SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 OR THE TRANSITION PERIOD FROM _______ TO _______
Commission file number 0-19333
Bion Environmental Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Colorado 84-1176672
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 East 50th Street 10th Floor N.Y., N.Y. 10022
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(Address of principal executive offices) (Zip Code)
(212) 758-6622
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No___
As of November __, 2002 the issuer had outstanding 5,304,521 shares of common
stock. This includes 1,900,000 shares held by a majority-owned subsidiary of
the registrant.
Transitional Small Business Disclosure Format (Check one): Yes ___ No X
BION ENVIRONMENTAL TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
PART I ................................................................. 3
Item 1. Financial Statements .................................... 3
Unaudited consolidated balance sheet as of
September 30, 2002 ..................................... 3
Unaudited consolidated statements of operations for
the three months ended September 30, 2002 and 2001 ..... 4
Unaudited consolidated statements of cash flows for
the three months ended September 30, 2002 and 2001 ..... 5
Notes to unaudited consolidated financial statements ..... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 12
Item 3. Controls and Procedures .................................. 18
PART II ................................................................ 19
Item 1. Legal Proceedings ........................................ 19
Item 2. Changes in Securities .................................... 19
Item 6. Exhibits and Reports on Form 8-K ......................... 20
Signatures ....................................................... 21
Certifications ................................................... 21
2
PART I
Item 1. Financial Statements
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Consolidated Balance Sheet
As of September 30, 2002
ASSETS
Current assets:
Cash and cash equivalents $ 867,375
Accounts receivable, net of allowance for doubtful
accounts of $2,000 8,946
Inventory 116,286
Prepaid expenses and other current assets 106,204
-----------
Total current assets 1,098,811
Property and equipment, net 243,402
Claims receivable 1,339,154
Other assets 213,455
-----------
Total assets
$ 2,894,822
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 411,301
Note payable - related party 150,000
Accrued expenses 57,433
Capital lease obligation 2,804
-----------
Total current liabilities 621,538
Minority interest 406,041
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, $.01 par value, 10,000 shares
authorized, -0- shares issued and outstanding
Common stock, no par value, 100,000,000 shares
authorized, 4,208,791 shares issued and
outstanding (this does not include 1,095,730
shares held by Centerpoint which will be
distributed to Bion and subsequently cancelled)
Additional paid in capital 59,411,915
Accumulated deficit (57,544,672)
-----------
Total stockholders' equity 1,867,243
Total liabilities and stockholders' equity $ 2,894,822
===========
See notes to consolidated financial statements
3
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
Three Months Ended
September 30,
---------------------------
2002 2001
------------ -----------
Revenue:
Soil sales $ 46,638 $ 13,003
------------ -----------
Cost of soil 195,718 119,090
------------ -----------
Gross loss (149,080) (106,087)
------------ -----------
Expenses:
General and administrative (excluding
$158,447 and $218,231 of non-cash charges
for services and compensation, respectively) 637,192 627,778
Research and development 149,862 213,467
Non-cash charges for services and compensation 158,447 218,231
------------ -----------
945,501 1,059,476
------------ -----------
Operating loss (1,094,581) (1,165,563)
------------ -----------
Other income and expense:
Interest expense (including $0 and $1,118,718
of non-cash interest charges, respectively) (75) (1,119,214)
Interest income 5,629 9,198
Other expense, net (16,699) 41,358
------------ -----------
(11,145) (1,068,658)
------------ -----------
Net loss before minority interest (1,105,726) (2,234,221)
------------ -----------
Minority interest 35,052 -
------------ -----------
Net loss and comprehensive loss $ (1,070,674) $(2,234,221)
=========== ===========
Basic and diluted loss per common share:
Net loss per common share $ (0.20) $ (1.71)
============ ===========
Weighted-average number of common shares
outstanding, basic and diluted loss per share 5,304,521 1,306,839
============ ===========
See notes to consolidated financial statements
4
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
Three Months Ended
September 30,
---------------------------
2002 2001
------------ -----------
Cash flows from operating activities:
Net loss $ (1,070,674) $ (2,234,221)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in net loss of subsidiary (35,052) -
Depreciation and amortization 20,543 19,640
Loss on disposal of asset 7,444 -
Amortization of debt discount - 777,213
Issuance of note payable for consulting
services 150,000 -
Accretion of notes payable for interest
expense - 341,505
Compensation charge from variable options - (3,469)
Non-cash charges for equity instruments
issued for compensation and services 8,447 221,579
Changes in:
Accounts receivable 8,349 13,673
Note receivable (985) 15,188
Inventory (48,646) -
Prepaid expenses and other current assets 41,795 (14,635)
Deposits and other (463) -
Accounts payable 87,364 (33,334)
Accrued liabilities 2,281 10,195
------------ ------------
Net cash used in operating activities (829,599) (886,666)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (116,152) -
------------ ------------
Net cash used in investing activities (116,152) -
------------ ------------
Cash flows from financing activities:
Payments of capital lease obligations (445) (5,857)
------------ ------------
Net cash used in financing activities (445) (5,857)
------------ ------------
Net decrease in cash and cash equivalents (946,196) (892,523)
Cash and cash equivalents, beginning of period 1,813,571 1,300,398
------------ ------------
Cash and cash equivalents, end of period $ 867,375 $ 407,875
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 75 $ 495
============ ============
Supplemental disclosure of non-cash financing
activities:
Issuance of stock for convertible bridge
note $ - $ 112,740
Issuance of stock for note receivable $ - $ 70,000
See notes to consolidated financial statements
5
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to unaudited consolidated financial statements
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Bion
Environmental Technologies, Inc. (the "Company" or "Bion") have been prepared
in accordance with accounting principles generally accepted in the United
States of America ("GAAP") for interim financial information. In the opinion
of management, such statements include all adjustments (consisting only of
normal recurring adjustments) necessary for the fair presentation of the
Company's financial position, results of operations and cash flows at the
dates and for the periods indicated. Pursuant to the requirements of the
Securities and Exchange Commission applicable to Quarterly Reports on Form
10-QSB, the accompanying financial statements do not include all the
disclosures required by GAAP for annual financial statements. While the
Company believes that the disclosures presented are adequate to make the
information not misleading, these interim consolidated financial statements
should be read in conjunction with the audited financial statements and
related notes included in the Company's Annual Report on Form 10-KSB for the
year ended June 30, 2002. Operating results for the three month periods ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2003.
Certain fiscal year 2002 items have been reclassified to conform to their
fiscal year 2003 presentation.
2. ORGANIZATION AND NATURE OF BUSINESS
Bion Environmental Technologies, Inc. ("Bion" or the "Company") was
incorporated in 1987 in the State of Colorado.
Bion is an environmental service company focused on the needs of confined
animal feeding operations (CAFOs). Bion is engaged in two main areas of
activity: waste stream remediation and organic soil and fertilizer production.
Bion's waste remediation service business provides CAFOs (primarily in the
swine and dairy industries) with treatment for the animal waste outputs. In
this regard, Bion treats their entire waste stream in a manner which cleans
and reduces the waste stream thereby mitigating pollution of the air, water
(both ground and surface) and soil, while creating value-added organic soil
and fertilizer products. Bion's soil and fertilizer products are being used
for a variety of applications including school athletic fields, golf courses
and home and garden applications.
The Company's Nutrient Management System (NMS) solution is a patented
biological and engineering process that treats water, nutrient and air
pollution associated with animal waste. The system also provides a use for
the waste materials and solids by biologically converting them into
environmentally friendly, time-release organic-based solids that are the basis
of Bion's organic soil and fertilizer business segment. Bion's BionSoil(R)
and Bion Fertilizer product lines contain a unique mix of organic nutrients,
bacteria and other microbes that extensive testing has shown produces superior
plant growth with reduced leaching of nutrients when compared to traditional
chemical fertilizers.
6
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to unaudited consolidated financial statements
2. ORGANIZATION AND NATURE OF BUSINESS (CONTINUED)
The unaudited consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company incurred losses
totaling $1,070,674 during the three months ended September 30, 2002
(including non-cash expenses of $158,447) and has a history of losses which
has resulted in an accumulated deficit of $57,544,672 at September 30, 2002.
During the year ended June 30, 2002, through the Company's transactions with
Centerpoint Corporation and OAM S.p.A. the Company obtained $4,800,000 in
cash. The Company is currently engaged in seeking additional financing to
satisfy its current operating requirements.
There can be no assurance that sufficient funds required during the next
twelve months or thereafter will be generated from operations or that funds
will be available from external sources such as debt or equity financings or
other potential sources. The lack of additional capital resulting from the
inability to generate cash flow from operations or to raise capital from
external sources would force the Company to substantially curtail or cease
operations and would, therefore, have a 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.
We have a stockholders' equity of $1,867,243, an accumulated deficit of
$57,544,672, limited current revenues and substantial current operating
losses. Our operations are not currently profitable; therefore, readers are
further cautioned that our continued existence is uncertain if we are not
successful in obtaining outside funding in an amount sufficient for us to meet
our operating expenses at our current level. Management is currently engaged
in seeking additional capital to fund operations until Bion system and
BionSoil(R) sales are sufficient to fund operations.
There is substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability or classification of asset carrying
amounts or the amounts and classification of liabilities that may result
should the Company be unable to continue as a going concern.
Effective July 8, 2002, the Company completed a 1 for 10 reverse stock split
(the "stock split"). The stock split has been retroactively reflected in the
Company's unaudited consolidated balance sheet, unaudited consolidated
statement of operations and notes to unaudited consolidated financial
statements.
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly- and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
7
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to unaudited consolidated financial statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loss per share of common stock:
Basic earnings per share includes no dilution and is computed by dividing
income or loss available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share
reflect the potential dilution of securities that could share in the earnings
of an entity, similar to fully diluted earnings per share. In loss periods,
dilutive common equivalent shares are excluded, as the effect would be
anti-dilutive. Therefore, basic and diluted earnings per share are the same
for all periods presented.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates and assumptions.
Stock-based compensation:
The Company accounts for its stock-based compensation arrangements with its
employees in accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and complies with
the disclosure provisions of SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 established a fair-value-based method of accounting
for stock-based compensation plans. Stock-based awards to nonemployees are
accounted for at fair value in accordance with the provisions of SFAS 123.
4. STOCKHOLDERS' EQUITY
Reverse stock split:
Effective July 8, 2002, the Company completed a one-for-ten reverse stock
split of its outstanding shares of common stock. The accompanying unaudited
consolidated financial statements have been retroactively adjusted to reflect
the reverse stock split.
5. COMMITMENTS AND CONTINGENCIES
Claims contingency:
On July 22, 2002, Thomas Keith Barefoot ("Barefoot"), doing business as Quin
Deca Farm ("Quin Deca"), an unaffiliated party, filed a complaint against the
Company in the Superior Court of the County of Harnett in the State of North
Carolina regarding the Company's first generation Bion NMS System on Quin Deca
Farm and the harvesting of BionSoil(R). The complaint includes breach of
contract claims asserting that the Company abandoned the NMS system on Quin
Deca Farm and the failure of the Company to harvest BionSoil(R). The second
8
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to unaudited consolidated financial statements
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
claim is for fraud regarding misrepresentation of the state of the technology
of the first generation NMS. The third claim is for unfair and deceptive trade
practices for misrepresentation of the state of the technology of the NMS
System. The fourth claim is for negligent misrepresentation made by Bion in
connection with the work it performed and its suitability for the intended
purpose. The fifth claim is for equity/specific performance in that Bion left
Quin Deca with an economically and technically deficient waste management
system that cannot continue to be used without adequate and alternative
methods of waste removal. Quin Deca is seeking $30,000 in damages, $10,000 in
punitive damages, to have its damages trebled, reasonable attorney fees and
principles of equity requiring Bion to install its second generation Bion NMS
system. 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.
On May 6, 2002, Arab Commerce Bank Ltd. ("ACB"), an unaffiliated party, filed
a complaint against the Company in the Supreme Court of the State of New York
regarding $100,000 of the Company's convertible bridge notes ("Notes") that
were issued to ACB in March of 2000. The complaint includes breach of
contract claim asserting that the Company owes ACB $265,400 plus interest or
$121,028 including interest based on ACB's interpretation of the terms of the
Notes and subsequent amendments. Effective June 30, 2001, the Company issued
ACB 5,034 shares of common stock on conversion in full payment of the Notes
based on the Company's interpretation of the Notes, as amended. The Company
has filed an answer to the complaint denying the allegations. 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.
Potential dilution from a subsequent equity financing:
On June 10, 2002, the Company entered into a subscription agreement with
Centerpoint Corporation ("Centerpoint") and a purchase agreement with OAM
S.p.A. ("OAM") whereby the Company issued, in aggregate, 2,000,000 shares of
its common stock at $7.50. Under the terms of these agreements, additional
shares may be issued to Centerpoint and OAM if the Company raises equity at a
price less than $7.50 per share until the cumulative investment in the
Company, from unaffiliated third parties, from the date of this transaction,
equals $5 million. The number of additional shares to be issued would be
determined by calculating the additional number of shares Centerpoint and OAM
would have received if the transactions were consummated at the price per
share of the subsequent equity financing.
In addition, if the Company raises equity at a price less than $7.50 per
share, the Company may be required to issue additional shares to former note
holders as if the $14,256,779 notes that were converted into 1,900,911 shares
of our common stock subsequent to the transactions with Centerpoint and OAM,
were converted at the price per share of the subsequent equity financing. In
addition, the exercise price for 17,596 warrants may be decreased to the price
per share of the subsequent equity financing and the exercise prices for
9
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to unaudited consolidated financial statements
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
195,174 warrants may be decreased to 80% of the price per share of the
subsequent equity financing. Also, in the event of a subsequent equity
financing below $7.50, additional warrants will be issued on 1,037,343
warrants currently outstanding to increase these warrants to reflect 20% of
the fully diluted shares outstanding as of January 15, 2002, after giving
effect to the above adjustments. These warrants will also have their exercise
price lowered to the price per share of the subsequent equity financing.
6. RELATED PARTY TRANSACTIONS
During the year ended June 30, 2002, we issued 58,246 shares of common stock
to the Trust, valued at $550,000, for the management fee owed to D2 of which
8,099 shares were issued for $125,000 of management fees earned for the three
months ending September 30, 2001,.
On July 1, 2002, the D2 returned to the Company 2,874 shares of the Company's
common stock that was issued as part of the consulting fee to D2 paid to the
Trust Under Deferred Compensation Plan for D2CO, LLC (the "Trust") for the
Benefit of D2. The shares were subsequently cancelled.
The Company and D2 orally agreed during January 2002, that in the event the
average price per common share is below $7.50 for any quarter in which
consulting fees are to be paid to the Trust, Bion will issue a convertible
note in lieu of the stock payment. The agreement is to remain in place during
the "Adjustment Period" noted in the Centerpoint and OAM Agreements.
On September 30, 2002, the Company issued a convertible note for the D2
management fee to be paid to the Trust for the three months ended September
30, 2002. The convertible note was issued having an amount of $150,000 and
pays interest at 6% per annum, payable in cash or in shares of the Company's
common stock. The convertible note is convertible into shares of common stock
in whole or in part at the time of the Company's next equity financing, at the
price of the next equity financing, at the election of the holder.
7. BUSINESS SEGMENT INFORMATION
The Company operates in three business segments as follows:
Systems: The Company designs, markets, installs and manages waste, wastewater
and storm water systems, primarily in the agricultural and food processing
industries.
Soil: The Company produces and markets BionSoil(R) products such as organic
fertilizers, potting soils and soil amendments which are produced from the
nutrient rich Bion Solids harvested from agricultural systems installed on
large dairy and hog farms.
Other: Contains the operating results of Centerpoint in which the Company
owns 57.6%. Centerpoint currently does not have any business operations other
than general and administrative.
10
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to unaudited consolidated financial statements
7. BUSINESS SEGMENT INFORMATION (CONTINUED)
The Company's reportable operating segments have been determined in accordance
with the Company's internal management structure, which is organized based on
operating activities. The accounting policies of the operating segments are
the same as those described in the summary of accounting policies. The Company
evaluates performance based upon several factors, of which the primary
financial measure is segment operating income.
The following table summarizes information about operations and long-lived
assets as of and for the three months ended September 30, 2002 and 2001:
Systems Soil Other Total
------- ---- ----- -----
Three Months Ended - September 30, 2002
Revenues $ - $ 46,638 $ - $ 46,638
=========== =========== ========= ===========
Operating loss $ (595,881) $ (484,570) $ (14,130) $(1,094,581)
Other income/(expense), net $ 32,991 $ 24,443 $ (68,579) $ (11,145)
Minority interest $ - $ - $ 35,052 $ 35,052
----------- ----------- --------- -----------
Net Loss $ (562,890) $ (460,127) $ (47,657) $(1,070,674)
=========== =========== ========= ===========
Supplemental segment information:
Amortization and depreciation $ 9,144 $ 11,399 $ - $ 20,543
As of September 30, 2002
Property and Equipment, net $ 61,311 $ 182,091 $ - $ 243,402
Total Assets $ 1,315,881 $ 1,538,396 $ 40,545 $ 2,894,822
Three Months Ended - September 30, 2001
Revenues $ - $ 13,003 $ - $ 13,003
=========== =========== ========= ===========
Operating loss $ (719,847) $ (445,716) $ - $(1,165,563)
Other income/(expense), net $ (531,253) $ (537,405) $ - $(1,068,658)
Minority interest $ - $ - $ - $ -
----------- ----------- --------- -----------
Net Loss $(1,251,100) $ (983,121) $ - $(2,234,221)
=========== =========== ========= ===========
Supplemental segment information:
Amortization and depreciation $ 7,630 $ 12,010 $ - $ 19,640
As of September 30, 2001
Property and Equipment, net $ 78,587 $ 85,431 $ - $ 164,018
Total Assets $ 418,244 $ 408,027 $ - $ 829,271
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Statements made in this Form 10-QSB that are not historical or current
facts are "forward-looking statements" within the meaning of section 27A of
the Securities Act of 1933, as amended (the "Securities Act") and section 21E
of the Securities Exchange Act of 1934, as amended. These statements often
can be identified by the use of terms such as "may," "will," "expect,"
"believe," anticipate," "estimate," or "continue" or the negative thereof.
Bion intends that such forward-looking statements be subject to the safe
harbors for such statements. We wish to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the
date made. Any forward-looking statements represent management's best
judgment as to what may occur in the future. However, forward-looking
statements are subject to risks, uncertainties and important factors beyond
our control that could cause actual results and events to differ materially
from historical results of operations and events and those presently
anticipated or projected.
These factors include adverse economic conditions, entry of new and
stronger competitors, inadequate capital, unexpected costs, failure to gain
product approval in the United States or foreign countries and failure to
capitalize upon access to new markets. Additional risks and uncertainties
that may affect forward-looking statements about Bion's business and prospects
include the possibility that a competitor will develop a more comprehensive or
less expensive environmental solution, delays in market awareness of Bion and
our systems and soil, or possible delays in Bion's marketing strategies, each
of which could have an immediate and material adverse effect by placing us
behind our competitors. Bion disclaims any obligation subsequently to revise
any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
The following discussion should be read in conjunction with our
consolidated financial statements and accompanying notes.
Overview
Bion Environmental Technologies, Inc. provides waste management solutions
to the agricultural industry, focusing on livestock waste from confined animal
feeding operations ("CAFOs"), such as large dairy and hog farms. We are
currently engaged in two main areas of activity:
* waste stream remediation and reduction of atmospheric emissions and
* organic soil and fertilizer production.
Our waste remediation and reduction of atmospheric emissions service
business provides CAFOs (primarily in the swine and dairy industries) with
treatment for the animal waste outputs. In this regard, we microbiologically
treat their entire waste stream, reducing air emissions and nutrient
discharges, while creating value-added organic soil and fertilizer products.
Bion's soil and fertilizer products are being used for a variety of
topdressing applications including school athletic fields, golf courses and
home and garden applications.
Our Nutrient Management System (NMS) is a patented biological and
engineering process that treats water, nutrient and air pollution associated
with animal waste. The system also provides a use for the waste materials and
12
solids by biologically converting them into environmentally friendly,
time-release organic-based solids that are the basis of our organic soil and
fertilizer business segment. Our BionSoil(R) and Bion Fertilizer product
lines contain a unique mix of organic nutrients, bacteria and other microbes
that extensive testing has shown produces superior plant growth with reduced
leaching of nutrients when compared to traditional chemical fertilizers.
We have been conducting business since 1989. Our original systems were
wastewater treatment systems for dairy farms and food processing plants. The
basic design was modified in late 1994 to create an NMS that produces organic
soil products as a by-product of remediation of the waste stream when
installed on large dairies or swine farms. Through June 2000, we sold and
subsequently installed, in the aggregate, 32 of these first generation systems
in 7 states, of which 23 are still in operation through June 2000. There are
presently 14 first generation Bion NMS soil production system installations
operating in 4 states on 8 dairy farms and 6 hog farms.
We also have an ongoing research program related to our BionSoil(R) and
Bion Fertilizer product lines. This research and development includes work
related to harvest and processing, blending of specialty product mixes for
specific market segments and tests of the effectiveness of BionSoil(R) and
Bion Fertilizer blends in a number of plants in a variety of growing
environments.
The past two years have been transitional years as to Bion's sales and
marketing efforts. As the development program described above moved forward
during the 2001 and 2002 fiscal years, our focus shifted from sales of first
generation systems to pre-marketing the system capabilities and the economics
of our second generation NMS. We have recently initiated marketing Bion's
second generation system and anticipate our first sales during the second half
of calendar 2002. In addition, Bion has begun marketing various upgrade
capabilities from its second generation system to its existing base of first
generation installations. The nutrient management capabilities of this new
generation of systems will help break one of the major barriers facing those
portions of the dairy and protein growing businesses in the U.S. which desire
to expand. Our second generation system will allow businesses in these
markets to meet ever stricter environmental standards for larger farms and
raise more animals on less land while meeting or exceeding all requirements to
protect the environment.
Critical Accounting Policies and Significant Use of Estimates in Financial
Statements
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and
may change in subsequent periods.
The following list of critical accounting policies is not intended to be
a comprehensive list of all of our accounting policies. Our significant
accounting policies are more fully described in Note 3 to the consolidated
financial statements included in this Quarterly Report on Form 10-QSB and in
Note 2 to the consolidated financial statements included in our Annual Report
on Form 10-KSB. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles with no need for management's judgment in their application. There
13
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result. We have
identified the following to be critical accounting policies of the Company:
Revenue recognition: Revenues from fixed-price system development and
construction projects are recognized on the percentage-of-completion method.
For contracts accounted for under the percentage-of-completion method, the
amount of revenue recognized is the percentage of the total contract price
that the costs expended to date bear to the anticipated final total cost based
upon current estimates of the cost to complete the contract. Contract costs
include all labor and benefits, materials unique to or installed in the
project, subcontract costs and allocations of indirect costs. General and
administrative costs are charged to expense. Provisions for estimated losses
on uncompleted contracts are provided when determined, regardless of the
completion percentage. As contracts can extend over one or more accounting
periods, revisions in costs and earnings estimated during the course of the
work are reflected during the accounting period in which the facts that
require such revisions become known. Project managers make assumptions
concerning cost estimates for labor hours, consultant hours and other project
costs. Due to uncertainties inherent in the estimation process and potential
changes in customer needs as projects progress, it is at least reasonably
possible that completion costs for some uncompleted projects may be further
revised in the near term, and that such revisions may be material.
Revenue from the sale of BionSoil(R) products and associated fees are
recognized when shipped, as the Company has no continuing obligations.
Stock-based compensation: The Company accounts for its stock-based
compensation arrangements with its employees in accordance with the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and complies with the disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 123 established a
fair-value-based method of accounting for stock-based compensation plans.
Stock-based awards to nonemployees are accounted for at fair value in
accordance with the provisions of SFAS 123.
Income taxes: Deferred income taxes are determined by applying enacted
statutory rates in effect at the balance sheet date to the differences between
the tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements. A valuation allowance is provided based on
the weight of available evidence, if it is considered more likely than not
that some portion, or all, of the deferred tax assets will not be realized.
Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosures of contingent assets and liabilities at
the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates and
assumptions.
Results of Operations - Comparison of Three Months Ended September 30, 2002
with Three Months Ended September 30, 2001
We recorded $47,000 of BionSoil(R) sales during the three months ended
September 30, 2002 ("2003 Quarter"). This compares to BionSoil(R) sales of
$13,000 for the three months ended September 30, 2001 ("2002 Quarter"). The
amounts remained approximately the same due to our concentration on research
14
and development of our second generation system in the 2002 Quarter and the
early phase of our transition to commercial production in the 2003 Quarter, as
well as further BionSoil(R) testing and analysis. Cost of soil was $196,000
for the 2003 Quarter and $119,000 for the 2002 Quarter. The increase in cost
of goods sold was proportionately higher than the increase in sales due to the
fact that more soil was produced and sold at prices below cost to help gain
market acceptance. We believe that this trend will reverse as we enter the
commercial phase of system sales and revenues will increase at a higher rate.
General and administrative expenses increased to $637,000 for the 2003
Quarter from $628,000 for the 2002 Quarter. The increase is primarily
attributable to an increase in legal and licensing fees offset by a decrease
in salaries.
Research and development costs decreased by $64,000 during the 2003
Quarter. This decrease is due to the higher costs in the 2002 quarter from
the construction of the second generation prototype system built at Dreammaker
Dairy. No such prototype was in construction during the 2003 quarter.
Non-cash expenses for services and compensation decreased to $158,000 for
the 2003 Quarter from $218,000 for the 2002 Quarter. The decrease is due to a
reduction in amortization expense for the value of options previously issued
to various individuals.
Interest expense decreased to $75 for the 2003 Quarter from $1,119,000
for the 2002 Quarter. The decrease was due to the conversion of all the
Company's outstanding debt other than trade payables to common stock in
January 2002.
We did not record income tax expense during the 2003 Quarter and 2002
Quarter as a result of our net losses. A valuation allowance of $16,867,000
at September 30, 2002, was established because of the uncertainty that the
deferred tax asset will be realized.
At September 30, 2002, we had net operating loss carryforwards of
approximately $33,513,000, with expirations through 2022. The utilization of
a portion of the loss carryforwards may be limited under Section 382 of the
Internal Revenue Code.
The net loss and comprehensive loss decreased $1,164,000 (52%) in the
2003 Quarter compared to the 2002 Quarter. The decrease primarily related to
a decrease of $1,119,000 of non-cash interest expense
Basic and diluted loss per common share decreased by $1.51, from $1.71 to
$0.20. The decrease in the loss per share is attributable to the increase in
the amount of shares outstanding due to the conversion of all our debt, other
than trade payables, to common stock and the decrease in interest expense.
Seasonality
Bion's installation capability is restricted in cold weather climates to
approximately eight months per year. However, when weather conditions limit
construction activity in southern market areas, projects in northern markets
can proceed, and when northern area weather is inappropriate, southern
projects can proceed. BionSoil(R) harvests on the existing installed base is
semi-annual and is timed for spring and fall, with harvested soils being
available for sale during the next spring or fall. BionSoil(R) and Bion
Fertilizer product sales are expected to exhibit a somewhat seasonal sales
pattern with emphasis on spring, summer and fall sales.
15
Liquidity and Capital Resources
Our principal sources of liquidity, which consist of cash and cash
equivalents, are $867,000 as of September 30, 2002. We believe we will not
generate sufficient operating cash flow to meet our needs without additional
external financing during fiscal 2003. There can be no assurances that any
financing will be available or that the terms will be acceptable to us, or
that any financing will be consummated. Any failure on our part to do so will
have a material adverse impact on us and may cause us to cease operations.
We were successful during the year ended June 30, 2001 in raising working
capital through the sale of warrants and convertible debt. During the year
ended June 30, 2001 we raised $2,527,000 in a private placement in the form of
convertible bridge notes. In addition, Southview, Inc., a related party, had
advanced the Company funds totaling $518,000 as of June 30, 2001. During the
year ended June 30, 2002 we raised approximately $8,500,000 of working capital
as partial consideration for the issuance of the Company's common stock to
Centerpoint (less cash of $3,700,000 used as partial consideration to purchase
57.7% of the outstanding shares of Centerpoint) through our transactions with
Centerpoint.
All outstanding convertible debt of the Company was converted into shares
of the Company's common stock on January 15, 2002 due to the Centerpoint
transaction based upon agreed terms.
The level of funding required to accomplish our objectives is ultimately
dependent on the success of our research and development efforts, which at
this time is unknown. Currently, we estimate that no less than approximately
$5,000,000 will be required during the year ending June 30, 2003. We
anticipate spending $1,300,000 on research and development efforts and the
balance on compensation and general business overhead.
Going Concern
In connection with their report on our Consolidated Financial Statements
as of and for the year ended June 30, 2002, BDO Seidman, LLP, our independent
certified public accountants, expressed substantial doubt about our ability to
continue as a going concern because of recurring net losses and negative cash
flow from operations.
We have stockholders' equity of $1,867,000, a cumulative deficit of
$57,545,000, limited current revenues and substantial current operating
losses. Our operations are not currently profitable; therefore, readers are
further cautioned that our continued existence is uncertain if we are not
successful in obtaining outside funding in an amount sufficient for us to meet
our operating expenses at our current level. Management is currently engaged
in seeking additional capital to fund operations until Bion system and
BionSoil(R) sales are sufficient to fund operations.
Consolidated Working Capital
Consolidated working capital increased to $477,000 at September 30, 2002
from a negative $8,728,000 at September 30, 2001. This increase is primarily
due to the issuance of common stock to Centerpoint for partial consideration
of $8,500,000, reduction our current debt of $8,100,000 as a result of the
conversion of this amount of debt into 1,312,094 shares of the Company's
common stock. These increases were offset by cash of $3,700,000 paid for the
purchase of 57.7% of the outstanding shares of Centerpoint and continued
16
operating losses since the 2002 Quarter of $3,424,000 not including non cash
charges for services and compensation, non cash interest expenses and
depreciation and amortization.
Analysis of Cash Flows
Cash used in operating activities decreased slightly to $830,000 in the
2003 Quarter from $887,000 in the 2002 Quarter. The decrease is primarily the
result of a decrease in operating losses in research and development.
Cash used in investing activities increased to $116,000 in the 2003
Quarter compared to $0 cash used in investing activities in the 2002 Quarter.
The $116,000 increase is the result of purchases made in the 2003 Quarter for
property and equipment.
Cash used in financing activities decreased to $0 in the 2003 Quarter
compared to $6,000 of cash used in financing activities in the 2002 Quarter.
The decrease is primarily the result of the pay down of capital leases.
We currently have no commitments for material capital expenditures.
Recent Accounting Pronouncements
In July 2001, the FASB issued Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141"), which supersedes APB Opinion No. 16.
SFAS 141 eliminates the pooling-of-interests method of accounting for
business combinations and modifies the application of the purchase accounting
method. The elimination of the pooling-of-interests method is effective for
transactions initiated after June 30, 2001. The remaining provisions of SFAS
141 will be effective for transactions accounted for using the purchase method
that are completed after June 30, 2001. The adoption of SFAS No. 141 did not
have an effect on our financial condition or the results of operations.
In July 2001, the FASB also issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Intangible Assets," ("SFAS 142"), which
supersedes APB Opinion No. 17. SFAS 142 eliminates the current requirement to
amortize goodwill and indefinite-lived intangible assets, addresses the
amortization of intangible assets with a defined life and addresses the
impairment testing and recognition for goodwill and intangible assets. SFAS
142 will apply to goodwill and intangible assets arising from transactions
completed before and after the statement's effective date. SFAS 142 is
effective for fiscal 2002. The adoption of SFAS No. 142 will not have an
effect on our financial condition or the results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment of Disposal of Long-Lived Assets. SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount of fair value
less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses that
have not occurred. SFAS No. 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001 and, generally, is to be
applied prospectively. The Company is currently evaluating the potential
impact of SFAS No. 144 on its results of operations and financial position.
In July 2002, the FASB issued SFAS No. 146, Accounting for Restructuring
Costs. SFAS No. 146 applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived assets. Those
17
activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. Under
SFAS No. 146, a company will record a liability for a cost associated with an
exit or disposal activity when that liability is incurred and can be measured
at fair value. SFAS No. 146 will require a company to disclose information
about its exit and disposal activities, the related costs, and changes in
those costs in the notes to the interim and annual financial statements that
include the period in which an exit activity is initiated and in any
subsequent period until the activity is completed. SFAS No. 146 is effective
prospectively for exit or disposal activities initiated after December 31,
2002 with earlier adoption encouraged. Under SFAS No. 146, a company may not
restate its previously issued financial statements and the new Statement
grandfathers the accounting for liabilities that a company had previously
recorded under Emerging Issues task Force Issue 94-3. The Company is
currently evaluating the potential impact of SFAS No. 144 on its results of
operations and financial position.
Item 3. Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There were no significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
Disclosure controls and procedures are our controls and other procedures
that are designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
18
PART II
Item 1. Legal Proceedings
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 the $100,000 of the Company's convertible bridge notes
("Notes") that were issued to ACB in March of 2000. The complaint includes
breach of contract claims asserting that the Company owes ACB $265,400 plus
interest or $121,028 including interest based on its interpretation of the
terms of the Notes and subsequent amendments. Effective June 30, 2001, the
Company issued ACB 5,034 shares of common stock on conversion in full payment
of the Notes based on the Company's interpretation of the Notes, as amended.
The Company has filed an answer to the complaint denying liability and does
not believe that this litigation will have a material adverse effect on the
Company, its operations or its financial condition.
On July 22, 2002, Thomas Keith Barefoot ("Barefoot"), doing business as
Quin Deca Farm ("Quin Deca"), an unaffiliated party, filed a complaint against
the Company in the Superior Court of the County of Harnett in the State of
North Carolina regarding the Company's first generation Bion NMS System on
Quin Deca Farm and the harvesting of BionSoil(R). The complaint includes
breach of contract claims asserting that the Company abandoned the NMS system
on Quin Deca Farm and the failure of the Company to harvest BionSoil(R). The
second claim is for fraud regarding misrepresentation of the state of the
technology of the first generation NMS. The third claim is for unfair and
deceptive trade practices for misrepresentation of the state of the technology
of the NMS System. The fourth claim is for negligent misrepresentation made
by Bion in connection with the work it performed and its suitability for the
intended purpose. The fifth claim is for equity/specific performance in that
Bion left Quin Deca with an economically and technically deficient waste
management system that cannot continue to be used without adequate and
alternative methods of waste removal. Quin Deca is seeking $30,000 in
damages, $10,000 in punitive damages, to have its damages trebled, reasonable
attorney fees and principles of equity requiring Bion to install its second
generation Bion NMS system. 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 2. Changes in Securities
On September 30, 2002, the Company issued a convertible note for the D2
management fee to be paid to the Trust Under Deferred Compensation Plan for
D2CO, LLC ("Trust") for the three months ended September 30, 2002. The
convertible note was issued having an amount of $150,000 and pays interest at
6% per annum, payable in cash or in shares of the Company's common stock. The
convertible note is convertible into shares of common stock in whole or in
part at the time of the Company's next equity financing, at the price of the
next equity financing, at the election of the holder. The securities
described in this section were issued by Bion in a transaction not involving a
public offering. The Trust is a sophisticated investor associated with a
Director of the Company and had access to complete information concerning the
Company. The Trust made representations that it was an "accredited" investor
who was receiving the securities with investment intent and not with the
intent to distribute the securities. The issuance of the securities was
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended.
19
Item 6. Exhibits and Reports on Form 8-K
The following documents are filed as exhibits to this Form 10-QSB,
including those exhibits incorporated in this Form 10-QSB by reference to a
prior filing of Bion under the Securities Act or the Exchange Act as indicated
in parenthesis:
Exhibit No. Description
----------- -----------
99.1 Certification by David J. Mitchell pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certification by Lawrence R. Danziger pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Reports on Form 8-K
None.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: November 12, 2002 BION ENVIRONMENTAL TECHNOLOGIES, INC.
by: /s/ David J. Mitchell
-------------------------------------
David J. Mitchell
President and Chief Executive Officer
by: /s/ Lawrence R. Danziger
-------------------------------------
Lawrence R. Danziger
Chief Financial Officer
CERTIFICATIONS PURSUANT TO RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, David J. Mitchell, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Bion
Environmental Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
21
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 /s/ David J. Mitchell
-------------------------------------
Name: David J. Mitchell
Title: Principal Executive Officer
I, Lawrence R. Danziger, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Bion
Environmental Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
22
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 /s/ Lawrence Danziger
-------------------------------------
Name: Lawrence Danziger
Title: Principal Financial Officer
23