notes at a conversion rate equal to the lesser of
(i) $1.80 per share or (ii) the conversion price of our outstanding
Convertible Bridge Notes and 2001 Convertible Notes.
6. Stockholders' Deficit
On September 24, 2001 we issued 50,330 shares to a holder of one of our
convertible bridge notes who elected not to extend the terms of the note. The
note had a value of $112,740 as of June 30, 2001, the maturity date, and was
converted at $2.24 per share based on the average closing price of the last 20
business days of June.
On September 15, 2001, we granted 90,000 options to Jon Northrop, a
consultant, to purchase shares of the Company's common stock at $2.00 per
share expiring until July 31, 2004. These options were valued using the Black
Scholes model at $40,014 and are being amortized over the life of the service
contract. 134,000 options that Jon Northrop received as an employee to
purchase shares of the Company's common stock were cancelled on August 29,
2001.
On September 15, 2001, we granted 25,000 options to Edward Hennig, as
consideration for consulting, to purchase shares of the Company's common stock
at $2.00 per share expiring July 31, 2003. These options were valued using
the Black Scholes model at $8,072 and are being amortized over the life of the
service contract. On August 27, 2001 we cancelled 56,000 options that were
previously issued to him as an employee to purchase shares of the Company's
common stock.
On September 6, 2001, we granted 19,000 options to certain employees. These
options vest over a three year period expiring December 31, 2003.
On September 6, 2001, we granted 4,000 options to certain employees. One-
third of these options (1,334) vests on May 1, 2001 and one-third (1,334)
vests on February 1, 2002 and one-third (1,332) vests on November 1, 2002.
These options are exercisable until December 31, 2003.
On August 27, 2001 we cancelled 322,000 options previously issued to certain
individuals to purchase shares of the Company's common stock.
F-13
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
On August 17, 2001, Bart Chilton resigned his position of Senior Vice
President of the Company. In recognition of his work with us, Mr. Chilton was
granted fully vested options to purchase a total of 66,000 shares of our
Common Stock at a purchase price of $1.50 per share. These options will
expire on August 17, 2003. Options to purchase 100,000 shares that were
previously held by Mr. Chilton were cancelled at the time the new options were
issued.
On August 9, 2001 the Company's attorney, exercised options to purchase 41,177
shares of our common stock at $1.70 per share. Due to the change in terms of
these options, the Company valued the options using the Black Scholes model at
$35,323, which was expensed to legal during the quarter. For payment of the
shares the Company was issued a negotiable promissory note for $70,000 due
August 9, 2011.
On July 13, 2001 we granted 70,000 options to members of our advisory board.
One-half of these options (35,000) vests on July 13, 2002 and one-half
(35,000) vests on July 13, 2003. These options are exercisable until July 13,
2004 and July 13, 2005. These options have been valued using the Black
Scholes model at $50,764 and are being amortized over the vesting period
through July 13, 2003.
7. Capital Structure
Because the Company has a relatively complex capital structure the following
capital structure details are set forth:
Common Stock
As of November 9, 2001 the Company had 13,303,815 shares of common stock
issued and outstanding.
F-14
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Options
As of November 9, 2001, the Company had the following options outstanding:
Options Vested
Exercise Price Shares Expiration
-------------- --------- ----------
Directors $ 1.55 11,112 08/19/02
Plan $ 2.04 11,112 08/19/02
$ 2.91 11,112 11/17/03
$ 1.61 10,000 08/04/04
---------
Total Directors 43,336
=========
Exercise Price Shares Expiration
-------------- --------- ----------
Employee $ .95 667 12/31/03
Plans $ 1.22 5,000 12/31/03
$ 1.50 66,000 08/17/03
$ 1.50 26,336 12/31/03
$ 1.85 13,334 12/31/03
$ 2.00 294,426 12/31/02
$ 2.00 25,000 07/31/03
$ 2.00 90,000 07/31/04
$ 2.20 106,667 12/31/03
$ 2.25 160,000 12/31/03
$ 2.50 169,445 10/15/02
$ 2.50 35,000 12/31/02
$ 2.50 115,000 06/30/03
$ 2.70 55,556 12/31/02
---------
Total Employees 1,162,431
=========
Total (Directors
and Employees) 1,205,767
=========
F-15
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Options Non-Vested
Exercise
Price Shares Vesting Dates Expiration
-------- --------- ----------------- ----------
Employee Plans $ 1.22 10,000 04/09/02-01/09/03 12/31/03
$ 1.50 3,000 02/01/02-11/01/02 12/31/03
$ 1.50 58,331 12/01/01-09/01/02 12/31/03
$ 1.50 10,000 06/06/02-06/06/03 12/31/05
$ 1.60 35,000 07/13/02 07/13/04
$ 1.60 35,000 07/13/03 07/13/05
$ 1.85 26,666 03/01/02-12/01/02 12/31/03
$ 2.00 49,201 04/30/02 12/31/02
$ 2.20 53,333 11/01/01-11/01/02 12/31/03
$ 2.50 75,000 12/31/02 06/30/03
---------
Total 355,531
---------
Total Vested
and Non-Vested 1,561,298
=========
F-16
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Warrants
As of November 9, 2001, the Company had the following warrants outstanding:
Warrant Shares Expiration Date Exercise Price
------- --------- --------------- --------------
Class AA.01 15,000 (1) $ 5.40
Class D2C-W 24,550 (2) $ 2.50
Class G-6 3,148 (3) $ 5.40
Class J-1 30,000 (4) $ 2.00
Class J-1A 1,374,450 (5) $ 1.50
Class J-1B 300,450 (6) $ 1.50
Class J-1C 457,688 (7) $ 1.50
Class J-2 165,000 (8) $ 2.375
Class SV-1 3,250,000 (9) $ 1.00
Class SV-2 3,250,000 (10) $ 1.00-2.00
Class X 461,179 (11) $ 8.00
--------- -----------
9,331,465 $ 1.00-8.00
========= ===========
1. Class AA.01 Warrants may be exercised to purchase 15,000 shares of
Common Stock for a period beginning August 12, 1999 and ending
December 31, 2001.
2. Class D2C-W Warrants may be exercised to purchase 24,550 shares of
Common Stock for a period beginning October 30, 2000 and ending
June 30, 2004.
3. Class G-6 Warrants may be exercised to purchase 3,148 shares of
Common Stock for a period beginning April 21, 1997 and ending
April 20, 2002.
F-17
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
4. Class J-1 Warrants may be exercised to purchase 30,000 shares of
Common Stock for a period beginning March 31, 2000 and ending
December 31, 2004.
5. Class J-1A Warrants may be exercised to purchase 1,374,450 shares of
Common Stock for a period beginning March 31, 2000 and ending
December 31, 2004. (See Note 8 - Subsequent Events for changes in terms
of these warrants)
6. Class J-1B Warrants may be exercised to purchase 300,450 shares of
Common Stock for a period beginning April 13, 2001 and ending
December 31, 2005. (See Note 8 - Subsequent Events for changes in terms
of these warrants)
7. Class J-1C Warrants may be exercised to purchase 457,688 shares of
Common Stock for a period beginning May 23, 2001 and ending
December 31, 2005. (See Note 8 - Subsequent Events for changes in terms
of these warrants)
8. Class J-2 Warrants may be exercised to purchased 165,000 shares of
Common Stock for a period beginning March 31, 2000 and ending
December 31, 2004.
9. Class SV-1 Warrants may be exercised to purchased 3,250,000 shares of
Common Stock for a period beginning February 16, 2001 and ending
February 16, 2006.
10. Class SV-2 Warrants may be exercised to purchased 3,250,000 shares of
Common Stock for a period beginning February 16, 2001 and ending
February 16, 2006.
11. Class X Warrants may be exercised to purchase 461,179 shares of
Common Stock for a period beginning January 1, 2000 and ending
December 31, 2001.
At November 9, 2001, there were warrants exercisable to purchase 9,331,465
shares of Common Stock.
F-18
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Convertible Notes
As of September 30, 2001 the Company had outstanding convertible notes
totaling $4,619,599, net of unamortized discount of $1,008,236, to certain
shareholders that are all convertible at the same time and at the same price,
subject to conversion price caps which differ for the various debt instruments
from $1.80 to $2.25 per share. All of the subject debt is convertible to
shares of Common Stock on or before April 29, 2002, subject to certain
conditions precedent. See Note 4.
Convertible Bridge Notes
On April 13, 2000 the Company completed a private offering of unsecured
convertible bridge notes payable (the "Notes") in the principal amount of
$4,095,000. See Note 3.
On June 8, 2001 the Company completed a private offering of unsecured
convertible bridge notes payable in the principal amount of $2,527,218. See
Note 3.
Management fees and accrued interest totaling $271,000 has been added to the
balance of the 2000 D2 Convertible Bridge Note; management and interest
totaling $133,333 has been added to the balance of the 2000 Convertible Bridge
Note for the Trust Under Deferred Compensation Plan for D2CO, LLC; and
management fees and interest totaling $130,208 has been added to the balance
of the 2001 Convertible Bridge Note for the Trust Under Deferred Compensation
Plan for D2CO, LLC.
F-19
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
8. Subsequent Events
On October 22, 2001 we issued 80,984 shares of the Company's common stock to
the Trust Under Deferred Compensation Plan for D2CO, LLC for $125,000 of
management fees earned for the three months ending September 30, 2001, based
on an average closing price of the Company's common stock for the quarter of
$1.54.
On October 1, 2001 we issued 40,000 shares of the Company's common stock to
Jon Northrop towards the balance of consideration due for consulting services.
On October 29, 2001 91% of the holders of our Bridge Warrants (J-1A warrants)
and 58% of the holders of our 2001 Bridge Warrants (J-1B and J-1C warrants)
agreed to changes that will occur only on conversion of our Convertible Bridge
Notes and 2001 Convertible Notes. Until that time the terms of the Bridge
Warrants will not change. The changes in terms of these Bridge Warrants are
as follows:
*The exercise price will be an amount equal to 80% of the conversion
price of the Convertible Bridge Notes and the 2001 Convertible Notes
that were issued in the same offerings as the Bridge Warrants but in no
event will the exercise price be greater than the current exercise
price.
*The price at which the Bridge Warrants may be redeemed will be reduced
to an amount equal to 200% of the New Exercise Price.
On October 29, 2001 88% of the brokers related to the sale of our Convertible
Bridge Notes agreed to changes that will occur only on conversion of our
Convertible Bridge Notes and 2001 Convertible Notes. Until that time the
terms of the Bridge Warrants will not change. The changes in terms of these
Bridge Warrants as follows:
*The exercise price will be an amount equal to 100% of the conversion
price of the Convertible Bridge Notes and the 2001 Convertible Notes
that were issued in the same offerings as the Bridge Warrants but in no
event will the exercise price be greater than the current exercise
price.
*The price at which the Bridge Warrants may be redeemed will be reduced
to an amount equal to 150% of the new exercise price.
The Company will record a beneficial conversion feature in the second quarter
ending December 31, 2001 to the extent that the lowest possible conversion
rate is less than the market value of the Company's stock on October 29, 2001.
The beneficial conversion feature will be amortized to interest expense over
the term of the convertible note.
F-20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements and accompanying notes.
Going Concern
-------------
The financial statements contained in this Form 10-QSB show $30,475,020
being invested in or contributed to Bion as of September 30, 2001. We have a
shareholder deficit of $11,139,301, accumulated deficit of $41,614,321,
limited current revenues and substantial current operating losses. (Note that
holders of $5,147,324 of the related parties notes payable and $6,441,191 of
convertible bridge notes payable, approximately 104% of the negative net
worth, have agreed to convert into our restricted and legended Common Stock on
or before April 29, 2002. Therefore, upon conversion, our negative net worth
will be eliminated.) Our operations are not currently profitable; therefore,
readers are further cautioned that our continued existence is uncertain if we
are not successful in obtaining outside funding in an amount sufficient for us
to meet our operating expenses at our current level. Management plans to
continue raising additional capital to fund operations until Bion system and
BionSoil(R) sales are sufficient to fund operations.
Bion NMS system and BionSoil(R) sales require additional expenditures.
Our system sales require additional personnel and significant capital
expenditures, which will generally increase our overhead. BionSoil(R) product
sales and marketing require wholesaler and retailer distribution networks
(which may require permitting in some locations) and additional expenditures
for personnel and equipment to harvest, process, package, sell and deliver our
products. We are in the process of obtaining the necessary additional funding
from independent third parties and related parties. Although management
believes that there is a reasonable basis to remain optimistic, no assumption
can be made that we will be able to attain profitable operations and/or raise
sufficient capital to sustain operations.
The level of funding required to accomplish our objectives is ultimately
dependent on the success of our research and development efforts, which at
this time, are unknown. Currently, we estimate that an additional $2,000,000
will be required during the period ending June 30, 2002. We anticipate
spending $550,000 on research and development efforts and the balance on
compensation and general business overhead.
Financial Condition and Results of Operations
---------------------------------------------
Liquidity and Capital Resources
Our Consolidated Balance Sheet as of September 30, 2001 shows current
assets of $439,021 and total assets of $826,271. Our current and total
liabilities as of September 30, 2001 are $9,167,085 and $11,965,572,
respectively. Total assets decreased by $856,391 from June 30, 2001. The
change is primarily attributable to the $892,523 decrease in cash and cash
3
equivalents primarily as a result of net cash used in operating activities.
Our current ratio is 0.05:1 as of September 30, 2001 as compared to 0.16:1 as
of June 30, 2001. The reduction in the current ratio results from the
reduction in cash and cash equivalents.
Total liabilities increased by $1,121,148 in the three-month period ended
September 30, 2001. This increase was due to additions to the convertible
bridge notes and related parties notes payable for accrued interest of
$329,255 and amortization of the debt discount of $777,213, a further increase
on the convertible bridge notes of $12,250 for interest due D2 and the Trust
Under Deferred Compensation Plan for D2CO, LLC, and an increase in stock
subscription payable of $144,147. These amounts were reduced by a decrease in
accounts payable of $33,334 and the conversion of one of the convertible
bridge notes with a balance including accrued interest of $112,740.
We believe that during the balance of the fiscal year ending June 30,
2002, we will not generate sufficient operating cash flow to meet our needs
without additional external financing. We are in the process of obtaining
such financing but there is no assurance that our efforts will be successful.
Any failure on our part to do so will have a material adverse impact on us and
may cause us to cease operations.
We do not currently have any commitments for any material capital
expenditures.
Results of Operations
---------------------
Comparison of the Three Months Ended September 30, 2001 with the Three Months
Ended September 30, 2000
We recorded $13,003 of BionSoil(R) sales during the three months ended
September 30, 2001. This compares to $17,652 BionSoil(R) sales during the
three months ended September 30, 2000. The decrease of $4,649 is attributable
to lower BionSoil(R) sales to customers, as a larger quantity of BionSoil(R)
was used for testing and turf trials. As a result of our research and
development efforts during the last two years, the second generation of our
technology has completed development. We have designed and/or tested NMS
systems, which use state-of-the-art, computerized, real-time monitoring and
system control that can be remotely accessed for both reporting requirements
and control functions. These systems are smaller, faster and require less
capital per animal than our first generation NMS systems. The focus on the
new system design has had a negative effect on system sales. Cost of goods
sold increased $38,283 for the soil sales primarily as a result of payments
for equipment rental ($29,600), equipment maintenance ($4,536) and equipment
expense ($3,215) for the harvest of materials not sold during the three months
ended September 30, 2001.
We incurred gross losses of $106,087 and $63,155 during the three months
ended September 30, 2001 and 2000, respectively. The gross losses are
primarily a result of the fact that much of the soil produced was sold at
below cost to help gain market acceptance. We believe that this trend will
reverse as we enter the final phase of system testing and revenues will
increase with new sales.
4
General and administrative expenses decreased $2,325,645 (73%) for the
three months ended September 30, 2001 as compared to the three months ended
September 30, 2000. The decrease is attributable ($2,449,253) to September
30, 2000 non-cash expense related to the beneficial value of the stock
consideration received over the value of the warrants surrendered in
connection with warrant/stock exchange transactions, partially offset by other
individually insignificant increases.
Research and development costs decreased $168,852 during the three months
ended September 30, 2001 as compared to the three months ended September 30,
2000. This decrease is due to winding down the design and testing of the
second-generation system.
Interest expense increased $436,112 for the three months ended September
30, 2001 as compared to the three months ended September 30, 2000 due to
additional borrowings from private placements. Of this increase, $436,865 was
for non-cash interest expenses offset slightly by lower cash interest
expenses.
We had a decrease in interest income ($32,755) due to lower average cash
balances associated with cash flow generated from financing activities.
The net loss and comprehensive loss decreased by $2,030,855 (48%) during
the three months ended September 30, 2001. The decrease primarily related to
the decrease of $2,325,645 of general and administrative expenses (primarily
for the beneficial value of the stock consideration received over the value of
the warrants surrendered in connection with warrant/stock exchange
transactions in the period ending September 30, 2000), and the decrease in
research and development of $168,852. This was offset by the increase of
$436,112 of interest expense and the decrease of $32,755 of interest income.
Basic and diluted loss per common share decreased by $0.17, from $0.34 to
$0.17. The decrease in the loss per share is attributable to the
aforementioned decrease in the net loss.
Seasonality
-----------
Bion's installation capability is restricted in all cold weather climates
to approximately eight months per year. However, when weather conditions
limit construction activity in southern market areas, projects in northern
markets can proceed, and when northern area weather is inappropriate, southern
projects can proceed. BionSoil(R) harvests on the existing installed base is
semi-annual and is timed for spring and fall with harvested soils being
available for sale during the next spring or fall. BionSoil(R) and
BionSoil(R) product sales are expected to exhibit a somewhat seasonal sales
pattern with emphasis on spring, summer and fall sales.
Impact of Recently Issued Accounting Pronouncements
---------------------------------------------------
In July 2001, the FASB issued Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141"), which supersedes APB Opinion No. 16.
SFAS 141 eliminates the pooling-of-interests method of accounting for business
combinations and modifies the application of the purchase accounting method.
5
The elimination of the pooling-of-interests method is effective for
transactions initiated after June 30, 2001. The remaining provisions of SFAS
141 will be effective for transactions accounted for using the purchase method
that are completed after June 30, 2001. The new standard will not have any
affect on the Company's financial statements.
In July 2001, the FASB also issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Intangible Assets," ("SFAS 142"), which
supersedes APB Opinion No. 17. SFAS 142 eliminates the current requirement to
amortize goodwill and indefinite-lived intangible assets, addresses the
amortization of intangible assets with a defined life and addresses the
impairment testing and recognition for goodwill and intangible assets. SFAS
142 will apply to goodwill and intangible assets arising from transactions
completed before and after the statement's effective date. SFAS 142 is
effective for fiscal 2002. The new standard will not have any affect on the
Company's financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that
those long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discounted operations. Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses that
have not yet occurred. SFAS No. 144 is effective for financial statements
issued for fiscal years beginning after December 14, 2001 and generally, is to
be applied prospectively.
Inflation and Changes in Prices
-------------------------------
We are unable to predict the impact of inflation on our activities;
however, at this time we believe it is minimal.
PART II
ITEM 1. Legal Proceedings
We are not a party to any pending legal proceeding that is material to
our business.
ITEM 2. Changes in Securities and Use of Proceeds
The following securities were sold in the quarter ended September 30,
2001 without registration under the Securities Act of 1933, as amended:
Common Stock
------------
On October 22, 2001 we issued 80,984 shares of the Company's common stock
to the Trust Under Deferred Compensation Plan for D2CO, LLC for $125,000 of
management fees earned for the three months ending September 30, 2001, based
on an average closing price of the Company's common stock for the quarter of
$1.54.
6
Convertible Notes
-----------------
The terms of certain Notes to Related Parties (Notes) have been amended
so that the Notes are automatically convertible into shares of the Company's
common stock on or before April 29, 2002. The Notes are convertible at the
conversion price per share of our Convertible Bridge Notes and 2001
Convertible Notes up to a maximum price per share of $2.25. The Notes are
convertible upon the conversion of our Convertible Bridge Notes and 2001
Convertible Notes. As of September 30, 2001 the accrued amounts due under
notes that we amended are as follows:
Jon Northrop $ 334,887
Jere Northrop $ 295,232
Northrop Family Trust $ 135,098
Edward A. Hennig $ 157,920
M. Duane Stutzman $ 179,706
William J. Crossetta $ 276,750
S. Craig Scott $ 49,419
Four other Notes to Related Parties also had the terms amended so that
the Notes are automatically convertible into shares of the Company's common
stock at the lower of the conversion price per share of our Convertible Bridge
Notes and 2001 Convertible Notes up to a maximum price per share of $1.80.
The Notes are convertible upon the conversion of our Convertible Bridge Notes
and 2001 Convertible Notes. Certain Notes are convertible at their maturity
value regardless of the date of their conversion. As of September 30, 2001
the accrued amounts or, if convertible at the maturity value, including debt
discount, due under notes that are as follows:
Dublin Holding Ltd.(1) $3,682,944
Mark Smith Rollover IRA(1) $ 393,557
Kelly Smith Rollover IRA(1) $ 339,870
Harley Northrop $ 394,783
(1) These Notes are shown at the December 31, 2002 maturity amount, which is
the amount they will be converted at.
The securities, which were issued pursuant to the transactions set forth
above, were issued in reliance upon the exemptions from registration afforded
by Sections 3(b), 4(2), and/or other provisions of the Securities Act of 1933,
as amended. Each of the persons to whom such securities were issued made an
informed investment decision based upon negotiation with us and was provided
with appropriate offering documents and/or access to material information
regarding Bion. We believe that such persons had knowledge and experience in
financial and business matters such that they were capable of evaluating the
merits and risks of the acquisition of our Common Stock in connection with
these transactions. All certificates representing such common shares bear an
appropriate legend restricting the transfer of such securities, except in
accordance with the Securities Act of 1933, as amended, and stop transfer
instructions have been provided to our transfer agent in accordance therewith.
7
ITEM 3. Defaults Upon Senior Securities. None
ITEM 4. Submission of Matters to a Vote of Security Holders. None
ITEM 5. Other Information. None
ITEM 6. Exhibits and Reports on Form 8-K.
Index to Exhibits
-----------------
Exhibits
--------
None
Reports on Form 8-K
-------------------
The following current reports on Form 8-K were filed during the three
months ended September 30, 2001.
Form 8-K dated September 28, 2001: Items 5 & 7
8
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
Bion Environmental Technologies, Inc.
By: /s/ David Fuller
------------------------------------
David Fuller, Authorized Officer and
Principal Accounting Officer
Dated: November 14, 2001
9