UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[x] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2003
OR
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission File No. 001-31437
BION ENVIRONMENTAL TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1176672
(State of Incorporation) (I.R.S. Employer Identification Number)
18 E. 50th Street, 10th Floor
New York, New York 10022
(Address of principal executive offices, including zip code)
(212) 758-6622
(Registrant's telephone number, including area code)
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]
As of October 31, 2003 the issuer had outstanding 5,300,021 shares of common
stock. This includes 1,900,000 shares held by a majority-owned subsidiary.
BION ENVIRONMENTAL TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-QSB
THIS REPORT INCLUDES FINANCIAL STATEMENTS (AND NOTES ATTACHED THERETO) FOR THE
QUARTER ENDED SEPTEMBER 30, 2003 WHICH HAVE BEEN INTERNALLY PREPARED AND WHICH
HAVE NOT BEEN REVIEWED BY ANY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS. WHILE
WE BELIEVE THAT THE FINANCIAL STATEMENTS ARE ACCURATE AND COMPLETE IN ALL
MATERIAL RESPECTS, IT IS POSSIBLE THAT A REVIEW MAY RESULT IN ADJUSTMENTS,
SOME OF WHICH MAY BE MATERIAL.
2
BION ENVIRONMENTAL TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
PART I ................................................................... 4
Item 1. Financial Statements ...................................... 4
Unaudited consolidated balance sheet as
of September 30, 2003 .................................... 5
Unaudited consolidated statements of operations
for the three months ended
September 30, 2003 and 2002 ............................... 6
Unaudited consolidated statements of cash
flows for the three months ended
September 30, 2003 and 2002 ............................... 7
Notes to unaudited consolidated financial statements ....... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 18
Item 3. Controls and Procedures ................................... 27
PART II
Item 1. Legal Proceedings ......................................... 27
Item 5. Other Information ......................................... 28
Item 6. Exhibits and Reports on Form 8-K .......................... 29
Signatures ......................................................... 30
3
PART I
Item 1. Financial Statements
This Form 10-QSB has not been reviewed by BDO Seidman, LLP, our independent
certified public accountants, as required by Item 310(b) of Regulation S-B.
BDO Seidman, LLP has not performed the review (and prior reviews and audits)
because they ceased work prior to review of the impact on the Company's
accounts and operations of the various items disclosed in our Report on Form
8-K dated February 7, 2003. We are not aware of any dispute with BDO Seidman,
LLP as to any accounting matters. Since we owe approximately $125,000 to BDO
Seidman, LLP, which must be paid or otherwise resolved in order to eliminate
independence issues prior to any review or audit of our financial statements
and we lack the resources to pay such amounts, no review has been performed.
4
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Consolidated Balance Sheet
As of September 30, 2003
ASSETS
Current assets:
Cash and cash equivalents $ 162,317
Accounts receivable, net of allowance for doubtful
accounts of $5,935 5,785
Prepaid expenses and other current assets 61,102
-----------
Total current assets 229,204
Property and equipment, net 214,924
Claims receivable 600,000
Other assets 30,967
-----------
Total assets
$ 1,075,095
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 975,897
Accrued expenses 244,426
Deferred compensation B due to Trust 504,506
Accrued deferred compensation 247,500
Capital lease obligation 947
Advances from affiliates 48,977
Secured notes payable - affiliates 736,574
Secured notes payable-others 455,971
-----------
Total current liabilities 3,214,798
Minority interest 650,228
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, $.01 par value, 10,000 shares
authorized, -0- shares issued and outstanding
Common stock, no par value, 100,000,000 shares
authorized, 4,204,291 shares issued and
outstanding (this does not include 1,095,730
shares held by Centerpoint which will be
distributed to Bion and subsequently cancelled)
Additional paid in capital 58,347,239
Accumulated deficit (61,137,170)
-----------
Total stockholders' equity ( 2,789,931)
Total liabilities and stockholders' equity $ 1,075,095
===========
See notes to consolidated financial statements
5
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
Three Months Ended
September 30,
---------------------------
2003 2002
------------ -----------
Revenue:
Soil sales $ - $ 46,638
------------ -----------
Cost of soil ( 10,370) 195,718
------------ -----------
Gross loss 10,370 (149,080)
------------ -----------
Expenses:
General and administrative (excluding
$158,447 and $218,231 of non-cash charges
for services and compensation, respectively) 664,646 637,192
Research and development 283,374 149,862
Non-cash charges for services and compensation - 158,447
------------ -----------
948,020 945,501
------------ -----------
Operating loss ( 937,650) (1,094,581)
------------ -----------
Other income and expense:
Interest expense including
non-cash interest charges ( 64,824) ( 75)
Interest income - 5,629
Other expense, net 37,232 ( 16,699)
------------ -----------
( 27,592) ( 11,145)
------------ -----------
Net loss before minority interest ( 965,242) (1,105,726)
------------ -----------
Minority interest ( 64,534) 35,052
------------ -----------
Net loss and comprehensive loss $(1,029,776) $(1,070,674)
============ ===========
Basic and diluted loss per common share:
Net loss per common share $ (0.24) $ (0.20)
============ ===========
Weighted-average number of common shares
outstanding, basic and diluted loss per share 4,205,993 5,304,521
============ ===========
See notes to consolidated financial statements
6
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
Three Months Ended
September 30,
---------------------------
2003 2002
------------ -----------
Cash flows from operating activities:
Net loss $ (1,029,776) $ (1,070,674)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in net loss of subsidiary 259,702 (35,052)
Depreciation and amortization 5,808 20,543
Loss on disposal of asset 19,459 7,444
Issuance of note payable for consulting
services 150,000
Non-cash charges for equity instruments
issued for compensation and services 8,447
Changes in:
Accounts receivable 2,160 8,349
Note receivable - (985)
Inventory - (48,646)
Prepaid expenses and other current assets (18,114) 41,795
Deposits and other 906 (463)
Accounts payable 120,940 87,364
Accrued liabilities 41,250 2,281
Increase in accrued deferred compensation 120,000
Increase in due to trust 7,456
------------ ------------
Net cash used in operating activities (470,289) (829,599)
------------ ------------
Cash flows from investing activities:
Net proceeds from sale of assets 8,313
Purchases of property and equipment ( 32,821) (116,152)
------------ ------------
Net cash used in investing activities ( 24,508) (116,152)
------------ ------------
Cash flows from financing activities:
Proceeds from secured loans from affiliates 736,574
Proceeds of secured loans payable 455,971
Conversion of advances from affiliates to secured
Loans from affiliates (574,823)
Proceeds of advances from affiliates 30,000
Payments of capital lease obligations ( 74) ( 445)
------------ ------------
Net cash used in financing activities 647,648 ( 445)
------------ ------------
Net decrease in cash and cash equivalents 152,931 (946,196)
Cash and cash equivalents, beginning of period 9,386 1,813,571
------------ ------------
Cash and cash equivalents, end of period $ 162,317 $ 867,375
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ - $ 75
============ ============
See notes to consolidated financial statements
7
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to unaudited consolidated financial statement
PRELIMINARY NOTE:
THE FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2003 AND FOR THE THREE MONTHS
THEN ENDED HAVE NOT BEEN REVIEWED BY ANY INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS.
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Bion
Environmental Technologies, Inc. and its subsidiaries (the "Company", "Bion",
"we", "us" or "our") have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") for
interim financial information. In the opinion of management, such statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for the fair presentation of the Company's financial position,
results of operations and cash flows at the dates and for the periods
indicated, except that no amounts have been recorded as expense for warrants
issued/reissued to certain persons. See Note 5 "Related Party Transactions
and Subsequent Events" below for details concerning the Black Scholes value
of these warrants. Pursuant to the requirements of the Securities and
Exchange Commission applicable to Quarterly Reports on Form 10-QSB, the
accompanying financial statements do not include all the disclosures required
by GAAP for annual financial statements. While the Company believes that the
disclosures presented are adequate to make the information not misleading,
these interim consolidated financial statements should be read in conjunction
with the financial statements and related notes included in the Company's
Annual Report on Form 10-KSB for the year ended June 30, 2003. Operating
results for the periods indicated are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 2004.
Certain fiscal year 2003 items have been reclassified to conform to their
fiscal year 2004 presentation.
2. ORGANIZATION AND NATURE OF BUSINESS
Bion Environmental Technologies, Inc. ("Bion" or the "Company", INCLUDING ALL
SUBSIDIARIES UNLESS OTHERWISE INDICATED) was incorporated in 1987 in the State
of Colorado.
The Company is in the process of developing and testing a second generation of
its technology to provide waste management solutions to the agricultural
industry, focusing on livestock waste from confined animal feeding operations,
such as large dairy and hog farms. In the past the Company has engaged in two
main areas of activity by utilizing the first generation of its technology
(which the Company discontinued marketing during calendar year 2001) (which
areas the Company intends to re-enter during the current fiscal year pending
results of field testing its second generation NMS technology during fiscal
year 2004):
8
1) WASTE STREAM REMEDIATION. The removal of pollutants (primarily
nitrogen and phosphorus) which pollute soil and water and reduction of
emissions of gases to the atmosphere which result in acid rain, smog,
ground-level ozone or produce "greenhouse warming" effects). We intend
to pursue this area of activity primarily through licensing our second
generation technology: a) to retrofit existing confined animal feeding
operations installations (with emphasis on large dairy farms utilizing
anaerobic lagoons for the next 12 months) and b) for use in newly
constructed dairy farms; and
2) BIONSOIL SALES. The production and sale of organic BionSoil
fertilizer products made from the waste solids produced by use of our
technology.
In addition, the Company intends to pursue the "Dairy Park Opportunity," which
reflects what the Company believes is the potential for the Bion technology to
allow very large dairy farms to vertically integrate (with pasteurization,
cream separation, milk bottling, and/or cheese plants, etc.) and pursue site
integration (with ethanol plants, methane production, organic farming, etc.)
on relatively small plots of land. The consolidated financial statements have
been prepared assuming the Company will continue as a going concern. The
Company incurred losses totaling $1,029,776 during the quarter ended September
30, 2003 (including non-cash interest expense and other non-cash expenses) and
has a history of losses which has resulted in an accumulated deficit of
$61,137,170 at September 30, 2003.
Effective July 8, 2002, the Company completed a 1 for 10 reverse stock split
(the "stock split"). The stock split has been retroactively reflected in the
Company's consolidated balance sheet and consolidated statement of operations,
adjusted in the consolidated statements of changes in stockholders equity and
notes to consolidated financial statements.
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. The Company incurred losses totaling
$1,029,776 during the quarter ended September 30, 2003 and has a history of
losses which has resulted in an accumulated deficit of $61,137,170 at
September 30, 2003.
The Company has been suffering from severe financial difficulties since
approximately January of 2003. These financial difficulties resulted in the
resignation of nearly all of the Company's officers and directors during
February and March of 2003, and the termination of most of our employees. The
Company has retained a core technical staff, but has drastically curtailed its
business activities to include only those activities that are directly needed
to complete development and testing of the Company's second generation
technology.
The Company's financial difficulties resulted primarily from its inability to
raise additional funds due to contractual anti-dilution provisions that were
contained in the agreements related to the financing transactions that were
completed in January of 2002 which provisions prevented any reasonable
financing from being completed. When the Company became aware of the negative
implications of these anti-dilution provisions while attempting to structure a
planned financing (which financing attempts ultimately failed during January
2003), the Company attempted to either find alternative financing methods
9
which could be reasonably completed and/or negotiate an amendment to such
provisions. After many months of negotiations, agreements related to amending
such provisions were entered into during the spring of 2003 and the provisions
were finally amended effective August 27, 2003.
Although the Company was able to complete a small financing through one of its
subsidiaries during August of 2003 (with minor additional funding during early
November 2003) which has allowed it to continue limited work on its second
generation technology, the Company's operations have been severely damaged
during the past year. In order to continue with business activities, the
Company has had to structure interim financing on extremely dilutive terms.
The Company still faces a severe working capital shortage and since it has no
revenues will need to obtain additional capital to satisfy its existing
creditors. There is no assurance that the Company will be able to obtain the
funds that it needs to stay in business or to successfully develop its
business.
The Company's main activity at present consists of work related to its Texas
second generation dairy NMS installation which is currently in the
testing/demonstration stage. We anticipate preliminary results during the last
calendar quarter of 2003 or the first calendar quarter of 2004. See our Annual
Report on Form 10-KSB for the year ended June 30, 2003 , Item 1. "Description
of Business B Development of Our Business" for details concerning this matter.
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.
The Company has a stockholders' deficit of $2,789,931 accumulated deficit of
$61,137,170 limited current revenues and substantial current operating losses.
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.
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly- and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Revenue recognition:
Revenue from the sale of BionSoil products and associated fees are recognized
when shipped, as the Company has no continuing obligations.
Revenues from fixed-price system development and construction projects are
recognized on the percentage-of-completion method. For contracts accounted
for under the percentage-of-completion method, the amount of revenue
recognized is the percentage of the total contract price that the cost
expended to date bears to the anticipated final total cost based upon current
estimates of the cost to complete the contract. Contract cost includes all
10
labor and benefits, materials unique to or installed in the project,
subcontract costs and allocations of indirect costs. General and
administrative costs are charged to expense. Provisions for estimated losses
on uncompleted contracts are provided when determined, regardless of the
completion percentage. As contracts can extend over one or more accounting
periods, revisions in costs and earnings estimated during the course of the
work are reflected during the accounting period in which the facts that
require such revisions become known. Project managers make assumptions
concerning cost estimates for labor hours, consultant hours and other project
costs. Due to uncertainties inherent in the estimation process and potential
changes in customer needs as projects progress, it is at least reasonably
possible that completion costs for some uncompleted projects may be further
revised in the near term, and that such revisions may be material.
Depreciation and amortization:
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
generally three to seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of the term of the lease or the
estimated useful life of the asset.
Income taxes:
Deferred income taxes are determined by applying enacted statutory rates in
effect at the balance sheet date to the differences between the tax bases of
assets and liabilities and their reported amounts in the consolidated
financial statements. A valuation allowance is provided based on the weight
of available evidence, if it is considered more likely than not that some
portion, or all, of the deferred tax assets will not be realized.
Cash and cash equivalents:
The Company considers cash and all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Impairment of long-lived assets:
Long-lived assets and certain intangibles are evaluated for impairment when
events or changes in circumstances indicate that the carrying value of the
assets may not be recoverable through the estimated undiscounted future cash
flows resulting from the use of these assets. When any such impairment exists,
the related assets will be written down to fair value.
Inventory:
Inventories are stated at the lower of cost or market, principally determined
by the FIFO method. Inventories include the cost of raw materials, supplies,
labor and overhead.
11
Loss per share of common stock:
Basic earnings per share includes no dilution and is computed by dividing
income or loss available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share
reflect the potential dilution of securities that could share in the earnings
of an entity, similar to fully diluted earnings per share. In loss periods,
dilutive common equivalent shares are excluded, as the effect would be
anti-dilutive. Therefore, basic and diluted earnings per share are the same
for all periods presented.
For the quarters ended September 30, 2003 and 2002, stock options exercisable
into 342,336 and 242,232 shares of common stock, respectively, and stock
warrants exercisable into 1,543,393 and 1,393,393 shares of common stock,
respectively, were not included in the computation of diluted earnings per
share because their effect was anti-dilutive.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates and assumptions.
Fair value of financial instruments:
The estimated fair value of financial instruments has been determined using
available market information or other appropriate valuation methodologies,
including the Black Scholes model. However, considerable judgment is required
in interpreting market data to develop estimates of fair value. Consequently,
the estimates are not necessarily indicative of the amounts that could be
realized or would be paid in a current market exchange. The carrying amounts
reported on the consolidated balance sheets approximate their respective fair
values.
Stock-based compensation:
The Company accounts for its stock-based compensation arrangements with its
employees in accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and complies with
the disclosure provisions of SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 established a fair-value-based method of accounting
for stock-based compensation plans. Stock-based awards to nonemployees are
accounted for at fair value in accordance with the provisions of SFAS 123. NO
CALCULATIONS OF THESE ITEMS HAVE BEEN PREPARED SINCE 2002 DESPITE THE FACT
THAT A SUBSTANTIAL NUMBER OF OPTIONS (290,833), IN AGGREGATE WERE GRANTED
EFFECTIVE AUGUST 31,2003. See Note 5 "Related Party Transactions and
Subsequent Events" below for information concerning the Black Scholes values
of issuances/grants of warrants and options.
12
Patents:
Patents are recorded at cost less accumulated amortization, which is
calculated on a straight-line basis over a period of the estimated economic
life or legal life of 17 years. Amortization expense for the years ended June
30, 2003 and 2002 was $3,232 each year or $808 per quarter.
Reclassifications:
Certain prior-year amounts have been reclassified to conform to their 2002
presentation.
Cumulative effects of accounting changes:
During the year ended June 30, 2001, the Company applied Emerging Issues Task
Force Issue No. 00-27 ("EITF 00-27"), "Application of EITF Issue No. 98-5,
Accounting for Convertible Securities with Beneficial Conversion Features of
Contingently Adjustable Conversion Ratios, to Certain Convertible
Instruments", which is effective for all such instruments. This issue
clarifies the accounting for instruments with beneficial conversion features
or contingently adjustable conversion ratios. The Company modified the
previous calculation of the beneficial conversion features associated with
previously issued convertible bridge notes. Based on further clarification,
the beneficial conversion feature should be calculated by allocating the
proceeds received in the financing to the convertible instruments and to any
detachable warrants issued in the transactions, and measuring the intrinsic
value based on the effective conversion price based on the allocated proceeds.
The previous calculation was based on a comparison of the stated conversion
price in the terms of the instrument to the fair value of the issuer's stock
at the commitment date.
As a result of the issuance of EITF 00-27, effective October 1, 2000, the
Company recorded an additional warrant discount on the 2000 convertible bridge
notes of $1,050,000 due to the beneficial conversion feature calculated on the
intrinsic value of the allocated proceeds received in the financing. Since
the notes automatically convert into common stock one year from the date of
issuance, the Company has recorded $481,250 as a cumulative effect of change
in accounting principle. The remaining discount of $568,750 has been
amortized to interest expense over the remaining conversion period.
4. LITIGATION
On September 30, 2003, Morrison Cohen Singer & Weinstein, LLP ("MCSW") filed a
complaint in the Supreme Court of the State of New York, County of New York,
against us alleging that we owe MCSW approximately $114,000 for legal services
provided. We have not yet filed an answer in that proceeding. We have
already recorded a liability for these legal services, and therefore we do not
believe that this lawsuit will have a material adverse effect on our financial
condition. During October 2003, we concluded a settlement of this matter for
an aggregate sum of $65,000 (including attorneys' fees) and the litigation has
been dismissed with prejudice.
On July 22, 2002, Thomas Keith Barefoot ("Barefoot"), doing business as Quin
Deca Farm ("Quin Deca"), an unaffiliated party, filed a complaint against the
Company in the Superior Court of the County of Harnett in the State of North
Carolina regarding the Company's first generation Bion NMS System on Quin Deca
13
Farm and the harvesting of BionSoil. The complaint includes breach of
contract claims asserting that the Company abandoned the NMS system on Quin
Deca Farm and the failure of the Company to harvest BionSoil. The second
claim is for fraud regarding misrepresentation of the state of the technology
of the first generation NMS. The third claim is for unfair and deceptive trade
practices for misrepresentation of the state of the technology of the NMS
System. The fourth claim is for negligent misrepresentation made by Bion in
connection with the work it performed and its suitability for the intended
purpose. The fifth claim is for equity/specific performance in that Bion left
Quin Deca with an economically and technically deficient waste management
system that cannot continue to be used without adequate and alternative
methods of waste removal. Quin Deca is seeking $830,000 in damages plus
punitive damages and to have its damages trebled, reasonable attorney fees and
principles of equity requiring Bion to install its second generation Bion NMS
system. We have filed an answer and counterclaims. The action has been
removed to the U.S. District Court for the Eastern District of North Carolina
which court recently ruled that most of the substantive claims should be
arbitrated between Quin Deca and our Bion Technologies, Inc. subsidiary. The
Company does not believe that the claims against it have merit and, assuming
that we have the funds to properly defend this action, we that the ultimate
resolution of this litigation will not have a material adverse effect on the
Company, its operations or its financial condition. On May 6, 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 ("Notes") that were issued to ACB in
March of 2000. The complaint includes breach of contract claim asserting that
the Company owes ACB $265,400 plus interest or $121,028 including interest
based on ACB's interpretation of the terms of the Notes and subsequent
amendments. Effective June 30, 2001, the Company issued ACB 5,034 shares of
common stock on conversion in full payment of the Notes based on the Company's
interpretation of the Notes, as amended. The Company has filed an answer to
the complaint denying the allegations. Assuming that we have the funds to
properly defend this action. The Company does not believe that the ultimate
resolution of this litigation will have a material adverse effect on the
Company, its operations or its financial condition.
5. RELATED PARTY TRANSACTIONS AND SUBSEQUENT EVENTS
During February 2003 Bion entered into an agreement with Centerpoint (which
agreement was amended April 23, 2003) which agreement was ratified by the
shareholders of Centerpoint on August 25,2003. This agreement, upon
ratification by Centerpoint's shareholders and completion of a related
agreement (executed May 29,2003) with OAM, S.p.A., the former parent of
Centerpoint, on August 27, 2003, amended certain contractual provisions which
had prevented the raising of funds by Bion thereby creating the
financial/management crisis which has afflicted Bion over the past year. For
details, see Our Annual Report on Form 10-KSB for the year ended June 30,
2003, "Item 1. Description of Business---Acquisition of
Centerpoint/Transactions with Centerpoint and Recent Developments -
Centerpoint Shareholders' Meeting/Removal of Contractual Problems" and our
Current Reports on Form 8-K dated August 25, 2003, June 9, 2003 and April 12,
2003 and the exhibits thereto.
14
From January 2003 through August 2003, Dominic Bassani made advances to Bion
(primarily through Bright Capital, Ltd. and D2, LLC) which totaled in excess
of $600,000. From late March 2003 (when most management personnel resigned
and the contract with D2, LLC under which he had been providing consulting
services to Bion terminated)) through present, Mr. Bassani has provided
ongoing consulting services to Bion. Mr. Bassani will provide services to Bion
and Dairy through March 31,2005 for the sum of $300,000 per year in deferred
compensation (to be converted into Bion common stock at a price no greater
than $3.00 per share and the grant of 200,000 options to purchase Bion common
stock at a price of $3.00 per share until August 31,2008. Additionally,
pursuant to prior existing arrangements, adjustments were made to Class SV
(650,000 increased to 800,000; exercise price reduced to $3.00; term extended
to August 31,2008) now owned by family members of Mr. Bassani (and/or trust
for such family members). Various agreements related to such advances,
services and adjustments have been executed by Bion. See our Current Reports
on Form 8-K dated March 25, 2003, April 12, 2003, June 9, 2003 and August 25,
2003 and the exhibits thereto for further details. See also "Bion Dairy
Corporation Financing" below.
Mark A. Smith, our President and a director, has agreed to serve in such
positions on a consulting basis through March 31,2003 in consideration of
$150,000 in deferred compensation (to be converted into Bion common stock at a
price no greater than $3.00 per share) and the grant (effective August 31,
2003) of 50,000 options to purchase Bion common stock at $3.00 per share until
August 31, 2003. See our Current Report on Form 8-K dated June 9, 2003 and
the exhibits thereto for further details. See also "Bion Dairy Corporation
Financing" below.
Jon Northrop, a director of Bion, has been granted (effective August 31, 2003)
an option to purchase 10,000 shares of Bion's common stock at a price of $3.00
until August 31, 2008.
Jere Northrop, director and Technology Director of Bion, has been granted
(effective August 31,2003) an option to purchase 40,000 shares of Bion's
common stock at a price of $3.00 per share until August 31, 2008. In
addition, Jere Northrop is receiving $2,500 per month of deferred compensation
(to be converted into Bion common stock at $3.00 per share) to compensate for
additional duties he has taken on due to Bion's reduced technical personnel
resulting from our ongoing financial crisis.
On August 31, 2003, we granted James Morris, Bion's Chief Technology Officer,
80,000 options to purchase shares of the Company's common stock at $3.00 per
share expiring July 31, 2008.
On August 31, 2003, we granted George Bloom, Bion's Chief Engineer, 80,000
options to purchase shares of the Company's common stock at $3.00 per share
expiring July 31, 2008.
On August 31, 2003, 1,187,343 warrants were "issued" (or reissued/amended to
extend the term, reduce the exercise prices and increase the number by
150,000, in aggregate) of which 1,037,343 were previously outstanding) to
related parties at an average exercise price of $3.65 and an average term of
8.29 years. If these warrants were valued using the Black Sholes method,
their value would be estimated at $1,090,992. In addition, a total of 583,833
options were issued with an average exercise price of $3.10 and an average
term of 4.92 years. Of these options, 460,000 were granted to related
15
parties. If these options were valued using the Black Sholes method, their
value would be estimated at $493,017. See our Current Report on Form 8-K dated
June 9, 2003 and our Annual Report on Form 10-KSB for the year ended June 30,
2003 and the exhibits thereto for additional information concerning these
issuances/reissuance of warrants and grants of options. In addition, 10,573
Warrants previously issued to D. Slavney were re-issued at a new exercise
price of $6.00. If these warrants were valued using the Black Sholes method,
their value would be estimated at $63,478. None of these Black Scholes values
have been reflected in the Financial Statements. Had these items been
recorded in the Financial Statements, our losses would have been increased by
the amounts recorded.
Centerpoint Shareholders Meeting/Removal of Contractual Problems
A meeting of the Centerpoint Corporation ("Centerpoint") stockholders which
commenced on July 31,2003 was concluded on August 25, 2003. Centerpoint's
stockholders approved the ratification of the Amended Centerpoint Agreement,
with 96% of the shares present at the meeting voted in favor, including shares
owned by Bion. Of the shares present at the meeting, 85% (1,179,405 shares)
other than the shares owned by Bion voted in favor of the ratification and
only 1,490 shares voted against the ratification (with the balance of such
shares abstaining). See our Current Reports on Form 8-K dated April 12, 2003
and August 25, 2003 and the exhibits thereto for further details regarding the
matters being ratified.
On August 27, 2003, Bion paid the sum of $90,000 to OAM, S.p.A. (and its
designees) to complete the transaction described in our Current Report on Form
8-K dated April 12, 2003 (set forth in Exhibit 99.2 thereto) as a result of
the favorable vote by Centerpoint's stockholders.
As a result, the contractual impediments to future financing described in our
Current Report on Form 8-K dated April 12, 2003(see Exhibits 99.2 and 99.3
thereto) have now been remove
On November 3, 2003, Centerpoint received $430,300.74(net of litigation costs)
from the settlement of a portion of its arbitration with Aprilia. See Note 5,
"Claims Receivable - Aprilia Claim", to the Financial Statements in our Annual
Report on Form 10-KSB for the year ended June 30, 2003 for further details. On
November 10, 2003 Centerpoint made a $400,000 investment as set forth below at
"Bion Dairy Corporation Financing".
On August 25, 2003, Bion Dairy Corporation ("Dairy"), of which we own all
4,000,000 shares of its common stock outstanding, closed an initial stage of
financing totaling $1,117,500 (including $600,000 of prior advances from
Bright Capital, Ltd. ("Brightcap") and $65,000 of prior advances from
affiliates of David Mitchell, our former CEO) of secured convertible debt
("Notes"). Through September 30,2003 an additional $65,000 of the Notes were
sold to Mark A. Smith our president, for a total issuance of $1,182,500. On
November 10, 2003 Centerpoint purchased $400,000 of the Notes bringing the
total sale and issuance to $1,582,500. Dairy has now closed the offering of
these Notes. Up to an aggregate total of $4,482,500 of such Notes (or similar
Notes) may be issued by Dairy in subsequent tranches. The largest holder of
these Notes($600,000 principal) is Chris-Dan, LLC, which is owned by Dominic
Bassani, General Manager of Dairy and a consultant to Bion. The Notes are
secured by: a) all of the intellectual property of Bion (and its subsidiaries)
16
(which previously secured outstanding obligations to Bright Capital, Ltd.
which is owned by Mr. Bassani), b) all of the outstanding shares of Dairy, and
c) all of the shares of Centerpoint owned by Bion. The Notes are convertible
into the common stock of Dairy at a price of $1.00 (principal and accrued
interest on the Notes) under various conditions specified in the financing
documentation, one or more of which conditions precedent to conversion may
never be met. Under additional specified conditions (which also have no
assurance of being met), the Notes (or Dairy common stock received pursuant to
the conversion thereof) may in the future be exchanged for shares of the
common stock of Bion. If conversion of the Notes into the common stock of
Dairy takes place, all of Bion's business opportunity in the dairy industry
world-wide will be conducted through Dairy, and the board of directors of
Dairy will consist of three members, two of which will be designated by the
majority of the shareholders of Dairy and only one will be designated by Bion.
The financing restricts the use of its proceeds and, unless Dairy and/or Bion
raise substantial additional funds, there will be no substantial funds
available for Bion to pay its creditors and carry out its business. See
Exhibit 10.1 to our Current Report on Form 8-K dated August 25,2003 for
further details.
Although Dairy, our subsidiary, recently received the financing described
above (which financing was not large enough to repay our creditors and is
subject to a limiting "Use of Proceeds" which does not permit significant
payment to our existing creditors) and we are currently seeking other outside
sources of capital, as of this date we have not been able to secure the level
of financing that is necessary for our current and future operations and/or to
repay our existing indebtedness and there can be no assurance that sufficient
funds will be available from external sources. 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
our existing shareholders. Since we do not yet have the ability to generate
cash flow from operations, we have substantially curtailed our current
business activities and we may need to cease operations if we are not able to
raise capital from outside sources. This would have a material adverse effect
on our business and our shareholders.
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THIS REPORT INCLUDES FINANCIAL STATEMENTS (AND NOTES ATTACHED THERETO)
FOR THE QUARTER ENDING SEPTEMBER 30, 2003 WHICH HAVE NOT BEEN REVIEWED OR
AUDITED BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AND OTHER ITEMS DERIVED
THEREFROM WHICH MAY NOT FULLY CONFORM THE REQUIREMENTS/REGULATIONS GOVERNING
THE CONTENT OF FORM 10-QSB. Since we owe approximately $125,000 to BDO
Seidman, LLP, which must be paid or otherwise resolved in order to eliminate
independence issues prior to any review or audit of our financial statements
and we do not presently have the funds to pay such sums and for subsequent
work, no review or audit has been performed on our financial statements since
December 31, 2002.
Statements made in this Form 10-QSB that are not historical or current
facts are "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act") and section 21E
of the Securities Exchange Act of 1934, as amended. These statements often
can be identified by the use of terms such as "may," "will," "expect,"
"believe," anticipate," "estimate," or "continue" or the negative thereof.
Bion intends that such forward-looking statements be subject to the safe
harbors for such statements. We wish to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the
date made. Any forward-looking statements represent management's best
judgment as to what may occur in the future. However, forward-looking
statements are subject to risks, uncertainties and important factors beyond
our control that could cause actual results and events to differ materially
from historical results of operations and events and those presently
anticipated or projected.
These factors include adverse economic conditions, entry of new and
stronger competitors, inadequate capital, unexpected costs, failure to gain
product approval in the United States or foreign countries and failure to
capitalize upon access to new markets. Additional risks and uncertainties
that may affect forward-looking statements about Bion's business and prospects
include the possibility that a competitor will develop a more comprehensive or
less expensive environmental solution, delays in market awareness of Bion and
our systems and soil, or possible delays in Bion's marketing strategies, each
of which could have an immediate and material adverse effect by placing us
behind our competitors. Bion disclaims any obligation subsequently to revise
any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
The following discussion should be read in conjunction with our
consolidated financial statements and accompanying notes.
Overview
BION ENVIRONMENTAL TECHNOLOGIES, INC. ("BION," "WE," "US," OR "OUR") HAS
BEEN SUFFERING FROM SEVERE FINANCIAL DIFFICULTIES SINCE APPROXIMATELY LATE
JANUARY OF 2003, AS DISCLOSED IN OUR PERIODIC AND OTHER REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION COMMENCING WITH OUR CURRENT REPORT ON FORM
8-K DATED FEBRUARY 7, 2003. THESE FINANCIAL DIFFICULTIES RESULTED IN THE
RESIGNATION OF NEARLY ALL OF OUR OFFICERS AND DIRECTORS DURING FEBRUARY AND
MARCH OF 2003, AND THE TERMINATION OF MOST OF OUR EMPLOYEES. WE HAVE RETAINED
A CORE TECHNICAL STAFF, BUT WE HAVE DRASTICALLY CURTAILED OUR BUSINESS
18
ACTIVITIES TO INCLUDE ONLY THOSE ACTIVITIES THAT ARE DIRECTLY NEEDED TO
COMPLETE DEVELOPMENT AND TESTING OF OUR SECOND GENERATION TECHNOLOGY.
OUR FINANCIAL DIFFICULTIES RESULTED PRIMARILY FROM OUR INABILITY TO
RAISE ADDITIONAL FUNDS DUE TO CONTRACTUAL ANTI-DILUTION PROVISIONS THAT WERE
CONTAINED IN THE AGREEMENTS RELATED TO THE FINANCING TRANSACTIONS THAT WERE
COMPLETED IN JANUARY OF 2002 (SEE OUR FORM 10-KSB FOR THE YEAR ENDED JUNE 30,
2002 AND OUR CURRENT REPORT ON FORM 8-K DATED DECEMBER 12, 2001 AND THE
EXHIBITS AND AMENDMENT THERETO) WHICH PREVENTED ANY REASONABLE FINANCING FROM
BEING COMPLETED. WHEN WE BECAME AWARE OF THE NEGATIVE IMPLICATIONS OF THESE
ANTI-DILUTION PROVISIONS WHILE ATTEMPTING TO STRUCTURE A PLANNED FINANCING
(WHICH FINANCING ATTEMPTS ULTIMATELY FAILED IN JANUARY OF 2003), WE ATTEMPTED
TO EITHER FIND ALTERNATIVE FINANCING METHODS WHICH COULD BE REASONABLY
COMPLETED AND/OR NEGOTIATE AN AMENDMENT TO SUCH PROVISIONS. AFTER MONTHS OF
NEGOTIATIONS, AGREEMENTS RELATED TO AMENDING SUCH PROVISIONS WERE ENTERED INTO
DURING THE SPRING OF 2003(SEE OUR CURRENT REPORT ON FORM 8-K DATED April 12,
2003) AND THE PROVISIONS WERE FINALLY AMENDED EFFECTIVE AUGUST 27, 2003 (SEE
OUR CURRENT REPORT ON FORM 8-K DATED AUGUST 25, 2003 AND EXHIBITS THERETO).
ALTHOUGH WE WERE ABLE TO COMPLETE A SMALL FINANCING THROUGH ONE OF OUR
SUBSIDIARIES DURING AUGUST OF 2003 WHICH HAS ALLOWED US TO CONTINUE LIMITED
WORK ON OUR SECOND GENERATION TECHNOLOGY (SEE OUR CURRENT REPORT ON FORM 8-K
DATED AUGUST 25, 2003), OUR OPERATIONS HAVE BEEN SEVERELY DAMAGED DURING THE
PAST YEAR. NOT ONLY DID WE HAVE TO TERMINATE MOST OF OUR ACTIVITIES AND
EMPLOYEES, BUT WE HAVE SUFFERED SUCH DIRE FINANCIAL CONSTRAINTS (AS WE WERE
FACED WITH THE LIKELY POSSIBILITY OF A BANKRUPTCY FILING) THAT WE HAVE LOST
CREDIBILITY WITH OUR VENDORS, CREDITORS, THE FINANCIAL COMMUNITY AND OUR
EXISTING SHAREHOLDERS AND INVESTORS. AS A RESULT, THE MARKET PRICE FOR OUR
STOCK FELL IN ORDER TO CONTINUE WITH OUR BUSINESS ACTIVITIES AND SAVE THE
COMPANY WE HAVE HAD TO STRUCTURE INTERIM FINANCING ON EXTREMELY DILUTIVE TERMS
WHICH HAS NEGATIVELY AFFECTED OUR SHAREHOLDERS AND WILL PROBABLY CONTINUE TO
NEGATIVELY IMPACT OUR ABILITY TO OBTAIN FUTURE FINANCING ON REASONABLE TERMS.
WE STILL FACE A SEVERE WORKING CAPITAL SHORTAGE AND SINCE WE HAVE NO REVENUES
WE WILL NEED TO OBTAIN ADDITIONAL CAPITAL TO SATISFY OUR EXISTING CREDITORS
(SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" AND "FINANCIAL STATEMENTS").
THERE IS NO ASSURANCE WE WILL BE ABLE TO OBTAIN THE FUNDS THAT WE NEED TO STAY
IN BUSINESS OR TO SUCCESSFULLY DEVELOP OUR BUSINESS.
We are in the process of developing and testing a second generation of
our technology ("Bion NMS" or "NMS" or "System" or "Technology") to provide
waste management solutions to the agricultural industry, focusing on livestock
waste from confined animal feeding operations, such as large dairy and hog
farms. In the past we have engaged in two main areas of activity by utilizing
the first generation of our technology (which we discontinued marketing during
calendar year 2001) (which areas we intend to re-enter during the current
fiscal year pending results of field testing our second generation NMS
technology during fiscal year 2004):
1) WASTE STREAM REMEDIATION. The removal of pollutants (primarily
nitrogen and phosphorus) which pollute soil and water and reduction of
emissions of gases to the atmosphere which result in acid rain, smog,
ground-level ozone or produce "greenhouse warming" effects). We intend
to pursue this area of activity primarily through licensing our second
generation technology: a) to retrofit existing confined animal feeding
operations installations (with emphasis on large dairy farms utilizing
anaerobic lagoons for the next 12 months) and b) for use in newly
constructed dairy farms; and
19
2) BIONSOIL SALES. The production and sale of organic BionSoil
fertilizer products made from the waste solids produced by use of our
technology.
In addition, we intend to pursue what we call the "Dairy Park
Opportunity," which reflects what we believe is the potential for the Bion
technology to allow very large dairy farms to vertically integrate (with
pasteurization, cream separation, milk bottling, and/or cheese plants, etc.)
and pursue site integration (with ethanol plants, methane production, organic
farming, etc.) on relatively small plots of land.
Note that all of these activities completely are dependent upon two
things, neither of which can be assured at this date:
1) successful completion of the field testing of our second generation
technology which is presently taking place in Texas for the purpose of
demonstrating its capacity for nutrient ( primarily nitrogen and
phosphorus)removal from the dairy confined animal feeding operations
waste stream)(which will be followed, if successful, by a
demonstration/test( either at the Texas site or in California pursuant
to existing agreements) of our technology's capacity to reduce polluting
gaseous emissions from confined animal feeding operations operation);
and
2) our ability to raise sufficient funds to allow us to finance our
activities and pay our existing creditors.
We believe that our waste remediation technology will provide confined
animal feeding operations (primarily in the dairy and swine industries) with
treatment for their animal waste outputs. In this regard, our systems are
designed to microbiologically treat their entire waste stream while reducing
air emissions and nutrient discharges and creating solids which are in turn
the basis for the creation of organic soil and fertilizer products. We are
attempting to develop our soil and fertilizer products for use in a variety of
applications.
Currently, the majority of confined animal feeding operations dispose of
their animal waste by spreading it on cropland (before or after placement in
anaerobic lagoons). In many parts of the United States, the operation and/or
expansion of confined animal feeding operations are severely restricted due to
a combination of the amount of land that is necessary to dispose of the animal
waste at an environmentally sustainable rate, and the pollution of existing
land and water due to prior disposal of excess nutrients and/or air pollution
emissions. Confined animal feeding operations are enormous polluters of our
air, water and land and are under significant pressure from state and federal
regulatory agencies, the media, environmental groups and the public to reduce
their role as a major source of excess nutrient pollution and harmful air
emissions. Although nutrient pollution from these feeding operations has gone
largely unregulated in the past, they are now subject to stringent regulation
under the Federal Clean Water Act and are required to become zero-discharge
facilities. Air emissions from these operations are increasingly being
evaluated for potential regulation under the Federal Clean Air Act and/or
similar state statutes (including without limitation a law recently passed in
California which explicitly makes large dairies subject to such regulation).
The livestock industry and regulatory agencies are searching for affordable
waste treatment solutions to this widespread and immediate problem.
20
Although we have been conducting business since 1989, we recently have,
effectively, re-entered the "development stage" pending completion of
testing/demonstration of our second generation technology during the current
fiscal year. Our original systems were wastewater treatment systems for dairy
farms and food processing plants. The basic design was modified in late 1994
to create Nutrient Management Systems (NMS) that produced organic soil
products as a by-product of remediation of the waste stream when installed on
large dairy or swine farms. Through June 30, 2001, we sold and subsequently
installed, in the aggregate, 32 of these first generation systems in 7
states., of which 19 were still in operation through June 30, 2002. There are
presently approximately 12 first generation Bion NMS soil production system
installations operating in 3 states.
We discontinued marketing of our first generation NMS systems during
calendar 2001. We were unable to produce a business model based on the first
generation technology which would generate sufficient revenues to create a
profitable business. While continuing to market and operate the first
generation systems, during the second half of calendar year 2000 we began to
focus our activities on developing the next generation of the Bion NMS
technology. We no longer operate any of the first generation NMS systems.
As a result of our research and development efforts during the last three
years, the second generation of our technology has been developed. We have
designed and tested NMS systems that use state-of-the-art, computerized,
real-time monitoring and system control that have the potential to be remotely
accessed for both reporting requirements and control functions. These systems
are smaller, faster and require less capital per animal than our first
generation NMS systems. The new generation of NMS system is designed to
harvest solids used to produce our BionSoil(R) products in a few weeks as
compared to six to twelve months with our first generation systems.
The Company's main activity at present consists of work related to its
Texas second generation dairy NMS installation which is currently in the
testing/demonstration stage. We anticipate preliminary results during the last
calendar quarter of 2003 or the first calendar quarter of 2004. See our Annual
Report on Form 10-KSB for the year ended June 30, 2003 , Item 1. "Description
of Business B Development of Our Business" for details concerning this matter.
Critical Accounting Policies and Significant
Use of Estimates in Financial Statements
--------------------------------------------
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and
may change in subsequent periods.
The following list of critical accounting policies (WHICH HAS NOT BEEN
UPDATED SINCE 2002) is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
21
alternative would not produce a materially different result. We have
identified the following to be critical accounting policies of the Company:
Revenue recognition: Revenues from fixed-price system development and
construction projects are recognized on the percentage-of-completion method.
For contracts accounted for under the percentage-of-completion method, the
amount of revenue recognized is the percentage of the total contract price
that the costs expended to date bear to the anticipated final total cost based
upon current estimates of the cost to complete the contract. Contract costs
includes all labor and benefits, materials unique to or installed in the
project, subcontract costs and allocations of indirect costs. General and
administrative costs are charged to expense. Provisions for estimated losses
on uncompleted contracts are provided when determined, regardless of the
completion percentage. As contracts can extend over one or more accounting
periods, revisions in costs and earnings estimated during the course of the
work are reflected during the accounting period in which the facts that
require such revisions become known. Project managers make assumptions
concerning cost estimates for labor hours, consultant hours and other project
costs. Due to uncertainties inherent in the estimation process and potential
changes in customer needs as projects progress, it is at least reasonably
possible that completion costs for some uncompleted projects may be further
revised in the near term, and that such revisions may be material.
Revenue from the sale of BionSoil(R) products and associated fees are
recognized when shipped, as the Company has no continuing obligations.
Stock-based compensation: The Company accounts for its stock-based
compensation arrangements with its employees in accordance with the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and complies with the disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 123 established a
fair-value-based method of accounting for stock-based compensation plans.
Stock-based awards to nonemployees are accounted for at fair value in
accordance with the provisions of SFAS 123.
Income taxes: Deferred income taxes are determined by applying enacted
statutory rates in effect at the balance sheet date to the differences between
the tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements. A valuation allowance is provided based on
the weight of available evidence, if it is considered more likely than not
that some portion, or all, of the deferred tax assets will not be realized.
Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosures of contingent assets and liabilities at
the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates and
assumptions.
22
Results of Operations - Comparison of Quarter Ended September 30, 2003
with Quarter Ended September 30, 2002
---------------------------------------------------------------------
We recorded no sales of of BionSoil(R) during the quarter ended September
30, 2003 ("2003@). This compares to total sales of $47,000 for the quarter
ended September 30, 2002 ("2002"). The amount decreased due to our
financial/management crisis and our focus on research and development in 2003.
Cost of soil was $(10,370) for 2003 and $196,000 for 2002. The decrease in
cost was due to the fact that no new soil was produced for sale and
settlements with vendors resulted in a credit for the 2003 quarter.
General and administrative expenses increased to $664,646 for 2003 from
$637,000 for 2002. The increase is primarily attributable to an increase in
accrued deferred compensation even with a reduction in salaries and expenses
due to a general reduction in overall staff size.
Research and development costs increased by $133,000 during the 2003
quarter. This increase is primarily the result of the construction/testing
during 2003 of the second generation NMS system built in Texas. No such
prototype was in construction/testing in the 2002 quarter.
Non-cash expenses for services and compensation decreased to $0 for 2003
from $158,000 for 2002. The decrease is due to a reduction in amortization
expense for the value of options previously issued to various individuals.
Interest expense increased to $64,824 for 2003 from $75 for 2002. The
increase was due to new loans in 2003.
We did not record income tax expense during the quarters ended September
30, 2003 and 2002, as a result of our net losses. A valuation allowance of
$15,394,000 at June 30, 2002, was established because we have not been able to
determine that it is more likely than not that the deferred tax asset will be
realized.
WE HAVE NOT YET HAD THE RESOURCES (FINANCIAL AND PERSONNEL) TO ADDRESS
OUR TAX ITEMS FOR THE YEAR ENDED JUNE 30, 2003 AND PERIODS SUBSEQUENT THERETO.
HOWEVER, AS SET FORTH IN THE FINANCIAL STATEMENTS, IT IS CLEAR THAT WE HAD
ADDITIONAL LOSSES DURING THE QUARTER.
DUE TO OUR INABILITY TO OBTAIN ACCOUNTING SERVICES, WE ARE UNABLE TO
DETERMINE THE AMOUNTS OF THE VALUATION ALLOWANCES OR CARRY-FORWARDS AT
SEPTEMBER 30, 2003.
The net loss and comprehensive loss decreased $41,000 (4%) during the
quarter ended September 30, 2003. The decrease primarily related to any
decrease in overall operations.
Basic and diluted loss per common share increased by $0.04 from $0.20 to
$0.21. The decrease in the loss per share is primarily attributable to the
use of a calculation which "netted out" our 57.7% portion of the 1.900,000
shares of our common stock owned by Centerpoint in the 2003 calculation, which
was offset by our lower level of activity and the decrease in non-cash
charges.
23
We have not recorded any expense for options/warrants granted/issued
during the period. See Note 5 "Related Party Transactions and Subsequent
Events" for details related to these items including without limitation the
Black Scholes vales of such options/warrants.
Seasonality
-----------
Bion's installation capability is restricted in 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 Bion
Fertilizer product sales are expected to exhibit a somewhat seasonal sales
pattern with emphasis on spring, summer and fall sales.
Liquidity and Capital Resources
-------------------------------
Our principal sources of liquidity, which consist of cash and cash
equivalents, are $162,000 as of September 30, 2003. We believe we will not
generate sufficient operating cash flow to meet our needs without additional
external financing. THE LACK OF ADDITIONAL CAPITAL RESULTING FROM THE
INABILITY TO GENERATE CASH FLOW FROM OPERATIONS OR TO RAISE CAPITAL FROM
EXTERNAL SOURCES HAVE ALREADY FORCED THE COMPANY TO SUBSTANTIALLY CURTAIL
OPERATIONS, CAUSED US TO REDUCE STAFF, AND MAY CAUSE THE COMPANY TO CEASE
OPERATIONS AND WOULD, THEREFORE, HAVE A MATERIAL ADVERSE EFFECT ON ITS
BUSINESS. There can be no assurances that any financing will be available or
that the terms will be acceptable to us, or that any financing will be
consummated. Any failure on our part to do so will have a material adverse
impact on us and may cause us to cease 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 is unknown.
Effective February 12, 2003, in order to eliminate an impediment to a
possible future financing, we entered into an agreement with Centerpoint
Corporation, our majority-owned subsidiary, to immediately cancel Section 2.4
"Post-Closing Adjustment" and Section 1.2(b) "Failure to Register or Lapse of
Effectiveness" from the January 2002 Subscription Agreement between us and
Centerpoint. Our management believes that it is in the best interest of all
of the shareholders of both companies that these obstacles to a possible
future financing be removed. As majority stockholder, we have fiduciary
obligation to act in the best interests of the Centerpoint minority
stockholders.As consideration to Centerpoint for canceling the sections noted
above we will forgive all amounts due from Centerpoint, totaling approximately
$450,000 (this amount has been eliminated in consolidation). In addition, we
will return to Centerpoint, for cancellation, warrants to purchase one million
shares of Centerpoint's common stock. On August 25, 2003 Centerpoint's
shareholders ratified these agreements. On August 27, 2003 a payment of
$90,000 was made to the former controlling shareholder of Centerpoint (and its
attorneys) to remove our remaining contractual impediments. See our Current
Report on Form 8-K dated August 25,2003 and the exhibits thereto.
24
During the period from January 2003 to September 30, 2003, Bright Capital
LLC ("Brightcap"), an entity owned and controlled by Dominic Bassani, a
consultant whose services were provided to us as a part of our management
agreement with D2CO, LLC ("D2"), advanced us in excess of $600,000 pursuant to
various agreements. These advances were made for the purpose of providing
funds to allow us to be able to pay operating expenses that are critical to
our operations primarily consisting of salaries paid to retain critical
personnel (which now consists of six employees), to take actions to protect
and expand our intellectual property and to commence work on the system
installation in Texas. On August 25, 2003, in connection with the financing
of Bion Dairy Corporation ("Dairy"), $600,000 of advances from Brightcap were
converted into secured convertible debt of Dairy. See our Current Report on
Form 8-K dated August 25, 2003 and the exhibits thereto.
Going Concern
-------------
IN CONNECTION WITH THEIR REPORT ON OUR CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED JUNE 30, 2002, BDO SEIDMAN, LLP, OUR INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS, EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN BECAUSE OF RECURRING NET LOSSES AND NEGATIVE CASH
FLOW FROM OPERATIONS. SINCE THAT DATE, BION'S FINANCIAL SITUATION HAS GREATLY
WORSENED AND HAS EXPERIENCED SUBSTANTIAL FINANCIAL AND MANAGEMENT DISTRESS.
At September 30, 2003, we had stockholders' deficit of $2,789,931 and, an
accumulated deficit of $61,137,170. We have no significant current revenues
and substantial current operating losses. 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 is currently engaged in seeking additional capital or other
financing arrangements to fund operations until Bion system and BionSoil(R)
are sufficient to fund operations.
Consolidated Working Capital
----------------------------
Consolidated working capital decreased to a deficit of $2,217,185 at
September 30, 2003 from $1,814,000 at September 30, 2002. This decrease is
primarily due to the loss incurred during the year and our inability to raise
funds to replace the funds expended. As of September 30, 2003 we have only
secured limited funding to carry forwards limited operations.
Analysis of Cash Flows
----------------------
Cash used in operating activities decreased to $470,209 in 2003 from
$830,000 in 2002. The decrease is primarily the result of a decrease in
overall operations due to a lack of available funds.
Cash used in investing activities decreased to $25,000 in 2003 compared
to $116,000 cash used in investing activities in 2002. The decrease is
primarily the result of minimal investing activities in 2003 due to a lack of
available funds.
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Cash provided by financing activities increased to $648,000 in 2003
compared to $0 cash used for financing activities in 2002. The increase is
primarily the result of new advances from affiliates, new secured loans and
conversion of advances from affiliates into secured loans in 2003 versus
payment of loans in 2002.
We currently have no commitments for material capital expenditures except
as to ongoing work related to our Texas installation/demonstration which is
being funded through Dairy, our subsidiary. See "Item 1. Description of
Business" in our Annual Report on Form 10-KSB for the year ended June 30,
2003.
Bion Dairy Corporation Financing
On August 25, 2003, Bion Dairy Corporation (" Dairy"), of which we own
all 4,000,000 shares of its common stock outstanding, closed an initial stage
of financing totaling $1,117,500 (including $600,000 of prior advances from
Bright Capital, Ltd. ("Brightcap") and $65,000 of prior advances from
affiliates of David Mitchell, our former CEO) of secured convertible debt
("Notes"). Through September 30,2003 an additional $65,000 of the Notes were
sold to Mark A. Smith our president, for a total issuance of $1,182,500. On
November 10, 2003 Centerpoint purchased $400,000 of the Notes bringing the
total sale and issuance to $1,582,500. Dairy has now closed these offering of
these Notes. Up to an aggregate total of $4,482,500 of such Notes (or similar
Notes) may be issued by Dairy in subsequent tranches. The largest holder of
these Notes($600,000 principal) is Chris-Dan, LLC, which is owned by Dominic
Bassani, General Manager of Dairy and a consultant to Bion. The Notes are
secured by: a) all of the intellectual property of Bion (and its subsidiaries)
(which previously secured outstanding obligations to Bright Capital, Ltd.
which is owned by Mr. Bassani), b) all of the outstanding shares of Dairy, and
c) all of the shares of Centerpoint owned by Bion. The Notes are convertible
into the common stock of Dairy at a price of $1.00 (principal and accrued
interest on the Notes) under various conditions specified in the financing
documentation, one or more of which conditions precedent to conversion may
never be met. Under additional specified conditions (which also have no
assurance of being met), the Notes (or Dairy common stock received pursuant to
the conversion thereof) may in the future be exchanged for shares of the
common stock of Bion. If conversion of the Notes into the common stock of
Dairy takes place, all of Bion's business opportunity in the dairy industry
world-wide will be conducted through Dairy, and the board of directors of
Dairy will consist of three members, two of which will be designated by the
majority of the shareholders of Dairy and only one will be designated by Bion.
The financing restricts the use of its proceeds and, unless Dairy and/or Bion
raise substantial additional funds, there will be no substantial funds
available for Bion to pay its creditors and carry out its business. See
Exhibit 10.1 to our Current Report on Form 8-K dated August 25,2003 for
further details.
This Form 10-QSB (and our prior filing on Form 10-KSB for the year ended
June 30, 2003 and Forms 10-QSB for the quarters ended December 21, 2002 and
March 31, 2003) have not been reviewed by BDO Seidman, LLP, our independent
certified public accountants, as required by Item 310(a)) of Regulation S-B.
BDO Seidman, LLP has not performed the review (or prior reviews) initially
because they had not reviewed the impact on the Company's accounts and
operations of the various items disclosed in our Form 8-K dated February
7,2003. No review or audit has been performed since that date. We are not
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aware of any dispute with BDO Seidman, LLP as to any accounting matters. We
owe approximately $125,000 to BDO Seidman, LLP which must be paid or otherwise
resolved in order to eliminated independence issues prior to any review or
audit of our financial statements.
Item 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and
that such information is accumulated and communicated to management, including
the chief executive officer and chief financial officer, as appropriate, to
allow timely decisions regarding required disclosure. Management necessarily
applied its judgment in assessing the costs and benefits of such controls and
procedures, which, by their nature, can provide only reasonable assurance
regarding management's control objectives.
With the participation of management, our chief executive officer and
interim chief financial officer evaluated the effectiveness of the design and
operation of our disclosure controls and procedures at the conclusion of the
period ended September 30, 2003. Based upon this evaluation, the chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures were effective in ensuring that material information
required to be disclosed is included in the reports that it files with the
Securities and Exchange Commission.
Changes in Internal Controls
----------------------------
There were no significant changes in our internal controls or, to the
knowledge of our management, in other factors that could significantly affect
internal controls subsequent to the date of most recent evaluation of our
disclosure controls and procedures utilized to compile information included in
this filing.
Within the twenty-four (24) months prior to the date of our most recent
Financial Statements and through the date of this report, we have had no
disagreements with our accountants on accounting or financial disclosure.
PART II
Item 1. Legal Proceedings
On September 30, 2003, Morrison Cohen Singer & Weinstein, LLP ("MCSW")
filed a complaint in the Supreme Court of the State of New York, County of New
York, against us alleging that we owe MCSW approximately $114,000 for legal
services provided. We have not yet filed an answer in that proceeding. We
have already recorded a liability for these legal services, and therefore we
do not believe that this lawsuit will have a material adverse effect on our
financial condition. During October 2003, we concluded a settlement of this
matter for an aggregate sum of $65,000 (including attorneys' fees) and the
litigation has been dismissed with prejudice.
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On July 22, 2002, Thomas Keith Barefoot ("Barefoot"), doing business as
Quin Deca Farm ("Quin Deca"), an unaffiliated party, filed a complaint against
the Company in the Superior Court of the County of Harnett in the State of
North Carolina regarding the Company's first generation Bion NMS System on
Quin Deca Farm and the harvesting of BionSoil. The complaint includes breach
of contract claims asserting that the Company abandoned the NMS system on Quin
Deca Farm and the failure of the Company to harvest BionSoil. The second
claim is for fraud regarding misrepresentation of the state of the technology
of the first generation NMS. The third claim is for unfair and deceptive trade
practices for misrepresentation of the state of the technology of the NMS
System. The fourth claim is for negligent misrepresentation made by Bion in
connection with the work it performed and its suitability for the intended
purpose. The fifth claim is for equity/specific performance in that Bion left
Quin Deca with an economically and technically deficient waste management
system that cannot continue to be used without adequate and alternative
methods of waste removal. Quin Deca is seeking $830,000 in damages plus
punitive damages and to have its damages trebled, reasonable attorney fees and
principles of equity requiring Bion to install its second generation Bion NMS
system. We have filed an answer and counterclaims. The action has been
removed to the U.S. District Court for the Eastern District of North Carolina
which court recently ruled that most of the substantive claims should be
arbitrated between Quin Deca and our Bion Technologies, Inc. subsidiary. The
Company does not believe that the claims against it have merit and, assuming
that we have the funds to properly defend this action, we that the ultimate
resolution of this litigation will not have a material adverse effect on the
Company, its operations or its financial condition.
On May 6, 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 ("Notes")
that were issued to ACB in March of 2000. The complaint includes breach of
contract claim asserting that the Company owes ACB $265,400 plus interest or
$121,028 including interest based on ACB's interpretation of the terms of the
Notes and subsequent amendments. Effective June 30, 2001, the Company issued
ACB 5,034 shares of common stock on conversion in full payment of the Notes
based on the Company's interpretation of the Notes, as amended. The Company
has filed an answer to the complaint denying the allegations. Assuming that we
have the funds to properly defend this action. The Company does not believe
that the ultimate resolution of this litigation will have a material adverse
effect on the Company, its operations or its financial condition.
We have been delinquent in paying our creditors due to our poor financial
condition. As a result, various creditors have threatened litigation,
although none have commenced litigation as of the date of the filing of this
Report except as disclosed above.
Item 5. Other Information
We have been informed that effective approximately November 17, 2003 our
stock will no longer be listed on the OTC Electronic Bulletin Board because we
filed our Annual Report on Form 10-KSB without audited financial statements.
We anticipate that a limited "over-the-counter" "pink sheets" trading market
may develop in our common stock.
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Item 6. Exhibits and Reports on Form 8-K
Exhibits.
31.1 Certification of Chief Executive Officer and Interim Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. Filed herewith electronically.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350. Filed herewith electronically.
Reports on Form 8-K.
We filed a Report on Form 8-K dated August 25, 2003 reporting information
under Items 5 and 7 of that form concerning the initial stage of Bion Dairy
Corporation Financing.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: November 18, 2003 BION ENVIRONMENTAL TECHNOLOGIES, INC.
By: /s/ Mark A. Smith
-------------------------------------
Mark A. Smith
President and Interim Chief
Financial Officer
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