UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year ended: June 30, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: _____ to ____
Commission File No. 000-19333
BION ENVIRONMENTAL TECHNOLOGIES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-1176672
------------------------------- ------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication No.)
Box 566/1774 Summitview Way, Crestone, Colorado 81131
------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (212) 758-6622
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None N/A
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
--------------------------
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] YES [ X ] NO
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ] YES [ X ] NO
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [ X ] YES [ ] NO
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). N/A
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ X ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). [ ] YES [ X ] NO
The aggregate market value of the approximately 5,500,000 shares of voting
stock held by non-affiliates of the Registrant as of December 31, 2008
approximated $5.5 million. As of September 11, 2009, the Registrant had
12,364,752 shares of common stock issued and 11,660,443 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
2
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (and the documents incorporated herein by
reference) contain forward-looking statements, within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), that involve substantial risks and
uncertainties. Forward-looking statements generally can be identified by the
use of forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "project," "predict," "plan," "believe" or
"continue" or the negative thereof or variations thereon or similar
terminology. The expectations reflected in forward-looking statements may
prove to be incorrect.
Important factors that could cause actual results to differ materially from
our expectations include, but are not limited to, the following:
* changes in political, regulatory and economic climates;
* changes in legal and/or regulatory environment;
* industry risks, including environmental related problems;
* the ability of the Company to implement its business strategy;
* the Company's limited financial and management resources and ability to
raise additional needed funds and/or hire needed personnel;
* the extent of the Company's success in developing and operating the
Integrated Projects;
* engineering, mechanical or technological difficulties with operational
equipment;
* operating variances from expectations;
* the substantial capital expenditures required for construction of the
Company's proposed CAFO retrofit projects and Integrated Projects and the
related need to fund such capital requirements through commercial banks
and/or public or private securities markets;
* the need to develop and re-develop technology and related applications;
* dependence upon key personnel;
* the lack of liquidity of the Company's equity securities;
* operating hazards attendant to the environmental clean-up, CAFO and
renewable energy production, food processing and biofuel industries;
* potential mechanical failure or under-performance of equipment;
* climatic conditions;
* availability and cost of material and equipment;
* delays in anticipated start-up dates;
* availability of capital in the current 'distressed' financial markets;
* the strength and financial resources of the Company's competitors; and
* general economic conditions, including the current recession and its
effects on the national and international capital markets .
We do not undertake, and specifically disclaim any obligation, to
publicly release the results of any revisions that may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
3
PART I
ITEM 1. BUSINESS.
GENERAL
Bion Environmental Technologies, Inc.'s ("Bion," "Company," "We," "Us,"
or "Our") patented and proprietary technology provides a comprehensive
environmental solution to a significant source of pollution in US
agriculture, Confined Animal Feeding Operations ("CAFO's"). Bion's
technology is "comprehensive" in that it surpasses current environmental
regulations for both nutrient releases to water and air emissions from
livestock waste streams based upon our research to date. Because Bion's
technology reduces the harmful emissions from a CAFO on which it is utilized,
the CAFO can increase its herd concentration while lowering or maintaining
its level of nutrient releases and atmospheric emissions.
During 2008 the Company reorganized its management team to pursue its
business plan through two operating subsidiaries in order to focus on its two
related but distinct business opportunities: 1) Bion Services Group. Inc.
('Services Group') will utilize Bion's technology to provide environmental
waste treatment (often with renewable energy production from the waste
stream) for existing livestock facilities through retrofit of pre-existing
facilities; and 2) Bion Integrated Projects Group, Inc. ('Projects Group')
will utilize Bion's patented technology to develop new, state-of-the-art,
'closed loop' livestock facilities integrated with related agriculture
activities such as food processing and biofuels production in Integrated
Projects (as defined below).
Services Group is proceeding with its initial projects at Kreider Farms
in Pennsylvania as described below. Projects Group is moving forward with
pre-development activities for its initial Integrated Project in upstate New
York and preliminary work with other potential projects.
We believe that Bion's technology platform creates the opportunity to
profitably integrate large-scale CAFO's and their end-product users,
renewable energy production from the CAFO waste stream, on site utilization
of the renewable energy generated and biofuel/ethanol production in an
environmentally and economically sustainable manner while reducing the
aggregate capital expense and operating costs for the entire integrated
complex ("Integrated Projects" or "Projects"). In the context of Integrated
Projects, Bion's waste treatment technology, in addition to mitigating
polluting releases to water and emissions to air, generates renewable energy
from portions of the CAFO waste stream which renewable energy can be utilized
by integrated ethanol plants, CAFO end-product processors (including cheese,
ice cream and /or bottling plants in the case of dairy CAFOs and/or slaughter
and/or processing facilities in the context of beef CAFOs) and/or other users
as a replacement for fossil fuel energy. Note that an integrated ethanol
plant's main by-product, called distillers grain, can be added to the feed of
the animals in wet form thereby potentially lowering the capital
expenditures, operating, marketing and shipping costs and energy usage of the
ethanol production process. The integrated ethanol plant(s) will act as a
feed mill for the CAFO, thus reducing the CAFO's feeding costs and generating
revenue to the ethanol plant, and also provides a market for the renewable
energy that Bion's System (defined below) produces from the CAFO waste
4
stream. Thus, such Bion Integrated Projects can be denominated "closed loop".
Bion, as developer of and participant in Integrated Projects, anticipates
that it will share in the cost savings and revenue generated from these
activities.
From fiscal 2004 through early 2008, the Company primarily focused its
activities on completing re-development of its technology platform and
refining its business model. As such, we elected not to pursue near term
revenue opportunities such as retrofitting existing CAFO's with our first
generation (and transitional versions) waste management solutions, because
such efforts would have diverted scarce management and financial resources
and negatively impacted our ability to complete: 1) re-development of our
technology for environmentally sound treatment of CAFO waste streams, 2)
development of our integrated technology platform in support of large-scale
sustainable Integrated Projects and 3)finalizing a business model to
commercially utilize our technology. Since mid-2008, with the substantial
completion of the technology/business model re-development process, Bion has
been simultaneously pursuing both retrofit/remediation and Integrated Project
development opportunities based on its patented and proprietary waste
handling/renewable energy technology ("Bion System" or "System") and its
technology platform based on its core technology.
The Company is focusing its efforts on both the CAFO
retrofit/remediation market and on development and operation of Integrated
Projects. The Integrated Projects development opportunity is being primarily
pursued through our Projects Group subsidiary which will focus on development
of numerous Integrated Projects in multiple states. The CAFO/environmental
remediation opportunity is being pursued primarily through our Services Group
subsidiary which will also provide design, engineering and construction and
project management services to the Projects Group. We anticipate that most
projects undertaken by the Company in which we retain ownership interests
(whether retrofit or Integrated Projects) will be pursued through 'special
purpose' entities. Bion PA 1 LLC, through which we are developing the Bion
System required by Phase 1 of the Kreider project, is the first of such
entities.
The Company's consolidated financial statements for the years ended June
30, 2009 and 2008 included herein have been prepared assuming the Company
will continue as a going concern. The Company has not recorded any revenue
from operations for either of the years ended June 30, 2009 or June 30, 2008.
The Company has incurred net losses of approximately $1,312,000 and
$1,779,000 during the years ended June 30, 2009 and 2008, respectively. The
Company had a working capital surplus and stockholders' equity, respectively,
of approximately $515,000 and $743,000 as of June 30, 2009. The report of
the independent registered public accounting firm on the Company's
consolidated financial statements as of and for the years ended June 30, 2009
and June 30, 2008 includes a "going concern" explanatory paragraph, which
means that there are factors that raise substantial doubt about the Company's
ability to continue as a going concern.
PRINCIPAL PRODUCTS AND SERVICES
Currently, Bion is focused on using applications of its patented waste
management technology to pursue two large opportunities: 1) retrofit and
5
environmental remediation of existing CAFOs (pursued through Services Group)
and 2) development of Integrated Projects (pursued through Projects Group).
Bion's Services Group, building upon our redeveloped technology and
Bion's 15 years' of experience providing waste treatment services to the
livestock industry with its first generation technology applications, is
pursuing the opportunity related to retrofit and environmental remediation of
existing CAFOs. Our technology has evolved and been upgraded over the last
five years to meet changing standards and requirements. Bion's re-developed
technology platform creates a potentially profitable business opportunity to
provide waste treatment services and systems and/or renewable energy
production capability to existing livestock operations - of which there are
many. Early candidates for these solutions include individual CAFO facilities
that face impending regulatory action, CAFOs that wish to expand or relocate,
and operations located in regions that suffer severe and immediate
environmental issues, such as the Chesapeake Bay watershed or the San Joaquin
Valley, where financial incentives are (or may become) available that
encourage voluntary reductions of nutrient releases and/or atmospheric
emissions from agricultural sources. The Company's Kreider Farms projects in
Pennsylvania in the Chesapeake Bay watershed represent the Company's first
new endeavors in this market segment. These installations, if and when
completed, will reduce nitrogen releases and ammonia emissions from the dairy
and poultry waste streams to generate tradable nutrient reduction credits as
part of a nutrient credit trading program through the PA Department of
Environmental Protection. Phase 2 of the Kreider project, which is in its
early development and permitting phase, will treat the recovered cellulosic
solids from Kreider's dairy waste and the waste stream from Kreider's poultry
operations to generate renewable energy and tradable credits.
Bion's Projects Group is pursuing the opportunity related to development
of Integrated Projects which will include large CAFOs (such as large dairies,
beef cattle feed lots and/or hog farms) with Bion waste treatment System
modules processing the aggregate CAFO waste stream from the equivalent of
20,000 to 80,000 (or more) beef or dairy cows (or the waste stream equivalent
of other species) while producing solids to be utilized for renewable energy
production (and possibly to be marketed as feed and/or fertilizer),
integrated with CAFO end product users/processing facilities and/or a
biofuel/ethanol plant capable of producing 20 million to 40 (or more) million
gallons of ethanol per year. Such Integrated Projects will involve multiple
CAFO modules of 10,000 or more beef or dairy cows (or waste stream equivalent
of other species) on a single site and/or on sites within an approximately 30
mile radius. Bion believes its technology platform will allow integration of
large-scale CAFO's with end product processors and/or ethanol production
together with renewable energy production from waste streams and on-site
energy utilization in a 'closed loop' manner that reduces the capital
expenditures and operating costs for the entire Integrated Project and each
component facility. Some Projects may be developed from scratch while others
may be developed in geographic proximity of existing participating CAFOs,
ethanol plants and/or end product processors.
During the 2008 fiscal year, Bion began pre-development work on an
Integrated Project planned to include a large-scale beef cattle finishing
operation, a beef processing facility and an ethanol production facility to
be located in upstate New York. Progress has been made in the pre-development
process and the Company currently believes there is a significant likelihood
6
that we will option land and move into the development process during the
next six months. In addition to the NYS beef cattle project, Bion has been
working with various local and state agencies in Nebraska to develop a large
scale integrated dairy/cheese Integrated Project (which would be integrated
with one or more existing ethanol plant(s)). This project is in its early
stages.
Bion is currently working with local, state and federal officials and
with potential industry participants to evaluate opportunities and/or sites
for additional Projects and/or System installations in multiple states
including without limitation New York, Nebraska, Pennsylvania, California,
Indiana and other states. The Company anticipates selecting a site for its
initial Integrated Project (and possibly additional Integrated Projects)
during the current fiscal year. Bion intends to commence development of its
initial Integrated Project during the 2009 fiscal year by optioning land and
beginning the permitting process.
In addition, Bion intends to choose sites for additional Projects
through calendar years 2009-11 to create a pipeline of Projects. Management
has a 5-year development target (through fiscal year 2015) of approximately
12-24 Integrated Projects. At the end of the 5-year period, Bion projects
that 8-12 of these Integrated Projects will be in full operation in 3-8
states, and the balance would be in various stages ranging from partial
operation to early development stage. No Integrated Project has been
developed to date.
As part of our minor functional re-structuring to pursue the two
opportunities set forth herein, during October 2008 we re-deployed our
management/technology team roughly as follows: 1) our President, Mark A.
Smith, serves as President of Services Group the activities of which are
under the direct supervision of Jeremy Rowland, its Chief Operating Officer,
James Morris, our Chief Technology Officer and George Bloom, our Chief
Engineering Officer. Jere Northrop, our Senior Technology Director, assists
Services Group; and 2) Mark A. Smith serves as President of Projects Group
supervising the activities of Services Group personnel in this area and
Dominic Bassani, its Vice President-Special Projects and Strategic Planning
(who also consults to the Services Group and other Bion entities).
The Company's successful accomplishment of its business activities is
dependent upon many factors including without limitation the following,
neither of which can be assured at this date:
* Successful development and completion of the first Project to
demonstrate the operation of a fully integrated, environmentally
compliant, Bion-based CAFO/ethanol Project at a profitable level; and
* Our ability to raise sufficient funds to allow us to finance our
activities.
INDUSTRY BACKGROUND
The traditional business model for CAFO's, regardless of livestock type,
has relied on a combination of: 1) a passive environmental regulatory regime,
and 2) access to a relatively unlimited supply of cheap land and water to
serve as the basis for "environmental" treatment of animal waste. Such land
7
and water resources have now become significantly more expensive while
ongoing consolidation of the CAFO industry has produced substantially
increased and more concentrated waste streams. At the same time, regulatory
scrutiny of, and public concern about, the environmental impact from CAFO's
has intensified greatly.
Agricultural runoff is the largest water pollution problem in the United
States. Over-application of animal waste to cropland has resulted in manure
nutrients polluting surface and ground water systems, adversely impacting
water quality throughout the country including the Chesapeake Bay, the Great
Lakes and the Gulf of Mexico 'Dead Zone'. Clean-up initiatives for the
Chesapeake Bay, the Great Lakes and elsewhere are requiring the expenditure
of substantial sums of money to reduce excess nutrient pollution. In each
such case, agriculture in general and CAFO's in particular have been
identified among the main contributors of pollution. CAFO's are also
significant emitters of pollutants to air, with dairy CAFO's having been
identified as the largest contributor to airborne ammonia and other polluting
gases in the San Joaquin Valley and elsewhere and among the largest
contributors to nutrient pollution of the Chesapeake Bay. Note that a
substantial volume of the nitrogen released to the atmosphere from CAFO waste
streams as ammonia and other nitrogen gases emitted by CAFOs is then re-
deposited to the ground and then adds to nitrogen pollution of surface and
ground water systems. Bion believes that its patented and proven technology
offers the only comprehensive solution to the environmental impacts of these
concentrated livestock waste streams.
We believe Bion's technology can enable increased CAFO herd
concentration that is economically and environmentally sustainable because
the technology removes nutrients from the waste streams generated by animal
operations while dramatically reducing atmospheric emissions. The resulting
herd concentration potentially creates reduced marginal costs for the CAFOs
and results in a core Bion technology platform that integrates environmental
treatment and renewable energy production and utilization with ethanol
production.
Bion's technology platform and the resulting herd concentration, in
turn, potentially provide the opportunity to integrate a number of revenue
generating operations while maximizing the realized value of the renewable
energy production. The Bion Integrated Project model will access diversified
revenue streams through a balanced integration of technologies to provide a
hedge of the commodity risks associated with any of the separate enterprises.
We believe that Bion's Integrated Projects may generate revenues and profits
from one or more of the following items:
* Waste processing and technology licensing fees;
* Fees related to permanently integrated utilization of the wet
distiller grains, which are a by-product of ethanol production;
* Renewable energy production from the waste streams combined with
utilization of the energy produced within the Integrated Projects;
and
* Ethanol production;
8
* Various "environmental" credits.
Exactly what fees and revenues accrue to Bion will depend on the nature
of Bion's participation in each Integrated Project and on negotiations with
other participants in such Projects. If Bion is simply the operator of its
waste System within an Integrated Project that it develops, it would probably
generate revenue from: a) waste processing and technology licensing fees
charged to the CAFO, b) sales of the fertilizer and/or other products
generated from the waste treatment process, c) sales of renewable energy to
the ethanol plant and/or other facilities, d) fees related to the utilization
of the wet distillers grain made possible by the integration, and e) fees for
its "developer" role. If Bion also participates in the ownership and/or
operation of the ethanol plant, it would further generate revenue from sales
of ethanol and sales of feed products to the CAFO. Sales of distillers grain
as feed products generally represent 14-20% of the total revenues of an
ethanol plant if there is an available market for the distillers grain. If
Bion participates in ownership and/or operation of the integrated CAFO (and
its facilities), it would generate revenues from the sale of the CAFO's end
products. While it is possible that Bion would have a uniform ownership
interest throughout a Project, it is likely that in many cases Bion will have
differing ownership interests (from 0% to 100%) in each component of an
Integrated Project.
We believe that our technology platform and the proposed Projects do not
involve significant technology risk. Our waste handling technology has been
utilized efficiently in the past and has been verified by peer-reviewed data.
The other Project components required for an integrated operation, such as
CAFO facilities, ethanol plants and solids separation, drying and combustion
equipment, all consist of available and fully-tested processes and equipment
that do not pose any experimental challenges once properly sized, selected
and installed. It is Bion's ability to integrate the component parts in a
balanced proportion with large CAFO herds and ethanol production in an
environmentally sustainable manner that creates this unique economic
opportunity. Bion has a patent pending relating to the Bion integration model
described herein.
Bion has identified three primary market opportunities to potentially
develop Integrated Projects depending on the facilities that exist in a given
geographic region:
Existing Processing: Our technology enables newly-permitted livestock
herds to be located near existing beef or dairy processing plants. A
dedicated herd with Bion environmental treatment will potentially create
the opportunity for the processor to brand finished products as being
'environmentally-responsible,' 'Green,' or 'locally-grown,' as well as
provide single sourcing for inputs resulting in improved food safety,
security and accountability. Locating the herd in close proximity to the
existing processing plant will likely substantially reduce transporta-
tion cost and the processing plant can purchase and utilize the
renewable energy Bion produces from the CAFO wastes.
Existing Ethanol: Newly-permitted livestock herds can be located near
existing ethanol plants that are struggling in the current economic
environment. In Bion's closed-loop livestock/ethanol model, a corn
ethanol plant serves as a feed mill for the livestock herd, the ethanol
9
plant(s) provides its distiller grain co-product to supplement the
herd's ration, eliminating the ethanol plant's traditional costs to dry,
market and ship its distiller grains. The ethanol plant(s) becomes an
onsite/local consumer of the renewable energy generated from the herd's
waste that replaces all of the remaining fossil fuel requirements of the
ethanol plant. Efficiency can be significantly increased since
integration enables three 'shots' at the corn: first ethanol is produced
from it, then it is fed to the cows, then renewable energy is produced
from the leftover cellulosic biomass extracted from the livestock waste
stream. Integration with Bion's technology platform has the potential
to more than triple the energy efficiency of corn ethanol production,
improving the generally-accepted net energy balance of 1.4 to 1 to
approximately 4-5 to 1 (based on the Argonne National Laboratories GREET
model assessment of a similar integrated, closed-loop project) - close
to the efficiency targets publicly discussed for future cellulosic
ethanol production.
Greenfield Projects: Bion will develop new state-of-the-art Projects in
selected locations that maximize economic advantages of the Projects'
partners. Bion's partners in these Projects will potentially realize
increased productivity and profits by capitalizing on the operational
and resource efficiencies of integration as described elsewhere herein.
Additionally, the facilities and processes of Greenfield Project
participants will be optimized to provide the greatest benefit to the
Project as a cooperative enterprise. Further market advantages may
result from strategic location, such as proximity to high-value product
markets, product branding, and economic development incentives,
subsidies and tax credits.
Although we have developed the structure and basic design work related
to Integrated Projects, we have not yet actually developed or operated an
Integrated Project. Further, we have not completed the development of all of
the System applications that will be necessary to address all targeted
markets (such as swine, poultry, etc.) and all geographic areas and we
anticipate a continuing need for the development of additional applications
and more efficient integration.
The basic integration in a fully integrated Project will probably
include:
* An ethanol plant and CAFO combination sized to balance the distillers
grain by-product of the ethanol production with the feed requirements
of the CAFO herd and to meet or exceed the energy needs of the
ethanol plant with the renewable energy produced by Bion from the
CAFO waste stream. Beyond the production of ethanol, the ethanol
facility will function as a feed mill for the CAFO herd which will
utilize the spent grain from ethanol production in its feed ration,
materially reducing the operating expenses (energy and
transportation) and capital expenditure requirements (for items such
as dryers) and increasing the net energy efficiency of ethanol
production;
* Additionally, the ethanol plant is potentially a source of waste heat
(which, if not productively utilized, would increase ethanol
production costs for required disposal) to be used to maintain
10
temperatures throughout the co-located Bion System. In colder
climates, additional uses of this waste heat will potentially include
heating some of the CAFO or other integrated facilities;
* Processing, drying and combusting the coarse solids portion of
the CAFO's manure stream to produce heat used for solids drying and
to replace natural gas usage by the ethanol production process and
other co-located facilities;
* Drying and processing of the fine solids portion of the CAFO's waste
stream (if any) into a value-added, marketable, organic fertilizer
and/or high protein feed product ingredients; and
* Co-located end-product production facilities (cheese and/or other
dairy processors, beef processing facilities, etc.) that will
utilize the output of the CAFO and consume renewable energy produced
from the CAFO waste stream.
In order to implement this plan, Bion will need to work with CAFO's,
ethanol producers and/or end-product processors to generate multi-party
agreements pursuant to which the Integrated Projects will be developed and
which will provide that at least the following take place: a) the CAFO and
ethanol plant(and other facilities) agree to locate in geographic proximity
to each other, b) Bion licenses, constructs and operates its System to
process the CAFO's waste stream and produce renewable energy and other
products therefrom, c) the CAFO agrees to purchase and utilize the wet
distillers grain by-product of the ethanol plant in its feed ration and d)the
ethanol plant and/or end product facilities agree to purchase and utilize the
renewable energy produced by Bion from the CAFO waste stream in the place of
natural gas or other energy purchases. These agreements could be in the form
of joint ventures, in which all parties share the cost and ownership of all
facilities in the Integrated Project (in negotiated uniform or varied manners
across the various facilities), or in other forms of multi-party agreements
including agreements pursuant to which Bion would bear the cost of
construction of its System and the owners of the CAFO and the ethanol plant
would bear the cost of construction of the CAFO facilities and ethanol plant,
respectively, and negotiated contractual arrangements would set forth the
terms of transfer of products (wet distillers grain, combustible dried
solids, etc.), energy and dollars among the parties.
CORPORATE BACKGROUND
The Company is a Colorado corporation organized on December 31, 1987.
Our principal executive offices are located at residence of our president at
1774 Summitview Way, Crestone, Colorado 81131. Our primary telephone number
is 212-758-6622. We have no additional offices at this time.
DEVELOPMENT OF OUR BUSINESS
Substantially all of our business and operations to date has been
conducted through wholly owned subsidiaries, Bion Technologies, Inc. (a
Colorado corporation organized September 20, 1989), Bion Integrated Projects
Group, Inc. ("Projects Group") (formerly Bion Dairy Corporation ("Bion
Dairy") through August 2008 and originally Bion Municipal, Inc., a Colorado
corporation organized July 23, 1999) and Bion Services Group, Inc. ("Services
11
Group")(formerly Bion International, Inc., a Colorado corporation organized
July 23, 1999) and BionSoil, Inc. (a currently inactive Colorado corporation
organized June 3, 1996). Bion is also the parent of Dairy Parks, LLC (an
inactive Delaware entity organized July 25, 2001) and Bion PA 1 LLC (a
Colorado entity organized August 14, 2008). In January 2002, Bion entered
into a series of transactions whereby the Company became a 57.7% (now 58.9%)
owner of Centerpoint Corporation (a Delaware corporation organized August 9,
1995) ("Centerpoint").
Although we have been conducting business since 1989, we determined that
we needed to redefine how we could best utilize our technology during 2003.
From 2003 through early 2008, we primarily worked on technology improvements
and applications and in furtherance of our business model of Integrated
Project development. During 2008 we re-commenced pursuing active commercial
transactions involving installation of our Systems for CAFO waste treatment
and related environmental remediation and initiation of development of our
initial Integrated Projects.
Our original systems were wastewater treatment systems for dairy farms
and food processing plants. The basic design was modified in late 1994 to
create Nutrient Management Systems ("NMS") that produced organic soil
products as a byproduct of remediation of the waste stream when installed on
large dairy or swine farms. Through June 30, 2002, we sold and subsequently
installed, in the aggregate, approximately 30 of these first generation
systems in 7 states, of which we believe approximately 10 are still in
operation in 3 states. We discontinued marketing of our first generation NMS
systems during fiscal year 2002 and turned control of the first generation
systems over to the farms on which they were installed over the following two
years. We were unable to produce a business model based on the first
generation technology that would generate sufficient revenues to create a
profitable business. While continuing to market and operate the first
generation systems, during the second half of calendar year 2000, we began to
focus our activities on developing the next generation of the Bion
technology. We no longer operate or own any of the first generation NMS
systems.
As a result of our research and development efforts, the core of our
current technology was re-developed during fiscal years 2001-2004. We
designed and tested Systems that use state-of-the-art, computerized, real-
time monitoring and system control with the potential to be remotely accessed
for both reporting requirements and control functions. These Systems are
smaller, faster and require less capital per animal than our first generation
NMS systems. The initial versions of our new generation of Bion Systems was
designed to harvest solids used to produce organic fertilizer and soil
amendments or additives(the "BionSoil(R) products") in a few weeks as
compared to six to twelve months with our first generation systems.
During 2003-4 we designed, installed and began testing a commercial
scale, second generation Bion System as a temporary modification or retrofit
to a waste lagoon on a 1,250 milking cow dairy farm in Texas known as the
DeVries Dairy. In December 2004, Bion published an independently peer-
reviewed report, a copy of which may be found on our website,
www.biontech.com, with data from the DeVries project demonstrating a
reduction in nutrients (nitrogen and phosphorus) of approximately 75% and air
emissions of approximately 95%. More specifically, those published results
12
indicated that on a whole farm basis, the Bion System produced a 74%
reduction of nitrogen and a 79% reduction of phosphorus. The air results
show that the Bion System limited emissions as follows: (in pounds per 1,400
pound dairy cow per year):
* Ammonia 0.20
* Hydrogen Sulfide 0.56
* Volatile Organic Compounds 0.08
* Nitrogen Oxides 0.17
These emissions represented a reduction from published baselines of 95%-99%.
Through 2007 the demonstration project at the DeVries Dairy in Texas
also provided Bion with the opportunity to explore mechanisms to best
separate the processed manure into streams of coarse and fine solids, with
the coarse solids supporting generation of renewable energy and the fine
solids potentially becoming the basis of organic fertilizer products and/or a
high protein animal feed ingredients. On-going research was also carried out
on various aspects of nutrient releases and atmospheric emissions.
Bion discontinued operation of the DeVries demonstration research system
during 2008.
During 2005-2007, Bion focused on completing development of its
technology platform and business model. As such, we did not pursue near term
revenue opportunities such as retrofitting existing CAFO's with interim
versions of our waste management solutions, because such efforts would have
diverted scarce management and financial resources and negatively impacted
our ability to complete development of an integrated technology platform in
support of large-scale sustainable Integrated Projects.
We are currently pursuing two large market opportunities: 1)retrofit and
environmental remediation of existing CAFOs and 2) development of Integrated
Projects as described above.
We believe significant retrofit opportunities exist that will enable us
to generate additional future revenue streams from Bion's technology. The
initial retrofit opportunities we are pursuing are related to the existing
clean-up program for the Chesapeake Bay ('Chesapeake Bay Program' or 'CB
Program').
Chesapeake Bay Watershed: Kreider Farms Projects
The urgency and priority of the Chesapeake Bay Program was made clear
recently with President Obama's executive order to clean up the Chesapeake
Bay and the appointment of Chuck Fox by EPA Secretary Lisa Jackson to act as
a "czar" for CB cleanup efforts. The overall mission has been defined as
requiring a 140 million pound annual reduction from the existing nitrogen (N)
loading to the Chesapeake Bay (from 315 million lbs of N to 175 million
pounds of N per year) by 2025. More importantly, the timetable for
compliance has been moved up, with greater reductions required in the early
years rather than the old approach of backend loading the reductions. For
example, as a result of the changes, Pennsylvania's near term 2012 N
reduction is being increased by 2M lbs. Similar increases have been imposed
on other states (Maryland and Virginia) in the Chesapeake Bay watershed. As
13
a result, Bion believes that its long term opportunity related to the
Chesapeake Bay Program is being significantly expanded and extended.
During 2008 Bion executed an agreement to install a Bion System at the
Kreider Dairy in Lancaster County, Pennsylvania to reduce nitrogen (including
ammonia emissions which are re-deposited as nitrogen from the atmosphere) and
phosphorus in the farm's effluent. Bion undertook this project due in large
part to Pennsylvania's nutrient credit trading program, which was established
to provide cost-effective reductions of the excess flow of nutrients
(nitrogen and phosphorus) into the Chesapeake Bay watershed. Bion worked
extensively with the Pennsylvania Department of Environmental Protection
('PADEP') over the past year to establish a nutrient credit calculation/
verification methodology that is appropriate to Bion's proven technology and
recognizes its 'multi-media' (both water and atmospheric) approach to
nutrient reductions. Pennsylvania's nutrient credit trading program allows
for voluntary credit trading between a 'non-point source' (such as a dairy or
other agricultural sources) and a 'point source' polluter, such as a
municipal waste water treatment plant or a housing development. For example,
pursuant to this program, Bion can reduce the nutrients from an existing
dairy (below its baseline discharge levels) much more cost-effectively than a
municipal wastewater treatment plant can reduce nutrients to meet its
baseline. The municipal facility can purchase credits from Bion to offset its
nutrient discharges, rather than spending significantly more money to make
the plant upgrades necessary to achieve its own reductions.
During May 2008, the PADEP approved Bion's protocols to determine how
many tradable nutrient (nitrogen and phosphorus) credits Bion will receive
for nutrient reductions achieved through installation of its comprehensive
dairy waste management technology in Phase 1 of the Kreider project pursuant
to Pennsylvania's efforts under the Chesapeake Bay Program mandates. The
DEP's approval includes Bion's innovative multi-media measurement protocol,
enabling the certification of credits both for ammonia air emission
reductions as well as significantly reducing the leaching and runoff
potential of land applied nutrients. The PADEP has certified the proposed
System at Kreider dairy for 125 nitrogen and 16 phosphorus credits (each
credit represents an annual pound of reduction) for each of the approximately
1200-1300 dairy cows (subject to final permitting, construction and testing
after operations have been stabilized).
During January 2009 the Board of the Pennsylvania Infrastructure
Investment Authority ('Pennvest') approved a loan of up to $7.8 million to
Bion PA 1, LLC, a wholly-owned subsidiary of the Company, for development and
construction of the Phase 1 System ('Kreider System')of Bion's Kreider Farms
projects('Pennvest Loan'). The Pennvest Loan is structured in phases (pre-
and post-completion of permitting/commencement of construction) and
Pennvest's disbursements will take the form of reimbursement of qualified
sums expended by Bion PA 1, LLC. In connection with the Pennvest Loan the
Company has provided a 'technology guaranty' regarding nutrient reduction
performance of the Kreider System which 'technology guaranty' will expire
when the Kreider System's nutrient reduction performance has been
demonstrated. The Company anticipates that the steps required to finalize the
pre-construction phase of the Pennvest Loan will be completed during the next
quarter and that the initial drawdown/re-imbursement from Pennvest pursuant
to the Pennvest Loan will be received shortly thereafter. Bion is in the
process of finalizing its design for the Phase 1 Kreider System and has
14
commenced the permitting process. It is anticipated that construction
activities will commence during the fall of 2009.
The Kreider agreement also provides for a second phase which will expand
the initial system to treat the waste from the Kreider dairy support herd,
treat the waste from Kreider's approximately 4.2 million chickens and
construct a renewable energy production facility that will generate renewable
energy through the combustion of the poultry wastes and the cellulosic solids
captured by Bion in the Phase 1 system ('Kreider Renewable Energy Facility').
Bion is currently working with the PADEP to finalize credit protocols related
to the Kreider Renewable Energy Facility which will generate renewable energy
from the dairy solids produced in the Kreider System and poultry waste from
Kreider's poultry operations (and possibly other poultry operations in the
region). The Company recently submitted its formal nutrient reduction
protocol application related to the Kreider Renewable Energy Facility for
approval by the PADEP and the review process to clarify certain issues is
under way. The Company does not yet have financing in place for the Kreider
Renewable Energy Facility.
Bion anticipates that the Kreider System and Kreider Renewable Energy
Facility will generate revenue from sale of nutrient credits, renewable
energy and, in time, credits for the reduction of greenhouse gas emissions.
Bion estimates that treatment of Kreider's combined dairy and poultry waste
will ultimately produce approximately 1.5 million (or more) tradable nutrient
credits annually, with the potential of additional nutrient credits to be
generated from the treatment of waste from other livestock operations located
in the area.
Note that a 2008 independent study commissioned by the PA State Senate
estimates that capital costs of $1.4 billion plus $60 million annual
operating costs (an average of $28 per lb per year) will be required to
upgrade the municipal wastewater treatment plants in Pennsylvania to meet the
initial 7.5 million pounds of nitrogen reduction required by the Chesapeake
Bay Program. Bion anticipates that it will be able to profitably sell
nutrient credits from its Kreider facilities (and subsequent projects) for an
annual total cost in the range of $6-$10 per lb - roughly the equivalent of
the projected municipal wastewater upgrade annual operating costs alone -
thereby creating potential saving to Pennsylvania ratepayers of most of the
$1.4B capital cost required for on the initial required 7.5 million lbs of N
reduction if Bion's technology were utilized to make the all required
reductions (which is not likely)under the Pennsylvania portion of the
Chesapeake Bay Program.
Bion estimates that the overall market opportunity for Bion in the
Chesapeake Bay watershed is large and of long duration. While regulatory and
enforcement policy is still evolving and, therefore, the impact of those
future policies upon Bion's operations cannot be precisely predicted and/or
fully quantified, Bion believes that the tremendous difference between its
cost to remove nutrients from a waste stream and the cost required for
conventional waste water treatment technologies makes it reasonable to
believe that Bion's potential profitability from these projects should be
significant. Based on the aggregate size of livestock operations in the
Chesapeake Bay watershed, Bion believes that the potential market for
reductions in nitrogen loadings to the Chesapeake Bay watershed from
livestock can be reasonably anticipated to increase tenfold (or more) to
15
total in excess of 75 million (or more) pounds annually (including airborne
ammonia) with certified tradable nutrient credits potentially generated
equaling 50% to 60% of that aggregate required nitrogen reduction. Bion hopes
to capture some significant portion of the work related to this clean-up
mandate(which portion cannot be reasonably estimated at this time).
Bion also believes that it is reasonable to assume that the Chesapeake
Bay Program strategies developed by US EPA and various state regulatory
agencies to address the issue of excess nitrogen loadings to the Chesapeake
Bay watershed clean-up will be subsequently applied to deal with the much
larger nutrient pollution problems of the Mississippi River Basin that are a
primary cause of the 'Dead Zone' in the Gulf of Mexico and similar problems
elsewhere. We believe that Bion will potentially have large business
opportunities for utilization of its technology as efforts to clean up such
polluted areas develop but such opportunities not quantifiable at this time.
Integrated Projects
Bion's remains focused on implementation of its integrated technology
platform as the basis for development of its large-scale Integrated Projects.
Bion will pursue this opportunity through our Projects Group subsidiary (and
project specific entities) which will act as the developer and manager of,
and a direct participant in and/or owner of components of, the Projects. As
such, Bion will:
* Locate, secure and develop appropriate sites;
* Negotiate agreements with both input providers and, in certain
Instances, end-product users;
* Secure required permits based upon clear standards that establish
acceptable environmental operating parameters for each component
of the Integrated Projects;
* Manage construction and operation of the Projects; and
* Provide its waste treatment services to CAFO operators for a fee
while producing renewable energy for on-site use (including sale to
the integrated biofuel and/or end product facilities) and, possibly,
fine solids products for sale.
In turn, the CAFO operator will use the wet distiller grains from the
ethanol plant as a feed component for the herd at a long-term competitive
price. The CAFO facilities, which will be subject to permits imposing
standards limiting their emissions and releases, can be owned either by the
CAFO operator or by an independent third party finance source and
subsequently leased to the CAFO operator. The CAFO operator will be
responsible to provide its herd and operate the CAFO.
In some instances, Bion will own direct interests in the CAFO herd,
ethanol plant, end-product user and/or the related facilities in addition to
its ownership interest in the Bion System.
During fiscal 2008 Bion began pre-development work on an Integrated
Project comprised of a large-scale beef cattle finishing operation and an
16
ethanol production facility to be located in upstate New York. Bion was
initially focused on St. Lawrence County but more recently has explored
opportunities in other nearby upstate regions including Oswego County which
has an existing ethanol production facility. No decision has yet been made as
to where (if anywhere) the initial New York State Project will be located.
Bion believes its proposed closed loop Integrated Projects will have
substantial competitive advantages due to the overall scale and gains in
resource efficiency, branding opportunities, and proximity to a market
consisting of 50 million people within a 350 mile radius as well as export
potential through the St. Lawrence Seaway. Bion's current preliminary plans
call for Phase 1 of this Project to include approximately 72,000 beef cattle
with a dedicated slaughter and cooking (further processing) facility
integrated with an ethanol plant (existing or newly constructed). Bion
anticipates that renewable energy produced from the cellulosic solids that
Bion's technology recovers from the livestock waste stream will replace most
(if not all) of the fossil fuel needs of the ethanol production and other
integrated facilities. Bion estimates that the basic capital expense for the
NYS project will be not less than $200 million and that the Project, if
developed, will result in the creation of 350 to 400 permanent long term
jobs. Note that this Project has not yet emerged from the pre-development
phase, no land or permits for the Project have been acquired and Bion has no
commitments from anyone related to financing or participation in this Project
and that no such Project has yet been developed by Bion (or others). This
project is currently in the pre-development phase. However, Bion anticipates
that it may option land and commence the actual development phase during the
current fiscal year.
In addition to the NYS beef cattle Project described above, Bion has
been working with various local and state agencies in Nebraska to develop a
large scale integrated dairy /cheese Integrated Project that would require
capital expense estimated to be in excess of $750 million and would
potentially generate 700 to 850 full time permanent jobs. This Project would
integrate newly constructed, very large-scale dairy complexes with a new
dedicated milk processing/cheese production facility and, most likely, one or
more existing ethanol production facilities. Preliminary plans under
discussion involve up to 80,000 milking cows (requiring approximately 140,000
total head including the dairy support herd and steers) to be located on
several satellite farms with waste treated by Bion's technology to assure
environmental compliance and to produce renewable energy for use in the
integrated facilities to replace fossil fuel requirements. Bion is in
ongoing discussions regarding this project with Nebraska state development
officials, as well as a large cheese producer/distributor and major dairy
industry participants. Note that this Project has not yet emerged from the
pre-development phase, no land or permits for the Project have been acquired
and Bion has no commitments from anyone related to financing or participation
in this Project and that no such Project has yet been developed by Bion (or
others). This project is in its early stages.
In addition, Bion has had preliminary discussions with several
nationally- and internationally-known food producers, processors, and
distributors, regarding use of its technology to develop Projects which
integrate new livestock herds with both existing and new processing
facilities in order to improve their economic efficiencies, reduce
environmental impacts and carbon footprint, produce branding opportunities
and address food-safety concerns.
17
At present it is not possible to determine whether any of the Projects
referred to above will move to the development phase, will actually be
developed and constructed, or precisely what, if any, the economic returns
and/or profitability for such Integrated Projects (and/or for Bion in
connection therewith)will be due to the pre-development stage of each Project
and numerous unknown variables related to future financing and partnering
terms, as well as the availability of existing and proposed economic
development incentive plans for which such Projects may qualify. However,
Bion strongly believes that the economic efficiencies of these closed loop
Integrated Projects will potentially increase the annual returns by 5
percentage points (or more) over the existing dairy/livestock/food industry
metrics. In a basic commodity business such as food products and ethanol
production, such an increase, if realized, represents a very significant
economic advantage which Bion believes will result in advantageous financing
terms and in clearly superior profitability for its Integrated Projects.
RECENT FINANCINGS
2006 SERIES A CONVERTIBLE PROMISSORY NOTES
On September 13, 2006, Bion closed an offering of its Series A
Convertible Promissory Notes in the principal amount of $700,000. The notes
earned interest at the rate of 6%, payable on May 31, 2008, the maturity of
the notes. All principal and accrued interest under the notes were required
to be converted into common shares of Bion at the rate of $6 per share if the
closing market price of Bion's common stock has been at or above $7.20 per
share for 10 consecutive trading days and the earlier to occur of (i) an
effective registration statement allowing public resale of the shares
received upon conversion of the notes or (ii) one year after September 13,
2006. No conversion could occur unless Bion became a "reporting company"
with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended ("Exchange Act"). The notes could also be
converted, in whole or in part, at the election of the noteholders. On May
31, 2008, the principal and accrued interest of each of the 2006 Notes,
totaling $779,074, were exchanged, via subscription agreements, for 389,543
shares of restricted common stock of the Company at $2.00 per share which
approximated the market price of the stock at the time of the conversion.
2007 SERIES A CONVERTIBLE PROMISSORY NOTES
In March and April 2007, Bion sold $800,000 of its 2007 Series A
Convertible Promissory Notes to existing investors. The notes earned
interest at the rate of 6%, payable on July 1, 2008, the maturity date of the
notes. Principal and accrued interest under the notes was convertible at
$4.00 per share. Additionally, Mark A. Smith, our President, accepted
$151,645 of the Company's 2007 Series A Convertible Notes in exchange for his
deferred compensation for the period from January 1, 2007 through March 31,
2007 and the Company's promissory note issued on January 1, 2007 for Mr.
Smith's deferred compensation from April 1, 2006 through December 31, 2006.
Salvatore Zizza, Chairman and a Director of Bion's operating subsidiary, Bion
Dairy Corporation, and Bright Capital, Ltd. ("Brightcap"), which provide the
consulting services of Dominic Bassani to the Bion companies, accepted
$379,389 and $455,486, respectively, of the Company's Series A Notes in
exchange for their respective deferred compensation for the period from
18
January 1, 2007 through March 31, 2007 and the Company's promissory notes
issued on January 1, 2007 for their respective deferred compensation owed by
Bion on December 31, 2006.
On May 31, 2008 all of the non-affiliate 2007 Note holders, at their
election per the terms of their original 2007 Notes, converted their 2007
Notes totaling $856,737 (including accrued interest) into 428,369 restricted
common shares of the Company. Also on May 31, 2008, 2007 Notes owned by
affiliates totaling $650,427 (including accrued interest) were converted into
325,214 common shares of the Company. These Notes were converted at a price
of $2.00 per share, the price at which the Company sold common stock during
the same period.
On June 18, 2008, Salvatore Zizza, former Chairman of Projects Group,
the remaining affiliated holder of the outstanding 2007 Notes increased the
principal of his Note, maturing on July 1, 2013, by $375,000 to $784,122,
which represented the potential deferred compensation (subject to forfeiture)
through June 30, 2008 and he agreed to add his future compensation from the
Company to his Note as it accrued. As of December 31, 2008, the principal
and interest on the Note totaled $959,184. Pursuant to an agreement dated
December 19, 2008, Mr. Zizza agreed to no longer provide services to the
Company effective December 31, 2008. In conjunction with this agreement, Mr.
Zizza's Note was returned to the Company on December 31, 2008 and it was
cancelled, which resulted in the Company's recognition of income due to
forfeiture of deferred compensation of $959,184. The deferred compensation
underlying the convertible note had not yet vested at the date the Note was
cancelled. In addition, the Note was subject to certain risks of forfeiture
and/or cancellation.
SERIES B CONVERTIBLE PREFERRED STOCK (2009)
On July 29, 2009 the Company concluded a private offering in which we
sold 28,170 shares of its Series B Convertible Preferred Shares ('Preferred
Shares') and received net proceeds of approximately $2,450,000 after
commissions and offering expenses. The Company sold 21,320 Preferred Shares
through June 30, 2009 for net proceeds of approximately $1,854,840 with the
balance sold thereafter. The Preferred Shares pay a dividend of 2.5% per
quarter (pro-rated), are convertible into our common shares at $2.00 per
share and will be redeemed at 3 years if not previously converted. The
Company has the right to call for the redemption of the Preferred Shares one
year after the issuance of the initial Preferred Shares and, if Bion
initiates such a call for redemption, the holders of the Preferred Shares
have the right to convert the Preferred Shares to common stock prior to such
redemption.
SALES OF COMMON STOCK DURING 2009 FISCAL YEAR
During the fiscal year ended June 30, 2009 the Company sold 446,667
shares, in aggregate, of its restricted common stock for $380,000 of cash
(net proceeds). Additionally the Company issued 290,343 shares of its
restricted common stock, in aggregate, for $177,370 of services. The Company
also issued 318,780 shares, in aggregate, of its restricted common stock in
conversion of $239,083 of its debt to equity.
19
COMPETITION
There are a significant number of competitors in the waste treatment
industry who are working on animal related pollution issues. This competition
is increasing with the growing governmental and public concern focused on
pollution due to CAFO wastes. Waste treatment lagoons which depend on
anaerobic microorganisms ("anaerobic lagoons") are the most common
traditional treatment process for animal waste on large farms within the
swine and dairy industries. These lagoons are coming under increasing
regulatory pressure due to associated odor, nutrient management and water
quality issues and are facing possible phase-out in some states. Although we
believe that Bion has the most economically and technologically viable
solution for the current problems, other alternative (though partial)
solutions do exist including, for example, synthetic lagoon covers (which are
placed on the top of the water in the lagoon to trap the gases), methane
digesters (a tank which uses anaerobic microorganisms to break down the waste
to produce methane), multistage anaerobic lagoons and solids separators
(processes which separate large solids from fine solids). Additionally, many
efforts are underway to develop and test new technologies.
Our ability to compete is dependent upon our ability to obtain required
approvals and permits from regulatory authorities and upon our ability to
introduce and market our Systems in the appropriate markets.
There is also extensive competition in the livestock, ethanol
production, organic soil amendment/fertilizer/organic fertilizer and feed
ingredient markets. There are many companies that are already selling
products to satisfy demand in the sectors of these markets we are trying to
enter. Many of these companies have established marketing and sales
organizations and retail customer commitments, are supporting their products
with advertising, sometimes on a national basis, and have developed brand
name recognition and customer loyalty in many cases.
Additionally, a number of companies, including without limitation, Panda
Ethanol, E3 BioFuels and Prime BioSolutions, are (or have) pursuing the
development of various forms of "closed loop" projects which combine CAFOs
and ethanol plants and utilize the CAFO waste stream to produce energy for
the ethanol plant and the CAFO herd to consume the distillers grain by-
product of the ethanol production. While a very limited number of entities
(including those named above) have announced projects and/or solutions that
sound similar to the Company's Integrated Projects with limited success to
date, there appear to be significant differences including without
limitation, the use of technology that is based on either manure
'gasification' or capturing methane from the waste stream using anaerobic
digesters (ADs). Although ADs do produce methane that can be used to replace
some or all of the natural gas requirement of an ethanol plant, the AD
process produces only about one third of the energy per animal that Bion
believes will be produced by its technology platform from the combustible
solids extracted from the CAFO waste stream based on Bion's internal
analysis. Further, none of the technologies of which the Company is aware
appear to represent solutions to the nutrient and atmospheric environmental
problems of CAFOs addressed by Bion's technology, or have any independent
data supporting claimed environmental benefits, and, therefore, the Company
believes that their potential projects will be limited to locations in which
CAFOs have already been permitted and limited to the existing CAFO size.
20
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
In our Integrated Projects business, we will most likely be dependent
upon one or a few major customers/partners/joint venturers since a limited
number of Integrated Projects will be developed. We anticipate initially
developing, owning interests in, and operating only one or a few fully
Integrated Projects commencing during fiscal 2010, and, thereafter,
developing a limited number of Projects at a time. Thus, at least for the
near future, our revenues will be dependent on a few major Projects or
customers.
PATENTS
We are the sole owner of ten United States patents (numbered below), one
Australian patent, one Canadian patent, one patent from Mexico and one New
Zealand patent:
1* U.S. Patent No. 4,721,569, Phosphorus Treatment Process,
expires April 2007.
2* U.S. Patent No. 5,078,882, Bioconversion Reactor and System,
expires March 2010.
3* U.S. Patent No. 5,472,472, Animal Waste Bioconversion System,
expires September 2013.
4* U.S. Patent No. 5,538,529, Bioconverted Nutrient Rich Humus,
expires August 2014.
5* U.S. Patent No. 5,626,644, Storm Water Remediatory Bioconversion
System, expires October 2015.
6* U.S. Patent No. 5,755,852, Bioconverted Nutrient Rich Humus,
expires July 2016.
7* U.S. Patent No. 6,689,274, Low Oxygen Waste Bioconversion System,
expires November 2020.
8* U.S. Patent No. 6,908,495, extension of Low Oxygen Waste
Bioconversion System, expires June 2023.
9* U.S. Patent No. 7,431,839 - 10/7/08: Low Oxygen Biologically
Mediated Nutrient Removal; expires December 2021
10* U.S. Patent No. 7,575, 685 - 8/18/09: Low Oxygen Biologically
Mediated Nutrient Removal." expires November 2023
* Australian Patent No. 2002227224, Low Oxygen Organic Waste
Bioconversion System; expires November 8, 2021
* Canadian Patent No. 1,336,623, Aqueous Stream Treatment Process,
expires August 2012.
* New Zealand Patent No. 526,342, Low Oxygen Organic Waste
Bioconversion System, expires November 8, 2021.
* Mexican Patent No. 240,124, Low Oxygen Organic Waste Bioconversion
System, expires November 8, 2021.
On November 3, 2006, we filed a patent application titled
"Environmentally Compatible Integrated Food and Energy Production System."
The application number is 11/592,511.
On February 27, 2009, we filed a provisional patent application titled
"Method for Treating Nitrogen in Waste Streams." The application number is
61/208,843.
21
On August 17, 2009, we filed a patent application titled "Low Oxygen
Biologically Mediated Nutrient Removal." The application number is
12/542,122.
In addition to such factors as innovation, technological expertise and
experienced personnel, we believe that a strong patent position is
increasingly important to compete effectively in the businesses on which we
are focused. It is likely that we will file applications for additional
patents in the future. There is, however, no assurance that any such patents
will be granted.
It may become necessary or desirable in the future for us to obtain
patent and technology licenses from other companies relating to technologies
that may be employed in future products or processes. To date, we have not
received notices of claimed infringement of patents based on our existing
processes or products, but due to the nature of the industry, we may receive
such claims in the future.
We generally require all of our employees and consultants, including our
management, to sign a non-disclosure and invention assignment agreements upon
employment with us.
RESEARCH AND DEVELOPMENT
During the year ended June 30, 2009 we expended approximately $357,000
(including non-cash expenditures) on undertaking research and development
related to our technology platform applications in support of large-scale,
economically and environmentally sustainable Integrated Projects. Bion's
main efforts were directed at further refinement of our technology and its
applications. In addition, substantial research and development activity was
focused on design and refinement of all aspects of the technology and
integration engineering related to the energy balances, renewable energy
production and on-site utilization, related to Integrated Project issues and
our business model. Research activities have focused on factors related to
renewable energy production from CAFO waste including coarse solid recovery,
drying and use for renewable energy production, as well as fine solids
recovery, drying and utilization as fertilizer and/or animal feed. We
discontinued operations at the DeVries dairy facility during the 2009 fiscal
year. The sums expended on research and development were focused on
substantially the same areas as in the prior year but were reduced compared
to the prior year due to the fact that during the 2009 fiscal year a greater
portions of the Company's activities were focused on commercialization and
business development based on our technology.
During the year ended June 30, 2008 we expended approximately $792,000
(including non-cash expenditures) on undertaking research and development
related to our technology platform applications in support of large-scale,
economically and environmentally sustainable Integrated Projects. Bion's
main efforts were directed at further development of our technology and its
applications. In addition, substantial research and development activity was
focused on design and refinement of all aspects of the technology and
integration engineering related to the energy balances, renewable energy
production and on-site utilization, related to Integrated Project issues and
our business model. Research activities have focused on factors related to
renewable energy production from CAFO waste including coarse solid recovery,
22
drying and use for renewable energy production, as well as fine solids
recovery, drying and utilization as fertilizer and/or animal feed. On-going
research related to reduction of nutrient releases and gaseous emissions from
CAFO waste streams also took place at the DeVries dairy facility and
elsewhere. The sums expended on research and development were focused on
substantially the same areas as in the prior years but were reduced compared
to the prior year due to the fact that during the 2008 fiscal year a greater
portions of the Company's activities were focused on commercialization and
business development based on our technology.
Environmental Protection/Regulation
In regard to development of Projects, we will be subject to extensive
environmental regulations related to CAFO's and ethanol production. To the
extent that we are a provider of systems and services to others that result
in the reduction of pollution, we are not under direct enforcement or
regulatory pressure. However, we are involved in CAFO waste treatment and
are impacted by environmental regulations in at least four different ways:
* Our marketing and sales success depends, to a substantial degree,
on the pollution clean-up requirements of various governmental
agencies, from the Environmental Protection Agency (EPA) at
the federal level to state and local agencies;
* Our System design and performance criteria must be responsive to
the changes in federal, state and local environmental agencies'
effluent and emission standards and other requirements;
* Our System installations and operations require governmental permit
approvals in many jurisdictions; and
* To the extent we own or operate Integrated Projects including
CAFO facilities and ethanol plants, those facilities will be
subject to environmental regulations.
EMPLOYEES
As of September 15, 2009, we had 9 employees and primary consultants,
all of whom are full-time except for Jeff Kappel who provides consulting
services to the Company on a part-time basis. Our future success depends in
significant part on the continued service of our key technical and senior
management personnel. The competition for highly qualified personnel is
intense, and there can be no assurance that we will be able to retain our key
managerial and technical employees or that we will be able to attract and
retain additional highly qualified technical and managerial personnel in the
future. None of our employees is represented by a labor union, and we
consider our relations with our employees to be good. None of our employees
is covered by "key person" life insurance.
ITEM 1A. RISK FACTORS.
Not applicable.
23
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
The Company maintains its corporate office at Box 566/1774 Summitview
Way, Crestone, Colorado 81131, the office of its president, and its main
corporate telephone number is: (212) 758-6622. The Company remains
responsible for its former corporate offices at 641 Lexington Ave, New York,
New York 10022 which are currently subleased to Mr. Salvatore Zizza, former
Chairman and director of the Company's Integrated Projects subsidiary. These
offices are leased pursuant to a non-cancellable operating lease that became
effective on August 1, 2006 and expires on November 30, 2013. The average
monthly rental for the balance of the term of the lease is $15,820. The
master sub-lease with Mr. Zizza, presently not an affiliate of the Company,
presently pays the Company's entire obligations under this lease through
December 31, 2009.
The Company holds ten United States patents, one Canadian patent, one
patent from Mexico and one New Zealand patent as described above. Three
patent applications have been filed and are pending.
ITEM 3. LEGAL PROCEEDINGS.
On August 10, 2007 a class action/derivative action lawsuit in Delaware
Chancery Court (TCMP#3 Partners, LLP, et al v. Trident Rowan Group, Inc., et
al, Civil Action No. 170-N) (the "TCMP Litigation") was settled in which
Bion, our President Mark A. Smith and Bion Dairy were defendants. As part of
the settlement reached in the TCMP Litigation, Bion, its majority owned
subsidiary Centerpoint Corporation ("Centerpoint"), and Bion's shareholders
(as of January 15, 2002 other than the 'Released Parties' in these two
actions who were not current officers and/or directors of Bion) ("Shareholder
Class") filed an action against Comtech Group, Inc. ("Comtech") (formerly
known as Trident Rowan Group, Inc.), OAM S.p.A ("OAM") and others in the
Court of Chancery in the State of Delaware, case number 2968-VCP (the
"Comtech Litigation"), along with a stipulated settlement of the litigation.
Pursuant to the settlement, Comtech and OAM agreed to deliver to the
Shareholder Class: a) 144,240 shares of Bion common stock; b) a warrant to
purchase 100,000 shares of Bion's common stock, and c) 140,000 shares of the
common stock of Centerpoint Corporation. Delivery of these securities (net of
10% attorneys' fees) took place during the second quarter of 2008 and each
member of the Shareholder Class received the equivalent of approximately .05
Bion shares for each share of Bion common stock (split adjusted) owned on
January 15, 2002. Additionally, Comtech and OAM assigned to Bion and
Centerpoint all of their rights to any proceeds of an escrow established from
the sale of Centerpoint's assets to Aprilia S.p.A. (the "Aprilia Escrow") and
any proceeds from litigation related to the transaction with Aprilia. On
September 18, 2007 Bion and Centerpoint received $798,000 (before attorneys'
fees and other expenses), in aggregate, from the Aprilia Escrow. As part of
the settlement, one of the other defendants paid $150,000 into a settlement
fund, through insurance, from which funds Bion and Centerpoint received
$110,000, in aggregate, on September 10, 2007. Pursuant to the settlement,
$165,000 was paid, through insurance, into a settlement fund on behalf of
Bion, Bion Dairy Corporation and Mark Smith.
24
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 ("ACB
Notes") that were purchased by ACB in March of 2000. The complaint includes
a breach of contract claim asserting that the Company owes ACB either
a) $265,400 plus interest or b) $121,028 including interest based on ACB's
interpretation of the terms of the ACB Notes and subsequent amendments.
Effective June 30, 2001, the Company issued ACB 5,034 shares of common stock
in full payment of its ACB Note based on the Company's interpretation of the
ACB Note, as amended. The Company has filed an answer to the complaint
denying the allegations. No activity has taken place in this lawsuit since
2002. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a) Market Information
Our common stock is quoted on the Over-The-Counter Electronic Bulletin
Board under the symbol "BNET." The following quotations reflect inter
dealer prices, without retail mark up, markdown or commissions and may not
represent actual transactions.
2009 2008
-------------- -------------
Fiscal Year Ended June 30, High Low High Low
-------------------------- ---- ----- ----- -----
First Fiscal Quarter $2.74 $1.72 $3.90 $2.20
Second Fiscal Quarter $2.10 $0.55 $2.34 $1.25
Third Fiscal Quarter $1.25 $0.64 $2.45 $1.70
Fourth Fiscal Quarter $1.90 $0.76 $2.55 $2.00
(b) Holders
The number of holders of record of our common stock at August 31, 2009
was approximately 1,700. Many of our shares of common stock are held by
brokers and other institutions on behalf of stockholders, so we are unable to
estimate the number of stockholders represented by these record holders.
The transfer agent for our common stock is Corporate Stock Transfer,
Inc., 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209.
25
(c) Dividends
We have never paid any cash dividends on our common stock. Our board of
directors does not intend to declare any cash dividends in the foreseeable
future, but instead intends to retain earnings, if any, for use in our
business operations. The payment of dividends, if any, in the future is
within the discretion of the board of directors and will depend on our future
earnings, if any, our capital requirements and financial condition, and other
relevant factors.
On August 15, 2009 the Company paid an aggregate dividend of $12,877 on
shares of Series B Preferred Stock which were outstanding during the quarter
ended June 30, 2009.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
In June 2006 the Company adopted its 2006 Consolidated Incentive Plan,
as amended, ("Plan") which terminated all prior plans and merged them into
the Plan. The Plan was ratified by the Company's shareholders in October
2006. Under the Plan, Directors may grant Options, Stand Alone Stock
Appreciation Rights ("SAR's"), shares of Restricted Stock, shares of Phantom
Stock and Stock Bonuses with respect to a number of Common Shares that in the
aggregate does not exceed 6,000,000 shares. The maximum number of Common
Shares for which Incentive Awards, including Incentive Stock Options, may be
granted to any one Participant shall not exceed 500,000 shares in any one
calendar year; and the total of all cash payments to any one participant
pursuant to the Plan in any calendar year shall not exceed $500,000.
2,653,333 Options have been granted and are outstanding under the Plan (as
amended), including all options granted under prior merged plans, of which
1,708,334 are vested as of September 15, 2009. Additionally, 502,500 shares
of Contingent Stock Bonuses and 150,000 shares of Stock Bonuses have been
granted under the Plan
Equity Compensation Plan Information
The following table summarizes share and exercise price information
about the Company's equity compensation plans as of June 30, 2009:
26
--------------------------------------------------------------------------------------
Number of
Number of securi- securities remain-
ties to be issued Weighted-average ing available for
upon exercise of exercise price of future issuance
outstanding options, outstanding options, under equity
warrants and rights warrants and rights compensation plans
Plan Category (a) (b) (c)
--------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 1,995,833 $3.01 4,004,167
--------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders - - -
--------------------------------------------------------------------------------------
Total 1,995,833 $3.01 4,004,167
--------------------------------------------------------------------------------------
(e) Recent Sales of Unregistered Securities:
On July 29, 2009 the Company concluded a private offering in which we
sold 28,170 shares of its Series B Convertible Preferred Shares ('Preferred
Shares')and received net proceeds of approximately $2,450,000 after
commissions and offering expenses. The Preferred Shares were sold to
accredited investors under Rule 506 of Regulation D under the Securities Act
of 1933, as amended. The Company sold 21,320 Preferred Shares through June
30, 2009 for net proceeds of approximately $1,854,840 with the balance sold
thereafter. The Preferred Shares pay a dividend of 2.5% per quarter (pro-
rated), are convertible into our common shares at $2.00 per share and will be
redeemed at 3 years if not previously converted.
During the fiscal year ended June 30, 2009 the Company sold 446,667
shares, in aggregate, of its restricted common stock for $380,000 of cash
(net proceeds). Additionally the Company issued 290,343 shares of its
restricted common stock, in aggregate, for $177,370 of services. The Company
also issued 318,780 shares, in aggregate, of its restricted common stock in
conversion of $239,083 of its debt to equity. In all of these transactions
the Company relied on the exemptions in Section 4(2) of the Securities Act of
1933, as amended, and/or under Rule 506 of Regulation D under the Securities
Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA.
N/A
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Included in ITEM 8 are the audited Consolidated Financial Statements for
the fiscal years ended June 30, 2009 and 2008 ("Financial Statements").
27
Statements made in this Form 10-K that are not historical or current
facts, which represent the Company's expectations or beliefs including, but
not limited to, statements concerning the Company's operations, performance,
financial condition, business strategies, and other information, involve
substantial risks and uncertainties. The Company's actual results of
operations, most of which are beyond the Company's control, could differ
materially. These statements often can be identified by the use of terms
such as "may," "will," "expect," "believe," anticipate," "estimate," or
"continue" or the negative thereof. We wish to caution readers not to place
undue reliance on any such forward looking statements, which speak only as of
the date made. Any forward looking statements represent management's best
judgment as to what may occur in the future. However, forward looking
statements are subject to risks, uncertainties and important factors beyond
our control that could cause actual results and events to differ materially
from historical results of operations and events and those presently
anticipated or projected.
These factors include adverse economic conditions, entry of new and
stronger competitors, inadequate capital, unexpected costs, failure to gain
product approvals in the United States (or particular states) or foreign
countries and failure to capitalize upon access to new markets. Additional
risks and uncertainties that may affect forward looking statements about
Bion's business and prospects include the possibility that a competitor will
develop a more comprehensive or less expensive environmental solution, delays
in market awareness of Bion and our Systems, or possible delays in Bion's
development of Projects and failure of marketing strategies, each of which
could have an immediate and material adverse effect by placing us behind our
competitors. Bion disclaims any obligation subsequently to revise any forward
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated
events.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes to Consolidated Financial
Statements filed with this Report.
BUSINESS OVERVIEW
For several years, the Company focused on completion of the development
of its second-generation technology which provides a comprehensive
environmental solution to a significant source of pollution in U.S.
agriculture, Confined Animal Feeding Operations ("CAFO's"), which development
is now substantially complete. Currently, Bion is focused on using
applications of its patented waste management technology to pursue two main
business opportunities: 1) environmental retrofit and remediation of the
waste streams of existing CAFOs in selected markets; and 2) to develop
Integrated Projects which will include large CAFOs, such as large dairies,
beef cattle feed lots and hog farms, with Bion waste treatment System modules
processing the aggregate CAFO waste stream from the equivalent of 40,000 or
more beef and/or dairy cows (or the waste stream equivalent of other species)
while producing solids to be utilized for renewable energy production (and
potentially to be marketed as feed and/or fertilizer), integrated with an
ethanol plant capable of producing 40 (or more) million gallons of ethanol
per year and/or with CAFO end product processors.
28
The Company has commenced actively pursuing the opportunity presented by
environmental retrofit and remediation of the waste streams of existing
CAFOs. The first commercial activity in this area is an agreement with
Kreider Farms ("KF") in Pennsylvania to design, construct and operate Bion
Systems to treat KF's dairy and poultry waste streams to reduce nutrient
releases to the environment while generating marketable nutrient credits and
renewable energy. On January 26, 2009 the Board of the Pennsylvania
Infrastructure Investment Authority approved a $7.8 million loan to Bion PA
1, LLC, a wholly-owned subsidiary of the Company, for the initial stage of
Bion's Kreider Farms project. The Company anticipates that the steps required
to finalize the pre-construction phase of the Pennvest Loan will be completed
during the next quarter and that the initial drawdown/re-imbursement from
Pennvest pursuant to the Pennvest Loan will be received shortly thereafter.
The Company has commenced permitting for this project and anticipates
construction of this project during the current fiscal year.
Additionally, we believe that Bion's technology platform allows the
integration of large-scale CAFO's and their end-product users, renewable
energy production from the CAFO waste stream, on site utilization of the
renewable energy generated and biofuel/ethanol production in an
environmentally and economically sustainable manner while reducing the
aggregate capital expense and operating costs for the entire integrated
complex ("Integrated Projects" or "Projects"). In the context of Integrated
Projects, Bion's waste treatment process, in addition to mitigating polluting
releases, generates renewable energy from cellulosic portions of the CAFO
waste stream which renewable energy can be utilized by integrated facilities
including ethanol plants, CAFO end-product processors (including cheese, ice
cream and /or bottling plants in the case of dairy CAFOs and/or slaughter
and/or processing facilities in the context of beef CAFOs) and/or other users
as a natural gas replacement. Note that an integrated ethanol plant's main
by-product, called distillers grain, can be added to the feed of the animals
in wet form thereby lowering the capital expenditures, operating, marketing
and shipping costs and energy usage of the ethanol production process. In
such cases, the ethanol plant would act as a feed mill for the integrated
CAFO, thus reducing the CAFO's feeding costs and generating revenue to the
ethanol plant, and also provides a market for the renewable energy that
Bion's System produces from the CAFO waste stream. Thus, such Bion Integrated
Projects can be denominated "closed loop". Bion, as developer of and
participant in Integrated Projects, anticipates that it will share in the
cost savings and revenue generated from these activities.
Bion is currently working with local, state and federal officials and
with potential industry participants to evaluate sites in multiple states and
anticipates selecting a site for its initial Project during the 2009 calendar
year. At present it is possible, but not certain, that the initial Integrated
Project will be located in upstate New York (although locations in other
states are also under review). In addition, Bion intends to choose sites for
additional Projects during the remainder of calendar years 2009-2011 to
create a pipeline of Projects. Management has a 5-year development target
(through calendar year 2015) of approximately 12-24 Integrated Projects. At
the end of the 5-year period, Bion projects that 8 or more of these
Integrated Projects will be in full operation in 3-8 states, and the balance
would be in various stages ranging from partial operation to early permitting
stage. No Integrated Project has been developed to date.
29
The financial statements for the years ended June 30, 2009 and 2008 have
been prepared assuming the Company will continue as a going concern. The
Company has incurred net losses of approximately $1,312,000 and $1,779,000
during the years ended June 30, 2009 and 2008, respectively. At June 30,
2009, the Company had a working capital surplus and stockholders' equity of
approximately $515,000 and $743,000, respectively. The report of the
independent registered public accounting firm on the Company's consolidated
financial statements as of and for the year ended June 30, 2009 includes a
"going concern" explanatory paragraph which means that the accounting firm
has expressed substantial doubt about the Company's ability to continue as a
going concern. Management's plans with respect to these matters are
described in this section and in our consolidated financial statements, and
this material does not include any adjustments that might result from the
outcome of this uncertainty. There is no guarantee that we will be able to
raise the funds or raise further capital for the operations planned in the
near future.
CRITICAL ACCOUNTING POLICIES
Management has identified the following policies below as critical to
our business and results of operations. Our reported results are impacted by
the application of the following accounting policies, certain of which
require management to make subjective or complex judgments. These judgments
involve making estimates about the effect of matters that are inherently
uncertain and may significantly impact quarterly or annual results of
operations. For all of these policies, management cautions that future
events rarely develop exactly as expected, and the best estimates routinely
require adjustment. Specific risks associated with these critical
accounting policies are described in the paragraphs below.
Revenue Recognition
While the Company has not recognized any operating revenues for the past
two fiscal years, the Company anticipates that future revenues will be
generated from product sales, credit sales, technology license fees, annual
waste treatment fees and/or direct ownership interests in Integrated
Projects. The Company expects to recognize revenue from product sales when
there is persuasive evidence that an arrangement exists, when title has
passed, the price is fixed or determinable, and collection is reasonably
assured. The Company expects that technology license fees will be generated
from the licensing of Bion's Systems. The Company anticipates that it will
charge its customers a non-refundable up-front technology license fee, which
will be recognized over the estimated life of the customer relationship. In
addition, any on-going technology license fees will be recognized as earned
based upon the performance requirements of the agreement. Annual waste
treatment fees will be recognized upon receipt. Revenues, if any, from the
Company's interest in Projects will be recognized when the entity in which
the Project has been developed recognizes such revenue.
Compensation Cost for Options with Service Conditions and Graded Vesting
Schedules
The Company has issued non-employee options that include service
conditions and have graded vesting schedules. Generally for these
arrangements, the measurement date of the services occurs when the options
30
vest. In accordance with Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services",
recognition of compensation cost for reporting periods prior to the
measurement date is based on the then current fair value of the options.
Fair value of the options is determined using a Black-Scholes option-pricing
model. Any subsequent changes in fair value will be recorded on the
measurement date. Compensation cost in connection with options that are not
fully vested is being recognized on a straight-line basis over the requisite
service period for the entire award.
Stock-based compensation
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123 (Revised), "Share-Based Payment" ("SFAS 123(R)"),
which generally requires that share-based compensation transactions be
accounted and recognized in the statement of income based on their fair
values.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of
FASB Statement No. 115 ("SFAS 159"). This statement permits entities to
choose to measure eligible items at fair value at specified election dates.
SFAS 159 was effective for the Company on July 1, 2008. The Company did not
apply the fair value option to any of its outstanding instruments, and
therefore, SFAS 159 did not have an impact on the consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations ("SFAS 141R"). SFAS 141R continues to require the purchase
method of accounting to be applied to all business combinations, but it
significantly changes the accounting for certain aspects of business
combinations. Under SFAS 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS 141R will
change the accounting treatment for certain specific acquisition related
items including: (1) expensing acquisition related costs as incurred; (2)
valuing non-controlling interests at fair value at the acquisition date; and
(3) expensing restructuring costs associated with an acquired business. SFAS
141R also includes a substantial number of new disclosure requirements. SFAS
141R is to be applied prospectively to business combinations for which the
acquisition date is on or after July 1, 2009 for the Company. The Company
does not expect that the adoption of SFAS 141R will have an impact on its
consolidated financial statements unless the Company enters into business
acquisitions in the future.
In December 2007, the FASB issued SFAS No. 160, Non-controlling
Interests in Consolidated Financial Statements ("SFAS 160"). SFAS 160
establishes new accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary (minority interest)
is an ownership interest in the consolidated entity that should be reported
as equity in the consolidated financial statements and separate from the
31
parent company's equity. Among other requirements, this statement requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. It also
requires disclosure, on the face of the consolidated statement of operations,
of the amounts of consolidated net income attributable to the parent and to
the non-controlling interest. This statement is effective for the Company on
July 1, 2009. At that date, the Company will report the non-controlling
interest in a subsidiary (which amounts to $111,790 at June 30, 2009) as a
component of stockholders' equity. This will have the immediate effect of
increasing stockholders' equity by $111,790. The Company is currently
evaluating the effect the adoption of other provisions of this statement may
have on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB
Statement No. 133 ("SFAS 161"). SFAS 161 changes the disclosure requirements
for derivative instruments and hedging activities by requiring that the
objectives for using derivative instruments be disclosed in terms of
underlying risk and accounting designation. The statement is effective for
the Company on January 1, 2009. The Company does not expect that the
adoption of SFAS 161 will have an impact on its consolidated financial
statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles ("SFAS 162"). SFAS 162 is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with U.S. GAAP for nongovernmental entities.
SFAS 162 is effective 60 days following the Securities and Exchange
Commission's approval of the Public Company Accounting Oversight Board
auditing amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles." The Company does
not expect SFAS 162 to have an effect on its consolidated financial
statements.
In May 2008, the FASB issued SFAS No. 163, Accounting for Financial
Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60.
("SFAS 163"). SFAS 163 requires that an insurance enterprise recognize a
claim liability prior to an event of default (insured event) when there is
evidence that credit deterioration has occurred in an insured financial
obligation. SFAS 163 also clarifies how Statement 60 applies to financial
guarantee insurance contracts, including the recognition and measurement to
be used to account for premium revenue and claim liabilities. SFAS 163
requires expanded disclosures about financial guarantee insurance contracts.
SFAS 163 will be effective for financial statements issued for fiscal years
beginning after December 15, 2008. The Company does not expect the adoption
of FAS 163 will have any impact on its consolidated financial statements.
In June 2008, the FASB ratified Emerging Issues Task Force ("EITF")
Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity's Own Stock ("EITF 07-5"). EITF 07-5 is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Paragraph 11(a) of SFAS
No. 133 - specifies that a contract that would otherwise meet the definition
of a derivative but is both (a) indexed to the Company's own stock and (b)
32
classified in stockholders' equity in the statement of financial position
would not be considered a derivative financial instrument. EITF 07-5 provides
a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer's own stock and
thus able to qualify for the SFAS No. 133 paragraph 11(a) scope exception.
This statement is effective for the Company on July 1, 2009. The Company is
currently evaluating the effect the adoption of this statement may have on
its consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position ("FSP") SFAS 107-1
and Accounting Principles Board ("APB") 28-1, Interim Disclosures about Fair
Value of Financial Instruments ("FSP 107-1"), which will require that the
fair value disclosures required for all financial instruments within the
scope of SFAS 107, Disclosures about Fair Value of Financial Instruments, be
included in interim financial statements. This FSP also requires entities to
disclose the method and significant assumptions used to estimate the fair
value of financial instruments on an interim and annual basis and to
highlight any changes from prior periods. FSP 107-1 will be effective for
interim periods ending after June 15, 2009. The adoption of FSP 107-1 is not
expected to have a material impact on the Company's consolidated financial
statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No.
165), which updates previous guidance under GAAP by replacing "type 1" and
"type 2" with "recognized" and "unrecognized," and requires disclosure in
financial statements of the date through which subsequent events have been
evaluated. SFAS No. 165 is effective for interim and annual periods after
June 15, 2009 and was adopted by the Company beginning in the fourth quarter
of its fiscal year 2009. The adoption of SFAS No. 165 did not have a
material impact on the Company's consolidated results of operation and
financial condition.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles - a replacement of SFAS 162 (SFAS No. 168), establishing
codification, which integrates and categorizes all guidance by standard
setters within levels A through D of the previous GAAP hierarchy. SFAS No.
168 will replace all existing GAAP for non-governmental entities and will
establish a new hierarchy of GAAP, both authoritative and non-authoritative.
SFAS No. 168 is effective for interim and annual periods ending after
September 15, 2009 and will be adopted by the Company beginning in the first
quarter of its fiscal year 2010. The Company does not expect the adoption to
have a material impact on its consolidated results of operations and
financial condition.
YEAR ENDED JUNE 30, 2009 COMPARED TO THE YEAR ENDED JUNE 30, 2008
General and Administrative
Total general and administrative expenses were $1,960,000 and $2,089,000
for the years ended June 30, 2009 and 2008, respectively.
General and administrative expenses, excluding stock-based compensation
charges of $25,000 and $333,000 for the years ended June 30, 2009 and 2008,
respectively, were $1,935,000 versus $1,756,000 for the years ended June 30,
33
2009 and 2008, respectively. The primary reason for the increase in general
and administrative expenses excluding stock-based compensation during the
year ended June 30, 2009 is due to the shift in the Company's focus from
research and development to pre-commercial and commercial business activities
related to its next generation technology applications during the fourth
quarter of fiscal year 2008, therefore costs of various employees and
consultants (and their activities) that were previously incurred as research
and development expense are now allocated to general and administrative
expense. The increases in general and administrative expenses were partially
offset by the capitalization of the direct general and administrative costs
related to the KF Project during the fourth quarter of fiscal year 2009 of
approximately $433,000 which included $170,000 of salary and payroll related
costs. Salary and payroll related taxes recorded as general and
administrative expenses were $703,000 and $695,000 for the years ended June
30, 2009 and 2008, respectively. Consulting expense was $703,000 and
$717,000 for the years ended June 30, 2009 and 2008, respectively. Legal
costs increased $146,000 for the year ended June 30, 2009 due to the fact
during the year ended June 30, 2008 insurance reimbursements for the
Centerpoint litigation expenses of $133,000 were received. The Company also
incurred lower rent expense, $44,000 and $89,000 for the years ended June 30,
2009 and 2008, respectively, due to additional sub-tenant month to month
rentals during the year ended June 30, 2009.
General and administrative stock-based compensation for the years ended
June 30, 2009 and 2008 consist of the following:
Year ended Year ended
June 30, 2009 June 30, 2008
------------------------------
General and administrative:
Fair value remeasurement of convertible
notes - affiliates $ - $(237,383)
Fair value and amortization of expenses
prepaid with stock options granted to
non-employees - 69,828
Fair value remeasurement of options with
service conditions (184,400) (19,394)
Fair value of stock options expensed
under SFAS 123(R) 209,262 519,751
-------------------------------
Total $ 24,862 $ 332,802
===============================
Stock-based compensation charges decreased from $333,000 to $25,000 for
the years ended June 30, 2008 and 2009, respectively. The change in stock-
based compensation fair value adjusted expense relating to the President's
convertible deferred compensation of $(237,000) is due to the fact his note
was converted in December 2007, therefore no remeasurement was required for
the year ended June 30, 2009. For the year ended June 30, 2009 the Company
recognized expense relating to the fair value of stock options for general
and administrative employees of $209,000, compared to $520,000 for the year
ended June 30, 2008. Compensation expense relating to stock options was
higher during the year ended June 30, 2008 due to modifications in vested
stock options during the period which resulted in additional expense. The
Company also recognized as general and administrative expenses $(184,000) for
34
the remeasurement of options with service conditions due to the reallocation
of research and development related costs and the decrease in the fair value
of the options from approximately $2.06 per share to approximately $0.98 per
share during the year ended June 30, 2009.
Research and development
Total research and development expenses were $357,000 and $792,000 for
the years ended June 30, 2009 and 2008, respectively.
Research and development expenses, excluding stock-based compensation
charges/(credits) of $118,000 and $(149,000) for the years ended June 30,
2009 and 2008 were $239,000 and $941,000, respectively. The primary reason
for the decrease in research and development expenses during the year ended
June 30, 2009 is due to the shift in the Company's focus from research and
development to pre-commercial and commercial activities related to its next
generation technology applications, therefore costs of various employees and
consultants (and their related activities) that were previously incurred as
research and development expense are now allocated to general and
administrative expense. Salary and payroll related taxes were $130,000 and
$391,000 for the year ended June 30, 2009 and 2008, respectively, and the
decrease is due to the expensing of previous research and development
employees to general and administrative. Consulting expenses also decreased
significantly, from $368,000 to $36,000 for the years ended June 30, 2008 and
2009, respectively, due to the shift from research and development to general
and administrative.
Research and development stock-based compensation for the years ended
June 30, 2009 and 2008 consist of the following:
Year ended Year ended
June 30, 2009 June 30, 2008
------------------------------
Research and development:
Fair value remeasurement of convertible
notes - affiliates $ - $(323,387)
Fair value and amortization of expenses
prepaid with stock options granted to
non-employees - 34,377
Fair value remeasurement of options with
service conditions 65,461 (19,394)
Fair value of stock options expensed
under SFAS 123(R) 52,830 159,401
------------------------------
Total $ 118,291 $(149,003)
==============================
Stock-based compensation charges/(credits) increased from $(149,000) for
the year ended June 30, 2008 to $118,000 for the same period in fiscal year
2009. Stock-based compensation fair value adjusted credits of $(323,000) for
the year ended June 30, 2008, were recorded to re-measure the fair value of
Brightcap's convertible deferred compensation. There was no similar charge
for the year ended June 30, 2009 as the note was converted at May 31, 2008.
The Company recorded stock-based compensation expense of $53,000 and $159,000
under the provisions of SFAS 123(R) for the year ended June 30, 2009 and
35
2008, respectively for options vested to research and development employees.
The decrease is due to expensing options issued to employees who in the prior
year were deemed to be research and development and in the fiscal year 2009
were primarily allocated to general and administrative. The Company also
recognized as research and development credits of $(19,000) for the
remeasurement of options with service conditions for the year ended June 30,
2008 while $53,000 was expensed for the year ended June 30, 2009 due to the
allocation of such expenses to general and administrative expenses.
Loss from Operations
As a result of the factors described above, the loss from operations was
$2,317,000 and $2,881,000 for the years ended June 30, 2009 and 2008,
respectively.
Other expense and (income)
Other expense and (income) was $(1,005,000) and $(1,102,000) for the
years ended June 30, 2009 and 2008, respectively. Interest expense decreased
$148,000 from $186,000 for the year ended June 30, 2008 to $38,000 for the
year ended June 30, 2009. Interest expense decreased for the year ended June
30, 2009 due to lower interest bearing debt balances as the 2006 and 2007
Series A Notes were settled in fiscal year 2008. For the year ended June 30,
2009, the Company recognized other income of $1,036,000 due to the forfeiture
of deferred compensation relating the cancellation of Mr. Zizza's Notes of
$959,000, a $75,000 settlement with the Company's directors' and officers'
liability insurance providers and $2,000 from the extinguishment of
liabilities. For the year ended June 30, 2008, the Company recognized other
income of $1,385,000 due to the receipts of $828,000 from litigation
settlements, $430,000 from release of previously escrowed funds owed to
Centerpoint and $127,000 from the extinguishment of liabilities. The
receipts of the litigation settlement proceeds and the escrowed funds
resulted in a positive net equity position for the Company's majority held
subsidiary, Centerpoint, which resulted in the recording of the $118,000
minority interest expense of Centerpoint for the year ended June 30, 2008
while for the year ended June 30, 2009 the amount was $(6,000).
Net loss
As a result of the factors described above, the net loss was $1,312,000
and $1,779,000 for the years ended June 30, 2009 and 2008, respectively,
representing a $0.09 decrease in the net loss per basic and diluted common
share for the years ended June 30, 2009 and 2008, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements for 2009 have been prepared on a
going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business.
The Report of our Independent Registered Public Accounting Firm on the
Company's financial statements as of and for the year ended June 30, 2009
includes a "going concern" explanatory paragraph which means that the
auditors stated that conditions exist that raise substantial doubt about the
Company's ability to continue as a going concern.
36
As of June 30, 2009, the Company had cash and cash equivalents of
approximately $1,696,000. During the year ended June 30, 2009, net cash used
in operating activities was $955,000, primarily consisting of cash operating
expenses. As previously noted, the Company is currently not generating
revenue and accordingly has not generated cash flows from operations. The
Company does not anticipate generating sufficient revenues to offset
operating and capital costs for a minimum of one to five years. While there
are no assurances that the Company will be successful in its efforts to
develop and construct its Projects and market its Systems, it is certain that
the Company will require significant funding from external sources. Given the
unsettled state of the current credit and capital markets, there is no
assurance the Company will be able to raise the funds it needs on reasonable
terms.
Investing Activities
During the year ended June 30, 2009 the Company provided $42,000 of cash
due to the release of restricted cash related to the New York office
operating lease and used $433,000 for the design and permitting of the KF
Project which has been capitalized as property and equipment.
Financing Activities
During the year ended June 30, 2009, $165,000 of cash was provided by
financing activities from short-term promissory notes - affiliates, $162,500
of cash was provided from short-term loans - affiliates, $380,000 of cash was
provided from the sale of the Company's restricted common stock and
$1,854,840 was provided from the sale of the Company's Series B preferred
stock.
As of June 30, 2009 the Company has significant debt obligations
consisting primarily of deferred compensation of $325,000 and loans payable -
affiliates of $162,500. In addition, the Company has entered into an 88-
month operating lease for office space in New York City, with an average
monthly lease expense of $15,820.
Subsequent to June 30, 2009, the Company received net proceeds of
$595,950 from the issuance of 6,850 shares of its Series B Preferred stock.
Plan of Operations and Outlook
As of June 30, 2009 the Company had cash and cash equivalents of
approximately $1,696,000. While the Company currently does not face a severe
working capital shortage, it is not currently generating any revenues. The
Company will need to obtain additional capital to fund its operations and
technology development, to satisfy existing creditors, to develop Projects
and to construct the KF facilities. In January 2009, the Board of
Pennsylvania Infrastructure Investment Authority approved a $7.8 million loan
to the Company for the initial stage of the KF Project. The Company
anticipates to finalize the documentation for this loan during the next
quarter and intends to permit and construct this project during the 2010
fiscal year.
The Company anticipates that it will seek to raise from $5,000,000 to
$50,000,000 (debt and equity) during the next twelve months. There is no
37
assurance, especially in the extremely unsettled capital markets that
presently exist, that the Company will be able to obtain the funds that it
needs to stay in business, complete its technology development or to
successfully develop its business.
There can be no assurance that funds required during the next twelve
months or thereafter will be generated from operations or that those funds
will be available from external sources such as debt or equity financings or
other potential sources. The lack of additional capital resulting from the
inability to generate cash flow from operations or to raise capital from
external sources would force the Company to substantially curtail or cease
operations and would, therefore, have a material adverse effect on its
business. Further, there can be no assurance that any such required funds, if
available, will be available on attractive terms or that they will not have a
significantly dilutive effect on the Company's existing shareholders. All
of these factors have been exacerbated by the extremely unsettled credit and
capital markets presently existing.
Currently, Bion is focused on using applications of its patented waste
management technology to pursue two main business opportunities: 1) to
develop Integrated Projects which will include large CAFOs, such as large
dairies, beef cattle feed lots and hog farms, with Bion waste treatment
System modules processing the aggregate CAFO waste stream from the equivalent
of 40,000 or more beef and/or dairy cows (or the waste stream equivalent of
other species) while producing solids to be utilized for renewable energy
production (and potentially to be marketed as feed and/or fertilizer),
integrated with an ethanol plant capable of producing 40 (or more) million
gallons of ethanol per year and/or integrated with CAFO end product
processors, and 2) environmental retrofit and remediation of the waste
streams of existing CAFOs in selected markets.
Bion is currently working with local, state and federal officials and
with potential industry participants to evaluate sites in multiple states and
anticipates selecting a site for its initial Project during the 2009 calendar
year. At present it is possible, but not certain, that the initial Integrated
Project will be located in upstate New York (although locations in other
states are also under review). In addition, Bion intends to choose sites for
additional Projects during the remainder of calendar years 2009-2011 to
create a pipeline of Projects. Management has a 5-year development target
(through calendar year 2015) of approximately 12-24 Integrated Projects. At
the end of the 5-year period, Bion projects that 8 or more of these
Integrated Projects will be in full operation in 3-8 states, and the balance
would be in various stages ranging from partial operation to early permitting
stage. No Integrated Project has been developed to date.
The Company has also commenced actively pursuing the opportunity
presented by environmental retrofit and remediation of the waste streams of
existing CAFOs in selected markets. The first commercial activity in this
area is the agreement with KF in Pennsylvania.
CONTRACTUAL OBLIGATIONS
We have the following material contractual obligations (in addition to
employment and consulting agreements with management and employees):
38
1) The Company executed a non-cancelable operating lease for office
space in New York City effective August 1, 2006 and extending to November 30,
2013. The average monthly rent expense under the lease is $15,820. The
Company has provided the lessor with a letter of credit in the amount of
$85,973 in connection with the lease as of June 30, 2008. The Company's
obligations under the lease are partially guaranteed by Salvatore Zizza,
former Chairman of Bion Projects. The Company has entered into sub-leases
with non-affiliated parties for approximately 32% of the obligations under
the lease. Effective January 1, 2009, Mr. Zizza has entered into a Master
Sublease with the Company whereby Mr. Zizza will become a sublessee and will,
for a one year initial period, make all payments pursuant to the lease and
manage the lease premises. Rental payments from existing sub-tenants will be
deposited into a Company bank account such that Mr. Zizza will have use of
those funds towards the monthly lease payment. Mr. Zizza will have the
option on or before November 15, 2009 to continue the Master Sublease for the
entire period of the lease. If Mr. Zizza fulfills his obligations under the
Master Sublease during the one year initial period, he shall receive the
funds from the next release from the Company's letter of credit approximating
$28,000. If Mr. Zizza exercises the option to continue the Master Sublease
for the entire term of the lease, Mr. Zizza will be entitled to the balance
of funds held under the letter of credit.
2) On September 27, 2008, the Company executed an agreement with
Kreider Farms (and its affiliated entities) (collectively "Kreider") to
design, construct and operate, through its wholly-owned subsidiaries, Bion
Services Group, Inc. ("Bion Services") and Bion PA-1 LLC ("LLC"), a Bion
system to treat the waste of the dairy cows (milkers, dry cows and heifers)
at the Kreider Dairy, located in Mannheim, Pennsylvania. In addition, the
agreement provides for a second phase which will include a renewable energy
facility that will treat cellulosic solid wastes from Phase 1 together with
the waste stream from Kreider's poultry facilities to produce renewable
energy for Bion's waste treatment facility and/or for market sales. The
system will be owned and operated by Bion through LLC, in which Kreider will
have the option to purchase a minority interest. To complete final design
work and all building, zoning and other related pre-construction matters,
substantial capital (equity and/or debt) has been and will continue to be
expended. Additional funds will be expended for construction. Upon
successful construction and operation of the system, the Company anticipates
that it will receive revenue from the sale of nutrient (and other)
environmental credits related to the Kreider system and through sales of
renewable energy generated at the Kreider system. On January 26, 2009 the
Board of the Pennsylvania Infrastructure Investment Authority (PENNVEST)
approved a $7.8 million loan to Bion for "the construction of a livestock
waste treatment facility at Kreider Farms..." for the Phase 1 dairy portion
of the Kreider Farms projects. The Company anticipates that the steps
required to finalize the pre-construction phase of the Pennvest Loan will be
completed during the next quarter and that the initial drawdown/reim-
bursement from Pennvest pursuant to the Pennvest Loan will be received
shortly thereafter.
3) The Company issued 200,000 shares of its restricted stock in January
2009 as prepayment for Mark Smith's calendar year 2009 salary of $150,000,
which the Company will expense as it is earned. As of June 30, 2009, the
Company has $75,000 of expense to recognize through December 31, 2009.
39
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements (as that term is
defined in Item 303 of Regulation S-K) that are reasonably likely to have a
current or future material effect on our financial condition, revenue or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements are set forth on pages F-1 through
F-38 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
As of June 30, 2009, under the supervision and with the participation of
the Company's Chief Executive Officer and Principal Financial Officer (the
same person), management has evaluated the effectiveness of the design and
operations of the Company's disclosure controls and procedures. Based on
that evaluation, the Chief Executive Officer and Principal Financial Officer
concluded that the Company's disclosure controls and procedures were not
effective as of June 30, 2009 as a result of the material weakness in
internal control over financial reporting discussed below.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting that
occurred during the last fiscal quarter covered by this report that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in the
Securities Exchange Act of 1934 Rule 13a-15(f). Our Chief Executive Officer
and Principal Financial Officer (the same person) conducted an evaluation of
the effectiveness of our internal control over financial reporting based on
the framework in Internal Control - Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO
Framework").
Based on this evaluation, management has concluded that our internal
control over financial reporting was not effective as of June 30, 2009. Our
40
Chief Executive Officer and Principal Financial Officer concluded we have a
material weakness due to lack of segregation of duties. Our size has
prevented us from being able to employ sufficient resources to enable us to
have an adequate level of supervision and segregation of duties within our
internal control system. There is one person involved in the processing of
the Company's accounting and banking transactions and a single person with
overall supervision and review of the cash disbursements and receipts and the
overall accounting process. Therefore while there are some compensating
controls in place, it is difficult to ensure effective segregation of
accounting duties. While we strive to segregate duties as much as
practicable, there is an insufficient volume of transactions to justify
additional full time staff. As a result of this material weakness, we have
implemented remediation procedures whereby in May 2006 we engaged an outside
accounting and consulting firm with SEC and US GAAP experience to assist us
with the preparation of our financial statements, evaluation of complex
accounting issues and the implementation of systems to improve controls and
review procedures over all financial statement and account balances. We
believe that this outside consultant's review improved our disclosure
controls and procedures. If this review is effective throughout a period of
time, we believe it will help remediate the segregation of duties material
weakness. However, we may not be able to fully remediate the material
weakness unless we hire more staff. We will continue to monitor and assess
the costs and benefits of additional staffing.
This annual report does not include an attestation report of the
Company's independent registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to
attestation by the Company's independent registered public accounting firm
pursuant to temporary rules of the SEC that permit the Company to provide
only management's report on internal control in this annual report.
ITEM 9B. OTHER INFORMATION
None.
41
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Our directors, executive officers and significant employees/consultants,
along with their respective ages and positions are as follows:
Name Age Position
---- --- --------
Director and Officers:
Mark A. Smith 59 President, General Counsel, Interim Chief
Financial Officer and Director
Jere Northrop 67 Senior Technology Director and Director
Jon Northrop 66 Secretary and Director
Significant Employees:
Jeremy Rowland 46 Chief Operating Officer of Services Group
James W. Morris 59 Chief Technology Officer
George W. Bloom 55 Chief Engineering Officer
Dominic Bassani 63 V.P.-Special Projects and Strategic
Planning of Projects Group and Full Time
Consultant to Bion
Mark A. Smith (59) has been President, General Counsel, interim Chief
Financial Officer and a director of Bion Environmental Technologies, Inc.
since late March 2003. Since that time, he has also served as sole director,
President and General Counsel of Bion's wholly-owned subsidiaries including
Project Group and Services Group. Since mid-February 2003, Mr. Smith has
served as sole director and President and General Counsel of Bion's majority-
owned subsidiary, Centerpoint Corporation. Previously, from May 21, 1999
through January 31, 2002, Mr. Smith served as a director of Bion. From July
23, 1999, when he became President of Bion, until mid-2001 when he ceased to
be Chairman, Mr. Smith served in senior positions with Bion on a consulting
basis. Additionally, Mr. Smith was the president of RSTS Corporation prior
to its acquisition of Bion Technologies, Inc. in 1992. Mr. Smith received a
Juris Doctor Degree from the University of Colorado School of Law, Boulder,
Colorado (1980) and a BS from Amherst College, Amherst, Massachusetts (1971).
Mr. Smith has engaged in the private practice of law in Colorado since 1980.
In addition, Mr. Smith has been active in running private family companies,
Stonehenge Corporation (until 1994) and LoTayLingKyur, Inc. (1994-2002).
Until returning to Bion during March 2003, Mr. Smith had been in retirement
with focus on charitable work and spiritual retreat.
Jere Northrop (67) is the founder of Bion and developed its technology.
He has served as the Company's Senior Technology Director since 1999 and has
been a Board of Directors member since April 9, 1992. Dr. Northrop is a
founder of Bion Technologies, Inc. and was its President from October 1989 to
42
July 23, 1999. Since 2003, Dr. Northrop has served as a director of As It Is,
Inc., a private company of which he is a cofounder. Prior to founding Bion,
he had ten years experience in the management of operations and process
control at a large municipal advanced wastewater treatment plant in Amherst,
New York (1979-1989). He also has twenty-five years of experimental research
on both individual and complex systems of microorganisms. Dr. Northrop has a
BS degree in biology from Amherst College, Amherst, Massachusetts (1964), a
PhD in biophysics from Syracuse University, Syracuse, New York, (1969), and
has done post doctoral work at the University of California at Davis, Davis,
California and The Center for Theoretical Biology, State University of New
York at Buffalo, Buffalo, New York. Jere Northrop is the brother of Jon
Northrop.
Jon Northrop (66) has served as our Secretary and a Director since March
of 2003. Since September 2001 he has been self employed as a consultant with
a practice focused on business buyer advocacy. Mr. Northrop is one of our
founders and served as our Chief Executive Officer and a Director from our
inception in September 1989 until August 2001. Before founding Bion
Technologies, Inc., he served in a wide variety of managerial and executive
positions. He was most recently the Executive Director of Davis, Graham &
Stubbs, one of Denver's largest law firms, from 1981 to 1989. Prior to his
law firm experience, Mr. Northrop worked at Samsonite Corporation's Luggage
Division in Denver, Colorado, for over 12 years. His experience was in all
aspects of manufacturing, systems design and implementation, and planning and
finance, ending with three years as the Division's Vice President, Finance.
Mr. Northrop has a bachelor's degree in Physics from Amherst College,
Amherst, Massachusetts (1965), an MBA in Finance from the University of
Chicago, Chicago, Illinois (1969), and spent several years conducting post
graduate research in low energy particle physics at Case Institute of
Technology, Cleveland, Ohio. Jon Northrop is the brother of Jere Northrop.
George W. Bloom (55), Bion's Chief Engineering Officer, has been with
Bion since December 2000 and served as Chief Operating Officer since January
15, 2002 of our Bion Technologies, Inc. subsidiary until our 2008 functional
reorganization. From 1986 through December 2000, Mr. Bloom was employed by
Woodard & Curran, Inc., an environmental engineering and science-consulting
firm, where he held the position of Chief Engineer of the Municipal Business
Center at the time of his departure. Mr. Bloom is a registered professional
engineer with over twenty years environmental engineering and consulting
experience specializing in the planning, design, construction and operation
of waste treatment facilities. Mr. Bloom is responsible at Bion for
oversight of the planning, design and construction of waste treatment systems
and solids processing facilities. He has his BS in Environmental Science from
Cornell University.
Jeremy Rowland (46) joined Bion on September 18, 2006 and presently
serves as Chief Operating Officer of Services Group. Prior to joining Bion,
he worked for URS Corporation, a major national engineering/consulting firm,
for 16 years where he developed and lead URS's efforts in the renewable
energy marketplace. Mr. Rowland has eighteen years experience in multi-
disciplinary energy and environmental project development and management
throughout the U.S. and overseas. Mr. Rowland's areas of expertise include
renewable energy project development, distributed generation (mostly combined
heat/power), large-scale power plant developments, and strategic energy
management. Mr. Rowland earned his MS in Environmental Science in 1987 and
43
his BS in Forest Ecology in 1985 from Southern Illinois University, School of
Agriculture Science.
James W. Morris (59) has served as Bion's Chief Technology Officer since
February 2002 and is co-inventor of portions of the Bion Process. Prior to
joining Bion, Dr. Morris provided the Company with technical assistance and
technical advice for over two years as a consultant. Other consulting work
included eight years acting as the Senior Technical Consultant for a large
environmental consulting firm and the formation of James W. Morris &
Associates, Inc. that allowed him to serve clients ranging from small
commercial establishments, to municipalities and corporations, as well as a
sub consultant to several larger engineering firms. Dr. Morris is a licensed
professional engineer in Maine and Vermont with more than 30 years of
engineering experience. Over a twelve-year period he performed research and
taught graduate and undergraduate engineering as a member of the faculties of
Cornell University, the University of Manitoba and the University of Vermont.
He earned his BSCE and MSCE at Tennessee Technological University and a Ph.D.
in Environmental Quality/Agricultural Engineering from Cornell University.
He is a member of the American Society of Civil Engineers, Water Environment
Federation, Institute of Food Technologists, American Society of Agricultural
Engineers, Agricultural Engineering Society, Aquacultural Engineering Society
and American Water Works Association, Tau Beta Phi (Engineering honor
society), Chi Epsolon (Civil Engineering honor society) and is a member of
Sigma Xi, The Scientific Research Society of North America.
Dominic Bassani (63), a full-time consultant to the Company, served as
the General Manager of Bion' Projects Group subsidiary from April 2003
through September 2006. Since September 15, 2008 he has served as Vice
President-Special Projects and Strategic Planning of our Projects Group
subsidiary. He has been an investor in and consultant to Bion since December
1999. He is an independent investor and since 1990 has owned and operated
Brightcap, a management consulting company that provides management services
to early stage technology companies. He was a founding investor in 1993 in
Initial Acquisition Corp. that subsequently merged in 1995 with Hollis Eden
Corp. (HEPH), a biotech company specializing in immune response drugs. From
early 1998 until June 1999 he was a consultant to Internet Commerce Corp.
(now EasyLink Services International Corporation) (ESIC), a leader in
business-to-business transactions using the Internet. He is presently an
investor in numerous private and public companies primarily in technology
related businesses. From 1980 until 1986, Mr. Bassani focused primarily on
providing management reorganization services to manufacturing companies and
in particular to generic pharmaceutical manufacturers and their financial
sponsors.
Family Relationships
There are currently no family relationships among our Directors and
Executive Officers except that Jon Northrop and Jere Northrop are brothers.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our officers and directors,
and stockholders owning more than ten percent of a registered class of our
equity securities, to file reports of ownership and changes in ownership with
44
the Securities and Exchange Commission. The Company is not aware of any
persons who failed to timely file reports under this section.
Involvement in Legal Proceedings
To the best of our knowledge, during the past five years, none of the
following occurred with respect to our directors or executive officers:
(1) any bankruptcy petition filed by or against any business of which
one of them was a general partner or executive officer either at the time of
the bankruptcy or within two years prior to that time;
(2) any conviction in a criminal proceeding or being subject to a
pending criminal proceeding (excluding traffic violations and other minor
offenses).
(3) being subject to any order, judgment or decree of any court of
competent jurisdiction, permanently or temporarily inquiring, barring,
suspending or otherwise limiting involvement in any type of business,
securities or banking activities, and
(4) being found by a court of competent jurisdiction, the SEC or the
CFTC to have violated Federal or state securities or commodities laws.
Audit Committee
The Company has no audit committee and is not now required to have one,
or an audit committee financial expert.
Code of Ethics
To date, the Company has not adopted a code of business conduct and
ethics applicable to its officers, directors or accounting officer.
45
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid to, or accrued for,
each of our current and former executive officers during each of our last two
fiscal years and the compensation paid to, or accrued for, each of our
significant employees and consultants for the same period.
Non-
Qualified
Deferred
Compen- All
sation Other
Fiscal Stock Option Earnings Compen-
Name and Principal Position Year Salary(1) Bonus Awards Awards(5) (2)(3) sation Total
--------------------------- ------ --------- -------- ------ --------- --------- ------- ---------
Mark A. Smith (2) 2009 $150,000 $ 37,500 - $ 7,750 - - $ 195,250
President and Interim Chief 2008 $150,000 $ 16,000 - $227,870 $(237,383) - $ 156,487
Financial Officer since
March 25, 2003, Director
Brightcap/Dominic Bassani(3) 2009 $300,000 $125,000 - - - - $ 425,000
VP-Special Projects & 2008 $300,000 - - - $(323,387) - $ (23,387)
Strategic Planning
George W. Bloom (4) 2009 $150,000 - - - - - $ 150,000
Chief Operating Officer 2008 $150,000 - - $ 23,542 - - $ 173,542
Bion Technologies
James W. Morris (5) 2009 $150,000 $ 2,500 - - - - $ 152,500
Chief Technology Officer 2008 $150,000 - - $ 23,542 - - $ 173,542
Bion Technologies
Jeremy Rowland 2009 $150,000 - - $178,867 - - $ 328,867
Chief Operating Officer 2008 $150,000 - - $195,008 - - $ 345,008
of Services Group
Salvatore J. Zizza (6) 2009 $150,000 - - - - - $ 150,000
Chairman and Director of 2008 $300,000 - - - - - $ 300,000
Projects Group
______________________________
(1) Includes compensation paid by Bion Technologies, Inc. and Projects Group, our wholly owned
subsidiaries.
(2) Mr. Smith has agreed to provide services to Bion and subsidiaries through December 31, 2009 at a salary
of $150,000 all of which as been received in the form of restricted common stock of the Company. On
April 4, 2006, Mr. Smith's accrued deferred compensation was exchanged for a promissory note and
conversion agreement. Through December 2, 2007, $412,124 had been accrued on the note, including
interest at the rate of 6% per annum, at which point it was converted into 274,750 shares of the
Company's common stock at the conversion rate of $2.00 per share. The "Nonqualified Deferred
Compensation Earnings" represents the change in the fair value of Mr. Smith's deferred compensation
recorded as an expense of the Company for the year ended June 30, 2008 of $(237,383). On June 30,
2008, Mr. Smith agreed to accept 89,640 shares of the Company's common stock in exchange for his
deferred salary for the period from April 1, 2007 through June 30, 2008, of $179,280. In January 2009
Mr. Smith agreed to accept 88,102 shares of the Company's common stock in exchange for his deferred
salary of $66,076 for the period from July 1, 2008 to December 31, 2008 and also accepted 200,000
shares of the Company's common stock as payment for his calendar year 2009 salary of $150,000.
(3) On December 31, 2005, convertible deferred compensation payable to Brightcap for services provided to
the Company by Dominic Bassani between April 2, 2003 and September 30, 2005 was exchanged for a
promissory note and conversion agreement upon the same terms as Mr. Smith's note. At May 31, 2008, the
note balance (including accrued interest at a rate of 6% per annum due to Brightcap was $580,318 and
was converted into 290,160 common shares of the Company. Effective March 31, 2005, Brightcap entered
46
into an agreement to provide Mr. Bassani's services to the Company through March 31, 2009, with annual
compensation in the amount of $300,000. The "Nonqualified Deferred Compensation Earnings" represents
the change in the fair value of the convertible deferred compensation recorded as an expense of the
Company for the year ended June 30, 2008 of $(323,387). On May 31, 2008, Brightcap agreed to accept
175,403 shares of the Company's common stock in exchange for his deferred salary for the period from
April 1, 2007 through May 31, 2008, of $350,805. Brightcap's deferred compensation of $175,000 for the
period ending December 31, 2008 is convertible at Brightcap's election into the Company's restricted
common stock at a price of $.75 per share until December 31, 2009. Brightcap's deferred compensation
for the period from January 1, 2009 through June 30, 2009 of $150,000 is convertible at Brightcap's
election, into the restricted common stock until July 1, 2010.
(4) Reflects the dollar amount expensed by the Company during the applicable fiscal year for financial
statement reporting purposes pursuant to FAS 123R.
(5) Options were issued subject to execution of a new employment agreement which as of June 30, 2009 has
not been finalized.
(6) Mr. Zizza was working for the Company at an annual compensation rate of $300,000 prior to his
resignation on December 31, 2008. On March 2007, Mr. Zizza agreed to accept $379,389 of the Company's
Series A Notes in exchange for his deferred compensation for the period from January 1, 2007 through
March 31, 2007 and the Company's promissory notes issued January 1, 2007 for his deferred compensation
owed by Bion on December 31, 2006. On May 31, 2008 Mr. Zizza agree to accept $375,000 of the Company's
Series 2007 A Notes in exchange for deferred compensation earned from April 1, 2007 through May 31,
2008 and agreed to accepted 2007 Series A Notes for all compensation as earned. Pursuant to an
agreement, during December 2009 Mr. Zizza ceased providing services to the Company, returned 450,000
warrants to the Company for cancellation and his aggregate unvested deferred compensation in the amount
of $959,184 (which was evidenced by a convertible promissory note) was cancelled.
Employment Agreements
Effective March 31, 2007 Mark A. Smith, our President, agreed to serve
as President, General Counsel and as a Director of the Company and its
subsidiaries until December 31, 2007 for compensation at an annual rate of
$150,000. The amount deferred through June 30, 2007 under this arrangement is
$37,500 which sum has been accrued on a non-convertible and non-interest
bearing basis. Amounts accrued prior to April 1, 2006 in the amount of
$401,954 (principal and accrued interest) are represented by a convertible
promissory note bearing interest at the rate of 6% per annum and convertible
after July 1, 2007 into the Company's common stock at the lower of the
current market value at the time of conversion, or $2.00 per share. The note
is mandatorily convertible on July 1, 2009. On March 31, 2007, Mr. Smith
agreed to accept $151,645 of the Company's 2007 Series A Convertible Notes
("Series A Notes") in exchange for his deferred compensation for the period
from January 1, 2007 through March 31, 2007 and the Company's promissory note
issued on January 1, 2007 for Mr. Smith's deferred compensation from April 1,
2006 through December 31, 2006. As of May 31, 2008, the Company entered into
an extension agreement with Mr. Smith through December 31, 2009 (part of
which period may consist of consulting) which allowed for the conversion of
deferred compensation accrued through June 30, 2008 of $179,280 into 89,640
common shares of the Company. On January 11, 2009, the Company and Mr. Smith
entered into an agreement pursuant to which Mr. Smith will continue to hold
positions of Director, President and General Counsel of the Company and its
subsidiaries. Mr. Smith was granted a $37,500 bonus in the form of a warrant
(and extension of outstanding warrants previously issued to Mr. Smith),
immediately vested, to purchase 300,000 shares of the Company's common stock
at $0.75 per share until December 31, 2018 and Mr. Smith agreed to accept
pre-payment of his calendar year 2009 base compensation of $150,000 in the
form of 200,000 restricted shares of Company common stock at a price of $0.75
per share. In addition, Mr. Smith converted his deferred compensation as of
47
December 31, 2008 of $66,076 into 88,102 shares of the Company's common stock
at $.75 per share.
Effective May 1, 2005, the Company entered into a four-year
consulting/employment agreement with a former officer and director of the
Company, Salvatore Zizza. Mr. Zizza received $60,000 for his services to the
Company through December 31, 2005 which sum he used to purchase 600,000
warrants. As of January 1, 2006, the former officer and director assumed the
position of Chairman and Director of Projects Group, with an annual salary of
$300,000, all of which has been deferred to date. The amounts deferred
through June 30, 2007 under this arrangement is $75,000 which sum is accrued
on a non-convertible and non-interest bearing basis. On March 31, 2007 Mr.
Zizza agreed to accept $379,389 of the Company's Series A Notes in exchange
for his deferred compensation for the period from January 1, 2007 through
March 31, 2007 and the Company's promissory notes issued on January 1, 2007
for his deferred compensation owed by Bion on December 31, 2006. On June 18,
2008 Mr. Zizza increased the principal of his Note, maturing on July 1, 2013,
by $375,000 to $784,122, which represented the potential deferred
compensation (subject to forfeiture) through June 30, 2008 and he agreed to
add his future compensation from the Company to his Note as it accrued. As
of December 31, 2008, the principal and interest on the Note totaled
$959,184. Pursuant to an agreement dated December 19, 2008, Mr. Zizza
agreed to no longer provide services to the Company effective December 31,
2008. The $959,184 deferred compensation underlying the convertible note had
not yet vested at the date the Note was cancelled and Mr. Zizza returned
450,000 warrants to the Company which were canceled.
Dominic Bassani, full-time consultant to the Company and Vice President-
Special Projects and Strategic Planning of Projects Group, agreed, through
Brightcap, to serve as a consultant to Bion and Projects Group until March
31, 2009 for compensation of $300,000 per year. Amounts accrued prior to
September 30, 2005 in the amount of $549,704 (principal and accrued interest)
are represented by a convertible promissory note bearing interest at the rate
of 6% per annum and convertible after July 1, 2007 into the Company's common
stock at the lower of the current market value at the time of conversion or
$2.00 per share. The note was mandatorily convertible on July 1, 2009. On
March 31, 2007 Brightcap agreed to accept $455,486 of the Company's Series A
Notes in exchange for its deferred compensation for the period from January
1, 2007 through March 31, 2007 and the Company's promissory notes issued on
January 1, 2007 for its deferred compensation owed by Bion on December 31,
2006. The amount deferred through June 30, 2007 under this arrangement was
$75,000 which sum is accrued on a non-convertible and non-interest bearing
basis. During fiscal year 2008, the Company entered into an agreement with
Brightcap converting deferred compensation of $350,000 owed as of May 31,
2008 into a promissory note with a conversion agreement. The convertible
note plus accrued interest totaling $350,805 was exchanged for 175,403 common
shares at $2.00 per share of the Company on June 15, 2008. As of June 30,
2008 the Company owed Brightcap deferred compensation of $25,000. On January
11, 2009, the Company entered in an agreement which extends Mr. Bassani's
services under the terms of the March 31, 2005 agreement to September 30,
2009. In addition, Mr. Bassani was granted a bonus of $125,000 in the form
of a) warrant, immediately vested, to purchase 1,000,000 shares of the
Company's common stock at $0.75 per share until December 31, 2018 and b) the
extension of all warrants previously issued to either Brightcap or Mr.
Bassani, now held by their donees, to December 31, 2018. Pursuant to the
48
agreement the Company no longer defers compensation earned by Brightcap and
since July 2009, Brightcap has been paid in cash. The agreement granted
Brightcap the right, at its sole election, to convert its existing deferred
compensation as of December 31, 2008 of $175,000 into 233,334 shares of the
Company's common stock at a price of $0.75 per share until December 31, 2009.
The Brightcap Agreement also extended the maturity date of Mr. Bassani's then
outstanding $50,000 promissory note to June 30, 2009 and allowed for the
conversion of the principal and interest, in whole or in part, at the
election of Mr. Bassani, into the Company's restricted common shares at $0.75
per share. The promissory note was converted on June 30, 2009. Brightcap's
$150,000 deferred compensation for the period from January 1, 2009 through
June 30, 2010 is now due on July 1, 2010 and Brightcap has the right to
convert this obligation, in whole or in part, to the Company's common stock
at $1.50 per share until June 30, 2010.
Effective September 18, 2006, Bion entered into a four-year employment
agreement with Jeremy Rowland. Under the terms of the agreement, Mr. Rowland
serves as Services Group's Chief Operating Officer at a salary of $150,000
per year. In June 2008, the employment agreement terms were extended through
July 1, 2012. Mr. Rowland now serves as Chief Operating Officer of the
Company's Services Group subsidiary.
On June 30, 2009, Mr. Craig Scott, the Company's VP-Capital Markets and
Shareholder Relations, agreed to extend the term of his services to the
Company through December 31, 2010.
The Company entered into an employment agreement contract extension
effective June 30, 2009, with Craig Scott whereby Mr. Scott will continue to
act as Vice President of Capital Markets and Shareholder Relations through
December 31, 2010, at an annual salary of $144,000. The Company has granted
Mr. Scott options (with vesting conditions) to purchase 100,000 shares of the
Company's common stock at a price of $1.25 per share through June 30, 2014.
The Company has the right terminate the agreement with 30 days notice
commencing December 2009 with no further liability.
Other Agreements
In May 2005, Bion declared Contingent Stock Bonuses of 690,000 shares,
in aggregate, to its key employees and consultants. On September 15, 2009
Contingent Stock Bonuses of 367,500 and 135,000 shares remained outstanding
and are contingent upon the Company's stock price exceeding $10.00 and $20.00
per share, respectively, and the grantees still being employed by or
providing services to the Company at the time the target prices are reached.
Effective July 1, 2009, the Company has made grants of stock bonuses
aggregating 150,000 shares, which grants are split among all of the Company's
core employees and consultants (including a severance grant to a former
consultant) other than Mr. Bassani and Mark A. Smith, the Company's
President, pursuant to the Company's 2006 Consolidated Incentive Plan, as
amended. These stock bonuses have various conditions regarding vesting.
49
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth the number of shares of common stock
covered by outstanding stock option awards that are exercisable and
unexercisable, and the number of shares of common stock covered by unvested
restricted stock awards for each of our named executive officers as of June
30, 2009.
Option Awards Stock Awards
--------------------------------------- ----------------------------------------
Equity
Equity Incentive
Incentive Plan
Plan Awards:
Number Market Awards: Market or
of Value Number of Payout
Shares of Unearned Value of
Number of Number of or Shares Shares, Unearned
Securities Securities Units of or Units or Shares,
Underly- Underly- Stock Units of Other Units
ing Un- ing Un- Option That Stock Rights or Other
exercised exercised Exer- Option Have That That Rights
Options(#) Option(#) cise Expir- Not Have Have Not That
Exercis- Unexer- Price ation Vested Not Vested Have Not
Name able cisable ($) Date (#) Vested (3) Vested
-----------------------------------------------------------------------------------------------------
Mark A. Smith 20,000 - $2.00 2012 - - - -
Mark A. Smith 10,000 - $2.50 2015 - - - -
Mark A. Smith 12,500 - $4.25 2012 - - - -
Mark A. Smith 50,000 - $5.00 2012 - - - -
Mark A. Smith 12,500 - $5.50 2012 - - - -
Mark A. Smith 100,000 - $4.25 2012 - - - -
Mark A. Smith 125,000 - $2.20 2012 - - - -
Mark A. Smith 70,000 - $2.50 2013 - - - -
Mark A. Smith 25,000 - $1.00 2014 - - - -
Brightcap/
Dominic Bassani - - - - - - 250,000 237,500
George W. Bloom 100,000 - $2.50 2015 - - 75,000 71,250
George W. Bloom (1) 100,000 - $3.00 2012 - - - -
James W. Morris 100,000 - $2.50 2015 - - 75,000 71,250
James W. Morris (1) 100,000 - $3.00 2012 - - - -
Jeremy Rowland (2) 93,750 56,250 $3.00 2012 - - - -
Jeremy Rowland (2) 18,750 31,250 $3.00 2012 - - - -
Salvatore J. Zizza 7,500 - $5.00 2012 - - - -
_________________
(1) Options have been approved subject to the execution of a new employment agreement which as of June 30, 2009
has not been finalized.
(2) Common share purchase options to acquire 150,000 shares of common stock at $3.00 per share were granted on
May 31, 2008 in connection with the signing of a new employment agreement. These options vest over a two year
period (1/8 each quarter) from the grant date anniversary. Common share purchase options to acquire 50,000
shares of common stock at $3.00 per share were granted on May 31, 2008. These options vest over a four year
period (1/8 each six months) from the grant date anniversary.
(3) During May 2005 the Company's Board of Directors approved the issuance of deferred stock bonuses to its key
employees and consultants. The stock bonuses are contingent upon the Company's stock price exceeding $10 and
$20 per shares for 20 consecutive trading days and the grantees still being employed or providing services to
the Company at the time the target prices are reached.
50
Director Compensation
Members of the Board of Directors do not currently receive any cash
compensation for their services as Directors, but are entitled to be
reimbursed for their reasonable expenses in attending meetings of the Board.
However, it is the Company's intention to begin to pay cash compensation to
Board members at some future date.
DIRECTOR COMPENSATION
The following table sets forth certain information regarding the
compensation paid to directors during the fiscal year ended June 30, 2009:
------------------------------------------------------------------------
Fees All
earned other
or paid Stock Option compen-
in cash Awards Awards sation Total
Name ($) ($) ($)(1) ($) ($)
------------------------------------------------------------------------
Jon Northrop (2) - - 8,750 - 8,750
Jere Northrop (3)(4) - - 7,750 20,000 27,750
Richard Berman (5) - - 28,524 - 28,524
------------------------------------------------------------------------
(1) Reflects the dollar amount expensed by the Company during the applicable
fiscal year for financial statement reporting purposes pursuant to FAS
123R.
(2) Includes 25,000 shares that Mr. Jon Northrop is entitled to purchase
through stock options granted on November 15, 2008, all of which are
exercisable.
(3) Includes 25,000 shares that Mr. Jere Northrop is entitled to purchase
through stock options granted on November 15, 2008, all of which are
exercisable.
(4) Includes salary paid to Mr. Jere Northrop as an employee of the Company
through October 31, 2008.
(5) Includes 35,000 shares that Mr. Berman is entitled to purchase through
stock options granted on October 15, 2006, of which 23,334 are
exercisable as of June 30, 2009.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
At September 11, 2009, the Company had issued 12,364,752 shares of its
common stock, of which 11,660,443 are outstanding (the balance of 704,309
shares are owned by Centerpoint, the Company's majority owned subsidiary).
51
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of September 11, 2009 by:
* each person that is known by us to beneficially own more than
5% of our common stock;
* each of our directors;
* each of our executive officers and significant employees; and
* all our executive officers, directors and significant employees
as a group.
Under the rules of the Securities and Exchange Commission, beneficial
ownership includes voting or investment power with respect to securities and
includes the shares issuable under stock options that are exercisable within
sixty (60) days of September 11, 2009. Those shares issuable under stock
options are deemed outstanding for computing the percentage of each person
holding options but are not deemed outstanding for computing the percentage
of any other person. The percentage of beneficial ownership schedule is
based upon 11,660,4433 shares outstanding as of September 11, 2009. The
address for those individuals for which an address is not otherwise provided
is c/o Bion Environmental Technologies, Box 566/1774 Summitview, Crestone,
Colorado 81131. To our knowledge, except as indicated in the footnotes to
this table and pursuant to applicable community property laws, the persons
named in the table have sole voting power and investment power with respect
to all shares of common stock listed as owned by them.
Shares of Common Stock
Beneficially Owned
----------------------------------
Percent of
Class Entitled
Name and Address Number Outstanding to Vote
---------------- --------- ----------- --------
Centerpoint Corporation (1) 704,309 5.7% -
Box 566/1774 Summitview
Crestone, Colorado 81131
Dominic Bassani (2) 4,449,364 30.02% 31.51%
64 Village Hills Drive
Dix Hills, NY 11746
Chris-Dan, LLC (3) 1,055,692 8.54% 9.05%
c/o Dominic Bassani
64 Village Hills Drive
Dix Hills, NY 11746
Bright Capital, Ltd. (4) 1,622,735 12.30% 12.99%
c/o Dominic Bassani
64 Village Hills Drive
Dix Hills, NY 11746
Bright Capital, Ltd. Defined 785,501 6.35% 6.74%
Benefit Pension Plan (5)
c/o Dominic Bassani
64 Village Hills Drive
Dix Hills, NY 11746
52
Anthony Orphanos (6) 1,253,916 10.11% 10.72%
c/o Carret Asset Management
40 West 57th Street
New York, NY 10019
Danielle Christine Bassani (7) 604,000 4.67% 4.94%
c/o Dominic Bassani
64 Village Hills Drive
Dix Hills, NY 11746
Mark A. Smith (8) 1,619,031 12.63% 13.37%
Jere Northrop (9) 369,686 2.94% 3.12%
Jon Northrop (10) 279,809 2.24% 2.38%
Jeremy Rowland (11) 220,000 1.75% 1.85%
James Morris (12) 325,000 2.56% 2.71%
George Bloom (13) 322,112 2.54% 2.69%
All executive officers, directors
and significant employees as
a group (7 persons) 7,585,002 46.09% 48.15%
__________________
(1) Centerpoint Corporation is currently majority owned by the Company. Under
Colorado law, Centerpoint Corporation is not entitled to vote these shares unless
otherwise ordered by a court. These shares of common stock may be distributed to the
shareholders of Centerpoint Corporation at a future date pursuant to a dividend
declared during July 2004. The shares distributed to Bion, if any, will be cancelled
immediately upon receipt.
(2) Includes 53,505 shares and 1,600,000 shares underlying warrants held directly by
Mr. Bassani; 3,900 shares and 500,000 shares underlying warrants held by Bright
Capital, Ltd. ("Brightcap") of which Mr. Bassani is the owner; 785,501 shares owned by
the Bright Capital Ltd. Defined Benefit Pension Plan of which Mr. Bassani is the
beneficiary; 1,055,692 shares held by Chris-Dan, LLC of which Mr. Bassani is owner;
25,000 shares underlying warrants held by Mr. Bassani's wife; and 10,050 shares and
44,382 shares held in IRA accounts of Mr. Bassani and his wife, respectively. Also
includes 333,334 shares issuable to Brightcap related to convertible deferred
compensation and 38,000 shares owned by Mr. Bassani's daughter, Danielle Bassani. Mr.
Bassani has also been granted 250,000 shares of contingent stock bonuses that are not
included in this calculation. Mr. Bassani disclaims ownership of 566,000 shares
underlying warrants held by The Danielle Christine Bassani Trust, which is separately
itemized herein. Mr. Bassani's adult daughter, who lives with him, is the beneficiary
of the Danielle Christine Bassani Trust and Mr. Bassani is not one of the trustees of
the trust. Mr. Bassani further disclaims beneficial ownership of shares and warrants
owned by various other family members, none of whom live with him or are his
dependents, and such shares are not included in this calculation.
(3) Represents 1,055,692 shares held directly by Chris-Dan, LLC, which is owned by
Dominic Bassani.
(4) Represents 3,900 shares held directly by Bright Capital, Ltd. and 500,000 shares
underlying warrants held by Bright Capital, Ltd.; and 785,501 shares owned by the
Bright Capital, Ltd. Defined Benefit Pension Plan. Also includes 333,334 shares
issuable to Bright Capital, Ltd. related to convertible deferred compensation.
Dominic Bassani owns Bright Capital, Ltd. and is the beneficiary of its Defined
Benefit Pension Plan.
53
(5) Represents 785,501 shares held directly by the Bright Capital, Ltd. Defined
Benefit Pension Plan. Dominic Bassani is the beneficiary of this Pension Plan.
(6) Includes 402,446 shares held directly by Mr. Orphanos plus 25,500 and 10,000
shares, respectively, underlying warrants and options held directly by Mr. Orphanos;
130,263 shares held jointly with his wife; and 685,707 shares held in an IRA. Not
included are 566,000 shares underlying warrants held by the Danielle Christine Bassani
Trust, of which Mr. Orphanos is a co-trustee and 1,470,260 common shares owned by
certain clients of Mr. Orphanos, over which Mr. Orphanos exercises discretionary
authority (which shares include: a) 785,501 shares owned by the Bright Capital Ltd.
Defined Benefit Pension Plan of which Mr. Bassani is the beneficiary; b) 18,893 shares
held by Mr. Bassani personally; c) 54,432 shares owned by IRAs for Mr. Bassani and/or
his wife; and 38,000 shares owned by Danielle Bassani). Mr. Orphanos disclaims
beneficial ownership of the shares listed in the preceding sentences because he has no
pecuniary interest in the shares.
(7) Represents 566,000 shares underlying warrants held by The Danielle Christine
Bassani Trust, Anthony Orphanos and Donald Codignotto, trustees and 38,000 shares
owned by Danielle Bassani, beneficiary of the trust.
(8) Includes 905,065 shares held directly by Mark A. Smith; 450,000 shares underlying
options held directly by Mr. Smith; 25,829 shares held jointly with his wife; 70,456
shares held by his wife; and 167,681 shares of common stock held by LoTayLingKyur
Foundation which is controlled by Mr. Smith. Does not include shares and warrants
owned by various family members of which Mr. Smith disclaims beneficial ownership.
Mr. Smith is also the President of Centerpoint, although shares owned by Centerpoint
are not entitled to a vote while held by Centerpoint.
(9) Includes 77,746 shares owned jointly by Jere Northrop and his wife and 67,697
shares held by Jere Northrop's wife; and 20,730 shares held by a family estate trust
and 3,513 shares held by a family foundation; plus 200,000 shares underlying options
held by Jere Northrop. Does not include shares owned by the adult child Jere
Northrop; also does not include 8,302 shares owned by the Jere Northrop Family trust
and 1,371 shares owned by the Harley Northrop Charitable Trust, for each of which Mr.
Northrop disclaims beneficial ownership. Jere Northrop has also been granted 22,500
shares of contingent stock bonus that are not included in this calculation.
(10) Includes 108,466 shares held directly by Jon Northrop; 16,464 shares owned by
Jon Northrop's wife; 9,265 shares owned jointly by Jon Northrop and his wife; options
to purchase 120,000 shares held by Jon Northrop; and 20,730 shares owned by a family
trust, 3,513 shares held by the Harley Northrop Family Foundation and 1,371 shares
owned by the Harley Northrop Charitable Remainder UniTrust. Does not include shares
owned by the adult children of Jon Northrop.
(11) Mr. Rowland holds 20,000 shares and warrants to purchase 150,000 shares and
options to purchase 50,000 shares.
(12) Mr. Morris holds 25,000 shares and options to purchase 300,000 shares (all
subject to vesting conditions not yet met) Mr. Morris has also been granted 75,000
shares of contingent stock bonus that are not included in this calculation.
(13) Mr. Bloom holds 22,112 shares (20,000 subject to vesting conditions not yet met)
and options to purchase 300,000 shares (all subject to vesting conditions not yet
met). Mr. Bloom has also been granted 75,000 shares of contingent stock bonus that are
not included in this calculation.
54
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Other than the employment/consulting agreements, deferred compensation
arrangements and conversions of debt described above in Item 1 Business and
Item 11 Executive Compensation, there are no related party transactions
except that:
1) Bion accrued a payable of $41,647 to a company controlled by
Salvatore Zizza for rental of office space in 2003. This obligation was
convertible into the Company's common stock at $.75 per share until paid by
the Company and Mr. Zizza converted it into 55,530 shares of the Company's
restricted common stock during September 2009.
2) The Company executed a non-cancellable operating lease for office
space in New York City effective August 1, 2006 and extending to November 30,
2013. The average monthly rent under the lease is $15,820. The Company
provided the lessor with a letter of credit in the amount of $128,443 in
connection with the lease which reduces over the term of the release. The
Company's obligations under the lease are partially guaranteed by Salvatore
Zizza, former Chairman of Projects Group. Effective January 1, 2009, Mr.
Zizza entered into a Master Sublease with the Company pursuant to which Mr.
Zizza became a sublessee and, for a one year initial period, is responsible
to make all payments pursuant to the lease and manage the lease premises.
Rental payments from existing sub-tenants are being deposited into a Company
bank account and Mr. Zizza has utilized such funds as partial funding of the
monthly lease payments. Mr. Zizza has the option, exercisable on or before
November 15, 2009, to continue the Master Sublease for the entire period of
the lease. If Mr. Zizza fulfills his obligations under the Master Sublease
during the one year initial period, he shall receive the funds from the next
release from restricted funds securing the Company's letter of credit
approximating $28,000. If Mr. Zizza exercises the option to continue the
Master Sublease for the entire term of the lease, Mr. Zizza will be entitled
to the balance of restricted funds securing the letter of credit.
No directors of the Company are considered to be independent directors.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
AUDIT FEES
In December 2005, the Company engaged GHP Horwath, P.C. as its
independent registered public accounting firm. The aggregate fees billed for
each of the last two fiscal years ended June 30, 2009 and June 30, 2008 by
GHP Horwath, P.C. for professional services rendered for the audit of the
Company's annual financial statements and reviews of interim financial
statements included in the Company's quarterly reports on Form 10-Q (and
related matters) were $58,520 and $64,400, respectively.
AUDIT RELATED FEES
There were no fees billed by GHP Horwath, P.C. for audit-related fees in
each of the last two fiscal years ended June 30, 2009 and June 30, 2008.
55
TAX FEES
The aggregate fees billed for tax services rendered by GHP Horwath, P.C.
for tax compliance and tax advice for the two fiscal years ended June 30,
2009 and June 30, 2008 were $373 and $0, respectively.
ALL OTHER FEES
None.
AUDIT COMMITTEE PRE-APPROVAL POLICY
Under provisions of the Sarbanes-Oxley Act of 2002, the Company's
principal accountant may not be engaged to provide non-audit services that
are prohibited by law or regulation to be provided by it, and the Board of
Directors (which serves as the Company's audit committee) must pre-approve
the engagement of the Company's principal accountant to provide audit and
permissible non-audit services. The Company's Board has not established any
policies or procedures other than those required by applicable laws and
regulations.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION AND LOCATION
------- ------------------------
3.1 Articles of Incorporation. (1)
3.2 Bylaws. (1)
10.1 Subscription Agreement dated January 10, 2002 between Bion
Environmental Technologies, Inc and Centerpoint Corporation
regarding issuance of stock in exchange for cash and claims
regarding Aprilia. (1)
10.2 Agreement dated March 15, 2002 and effective January 15, 2002
between Bion Environmental Technologies, Inc. and Centerpoint
Corporation regarding purchase of warrant and management
agreement. (1)
10.3 Agreement dated February 12, 2003 between Bion Environmental
Technologies, Inc. and Centerpoint Corporation canceling
provisions of the Subscription Agreement by and between Bion
Environmental Technologies, Inc. and Centerpoint Corporation. (1)
10.4 Promissory Note and Security Agreement between Bion
Environmental Technologies, Inc. and Bright Capital, LLC. (1)
56
10.5 First Amendment to Lease between Bion Environmental
Technologies, Inc. and Pan Am Equities Corp. (1)
10.6 Agreement between Bion Environmental Technologies, Inc. and
Bergen Cove. (1)
10.7 Agreement between Bion Environmental Technologies, Inc. and
David Mitchell dated April 7, 2003. (1)
10.8 Letter Agreement with Bright Capital, Ltd. (1)
10.9 Agreement with OAM, S.p.A. dated May 2003. (1)
10.10 Amended Agreement with Centerpoint Corporation dated
April 23, 2003. (1)
10.11 Form of Series A Secured Convertible Notes issued in August 2003.
(1)
10.12 Financing Documents for Bion Dairy Corporation. (1)
10.13 Form of Class SV/DB Warrant. (1)
10.14 Form of Class SV/DM Warrant. (1)
10.15 Form of Series A* Secured Convertible Notes issued in April 2004.
(1)
10.16 Form of Series B Secured Convertible Notes issued in Spring 2004.
(1)
10.17 Form of Series B* Secured Convertible Notes issued in June 2004.
(1)
10.18 Form of Series C Notes issued in September 2005. (1)
10.19 Form of 2006 Series A Convertible Promissory Notes issued in
September 2006. (1)
10.20 Form of Non-Disclosure Agreement used by the Company. (1)
10.21 Promissory Note and Conversion Agreement between Bion
Environmental Technologies, Inc. and Mark A. Smith related to
deferred compensation. (1)
10.22 Promissory Note and Conversion Agreement between Bion
Environmental Technologies, Inc. and Bright Capital, Ltd.
related to deferred compensation. (1)
10.23 Employment agreement with Mark A. Smith. (1)
10.24 Employment agreement with Salvatore Zizza. (1)
10.25 Employment agreement with Bright Capital, Ltd. (1)
57
10.26 Employment agreement with Jeff Kapell. (1)
10.27 Employment agreement with Jeremy Rowland. (1)
10.28 Office lease at 641 Lexington Avenue, 17th Floor, New York. (1)
10.29 2006 Consolidated Incentive Plan. (1)
10.30 Memo to Dominic Bassani & Bright Capital, Ltd. dated October 16,
2006 regarding Change in Title/Status of DB/Amendment to
Brightcap Agreement. (1)
10.31 Letter Agreement between Bion Dairy Corporation and Fair Oaks
Dairy Farms dated June 19, 2006. (2)
10.32 Waiver and Release Agreement with Ardour Capital Investments,
LLC. (2)
10.33 Promissory Note and Conversion Agreement for Mark Smith, dated
January 1, 2007. (2)
10.34 Promissory Note and Conversion Agreement for Salvatore Zizza,
dated January 1, 2007. (2)
10.35 Promissory Note and Conversion Agreement for Bright Capital,
Ltd., dated January 1, 2007. (2)
10.36 Extension Agreement dated March 31, 2007 between the Company
and Mark A Smith. (3)
10.37 Form of Note dated March 31, 2007 in the amount of $151,645.89
in favor of Mark A. Smith. (3)
10.38 Form of Note dated March 31, 2007 in the amount of $379,389.04
in favor of Salvatore Zizza. (3)
10.39 Form of Note dated March 31, 2007 in the amount of $455.486.30
in favor of Bright Capital, Ltd. (3)
10.40 Stipulation and Agreement of Compromise and Release dated May 21,
2007 between Centerpoint Corporation, Bion Environmental
Technologies, Richard Anderson and Joseph Foglia, as Plaintiffs,
and Comtech Group, Inc., OAM S.p.A., Invested Ernst & Company and
others as Defendants. (4)
10.41 Stipulation and Agreement of Compromise, Settlement and Release
dated May 15, 2007 between TCMP3 Partners, LLP as Plaintiff and
Bion Environmental Technologies, Inc. and Bion Dairy Corporation,
among others, as Defendants. (4)
10.42 Stipulation and Agreement of Compromise, Settlement and Release as
to Certain Defendants dated May 15, 2007 between TCMP3 Partners,
LLP as Plaintiff and certain defendants other than Bion
Environmental Technologies, Inc. and Bion Dairy Corporation. (4)
58
10.43 Letter of Intent dated August 18, 2007 between Bion Environmental
Technologies, Inc. and Evergreen Farm, Inc. (5)
10.44 Memorandum of Understanding with Kreider Farms (6)
10.45 Subscription Agreement from Bright Capital, Ltd. (7)
10.46 Amendment to 2006 Consolidated Incentive Plan (7)
10.47 Agreement between the Company and Mark A. Smith dated May 31,
2008. (7)
10.48 2007 Series AB Convertible Promissory Note. (8)
10.49 Promissory Note between Bion Environmental Technologies,
Inc. and Salvatore Zizza (9)
10.50 Promissory Note between Bion Environmental Technologies,
Inc. and Dominic Bassani (9)
10.51 Agreement between Jeff Kapell and Bion dated November 1,
2008 (10)
10.52 Agreement Between David Mager and Bion dated November 1,
2008 (10)
10.53 Promissory Note between Anthony Orphanos and Bion dated October
30, 2008, Guaranteed by Dominic Bassani (10)
10.54 Addendum to Settlement Agreement and Release Stipulation
from Bion, Bion Dairy and Mark Smith dated October 31,
2008 (10)
10.55 Kreider Farms Agreement (September 25, 2008): REDACTED (11)
10.56 Agreement between Salvatore Zizza and Bion effective December
31, 2008 (12)
10.57 Amendment #3 to 2006 Consolidated Incentive Plan (12)
10.58 Agreement between Bright Capital, Ltd. and Dominic Bassani and
Bion effective January 11, 2009 (13)
10.59 Agreement between Mark A. Smith and Bion effective January 12,
2009 (13)
10.60 Orphanos Extension Agreement dated January 13, 2009 (13)
10.61 Articles of Amendment including Statement of Designation and
Determination of Preferences of Series B Convertible
Preferred Stock (14)
10.62 Lease Agreement between Ronald Kreider and Kreider
Farms and Bion PA 1 LLC dated June 26, 2009 (15)
59
10.63 Capitalization Agreement between Bion Companies and
Bion PA 1 LLC dated June 30, 2009 (15)
21 Subsidiaries of the Registrant. (1)
23.1 Consent of GHP Horwath, P.C., Independent Registered Public
Accounting Firm - Filed herewith electronically
31.1 Certification of Chief Executive Officer and Principal Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
- Filed herewith electronically
32.1 Certification of Chief Executive Officer and Principal Financial
Officer Pursuant to Section 18 U.S.C. Section 1350 - Filed
herewith electronically
_______________
(1) Filed with Form 10SB12G on November 14, 2006.
(2) Filed with Form 10SB12G/A on February 1, 2007.
(3) Filed with Form 8-K on April 3, 2007.
(4) Filed with Form 9-K on August 13, 2007.
(5) Filed with Form 8-K on August 22, 2007.
(6) Filed with Form 8-K on February 27, 2008.
(7) Filed with Form 8-K on June 3, 2008.
(8) Filed with Form 8-K on June 19, 2008.
(9) Filed with Form 8-K on September 30, 2008.
(10) Filed with Form 8-K on November 13, 2008.
(11) Filed with September 30, 2008 Form 10-Q on November 14, 2008.
(12) Filed with Form 8-K on January 6, 2009.
(13) Filed with Form 8-K on January 15, 2009.
(14) Filed with March 31, 2009 Form 10-Q on May 14, 2009.
(15) Filed with Form 8-K on July 2, 2009.
(b) FINANCIAL STATEMENT SCHEDULES.
Our consolidated financial statements being filed as part of this Form
10-K are filed on Item 8 of this Form 10-K. All other schedules for which
provision is made in the applicable accounting regulations of the Securities
and Exchange Commission are not required under the related instructions or
are inapplicable, and therefore have been omitted.
60
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2009 AND 2008
CONTENTS
Page
Consolidated financial statements:
Report of independent registered public accounting firm ........ F-2
Balance sheets ................................................. F-3
Statements of operations ....................................... F-4
Statements of changes in stockholders' equity (deficit) ........ F-5
Statements of cash flows ....................................... F-6
Notes to consolidated financial statements ..................... F-7 - F-38
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Bion Environmental Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Bion
Environmental Technologies, Inc. and subsidiaries ("the Company") as of June
30, 2009 and 2008, and the related consolidated statements of operations,
changes in stockholders' equity (deficit) and cash flows for each of the
years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bion
Environmental Technologies, Inc. and subsidiaries as of June 30, 2009 and
2008, and the results of their operations and their cash flows for each of
the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has not
generated revenue and has suffered recurring losses from operations. These
factors raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also discussed in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ GHP HORWATH, P.C.
Denver, Colorado
September 23, 2009
F-2
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2009 2008
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,695,713 $ 478,899
Prepaid rent and expenses 12,217 9,130
Other receivable - affiliate 8,797 -
Deposits and other receivables 11,956 12,068
------------ ------------
Total current assets 1,728,683 500,097
------------ ------------
Restricted cash (Note 13) 85,973 128,443
Property and equipment, net (Note 4) 477,229 59,504
------------ ------------
Total assets $ 2,291,885 $ 688,044
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable and accrued expenses $ 834,638 $ 567,811
Accrued payable - affiliate (Note 16) 41,647 41,647
Loans payable - affiliates (Note 6) 162,500 -
Deferred compensation (Note 8) 175,000 25,000
------------ ------------
Total current liabilities 1,213,785 634,458
Convertible promissory notes - affiliates
(Note 5) - 784,122
Deferred compensation (Note 8) 150,000
Deferred rent (Note 13) 73,232 71,865
------------ ------------
Total liabilities 1,437,017 1,490,445
------------ ------------
Minority interest (Note 3) 111,790 117,692
------------ ------------
Stockholders' equity (deficit) (Note 9):
Series A Preferred stock, $0.01 par value,
10,000 shares authorized, no shares issued
and outstanding - -
Series B Preferred stock, $.01 par value,
50,000 shares authorized, 21,320 shares
issued and outstanding; liquidation preference
of $2,144,876 1,867,716 -
Common stock, no par value, 100,000,000
shares authorized, 12,126,448 and 11,070,658
shares issued, respectively, 11,422,139 and
10,366,349 shares outstanding, respectively - -
Additional paid-in capital 74,529,507 73,422,195
Accumulated deficit (75,654,145) (74,342,288)
------------ ------------
Total stockholders' equity (deficit) 743,078 (920,093)
------------ ------------
Total liabilities and stockholders' equity
(deficit) $ 2,291,885 $ 688,044
============ ============
See notes to consolidated financial statements.
F-3
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2009 AND 2008
2009 2008
------------ ------------
Revenue $ - $ -
------------ ------------
Operating expenses:
General and administrative (including stock-
based compensation (Note 9)) 1,959,810 2,089,015
Research and development (including stock-
based compensation (Note 9)) 357,331 791,931
------------ ------------
Total operating expenses 2,317,141 2,880,946
------------ ------------
Loss from operations (2,317,141) (2,880,946)
------------ ------------
Other expense and (income):
Interest expense 38,401 186,320
Interest income (1,773) (21,489)
Minority interest (Note 3) (5,902) 117,692
Forfeiture of deferred compensation (Note 5) (959,184) -
Extinguishment of liabilities (Note 11) (1,826) (126,712)
Other, net (Note 10) (75,000) (1,258,195)
------------ ------------
(1,005,284) (1,102,384)
------------ ------------
Net loss (1,311,857) (1,778,562)
Dividends on preferred stock (12,876) -
------------ ------------
Net loss applicable to common stockholders $ (1,324,733) $ (1,778,562)
============ ============
Net loss per basic and diluted common share: $ (0.12) $ (0.21)
============ ============
Weighted-average number of common shares
outstanding, basic and diluted 10,684,962 8,383,068
============ ============
See notes to consolidated financial statements.
F-4
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 2009 AND 2008
Total
Series B stockholders'
Preferred Stock Common Stock Additional Accumulated equity
Shares Amount Shares Amount paid-in capital deficit (deficit)
------ ---------- ---------- ------ --------------- ------------ ------------
Balances, June 30, 2007 - $ - 8,770,079 $ - $67,900,379 $(72,563,726) $(4,663,347)
Exchange/conversion of
debt to common stock -
affiliates - - 890,124 - 1,943,352 - 1,943,352
Exchange/conversion of
debt to common stock -
non-affiliates - - 817,912 - 1,635,810 - 1,635,810
Conversion of deferred
compensation to common
stock - - 265,043 - 530,085 - 530,085
Sale of common stock,
net of offering costs
of $20,000 - - 325,000 - 630,000 - 630,000
Issuance of common stock
for services - - 2,500 - 5,000 - 5,000
Issuance of warrants for
services - - - - 17,000 - 17,000
Issuance of warrants - - - - 16,000 - 16,000
Vesting of options for
services - - - - 744,569 - 744,569
Net loss - - - - - (1,778,562) (1,778,562)
------ ---------- ---------- ------ ----------- ------------ -----------
Balances, June 30, 2008 - - 11,070,658 - 73,422,195 (74,342,288) (920,093)
------ ---------- ---------- ------ ----------- ------------ -----------
Vesting and remeasurement
of options for services - - - - 143,153 - 143,153
Issuance of common stock
for services - - 290,343 - 177,370 - 177,370
Issuance of warrants for
services - - - - 180,582 - 180,582
Sale of common stock - - 446,667 - 380,000 - 380,000
Sale of Series B preferred
stock, net 21,320 1,854,840 - - - - 1,854,840
Dividends on Series B
Preferred stock - - 12,876 - - (12,876) - -
Conversion of debt to
equity - - 318,780 - 239,083 - 239,083
Net loss - - - - - (1,311,857) (1,311,857)
------ ---------- ---------- ------ ----------- ------------ -----------
Balances, June 30, 2009 21,320 $1,867,716 12,126,448 $ - $74,529,507 $(75,654,145) $ 743,078
====== ========== ========== ====== =========== ============ ===========
See notes to consolidated financial statements.
F-5
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2009 AND 2008
2009 2008
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,311,857) $ (1,778,562)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation expense 15,454 16,253
Accrued interest on convertible notes and debt 33,069 186,320
Stock-based compensation 493,188 782,569
Forfeiture of deferred compensation (959,184) -
Decrease in fair value of convertible notes - (560,770)
Minority interest (5,902) 117,692
Decrease in prepaid rent and expenses 4,830 10,980
Increase in deposits and other receivables (8,685) (9,223)
Increase (decrease) in accounts payable and
accrued expenses 266,827 (80,506)
Increase in deferred rent 1,367 5,892
Increase in deferred compensation 516,076 741,780
------------ ------------
Net cash used in operating activities (954,817) (567,575)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in restricted cash 42,470 43,502
Proceeds from refund of property and equipment - 5,258
Purchase of property and equipment (433,179) (5,395)
------------ ------------
Net cash (used in) provided by investing
activities (390,709) 43,365
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 380,000 630,000
Proceeds from sale of Series B preferred stock 1,854,840 -
Proceeds from loans payable - affiliates 162,500 -
Proceeds from notes payable - affiliates 165,000 -
------------ ------------
Net cash provided by financing activities 2,562,340 630,000
------------ ------------
Net increase in cash and cash equivalents 1,216,814 105,790
Cash and cash equivalents at beginning of year 478,899 373,109
------------ ------------
Cash and cash equivalents at end of year $ 1,695,713 $ 478,899
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest and income taxes $ - $ -
Non-cash investing and financing transactions:
Exchange/conversion of debt to common stock $ 239,083 $ 3,579,162
Conversion of deferred compensation to
convertible notes - affiliates - 375,000
Conversion of deferred compensation to common
stock - 530,085
See notes to consolidated financial statements.
F-6
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2009 AND 2008
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS:
Organization and nature of business:
Bion Environmental Technologies, Inc. ("Bion" or "We" or the "Company") was
incorporated in 1987 in the State of Colorado.
Bion's patented and proprietary technology provides a comprehensive
environmental solution to a significant source of pollution in US
agriculture, Confined Animal Feeding Operations ("CAFO's"). Bion's technology
produces substantial reductions of both nutrient releases to water and air
emissions including ammonia (which is subsequently re-deposited to the
ground) from livestock waste streams based upon our research to date. Because
Bion's technology reduces the harmful releases and emissions from a CAFO on
which it is utilized, the CAFO can potentially increase its herd
concentration while lowering or maintaining its level of nutrient releases
and atmospheric emissions.
From 2003 through early 2008, the Company primarily focused on completing re-
development of its technology platform and business model. As such, during
that period we elected not to pursue near term revenue opportunities such as
retrofitting existing CAFO's with our waste management solutions, because
such efforts would have diverted scarce management and financial resources
and negatively impacted our ability to complete: 1) re-development of our
technology for environmentally sound treatment of CAFO waste streams and 2)
development of our integrated technology platform in support of large-scale
sustainable Integrated Projects including renewable energy production.
Bion is now actively pursuing business opportunities in two broad areas: 1)
retrofit and environmental remediation of existing CAFOs to clean the air and
water in the surrounding areas (as described below) and 2) development of
"closed loop" Integrated Projects (defined below).
We believe that Bion's technology platform allows the integration of large-
scale CAFO's and their end-product users, renewable energy production from
the CAFO waste stream, on site utilization of the renewable energy generated
and biofuel/ethanol production in an environmentally and economically
sustainable manner while reducing the aggregate capital expense and operating
costs for the entire integrated complex ("Integrated Projects" or
"Projects"). In the context of Integrated Projects, Bion's waste treatment
process, in addition to mitigating polluting releases, generates renewable
energy from cellulosic portions of the CAFO waste stream which renewable
energy can be utilized by integrated facilities including ethanol plants,
CAFO end-product processors (including cheese, ice cream and /or bottling
plants in the case of dairy CAFOs and/or slaughter and/or processing
facilities in the context of beef CAFOs) and/or other users as a natural gas
replacement. Bion is presently involved in pre-development evaluations
F-7
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS:
(CONTINUED):
regarding opportunities for Integrated Projects in New York (beef), Nebraska
(dairy) and elsewhere.
On September 27, 2008, the Company executed an agreement with Kreider Farms
(and its affiliated entities) (collectively "Kreider") to design, construct
and operate (through its wholly-owned subsidiaries, Bion Services Group, Inc.
("Bion Services") and Bion PA-1 LLC ("LLC")) a Bion system to treat the waste
of the milking dairy cows (milkers, dry cows and heifers) at the Kreider
Dairy, located in Mannheim, Pennsylvania. In addition, the agreement provides
for a second phase which will include a renewable energy facility ("REF")
that will treat the cellulosic solid wastes from Phase 1 together with the
waste stream from Kreider's poultry facilities to produce renewable energy
for Bion's waste treatment facility and/or for market sales. The Phase 1
system will be owned and operated by Bion through LLC, in which Kreider will
have the option to purchase a minority interest. To complete final design
work and all building, zoning and other related pre-construction matters,
substantial capital (equity and/or debt) has been and will continue to be
expended. Additional funds will be expended for construction. Upon
successful construction and operation of these systems, the Company
anticipates that it will earn revenue from the sale of nutrient (and other)
environmental credits related to the Kreider system and through sales of
renewable energy generated by the Kreider systems.
During January 2009, the Board of Pennsylvania Infrastructure Investment
Authority ("Pennvest") approved a loan up to $7.8 million ("Pennvest Loan")
to LLC for development and construction of the Phase 1 System at Kreider.
The Pennvest Loan is structured in phases (pre and post-completion of
permitting/commencement of construction) and Pennvest's disbursements will
take the form of reimbursement of qualified sums expended by LLC. In
connection with the Pennvest Loan the Company has provided a 'technology
guaranty' regarding nutrient reduction performance of the Kreider System
which will expire when the Kreider System's nutrient reduction performance
has been demonstrated. The Company completed the steps required to finalize
the pre-construction phase of the Pennvest loan during September 2009. The
Company anticipates that the steps required to finalize the pre-construction
phase of the Pennvest Loan will be completed during the next quarter and that
the initial drawdown/re-imbursement from Pennvest pursuant to the Pennvest
Loan will be received shortly thereafter. Bion is in the process of
finalizing its design for the Phase 1 Kreider System and has commenced the
permitting process. It is anticipated that construction will commence during
the fall of 2009 and be completed during the 2010 fiscal year.
F-8
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS
(CONTINUED):
Going concern and management's plans:
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. The Company has not generated revenue and
has incurred net losses of approximately $1,312,000 and $1,779,000 during the
years ended June 30, 2009 and 2008, respectively. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability or classification of assets or the
amounts and classification of liabilities that may result should the Company
be unable to continue as a going concern. The following paragraphs describe
management's plans with regard to these conditions.
As discussed in Notes 9 and 17, the Company recently completed an offering of
the Company's Series B Preferred shares, which as of June 30, 2009 resulted
in the issuance of 21,320 shares at $100 per share resulting in net proceeds
to the Company of $1,854,840. Subsequent to June 30, 2009, the Company
issued an additional 6,850 shares resulting in net proceeds to the Company of
$595,950.
At June 30, 2009, the Company has a working capital surplus and stockholders'
equity of approximately $515,000 and $743,000, respectively.
The Company continues to explore sources of additional financing to satisfy
its current operating requirements.
While the Company currently does not face a severe working capital shortage,
it is not currently generating any revenues. The Company will need to obtain
additional capital to fund its operations and technology development, to
satisfy existing creditors, to develop Projects and to construct the Kreider
Farm facilities. The Company anticipates that it will seek to raise from
$5,000,000 to $50,000,000 (debt and equity) during the next twelve months.
There is no assurance, especially in the extremely unsettled capital markets
that presently exist, that the Company will be able to obtain the funds that
it needs to stay in business, complete its technology development or to
successfully develop its business.
There can be no assurance that funds required during the next twelve months
or thereafter will be generated from operations or that those funds will be
available from external sources such as debt or equity financings or other
potential sources. The lack of additional capital resulting from the
inability to generate cash flow from operations or to raise capital from
external sources would force the Company to substantially curtail or cease
operations and would, therefore, have a material adverse effect on its
F-9
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS
(CONTINUED):
business. Further, there can be no assurance that any such required funds, if
available, will be available on attractive terms or that they will not have a
significantly dilutive effect on the Company's existing shareholders. All
of these factors have been exacerbated by the extremely unsettled credit and
capital markets presently existing.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Bion Integrated Projects Group, Inc. (formerly
Bion Dairy Corporation ("Projects Group"), Bion Technologies, Inc., BionSoil,
Inc., Bion Services, LLC and its majority owned subsidiary, Centerpoint
Corporation ("Centerpoint") (Note 3). All significant intercompany accounts
and transactions have been eliminated in consolidation.
Property and equipment:
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
generally three to ten years. The Company capitalizes all direct costs and
all indirect incrementally identifiable costs related to the design and
construction of its Integrated Projects. The Company reviews its property
and equipment for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Management believes that no impairment exists at June 30, 2009.
Income taxes:
The Company recognizes deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their tax bases, as
well as net operating losses.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets or liabilities of a change in tax rates is recognized in the
period in which the tax change occurs. A valuation allowance is provided to
reduce the deferred tax assets to a level, that more likely than not, to be
realized.
F-10
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The Company adopted the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes -
an Interpretation of FASB Statement No. 109 ("FIN 48"), on July 1, 2007.
There were no unrecognized tax benefits and, accordingly, there was no effect
on the Company's financial condition or results of operations as a result of
implementing FIN 48.
The Company files income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. The Company is no longer subject to U.S. federal
and state tax examinations for fiscal years before 2003. Management does not
believe there will be any material changes in the Company's unrecognized tax
positions over the next 12 months.
The Company's policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. As of the
date of adoption of FIN 48, there were no penalties or accrued interest
amounts associated with any unrecognized tax benefits, nor was any interest
expense recognized during the year.
Cash and cash equivalents:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Loss per share:
Basic loss per share amounts are calculated using the weighted average number
of shares of common stock outstanding during the period. Diluted loss per
share assumes the conversion, exercise or issuance of all potential common
stock instruments, such as options or warrants, unless the effect is to
reduce the loss per share. During the years ended June 30, 2009 and 2008,
the basic and diluted loss per share is the same, as the impact of potential
dilutive common shares is anti-dilutive.
The following table represents the warrants, options and convertible
securities excluded from the calculation of diluted loss per share:
June 30, 2009 June 30, 2008
------------- -------------
Warrants 4,490,616 3,556,667
Options 1,995,833 2,183,333
Convertible debt 388,864 196,031
Preferred stock 1,072,438 -
F-11
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The following is a reconciliation of the denominators of the basic loss per
share computations for the years ended June 30, 2009 and 2008.
Year ended Year ended
June 30, 2009 June 30, 2008
------------- -------------
Shares issued - beginning of period 11,070,658 8,770,079
Shares held by subsidiaries (Note 9) (704,309) (693,799)
---------- ---------
Shares outstanding - beginning of
period 10,366,349 8,076,280
Weighted average shares issued
during the period 318,613 306,788
---------- ---------
Basic weighted average shares -
end of period 10,684,962 8,383,068
========== =========
Fair value of financial instruments:
Effective July 1, 2008, the Company partially adopted SFAS No. 157, Fair
Value Measurements. This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles, and expands disclosure about fair value measurements. As
permitted by FASB Staff Position No. FAS 157-2, Effective Dates of FASB
Statement No. 157, the Company elected to defer the adoption of the
nonrecurring fair value measurement disclosure of nonfinancial assets and
liabilities until July 1, 2009. The adoption of SFAS No. 157 did not have a
material impact on the Company's results of operations, cash flows or
financial position.
To increase consistency and comparability in fair value measurements, SFAS
No. 157 establishes a fair value hierarchy that prioritizes the inputs into
valuation techniques used to measure fair value into three levels as follows:
Level 1 - quoted prices (unadjusted) in active markets for identical assets
or liabilities;
Level 2 - observable inputs other than Level 1, quoted prices for similar
assets or liabilities in active markets, quoted prices for identical or
similar assets and liabilities in markets that are not active, and model-
derived prices whose inputs are observable or whose significant value drivers
are observable; and
F-12
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Level 3 - assets and liabilities whose significant value drivers are
unobservable.
Observable inputs are based on market data obtained from independent sources,
while unobservable inputs are based on the Company's market assumptions.
Unobservable inputs require significant management judgment or estimation.
In some cases, the inputs used to measure an asset or liability may fall into
different levels of the fair value hierarchy. In those instances, the fair
value measurement is required to be classified using the lowest level of
input that is significant to the fair value measurement. Such determination
requires significant management judgment.
The fair values of cash and cash equivalents and accounts payable
approximates their carrying amounts due to their short-term maturities. It is
not practicable to estimate the fair value of the accounts payable-affiliate,
and loans payable to affiliates due to the related party nature of the
underlying transactions.
Stock-based compensation:
The Company recognizes the cost of employee services received in exchange for
an award of equity instruments in the financial statements and the cost is
measured based on the grant date fair value of the award. The stock option
compensation expense is recognized over the period during which an employee
is required to provide service in exchange for the award (the requisite
service period). The Company utilizes the Black-Scholes option-pricing model
to determine fair value. Key assumptions of the Black-Scholes option-pricing
model include applicable volatility rates, risk-free interest rates and the
instrument's expected remaining life. These assumptions require significant
management judgment.
The Company has issued non-employee options that include service conditions
and have graded vesting schedules. Generally for these arrangements, the
measurement date of the services occurs when the options vest. In accordance
with Emerging Issues Task Force ("EITF") Issue No. 96-18, Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services ("EITF 96-18"), recognition of
compensation cost for reporting periods prior to the measurement date is
based on the then current fair value of the options. Fair value of the
options is determined using a Black-Scholes option-pricing model. Any
F-13
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
subsequent changes in fair value will be recorded on the measurement date.
Compensation cost in connection with options that are not fully vested is
being recognized on a straight-line basis over the requisite service period
for the entire award.
Use of estimates:
In preparing the Company's consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentrations of credit risk:
The Company's financial instruments that are exposed to concentrations of
credit risk consist of cash and cash equivalents. The Company's cash and
cash equivalents are in demand deposit accounts placed with federally insured
financial institutions and selected brokerage accounts. Such deposit accounts
at times may exceed federally insured limits. The Company has not
experienced any losses on such accounts.
Comprehensive income (loss):
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income (loss), its components, and
accumulated balances. For the years ended June 30, 2009 and 2008, there was
no difference between net loss and comprehensive loss.
Revenue recognition:
While the Company has not reported any revenues for the years ended June 30,
2009 and 2008, the Company anticipates that future revenues will be generated
from product sales and technology license fees. The Company expects to
recognize revenue from product sales when there is persuasive evidence that
an arrangement exits, when title has passed, the price is fixed or
determinable, and collection is reasonably assured. The Company expects that
technology license fees will be generated from the licensing of Bion's
integrated system. The Company anticipates that it will charge its customers
a non-refundable up-front technology license fee, which will be recognized
over the estimated life of the customer relationship. In addition, any on-
going technology license fees will be recognized as earned based upon the
F-14
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
performance requirements of the agreement. Annual waste treatment fees will
be recognized upon receipt. Revenues, if any, from the Company's interest in
Projects will be recognized when the entity in which the Project has been
developed recognizes such revenue.
Recent accounting pronouncements:
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115 ("SFAS 159"). This statement permits entities to choose to
measure eligible items at fair value at specified election dates. SFAS 159
was effective for the Company on July 1, 2008. The adoption of SFAS 159 did
not have a material impact on the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations ("SFAS 141R"). SFAS 141R continues to require the purchase
method of accounting to be applied to all business combinations, but it
significantly changes the accounting for certain aspects of business
combinations. Under SFAS 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS 141R will
change the accounting treatment for certain specific acquisition related
items including: (1) expensing acquisition related costs as incurred; (2)
valuing non-controlling interests at fair value at the acquisition date; and
(3) expensing restructuring costs associated with an acquired business. SFAS
141R also includes a substantial number of new disclosure requirements. SFAS
141R is to be applied prospectively to business combinations for which the
acquisition date is on or after July 1, 2009 for the Company. The Company
does not expect that the adoption of SFAS 141R will have an impact on its
consolidated financial statements unless the Company enters into business
acquisitions in the future.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements ("SFAS 160"). SFAS 160 establishes new
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary (minority interest) is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements and separate from the parent company's
equity. Among other requirements, this statement requires consolidated net
income to be reported at amounts that include the amounts attributable to
both the parent and the non-controlling interest. It also requires
disclosure, on the face of the consolidated statement of operations, of the
amounts of consolidated net income attributable to the parent and to the non-
F-15
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
controlling interest. This statement is effective for the Company on July 1,
2009. At that date, the Company will report the non-controlling interest in
a subsidiary (which amounts to $111,790 at June 30, 2009) as a component of
stockholders' equity. This will have the immediate effect of increasing
stockholders' equity by $111,790. The Company is currently evaluating the
effect the adoption of other provisions of this statement may have on its
consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133
("SFAS 161"). SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities by requiring that the objectives for using
derivative instruments be disclosed in terms of underlying risk and
accounting designation. The statement is effective for the Company on
January 1, 2009. The Company does not expect that the adoption of SFAS 161
will have an impact on its consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles ("SFAS 162"). SFAS 162 is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with U.S. GAAP for nongovernmental entities.
SFAS 162 is effective 60 days following the Securities and Exchange
Commission's approval of the Public Company Accounting Oversight Board
auditing amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles." The Company does
not expect SFAS 162 to have an effect on its consolidated financial
statements.
In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee
Insurance Contracts - an interpretation of FASB Statement No. 60. ("SFAS
163"). SFAS 163 requires that an insurance enterprise recognize a claim
liability prior to an event of default (insured event) when there is evidence
that credit deterioration has occurred in an insured financial obligation.
SFAS 163 also clarifies how Statement 60 applies to financial guarantee
insurance contracts, including the recognition and measurement to be used to
account for premium revenue and claim liabilities. SFAS 163 requires expanded
disclosures about financial guarantee insurance contracts. SFAS 163 will be
effective for financial statements issued for fiscal years beginning after
December 15, 2008. The Company does not expect the adoption of FAS 163 will
have any impact on its consolidated financial statements.
In June 2008, the FASB issued EITF Issue No. 07-5, Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock ("EITF
07-5"). EITF 07-5 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those
fiscal years. EITF 07-5 will require the application of a two-step model in
determining whether a financial instrument or an embedded feature is indexed
F-16
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
to an issuer's own stock, including evaluation of the instrument's contingent
exercise and settlement provisions. This statement is effective for the
Company on July 1, 2009. The Company is currently assessing the impact the
adoption of this statement may have on its consolidated financial statements.
In April 2009, the FASB issued FSP SFAS 107-1 and Accounting Principles Board
("APB") 28-1, Interim Disclosures about Fair Value of Financial Instruments
("FSP 107-1"), which will require that the fair value disclosures required
for all financial instruments within the scope of SFAS 107, Disclosures about
Fair Value of Financial Instruments, be included in interim financial
statements. This FSP also requires entities to disclose the method and
significant assumptions used to estimate the fair value of financial
instruments on an interim and annual basis and to highlight any changes from
prior periods. FSP 107-1 will be effective for interim periods ending after
June 15, 2009. The adoption of FSP 107-1 is not expected to have a material
impact on the Company's consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165),
which updates previous guidance under GAAP by replacing "type 1" and "type 2"
with "recognized" and "unrecognized," and requires disclosure in financial
statements of the date through which subsequent events have been evaluated.
SFAS No. 165 is effective for interim and annual periods after June 15, 2009
and was adopted by the Company beginning in the fourth quarter of its fiscal
year 2009. The adoption of SFAS No. 165 did not have a material impact on
the Company's consolidated results of operation and financial condition.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles -
a replacement of SFAS 162 (SFAS No. 168), establishing codification, which
integrates and categorizes all guidance by standard setters within levels A
through D of the previous GAAP hierarchy. SFAS No. 168 will replace all
existing GAAP for non-governmental entities and will establish a new
hierarchy of GAAP, both authoritative and non-authoritative. SFAS No. 168 is
effective for interim and annual periods ending after September 15, 2009 and
will be adopted by the Company beginning in the first quarter of its fiscal
year 2010. The Company does not expect the adoption to have a material
impact on its consolidated results of operations and financial condition.
3. MINORITY INTEREST OF CENTERPOINT CORPORATION:
In January 2002, Bion purchased a 57.7% majority interest in Centerpoint from
a third party. On April 30, 2008, Centerpoint received and cancelled 126,000
shares of its previously outstanding common stock in connection with a
litigation settlement, which increased Bion's ownership from 57.7% to 58.9%.
F-17
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
3. MINORITY INTEREST OF CENTERPOINT CORPORATION (CONTINUED):
Prior to July 1, 2008, the losses applicable to the minority interest in
Centerpoint exceeded the minority interest in the equity capital of
Centerpoint, therefore the loss attributable to the minority interest was
charged against the Company's earnings, as there was no obligation of the
minority interest to make good on such losses. During the year ended June
30, 2008, Centerpoint had earnings of approximately $673,700, of which the
Company utilized approximately $395,500 to offset minority interest losses
previously absorbed. The remaining $278,200 was allocated between the
Company and Centerpoint's minority interest holders, resulting in a minority
interest of $117,692 as of June 30, 2008. The minority interest as of June
30, 2009 was $111,790.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
2009 2008
--------- ---------
Research and development equipment $ 305,266 $ 305,266
Project construction in progress 433,179 -
Leasehold improvement 31,336 31,336
Furniture 28,932 28,932
Computers and office equipment 31,680 31,680
--------- ---------
830,393 397,214
Less accumulated depreciation (353,164) (337,710)
--------- ---------
$ 477,229 $ 59,504
========= =========
Depreciation expense was $15,454 and $16,253 for the years ended June 30,
2009 and 2008, respectively.
5. CONVERTIBLE PROMISSORY NOTES:
2006 Series A Convertible Promissory Notes:
On September 13, 2006, the Company closed the offering of its 2006 Series A
Convertible Promissory Notes, totaling $700,000 (the "2006 Notes"). The
holders of the 2006 Notes earned interest on the unpaid principal balance of
the 2006 Notes at 6% per annum, payable on May 31, 2008, the maturity date of
the 2006 Notes. On May 31, 2008 the 2006 Notes and accrued interest of
$779,074 were exchanged, via subscription agreements, for 389,543 shares of
restricted common stock of the Company at $2.00 per share which approximated
the market price of the stock at the time of conversion.
F-18
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
5. CONVERTIBLE PROMISSORY NOTES (CONTINUED):
During the fourth quarter of 2009, the Company determined that the conversion
of the 2006 Notes during fiscal year 2008 resulted in a non-cash inducement
expense of $519,382 that should have been recognized for the year ended June
30, 2008. Management evaluated this matter in the context of Staff
Accounting Bulletin No. 99 - "Materiality" and determined that the error was
not material to previously issued financial statements.
2007 Series A Convertible Promissory Notes:
In March and April 2007, the Company sold $800,000 of its Convertible Notes
(the "Notes") for cash proceeds. In addition, the Company issued Notes to
affiliates totaling $986,521 in exchange for promissory notes with
convertible features and deferred compensation (Note 8). The Notes were
convertible into shares of the Company's common stock at the price of
$4.00 per share until maturity on July 1, 2008, or at the election of the
Note holders, and accrued interest at 6% per annum. The Note holders also
had the option to exchange the Notes, plus interest, for securities
substantially identical to securities the Company sold in any offering prior
to the completion of an offering in which the Company raised less than
$3,000,000. The Company had the right to require the Notes (principal plus
interest) be converted into its common shares at the lesser of $4.00 per
share or the price of an offering in which the Company raised $3,000,000 or
more.
On May 31, 2008, all of the non-affiliate Note holders, at their election per
the terms of their original Notes, converted their Notes totaling $856,737
including accrued interest into 428,369 restricted common shares of the
Company. Also on May 31, 2008, Notes held by affiliates totaling $650,427
including accrued interest were converted into 325,214 common shares of the
Company. These Notes were converted at a price of $2.00 per share, the price
at which the Company sold common stock during the same period.
On June 18, 2008 the remaining affiliated holder of the outstanding Notes
increased the principal of his Note, maturing on July 1, 2013, by $375,000 to
$784,122, which represented the potential deferred compensation (subject to
forfeiture) through June 30, 2008. The holder, Salvatore Zizza, former
Chairman of Projects Group, agreed to add his future compensation from the
Company to his Note as it accrued. As of December 31, 2008, the principal
and interest on the Note totaled $959,184. Pursuant to an agreement dated
December 19, 2008, (the "Zizza Agreement" see Note 15), Mr. Zizza agreed to
no longer provide services to the Company effective December 31, 2008. In
conjunction with the Zizza Agreement, Mr. Zizza's Note was returned to the
Company on December 31, 2008 and it was cancelled, which resulted in the
F-19
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
5. CONVERTIBLE PROMISSORY NOTES (CONTINUED):
Company's recognition of income due to forfeiture of deferred compensation of
$959,184. The deferred compensation underlying the convertible note had not
yet vested at the date the Note was cancelled. In addition, the Note was
subject to certain risks of forfeiture and/or cancellation.
The Notes accrued interest of $25,062 and $103,630 for the years ended June
30, 2009 and 2008, respectively.
6. LOANS PAYABLE - AFFILIATES:
As of June 30, 2009, Dominic Bassani, Vice-President Special Project and
Strategic Planning for the Projects Group, Mark A. Smith, the Company's
President, and a major shareholder have loaned the Company $120,000, $7,500
and $35,000, respectively, for working capital needs. The loans, totaling
$162,500 as of June 30, 2009, are non-interest bearing and were repaid in
July 2009.
7. PROMISSORY NOTES PAYABLE - AFFILIATES:
During September 2008, Mr. Zizza and Mr. Bassani loaned the Company $50,000
each under separate promissory notes. Under the terms of the promissory
notes, which allowed for additional monies to be loaned, the notes bear
interest at 8% per annum and were payable on or before February 1, 2009.
Pursuant to the Zizza Agreement (Note 15) and the Brightcap Agreement (Note
15), the terms of the promissory notes were amended to allow for the
conversion of the interest and principal of the notes, in whole or in part,
into shares of the Company's restricted common stock at a price of $0.75 per
share, which was equal to the fair value at the date of the agreements.
The maturity dates of the Zizza and Bassani promissory notes were extended to
June 30, 2009 at which date the promissory notes (including accrued interest)
of $52,268 and $52,277, respectively, were converted into 69,692 and 69,703
shares of the Company's common stock.
During October 2008, a major shareholder loaned the Company $65,000 under a
promissory note. Under the terms of the promissory note, which allowed for
additional monies to be loaned, the note bears interest at 8% per annum and
was payable on or before March 1, 2009. In January 2009, an agreement was
reached whereby the maturity of the $65,000 promissory note was extended to
June 30, 2009 in consideration of a) at the election by the note holder, the
ability to convert the principal and interest into the Company's restricted
common stock at $0.75 per share, the fair value of the shares, at any date
prior to repayment and b) the issuance of a warrant to purchase 15,000 shares
of the Company's common stock at $0.75 per share until December 31, 2018.
The modification of the debt was not materially different from the original
F-20
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
7. PROMISSORY NOTES PAYABLE - AFFILIATES (CONTINUED):
debt and there were no beneficial conversion features present with the
modification. The promissory note (including accrued interest) of $68,462
was converted into 91,283 shares of the Company's common stock on June 30,
2009.
The promissory notes accrued interest of $8,007 for the year ended June 30,
2009.
8. DEFERRED COMPENSATION:
As of July 1, 2007, the Company had recorded deferred compensation
liabilities of $187,500 due to three officers of the Company. The Company
accrued $750,000 ($150,000 to Mr. Smith, $300,000 to Brightcap Capital Ltd.
("Brightcap") for services provided by Mr. Bassani, and $300,000 to Mr.
Zizza) as deferred compensation during the year ended June 30, 2008.
During fiscal year 2008, the Company entered into an agreement with Brightcap
converting deferred compensation of $350,000 owed as of May 31, 2008 into a
promissory note with a conversion agreement. The convertible note plus
accrued interest totaling $350,805 was exchanged for 175,403 common shares at
$2.00 per share of the Company on June 15, 2008. In addition, the Company
entered into an extension agreement with Mr. Smith which allowed for the
conversion of deferred compensation accrued through June 30, 2008 of $179,280
into 89,640 common shares of the Company at $2.00 per share. As the
conversion price of $2.00 per shares approximated the fair value of the
shares at the time the conversion agreement was entered into, no beneficial
conversion feature existed. Also during fiscal year 2008, the Company
mutually agreed with Mr. Zizza to convert his deferred compensation earned
through June 30, 2008 of $375,000, and his ongoing compensation as it accrues
to additional principal to his Note. Mr. Zizza's Note was cancelled on
December 31, 2008 (see Note 15).
As of June 30, 2009 the Company owed Brightcap deferred compensation of
$325,000. The Company entered into the Brightcap Agreement (see Note 15),
whereby the deferred compensation of Brightcap owed as of December 31, 2008
totaling $175,000, was made convertible until December 31, 2009 into the
Company's restricted common stock, at Brightcap's option, at a price of $0.75
per share, the fair value of the shares of the Company's stock at the date of
the agreement. As the conversion price of $0.75 per shares approximated the
fair value of the shares at the time the conversion agreement was entered
into, no beneficial conversion feature existed. The Company entered into
another agreement with Brightcap in June 2009, whereby the deferred
compensation earned by Brightcap from January 1, 2009 through June 30, 2009,
totaling $150,000, was made due July 1, 2010 and convertible until July 1,
2010 into the Company's restrict common stock, at Brightcap's option, at a
F-21
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
8. DEFERRED COMPENSATION (CONTINUED):
price of $1.50 per share, the fair value of the shares at the date of the
agreement. As the conversion price of $1.50 per share approximated the fair
value of the shares at the time the conversion agreement was entered into, no
beneficial conversion feature existed.
9. STOCKHOLDERS' EQUITY:
Series B Preferred stock:
During March 2009, the Company authorized the issuance of 50,000 shares of
Series B Preferred stock which have a par value of $0.01 per share and
issuable at a price of $100 per share. The Series B Preferred stock is
convertible for three years from the date of issuance at the option of the
holder into shares of the Company's common stock calculated by dividing the
sum of the $100 per share purchase price plus any accrued and unpaid
dividends by $2.00 (the Conversion Rate). The Series B Preferred stock shall
be automatically and mandatorily converted into shares of the Company's
common stock at the Conversion Rate share upon each occasion (at least 30
calendar days apart) after a date of six months subsequent to the initial
issuance of the Series B Preferred stock on which the closing price of the
Company's common stock have been equal or greater than 150% of the Conversion
Rate (initially $3.00) for twenty consecutive trading days with a reported
average daily trading volume of 10,000 shares or more. The Series B
Preferred stock may be redeemable at the option of the Company after one year
from the issuance on 10 days' written notice, at a price equal to $100 per
share plus any accrued unpaid dividends. During the 10 day period, the
holder may elect to convert the Series B Preferred stock to the Company's
common stock at the Conversion Rate. On the third anniversary of issuance,
the Company shall redeem the outstanding Series B Preferred stock at the
price of $100 per share plus any accrued unpaid dividends. The Series B
Preferred stock accrue dividends at a rate of 2.5% per quarter and shall be
earned and accrued or paid quarterly.
During the year ended June 30, 2009, the Company issued 21,320 shares of
Series B Preferred stock for cash proceeds of $2,132,000 (net proceeds of
$1,854,840 after commissions. On July 29, 2009, the Company concluded the
offering with total sales 28,170 shares (6,850 shares sold after June 30,
2009) of its Series B Convertible Preferred Shares and received net proceeds
of approximately $2,450,000 after commissions and offering expenses.
The Company declared dividends on July 29, 2009, for the Series B Preferred
stockholders with a record date of June 30, 2009, totaling $12,876 which were
paid on August 15, 2009.
F-22
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
9. STOCKHOLDERS' EQUITY (CONTINUED):
Common stock:
Holders of common stock are entitled to one vote per share on all matters to
be voted on by common stockholders. In the event of liquidation, dissolution
or winding up of the Company, the holders of common stock are entitled to
share in all assets remaining after liabilities have been paid in full or set
aside and the rights of any outstanding preferred stock have been satisfied.
Common stock has no preemptive, redemption or conversion rights. The rights
of holders of common stock are subject to, and may be adversely affected by,
the rights of the holders of any outstanding series of preferred stock or any
series of preferred stock the Company may designate in the future.
As of July 1, 2007, Centerpoint held 693,799 shares of the Company's common
stock. As a result of Company common shares being distributed pursuant to a
settlement in April 2008 (Note 10), Centerpoint obtained an additional 10,510
shares of the Company's common stock. These shares of the Company's common
stock held by Centerpoint are for the benefit of its shareholders without any
beneficial interest. The Company accounts for these shares similar to
treasury stock.
In December 2007, under the terms of a promissory note with a conversion
agreement, Mr. Smith converted deferred compensation plus interest of
$412,125 into 274,750 common shares of the Company's common stock.
In May 2008, the Company issued 2,500 shares of common stock to a consultant
for services valued at $5,000. The number of shares issued was based upon
the market price of the common shares at the time the service agreement was
entered into.
On May 31, 2008, under the terms of a subscription agreement, the holders of
convertible promissory notes exchanged the principal plus interest of
$779,074 into 389,543 common shares of the Company's common stock.
On May 31, 2008, under the terms of a promissory note with a conversion
agreement, Brightcap converted deferred compensation plus interest of
$754,414 into 290,160 common shares of the Company's common stock.
On May 31, 2008, under the terms of convertible promissory notes, holders of
the notes converted principal plus interest of $1,507,164 into 753,583 common
shares of the Company's common stock.
F-23
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
9. STOCKHOLDERS' EQUITY (CONTINUED):
In June 2008, the Company completed a private financing of 325,000 shares of
common stock priced at $2.00 per share. Net proceeds to the Company were
$630,000.
On June 15, 2008, under the terms of a convertible promissory note, Brightcap
converted deferred compensation plus interest totaling $350,805 into 175,403
common shares of the Company's common stock.
On June 30, 2008, Mr. Smith converted deferred compensation of $179,280 into
89,640 common shares of the Company's common stock.
From November 2008 through March 2009, the Company issued 333,333 shares of
the Company's restricted common stock at $0.75 per share for cash proceeds of
$250,000.
In January 2009, pursuant to the Smith Agreement (Note 15), the Company
issued 200,000 shares of the Company's restricted common stock at $0.75 per
share as prepayment of Mr. Smith's calendar year 2009 base compensation of
$150,000. The shares are forfeitable if services are not performed and fully
vest through December 2009. Through June 30, 2009, the Company has recorded
$75,000 as compensation expense and $75,000 remains to be expensed through
December 2009. Also during January 2009, the Company issued 88,102 shares of
the Company's restricted common stock at $0.75 per share for deferred
compensation owed Mr. Smith at December 31, 2008 of $66,076.
From November 2008 through February 2009, the Company issued 21,334 shares of
the Company's restricted common stock at $0.75 per share for services valued
at $16,000 to two of its employees.
During January 2009 through June 2009, the Company issued 69,009 shares of
the Company's restricted common stock ranging from $0.75 to $1.50 per shares
for consulting services valued at $86,370 to various consultants.
During June 2009, the Company issued 80,000 and 33,334 shares of the
Company's restricted common stock at $1.00 and $1.50 per share, respectively,
for cash proceeds of $80,000 and $50,000, respectively.
On June 30, 2009 the Company issued 69,692, 69,703 and 91,283 shares of the
Company's restricted common stock to Mr. Zizza, Mr. Bassani and a major
shareholder, respectively, under terms of convertible promissory notes of
$52,268, $52,277 and $68,462, respectively, at $0.75 per share.
F-24
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
9. STOCKHOLDERS' EQUITY (CONTINUED):
Warrants:
As of June 30, 2009, the Company had the following common stock warrants
outstanding:
Number of Shares Exercise Price Expiration Date
---------------- -------------- -----------------
Class SVDB 1-6 800,000 $3.00 December 31, 2018
Class DB-1 600,000 1.00 December 31, 2018
Class DB-1A 1,000,000 0.75 December 31, 2018
Class A 1-3 600,000 2.50 December 31, 2018
Class SVMAS-1 67,500 3.50 December 31, 2018
Class SVMAS-1A 40,000 3.50 December 31, 2018
Class SVMAS 2-3 72,500 2.50 December 31, 2018
Class SVB 1-4 125,000 2.50 December 31, 2018
Class SVC 1-5 125,000 4.25 December 31, 2018
Class SV-SEI 1-2 32,292 1.50 December 31, 2012
Class C,D,E 275,000 2.50 April 30, 2015
Class O 100,000 3.00 December 31, 2018
Class DM 150,000 3.00 December 31, 2011
Class MAS 80,000 2.50 December 31, 2018
Class MAS-1 A-K 300,000 0.75 December 31, 2018
Class GK 20,000 2.00 March 31, 2011
Class TO-1 15,000 0.75 December 31, 2018
Class BW 10,000 2.20 June 15, 2012
Class Z 1-3 53,324 1.25 December 31, 2018
Class NCC-1 25,000 2.00 May 31, 2014
----------
4,490,616
The Company issued 20,000 Class GK warrants priced at $0.25 per warrant to an
individual during the year ended June 30, 2008 as a standby fee for a
financing that the Company elected not to pursue, valued at $5,000 which was
expensed as general and administrative expense.
The Company issued 10,000 Class BW warrants priced at $0.20 per warrant to a
consultant during the year ended June 30, 2008 for services valued at $2,000
which was expensed as general and administrative expense.
The Company issued 150,000 Class DM warrants priced at $0.20 per warrant to a
consultant pursuant to a three-year agreement in which 50,000 warrants vested
on May 15, 2008, and 50,000 each on April 15, 2009 and 2010. The total value
of the services for the warrants that vested in fiscal year 2008 was valued
at $10,000, of which $1,250 was recorded as expense during the year ended
F-25
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
9. STOCKHOLDERS' EQUITY (CONTINUED):
June 30, 2008 and $8,750 was recorded as expense during the year ended June
30, 2009. The total value of the services for the warrants that vested in
fiscal year 2009 was valued at $10,000, of which $2,083 was recorded as
expense during the year ended June 30, 2009 and $7,917 is recorded as a
prepaid expense at June 30, 2009. The agreement also cancelled 387,343 Class
SVDM-1 warrants with an exercise price of $3.00 effective May 15, 2008.
The president of the Company purchased 80,000 warrants priced at $0.20 per
warrant on May 31, 2008.
During December 2008, 450,000 warrants were cancelled pursuant to the terms
of the Zizza Agreement (see Note 15).
In January 2009, warrants to purchase 1,000,000 and 300,000 shares of the
Company's common stock at $0.75 per share were issued pursuant to various
agreements with Mr. Bassani and Mr. Smith, respectively (Note 15). The
warrants were determined to have a fair value of $0.10 per warrant and expire
on December 31, 2018. The value placed upon the warrants to purchase common
stock at $0.75 per share was determined to be $0.10 per warrant based on
factors including the evaluation of the Company's value as of the date of the
issuances, consideration of the Company's limited liquid resources and
business prospects, the market price of the Company's stock in its mostly
inactive public market, the concurrent sales of restricted common stock at
$0.75 per share, and the historical valuation and purchases of the Company's
warrants. Additionally, 2,000,000 and 610,000 warrants originally issued to
Mr. Bassani and Mr. Smith, respectively, were extended to December 31, 2018.
The Company recorded non-cash compensation of $130,000 and $32,500 related to
the warrant issuances and extensions, respectively.
In January 2009, warrants to purchase 15,000 shares of the Company's common
stock at $0.75 per share were issued in consideration for the extension of
the promissory note owed to a major shareholder of the Company (see Note 7).
The warrants were valued at $0.10 per warrant, as described above, and expire
on December 31, 2018. The Company recorded non-cash compensation of $1,500
related to the warrant issue.
In April 2009, warrants to purchase 36,000, 6,824 and 10,500 shares of the
Company's common stock at $1.25 per share were issued in consideration for
the non-interest bearing loans payable - affiliates from Mr. Bassani, Mr.
Smith and a major shareholder, respectively. The warrants were determined to
have a fair value of $0.10 per warrant, as described above, and expire on
December 31, 2018. The Company recorded interest expense of $5,332 related
to the warrant issuances.
F-26
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
9. STOCKHOLDERS' EQUITY (CONTINUED):
In June 2009, warrants to purchase 25,000 shares of the Company's common
stock at $2.00 per share were issued to a consultant. The warrants were
determined to have a fair value of $0.05 per warrant and expire on May 31,
2014. The value placed upon the warrants to purchase common stock at $2.00
per share was determined to be $0.05 per warrant based on factors including
the evaluation of the Company's value as of the date of the issuances,
consideration of the Company's limited liquid resources and business
prospects, the market price of the Company's stock in its mostly inactive
public market, the concurrent sales of restricted common stock at $1.00 per
share, and the historical valuation and purchases of the Company's warrants.
The Company recorded general and administrative expense of $1,250 related to
the warrant issue.
During the year ended June 30, 2009, 9,375 warrants with an exercise price of
$1.50 expired.
The weighted average exercise price for the outstanding warrants is $1.95,
and the weighted average remaining contractual life as of June 30, 2009 is
8.9 years.
Stock options:
Effective June 2006, the Company approved the 2006 Consolidated Incentive
Plan (the "2006 Plan"), which consolidated previous incentive stock options
plans into the 2006 Plan. On November 28, 2008, the 2006 Plan was amended to
increase the maximum number of shares of the common stock of the Company
issuable pursuant to the 2006 Plan from 4,200,000 to 6,000,000 shares. Terms
of exercise and expiration of options granted under the 2006 Plan may be
established at the discretion of the Board of Directors, but no option may be
exercisable for more than ten years.
In May and June of 2008, the Board of Directors, in an effort to retain key
employees and consultants, approved the modifications of certain options to
certain employees and consultants. The modifications included the reduction
of the exercise price of certain options below the fair market value on the
date of grant, modifications to the vesting terms and extension of the expiry
dates. As a result of the modifications, pursuant to SFAS 123(R), the
Company recorded incremental compensation expense of $83,428, which was
recognized at June 30, 2008 and approximately $282,000 of additional
compensation will be recognized over a weighted average period of
approximately 2 years.
F-27
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
9. STOCKHOLDERS' EQUITY (CONTINUED):
The Company recorded compensation expense related to employee stock options
of $262,092 and $679,151 for the years ended June 30, 2009 and 2008,
respectively. The fair value of the options granted during the years ended
June 30, 2009 and 2008 were estimated on the grant date using the Black-
Scholes option-pricing model with the following assumptions:
Weighted Weighted
average Range average Range
June 30, June 30, June 30, June 30,
2009 2009 2008 2008
-----------------------------------------------
Volatility 99% 72%-151% 65% 54%-71%
Dividend yield 0% 0% 0% 0%
Risk-free interest rate 1.97% 1.63%-2.64% 3.11% 2.66%-3.61%
Expected term (years) 4 3-6 2.7 2.7
The expected volatility was based on the historical price volatility of the
Company's common stock. The dividend yield represents the Company's
anticipated cash dividend on common stock over the expected term of the stock
options. The U.S. Treasury bill rate for the expected term of the stock
options was utilized to determine the risk-free interest rate. The expected
term of stock options represents the period of time the stock options granted
are expected to be outstanding based upon management's estimates.
A summary of option activity under the 2006 Plan for the two years ended June
30, 2009 is as follows:
F-28
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
9. STOCKHOLDERS' EQUITY (CONTINUED):
Weighted
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price Life Value
--------------------------------------------
Outstanding at July 1, 2007 1,833,333 $ 3.33 4.8 $ 611,458
Granted 410,000 2.57
Exercised - -
Forfeited (25,000) 5.50
Expired (35,000) 5.14
--------------------------------------------
Outstanding at June 30, 2008 2,183,333 3.06 4.6 7,950
Granted 75,000 1.00
Exercised - -
Forfeited - -
Expired (262,500) 2.83
--------------------------------------------
Outstanding at June 30, 2009 1,995,833 $ 3.01 4.3 $ -
============================================
Exercisable at June 30, 2009 1,792,084 $ 3.00 4.3 $ -
============================================
The following table presents information relating to nonvested stock options
as of June 30, 2009:
Weighted Average
Shares Grant-Date Fair Value
-----------------------------------
Nonvested at July 1, 2008 562,916 $ 1.29
Granted 75,000 0.44
Vested (434,167) (1.13)
Forfeited - -
-----------------------------------
Nonvested at June 30, 2009 203,749 $ 1.31
===================================
The total fair value of stock options that vested during the year ended June
30, 2009 and 2008 was $491,877 and $584,955, respectively. As of June 30,
2009, the Company had $174,684 of unrecognized compensation cost related to
stock options that will be recorded over a weighted average period of one
year.
F-29
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
9. STOCKHOLDERS' EQUITY (CONTINUED):
The Company has issued options to non-employees to purchase shares of the
Company's common stock in exchange for services. As of June 30, 2009, non-
employee options represented 595,833 of the 1,995,833 options outstanding
under the 2006 Plan. Of the 595,833 non-employee options outstanding, 92,500
were fully vested and contained no service conditions as of June 30, 2009.
These non-employee options were valued using the Black-Scholes option-pricing
model. The fully vested options have been fully amortized on the straight-
line method and resulted in expense of $104,205 being recorded for the year
ended June 30, 2008.
The remaining 503,333 non-employee options outstanding include service
conditions and have graded vesting schedules through November 30, 2009. As
of June 30, 2009, 450,000 of these options included service conditions that
were fully vested. Generally for these agreements, the measurement date of
the services occurs when the options vest. In accordance with EITF No. 96-
18, recognition of compensation cost for reporting periods prior to the
measurement date is based on the then current fair value of the options as of
each of the interim reporting dates. Any subsequent change in fair value is
recorded on the measurement date. The fair value of these options was
determined using the Black-Scholes option-pricing model using the following
assumptions at June 30, 2009; a dividend yield of zero, risk-free interest
rates of 3.53%, volatility of 158%, and an expected life of 9 years.
Consulting cost in connection with options that are not fully vested as of
June 30, 2009, is being recognized on a straight-line basis over the
requisite service period for the entire award. Non-cash fair value credits
of $118,939 and $38,788 were recorded as a reduction of expense during the
years ended June 30, 2009 and 2008, respectively.
Stock-based compensation charges/(credits) in operating expenses in the
Company's financial statements for the years ended June 30, 2009 and 2008 are
as follows:
F-30
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
9. STOCKHOLDERS' EQUITY (CONTINUED):
Year Ended Year Ended
June 30, 2009 June 30, 2008
--------------------------------
General and administrative:
Fair value remeasurement of convertible
notes - affiliates $ - $(237,383)
Fair value and amortization of expenses
prepaid with stock options granted to
non-employees - 69,828
Fair value remeasurement of options
with service conditions (184,400) (19,394)
Fair value of stock options expensed
under SFAS 123(R) 209,262 519,751
--------------------------------
Total $ 24,862 $ 332,802
================================
Research and development:
Fair value remeasurement of convertible
notes - affiliates $ - $(323,387)
Fair value and amortization of expenses
prepaid with stock options granted to
non-employees - 34,377
Fair value remeasurement of options
with service conditions 65,461 (19,394)
Fair value of stock options expensed
under SFAS 123(R) 52,830 159,401
--------------------------------
Total $ 118,291 $(149,003)
================================
10. LITIGATION SETTLEMENT AND RETURN OF ESCROWED FUNDS:
The Company, its president and Dairy were defendants in a class
action/derivative action lawsuit in Delaware Chancery Court (TCMP#3 Partners,
LLP, et al v. Trident Rowan Group, Inc., et al, Civil Action No. 170-N) (the
"TCMP Litigation"). On August 10, 2007 a settlement was approved. As part of
the settlement reached in the TCMP Litigation, the Company, Centerpoint and
certain shareholders of the Company (the "Shareholder Class") filed an action
against Comtech Group, Inc. ("Comtech") (formerly known as Trident Rowan
Group, Inc.), OAM S.p.A ("OAM") and others in the Court of Chancery in the
State of Delaware (the "Comtech Litigation"), along with a stipulated
settlement of the Comtech Litigation. Pursuant to that settlement, Comtech
and OAM agreed to deliver to the Shareholder Class: a) 144,240 shares of the
F-31
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
10. LITIGATION SETTLEMENT AND RETURN OF ESCROWED FUNDS (CONTINUED):
Company's common stock; b) a warrant to purchase 100,000 shares of the
Company's common stock, and c) 140,000 shares of the common stock of
Centerpoint. The delivery of these securities (net of 10% attorneys' fees)
occurred in April 2008 and each member of the Shareholder Class received the
equivalent of approximately .05 of the Company's shares for each share of the
Company's common shares (split adjusted) owned on January 15, 2002.
Centerpoint, being a member of the Shareholder Class, received 10,510 shares
of the Company's common shares pursuant to the settlement, which the Company
accounts for similar to treasury stock. Also, on April 30, 2008 Centerpoint
received and cancelled 126,000 shares of its previously outstanding common
stock which increased Bion's ownership in its subsidiary from 57.7% to 58.9%.
Additionally, Comtech and OAM assigned to the Company all of their rights to
the proceeds of an escrow established from the sale of Centerpoint's assets
to Aprilia S.p.A. (the "Aprilia Escrow") and any proceeds from litigation
related to the transaction with Aprilia. On September 18, 2007 the Company
received gross proceeds of $798,210 (net receipts were $159,642 to
Centerpoint and $558,747 to Bion, after payment of attorneys' fees of
$79,821) from the Aprilia Escrow. As part of the settlement, one of the
other defendants in the Comtech litigation paid $150,000 into a settlement
fund, through insurance, from which the Company and Centerpoint received
$110,000, in aggregate, on September 10, 2007. Pursuant to the settlement of
the TCMP Litigation, $165,000 was paid into the settlement fund through
insurance on behalf of the Company, its president and Dairy. As there are no
contingencies on the settlement, the Company recognized the net proceeds of
$828,389 as other income for the year ended June 30, 2008.
Also on September 18, 2007, Centerpoint received $429,806 from its direct 35%
ownership interest in the Aprilia Escrow which is included in other income
for the year ended June 30, 2008.
11. EXTINGUISHMENT OF LIABILITIES:
During the years ended June 30, 2009 and 2008, the Company recognized other
income due to the extinguishment of liabilities of $1,826 and $126,712,
respectively, resulting from the derecognition of certain accounts payable.
These accounts payable, which related to business activities of the Company
discontinued during the 2003 and 2004 fiscal years, were outstanding for 2-6
years and the vendors had made no attempts to collect these amounts from the
Company over the past several years. The extinguishment of liabilities was
recorded after a review of the statute of limitations in the various states
in which the original liability was incurred.
F-32
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
12. INCOME TAXES:
The reconciliation between the expected federal income tax benefit computed
by applying the Federal statutory rate to loss before income taxes and the
actual benefit for taxes on loss for the years ended June 30, 2009 and 2008
are as follows:
2009 2008
-----------------------
Expected income tax benefit at statutory rate $(486,000) $(660,000)
Permanent differences 4,000 (103,000)
Change in valuation allowance 482,000 763,000
-----------------------
Income tax benefit $ - $ -
=======================
The Company has net operating loss carry-forwards ("NOLs") for tax purposes
of approximately $37,775,000 as of June 30, 2009. These NOLs expire on
various dates through 2029.
The utilization of the NOLs may be limited under Section 382 of the Internal
Revenue Code.
The Company's deferred tax assets for the years ended June 30, 2009 and 2008,
are estimated as follows:
2009 2008
------------ ------------
NOLs - noncurrent $ 14,355,000 $ 14,272,000
Stock-based compensation - current 183,000 290,000
Deferred compensation - noncurrent 291,000 1,279,000
------------ ------------
14,829,000 15,841,000
Valuation allowance (14,829,000) (15,841,000)
------------ ------------
Net deferred tax assets $ - $ -
============ ============
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The Company has provided a valuation allowance of 100% of its net deferred
tax asset due to the uncertainty of generating future profits that would
allow for the realization of such deferred tax assets.
F-33
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
13. OPERATING LEASE:
The Company entered into a non-cancellable operating lease commitment for
office space in New York, effective August 1, 2006 and expiring November 30,
2013. In conjunction with the signing of the lease, the Company provided the
lessor with a secured letter of credit. As of June 30, 2009, the Company has
reflected $85,973 as restricted cash related to the secured letter of credit.
The Company's obligations under the lease are partially guaranteed by Mr.
Zizza. The Company has entered into two separate agreements to sub-lease
approximately 32% of the Company's lease obligation and the tenants have also
agreed to reimburse the Company for leasehold improvements and furnishings.
Because the lease contains an escalation clause, the Company is recognizing
rent under the straight-line method resulting in an average monthly rent
expense of $15,820. The Company is also recognizing the sub-lease rental
income from its tenants under the straight-line method, with a monthly
average of $5,250. The difference between the straight-line method, and the
actual lease payments have resulted in a deferred rent liability of $73,232
as of June 30, 2009. Rent expense, net of contractual and month to month
sub-lease rental income was $33,083 and $78,777 for the years ended June 30,
2009 and 2008, respectively.
At June 30, 2009, future minimum rental payments due under non-cancelable
leases and future minimum rental payments to be received under non-cancelable
subleases are:
Operating lease Sublease Net operating
Fiscal year: payments rentals lease payments
----------- --------------- --------- --------------
2010 $ 191,405 $ 61,249 $ 130,156
2011 198,602 63,553 135,049
2012 212,775 68,088 144,687
2013 225,756 72,242 153,514
Thereafter 97,219 31,110 66,109
----------- --------- ---------
Total $ 925,757 $ 296,242 $ 629,515
=========== ========= =========
Effective January 1, 2009, Mr. Zizza entered into a Master Sublease with the
Company pursuant to which Mr. Zizza became a sublessee and will, for a one
year initial period, make all payments pursuant to the lease and manage the
lease premises. Rental payments from existing sub-tenants are being
deposited into a Company bank account such that Mr. Zizza utilizes those
funds towards the monthly lease payment. Mr. Zizza will have the option on
or before November 15, 2009, at his sole election, to continue the Master
Sublease for the entire term of the lease. If Mr. Zizza fulfills his
F-34
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
13. OPERATING LEASE (CONTINUED):
obligations under the Master Sublease during the one year initial period, he
shall receive the funds from the next release of the restricted cash securing
the Company's letter of credit approximating $28,000. If Mr. Zizza exercises
the option to continue the Master Sublease for the entire term of the lease,
Mr. Zizza will be entitled to the balance of restricted funds securing the
letter of credit.
14. 401(k) PLAN:
Effective December 1, 2001, the Company adopted the Bion Technologies, Inc.
401(k) Profit Sharing Plan and Trust (the "401(k) Plan"), a defined
contribution retirement plan for the benefit of its employees. The 401(k)
Plan is currently a salary deferral only plan and at this time the Company
does not match employee contributions. The 401(k) is open to all employees
over 21 years of age and no service requirement is necessary.
15. COMMITMENTS AND CONTINGENCIES:
Employment and consulting agreements:
The Company had an employment agreement with its president, Mr. Smith,
through December 31, 2007 providing $150,000 per year compensation. On
November 7, 2007, the Company extended the employment agreement through
December 31, 2008. On May 31, 2008, an agreement was reached whereby Mr.
Smith would continue his services as president through December 31, 2008 and
effective January 1, 2009 (or March 31, 2009 at the latest) through December
31, 2009, he would provide services to the Company in a consulting capacity
at his current compensation. On January 11, 2009, the Company and Mr. Smith
entered into the Smith Agreement whereby Mr. Smith will continue to hold
positions of Director, President and General Counsel of the Company and its
subsidiaries. Pursuant to the Smith Agreement, Mr. Smith was granted a
$37,500 bonus in the form of a warrant (and extension of outstanding warrants
previously issued to Mr. Smith), immediately vested, to purchase 300,000
shares of the Company's common stock at $0.75 per share until December 31,
2018 and Mr. Smith agreed to accept pre-payment of his calendar year 2009
base compensation of $150,000 in the form of 200,000 restricted shares of
Company common stock at a price of $0.75 per share. In addition, Mr. Smith
converted his deferred compensation as of December 31, 2008 into shares of
the Company's common stock.
F-35
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
15. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Effective March 31, 2005, an agreement with Brightcap, through which the
services of Dominic Bassani are provided, was extended through March 31,
2009. Under the terms of the agreement, Brightcap will be paid $300,000
annually for Mr. Bassani's services. On January 11, 2009, the Company
entered into the Brightcap Agreement, which extends Mr. Bassani's services
under the terms of the March 31, 2005 agreement for up to an additional six
months. In addition, Mr. Bassani was granted a bonus of $125,000 in the form
of a) warrant, immediately vested, to purchase 1,000,000 shares of the
Company's common stock at $0.75 per share until December 31, 2018 and b) the
extension of all warrants previously issued to either Brightcap or Mr.
Bassani, now held by their donees, to December 31, 2018. The Brightcap
Agreement also required that upon the consummation of the next financing
received by the Company in excess of $1,000,000 net proceeds, the Company
will no longer defer compensation earned by Brightcap, rather it will be paid
in cash. Since July 2009, Brightcap has been paid in cash. The Brightcap
Agreement grants Brightcap the right to convert its existing deferred
compensation as of December 31, 2008 of $175,000 into 233,334 shares of the
Company's common stock at a price of $0.75 per share until December 31, 2009.
The Brightcap Agreement also extended the maturity date of Mr. Bassani's
$50,000 promissory note to June 30, 2009 and allows for the conversion of the
principal and interest, in whole or in part, at the election of Mr. Bassani,
into the Company's restricted common shares at $0.75 per share. The
promissory note was converted on June 30, 2009.
Effective May 1, 2005, the Company entered into a four-year
consulting/employment agreement with a former officer and director of the
Company, Salvatore Zizza. As of January 1, 2006, the former officer and
director assumed the position of Chairman and director of Bion Dairy
Corporation (now Projects Group), with an annual salary of $300,000.
Pursuant to an agreement dated December 19, 2008, Mr. Zizza no longer
provides services to the Company as of December 31, 2008 and the following
terms were agreed upon (and subsequently effected): a) Mr. Zizza's 600,000
warrants were returned to the Company and the Company reissued a certificate
to Mr. Zizza representing 150,000 warrants with no changes in the terms and
conditions of the original warrants, b) all options owned by Mr. Zizza shall
vest on the existing schedule, c) the Company canceled the 2007 Series AB
Convertible Promissory Note owned by Mr. Zizza which represented accrued
deferred compensation from the Company (see Note 5), d) the $50,000
promissory note owed to Mr. Zizza remained outstanding and was amended to
include the right of Mr. Zizza to convert the principal and interest, in
whole or part, into the Company's common stock at a price of $0.75 per share
at any date prior to the repayment of the Company, e) the Company's existing
F-36
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
15. COMMITMENTS AND CONTINGENCIES (CONTINUED):
accrued payable of $41,647 to Mr. Zizza remains a valid obligation of the
Company with the additional right of Mr. Zizza to convert the accrued
payable, in whole or in part, into the Company's restricted common stock at a
price of $0.75 per share (see Note 16) and f) the Company entered into a
Master Sublease (Note 13).
Effective September 18, 2006, the Company entered into a four-year employment
agreement with Jeremy Rowland whereby Mr. Rowland assumed the position of
Chief Operating Officer of Dairy at an annual salary of $150,000. In June
2008, the employment agreement terms were extended through July 1, 2012. Mr.
Rowland now serves as Chief Operating Officer of the Company's Services Group
subsidiary.
The Company approved an employment agreement contract extension effective
June 30, 2009, with Craig Scott whereby Mr. Scott will continue to act as
Vice President of Capital Markets and Shareholder Relations through December
31, 2010, at an annual salary of $144,000. The Company will have the right
terminate the agreement with 30 days notice commencing December 2009 with no
further liability.
In May 2005 the Company declared contingent deferred stock bonuses of 690,000
shares to its key employees and consultants. The stock bonuses of 492,500
and 197,500 shares are contingent upon the Company's stock price exceeding
$10.00 and $20.00 per share, respectively, and the grantees still being
employed by or providing services to the Company at the time the target
prices are reached. As of June 30, 2009, 422,500 shares remain outstanding
due to the expiry of 125,000 and 62,500 shares to be issued when and if the
Company's stock price exceeds $10.00 and $20.00 per share, respectively.
In May 2008, the Company approved 250,000 stock options to certain employees
that will be granted upon the execution of new employment agreements.
Claims contingency:
In May 2002, Arab Commerce Bank Ltd. ("ACB"), an unaffiliated party, filed a
complaint against the Company in the Supreme Court of the State of New York
regarding $100,000 of the Company's convertible bridge notes ("Bridge Notes")
that were issued to ACB in March 2000. The complaint includes a breach of
contract claim asserting that the Company owes ACB approximately $285,000
plus interest of $121,028 plus interest based on ACB's interpretation of the
terms of the Bridge Notes and subsequent amendments. Effective June 30,
2001, the Company issued ACB 5,034 shares of common stock in full
satisfaction of the Bridge Notes based on the Company's interpretation of the
Bridge Notes, as amended. The Company has filed an answer to the complaint
denying the allegations. No activity has taken place on this lawsuit since
F-37
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2009 AND 2008
15. COMMITMENTS AND CONTINGENCIES (CONTINUED):
early 2003. The Company believes that the ultimate resolution of this
litigation will not have a material adverse effect on the Company, its
operations or its financial condition.
16. RELATED PARTY TRANSACTIONS:
The Company has an accrued payable of $41,647 as of June 30, 2009, to a
company controlled by Mr. Zizza for rental of office space in 2003. The
amount is unsecured and non-interest bearing. Pursuant to the Zizza
Agreement, Mr. Zizza has the option to convert the payable into common shares
of the Company's stock at $0.75 per share at any time prior to the obligation
being paid by the Company.
17. SUBSEQUENT EVENTS:
The Company has evaluated events through September 23, 2009 for consideration
as a subsequent event to be included in its June 30, 2009 financial
statements issued September 23, 2009.
Issuance of Series B Preferred Stock
As discussed in Note 9 during July 2009, the Company completed an offering of
the Company's Series B Preferred shares, which as of June 30, 2009 resulted
in the issuance of 21,320 shares at $100 per share resulting in net proceeds
to the Company of $1,854,840. Subsequent to June 30, 2009, the Company
issued an additional 6,850 shares of Series B Preferred stock, resulting in
net proceeds to the Company of $595,950.
Issuance of Common Stock
During July 2009, the Company issued 130,000 common shares to employees as
bonus shares, under the 2006 Plan, valued at approximately $131,300. The
Company has also issued 52,774 common shares to consultants for services
valued at approximately $78,000.
During September 2009, the Company issued 55,530 shares of common, at Mr.
Zizza's election, in conversion and satisfaction of the accrued payable of
$41,647 described in Note 16.
Issuance of Options
In July 2009, the board of directors granted 75,000 options that vested on
July 1, 2009 with an exercise price of $1.25 per option and expire on July 1,
2014. The board also approved the granting of 100,000 options with an
exercise price of $1.25 per option and expiry date of July 1, 2014 that vest
over a 18 month period.
F-38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned thereunder duly authorized.
BION ENVIRONMENTAL TECHNOLOGIES, INC.
Dated: September 23, 2009 By:/s/ Mark A. Smith
Mark A. Smith, President (Chief
Executive Officer) and Interim Chief
Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ Mark A. Smith President, General Counsel, September 23, 2009
Mark A. Smith Interim Chief Financial
Officer and Director
/s/ Jon Northrop Secretary and Director September 23, 2009
Jon Northrop
/s/ Jere Northrop Senior Technology Director September 23, 2009
Jere Northrop and Director