SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
BION ENVIRONMENTAL TECHNOLOGIES, INC.
(Name of small business issuer as specified in its charter)
Colorado 84-1176672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
641 Lexington Avenue, 17th Floor
New York, New York 10022
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, including area code:
212-758-6622
Securities to be registered under Section 12(b) of the Act:
None
Securities to be registered under Section 12(g) of the Act:
Common Stock, no par value
Forward-Looking Statements
This Report contains, in addition to historical information, forward-
looking statements regarding BION ENVIRONMENTAL TECHNOLOGIES, INC. (the
"Company"), 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
and that involve substantial risks and uncertainties. The Company's actual
results of operations, most of which are beyond the Company's control, could
differ materially. For this purpose, any statements contained in this Report
that are not statements of historical fact may be deemed to be forward-
looking statements. Without limiting the generality of the foregoing, words
such as "may," "will," "expect," "believe," "anticipate," "intend," "could,"
"estimate," "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
Factors that could cause or contribute to such difference include, but are
not limited to, limited operating history; uncertain nature of environmental
regulation and operations; risks of development of first of their kind
Integrated Projects; need for additional financing; competition; dependence
on management; and other factors discussed herein.
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TABLE OF CONTENTS
Page
INFORMATION REQUIRED IN REGISTRATION STATEMENT
ITEM 1. DESCRIPTION OF BUSINESS ............................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION ..................................... 29
ITEM 3. DESCRIPTION OF PROPERTY ............................... 43
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ........................................ 44
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS ....................................... 47
ITEM 6. EXECUTIVE COMPENSATION ................................ 54
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........ 58
ITEM 8. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE
REGISTERED ............................................ 59
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S
COMMON STOCK AND RELATED STOCKHOLDER MATTERS .......... 59
ITEM 2. LEGAL PROCEEDINGS ..................................... 60
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ......... 61
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES ............... 61
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS ............. 63
PART F/S
FINANCIAL STATEMENTS .............................................. 63
PART III
ITEM 1. INDEX TO EXHIBITS ..................................... 63
ITEM 2. DESCRIPTION OF EXHIBITS ............................... 63
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ITEM 1. DESCRIPTION OF BUSINESS
General
Bion Environmental Technologies, Inc.'s ("Bion," "Company," "We," "Us,"
or "Our") patented and proprietary technology provides a comprehensive
environmental solution to the single largest 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. 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. Additionally, we believe that Bion's technology
platform allows the integration of ethanol production, renewable energy
production and on-site energy utilization with large-scale CAFO's (and their
end-product users) in an environmentally and economically sustainable manner
while reducing the aggregate capital expense and operating costs for the
entire integrated complex. In the context of Integrated Projects, Bion's
waste treatment process, in addition to mitigating polluting releases,
generates renewable energy from portions of the CAFO waste stream that can be
used by ethanol plants or other users as a natural gas replacement. The
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 and
operating cost of the ethanol production process. The ethanol plant thereby
acts 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 produces from the CAFO waste stream.
Bion, as developer of its Integrated Projects, anticipates that it will share
in the cost savings and revenue generated from these activities.
Since 2002, the Company has focused on completing development of its
technology platform and business model. As such, we have not pursued 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 development of an integrated technology platform in support of
large-scale sustainable Integrated Projects. The Company now intends to
focus its efforts on development and operation of Integrated Projects based
on Bion's waste handling/renewable energy technology platform ("Bion Systems"
or "Systems") integrating large-scale CAFO's and ethanol production
("Projects" or "Integrated Projects").
The financial statements for the years ended June 30, 2006 and 2005 and
for the periods ended December 31, 2006 and 2005 included in this
registration statement have been prepared assuming the Company will continue
as a going concern. The Company has not recorded any revenue for either the
year ended June 30, 2006 or for the period ended December 31, 2006. The
Company has incurred net losses of approximately $5,173,000 and $2,115,000
during the years ended June 30, 2006 and 2005, respectively, and has incurred
a net loss of approximately $1,069,000 (unaudited) for the six months ended
December 31, 2006. The Company had a working capital deficiency and a
stockholders' deficit of approximately $1,000 and $3,278,000, respectively,
as of June 30, 2006, and $1,141,000 and $4,605,000, respectively, as of
December 31, 2006.
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The report of the independent registered public accounting firm on the
Company's financial statements as of and for the year ended June 30, 2006
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.
Principal Products and Services
Currently, Bion is focused on using applications of its patented waste
management technology to develop Integrated Projects which will include large
CAFOs, such as large dairies, beef cattle feed lots and hog farms, with Bion
waste treatment System modules processing the aggregate CAFO waste stream
from the equivalent of 20,000 to 40,000 or more dairy cows (or the waste
stream equivalent of other species) while producing solids to be utilized for
renewable energy production and to be marketed as feed and/or fertilizer,
integrated with an ethanol plant capable of producing 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 dairy cows (or waste stream
equivalent of other species) on a single site and/or within an approximately
30 mile radius. Bion believes its technology platform will allow integration
of large-scale CAFO's with ethanol production, renewable energy production
from waste streams and on-site energy utilization in a manner that reduces
the capital expenditures and operating costs for the entire Integrated
Project and each component facility.
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 2007 fiscal
year. In addition, Bion intends to choose sites for additional Projects from
early 2007 through 2008 to create a pipeline of Projects. Management has a 5-
year development target (through calendar year 2011) of approximately 12-25
Integrated Projects. At the end of the 5-year period, Bion projects that 8-
16 of these Integrated Projects will be in full operation in 3-8 states, and
the balance would be in various stages ranging from partial operation to
early construction stage. No Integrated Project has been developed to date.
Bion is presently establishing its implementation management team with
the intention of commencing development and construction of an initial
Project during 2007. In September 2006, Jeremy Rowland joined Bion Dairy as
its Chief Operating Officer. Mr. Rowland has agreed to serve as the Company's
Chief Operating Officer once it has secured adequate director and officer
liability insurance coverage. 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. In addition, Sal Zizza, who rejoined Bion and Bion Dairy
during 2005 on a consulting basis, assumed the positions of Chairman and
Director of Bion Dairy on January 1, 2006 and Jeff Kapell, who became a
consultant to Bion and Bion Dairy in December 2003, joined the Bion
management team on a full-time basis during April 2006 as Bion Dairy's Vice-
President --Renewables. Mr. Zizza and Mr.Kapell have agreed to serve the
5
Company in similar positions once it has secured adequate director and
officer liability insurance coverage. Bion will need to continue to hire
additional management and technical personnel as it moves from the technology
re-development phase to the implementation phase during the 2007 calendar
year.
The Company's successful accomplishment of these activities is dependent
upon many factors including 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
and water resources have now become significantly more expensive while
ongoing consolidation of the CAFO industry has produced a 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. Clean-up initiatives for the
Chesapeake Bay and 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 dairies having been
identified as the largest contributor to airborne ammonia and other polluting
gases in the San Joaquin Valley.
We believe Bion's technology will 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 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 model will access diversified revenue streams
6
through a balanced integration of technologies to provide a hedge of the
commodity risks associated with any of the separate enterprises. We believe
that the Bion's Integrated Projects will generate revenues and profits from:
* Waste processing and technology licensing fees;
* High-value organic fertilizer and/or high protein feed products;
* 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.
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 generate
revenue from: a) waste processing and technology licensing fees charged to
the CAFO, b) sales of the fertilizer and other products generated from the
waste treatment process, c) sales of energy to the ethanol plant, 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 wet 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 wet distillers grain. If Bion also 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.
We believe that our technology platform and the proposed Projects do not
involve significant technology risk. Our waste handling technology has been
utilized in the past efficiently 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 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.
Although we have developed the structure and basic design work related to
Integrated Projects, we have not yet actually constructed 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 Project will include:
7
* 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 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 will be a source of waste heat
(which, if not productively utilized, would increase ethanol
production costs for required disposal) that will be used to pre-
heat the CAFO waste stream to maintain temperatures throughout the
co-located Bion System. In colder climates, additional uses of this
waste heat will potentially include heating some of the CAFO
facilities;
* Drying and processing of the fine solids portion of the CAFO's waste
stream into a value-added, marketable, organic fertilizer and/or
high protein feed product ingredients; and
* 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.
In order to implement this plan, Bion must work with both CAFO's and
ethanol producers 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 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 agrees 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 of construction of all of
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 641 Lexington Avenue, 17th
Floor, New York, New York 10022. Our telephone number at that address is
212-758-6622. We have no additional offices at this time.
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Development of our Business
Substantially all of our business and operations are conducted through
three wholly owned subsidiaries, Bion Technologies, Inc. (a Colorado
corporation organized September 20, 1989), BionSoil, Inc. (a Colorado
corporation organized June 3, 1996) and Bion Dairy Corporation ("Bion Dairy")
(formerly Bion Municipal, Inc., a Colorado corporation organized July 23,
1999). Bion is also the parent of Bion International, Inc. (a Colorado
corporation organized July 23, 1999), which is a wholly owned, presently
inactive subsidiary. Bion is also the parent of Dairy Parks, LLC (an
inactive Delaware entity organized July 25, 2001). In January 2002, Bion
entered into a series of transactions whereby the Company became a 57.7%
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 fiscal
year 2002. Since that time, we have been working on technology improvements
and applications and in furtherance of our business model of Integrated
Project development leading toward construction and operation of an initial
Integrated Project.
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, 2001, we sold and subsequently
installed, in the aggregate, 32 of these first generation systems in 7
states, of which we believe approximately 15 are still in operation in 3
states. We discontinued marketing of our first generation NMS systems during
fiscal year 2002. 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 developed during fiscal years 2001-2003. We have
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 new generation of Bion Systems is designed to harvest
solids used to produce our 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.
9
The first phase of this research and re-development, which was conducted
during the summer and fall of 2000 at DreamMaker Dairy, our former research
facility located outside Buffalo, New York, accelerated the speed at which we
could treat the CAFO waste stream and harvest the solids from the waste (the
"Bion Process") in a System which was substantially less than 20% of the size
of a comparable first generation system. We began second phase testing and
development during the winter of 2000-2001, based on the faster, smaller
System design at the DreamMaker Dairy. We placed the System into a
configuration of enclosed tanks that fully contained the process. This
configuration allowed control and monitoring of the entire System from all
inputs through all outputs. This closed tank system gave us the ability to
perform complete mass balance calculations (measuring all inputs of the
animal waste stream and all outputs from the System, including nitrogen and
phosphorus, which are the two elements of most critical concern from a
nutrient and water pollution control standpoint, and hydrogen sulfide and
ammonia, which are two of the main compounds of critical concern from an air
pollution control standpoint) on the System to produce the
scientific/technical data necessary to demonstrate definitively the
performance of our technology. Essentially, the tank configuration enabled
our technical staff to measure the amount and manner of nitrogen and
phosphorous removed and the amount and manner of gaseous emissions from the
waste stream and compare such quantities to the inputs to the System
contained in the CAFO waste stream (also known as a "mass balance analysis").
Initial results of the mass balance analysis calculations demonstrated that
phosphorus and nitrogen removals from the total waste stream approximated
80%. Additionally, measurements on the primary odor producing compounds
indicated levels low enough to essentially eliminate odor problems associated
with CAFO waste handling. In January 2002, we announced results of testing
the fully contained Bion prototype at DreamMaker Dairy. The goals of that
initiative (which were successfully reached) were to:
* Increase the efficiencies of the first generation system;
* Convert the core Bion technology into an operating System
that could be integrated with complementary technologies; and
* Develop a computerized monitoring and control system capable of
precise measurements and adjustments and remote reporting.
During 2003 we designed, installed and began testing a commercial scale,
second generation Bion System as a 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 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):
10
* 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%.
The demonstration project at the DeVries Dairy in Texas (which remains
in operation) has 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.
For the past two years, Bion has focused on completing development of
its technology platform and business model. As such, we have not pursued
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 development of an integrated technology platform in support of
large-scale sustainable Integrated Projects. We believe significant retrofit
opportunities exist that may enable us to generate additional future revenue
streams from Bion's technology. However, Bion's management team remains
focused on implementation of its integrated technology platform as the basis
for development of its large-scale Projects, which represents our long-term
strategic goal.
We currently anticipate that Bion will be 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 ethanol plant) and 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
11
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.
In June 2006, the Company entered into an agreement with Fair Oaks Dairy
Farm ("FODF") to construct a Bion research facility ("Stage I System") at
FODF. Bion has been working with FODF since May 2005 for the purpose of
installing a waste treatment facility at FODF that could become the basis for
a future Integrated Project. The June 2006 agreement contemplates expansion
beyond the initial waste treatment facility. The Stage I System will
initially be used for testing necessary for: a) finalization of design
criteria for permitting and construction of, and b) optimization of renewable
energy production and utilization for, a full scale Integrated Projects. We
are currently in negotiations toward an amended agreement with FODF pursuant
to which: a) the Company will construct a commercial scale Bion System
designed to handle the waste stream from approximately 3,500-6,200 milking
cows ("Initial System") at existing FODF facilities in Indiana which will
incorporate and expand the scope of the Stage I System; and b) when the
Initial System has completed start-up phase and demonstrated environmental
results consistent with the DeVries results set forth above, the Initial
System will become the basis of expansion into an Integrated Project at FODF
through development stages including dairy expansion, construction of
additional Bion System modules including renewable energy production and
solids processing facilities and construction of an ethanol plant. It is
anticipated that the amended agreement will be executed during early 2007.
Preliminary engineering, design and site work at FODF has begun pursuant to
the existing agreement and we anticipate commencement of construction during
the first half of 2007. We anticipate completion of development of this
Integrated Project during 2008.
Acquisition of Centerpoint/Transactions with Centerpoint
On January 15, 2002, Bion issued 1,900,000 shares of its restricted
common stock, valued at $7.50 per share, to Centerpoint, in exchange for
$8,500,000 in cash and the assignment of claims relating to Centerpoint's
transaction with Aprilia and other rights owned by Centerpoint for total
consideration of $14,250,000. Immediately upon consummation of the
transaction with Centerpoint, Bion purchased a 57.7% majority interest in
Centerpoint from Centerpoint's Italian parent, OAM, S.p.A. ("OAM") by issuing
100,000 shares of our common stock to OAM, a warrant to purchase an
additional 100,000 shares of common stock valued at $380,000, $3,700,000 of
cash, assignment of a loan receivable valued at $3,263,000 and its rights
acquired under claims receivable acquired from Centerpoint valued at
$2,487,000.
The agreements required additional Bion shares to be issued to
Centerpoint and OAM if the Company raised equity at a price less than $7.50
per share before the cumulative investment in the Company from unaffiliated
third parties, from the date of this transaction equaled $5 million. The
number of additional shares to be issued would have been determined through a
formula 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. The Centerpoint transaction also required
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conversion of $14,256,779 of notes payable (including interest) into
1,900,911 shares of our common stock. In addition, warrants to purchase
213,263 shares of our common stock had their exercise price decreased to
$7.50 and $6.00. As described above, if the Company raised equity at a price
less than $7.50 per share, the Company would have needed to issue additional
shares to the former holders of the converted notes as if the notes were
converted into shares of the Company's common stock at the price per share of
the subsequent equity financing.
The adjustment provisions in these agreements made it impossible for
Bion to raise additional needed funds from the middle of 2002 through
February 2003 (at which time Bion had run out of cash and liquid resources).
This resulted in the financial crisis (and subsequent management turnover and
curtailment of Bion's activities) described below. These provisions were
finally amended in August 2003 as described below.
In March 2002, the Company and Centerpoint entered into an agreement
effective January 15, 2002 whereby Centerpoint agreed to pay the Company
$12,000 per month and issued a warrant to purchase 1,000,000 shares of
Centerpoint's common stock at $3.00 per share exercisable until March 14,
2007 for management services, support staff and office space. In addition,
the Company agreed to advance to Centerpoint funds needed to cure its
delinquencies with the SEC, distribute the Company's common shares to
Centerpoint shareholders, to locate and acquire new business opportunities
and for ongoing expenses. The Company had no obligation to make any advances
in excess of $500,000. All funds due the Company were evidenced by a
convertible revolving promissory note, which bore interest at 1% per month,
payable with accrued interest on March 15, 2003. This date was extendable by
agreement between the Company and Centerpoint. The Company had the right to
convert, at any time, all or a portion of the amount due under the promissory
note in shares of Centerpoint's common stock at a conversion price of $3.00
per share.
During March 2003, the Company and Centerpoint entered into an agreement
(amended on April 23, 2003) which forgave sums due from Centerpoint to Bion
(approximately $450,000 at that time) and cancelled the warrants issued by
Centerpoint to Bion in consideration of amending the terms of the January
2002 agreement between Bion and Centerpoint to remove the adjustment
provisions (and other related provisions) described above. The shareholders
of Centerpoint ratified the agreement on August 25, 2003. Such ratification
enabled Bion to complete an agreement with OAM, S.p.A. on August 27, 2003
that removed the balance of the adjustment provisions.
Centerpoint delivered the shares of Bion it owned to its shareholders
during January 2004. Centerpoint now has only nominal assets other than
631,528 Bion shares that it holds in anticipation of future delivery to its
shareholders, of which shares Bion is the "beneficial owner" of approximately
57.7% (approximately 399,011 shares) based on its ownership of Centerpoint.
Centerpoint has declared a dividend of these shares to be distributed if and
when a registration statement covering such shares is declared effective.
When and if Centerpoint delivers the Bion shares to its shareholders, the
Company will cancel the shares it receives and Centerpoint will effectively
be a publicly held shell corporation.
13
Financial and Management Crisis (2003-2005)
Bion suffered from severe financial difficulties commencing during the
fall of 2002 and, as a result, elected to cease being a reporting company
during January 2004 by filing a Form 15. These financial difficulties
resulted in the resignation of nearly all of our officers and directors
during February and March of 2003, and the termination of most of our
employees. New management was able to retain our core technical staff, but we
had to drastically curtail our business activities to include only those
activities that were directly needed to complete development and testing of
our second-generation technology as described above. The Company's financial
difficulties resulted primarily from its inability to raise additional funds
due to:
* Contractual anti-dilution provisions that were contained in the
agreements related to the Centerpoint transactions that were
completed during January 2002, and
* Fiduciary breaches by prior control persons of Centerpoint related to
refusing to work with Bion to amend the anti-dilution provisions and
multiple other matters;
which combined to undermine the Company and to prevent any reasonable
financing from being completed by the Company. See Description of Business,
Risk Factors, "We are currently involved in significant litigation."
The Company became aware of the negative implications of these anti-
dilution provisions during the summer of 2002 while attempting to structure a
needed financing, which financing attempts ultimately failed in January of
2003. Management attempted to either find alternative financing methods
which could be reasonably completed and/or negotiate an amendment to amend or
release such provisions. The inability to obtain an agreement to amend these
provisions from the late summer of 2002 through February/March 2003 (and
other related events) caused the Company's financial and management crisis.
After months of negotiations commencing during February 2003, new management
negotiated and executed agreements related to amending such provisions during
late May 2003 and the provisions were finally amended effective August 27,
2003.
Thereafter, the Company was able to complete several relatively small
financing rounds through Bion Dairy, one of our subsidiaries, during August-
November of 2003 and May-June 2004. These financings enabled the Company to
continue development work on our technology, but our operations were severely
damaged during the period without financing. Not only did we have to
terminate most of our activities and employees, but also we operated under
such dire financial constraints through 2004 that the Company lost
credibility with its historic vendors, creditors, the financial community and
its existing shareholders and investors. As a result, the market price for
the Company's stock fell sharply. In order to continue with our business
activities and save the Company, we had to structure interim financing on
extremely dilutive terms which has negatively affected our shareholders and
will probably continue to negatively impact our ability to obtain future
financing on reasonable terms.
14
On September 30, 2005, the Company, through Bion Dairy, completed a
$1,917,500 placement of convertible debt that caused, in conjunction with the
Company's technical and financial progress, conversion of 100% of Bion
Dairy's convertible debt ($5,239,489, in aggregate, principal and accrued
interest) into 3,847,217 shares of Bion's restricted common stock on that
date. This closing and conversion marked the completion of Bion's recovery
from the crisis it faced during 2003.
While we no longer face a severe working capital shortage, we still have
no revenues. The Company will need to obtain additional capital to carry
forward its operations and technology development and to satisfy existing
creditors. There is no assurance the Company will be able to obtain the funds
that it needs to stay in business, complete its technology development or to
successfully develop its business.
Recent Financings
SERIES A, A*, B and B* NOTES OF BION DAIRY
On August 25, 2003, Bion Dairy closed an initial stage of financing that
consisted entirely of 2003 Series A Secured Convertible Notes ("Series A
Notes") totaling $1,117,500 (including issuance of notes to Chris-Dan, LLC
("Chris-Dan") in consideration of cancellation/exchange of $600,000 of prior
advances from Bright Capital, Ltd. ("Brightcap") (Brightcap and Chris-Dan are
owned by Dominic Bassani, General Manager of Bion Dairy from April 2003
through September 2006 and a now full-time consultant to the Company) and of
$65,000 of prior advances from affiliates of David Mitchell, the former CEO
of Bion). $65,000 of the Series A Notes were sold to Mark A. Smith, our
President. During November 2003, $400,000 of Series A* Notes were sold to our
affiliate Centerpoint. During April 2004, an additional $165,427.33 of Series
A* Notes were sold to Chris-Dan bringing the total issuance of Series A & A*
Notes to $1,747,927.30. The Series A & Series A* Notes are identical in all
material aspects.
During the spring of 2004, Bion Dairy sold $785,000 of 2003 Series B
Secured Convertible Notes ("Series B Notes"), including $10,000 to Mark A.
Smith, our President. On June 30, 2004, Bion Dairy sold $315,000 Series B*
Notes to Centerpoint and $59,172.18 to Chris-Dan (in exchange/cancellation of
prior advances from Brightcap) for a total issuance of $1,159,172.18 of
Series B & Series B* Notes. The Series B and Series B* Notes are identical in
all material aspects.
At June 30, 2005, the largest holder of the Series A, A*, B and B* notes
was Chris-Dan which owned $974,599.51 original principal of the notes. The
second largest note holder was Centerpoint which owned $715,000 principal
amount. Bion owned $75,000 of the notes, which it received from Mark A.
Smith, our President, on May 31, 2004.
All of these notes were converted as described below.
Additionally, on May 31, 2004 Mark A. Smith, our President, purchased
$135,000 of convertible promissory notes from the Company for cash
(convertible into our common stock at $1.50 per share) and exchanged his Bion
15
Dairy Series A & Series B Notes (described above) for convertible notes of
the Company with identical conversion prices. All of Mr. Smith's notes were
converted into restricted common stock of the Company (209,997 shares, in
aggregate) on December 31, 2005. Further, Mr. Smith converted $55,000 and
$60,000 of deferred compensation to 50,000 and 30,000 shares of the Company's
restricted common stock on December 31, 2004 and 2005, respectively.
SERIES C NOTES AND CONVERSION OF SERIES A, A*, B, B* & C NOTES OF BION DAIRY
On September 30, 2005, the Company, through Bion Dairy, completed a
$1,917,500 placement of Series C Notes that caused, in conjunction with the
Company's technical progress and agreements with certain creditors,
conversion of 100% of Bion Dairy's convertible debt ($5,239,489, in
aggregate, principal and accrued interest) into the Company's restricted
common stock on that date according to their terms. The Series C Notes were
identical to the other Notes in all material respects except for a $2.00
conversion price.
In conversion of the Series A, A*, B, B*, & C Notes, respectively, the
Company issued 1,381,031, 645,753, 581,883, 274,434 and 964,117 shares of its
restricted common stock including issuance of:
* 83,340 shares to Bion which have been cancelled as treasury stock
(from the Series A & Series B Notes acquired from Mr. Smith as
described above);
* 691,528 shares to Centerpoint, of which shares Bion is the
"beneficial owner" of 57.7% (approximately 399,011 shares) based
on its ownership of Centerpoint. Centerpoint has declared a
dividend of these shares. When and if Centerpoint delivers shares
to its shareholders, the Company will cancel the shares it
receives upon receipt;
* 1,005,692 shares to Chris-Dan, of which Dominic Bassani, former
General Manager of Bion Dairy, is the owner.
DECEMBER 2005 PRIVATE PLACEMENT OF COMMON STOCK
On December 23, 2005 Bion closed an offering of its restricted common
stock at a price of $4.00 per share that raised net proceeds of $1,136,500.
We also issued 3,750 shares of common stock as commissions in connection with
the financing.
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
earn interest at the rate of 6%, payable on May 31, 2008, the maturity of the
notes. All principal and accrued interest under the notes are 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
16
received upon conversion of the notes or (ii) one year after September 13,
2006. No conversion may occur unless Bion is a "reporting company" with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934, as amended ("Exchange Act"). The notes may also be converted, in whole
or in part, at the election of the noteholders.
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 ethanol production, potting
soil, organic soil amendment, fertilizer and 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.
Dependence on One or a Few Major Customers
We will be dependent upon one or a few major customers. Our business
model is focused on development of Integrated Projects. We anticipate
initially developing, owning interests in, and operating only one or a few
fully Integrated Projects commencing during fiscal 2007, 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 eight United States patents, one Canadian
patent and one New Zealand patent:
17
* U.S. Patent No. 4,721,569, Phosphorus Treatment Process,
expires April 2007.
* U.S. Patent No. 5,078,882, Bioconversion Reactor and System,
expires March 2010.
* U.S. Patent No. 5,472,472, Animal Waste Bioconversion System,
expires September 2013.
* U.S. Patent No. 5,538,529, Bioconverted Nutrient Rich Humus,
expires August 2014.
* U.S. Patent No. 5,626,644, Storm Water Remediatory Bioconversion
System, expires October 2015.
* U.S. Patent No. 5,755,852, Bioconverted Nutrient Rich Humus,
expires July 2016.
* U.S. Patent No. 6,689,274, Low Oxygen Waste Bioconversion System,
expires November 2020.
* U.S. Patent No. 6,908,495, extension of Low Oxygen Waste
Bioconversion System, expires June 2023.
* 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.
On April 15, 2005, we filed a patent application titled "Low Oxygen
Biologically Mediated Nutrient Removal." The application number is
11/106,751.
On June 5, 2006, we filed a patent application titled "Environmentally
Compatible IntegratedFood and Energy Production System". No application
number has yet been assigned.
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 agreement upon
employment with us.
18
Research and Development
During the year ended June 30, 2006 we expended $3,809,716 (including
non-cash expenditures) and $1,030,717 during the six months ended December
31, 2006 (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 based primarily on activities at the DeVries
Dairy. 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 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.
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.
During the year ended June 30, 2005, we expended $1,212,531 (including
non-cash expenditures) conducting research and development on similar matters
as described for the periods during 2006 above.
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.
19
Employees
As of January1, 2007, we had 11 employees and consultants, all of whom
are full-time except for Jere Northrop, our Senior Technology Director, who
works for 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.
RISK FACTORS
WE ARE AN EARLY STAGE COMPANY.
We have had no System sales since late 2001 when we ceased marketing our
first generation animal waste processing systems. Therefore, our Financial
Statements show no operating revenue for the relevant periods. Since 2001,
the Company has focused its activities on developing, testing and
demonstrating the next generation of its technology and developing its
business model. Although the Company has developed its integration model, it
has not yet implemented its model by development, construction or operation
of an Integrated Project. The Company has had no significant sales or
revenues while it has been in this technology re-development stage and has
accrued substantial losses to date.
Further, potential investors should be aware of the difficulties faced
by a new enterprise, especially in view of the intense competition from
existing and more established companies in the wastewater, waste management,
environmental control, CAFO, alternative energy and soils products
industries. During the past several years we curtailed our commercial
operations to focus on research and development activities associated with
our second-generation System and our potential development of Integrated
Projects. Consequently, we have very little relevant history of commercial
operations and we have never achieved any significant revenues.
Additionally, potential investors should be aware that Bion has never
developed an Integrated Project and does not have the financial resources to
do so at this date. Further, to the best of our knowledge no one has ever
developed and operated an economically and environmentally sustainable
CAFO/renewable energy/ethanol Integrated Project with either the size or
scope of integration contemplated by the Company.
WE HAVE INCURRED SUBSTANTIAL LOSSES AND MAY NEVER ACHIEVE PROFITABILITY.
From inception to date, neither Bion nor its subsidiaries have sustained
any profitable operations. As set forth in the Financial Statements, during
the years ended June 30, 2006 and 2005, respectively, we had net losses of
$5,173,294 and $2,115,332. Our net loss for the six months ended December 31,
2006 was $1,068,558. Through December 31, 2006 we have an accumulated
deficit of $71,814,345.
20
We are in the process of completing development of applications of our
new generation of technology and expect to commence development of Projects
based on applications of this technology during fiscal 2007. Although we
expect to eventually generate revenues from the sale and/or operation of our
Systems and/or related Projects, the integration opportunities created by
these Systems and the related renewable energy and/or by-products, and
pollution reduction credits to pay our future operating expenses, there can
be no assurance that profitable operations will ever be achieved or
sustained. We are still dependent upon infusions of capital from investors
and proceeds from loans to enable us to continue in business. We believe that
we will not generate sufficient operating cash flow to meet our needs in the
near term without additional external financing. Although we have recently
signed an engagement letter with a securities firm to act as our financial
advisor and placement agent, there is no assurance that our efforts to obtain
such financing will be successful. Any failure on our part to do so will have
a material adverse impact on us and may cause us to cease operations. In the
event we are unable to achieve sustained profitable operations in the future,
it is likely that any investment in our shares or other securities will
ultimately be lost.
GOING CONCERN OPINION.
Our financial statements have been prepared assuming that we will
continue in business as a going concern. As discussed above, we have
previously suffered significant losses. The report of our independent
registered public accounting firm on the Company's financial statements as of
and for the year ended June 30, 2006 includes a "going concern" explanatory
paragraph which means that the accounting firm expressed substantial doubt
about our ability to continue as a going concern. Management's plans with
respect to these matters are described in Item 2 and in our financial
statements. Our financial statements do not contain any adjustments that
might result from this uncertainty.
OUR OPERATIONS WILL DEPEND ON THE EFFORTS OF OUR MANAGEMENT TEAM AND OUR
BUSINESS WILL SUFFER IF WE LOSE THE SERVICES OF ANY KEY EMPLOYEES.
We are completely dependent upon the efforts and abilities of our team
of officers, directors, employees and consultants to manage and operate our
business. We do not currently carry any "key man" life insurance coverage on
any of our key personnel. Although none of our officers or directors has
experience in the management of any profitable entity that has engaged in our
area of business, the loss of the services of any of these persons could have
a material adverse impact on our business, results of operations and
financial condition.
WE NEED TO HIRE ADDITIONAL MANAGEMENT AND TECHNICAL PERSONNEL TO IMPLEMENT
OUR PLANS.
As we move from the research and development of our technology to
implementation of our plans to develop Integrated Projects, we must continue
to hire operational management and technical personnel. While we have hired
Mr. Sal Zizza as Chairman, Mr. Jeremy Rowland as our Chief Operations Officer
21
and Mr. Jeff Kappel as our Vice-President of Renewables, we must still hire
other management and technical personnel to implement our strategy. If we
are unable to attract qualified personnel, we may be delayed in the
implementation of our business strategy or we may be unable to implement our
strategy.
WE HAVE NUMEROUS AGREEMENTS WITH RELATED PARTIES THAT COULD CREATE CONFLICTS
OF INTEREST.
At present we have numerous agreements with related parties. See Item
7. Certain Relationships and Related Transactions. Moreover, we have from
time-to-time entered into various employment, consulting and other agreements
with related parties pursuant to which we have paid these related parties in
cash, stock and/or options. See Item 6. Executive Compensation. We believe
that all of these agreements were negotiated on terms at least as favorable
to us as those which could have been obtained from unaffiliated persons;
however, our business, results of operations and financial condition could be
materially adversely affected by conflicts of interest.
OUR TECHNOLOGY HAS BEEN LIMITED TO A FEW POTENTIAL MARKETS AND MAY NOT
ATTRACT ENOUGH CUSTOMERS TO BE SUCCESSFUL.
Our current generation technology platform to date has been re-developed
and tested only for dairy applications and has not yet been expanded into
other markets such as beef feedlots, hogs or poultry. We have not yet
completed the development of all of the System applications that will be
necessary to address targeted markets and geographic areas and we anticipate
a continuing need for the development of additional applications. Further,
there will be extensive design and planning work needed to implement the
integration opportunities created by our technology to successfully develop
Integrated Projects. During both our current and recent fiscal years, we have
continuously made a substantial investment in developing our new generation
technology and related integration business model. Although we believe that
our existing technology is sufficient to support development of the Projects
and additional commercial applications, no assurance can be given that new
applications can be developed or that existing or new applications will
achieve commercially viable sales levels.
We have not conducted formal market studies with respect to our
technology and services. We anticipate that achieving any significant degree
of market acceptance for our Systems and products will require substantial
marketing efforts and significant expenditures to inform regulators,
potential customers, and potential industry partners of the distinctive
characteristics and benefits of our products and the Projects. We cannot give
any assurances that our targeted customers will accept our proposed products.
We also cannot give any assurance that we will ever realize substantial
revenues from the sale of our Systems or through development and operation of
Projects.
22
WE FACE INTENSE COMPETITION THAT COULD ADVERSELY AFFECT OUR FINANCIAL
PERFORMANCE.
Although we believe that our technology offers many significant
advantages over other competing technologies and systems as to both
environmental clean-up of CAFO waste streams and the integration
opportunities it creates, competition in these industry sectors is intense.
We are in direct competition with local, regional and national engineering
and environmental consulting firms and soils products companies. Some of our
competitors may be capable of developing soils products or waste and
wastewater treatment systems similar to ours or based on other competitive
technologies. Many of our potential competitors are well established and have
much greater financial and other resources than we do.
OUR SYSTEMS COULD BECOME OBSOLETE AND WE MAY NOT BE ABLE TO KEEP UP WITH
CHANGES IN TECHNOLOGY.
Our business is susceptible to changing technology. Although we intend
to continue to develop and improve our Systems, there is no assurance that
funds for such expenditures will be available or that our competitors will
not develop similar or superior capabilities.
OUR PATENT AND TRADE SECRET PROTECTION EFFORTS MAY NOT BE ADEQUATE TO PROTECT
OUR TECHNOLOGY.
While we have protection from 8 U.S. patents, 2 foreign patents and 2
patents pending, and we intend to develop and file additional patent
applications and to obtain other appropriate protection for our technology,
including the use of nondisclosure contract provisions and license
arrangements which prohibit the disclosure of our proprietary processes,
there can be no assurance that we can effectively protect against
unauthorized duplication of our patents or the introduction of substantially
similar products. Our ability to compete with other companies is materially
dependent upon the proprietary nature of our patents and technologies. We
cannot give assurances that we will be able to obtain any additional key
patents or other protection for our technology. In addition, if any of our
key patents or proprietary rights were invalidated, there could be an adverse
effect on our business, results of operations and financial condition.
OUR BUSINESS IS AFFECTED BY GOVERNMENT REGULATIONS THAT CHANGE.
To date, we have been a provider of technology, Systems and services
that result in the reduction of pollution and, therefore, we have not been
under direct enforcement or regulatory pressure. However, if and when
Integrated Projects have been constructed and begin operation, we may be
under direct enforcement.
We are involved in waste and wastewater treatment and are impacted by
environmental regulations in at least three different ways: (1) 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 at the federal level to state and local agencies; (2) our
23
System design and performance criteria must be responsive to the changes in
federal, state and local environmental agencies' effluent standards and other
requirements; and (3) our System installations and operations require
governmental permits or approvals in many jurisdictions. In addition, we
depend on the varying strictness of enforcement policies of various
governmental bodies.
We also intend to manufacturer and provide soil amendments (soil
additives which are high in organic matter but low in nutrients) and
fertilizers. Some state and federal regulatory agencies have standards that
these products must meet to be sold as soil amendment or fertilizer products
in various markets. The production and sales of our fertilizer products will
need to meet relevant federal and state requirements. These regulations can
change which creates a level of unpredictability.
ADDITIONALLY, ETHANOL PRODUCTION IN PROJECTS WILL BE SUBJECT TO NUMEROUS
REGULATIONS.
We are continually reviewing current regulations and potential changes
that may affect our business and are making necessary compliance efforts in
all jurisdictions in which we do business. We believe that Bion's technology
will allow compliance with both current and proposed federal, state and local
regulations. We are in the business of helping our customers (including
Projects and facilities in which we may become direct participants) solve
problems associated with their discharge of their waste streams into the
environment, and most of our Systems and services are subject to federal,
state and local government regulation, and many are subject to extensive
testing procedures. The effects of rulings of regulatory bodies and courts
could delay our marketing efforts for a long time and ultimately could
prevent the completion of Projects. The regulations pertaining to the
environment that may impact our Systems and Projects are continually
changing. While we believe that such regulatory changes are favorable to our
business since such regulations may require the use of our Systems, there can
be no assurance that, in the future, such regulations will not cause us
additional economic expense or have a materially adverse effect on our
business, results of operations and financial condition.
WE ARE CURRENTLY INVOLVED IN SIGNIFICANT LITIGATION.
Bion, our President Mark A. Smith and Bion Dairy are 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 claims against the Company primarily relate to the January 2002
transaction with Centerpoint. The Plaintiffs basically allege in multiple
claims denoted as fraudulent and negligent misrepresentation, promissory
estoppel, and corporate waste, that Bion breached its fiduciary duties to
Centerpoint and its shareholders and/or aided and abetted others in breaching
their duties and was unjustly enriched as a result of these actions.
Further, the plaintiffs allege that Bion, Bion Dairy and Mr. Smith breached
their duties to Centerpoint and its shareholders in connection with
Centerpoint's investments in Series A* and Series B* Notes of Dairy. This
litigation is in the early stages of discovery and motion practice.
Settlement discussions are under way at the present time and the parties have
participated in voluntary, non-binding mediation to attempt to resolve the
24
disputed matters, which mediation has led to a contingent settlement
agreement. This agreement is contingent on settlement of the matter
described in the paragraph below. If a reasonable settlement is not reached
in the matter described below and, if this contingent settlement is not
completed, the Company, Bion Dairy and Mr. Smith intend to vigorously defend
the claims against them. Management believes that the claims against Bion,
Bion Dairy and Mr. Smith are without merit and that such parties will prevail
if the litigation eventually proceeds to trial. However, litigation costs
(of which a substantial amount has already been expended) can have a material
adverse effect on companies the size of Bion and Bion Dairy. Therefore, if a
reasonable settlement can be negotiated, Bion and Bion Dairy may enter into
such a resolution of the litigation.
Additionally, the Company has drafted (on behalf of itself and
Centerpoint and Bion's shareholders) a complaint against the former
controlling shareholders and related persons of Centerpoint for damages
related to the Company's financial crisis, which were caused by their
breaches of their fiduciary duties to Bion, Centerpoint and their
shareholders. The potential defendants have executed tolling agreements
through February 5, 2007 and the litigation has not yet been commenced while
the parties engage in settlement discussions. Extended settlement discussions
have taken place related to these matters and agreements in principle have
been reached (subject to due diligence inquiries, drafting and execution of
definitive agreements, and court approvals). If these settlements are
concluded on terms similar to those under discussion, Bion will be making no
payments. Rather, Bion and Centerpoint and the Bion shareholder class will be
receiving substantial asset transfers and Bion and Centerpoint will receive
cash sufficient to offset a large part of the portion their attorneys' fees
expended to date (in these two related matters) that have not been reimbursed
by insurance carriers. However, there is as yet no assurance that these
settlements will successfully be concluded.
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 $265,400 plus
interest or $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 believes
that the ultimate resolution of this litigation will not have a material
adverse effect on the Company, its operations or its financial condition.
WE FACE RISKS OF LITIGATION RESULTING FROM IMPROPER OPERATION OF OUR SYSTEMS.
In order for our waste and wastewater treatment Systems to function
properly, the Systems must be operated in accordance with our specifications.
In the event that our Systems are not operated properly and environmental
violations or other problems occur as a result, it is possible that we could
25
be named as a defendant in litigation brought by governmental agencies and/or
individuals. Such litigation could seek, among other things, damages,
equitable remedies, punitive damages and penalties. In fact, we were named as
a defendant, along with the owners of one of our first generation Systems, in
such an action filed by the Attorney General of the State of Illinois
alleging environmental violations associated with the operation of a hog
farm. While we were able to settle that litigation for approximately $9,000,
there can be no assurance that similar litigation will not occur in the
future. Litigation of this nature could damage our reputation.
While it is our intention to operate or supervise operation of our
second-generation Systems in a manner that precludes such improper operation,
there is no assurance that we will be successful in this endeavor.
WE DO NOT CARRY ADEQUATE INSURANCE IN THE EVENT OF SIGNIFICANT ENVIRONMENTAL
LITIGATION.
We do not have insurance coverage with respect to the risks of
litigation discussed above. Presently we carry only nominal amounts of
insurance coverage to cover relatively standard business risks. Management
believes such coverage to be adequate for our current operations. It is
possible, however, that circumstances might potentially exist that could
cause us to be held liable for damage to the environment, such as the
negligent design of a System resulting in the aggravation of an existing
wastewater problem. We could also be subject to liabilities resulting from
other business risks in excess of our current policy amounts. Any such
liability, if imposed, could be substantial and would, in all likelihood,
have an adverse effect on our business, results of operations and financial
condition. Additionally we intend to participate as a principal in Integrated
Projects and, therefore, may be exposed to damages for which we do not have
adequate insurance in those activities.
RESALES OF OUR PREVIOUSLY RESTRICTED SECURITIES COULD HURT THE MARKET PRICE
OF OUR STOCK.
Of our 8,605,996 shares of Common Stock currently outstanding, 5,808,378
shares are "restricted securities" which may in the future be sold upon
compliance with Rule 144 adopted under the Securities Act of 1933, as
amended. Generally, Rule 144 provides that a person holding restricted
securities for a period of at least one year may sell every three months, in
brokerage transactions, an amount equal to the greater of one percent of our
outstanding shares of Common Stock or the average weekly reported volume of
trading for the securities provided the Company is current on its periodic
reports. There is no limitation on the amount of restricted securities that
may be sold by a person who has been the beneficial owner of such restricted
securities for more than two years, and has not been an "affiliate" for at
least 90 days prior to the date of such sales. Investors should be aware that
such sales under Rule 144 may cause the price of our Common Stock to drop in
the future.
26
CONVERSION OF OUTSTANDING CONVERTIBLE OBLIGATIONS, EXERCISE OF WARRANTS AND
OPTIONS AND CONTINGENT STOCK BONUSES WILL DILUTE OUR CURRENT SHAREHOLDERS.
The future conversion to stock of outstanding obligations for
convertible debt and deferred compensation, possible future exercise of
warrants and options, and outstanding contingent stock bonuses will result in
a significant reduction in the respective percentage interests and voting
power held by our shareholders, other than those participating in the
conversions, exercises and bonuses. As of December 31, 2006 we are indebted
to Mark A. Smith, our President, in the amount of $390,332 (represented by a
promissory note) for deferred compensation, which amount is convertible into
our common stock at the lower of the current market value at the time of
conversion or $2.00 per share. As of December 31, 2006, we are also indebted
to Bright Capital, Ltd. ("Brightcap") for services provided to the Company by
Dominic Bassani in the amount of $533,879 (represented by a promissory note)
with the same conversion feature. In addition, as of December 31, 2006 we
have warrants outstanding to purchase 3,684,010 shares of our common stock at
prices ranging from $1.00 to $5.00. As of December 31, 2006 we have also
issued 1,645,833 options to purchase our common stock, of which 1,049,167 are
currently exercisable at prices ranging from $2.00 to $7.50. Additionally,
contingent stock grants have been made totaling 690,000 shares to employees
of and consultants to the Company which vest if and when the Company's stock
price exceeds $10.00 (492,500 shares) and $20.00 (197,500 shares) per share
if the grantee is still providing services to the Company on such dates.
Further, we expect to issue additional shares of our Common Stock, warrants
and options in connection with engaging further employees or consultants and
future financings.
OUR PRIOR FINANCINGS HAVE BEEN SUBSTANTIALLY DILUTIVE AND MAY CONTINUE TO
AFFECT OUR ABILITY TO RAISE CAPITAL.
The Company was subjected to significant anti-dilution provisions during
2002 which limited its ability to obtain financing. We were unable to
correct these anti-dilution provisions until August 2003. Thereafter, the
Company was able to complete several relatively small financing rounds
through Bion Dairy, one of our subsidiaries, during August-November of 2003
and May-June 2004. These financings enabled the Company to continue
development work on our technology, but our operations were severely damaged
during the period without financing. Not only did we have to terminate most
of our activities and employees, but also we operated under such dire
financial constraints through 2004 that the Company lost credibility with its
historic vendors, creditors, the financial community and its existing
shareholders and investors. As a result, the market price for the Company's
stock fell sharply. In order to continue with our business activities and
save the Company, we had to structure interim financing on extremely dilutive
terms which has negatively affected our shareholders and will probably
continue to negatively impact our ability to obtain future financing on
reasonable terms.
27
WE DO NOT EXPECT TO PAY DIVIDENDS.
We have never paid any cash dividends on any class of stock in the past.
Due to our present financial status and our contemplated financial
requirements, we do not anticipate paying any cash dividends upon any class
of stock in the immediately foreseeable future.
THE MARKET FOR OUR COMMON STOCK IS VERY LIMITED AND MAY NOT BE MAINTAINED.
Our common stock currently trades "over-the-counter" on the "Pink
Sheets." Upon our registration under the Exchange Act, we hope that our
stock will be traded over the counter on the OTC Bulletin Board. However,
there is currently only an extremely limited and thin trading market in our
Common Stock, and there is no assurance that it will continue or that any
active trading market will develop or be sustained if developed.
THE MARKET FOR OUR COMMON STOCK IS ADVERSELY AFFECTED BY THE "PENNY STOCK"
RULES.
Our Common Stock is currently defined as a "penny stock" under the
Exchange Act and rules of the SEC. The Exchange Act and such penny stock
rules generally impose additional sales practices and disclosure requirements
on broker-dealers who sell our securities to persons other than "accredited
investors" or in transactions not recommended by the broker-dealer. For
transactions covered by the penny stock rules, the broker-dealer must make a
written suitability determination for each purchaser and receive the
purchaser's written agreement prior to the sale. In addition, the broker-
dealer must make certain required disclosures in penny stock transactions,
including the actual sale or purchase price and actual bid and offer
quotations, and the compensation to be received by the broker-dealer and
certain associated persons, provide monthly account statements showing the
market value of each penny stock held in a customer's account, and deliver
certain standardized risk disclosures required by the SEC. Consequently, the
penny stock rules affect the ability of broker-dealers to make a market in or
trade our shares and may also affect the ability of purchasers of shares to
resell those shares in the public market.
NASD SALES PRACTICE REQUIREMENTS ADVERSELY AFFECT THE MARKET FOR OUR COMMON
STOCK.
In addition to the "Penny Stock" rules described above, the NASD has
adopted rules that require that, in recommending an investment to a customer,
a broker-dealer have reasonable grounds for believing that the investment is
suitable for that customer. Prior to recommending speculative low priced
securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customers' financial
status, tax status, investment objectives and other information. Under
interpretations of these rules, the NASD believes that there is a high
probability that speculative low priced securities will not be suitable for
at least some customers. The NASD requirements make it more difficult for
broker-dealers to recommend that their customers buy our Common Stock, and
this has an adverse effect on the market for our shares.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Included in Part F/S are the audited Consolidated Financial Statements
of the Company for the fiscal years ended June 30, 2006 and 2005 and
unaudited Consolidated Financial Statements for the three and six months
ended December 31, 2006 ("Financial Statements").
Statements made in this Amendment No. 1 to Form 10-SB 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 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, 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
The Company is currently focused on completion of the development of its
second-generation technology which provides solutions for environmentally
sound clean-up of the waste streams of large-scale CAFO's and creates
economic opportunities for integration of renewable energy production,
ethanol production, sustainable animal husbandry and organic soil/fertilizer
and feed production. We believe our technology will also allow development
of Projects that can also directly integrate with dairy (and other CAFO) end-
users and that can potentially increase profitability and quality control of
29
each participant while mitigating the environmental impact of the entire
integrated complex. The Company is in the process of finalizing engineering,
design and economic modeling for applications and Integrated Projects and
expects to select the site for and commence development of its initial
Integrated Project during its 2007 fiscal year.
The financial statements for the years ended June 30, 2006 and 2005 have
been prepared assuming the Company will continue as a going concern. The
Company has incurred net losses of approximately $5,173,000 and $2,115,000
during the years ended June 30, 2006 and 2005, respectively. At June 30,
2006, the Company has a working capital deficiency and a stockholders'
deficit of approximately $1,000 and $3,278,000, respectively. The financial
statements for the six months ended December 31, 2006 and 2005 have also been
prepared assuming the Company will continue as a going concern. The Company
has incurred net losses of approximately $1,069,000 and $2,186,000 during the
six month periods ended December 31, 2006 and 2005, respectively. At
December 31, 2006, the Company has a working capital deficiency and a
stockholders' deficit of approximately $1,141,000 and $4,605,000,
respectively. The report of the independent registered public accounting
firm on the Company's financial statements as of and for the year ended June
30, 2006 includes a "going concern" explanatory paragraph which means that
the accounting firm has expressed substantial doubt about the Company's
ability to continue as a going concern. Management's plans with respect to
these matters are described in this section and in our financial statements,
and this material does not include any adjustments that might result from the
outcome of this uncertainty. There is no guarantee that we will be able to
raise the funds or raise further capital for the operations planned in the
near future.
CRITICAL ACCOUNTING POLICIES
Management has identified the following policies below as critical to
our business and results of operations. Our reported results are impacted by
the application of the following accounting policies, certain of which
require management to make subjective or complex judgments. These judgments
involve making estimates about the effect of matters that are inherently
uncertain and may significantly impact quarterly or annual results of
operations. For all of these policies, management cautions that future
events rarely develop exactly as expected, and the best estimates routinely
require adjustment. Specific risks associated with these critical
accounting policies are described in the paragraphs below.
Revenue Recognition
While the Company has not recognized any operating revenues for the past
two fiscal years, the Company anticipates that future revenues will be
generated from product sales, technology license fees, annual waste treatment
fees and direct ownership interests in Integrated Projects. The Company
expects to recognize revenue from product sales when there is persuasive
evidence that an arrangement exists, when title has passed, the price is
fixed or determinable, and collection is reasonably assured. The Company
expects that technology license fees will be generated from the licensing of
Bion's Systems. The Company anticipates that it will charge its customers a
30
non-refundable up-front technology license fee, which will be recognized over
the estimated life of the customer relationship. In addition, any on-going
technology license fees will be recognized as earned based upon the
performance requirements of the agreement. Annual waste treatment fees will
be recognized upon receipt. Revenues, if any, from the Company's interest in
Projects will be recognized when the entity in which the Project has been
developed recognizes such revenue.
Compensation Cost for Options with Service Conditions and Graded Vesting
Schedules
The Company has issued non-employee options that include service
conditions and have graded vesting schedules. Generally for these
arrangements, the measurement date of the services occurs when the options
vest. In accordance with Emerging Issues Task Force Issue No. 96-18,
recognition of compensation cost for reporting periods prior to the
measurement date is based on the then current fair value of the options.
Fair value of the options is determined using a Black-Scholes option-pricing
model. Any subsequent changes in fair value will be recorded on the
measurement date. Compensation cost in connection with options that are not
fully vested is being recognized on a straight-line basis over the requisite
service period for the entire award.
Stock-based compensation
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"),
establishes financial accounting and reporting standards for stock-based
employee compensation plans. SFAS No. 123 encourages entities to adopt a
fair-value-based method of accounting for stock compensation plans.
However, SFAS No. 123 also permits entities to continue to measure
compensation cost under Accounting Principles Board Opinion No. 25 ("APB 25")
with the requirement that pro forma disclosures of net income (loss) and
earnings (loss) per share be included in the notes to the financial
statements. The Company has elected to measure compensation cost under APB
25; accordingly, the Company uses the intrinsic value method to account for
its stock-based employee compensation plans.
In December 2004, the Financial Accounting Standards Board issued SFAS
No. 123(R) Share Based Payment, which addresses the accounting for share-
based payment transactions. SFAS No. 123(R) eliminates the ability to
account for share-based compensation transactions using APB 25, and generally
requires instead that such transactions be accounted and recognized in the
statement of income based on their fair values. SFAS No. 123(R) will be
effective for the Company beginning on July 1, 2006. Depending upon the
number and terms of options that may be granted in future periods, management
believes that the implementation of this standard could have a material
impact on the Company's financial statements.
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2006 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 2005
General and Administrative
General and administrative expenses were $284,000 for the three months
ended December 31, 2006 versus $343,000 for the three months ended December
31
31, 2005. The decrease in general and administrative expenses of $59,000 was
partially due to non-cash compensation expense to re-measure the President's
convertible deferred compensation for the three months ended December 31,
2006 of $54,000 versus $258,000 to record the intrinsic value of the
liability for the three months ended December 31, 2005. The decrease in non-
cash compensation was due to the Company's adoption of SFAS 123(R)which
measures the fair value of the convertible feature of the liability, versus
valuing under the intrinsic value method. Offsetting the lower non-cash
compensation costs during the three months ended December 31, 2006, were
higher rent costs of $41,000 due to the Company obtaining office space in New
York effective August 1, 2006 while previous rent expenditures during the
three months ended December 31, 2005 were minimal. Accounting and tax
expenditures were $40,000 higher during the three months ended December 31,
2006 over the same period in the prior year due to the fiscal year 2006 audit
work and other accounting costs relating to the filing of the Company's Form
10-SB.
Research and Development
Research and development expenses decreased from $1,119,000 for the
three months ended December 31, 2005 to $922,000 for the three months ended
December 31, 2006. Non-cash compensation expense of $74,000 and $413,000
for the three months ended December 31, 2006 and 2005, respectively, was
recorded to re-measure the fair value and to recognize the intrinsic value of
Brightcap's convertible deferred compensation at December 31, 2006 and 2005,
respectively. With the Company's adoption of SFAS 123R during its fiscal
year 2007, other non-cash compensation expense of $66,000 was recognized
during the three months ended December 31, 2006 for options issued to
research and development employees, while no similar expense was recognized
during the same period in the prior year. Legal expenses were higher during
the three months ended December 31, 2006 due to more patent work being
performed compared to the three months ended December 31, 2005.
Loss from Operations
As a result of the factors described above, the loss from operations for
the three months ended December 31, 2006 decreased $256,000 from the three
months ended December 31, 2005.
Other Expense
Other expense for both the three months ended December 31, 2006 and 2005
was approximately $21,000. While interest income increased $11,000 during
the three months ended December 31, 2006 compared to the same period in the
prior year due to higher average cash balances, interest expense increased by
approximately $5,000, primarily due to the 2006 Series A convertible notes.
Net Loss
As a result of the factors described above, the net loss decreased by
$256,000 for the three months ended December 31, 2006 compared to the same
period in the prior year, representing a decrease in the net loss per common
share of $0.05.
32
RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 2006 COMPARED TO SIX
MONTHS ENDED DECEMBER 31, 2005
General and Administrative
General and administrative expenses were $36 for the six months ended
December 31, 2006 versus $525,000 for the six months ended December 31, 2005.
The primary factor for the decrease in general and administrative expenses is
due to a decrease in non-cash compensation expense of $703,000 relating to
the President's convertible deferred compensation. During the six months
ended December 31, 2005, the Company recorded non-cash compensation of
$386,000 to record the intrinsic value of the liability. During the six
months ended December 31, 2006, the Company adopted SFAS 123(R) which re-
measured the convertible feature on the deferred compensation at fair value
which resulted in a $317,000 credit to non-cash compensation expense.
Offsetting the large decrease in non-cash compensation expenses, were
increased rent expense due the office space in New York, and higher
accounting and tax costs due work performed on the fiscal year end audit and
the filing of the Company's Form 10-SB.
Research and development expenses decreased from $1,660,000 for the six
months ended December 31, 2005 to $1,030,000 for the six months ended
December 31, 2006. Non-cash compensation expense of ($434,000) and $503,000
for the six months ended December 31, 2006 and 2005, respectively, were
recorded to re-measure the fair value and recognize the intrinsic value of
Brightcap's convertible deferred compensation at December 31, 2006 and 2005,
respectively. Offsetting the decrease was other non-cash compensation
expense of $284,000 recognized during the six months ended December 31, 2006
for options issued to research and development employees. No similar expense
was recognized during the same period in the prior year, as the Company
adopted SFAS 123R during its fiscal year 2007. Legal expenses related to
research and development were $118,000 and $51,000 for the six months ended
December 31, 2006 and 2005, respectively, due to extensive patent work being
performed during the six months ended December 31, 2006. Salaries and
related payroll taxes increased $49,000 for the six months ended December 31,
2006 over the same period in the prior year due to the addition of a chief
operating officer of Dairy in September 2006, and overall pay increases to
employees.
Loss from Operations
As a result of the factors described above, the loss from operations for
the six months ended December 31, 2006 decreased $1,154,000 from the six
months ended December 31, 2005.
Other Expense
Other expense was $38,000 and $1,000 the six months ended December 31,
2006 and 2005, respectively. Interest expense decreased in the six month
period ended December 31, 2006 compared to the same period in the prior year
due to the absence of the Dairy notes and the Series A, B and C notes which
were converted during the six months ended December 31, 2005. Meanwhile
interest income increased $22,000 during the six months ended December 31,
33
2006 compared to the same period in the prior year due to higher average cash
balances. During the six months ended December 31, 2005, the Company had
other income of approximately $91,000 from the settlement of debt with third
party vendors.
Net Loss
As a result of the factors described above, the net loss decreased by
$1,117,000 for the six months ended December 31, 2006 compared to the same
period in the prior year, representing a decrease in the net loss per common
share of $0.24.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2006, the Company had cash and cash equivalents equal
to $630,317. During the six months ended December 31, 2006, net cash used in
operating activities was $818,787. As previously noted, the Company is
currently not generating revenue and accordingly has not generated cash flows
from operations. The Company does not anticipate generating sufficient
revenues to offset operating and capital costs for a minimum of two to five
years. While there are no assurances that the Company will be successful in
its efforts to develop and construct its Projects and market its Systems, it
is certain that the Company will require significant funding from external
sources.
Investing Activities
During the six months ended December 31, 2006 the Company used $76,150
of cash for investing activities to purchase property and equipment for the
New York office. In addition, the Company used $171,945 of cash to secure a
guarantee for the office lease obligation.
Financing Activities
During the six months ended December 31, 2006, $545,000 of cash was
provided by financing activities resulting from the sale of the 2006 Series A
convertible promissory notes.
As of December 31, 2006 the Company has significant debt obligations
consisting primarily of mandatorily convertible notes - affiliates $2,851,346
and deferred compensation of $1,386,367, of which $598,867 is mandatorily
convertible. The Company has entered into an 88-month operating lease for
office space in New York, with an average monthly lease expense of $15,820.
Convertible Notes
Under the terms of a convertible deferred compensation agreement with
our President that was exchanged for a promissory note and conversion
agreement on April 4, 2006, sums accrued through March 31, 2006 accrue
interest at 6% per annum and are convertible into the Company's common stock
at the lower of the current market value at the time of conversion, or $2.00
per share. Through July 1, 2007, conversions may occur by mutual agreement
between the Company and the President. The Company may convert the
34
promissory note, in whole or part, at any date after July 1, 2007 and the
convertible note owned by the President is mandatorily converted to common
stock of the Company on July 1, 2009. Through June 30, 2006, the Company
accounted for this employee stock-based compensation agreement under APB 25
and recorded the intrinsic value of the deferred compensation agreement at
each reporting date. On July 1, 2006, the Company adopted the provisions of
SFAS 123(R), which supersedes APB 25. In accordance with SFAS 123(R),
outstanding instruments previously classified as liabilities and measured at
intrinsic values, are to be measured initially at fair value with differences
to be recorded as the cumulative effect of a change in accounting principle.
The fair value of deferred compensation owed to Mark A. Smith on July 1, 2006
was $1,521,609, and the cumulative effect of the change in accounting
principle of $308,870 was recorded. Fair value at July 1, 2006 was
calculated using a Black-Scholes option pricing model with the following
assumptions: a dividend yield of zero, a risk-free interest rate of 5.13%,
volatility of 181%, and an expected life of 3 years. At December 31, 2006
the fair value of deferred compensation owed to Mark A. Smith was re-measured
as $1,204,328 and resulted in a charge/(credit) to earnings of $54,289 and
$(317,279) for the three and six months ended December 31, 2006,
respectively. Fair value at December 31, 2006 was calculated utilizing the
following assumptions: a dividend yield of zero, a risk-free interest rate of
4.74%, volatility of 66%, and an expected life of 2.5 years. Sums accrued
after April 1, 2006, ($112,500 through December 31, 2006), are non-interest
bearing and are non-convertible as of December 31, 2006. The President earns
compensation of $150,000 annually, all of which has been deferred from April
1, 2006 ($112,500 as of December 31, 2006) on a non-convertible and non-
interest bearing basis. All these sums related to Mr. Smith's deferred
compensation are net of $55,000 and $60,000 of deferred compensation that was
converted to 50,000 and 30,000 shares of the Company's restricted common
stock on December 31, 2004 and 2005, respectively.
On December 31, 2005, convertible deferred compensation payable to
Brightcap for services provided to the Company by the former general manager
of Bion Dairy between April 1, 2003 and September 30, 2005 was exchanged for
a promissory note which note bears interest at 6% per annum and conversion
agreement pursuant to which all sums accrued through September 30, 2005 are
convertible into the Company's common stock at the lower of the current
market value at the time of conversion or $2.00 per share. Through January
1, 2007 conversion may occur by mutual agreement between the Company and
Brightcap. The Company may convert the promissory note, in whole or in part,
at any date after January 1, 2007 and, on July 1, 2009, the promissory note
is mandatorily convertible to common stock of the Company. Through June 30,
2006, the Company accounted for this employee stock-based compensation
agreement under APB 25 and recorded the intrinsic value of the deferred
compensation agreement at each reporting date. On July 1, 2006, the Company
adopted the provisions of SFAS 123(R), which supersedes APB 25. The fair
value of deferred compensation owed to Brightcap on July 1, 2006 was
$2,081,475, and the cumulative effect of the change in accounting principle
of $422,516 was recorded. Fair value at July 1, 2006 was calculated using a
Black-Scholes option pricing model with the following assumptions: a dividend
yield of zero, a risk-free interest rate of 5.13%, volatility of 181%, and an
expected life of 3 years. At December 31, 2006 the fair value of deferred
35
compensation owed to Brightcap was re-measured as $1,647,017 and resulted in
a charge/(credit) to earnings of $74,245 and $(434,458) for the three and six
months ended December 31, 2006, respectively. Fair value at December 31,
2006 was calculated utilizing the following assumptions: a dividend yield of
zero, a risk-free interest rate of 4.74%, volatility of 66%, and an expected
life of 2.5 years. Brightcap receives annual compensation of $300,000 for the
full time consulting services of Dominic Bassani with payment deferred. Sums
accrued after October 1, 2005 total $375,000 as of December 31, 2006, and
accrue on a non-convertible and non-interest bearing basis.
Deferred Compensation
Prior to March 31, 2003, the Company incurred management fees under
various management agreements for management and consulting services. The
fees totaled $598,867 including interest at 6%, as of December 31, 2006. It
was agreed in March 2003 that payment would be made on March 31, 2007 by
conversion of the deferred compensation into common stock of the Company at
the higher of the average price of the Company's common stock during the ten
trading days ending March 27, 2007 or $4.00 per share.
The Company has aggregate deferred compensation liabilities of $787,500
for three of its officers/directors/consultants as of December 31, 2006.
This deferred compensation, as of December 31, 2006, does not accrue interest
and is not convertible. Payment is to be made at the earliest date that the
Company has in excess of $2,000,000 in cash and cash equivalents or as
decided by the Board of Directors or by December 31, 2007. Effective January
1, 2007, the Company entered into agreements converting these deferred
compensation amounts owed as of December 31, 2006 into promissory notes with
conversion agreements. The notes will accrue interest at 6% per annum. The
conversion agreements allow for the conversion of the notes into shares of
the Company's common stock at the equivalent price of the Company's next
private financing in excess of $2,000,000 as follows: a) by the holder at any
time after July 1, 2007; b) by the Company any time after there has been an
effective registration including the shares underlying conversion of the
notes for six months; c) by the holder and the Company by mutual agreement at
any time prior to payment by the Company of such principal and interest.
Plan of Operations and Outlook
As of December 31, 2006 the Company had cash and cash equivalents of
$630,317. Based on our operating plan, management believes that existing
cash on hand will be sufficient to fund the Company's basic overhead through
the end of the 2007 fiscal year. However, the Company will need to raise
additional capital to execute our business plan discussed below.
The Company currently intends to seek financing of between $5,000,000
and $50,000,000 during fiscal year 2007 in the form of equity and/or debt.
The proceeds would be used to expand and accelerate the development
activities of Bion's initial Integrated Projects and for general corporate
purposes. If we do not receive sufficient funding on a timely basis, it
could have a material adverse effect on our liquidity, financial condition
and business prospects. Additionally, in the event that we receive funding,
it may be on terms that are not favorable to the Company and its
shareholders. We have engaged a New York City based investment banking firm
36
to act as our placement agent, financial advisor and arranger for equity and
Project financings, although no specific financing has yet been arranged.
There is no assurance that the Company will successfully complete any
financings.
Currently, Bion is focused on using applications of its patented waste
management technology to develop Integrated Projects which will include large
CAFOs, such as large dairies, beef cattle feed lots and hog farms, with Bion
waste treatment System modules processing the aggregate CAFO waste stream
from the equivalent of 20,000 to 40,000 or more dairy cows (or the waste
stream equivalent of other species) while producing solids to be utilized for
renewable energy production and to be marketed as feed and/or fertilizer,
integrated with an ethanol plant capable of producing 20 million to 40 (or
more) million gallons of ethanol per year.
In June 2006, the Company entered into an agreement with Fair Oaks Dairy
Farm ("FODF") to construct a Bion facility ("Stage I System") at FODF. Bion
has been working with FODF since May 2005 for the purpose of installing a
waste treatment facility at FODF that could become the basis for a future
Integrated Project. The June 2006 agreement contemplates expansion beyond
the initial waste treatment facility. The Stage I System will initially be
used for testing necessary for: a) finalization of design criteria for
permitting and construction of, and b) optimization of renewable energy
production and utilization for the full scale Integrated Projects. We are
currently in negotiations toward an amended agreement with FODF pursuant to
which: a) the Company will construct a commercial scale Bion System designed
to handle the waste stream from approximately 3500-6200 milking cows
("Initial System") at existing FODF facilities in Indiana which will
incorporate and expand the scope of the Stage I System; and b) when the
Initial System has completed start-up phase and demonstrated environmental
results consistent with the published results achieved at Bion's DeVries
research facility, the Initial System will become the basis of expansion into
an Integrated Project at FODF through development stages including dairy
expansion, construction of additional Bion System modules including renewable
energy production and solids processing facilities and construction of an
ethanol plant. It is anticipated that the amended agreement will be executed
during early 2007. Preliminary engineering, design and site work at FODF has
begun pursuant to the existing agreement and we anticipate completion of
development of this Integrated Project during 2008.
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 2007 fiscal
year. In addition, Bion intends to choose sites for additional Projects
during 2007 and 2008 to create a pipeline of Projects. Management has a 5-
year development target (through calendar year 2011) of approximately 12-25
Integrated Projects. At the end of the 5-year period, Bion projects that 8-
16 of these Integrated Projects will be in full operation in 3-8 states, and
the balance would be in various stages ranging from partial operation to
early construction stage. No Integrated Project has been developed to date.
37
Bion is presently establishing its implementation management team with
the intention of commencing development and construction of an initial
Project during 2007. Bion will need to continue to hire additional management
and technical personnel as it moves from the technology re-development phase
to the implementation phase during the 2007 calendar year.
YEAR ENDED JUNE 30, 2006 COMPARED TO YEAR ENDED JUNE 30, 2005
General and Administrative
General and administrative expenses increased by $702,466 or 110% for
the year ended June 30, 2006 compared to the prior year. The increase in
general and administrative expenses is primarily due to an increase of non-
cash compensation charges of approximately $834,000 to record the intrinsic
value of the President's convertible deferred compensation as of June 30,
2006, and financial accounting and audit costs of $67,000 associated with the
preparation of the December 31, 2005 balance sheet audit and the June 30,
2006 audit, which were not performed during the fiscal year ended June 30,
2005. The increases in general and administrative expenses were partially
offset by lower legal fees during the fiscal year ended June 30, 2006 of
approximately $218,000 due to decreased litigation expense and partial
reimbursement of prior legal expenses.
Research and Development
Research and development expenses increased by $2,597,185 or 214% for
the year ended June 30, 2006 compared to the prior year. The increase in
research and development expenses was primarily due to increased consulting
expenses and salaries and related payroll taxes. Consulting expenses
increased due to the addition of several key consultants in order to further
the development of the Company's second generation technology and integration
applications. Also during the year ended June 30, 2006, $790,000 in non-cash
charges were recorded to recognize consulting expense related to the issuance
and vesting of the Company's stock options to non-employees and $1,140,000 of
non-cash charges were recorded to recognize the intrinsic value of
Brightcap's convertible deferred compensation as of June 30, 2006 compared to
$21,000 and $0, respectively, in fiscal 2005. Salaries and related payroll
taxes increased during the year ended June 30, 2006 due to pay raises and a
discretionary payment of bonuses to compensate certain employees for pay
reductions in prior years.
Loss from Operations
As a result of the factors described above, the loss from operations for
the year ended June 30, 2006 increased by $3,299,651 from the prior year of
which $2,756,000 represented the increase in non-cash expenses.
Other Expense
Other expense decreased by $241,689 for the year ended June 30, 2006
compared to the prior year. The decrease in other expenses is primarily due
to the decrease in interest expense of $155,408 and an increase in other
38
income of $65,298. Interest expense decreased during the year ended June 30,
2006 due to the conversion of the interest bearing Bion Dairy notes and
interest bearing notes held by the Company's president into the Company's
common stock during September and December 2005, respectively. Other income
increased during the year ended June 30, 2006 due to the settlement of
creditor liabilities during the year.
Net Loss
As a result of the factors described above, the net loss increased by
$3,057,962 for the year ended June 30, 2006 (an increased net loss of $0.20
per common share) compared to the prior year of which $2,756,000 represents
the increase in non-cash items.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2006, the Company had cash and cash equivalents equal to
$1,152,199. During the year ended June 30, 2006, net cash used in operating
activities was $2,040,708, 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 two to five years. While there are no assurances that
the Company will be successful in its efforts to develop and construct its
Projects and market its Systems, it is certain that the Company will require
significant funding from external sources.
Investing Activities
During the year ended June 30, 2006 the Company used $9,166 of cash for
investing activities to purchase property and equipment.
Financing Activities
During the year ended June 30, 2006, $3,194,821 of cash was provided by
financing activities primarily resulting from $1,870,821 received from the
sale of convertible debt and $1,136,500 received from the sale of common
stock.
As of June 30, 2006 the Company has significant debt obligations
consisting primarily of mandatorily convertible notes - affiliates
($2,871,698) and deferred compensation, of which $581,344 is mandatorily
convertible.
Convertible Notes
Under the terms of a convertible deferred compensation agreement with
our President that was exchanged for a promissory note and conversion
agreement on April 4, 2006, sums accrued through March 31, 2006 accrue
interest at 6% per annum and are convertible into the Company's common stock
at the lower of the current market value at the time of conversion, or $2.00
per share. Through July 1, 2007, conversions may occur by mutual agreement
between the Company and the President. The Company may convert the
39
promissory note, in whole or part, at any date after July 1, 2007 and the
convertible note owned by the President is mandatorily converted to common
stock of the Company on July 1, 2009. The Company is accounting for this
employee stock-based agreement under APB 25. At June 30, 2006, the note
balance (principal and accrued interest) due to the President was $378,981,
and the market price of the Company's common stock was $6.40 per share.
Therefore the Company has recorded the intrinsic value of the deferred
compensation agreement at $1,212,739 as of June 30, 2006. The President
earns compensation of $150,000 annually, all of which has been deferred from
April 1, 2006 ($37,500 as of June 30, 2006) on a non-convertible and non-
interest bearing basis. All these sums related to Mr. Smith's deferred
compensation are net of $55,000 and $60,000 of deferred compensation that was
converted to 50,000 and 30,000 shares of the Company's restricted common
stock on December 31, 2004 and 2005, respectively.
On December 31, 2005, convertible deferred compensation payable to
Brightcap for services provided to the Company by the former general manager
of Bion Dairy between April 1, 2003 and September 30, 2005 was exchanged for
a promissory note which note bears interest at 6% per annum and conversion
agreement pursuant to which all sums accrued through September 30, 2005 are
convertible into the Company's common stock at the lower of the current
market value at the time of conversion or $2.00 per share. Through January
1, 2007 conversion may occur by mutual agreement between the Company and
Brightcap. The Company may convert the promissory note, in whole or in part,
at any date after January 1, 2007 and, on July 1, 2009, the promissory note
is mandatorily convertible to common stock of the Company. At June 30, 2006,
the note balance (principal and accrued interest) due Brightcap was $518,425
and the market price of the company's common stock was $6.40 per share.
Therefore the Company has recorded the intrinsic value of the deferred
compensation agreement at $1,658,959. Brightcap receives annual compensation
of $300,000 for the full time consulting services of Dominic Bassani with
payment deferred. Sums accrued after October 1, 2005 total $225,000 as of
June 30, 2006, and accrue on a non-convertible and non-interest bearing
basis.
Deferred Compensation
Prior to March 31, 2003, the Company incurred management fees under
various management agreements for management and consulting services. The
fees totaled $581,344 including interest at 6%, as of June 30, 2006. It was
agreed in March 2003 that payment would be made on March 31, 2007 by
conversion of the deferred compensation into common stock of the Company at
the higher of the average price of the Company's common stock during the ten
trading days ending March 27, 2007 or $4.00 per share.
The Company has aggregate deferred compensation liabilities of $412,500
and $600,000 for three of its officers/directors/consultants as of June 30,
2006 and September 30, 2006, respectively. This deferred compensation does
not accrue interest and is not convertible. Payment is to be made at the
earliest date that the Company has in excess of $2,000,000 in cash and cash
equivalents or as decided by the Board of Directors or by December 31, 2007.
40
Plan of Operations and Outlook
As of June 30, 2006 the Company had cash and cash equivalents of
$1,152,199. In addition, subsequent to yearend and through the date of this
report, the Company received $545,000 in proceeds from the sale of its 2006
Series A Convertible Promissory Notes that closed on September 13, 2006.
Based on our operating plan, management believes that existing cash on hand
will be sufficient to fund the Company's basic overhead through the end of
the 2007 fiscal year. However, the Company will need to raise additional
capital to execute our business plan discussed below.
The Company currently intends to seek financing of between $5,000,000
and $50,000,000 during fiscal year 2007 in the form of equity and/or debt.
The proceeds would be used to expand and accelerate the development
activities of Bion's initial Integrated Projects and for general corporate
purposes. If we do not receive sufficient funding on a timely basis, it
could have a material adverse effect on our liquidity, financial condition
and business prospects. Additionally, in the event that we receive funding,
it may be on terms that are not favorable to the Company and its
shareholders. We have engaged a New York City based investment banking firm
to act as our placement agent, financial advisor and arranger for equity and
Project financings, although no specific financing has yet been arranged.
There is no assurance that the Company will successfully complete any
financings.
Currently, Bion is focused on using applications of its patented waste
management technology to develop Integrated Projects which will include large
CAFOs, such as large dairies, beef cattle feed lots and hog farms, with Bion
waste treatment System modules processing the aggregate CAFO waste stream
from the equivalent of 20,000 to 40,000 or more dairy cows (or the waste
stream equivalent of other species) while producing solids to be utilized for
renewable energy production and to be marketed as feed and/or fertilizer,
integrated with an ethanol plant capable of producing 20 million to 40 (or
more) million gallons of ethanol per year.
In June 2006, the Company entered into an agreement with Fair Oaks Dairy
Farm ("FODF") to construct a Bion facility ("Stage I System") at FODF. Bion
has been working with FODF since May 2005 for the purpose of installing a
waste treatment facility at FODF that could become the basis for a future
Integrated Project. The June 2006 agreement contemplates expansion beyond
the initial waste treatment facility. The Stage I System will initially be
used for testing necessary for: a) finalization of design criteria for
permitting and construction of, and b) optimization of renewable energy
production and utilization for the full scale Integrated Projects. We are
currently in negotiations toward an amended agreement with FODF pursuant to
which: a) the Company will construct a commercial scale Bion System designed
to handle the waste stream from approximately 3500-6200 milking cows
("Initial System") at existing FODF facilities in Indiana which will
incorporate and expand the scope of the Stage I System; and b) when the
Initial System has completed start-up phase and demonstrated environmental
results consistent with the published results achieved at Bion's DeVries
research facility, the Initial System will become the basis of expansion into
41
an Integrated Project at FODF through development stages including dairy
expansion, construction of additional Bion System modules including renewable
energy production and solids processing facilities and construction of an
ethanol plant. It is anticipated that the amended agreement will be executed
during early 2007. Preliminary engineering, design and site work at FODF has
begun pursuant to the existing agreement and we anticipate completion of
development of this Integrated Project during 2008.
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 2007 fiscal
year. In addition, Bion intends to choose sites for additional Projects from
during 2007 and 2008 to create a pipeline of Projects. Management has a 5-
year development target (through calendar year 2011) of approximately 12-25
Integrated Projects. At the end of the 5-year period, Bion projects that 8-
16 of these Integrated Projects will be in full operation in 3-8 states, and
the balance would be in various stages ranging from partial operation to
early construction stage. No Integrated Project has been developed to date.
Bion is presently establishing its implementation management team with
the intention of commencing development and construction of an initial
Project during 2007. Bion will need to continue to hire additional management
and technical personnel as it moves from the technology re-development phase
to the implementation phase during the 2007 calendar year.
CONTRACTUAL OBLIGATIONS
We have the following material contractual obligations (in addition to
employment and consulting agreements with management and employees):
1) The Company executed a non-cancelable operating lease for office
space in New York City effective August 1, 2006 and extending to November 30,
2013. The average monthly rent under the lease is $15,820. The Company has
provided the lessor with a letter of credit in the amount of $171,945 in
connection with the lease. The Company's obligations under the lease are
partially guaranteed by Salvatore Zizza, Chairman of Bion Dairy. The Company
has entered into sub-leases with non-affiliated parties for approximately 28%
of the obligations under the lease.
2) In June 2006, the Company entered into an agreement with Fair Oaks
Dairy Farm ("FODF") to construct a Bion facility ("Stage I System") at FODF.
Bion has been working with FODF since May 2005 for the purpose of installing
a waste treatment facility at FODF that could become the basis for a future
Integrate Project. The June 2006 agreement comtemplates expansion beyond the
initial waste treatment facility. The Stage I System will initially be used
for testing necessary for: a) finalization of design criteria for permitting
and construction of, and b) optimization of renewable energy production and
utilization for, full scale Integrated Projects. We are currently in
negotiations toward an amended agreement with FODF pursuant to which: a) the
Company will construct a commercial scale Bion optimization System designed
to handle the waste stream from approximately 6200 milking cows ("Initial
System") at existing FODF facilities in Indiana which will incorporate and
42
expand the scope of the Stage I System; and b) when the Initial System has
completed start-up phase and demonstrated environmental results consistent
with the DeVries results set forth above, the Initial System will become the
basis of expansion into an Integrated Project at FODF through development
stages including dairy expansion, construction of additional Bion System
modules including renewable energy production and solids processing
facilities and construction of an ethanol plant. It is anticipated that the
amended agreement will be executed during early 2007. Preliminary
engineering, design and site work at FODF has begun pursuant to the existing
agreement and we anticipate commencement of construction during the first
half of 2007. We anticipate completion of development of this Integrated
Project during 2008. The estimated cost of Stage I under the June 2006
agreement, including Stage I System construction and testing operations, is
$750,000, which Bion and FODF have agreed to split equally net of any grants.
However, as indicated above, we believe that an amended agreement will
supersede the June 2006 agreement which new agreement will require larger
expenditures.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123(R) Share Based Payment, which addresses the accounting
for share-based payment transactions. SFAS No. 123(R) eliminates the ability
to account for share-based compensation transactions using APB No. 25, and
generally requires instead that such transactions be accounted and recognized
in the statement of income based upon their fair values. SFAS No. 123(R)
will be effective for the Company beginning on July 1, 2006. Depending upon
the number and terms of options that may be granted in future periods,
management believes that the implementation of this standard could have a
material impact on the Company's financial statements.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company maintains its offices at 641 Lexington Avenue, 17th Floor,
New York, New York 10022, telephone number (212) 758-6622. 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
under the terms of the lease is $15,820. The Company has entered into sub-
leases with non-affiliated parties for approximately thirty-two per cent
(32%) of its obligations under this lease.
The Company holds eight United States patents, one Canada patent and one
New Zealand patent as described above. Two patent applications have been
filed and are pending.
43
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
At December 31, 2006, the Company had issued 8,605,996 shares of its
common stock, of which 7,912,197 are outstanding (the balance of 693,799
shares are owned by Centerpoint, the Company's majority owned subsidiary).
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of December 31, 2006 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 December 31, 2006. 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 8,605,996 shares outstanding as of December 31, 2006. The address
for those individuals for which an address is not otherwise provided is c/o
Bion Environmental Technologies, 641 Lexington Avenue, 17th Floor, New York,
New York 10022. 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) 693,799 8.1% -
641 Lexington Avenue, 17th Floor
New York, NY 10022
Dominic Bassani/Chris-Dan, LLC (2) 2,647,882 26.3% 28.2%
64 Village Hills Drive
Dix Hills, NY 11746
Anthony Orphanos (3) 1,398,228 15.0% 16.3%
c/o Austin Investments Management
520 Madison Avenue, 28th Floor
New York, NY 10022
44
Donald Codignotto (4) 811,409 8.6% 9.3%
4 Keenan Drive
Garden City, NY 11530
The Danielle Christine Bassani Trust (5) 566,000 6.2% 6.7%
Anthony Orphanos and
Donald Codignotto, Trustees
4 Keenan Drive
Garden City, NY 11530
Mark A. Smith (6) 968,183 10.8% 11.7%
Jere Northrop (7) 256,248 2.9% 3.2%
Jon Northrop (8) 198,710 2.3% 2.5%
Salvatore Zizza (9) 649,412 7.0% 7.6%
Jeremy Rowland (10) 150,000 1.7% 1.9%
James Morris (11) 200,000 2.3% 2.5%
George Bloom (12) 202,112 2.3% 2.5%
David Mager (13) 194,209 2.2% 2.4%
Jeff Kapell (14) 100,000 1.1% 1.2%
Richard Berman (15) 73,601
Bart Chilton (16) 28,000 * *
Charles Millard (17) 30,000 * *
All executive officers, directors
and significant employees as
a group ( 13 persons) 5,698,357 47.4% 50.3%
___________________
* Less than 1%
(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 64,612 shares and 600,000 shares underlying warrants held
directly by Mr. Bassani; 3,981 shares and 500,000 shares underlying warrants
held by Brightcap Capital, Ltd. ("Brightcap") of which Mr. Bassani is the
owner; 1,055,692 shares held by Chris-Dan, LLC of which Mr. Bassani is owner;
30,432 shares and 25,000 shares underlying warrants held by Mr. Bassani's
wife; 26,367 shares which represents 50% of the shares held by D2 Trust, of
45
which he is 50% beneficial owner; 74,858 shares which represents 50% of the
shares into which deferred compensation held by D2 Trust may be converted
based on the minimum conversion price of $4.00; and 266,940 shares that
Brightcap may receive pursuant to conversion of an outstanding note of the
Company calculated at December 31, 2006 at the $2.00 maximum conversion
price.. 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. Mr. Bassani further disclaims beneficial ownership
of shares and warrants owned by various family members, none of whom live
with him or are his dependents, and such shares are not included in this
calculation.
(3) Includes 315,529 shares and 10,000 shares underlying options held
directly by Mr. Orphanos; 130,263 shares held jointly with his wife; and
260,904 shares held in an IRA. Also includes 566,000 shares underlying
warrants held by the Danielle Christine Bassani Trust, of which Mr. Orphanos
is a co-trustee and 92,500 common shares and 23,032 common shares underlying
conversion of promissory notes owned by certain clients of Mr. Orphanos, over
which Mr. Orphanos exercises discretionary authority.
(4) Includes 11,409 shares held directly by Mr. Codignotto; 566,000 shares
underlying warrants held by The Danielle Christine Bassani Trust of which Mr.
Codignotto serves as co-Trustee (see note 5); and 234,000 shares underlying
warrants held by The Christopher Parlow Trust of which Mr. Codignotto serves
as co-Trustee.
(5) Represents shares underlying warrants held by the The Danielle Christine
Bassani Trust, Anthony Orphanos and Donald Codignotto, trustees.
(6) Includes 359,582 shares held directly by Mark A. Smith; 105,000 shares
underlying options and 75,000 shares underlying warrants held directly by Mr.
Smith; 20,334 shares held jointly with his wife; 56,145 shares held by his
wife; and 156,931 shares of common stock held by LoTayLingKyur Foundation
which is controlled by Mr. Smith. Also includes 195,191 shares that Mr.
Smith may receive pursuant to conversion of an outstanding note of the
Company calculated at December 31, 2006 at the $2.00 maximum conversion
price. 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.
(7) Includes 67,401 shares held by Jere Northrop's wife; 3,549 shares held
by a family trust; 62,598 shares and 122,500 shares underlying options held
by Jere Northrop; and 200 shares owned jointly by Jere Northrop and his wife.
Does not include 12,608 shares owned by the Jere and Lynn Northrop Family
Foundation, 7,906 shares owned by the Jere Northrop Family trust and 805
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.
46
(8) Includes 108,466 shares held directly by Jon Northrop; 16,464 shares
owned by Jon Northrop's wife; 4,100 shares owned jointly by Jon Northrop and
his wife; options to purchase 50,000 shares held by Jon Northrop; and 19,680
shares owned by a family trust. Does not include shares owned by the adult
children of Jon Northrop or 2,007 shares owned by the Harley Northrop Family
Foundation.
(9) Includes 41,912 shares held by Mr. Zizza; 7,500 shares underlying
options and 600,000 shares underlying warrants held by him. Mr. Zizza has
also been granted 150,000 shares of contingent stock bonus that are not
included in this calculation.
(10) Mr. Rowland holds warrants to purchase 150,000 shares.
(11) Mr. Morris holds options to purchase 200,000 shares. Mr. Morris has also
been granted 75,000 shares of contingent stock bonus that are not included in
this calculation.
(12) Mr. Bloom holds 2,112 shares and options to purchase 200,000 shares. Mr.
Bloom has also been granted 75,000 shares of contingent stock bonus that are
not included in this calculation.
(13) Mr. Mager holds 40,876 shares and warrants to purchase 153,333 shares.
Mr. Mager has also been granted 37,500 shares of contingent stock bonus that
are not included in this calculation.
(14) Mr. Kapell holds warrants to purchase 100,000 shares. Mr. Kapell has
also been granted 37,500 shares of contingent stock bonus that are not
included in this calculation.
(15) Mr. Berman holds 3,928 shares and options to purchase 35,000 shares.
Also includes 34,133 shares into which a $200,000 (initial principal amount)
2006 Series A Convertible Note held by Mr. Berman s (including accrued
interest) were convertible as of December 31, 2006.
(16) Mr. Chilton holds options to purchase 28,000 shares.
(17) Mr. Millard holds options to purchase 30,000 shares.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Our directors, executive officers and significant employees/consultants,
along with their respective ages and positions are as follows:
47
Name Age Position
---- --- --------
Director and Officers:
Mark A. Smith 57 President, General Counsel, Interim Chief
Financial Officer and Director
Jere Northrop 64 Senior Technology Director and Director
Jon Northrop 63 Secretary and Director
Salvatore J. Zizza 60 Chairman and Director of Bion Dairy
George W. Bloom 51 Chief Operating Officer of Bion
Technologies
Jeremy Rowland 43 Chief Operating Officer of Bion Dairy
Significant Employees:
James W. Morris 56 Chief Technology Officer of Bion
Technologies
Jeff Kapell 60 V.P. for Renewables of Bion Dairy
David Mager 53 V.P. for Public Policy of Bion Dairy
Dominic Bassani 61 Full Time Consultant to Bion and Bion
Dairy
Mark A. Smith (57) 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
Bion Dairy Corporation. 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.
48
Jere Northrop (64) 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
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.
Jon Northrop (63) 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.
Salvatore J. Zizza (60) recently rejoined Bion and Dairy during 2005 on
a consulting basis and assumed the positions of Chairman and Director of Bion
Dairy Corporation on January 1, 2006. Mr. Zizza served as a Director of Bion
from December 1999 through February 2003. Mr. Zizza has agreed to join
Bion's Board of Directors and serve as Bion's Chairman once Bion has
commenced Exchange Act reporting with Securities and Exchange Commission and
has secured adequate director and officer liability insurance coverage. From
2003 to 2005, Mr. Zizza was self employed providing consulting services as
well as his board of director duties as described below. He served as
Chairman of the Board, President and Treasurer from 1992 through 1997 of
Hollis Eden Pharmaceuticals (HEPH) (f/k/a IAC) and has served as a Director
since 1998. Mr. Zizza served as Chairman of the Board of Directors of The
Lehigh Group, Inc. (f/k/a The LVI Group Inc.) ("LHG") beginning in 1991, and
was President and Chief Financial Officer of The Lehigh Group, Inc. from 1985
to 1991. LHG, a New York Stock Exchange listed company, was engaged, through
its subsidiary, in the distribution of electrical products, and from 1985
until 1991 was one of the largest interior construction and asbestos
abatement firms in the United States. Mr. Zizza was Chief Operating and
Chief Financial Officer of NICO, Inc., an interior construction firm, from
49
1978 until its acquisition in 1985 by LHG. Mr. Zizza is a director of The
Gabelli Equity Trust, The Gabelli Asset Fund, The Gabelli Growth Fund and The
Gabelli Convertible Securities Fund and other funds in the Gabelli Fund
family. Mr. Zizza is presently Chairman of Hallmark Electrical Supplies Corp,
a distributor of electrical products, Bethlehem Advanced Metals which designs
and manufactures high-temperature furnaces for sale and for its own use in
the processing of specialty carbon, graphite and ceramic materials for
semiconductor and aerospace applications, and Chairman of Metropolitan Paper
Recycling, the largest independent recycler in New York.
George W. Bloom (51) has been with Bion Technologies, Inc. since
December 2000 and has served as Chief Operating Officer since January 15,
2002. 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 (43) joined Bion Dairy on September 18, 2006 as its
Chief Operating Officer. Mr. Rowland has agreed to serve as Chief Operating
Officer of Bion once Bion has commenced reporting with the Securities &
Exchange Commission and has secured adequate director and officer liability
insurance coverage. 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 his BS in Forest Ecology in 1985 from
Southern Illinois University, School of Agriculture Science.
James W. Morris (56) has served as Chief Technology Officer of Bion
Technologies, Inc. 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
50
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.
Jeff Kapell (60) became a consultant to Bion and Bion Dairy in December
2003 and joined the Bion management team on a full-time basis during April
2006 as Bion Dairy 's Vice-President --Renewables. Previously, Mr. Kapell was
Associate Principal at SJH & Company, a strategic management-consulting group
serving the global agri-food industry. Mr. Kapell served SJH & Company from
2000 to 2005. While at SJH, he led the firm's development of a practice area
in "renewables" and has become recognized throughout the industry as a sector
expert at the intersection of agriculture and renewable energy. Commencing
in mid-2005, Mr. Kapell provided consulting services to Bion and Bion Dairy
as Principal of Kapell Consulting. Mr. Kapell has also been a cranberry
grower for the past twenty-five years and has served on the Board of Ocean
Spray Cranberries, Inc., as president of The Cape Cod Cranberry Growers
Association, and is currently Vice-Chairman of the Board of the Cranberry
Institute. Mr. Kapell is an engineer by training, having performed systems
analysis for several firms prior to launching his farming and consulting
ventures. Mr. Kapell is a graduate of Lehigh University.
David Mager (53) became a consultant on a full time basis to Bion and
Bion Dairy in June 2003 and serves as Bion Dairy's Vice President for Public
Policy. He is a scientist, inventor and consultant whose specialty is helping
companies serve a 'dual bottom line' of being profitable while being
environmentally and socially responsible. Prior to joining Bion, Mr. Mager
wasemployed for over 20 years providing environmental consulting to
companies such as Amoco, General Electric, General Motors, Coca Cola, IBM,
Unilever, Aveda, Tommy Boy Records, Rhino Records, Eileen Fisher, Stonyfield
Farm Yogurt, Kozy Shack, Gaiam and ABC Home. He has focused on helping his
clients continuously improve their environmental footprints. Since 2001, he
has been a principal of Meadowbrook Lane Capital, LLC, an investment bank,
through which he provides his services to Bion and Bion Dairy. Mr. Mager has
a BS in biology from the State University of New York at Stony Brook (1975).
Dominic Bassani (60) served as the General Manager of Bion Dairy from
April 2003 through September 2006. He now serves Bion (and its subsidiaries)
as a consultant (through Bright Capital, Ltd. ("Brightcap")) on a full-time
basis with focus on strategic planning and special projects. 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
51
1998 until June 1999 he was a consultant to Internet Commerce Corp. (ICCA), 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 till 1986, Mr. Bassani focused
primarily on providing management reorganization services to manufacturing
companies and in particular to generic pharmaceutical manufacturers and their
financial sponsors.
In addition, the following persons became directors of Bion Dairy
effective October 15, 2006 and have agreed to become directors of Bion upon
effectiveness of this Form 10-SB registration statement and the Company's
acquisition of director and officer liability insurance:
Richard Berman (64) has a business career that spans over 35 years of
venture capital, management and merger & acquisitions experience. Since 1982,
Richard Berman has mainly been active as an investor, advisor, manager,
director, and financier to over 100 public and private companies, with
emphasis on biotech, internet, and other technology sectors. In the last
five years, Mr. Berman has served as a director and/or officer of
approximately a dozen public and private companies. He is currently CEO of
Nexmed, a small public biotech company; Chairman of National Investment
Managers, a public company in pension administration and investment
management; and Chairman of Candidate Resources, a private company delivering
human resources services over the web, and Chairman of Fortress Technology
Systems (homeland security). Mr. Berman is a director of seven public
companies: Dyadic International, Inc., Broadcaster, Inc., Internet Commerce
Corporation, MediaBay, Inc., NexMed, Inc., National Investment Managers, and
Advaxis, Inc. From 1998-2000, Mr. Berman was employed by Internet Commerce
Corporation as Chairman and CEO. From 1975-1982 Mr. Berman served Banker
Trust Company, New York with a final position of Senior Vice President where
he was Head of Mergers & Acquisitions and Leverage Buyout Departments. Mr.
Berman is active in real estate and venture capital investing. He is a past
Director of the Stern School of Business of NYU where he obtained his BS
(1964) and MBA (1973). He also has US and foreign law degrees from Boston
College (1969) and The Hague Academy of International Law, respectively.
Bart Chilton (46) has held the position of Chief of Staff, Vice
President for Strategic Development & Government Relations, National Farmers
Union since June 2006. From February 2005 - May 2006 he has served as
Executive Assistant to the Farm Credit Administration Board. From 2001 -
2005, Mr. Chilton served as Senior Advisor to Senator Daschle, the Majority
and Minority Leader, United States Senate. From 1998-2000 he served as
Deputy Chief of Staff to the U.S. Secretary of Agriculture and from 1995-1998
he served as Senior Policy Director for Rural Development to the U.S.
Secretary of Agriculture. From 1985-1995, Mr. Chilton served as Legislative
Director for four different members of the U.S. House of Representative's.
Mr. Chilton attended Purdue University from 1978-1983.
Charles Millard (49) has served as President and Managing Director of BP
Direct Securities, affiliate of Broadway Real Estate Partners since July
2004. From May 2001 though June 2004 he served at Lehman Brothers as Managing
Director/Head of Wealth Management Services and from May 1999 - April 2000 he
worked at Prudential Securities, Inc., as Group Head/Managing Director, NY
Internet Group. From December 1995 to May 1999, Mr. Millard served as
52
President of the New York City Economic Development Corporation and Chairman
of the New York City Industrial Development Agency. From 1991 to 1995, Mr.
Millard served as Councilman, Upper East Side, Manhattan, New York City
Council and from 1986 to 1991, he worked as an attorney at the law firm of
Davis, Polk & Wardell, NYC. Mr. Millard received a J.D. from Columbia
University School of Law (1985) and a B.A. from Holy Cross College (1979).
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
the Securities and Exchange Commission. Upon effectiveness of our Form 10-
SB, executive officers, directors and such stockholders will be required by
SEC regulations to furnish us with copies of all forms they file pursuant to
these requirements.
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 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.
53
ITEM 6. EXECUTIVE COMPENSATION.
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
three fiscal years and the compensation paid to, or accrued for, each of our
significant employees and consultants for the same period.
Summary Compensation Table
Annual Compensation Long-Term Compensation
-------------------------- -------------------------------------------
Securi-
ties
Under-
Other Restricted lying All Other
Fiscal Compen- Stock Options/ LTIP Compensation
Name and Principal Position Year Salary(1) Bonus sation Awards SARs Payouts (2)(3)
--------------------------- ------ --------- ------ ------- ---------- -------- ------- ------------
Mark A. Smith (2), 2006 150,000 12,500 20,569 (5) - 121,875 - 833,758
President and Interim Chief 2005 150,000 - 19,908 (5) - 25,000 - -
Financial Officer since 2004 150,000 - 10,910 (5) - 290,000 - -
March 25, 2003, Director
Jere Northrop, 2006 57,999 12,000 - - 118,750 - -
Senior Technology Officer, 2005 63,000 - - - 112,500 - -
Director 2004 81,466 - - - - - -
Jon Northrop, 2006 - - - - 68,750 - -
Secretary, Director 2005 - - - - - - -
2004 - - - - 65,000 - -
Brightcap/
Dominic Bassani (3), 2006 300,000 - 44,719 (5) - - - 1,140,535
General Manager of Dairy 2005 195,000 - 41,405 (5) - - - -
2004 230,000 - 18,224 (5) - - - -
Salvatore J. Zizza, (4) 2006 210,000 - - - - - -
Chairman and Director 2005 - - - - - - -
of Bion Dairy 2004 - - - - 37,500 - -
George W. Bloom, 2006 142,500 30,000 - - - - -
Chief Operating Officer 2005 120,000 - - - 197,500 - -
Bion Technologies 2004 120,000 - - - 332,500 - -
James W. Morris, 2006 142,500 30,000 - - - - -
Chief Technology Officer 2005 120,000 - - - 40,000 - -
Bion Technologies 2004 120,000 - - - 490,000 - -
David Mager, 2006 150,000 - - - - - -
Vice President for Public 2005 150,000 - - - 124,999 - -
Policy Bion Dairy 2004 137,500 - - - 325,000 - -
______________________________
(1) Includes compensation paid by Bion Technologies, Inc. and Bion Dairy, our wholly owned
subsidiaries.
(2) Mr. Smith has agreed to provide services to Bion and Dairy through March 31, 2007 at a
salary of $150,000 all of which has been deferred to date. On April 4, 2006, Mr. Smith's
accrued deferred compensation was exchanged for a promissory note and conversion agreement.
Through June 30, 2006, $378,981 had been accrued on the note, including interest at the
54
rate of 6% per annum. The note is convertible into our common stock at the lower of
current market value at the time of conversion or $2.00 per share. We may convert the
note, in whole or in part, at any date after July 1, 2007 and the note is mandatorily
converted to common stock on July 1, 2009. Compensation deferred after April 1, 2006 of
$37,500 through June 30, 2006 is non-interest bearing and non-convertible. The "Other
Compensation" represents the difference between the intrinsic value of Mr. Smith's deferred
compensation recorded as an expense of the Company as of June 30, 2006 ($1,212,739) and the
note balance due to Mr. Smith of $378,981.
(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 June 30, 2006, the note balance (including accrued interest at a rate
of 6% per annum) due to Brightcap was $518,425. Effective March 31, 2005, Brightcap
entered 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. Compensation deferred
commencing October 1, 2005 ($225,000 at June 30, 2006) is non-convertible and non-interest
bearing. The "Other Compensation" represents the difference between the intrinsic value of
Brightcap's deferred compensation recorded as an expense of the Company as of June 30, 2006
($1,658,959) and the note balance due to Brightcap of $518,425.
(4) Mr. Zizza is working for the Company at an annual compensation rate of $300,000 per
annum. All of Mr. Zizza's compensation since January 1, 2006 has been deferred on a non-
convertible and non-interest bearing basis ($150,000 at June 30, 2006). Mr. Zizza received
a fee of $60,000 for his service to the Company through December 31, 2005.
(5) Represents interest accruals on deferrals and related notes.
The following table sets forth the options that were granted during the
fiscal years ended June 30, 2006 and 2005 respectively to Executive Officers
and Significant Employees and Consultants:
Number of
Securities Percent of
Underlying Total Options
Options Granted to Exercise
Granted Employees in Price Expiration
Name 2006 Fiscal 2006 Per Share Date
---- ---------- ------------- --------- ----------
Mark A. Smith 12,500 13.23% $5.50 12/31/2010
12,500 13.23% $4.25 12/31/2010
Jere Northrop 12,500 13.23% $5.50 12/31/2010
20,000 21.16% $2.50 5/1/2005
Jon Northrop 12,500 13.23% $5.50 12/31/2010
55
Number of
Securities Percent of
Underlying Total Options
Options Granted to Exercise
Granted Employees in Price Expiration
Name 2005 Fiscal 2005 Per Share Date
---- ---------- ------------- --------- ----------
Mark A. Smith 10,000 1.50% $2.50 5/1/2015
Jere Northrop 10,000 1.50% $2.50 5/1/2005
22,500 3.38% $3.00 7/31/2008
10,000 1.50% $2.00 3/8/2009
George W. Bloom 75,000 11.28% $2.50 5/1/2015
5,000 0.75% $2.00 3/8/2009
James W. Morris 20,000 3.01% $2.00 3/8/2009
David Mager 10,000 1.50% $2.50 5/1/2015
33,333 5.01% $3.00 7/31/2008
Aggregated Option Exercises and Option Value Table as of June 30, 2006
The following table sets forth the options exercises during the fiscal
year ended June 30, 2006 and the value of exercisable and unexercisable
options outstanding as of June 30, 2006.
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options at In-the-Money
Shares June 30, 2006 Options at FYE
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
--------------- ----------- -------- ------------- ---------------
Mark A. Smith - - 105,000 / 0 $235,125 / $0
Jere Northrop - - 122,500 / 0 $384,000 / $0
Jon Northrop - - 37,500 / 0 $106,250 / $0
George W. Bloom - - 150,000 / 50,000 $555,000 / $195,000
James W. Morris - - 150,000 / 50,000 $555,000 / $195,000
Salvatore J. Zizza - - 7,500 / 0 $ 10,500 / $0
David Mager - - 143,333 / 10,000 $492,332 / $ 39,000
56
Employment Agreements
Effective April 1, 2006 Mark A. Smith, our President, agreed to serve as
President, General Counsel and as a Director of the Company and its
subsidiaries until March 31, 2007 for compensation of $150,000. To the extent
that such compensation is deferred, the deferred amount shall be payable at
the earliest of the date on which the Company has $2,000,000 cash, December
31, 2007 or at the discretion of the Company's Board of Directors. The amount
deferred through June 30, 2006 and September 30, 2006 under this arrangement
are $37,500 and $75,000, respectively. Compensation accrued after April 1,
2006 is non-convertible and non-interest bearing. Amounts accrued prior to
April 1, 2006 in the amount of $378,981 (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.
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 Bion Dairy, with an annual salary of
$300,000, all of which has been deferred to date. The amounts deferred
through June 30, 2006 and September 30, 2006 under this arrangement are
$150,000 and $225,000, respectively. Compensation accrued after January 1,
2006 is non-convertible and non-interest bearing. To the extent that such
compensation is deferred, the deferred amount shall be payable at the
earliest of the date on which the Company has $2,000,000 cash, December 31,
2007 or at the discretion of the Company's Board of Directors.
Dominic Bassani, former General Manager of Dairy, has agreed, through
Brightcap, to serve as a consultant to Bion and Bion Dairy until March 31,
2009 for compensation of $300,000 per year. Amounts accrued prior to
September 30, 2005 in the amount of $518,425 (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. To
the extent that such compensation accrued after September 30, 2005 is
deferred, the deferred amount shall be payable at the earliest of the date on
which the Company has $2,000,000 cash, December 31, 2007 or at the discretion
of the Company's Board of Directors. The amounts deferred through June 30,
2006 and September 30, 2006 under this arrangement are $225,000 and $300,000,
respectively. Compensation accrued after October 1, 2005 is non-convertible
and non-interest bearing.
Effective May 1, 2005, Bion entered into a four-year consulting/
employment agreement with Jeff Kapell. Under the terms of the agreement, Mr.
Kapell provided part-time consulting services to Bion through March 2006. In
April 2006, Mr. Kapell was appointed as Bion Dairy's Vice-President -
Renewables at a salary of $120,000 per year.
57
Effective September 18, 2006, Bion entered into a four-year employment
agreement with Jeremy Rowland. Under the terms of the agreement, Mr. Rowland
was appointed as Bion Dairy's Chief Operating Officer at a salary of $150,000
per year.
Other Agreements
In May 2005, Bion declared contingent Stock Bonuses of 690,000 shares,
in aggregate, to its key employees and consultants. 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.
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 date after the effectiveness of this Form 10-SB
registration statement.
Stock Option Plans
During June 2006 the Company adopted its 2006 Consolidated Incentive
Plan ("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 SARs, 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 3,200,000 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. 1,663,333 Options have been granted under the
Plan (as amended), including all options granted under prior merged plans.
Additionally, 690,000 shares of contingent Stock Bonuses have been granted
under the Plan.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Other than the employment/consulting agreements, deferred compensation
arrangements and conversions of debt described above in Item 1 Business and
Item 6 Executive Compensation, there are no related party transactions except
that:
1) Bion has accrued a payable of $41,647 to a company controlled by
Salvatore Zizza for rental of office space in 2003.
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 has
provided the lessor with a letter of credit in the amount of $171,945 in
connection with the lease. The Company's obligations under the lease are
partially guaranteed by Salvatore Zizza, Chairman of Bion Dairy. The Company
has entered into sub-leases with non-affiliated parties for approximately 30%
of the obligations under the lease.
58
3) On June 2006, the Company entered into an agreement with Fair Oaks
Dairy Farm ("FODF") to construct a Bion facility ("Stage I System") at FODF.
Bion has been working with FODF since May 2005 for the purpose of installing
a waste treatment facility at FODF that could become the basis for a future
Integrated Project. The June 2006 agreement comtemplates expansion beyond
the initial waste treatment facility. The Stage I System will initially be
used for testing necessary for: a) finalization of design criteria for
permitting and construction of, and b) optimization of renewable energy
production and utilization for, full scale Integrated Projects. We are
currently in negotiations toward an amended agreement with FODF pursuant to
which: a) the Company will construct a commercial scale Bion System designed
to handle the waste stream from approximately 6200 milking cows ("Initial
System") at existing FODF facilities in Indiana which will incorporate and
expand the scope of the Stage I System; and b) when the Initial System has
completed start-up phase and demonstrated environmental results consistent
with the DeVries results set forth above, the Initial System will become the
basis of expansion into an Integrated Project at FODF through development
stages including dairy expansion, construction of additional Bion System
modules including renewable energy production and solids processing
facilities and construction of an ethanol plant. It is anticipated that the
amended agreement will be executed during early 2007. Preliminary
engineering, design and site work at FODF has begun pursuant to the existing
agreement and we anticipate commencement of construction during the first
half of 2007. We anticipate completion of development of this Integrated
Project during 2008. FODF is owned and controlled by Michael McCloskey and
Timothy Den Dulk who have served as consultants to the Company since May
2005.
ITEM 8. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The class of securities to be registered is the Company's common stock,
no par value per share, of which 100,000,000 shares are authorized and
8,625,996 are outstanding. Except as otherwise set forth in our Articles of
Incorporation, the holders of common stock are entitled to one vote per share
on all matters to be voted upon by the stockholders. The holders of common
stock are entitled to share ratably in dividends, if any, as may be declared
from time to time by the board of directors out of funds legally available
for that purpose. In the event of our liquidation, dissolution or winding
up, the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities. Holder of common stock have no
preemptive or conversion rights or other subscription rights.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS.
(a) Market Information
During the past two years, we have had only limited volumes of trading
in our common stock in the over the counter pink sheets market, and there is
no assurance that such trading will expand or even continue.
59
Our common stock is quoted in the Pink Sheets under the symbol "BNET."
The following quotations reflect inter dealer prices, without retail mark up,
markdown or commission and may not represent actual transactions.
2005 2006
Fiscal Year Ending June 30, High Low High Low
--------------------------- ---- ----- ----- -----
First Fiscal Quarter $2.00 $1.01 $2.75 $1.15
Second Fiscal Quarter $1.35 $1.05 $6.00 $2.40
Third Fiscal Quarter $1.35 $1.20 $9.50 $4.00
Fourth Fiscal Quarter $1.30 $1.15 $7.00 $4.16
(b) Holders
The number of holders of record of our common stock at September 30,
2006 was approximately 742. 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.
(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
ITEM 2. LEGAL PROCEEDINGS.
Bion, our President Mark A. Smith and Bion Dairy are 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 claims against the Company primarily relate to the January 2002
transaction with Centerpoint. The Plaintiffs basically allege in multiple
claims denoted as fraudulent and negligent misrepresentation, promissory
estoppel, and corporate waste, that Bion breached its fiduciary duties to
Centerpoint and its shareholders and/or aided and abetted others in breaching
their duties and was unjustly enriched as a result of these actions.
Further, the plaintiffs allege that Bion, Bion Dairy and Mr. Smith breached
their duties to Centerpoint and its shareholders in connection with
Centerpoint's investments in Series A* and Series B* Notes of Dairy. This
litigation is in the early stages of discovery and motion practice.
Settlement discussions are under way at the present time and the parties have
participated in voluntary, non-binding mediation to attempt to resolve the
disputed matters, which mediation has led to a contingent settlement
agreement. This agreement is contingent on settlement of the matter
described in the paragraph below. If a reasonable settlement is not reached
in the matter described below and, if this contingent settlement is not
completed, the Company (and Bion Dairy and Mr. Smith) intends to vigorously
60
defend the claims against them. Management believes that the claims against
Bion, Bion Dairy and Mr. Smith are without merit and that such parties will
prevail if the litigation eventually proceeds to trial. However, litigation
costs (of which a substantial amount has already been expended) can have a
material adverse effect on companies the size of Bion and Bion Dairy.
Therefore, if a reasonable settlement can be negotiated, Bion and/or Bion
Dairy may enter into such a resolution of the litigation.
Additionally, the Company has drafted (on behalf of itself and
Centerpoint and Bion's shareholders) a complaint against the former
controlling shareholders (and related persons) of Centerpoint for damages
related to the Company's financial crisis, which were caused by their
breaches of their fiduciary duties to Bion, Centerpoint and their
shareholders. The potential defendants have executed tolling agreements
through February 5, 2007 and the litigation has not yet been commenced while
the parties engage in settlement discussions. Extended settlement discussions
have taken place related to these matters and agreements in principle have
been reached (subject to due diligence inquiries, drafting and execution of
definitive agreements, and court approvals). If these settlements are
concluded on terms similar to those under discussion, Bion will be making no
payments. Rather, Bion and Centerpoint and the Bion shareholder class will be
receiving substantial asset transfers and Bion and Centerpoint will receive
cash sufficient to offset a large part of the portion their attorneys' fees
expended to date (in these two related matters) that have not been reimbursed
by insurance carriers. However, there is as yet no assurance that these
settlements will successfully be concluded.
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
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 ACB Notes and subsequent amendments. Effective June 30, 2001,
the Company issued ACB 5,034 shares of common stock on conversion 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 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
On December 8, 2005, we engaged GHP Horwath, P.C. to serve as our
independent registered public accounting firm.
During the two most recent fiscal years, and through September 6, 2006,
the Company did not consult with GHP regarding any of the matters or events
set forth in Item 304(a)(2)(i) and (ii) of Regulation S-B.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
On September 30, 2005, the Company, through Bion Dairy, completed a
$1,917,500 placement of Series C Notes to accredited individuals and
institutions in compliance with Regulation D of the rules of the SEC and
61
Section 4(2) of the 1933 Act. The offering was conducted by the Company
without the aid of a placement agent, although the Company paid commissions
to participating dealers of $46,679, resulting in net proceeds of $1,870,821.
Completion of the offering caused, in conjunction with the Company's
technical progress and agreements with certain creditors, conversion of 100%
of Dairy's convertible A, B and C debt ($5,239,489, in aggregate, principal
and accrued interest) into 3,847,217 shares of Bion's restricted common
stock.
In conversion of the Series A, A*, B, B*, & C Notes of Bion Dairy,
respectively, the Company issued 1,381,031, 645,753, 581,883, 274,434 and
964,117 shares of its restricted common stock including issuance of:
* 83,340 shares to Bion which have been cancelled as treasury stock;
* 693,799 shares to Centerpoint, of which shares Bion is the
"beneficial owner" of 57.7% (approximately 399,011 shares) based on
its ownership of Centerpoint. Centerpoint has declared a dividend
of these shares. When and if Centerpoint delivers shares to its
shareholders, the Company will cancel these shares upon receipt;
* 1,005,692 shares to Chris-Dan, of which, Dominic Bassani, former
General Manager of Bion Dairy, is the owner.
On December 23, 2005 Bion closed an offering of 291,750 shares of its
restricted common stock at a price of $4.00 per share to accredited
individuals and institutions in compliance with Regulation D of the rules of
the SEC and Section 4(2) of the 1933 Act resulting in gross proceeds of
$1,167,000. The offering was conducted by the Company without the aid of a
placement agent, although the Company paid commissions to participating
dealers of $30,500, resulting in net proceeds of $1,036,500. We also issued
3,750 shares of common stock as commissions in connection with the financing.
On May 31, 2004 Mark A. Smith, our President, purchased $135,000 of
convertible promissory notes from the Company for cash (convertible into our
common stock at $1.50 per share) and exchanged his Bion Dairy Series A &
Series B Notes (described above) for convertible notes of the Company with
identical conversion terms. All of Mr. Smith's notes were converted into
restricted common stock of the Company (209,997 shares, in aggregate) on
December 31, 2005. Further, Mr. Smith's converted $55,000 and $60,000 of
deferred compensation to 50,000 and 30,000 shares of the Company's restricted
common stock on December 31, 2004 and 2005, respectively.
On September 13, 2006, Bion closed an offering of its Series A
Convertible Promissory Notes in the principal amount of $700,000 to
accredited individuals and institutions in compliance with Regulation D of
rules of the SEC and Section 4(2) of the 1933 Act. The offering was
conducted by the Company without the aid of a placement agent and no
commissions or discount were paid. The notes earn interest at the rate of
6%, payable on May 31, 2008, the maturity of the notes. All principal and
accrued interest under the notes are 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 day 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 such conversion may
occur unless Bion is a "reporting company" with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, as amended. The
notes may also be converted, in whole or in part, at the election of the
noteholders.
62
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation and the Bylaws provide that we may
indemnify our officers and directors for costs and expenses incurred in
connection with the defense of actions, suits, or proceedings where the
officer or director acted in good faith and in a manner he reasonably
believed to be in our best interest and is a party to such actions by reason
of his status as an officer or director.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons pursuant to the foregoing provisions or otherwise, we
have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.
PART F/S
The Company's Consolidated Financial Statements for the years ended June
30, 2006 and 2005 and the three and six months ended December 31, 2006 and
2005 (unaudited) are attached hereto.
PART III
ITEM 1. INDEX TO EXHIBITS; ITEM 2. DESCRIPTION OF EXHIBITS.
Exhibit
Number Description
3.1 Articles of Incorporation.*
3.2 Bylaws.*
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.*
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.*
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.*
10.4 Promissory Note and Security Agreement between Bion
Environmental Technologies, Inc. and Bright Capital, LLC.*
10.5 First Amendment to Lease between Bion Environmental
Technologies, Inc. and Pan Am Equities Corp.*
63
10.6 Agreement between Bion Environmental Technologies, Inc. and
Bergen Cove.*
10.7 Agreement between Bion Environmental Technologies, Inc. and
David Mitchell dated April 7, 2003.*
10.8 Letter Agreement with Bright Capital, Ltd.*
10.9 Agreement with OAM, S.p.A. dated May 2003.*
10.10 Amended Agreement with Centerpoint Corporation dated
April 23, 2003. *
10.11 Form of Series A Secured Convertible Notes issued in August 2003.*
10.12 Financing Documents for Bion Dairy Corporation.*
10.13 Form of Class SV/DB Warrant.*
10.14 Form of Class SV/DM Warrant.*
10.15 Form of Series A* Secured Convertible Notes issued in April 2004.*
10.16 Form of Series B Secured Convertible Notes issued in Spring 2004.*
10.17 Form of Series B* Secured Convertible Notes issued in June 2004.*
10.18 Form of Series C Notes issued in September 2005.*
10.19 Form of 2006 Series A Convertible Promissory Notes issued in
September 2006.*
10.20 Form of Non-Disclosure Agreement used by the Company.*
10.21 Promissory Note and Conversion Agreement between Bion
Environmental Technologies, Inc. and Mark A. Smith related to
deferred compensation.*
10.22 Promissory Note and Conversion Agreement between Bion
Environmental Technologies, Inc. and Bright Capital, Ltd.
related to deferred compensation.*
10.23 Employment agreement with Mark A. Smith.*
10.24 Employment agreement with Salvatore Zizza.*
10.25 Employment agreement with Bright Capital, Ltd.*
10.26 Employment agreement with Jeff Kapell.*
10.27 Employment agreement with Jeremy Rowland.*
10.28 Office lease at 641 Lexington Avenue, 17th Floor, New York.*
10.29 2006 Consolidated Incentive Plan.*
64
10.30 Memo to Dominic Bassani & Bright Capital, Ltd. dated October 16,
2006 regarding Change in Title/Status of DB/Amendment to
Brightcap Agreement.*
10.31 Letter Agreement between Bion Dairy Corporation and Fair Oaks
Dairy Farms dated June 19, 2006.*
10.32 Waiver and Release Agreement with Ardour Capital Investments,
LLC.*
10.33 Promissory Note and Conversion Agreement for Mark Smith, dated
January 1, 2007.*
10.34 Promissory Note and Conversion Agreement for Salvatore Zizza,
dated January 1, 2007.*
10.35 Promissory Note and Conversion Agreement for Bright Capital,
Ltd., dated January 1, 2007.*
21 Subsidiaries of the Registrant.*
____________
* Previously filed.
65
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
BION ENVIRONMENTAL TECHNOLOGIES, INC.
Date: February 1, 2007 By:/s/ Mark A. Smith
Mark A. Smith, President
66
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006 AND 2005
CONTENTS
Page
----
Report of independent registered public accounting firm ....... F-1
Consolidated financial statements:
Balance sheet ............................................... F-2
Statements of operations .................................... F-3
Statements of changes in stockholders' equity deficit ....... F-4
Statements of cash flows .................................... F-5
Notes to consolidated financial statements .................. F-6 - F-19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Bion Environmental Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Bion
Environmental Technologies, Inc. and subsidiaries as of June 30, 2006, and
the related consolidated statements of operations, stockholders' equity
deficit and cash flows for each of the two years in the period ended June 30,
2006. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
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 its subsidiaries as of June 30, 2006,
and the results of their operations and cash flows for each of the two years
in the period ended June 30, 2006, 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 suffered
recurring losses from operations and has a stockholders' deficit at June 30,
2006 that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described 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 18, 2006
F-1
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2006
ASSETS
Current assets:
Cash and cash equivalents $ 1,152,199
Prepaid services 103,513
Other assets 6,107
-------------
Total current assets 1,261,819
-------------
Property and equipment, net 7,473
-------------
Total assets $ 1,269,292
=============
LIABILITIES AND STOCKHOLDERS' EQUITY DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 454,193
Accrued payable - affiliate 41,647
Convertible debt 30,437
Subscribed promissory notes 155,000
Deferred compensation 581,344
-------------
Total current liabilities 1,262,621
Deferred compensation 412,500
Convertible notes - affiliates 2,871,698
-------------
Total liabilities 4,546,819
-------------
Stockholders' equity deficit:
Preferred stock, $.01 par value, 10,000 shares
authorized, no shares issued and outstanding -
Common stock, no par value, 100,000,000 shares
authorized, 8,625,996 shares issued, 7,932,197
outstanding -
Additional paid-in capital 66,736,874
Accumulated deficit (70,014,401)
-------------
Total stockholders' equity deficit (3,277,527)
-------------
Total liabilities and stockholders' deficit $ 1,269,292
=============
F-2
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2006 AND 2005
Year Ended June 30,
2006 2005
----------- ------------
Revenue $ - $ -
Operating expenses:
General and administrative 1,343,431 640,965
Research and development 3,809,716 1,212,531
----------- -----------
5,153,147 1,853,496
----------- -----------
Loss from operations (5,153,147) (1,853,496)
----------- -----------
Other (income) and expense:
Interest expense 134,540 289,948
Interest income (21,514) (531)
Other, net (92,879) (27,581)
----------- -----------
20,147 261,836
----------- -----------
Net loss $(5,173,294) $(2,115,332)
=========== ===========
Net loss per common share, basic and diluted $ (0.70) $ (0.50)
=========== ===========
Weighted-average number of common shares
outstanding, basic and diluted 7,353,914 4,231,126
==+======== ===========
See notes to financial statements.
F-3
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY DEFICIT
YEARS ENDED JUNE 30, 2006 AND 2005
Common Stock Additional Total
------------------ paid-in Accumulated stockholders'
Shares Amount capital deficit equity deficit
--------- ------ ----------- ------------ --------------
Balances, July 1, 2004 4,206,194 $ - $59,768,602 $(62,638,722) $(2,870,120)
Conversion of deferred
compensation to common
stock 50,000 - 55,000 - 55,000
Issuance of warrants in
exchange for deferred
compensation - - 132,500 - 132,500
Sale of warrants - - 13,000 - 13,000
Vesting of options for
services - - 20,860 - 20,860
Net loss - - - (2,115,332) (2,115,332)
--------- ------ ----------- ------------ -----------
Balances, June 30, 2005 4,256,194 - 59,989,962 (64,754,054) (4,764,092)
Conversion of debt to
equity 4,077,642 - 4,651,207 - 4,651,207
Retirement of common stock (83,340) - - (87,053) (87,053)
Conversion of deferred
compensation to common
stock 30,000 60,000 60,000
Sale of common stock 295,500 - 1,136,500 - 1,136,500
Issuance of common stock
for services 50,000 - 100,000 - 100,000
Sale of warrants - - 32,500 - 32,500
Issuance of warrants for
services - - 5,000 - 5,000
Issuance of options for
services - - 34,918 - 34,918
Vesting of options for
services - - 726,787 - 726,787
Net loss - - - (5,173,294) (5,173,294)
--------- ------ ----------- ------------ -----------
Balances, June 30, 2006 8,625,996 $ - $66,736,874 $(70,014,401) $(3,277,527)
=========== ======= ============= ============== ============
See notes to consolidated financial statements.
F-4
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2006 AND 2005
Year Ended June 30,
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,173,294) $(2,115,332)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation expense 77,971 142,269
Stock-based compensation 866,705 20,860
Increase in intrinsic value of convertible
notes 1,974,292 -
(Increase) decrease prepaid services (4,508) 46,677
(Increase) decrease other assets (6,107) 14,841
Increase (decrease) accounts payable and
accrued expenses (465,037) 271,008
Deferred compensation and accrued interest 689,270 338,685
----------- -----------
Net cash used in operating activities (2,040,708) (1,280,992)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (9,166) -
----------- -----------
Net cash used in investing activities (9,166) -
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of convertible debt 1,870,821 419,516
Net proceeds from sale of common stock 1,136,500 -
Increase in subscribed promissory notes 155,000 -
Proceeds from sale of warrants 32,500 13,000
----------- -----------
Net cash provided by financing activities 3,194,821 432,516
----------- -----------
Net increase (decrease) in cash and cash
equivalents 1,144,947 (848,476)
Cash and cash equivalents at beginning of year 7,252 855,728
----------- -----------
Cash and cash equivalents at end of year $ 1,152,199 $ 7,252
=========== ===========
Supplemental disclosure of cash flow
information:
Cash paid for interest and income taxes $ - $ -
Non-cash investing and financing transactions:
Conversion of debt to equity $ 4,610,832 $ -
Conversion of deferred compensation to warrants - 132,500
Conversion of deferred compensation to
common stock 60,000 55,000
Conversion of accounts payable into
convertible debt - 30,437
See notes to consolidated financial statements.
F-5
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2006 AND 2005
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S
PLANS:
Organization and business:
Bion Environmental Technologies, Inc. ("Bion" or the "Company") was
incorporated in 1987 in the State of Colorado.
Bion's patented and proprietary technology provides solutions for
environmentally sound clean-up of the waste streams of large-scale animal
farming operations ("confined animal feeding operations" or "CAFO's") (dairy,
cattle feedlot, hogs and poultry) and creates economic opportunities for
integration of alternative, renewable energy production, ethanol production,
sustainable animal husbandry and organic soil/fertilizer and feed production.
Bion's technology also potentially allows direct integration with dairy end-
users (bottling operations, cheese and ice cream plants, etc.) that can
potentially increase the profitability and quality control of each
participant while mitigating the environmental impact of the entire
integrated complex. The Company is in the process of finalizing engineering,
design and economic modeling for applications and integrated projects based
on its second-generation technology.
Bion is currently evaluating sites in multiple states and anticipates
selecting a site for its initial integrated project during its 2007 fiscal
year. Bion is presently establishing its implementation management team with
the intention of commencing development and construction of the initial
project during fiscal 2007. In addition, Bion intends to site additional
projects during 2007 and 2008 to create a pipeline of projects that will
insure significant market share and profitability within 3-5 years (both
regionally and nationally). Each project is to include: a) Bion waste
treatment system, b) processing the CAFO waste stream from the equivalent of
approximately 20-40,000 dairy cows, c) while producing renewable energy for
on-site use, d) solids to be marketed as feed and/or fertilizer e) which is
integrated with a 20-40+M gallon/year ethanol plant (though some smaller
projects may be undertaken in appropriate situations). At the end of the 5-
year period, Bion hopes to have numerous projects in various stages of
development ranging from full operation to early construction stage.
Through 2001 the Company was primarily an environmental service company
focused on the needs of CAFOs. Thereafter, Bion elected to cease sales of its
first generation systems and focused its activities on development of its
second-generation technology.
Going concern and management's plans:
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. The Company has incurred net losses of
approximately $5,173,000 and $2,115,000 during the years ended June 30, 2006
and 2005, respectively. At June 30, 2006, the Company has a working capital
deficiency and a stockholders' deficit of approximately $1,000 and
$3,278,000, respectively. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments relating to
the recoverability or classification of assets or the amounts and
classification of liabilities that may result should the Company be unable to
continue as a going concern. The following paragraphs describe management's
plans with regard to these conditions.
F-6
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S
PLANS (CONTINUED):
Going concern and management's plans (continued):
Bion suffered from severe financial difficulties from late 2002 through the
closing of its operating subsidiary Bion Dairy Corporation's ("Dairy") Series
C Note offering on September 30, 2005. These financial difficulties resulted
in the resignation of nearly all of the Company's officers and directors
during February and March of 2003, and the termination of most Company
employees. New management was able to retain core technical staff, but the
Company drastically curtailed business activities to include only those
activities that were directly needed to complete development and testing of
the second-generation technology. On September 30, 2005, the Company,
through Dairy, completed a placement of convertible debt, raising net
proceeds of $1,871,000, all of which has been converted to common stock as of
June 30, 2006 (Note 10).
The Company completed a private placement of restricted common stock in
December 2005, raising net proceeds of $1,136,500 (Note 10). During
September 2006, the Company completed a convertible note offering, raising
$700,000 (Note 6). 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, and to
satisfy existing creditors. There is no assurance the Company will be able to
obtain the funds that it needs to stay in business, complete its technology
development or to successfully develop its business.
There can be no assurance that sufficient funds required during the next
twelve months or thereafter will be generated from operations or those funds
will be available from external sources such as debt or equity financings or
other potential sources. The lack of additional capital resulting from the
inability to generate cash flow from operations or to raise capital from
external sources would force the Company to substantially curtail or cease
operations and would, therefore, have a material adverse effect on its
business. Further, there can be no assurance that any such required funds, if
available, will be available on attractive terms or that they will not have a
significantly dilutive effect on the Company's existing shareholders.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Bion Technologies, Inc., BionSoil, Inc. and
Bion Dairy Corporation and its 57.7% owned subsidiary, Centerpoint
Corporation ("Centerpoint"). 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 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.
F-7
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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, will be
realized.
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 earnings
(loss) per share assumes the conversion, exercise or issuance of all
potential common stock instruments, such as options or warrants, unless the
effect is to reduce the loss or increase earnings per share. During each of
the years ended June 30, 2006 and 2005, the effect of outstanding options and
warrants would have been anti-dilutive.
Fair value of financial instruments:
The fair values of cash and cash equivalents, convertible debt, subscribed
promissory notes and accounts payable approximate their carrying amounts due
to their short-term maturities. It is not practicable to estimate the fair
value of the accounts payable-affiliate, convertible notes-affiliates and
deferred compensation liability due to the related party nature of the
underlying transactions.
Use of estimates:
In preparing 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.
F-8
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Stock-based compensation:
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"),
establishes financial accounting and reporting standards for stock-based
employee compensation plans. SFAS No. 123 encourages entities to adopt a
fair-value-based method of accounting for stock compensation plans. However,
SFAS No. 123 also permits entities to continue to measure compensation cost
under Accounting Principles Board Opinion No. 25 ("APB 25") with the
requirement that pro forma disclosures of net income (loss) and earnings
(loss) per share be included in the notes to the financial statements. The
Company has elected to measure compensation cost under APB 25; accordingly,
the Company uses the intrinsic value method to account for its stock-based
employee compensation plans. Had compensation cost for these plans been
determined consistent with the fair value method prescribed by SFAS No. 123,
the Company's pro forma net loss and loss per share would have been as
follows:
June 30, 2006 June 30, 2005
------------- -------------
Net loss:
As reported $ (5,173,000) $ (2,115,000)
Less: Stock-based compensation expense
determined under fair value method (464,000) (184,000)
------------ ------------
Pro forma $ (5,637,000) $ (2,299,000)
============ ============
Basic and diluted net loss per share:
As reported ($0.70) ($0.50)
============ ============
Pro forma ($0.77) ($0.54)
============ ============
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for the grants in each of the following years:
Options granted Expected Expected Risk-Free Expected
year ended dividend volatility interest rate term
--------------- -------- ---------- ------------- --------
June 30, 2004 nil 177 2.87% 4 years
June 30, 2005 nil 196 3.90% 5 years
June 30, 2006 nil 195 4.75% 3.5 years
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, 2006 and 2005, there was
no difference between net loss and comprehensive loss.
F-9
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Revenue recognition:
While the Company has not reported any revenues for the years ended June 30,
2006 and 2005, 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
performance requirements of the agreement.
Recent accounting pronouncements:
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R) Share Based Payment, which addresses the accounting for
share-based payment transactions. SFAS No. 123(R) eliminates the ability to
account for share-based compensation transactions using APB No. 25, and
generally requires instead that such transactions be accounted and recognized
in the statement of income based on their fair values. SFAS No. 123(R) will
be effective for the Company beginning on July 1, 2006. Depending upon the
number and terms of options that may be granted in future periods, management
believes that the implementation of this standard could have a material
impact on the Company's financial statements. As of June 30, 2006, the
estimated fair value of non-vested employee stock options was approximately
$130,000.
3. MINORITY INTEREST OF CENTERPOINT CORPORATION:
In January 2002, Bion purchased a 57.7% majority interest in Centerpoint from
a third party. For the years ended June 30, 2006 and 2005, the losses
applicable to the minority interest in Centerpoint exceeded the minority
interest in the equity capital of Centerpoint, therefore the losses
attributable to the minority interest have been charged against the Company's
earnings as there is no obligation of the minority interest to make good on
such losses. If Centerpoint has future earnings, the Company shall be
credited to the extent of the minority interest losses previously absorbed.
4. PREPAID SERVICES:
The Company has issued options to purchase shares of the Company's common
stock in exchange for services. As of June 30, 2006, non-employee options
represented 630,833 of the 1,410,833 options outstanding under the Company's
2006 Consolidated Incentive Plan (Note 10). Of the 630,833 non-employee
options outstanding, 260,833 were fully vested and contained no service
conditions as of June 30, 2006. These non-employee options were valued using
the Black-Scholes option-pricing model. Prepaid services of approximately
$43,000 at June 30, 2006 in connection with the fully vested options are
being amortized on the straight-line method through June 30, 2007. The
Company also issued shares of common stock to a consultant in exchange for
services to be performed through June 30, 2007, of which $60,000 is deferred
as of June 30, 2006.
F-10
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
4. PREPAID SERVICES (CONTINUED):
The remaining 370,000 non-employee options outstanding include service
conditions and have graded vesting schedules through May 1, 2009. As of June
30, 2006, 97,500 of these options were fully vested. Generally for these
agreements, the measurement date of the services occurs when the options
vest. In accordance with Emerging Issues Task Force ("EITF") Issue No. 96-
18, recognition of compensation cost for reporting periods prior to the
measurement date is based on the then current fair value of the options.
Any subsequent changes in fair value is recorded on the measurement date.
The fair value of these options were determined using the Black-Scholes
option-pricing model, using the following assumptions as of June 30, 2006; a
dividend yield of zero, volatility of 182%, risk-free interest rate of
5.15%, and an expected life of 8.83 years. Compensation cost in connection
with options that are not fully vested as of June 30, 2006 is being
recognized on a straight-line basis over the requisite service period for the
entire award. Compensation expense of $726,787 and $20,860 was recorded
during the years ended June 30, 2006 and 2005, respectively.
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of June 30, 2006:
Research and development equipment $ 305,266
Computers and office equipment 13,189
-------------
318,455
Less accumulated depreciation (310,982)
-------------
$ 7,473
=============
Depreciation expense was $77,971 and $142,269 for the years ended June 30,
2006 and 2005, respectively.
6. SUBSCRIBED PROMISSORY NOTES:
In June 2006, the Company commenced an offering of its 2006 Series A
Convertible Promissory Notes (the "Notes"), with a minimum of $500,000 and
maximum of $3,000,000 in Notes to be issued. The holders of the Notes are to
earn interest on the unpaid principal balance of the Notes at 6%, payable on
May 31, 2008, the maturity date of the Notes. All of the principal and
accrued interest under the Notes shall be converted into common shares of the
Company at the conversion rate of one share for each $6.00 that is owed under
the terms of the Notes if the following conditions are met:
A) The closing market price of the Company's shares has been at or
above $7.20 per share for 10 consecutive trading days, and
B) The earliest of the following events:
1) An effective registration allowing public resale of the shares
to be received by the Note holders upon conversion, or
2) One year after the initial closing date of the offering, and
3) No conversion without an effective registration statement
shall take place until the Company has become a "reporting
company" with the Securities and Exchange Commission pursuant
to the Securities Exchange Act of 1934, as amended.
F-11
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
6. SUBSCRIBED PROMISSORY NOTES (CONTINUED):
The Notes may also be convertible, in whole or in part, into the Company's
common shares at any time at the election of the Note holders at a conversion
rate of $6.00 per share. As of June 30, 2006, the Company had received signed
subscription agreements and proceeds totaling $155,000, and through September
13, 2006, the date the offering closed, $700,000 was received.
7. CONVERTIBLE DEBT:
In June 2005, the Company and a vendor signed an agreement whereby $30,437 of
unpaid consulting fees due to the vendor are to be convertible into common
stock of the Company at a conversion price of $2.50 per share at the vendor's
option until May 1, 2007. If the vendor does not elect to convert the debt
prior to May 1, 2007, the debt will be paid by the Company on that date. The
market value of the shares at the time of the agreement was approximately
$1.25 per share. Therefore, no beneficial conversion features resulted from
the agreement.
8. CONVERTIBLE NOTES - AFFILIATES:
On April 4, 2006 convertible deferred compensation due to the Company's
president, Mark A. Smith, pursuant to an April 2003 deferred compensation
agreement, was exchanged for a promissory note and conversion agreement. The
promissory note and conversion agreement have the same terms and conversion
features as the April 2003 deferred compensation agreement. Under the
agreements, the president earns compensation of $150,000 annually, all of
which has been deferred to date. Sums accrued through March 31, 2006, accrue
interest at 6% per annum, and are convertible into the Company's common stock
at the lower of the current market value at the time of conversion, or $2.00
per share. Through July 1, 2007, conversions may occur by mutual agreement
between the Company and Mr. Smith. The Company may convert the deferred
compensation, in whole or in part, at any date after July 1, 2007 and the
convertible deferred compensation owed the president is mandatorily converted
to common stock of the Company on July 1, 2009. The Company is accounting
for this employee stock-based agreement under APB 25. At June 30, 2006, the
note balance (principal and accrued interest) due to Mr. Smith was $378,981,
and the market price of the Company's common stock was $6.40 per share.
Therefore the Company has recorded the intrinsic value of the deferred
compensation agreement at $1,212,739 as of June 30, 2006. Had the Company
been accounting for this employee stock-based agreement under SFAS 123, the
fair value of the deferred compensation agreement as of June 30, 2006 would
be approximately $1,500,000. Sums accrued after April 1, 2006, ($37,500
through June 30, 2006), are non-interest bearing and are non-convertible.
On December 31, 2005, convertible deferred compensation payable to Bright
Capital, Ltd. ("Brightcap") for services provided to the Company by Dominic
Bassani, the general manager of Dairy, between April 1, 2003 and September
30, 2005 was exchanged for a promissory note and conversion agreement with
the same terms and features as the deferred compensation agreement.
Effective March 31, 2005, Brightcap entered into an agreement to continue to
provide Mr. Bassani's services to the Company through March 31, 2009 and
Brightcap earns compensation of $300,000 annually with payment deferred.
Sums accrued through September 30, 2005, accrue interest at 6% per annum and
are convertible into the Company's common stock at the lower of the current
market value at the time of conversion or $2.00 per share. Through January 1,
2007 conversions may occur by mutual agreement between the Company and
Brightcap. The Company may convert the deferred compensation, in whole or in
part, at any date after January 1, 2007 and, on July 1, 2009, the Company's
obligation owed Brightcap is mandatorily convertible to common stock of the
Company. The Company is accounting for this employee stock-based agreement
under APB 25. At June 30, 2006, compensation due to Brightcap was $518,425
and the market price of the Company's common stock was $6.40 per share.
F-12
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
8. CONVERTIBLE NOTES - AFFILIATES (CONTINUED):
Therefore the Company has recorded the intrinsic value of the deferred
compensation agreement at $1,658,959 as of June 30, 2006. Had the Company
been accounting for this employee stock-based agreement under SFAS 123, the
fair value of the deferred compensation agreement as of June 30, 2006 would
be approximately $2,000,000. Sums accrued after October 1, 2005, ($225,000
through June 30, 2006), are non-interest bearing and are non-convertible.
9. DEFERRED COMPENSATION:
Prior to March 31, 2003, the Company incurred management fees under various
management agreements with the D2 LLC Deferred Compensation Trust ("Trust")
for management and consulting services. These fees totaled $581,344 including
interest at 6%, as of June 30, 2006. The services were provided in part by
Dominic Bassani, who beneficially owns 50% of the Trust. In March 2003, the
Trust agreed to accept payment on March 31, 2007, by conversion of the
deferred compensation into common stock of the Company at the higher of the
average price of the Company's common stock during the ten trading days
ending March 27, 2007, or $4.00 per share.
The Company has also recorded deferred compensation liabilities of $412,500
for three officers of the Company consisting of $37,500 to Mark A. Smith
(Note 8), $225,000 to Brightcap Capital Ltd. (Note 8), and $150,000 to
Salvatore Zizza, a former officer and director of the Company, who assumed
the position of Chairman and director of Dairy with an annual salary of
$300,000. This deferred compensation does not accrue interest and is non-
convertible. Payment is to be made at the earliest date that the Company has
in excess of $2,000,000 in cash and cash equivalents or as decided by the
Board of Directors or December 31, 2007.
10. STOCKHOLDERS' EQUITY:
Common stock:
Holders of common stock are entitled to one vote per share on all matters to
be voted on by common stockholders. In the event of liquidation, dissolution
or winding up of the Company, the holders of common stock are entitled to
share in all assets remaining after liabilities have been paid in full or set
aside. Common stock has no preemptive, redemption or conversion rights. The
rights of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of any other series of preferred stock
the Company may designate in the future.
On December 31, 2004, the president of the Company converted $55,000 of
deferred compensation into 50,000 shares of common stock. The conversion rate
of $1.10 per share was based on the deferred compensation agreement with the
president and the market price of the common stock of the Company on the date
of conversion (see Note 8).
In May 2005, Brightcap converted deferred compensation of $60,000 into
600,000 warrants and Salvatore Zizza was issued 600,000 warrants valued at
$60,000 in lieu of payment for services rendered to the Company. Also in May
2005, Mark Smith was granted a $12,500 bonus and purchased 125,000 warrants
of the Company for $12,500. The price per warrant of $0.10 was based on the
price received for concurrent and subsequent sales of warrants for cash.
In June 2005, Mark Smith and Jeff Kapell purchased 30,000 and 100,000
warrants of the Company at $.10 per warrant for $3,000 and $10,000,
respectively.
F-13
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
10. STOCKHOLDERS' EQUITY (CONTINUED):
Common stock (continued):
On September 30, 2005, the Company completed a $1,917,500 (net proceeds
$1,870,821) placement of Series C notes of Dairy, which triggered the
conversion of the Dairy's Series A, B and C notes ($5,239,489 in aggregate)
into 3,847,217 shares of the Company's common stock, including 693,799 shares
issued to Centerpoint and 83,340 shares issued to Bion.
In conjunction with the conversion, the Company retired the 83,340 shares of
common stock issued to the Company. The shares issued to Bion and
Centerpoint were recorded at $87,053 and $807,045, being the carrying value
of the debt that was converted.
As a result of dividends declared in July 2004, Centerpoint holds the shares
for the benefit of its shareholders without any beneficial interest. The
Company is accounting for the shares issued to Centerpoint as treasury stock.
The Company issued 20,428 shares of common stock as commissions in connection
with the placement of the C Notes of Dairy.
On December 31, 2005, the president of the Company converted, with similar
terms as the Dairy A, B and C notes, promissory notes of the Company totaling
$265,440 in principal and interest for 209,997 shares of common stock and
also converted $60,000 of deferred compensation into 30,000 shares of common
stock. The conversion rate of $2.00 per share was based on the deferred
compensation agreement with the President (see Note 8).
In December 2005, the Company completed a private financing of 291,750 shares
of common stock priced at $4.00 per share. Net proceeds to the Company were
$1,136,500 and the Company also issued 3,750 shares of common stock as
commissions in connection with the financing.
During the year ended June 30, 2006, the Company issued 50,000 shares of
common stock to a consultant for services valued at $100,000. The number of
shares issued were based upon the market price of the common shares at the
time the service agreement was entered into.
Warrants:
As of June 30, 2006 the Company had the following common stock warrants
outstanding:
Number of Exercise
Shares Price Expiration Date
--------- -------- -----------------
Class J/SLAV 10,573 $ 6.00 August 31, 2006
Class SVDB 1-6 800,000 $ 3.00 July 31, 2013
Class SVDM-1 387,343 $ 5.00 July 31, 2008
Class DB-1 600,000 $ 1.00 January 31, 2014
Class A 1-3 600,000 $ 2.50 May 14, 2015
Class SVMAS-1 67,500 $ 3.50 May 31, 2009
Class SVMAS-1A 40,000 $ 3.50 October 11, 2009
Class SVMAS-2 32,500 $ 2.50 September 30, 2009
Class SVMAS-3 40,000 $ 2.50 September 30, 2015
Class SVB 1-3 50,000 $ 2.50 April 30, 2015
Class SVB-4 75,000 $ 2.50 April 30, 2015
Class SVC 1-5 125,000 $ 4.25 December 31, 2012
Class SV-SEI 1-2 41,667 $ 1.50 June 30, 2009
Class C, D, E 725,000 $ 2.50 April 30, 2015
Class O 100,000 $ 3.00 December 31, 2008
---------
3,694,583
=========
F-14
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
10. STOCKHOLDERS' EQUITY (CONTINUED):
Warrants (continued):
The weighted average exercise for the outstanding warrants is $2.73 and the
weighted average life as of June 30, 2006 is 7 years.
During the year ended June 30, 2006, the president of the Company purchased
80,000 warrants in two separate transactions of 40,000 warrants each at $.25
per warrant, totaling $20,000. The president also purchased 125,000 warrants
at $.10 per warrant for $12,500.
The Company issued 25,000 warrants priced at $.20 per warrant to a consultant
during the year ended June 30, 2006 for services valued at $5,000.
Stock options:
Prior to June 2006, the Company had various incentive plans (the "Plans")
that provided for incentive stock options to be granted to selected employees
and directors of the Company, and selected non-employee advisors to the
Company. Effective June 2006, the Company approved the 2006 Consolidated
Incentive Plan (the "2006 Plan"), which consolidated previously reserved
incentive stock options under the Plans into the 2006 Plan. The Company has
reserved 3,200,000 shares, the maximum number of shares of the common stock
of the Company issuable pursuant to the 2006 Plan. Terms of exercise and
expiration of options granted under the 2006 Plan may be established at the
discretion of the Board of Directors, but no option may be exercisable for
more than ten years.
During the year ended June 30, 2006, the Company granted options to purchase
17,000 shares of common stock at $3.00 to $6.00 per share to non-employees.
The fair value of the options, using the Black-Scholes option pricing model,
is $34,918, of which options totaling $32,738 vested immediately and were
recognized as non-cash stock compensation expense. The remaining $2,180 of
options vest over a year and $1,163 was amortized on a straight line basis in
the year ended June 30, 2006 as non-cash stock compensation.
The Company granted options to purchase 77,500 shares of common stock to
employees and directors for the year ended June 30, 2006. The options have
an exercise price of $4.25 to $5.50 per share and are fully vested. The
Company applies APB Opinion 25 and related interpretations in accounting for
equity instruments issued to employees. Accordingly, no compensation cost has
been recognized for its employee stock options as all options had an exercise
price equal to or greater than the market value of the Company's common stock
at the date of grant.
As of June 30, 2006, options outstanding under the 2006 Plan are summarized
as follows:
F-15
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
10. STOCKHOLDERS' EQUITY (CONTINUED):
Stock options (continued):
Outstanding Options
Number of Weighted Average
Shares Exercise Price
--------- ----------------
Balance, July 1, 2004 651,333 $ 3.14
Options granted 665,000 $ 2.50
Options exercised - -
Options cancelled - -
--------- ----------
Balance, June 30, 2005 1,316,333 $ 2.82
Options granted 94,500 $ 4.69
Options exercised - -
Options cancelled - -
--------- ----------
Balance, June 30, 2006 1,410,833 $ 3.15
There were 956,667 options exercisable as of June 30, 2006.
The following table presents information relating to stock options
outstanding and exercisable as of June 30, 2006:
Weighted- Weighted-
Average Average Weighted-
Remaining Outstanding Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices Shares Life- Price- Shares Price
------------------------ ----------- ----------- ----------- ----------- ---------
$2.00 - $2.50 812,500 7.7 $ 2.41 363,334 $ 2.30
$3.00 - $3.50 420,333 2.1 $ 3.00 415,333 $ 3.00
$4.00 - $4.75 40,000 4.4 $ 4.28 40,000 $ 4.28
$5.00 - $7.50 138,000 2.7 $ 5.53 138,000 $ 5.53
--------------- --------- ----- ------ ------- ------
1,410,833 5.5 $ 2.94 956,667 $ 3.15
========= ===== ====== ======= ======
The Company, after giving consideration for the contingent deferred stock
bonuses (Note 12) and employee stock bonuses in 2002 and previously exercised
options of 75,440 shares, had 1,023,727 shares reserved for future issuance
under the 2006 Plan as of June 30, 2006.
11. INCOME TAXES:
The Company has net operating loss carry-forwards ("NOLs") for tax purposes
of approximately $36,100,000 as of June 30, 2006. These NOLs expire on
various dates from 2009 to 2027.
The utilization of the NOLs may be limited under Section 382 of the Internal
Revenue Code.
F-16
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
11. INCOME TAXES (CONTINUED):
The Company's deferred tax assets as of June 30, 2006, are estimated as
follows:
NOLs $ 13,700,000
Deferred compensation 1,500,000
-------------
15,200,000
Valuation allowance (15,200,000)
-------------
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.
The expected tax benefit for each of the years ended June 30, 2006 and 2005,
based on a federal tax rate of 34%, is approximately $1,759,000 and $719,000,
respectively. The difference between the expected tax benefit and non-
recognition of a tax benefit during 2006 and 2005 is primarily the result of
a valuation allowance applied to the deferred tax assets.
12. COMMITMENTS AND CONTINGENCIES:
Employment and consulting agreements:
The Company has an employment agreement with its president, Mark A. Smith,
through March 31, 2007 providing $150,000 per year compensation.
Effective March 31, 2005, an agreement with Brightcap, through which the
services of the general manager of Dairy, Dominic Bassani, are provided, was
extended through March 31, 2009. Under the terms of the agreement, Brightcap
will be paid $300,000 annually for Mr. Bassani's services.
Effective May 1, 2005, the Company entered into a four-year consulting/
employment agreement with a former officer and director of the Company,
Salvatore Zizza. As of January 1, 2006, the former officer and director
assumed the position of Chairman and director of Dairy, with an annual salary
of $300,000 (Note 8).
Effective May 1, 2005, the Company entered into a four-year consulting/
employment agreement with Jeff Kapell. Under the terms of the agreement, Mr.
Kapell provided part-time services to the Company through March 2006. In
April 2006, Mr. Kapell was appointed Dairy's Vice President-Renewables at a
salary of $120,000 per year.
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.
F-17
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
12. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Employment and consulting agreements (continued):
During February and March of 2003, four members of the Company's core
technical staff who had previously been terminated, returned to the Company
to work for reduced compensation. While the Company does not have a legal
obligation to pay the difference between the original compensation and the
reduced compensation, if and when the Company has sufficient financial
resources, it is the Company's intention to provide bonuses, over a one to
two-year period, to compensate for the reduced wages. As of June 30, 2006,
the amount of reduced compensation amounted to approximately $130,000.
Joint venture agreement:
In June 2006, the Company entered into a joint venture agreement with Fair
Oaks Dairy Farm ("FODF") to construct a long term Bion research facility at
FODF ("Stage I System"). The Stage I System will initially be used to
complete testing necessary for the development of design criteria for
permitting and construction of the integrated, full-scale Stage II
installation at FODF. The estimated cost of Stage I, including system
construction and testing operations in support of Stage II permitting, is
$750,000 which the Company and FODF have agreed to split equally net of any
grants. Bion has also agreed that FODF funding shall be convertible into the
Company's common shares under the same terms as the 2006 Series A Convertible
Promissory Notes. Dr. Michael McCloskey and Mr. Timothy den Dulk, co-owners
of FODR, are both consultants to Dairy and have each received 175,000 options
with service conditions and graded vesting schedules through May 1, 2009.
The Company is accounting for its investment in the joint venture using the
equity method. Through June 30, 2006, neither the Company nor FODF have
contributed any amounts to the joint venture.
Claims contingency:
In May 2002, Arab Commerce Bank Ltd. ("ACB"), an unaffiliated party, filed a
complaint against the Company in the Supreme Court of the State of New York
regarding $100,000 of the Company's convertible bridge notes ("Bridge Notes")
that were issued to ACB in March 2000. The complaint includes a breach of
contract claim asserting that the Company owes ACB approximately $285,000
plus interest of $121,028 plus interest based on ACB's interpretation of the
terms of the Bridge Notes and subsequent amendments. Effective June 30,
2001, the Company issued ACB 5,034 shares of common stock in full
satisfaction of the Bridge Notes based on the Company's interpretation of the
Bridge Notes, as amended. The Company has filed an answer to the complaint
denying the allegations. No activity has taken place on this lawsuit since
early 2002. 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.
The Company, together with the former controlling persons of Centerpoint, and
the Company's president are 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 claims against the
Company primarily relate to a January 2002 financing transaction with
Centerpoint, in which it is claimed the Company breached its fiduciary duties
to Centerpoint and its shareholders and/or aided and abetted others in
breaching their duties. Litigation is in the early stages of discovery and
motion practice. Settlement discussions are under way, and the parties have
F-18
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2006 AND 2005
12. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Claims contingency (continued):
participated in voluntary, non-binding mediation to attempt to resolve the
disputed matters, which has led to a contingent settlement agreement. This
agreement is contingent on settlement of a complaint to be filed by the
Company against the former controlling shareholders of Centerpoint.
Management believes the claims against the Company are without merit and
intends to defend the claims if a settlement is not reached.
13. RELATED PARTY TRANSACTIONS:
The Company has an accrued payable of $41,647 to a company controlled by
Salvatore Zizza for rental of office space in 2003.
14. SUBSEQUENT EVENTS:
Effective August 28, 2006, pursuant to terms agreed upon on December 15,
2005, the Company entered into a four year employment agreement with Jeremy
Rowland. As of September 18, 2006, Mr. Rowland will assume the position of
Chief Operating Officer of Dairy with an annual salary of $150,000. In
addition, 150,000 options were issued which are exercisable at $4.00 per
share through December 2015 and vest 25% at the start date of his employment,
and 25% at each of the next 3 anniversaries of his start date.
The Company signed a non-cancellable operating lease commitment for office
space, in New York, effective August 1, 2006 and expiring November 30, 2013.
The average monthly rental under the terms of the lease is $15,820. The
Company is currently negotiating sublease agreements to unrelated third
parties.
F-19
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
CONTENTS
Page
----
Consolidated financial statements:
Balance sheet ............................................. F-21
Statements of operations .................................. F-22
Statements of changes in stockholders' equity deficit ..... F-23
Statements of cash flows .................................. F-24
Notes to consolidated financial statements ................ F-25 - F-36
F-20
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2006
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 630,317
Prepaid services 16,985
Deposits and other receivables 43,749
------------
Total current assets 691,051
------------
Restricted cash 171,945
Property and equipment, net 80,968
------------
Total assets $ 943,964
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 444,489
Accrued payable - affiliate 41,647
Convertible debt 30,437
Convertible notes 716,727
Deferred compensation 598,867
------------
Total current liabilities 1,832,167
------------
Deferred rent 78,221
Deferred compensation 787,500
Convertible notes - affiliates 2,851,346
------------
Total liabilities 5,549,234
------------
Stockholders' deficit:
Preferred stock, $.01 par value, 10,000,000
shares authorized, no shares issued and outstanding -
Common stock, no par value, 100,000,000 shares
authorized, 8,605,996 shares issued, 7,912,197
outstanding -
Additional paid-in capital 67,209,075
Accumulated deficit (71,814,345)
------------
Total stockholders' deficit (4,605,270)
------------
Total liabilities and stockholders' deficit $ 943,964
============
See notes to unaudited consolidated financial statements
F-21
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
Three Months Ended December 31, Six Months Ended December 31,
------------------------------- -----------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Revenue $ - $ - $ - $ -
Operating expenses:
General and administrative 284,031 343,411 36 525,148
Research and development 922,333 1,119,436 1,030,717 1,659,891
----------- ----------- ----------- -----------
1,206,364 1,462,847 1,030,753 2,185,039
----------- ----------- ----------- -----------
Loss from operations (1,206,364) (1,462,847) (1,030,753) (2,185,039)
----------- ----------- ----------- -----------
Other (income) and expense:
Interest expense 33,008 27,665 61,106 92,252
Interest income (11,863) (730) (23,301) (927)
Other, net - (6,355) - (90,797)
----------- ----------- ----------- -----------
21,145 20,580 37,805 528
----------- ----------- ----------- -----------
Net loss $(1,227,509) $(1,483,427) $(1,068,558) $(2,185,567)
=========== =========== =========== ===========
Net loss per common share, basic
and diluted $ (0.14) $ (0.19) $ (0.12) $ (0.36)
=========== =========== =========== ===========
Weighted-average number of common
shares outstanding, basic and
diluted 8,619,039 7,917,519 8,622,518 6,086,857
=========== =========== =========== ===========
See notes to unaudited consolidated financial statements.
F-22
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR SIX MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
Total
Common Stock Additional Accumulated stockholders'
Shares Amount paid-in capital deficit equity (deficit)
---------- ------ --------------- ------------ ----------------
Balances, July 1, 2006 8,625,996 $ - $66,736,874 $(70,014,401) $(3,277,527)
Cumulative effect for
change in accounting
principle (731,386) (731,386)
Vesting of options for
services - - 512,201 - 512,201
Return of shares
previously issued for
services (20,000) (40,000) (40,000)
Net loss - - - (1,068,558) (1,068,558)
---------- ------ ----------- ------------ -----------
- - - - -
Balances, December 31,
2006 8,605,996 $ - $67,209,075 $(71,814,345) $(4,605,270)
========== ====== =========== ============ ===========
See notes to unaudited consolidated financial statements.
F-23
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2006 AND 2005
(UNAUDITED)
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,068,558) $(2,185,567)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation expense 2,655 4,766
Accrued interest on convertible notes 16,727 -
Stock-based compensation 512,201 341,390
Decrease in fair value of convertible notes (778,593) -
Increase in intrinsic value of convertible notes - 829,695
Decrease (increase) in prepaid services 46,528 (29,054)
Increase in other assets (37,642) (4,107)
Decrease in accounts payable and accrued expenses (9,704) (538,370)
Increase in deferred rent 78,221 -
Increase in deferred compensation 419,378 297,232
----------- -----------
Net cash used in operating activities (818,787)
(1,284,015)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in restricted cash (171,945) -
Purchase of property and equipment (76,150) -
----------- -----------
Net cash used in investing activities (248,095) -
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock - 1,136,500
Net proceeds from sale of convertible debt 545,000 1,870,821
Proceeds from sale of warrants - 32,500
----------- -----------
Net cash provided by financing activities 545,000 3,039,821
Net (decrease) increase in cash and cash
equivalents (521,882) 1,755,806
Cash and cash equivalents at beginning of period 1,152,199 7,252
----------- -----------
Cash and cash equivalents at end of period $ 630,317 $ 1,763,058
=========== ===========
Non-cash investing and financing transactions:
Conversion of debt to equity $ - $ 4,610,832
Conversion of deferred compensation to
common stock - 60,000
See notes to unaudited consolidated financial statements.
F-24
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS:
Organization and business:
Bion Environmental Technologies, Inc. ("Bion" or the "Company") was
incorporated in 1987 in the State of Colorado.
Bion's patented and proprietary technology provides solutions for
environmentally sound clean-up of the waste streams of large-scale animal
farming operations ("confined animal feeding operations" or "CAFO's") (dairy,
cattle feedlot, hogs and poultry) and creates economic opportunities for
development of integrated complexes including alternative, renewable energy
production, ethanol production, sustainable animal husbandry and organic
soil/fertilizer and feed production ("Projects" or "Integrated Projects").
Bion's technology also potentially allows direct integration with dairy end-
users (bottling operations, cheese and ice cream plants, etc.) and the end-
users of other CAFO's that can potentially increase the profitability and
quality control of each participant while mitigating the environmental impact
of the entire integrated complex. The Company is in the process of finalizing
engineering, design and economic modeling for dairy and beef applications and
Integrated Projects based on its second-generation technology.
Bion is currently evaluating sites in multiple states and anticipates
selecting a site for its initial Integrated Project during its 2007 fiscal
year. Bion is presently establishing its implementation management team with
the intention of commencing development and construction of the initial
Project during 2007. In addition, Bion intends to site additional Projects
during 2007 and 2008 to create a pipeline of Projects that will insure
significant market share and profitability within 3-5 years (both regionally
and nationally). Each Project is to include: a) Bion waste treatment
modules, b) processing the CAFO waste stream from the equivalent of
approximately 20-40,000 (or more) dairy cows, c) while producing renewable
energy for use within the Project modules, d) solids to be marketed as feed
and/or fertilizer e) which is integrated with a 40+M gallon/year ethanol
plant (though some smaller projects may be undertaken in appropriate
situations). At the end of the 5-year period, Bion hopes to have numerous
Projects in various stages of development ranging from full operation to
early construction stage.
Through 2001 the Company was primarily an environmental service company
focused on the needs of CAFOs. Thereafter, Bion elected to cease sales of its
first generation systems and focused its activity on development of its
second-generation technology.
Going concern and management's plans:
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. The Company has incurred net losses of
approximately $5,173,000 and $2,115,000 during the years ended June 30, 2006
F-25
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
1. ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT'S PLANS
(CONTINUED):
Going concern and management's plans (continued):
and 2005, respectively and net losses of approximately $1,228,000 and
$1,069,000 for the three month and six months ended December 31, 2006,
respectively. At December 31, 2006, the Company has a working capital
deficiency and a stockholders' deficit of approximately $1,141,000 and
$4,605,000, respectively. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments relating to
the recoverability or classification of assets or the amounts and
classification of liabilities that may result should the Company be unable to
continue as a going concern. The following paragraphs describe management's
plans with regard to these conditions.
During September 2006, the Company completed a convertible note offering,
raising $700,000 (Note 6). 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, and to
satisfy existing creditors. There is no assurance the Company will be able to
obtain the funds that it needs to stay in business, complete its technology
development or to successfully develop its business.
There can be no assurance that funds required during the next twelve months
or thereafter will be generated from operations or that those funds will be
available from external sources such as debt or equity financings or other
potential sources. The lack of additional capital resulting from the
inability to generate cash flow from operations or to raise capital from
external sources would force the Company to substantially curtail or cease
operations and would, therefore, have a material adverse effect on its
business. Further, there can be no assurance that any such required funds, if
available, will be available on attractive terms or that they will not have a
significantly dilutive effect on the Company's existing shareholders.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Bion Technologies, Inc., BionSoil, Inc. and
Bion Dairy Corporation and its 57.7% owned subsidiary, Centerpoint
Corporation ("Centerpoint"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
F-26
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Principles of consolidation (continued):
The accompanying consolidated financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. The consolidated financial statements reflect all adjustments
(consisting of only normal recurring entries) that, in the opinion of
management, are necessary to present fairly the financial position at
December 31, 2006 and the results of operations and cash flows of the Company
for the three and six months ended December 31, 2006 and 2005. Operating
results for the three and six months ended December 31, 2006 are not
necessarily indicative of the results that may be expected for the year
ending June 30, 2007.
The unaudited consolidated financial statements should be read in conjunction
with the Company's audited financial statements and footnotes thereto for the
years ended June 30, 2006 and 2005.
3. MINORITY INTEREST OF CENTERPOINT CORPORATION:
In January 2002, Bion purchased a 57.7% majority interest in Centerpoint from
a third party. For the three and six months ended December 31, 2006 and
2005, the losses applicable to the minority interest in Centerpoint exceeded
the minority interest in the equity capital of Centerpoint, therefore the
losses attributable to the minority interest have been charged against the
Company's earnings as there is no obligation of the minority interest to make
good on such losses. If Centerpoint has future earnings, the Company shall
be credited to the extent of the minority interest losses previously
absorbed.
4. PREPAID SERVICES:
The Company has issued options to purchase shares of the Company's common
stock in exchange for services. As of December 31, 2006, non-employee
options represented 630,833 of the 1,645,833 options outstanding under the
Company's 2006 Consolidated Incentive Plan. Of the 630,833 non-employee
options outstanding, 260,833 were fully vested and contained no service
conditions as of December 31, 2006. These non-employee options were valued
using the Black-Scholes option-pricing model. Prepaid services of $16,985 at
December 31, 2006 in connection with the fully vested options are being
amortized on the straight-line method through June 30, 2007.
The remaining 370,000 non-employee options outstanding include service
conditions and have graded vesting schedules through May 1, 2009. As of
December 31, 2006, 97,500 of these options were fully vested. Generally for
these agreements, the measurement date of the services occurs when the
options vest. In accordance with Emerging Issues Task Force ("EITF") Issue
No. 96-18, recognition of compensation cost for reporting periods prior to
F-27
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
4. PREPAID SERVICES (CONTINUED):
the measurement date is based on the then current fair value of the options
based on market price of the Company's common shares as of reporting date.
Any subsequent change in fair value is recorded on the measurement date.
The fair value of these options were determined using the Black-Scholes
option-pricing model, using the following assumptions at December 31, 2006; a
dividend yield of zero, a risk-free interest rate of 4.71%, volatility of
190% and an expected life of 8.33 years. Consulting cost in connection with
options that are not fully vested as of December 31, 2006 is being recognized
on a straight-line basis over the requisite service period for the entire
award. Consulting expense of $214,866 and $211,945 was recorded as research
and development expenses during the three and six months ended December 31,
2006, respectively, and $166,886 and $256,587 during the three and six months
ended December 31, 2005, respectively.
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31, 2006:
Research and development equipment $ 305,266
Leasehold improvements 34,336
Furniture 28,717
Computers and office equipment 26,286
---------
394,605
Less accumulated depreciation (313,637)
---------
$ 80,968
=========
Depreciation expense was $1,891and $5,646 for the three months ended
December 31, 2006 and 2005, respectively, and $2,655 and $4,766 for the six
months ended December 31, 2006 and 2005, respectively.
6. CONVERTIBLE NOTES:
On September 13, 2006, the Company closed the offering of its 2006
Series A Convertible Promissory Notes (the "Notes"), by issuing Notes
totaling $700,000. The holders of the Notes earn interest on the unpaid
principal balance of the Notes at 6%, payable on May 31, 2008, the maturity
date of the Notes. All of the principal and accrued interest under the Notes
shall be converted into common shares of the Company at the conversion rate
of one share for each $6.00 that is owed under the terms of the Notes if the
following conditions are met:
A) The closing market price of the Company's shares has been at or above
$7.20 per share for 10 consecutive trading days, and
F-28
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
6. CONVERTIBLE NOTE (CONTINUED):
B) The earliest of the following events:
1) An effective registration allowing public resale of the shares to
be received by the Note holders upon conversion, or
2) One year after the initial closing date of the offering, and
3) No conversion without an effective registration statement shall
take place until the Company has become a "reporting company" with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934, as amended, which occurred on January 13, 2007.
The Notes may also be convertible, in whole or in part, into the
Company's common shares at any time at the election of the Note holders at a
conversion rate of $6.00 per share, which was above the approximate market
price of the Company's common shares at the commitment date of the offering.
For the three and six months ended December 31, 2006 the notes accrued
interest of $6,168 and $10,559, respectively.
7. CONVERTIBLE DEBT:
In June 2005, the Company and a vendor signed an agreement whereby $30,437 of
unpaid consulting fees due to the vendor are to be convertible into common
stock of the Company at a conversion price of $2.50 per share at the vendor's
option until May 1, 2007. If the vendor does not elect to convert the debt
prior to May 1, 2007, the debt will be repaid by the Company on that date.
The market value of the shares at the time of the agreement was approximately
$1.25 per share. Therefore no beneficial conversion feature resulted from
the agreement.
8. CONVERTIBLE NOTES - AFFILIATES:
On April 4, 2006 convertible deferred compensation due to the Company's
president, Mark A. Smith, pursuant to an April 2003 deferred compensation
agreement, was exchanged for a promissory note and conversion agreement. The
promissory note and conversion agreement have the same terms and conversion
features as the April 2003 deferred compensation agreement. Under the
agreements, the president earns compensation of $150,000 annually, all of
which has been deferred to date. Sums accrued through March 31, 2006, accrue
interest at 6% per annum, and are convertible into the Company's common stock
at the lower of the current market value at the time of conversion, or $2.00
per share. Through July 1, 2007, conversions may occur by mutual agreement
between the Company and Mr. Smith. The Company may convert the deferred
compensation, in whole or in part, at any date after July 1, 2007 and the
convertible deferred compensation owed the president is mandatorily converted
to common stock of the Company on July 1, 2009. Through June 30, 2006, the
Company accounted for this employee stock-based compensation agreement under
Accounting Principles Board Opinion No. 25 ("APB 25") and recorded the
F-29
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
8. CONVERTIBLE NOTES - AFFILIATES (CONTINUED):
intrinsic value of the deferred compensation agreement at each reporting
date. On July 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123 (Revised), "Share-Based
Payment" ("SFAS 123(R)"), which supersedes APB 25. In accordance with SFAS
123(R), outstanding instruments previously classified as liabilities and
measured at intrinsic values, are to be measured initially at fair value with
differences to be recorded as the cumulative effect of a change in accounting
principle. The fair value of deferred compensation owed to Mark A. Smith on
July 1, 2006 was $1,521,609, and the cumulative effect of the change in
accounting principle of $308,870 was recorded. Fair value at July 1, 2006
was calculated using a Black-Scholes option pricing model with the following
assumptions: a dividend yield of zero, a risk-free interest rate of 5.13%,
volatility of 181%, and an expected life of 3 years. At December 31, 2006
the fair value of deferred compensation owed to Mark A. Smith was re-measured
as $1,204,328 and resulted in a charge/(credit) to earnings of $54,289 and
$(317,279) for the three and six months ended December 31, 2006,
respectively. Fair value at December 31, 2006 was calculated utilizing the
following assumptions: a dividend yield of zero, a risk-free interest rate of
4.74%, volatility of 66%, and an expected life of 2.5 years. Sums accrued
after April 1, 2006, ($112,500 through December 31, 2006), are non-interest
bearing and are non-convertible as of December 31, 2006.
On December 31, 2005, convertible deferred compensation payable to Bright
Capital, Ltd. ("Brightcap") for services provided to the Company by Dominic
Bassani, the former general manager of Dairy, between April 1, 2003 and
September 30, 2005 was exchanged for a promissory note and conversion
agreement with the same terms and features as the deferred compensation
agreement. Effective March 31, 2005, Brightcap entered into an agreement to
continue to provide Mr. Bassani's services to the Company through March 31,
2009 and Brightcap earns compensation of $300,000 annually with payment
deferred. Sums accrued through September 30, 2005, accrue interest at 6% per
annum and are convertible into the Company's common stock at the lower of the
current market value at the time of conversion or $2.00 per share. Through
January 1, 2007 conversions may occur by mutual agreement between the Company
and Brightcap. The Company may convert the deferred compensation, in whole
or in part, at any date after January 1, 2007 and, on July 1, 2009, the
Company's obligation owed Brightcap is mandatorily convertible to common
stock of the Company. Through June 30, 2006, the Company accounted for this
employee stock-based compensation agreement under APB 25 and recorded the
intrinsic value of the deferred compensation agreement at each reporting
date. On July 1, 2006, the Company adopted the provisions of SFAS 123(R),
which supersedes APB 25. The fair value of deferred compensation owed to
Brightcap on July 1, 2006 was $2,081,475, and the cumulative effect of the
change in accounting principle of $422,516 was recorded. Fair value at July
1, 2006 was calculated using a Black-Scholes option pricing model with the
F-30
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
8. CONVERTIBLE NOTES - AFFILIATES (CONTINUED):
following assumptions: a dividend yield of zero, a risk-free interest rate of
5.13%, volatility of 181%, and an expected life of 3 years. At December 31,
2006 the fair value of deferred compensation owed to Brightcap was re-
measured as $1,647,017 and resulted in a charge/(credit) to earnings of
$74,245 and $(434,458) for the three and six months ended December 31, 2006,
respectively. Fair value at December 31, 2006 was calculated utilizing the
following assumptions: a dividend yield of zero, a risk-free interest rate of
4.74%, volatility of 66%, and an expected life of 2.5 years.
Sums accrued after October 1, 2005, ($375,000 through December 31, 2006), are
non-interest bearing and are non-convertible. As of September 30, 2006, Mr.
Bassani will no longer act in the capacity of general manager of Dairy.
However, he continues to provide services through Brightcap as per the
agreement above.
9. DEFERRED COMPENSATION:
Prior to March 31, 2003, the Company incurred management fees under various
management agreements with the D2 LLC Deferred Compensation Trust ("Trust")
for management and consulting services. These fees totaled $598,867 including
interest at 6%, as of December 31, 2006. The services were provided in part
by Dominic Bassani, who beneficially owns 50% of the Trust. In March 2003,
the Trust agreed to accept payment on March 31, 2007, by conversion of the
deferred compensation into common stock of the Company at the higher of the
average price of the Company's common stock during the ten trading days
ending March 27, 2007, or $4.00 per share.
The Company has also recorded deferred compensation liabilities of $787,500
for three officers of the Company consisting of $112,500 to Mark A. Smith
(Note 8), $375,000 to Brightcap Capital Ltd. (Note 8), and $300,000 to
Salvatore Zizza, a former officer and director of the Company, who assumed
the position of Chairman and director of Dairy with an annual salary of
$300,000. This deferred compensation does not accrue interest and is non-
convertible as of December 31, 2006, with payment to be made at the earliest
date that the Company has in excess of $2,000,000 in cash and cash
equivalents or as decided by the Board of Directors or December 31, 2007.
Effective January 1, 2007, the Company entered into agreements converting
deferred compensation amounts owed as of December 31, 2006 into promissory
notes with conversion agreements. The notes will accrue interest at 6% per
annum, with principal and interest due and payable on January 1, 2009, if not
previously paid. The conversion agreements allow for the conversion of the
notes into shares of the Company's common stock at the equivalent price of
the Company's next private financing in excess of $2,000,000 as follows: a)
by the holder at any time after July 1, 2007; b) by the Company any time
after there has been an effective registration including the shares
underlying conversion of the notes for six months; c) by the holder and the
Company by mutual agreement at any time prior to payment by the Company of
outstanding principal and interest.
F-31
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
10. STOCKHOLDERS' EQUITY:
Common stock:
In November 2006, the Company entered into a mutual release and agreement
with a consultant to whom the Company had issued 50,000 shares of common
stock valued at $100,000 during the year ended June 30, 2006. Under the
terms of the mutual release and agreement, 20,000 shares valued at $40,000
were returned by the consultant and cancelled by the Company.
Warrants:
As of December 31, 2006 the Company had the following common stock warrants
outstanding:
Number of Exercise
Shares Price Expiration Date
---------- --------- --------------------
Class SVDB 1-6 800,000 $ 3.00 July 31, 2013
Class SVDM-1 387,343 $ 5.00 July 31, 2008
Class DB-1 600,000 $ 1.00 January 31, 2014
Class A 1-3 600,000 $ 2.50 May 14, 2015
Class SVMAS-1 67,500 $ 3.50 May 31, 2009
Class SVMAS-1A 40,000 $ 3.50 October 11, 2009
Class SVMAS-2 32,500 $ 2.50 September 30, 2009
Class SVMAS-3 40,000 $ 2.50 September 30, 2015
Class SVB 1-3 50,000 $ 2.50 April 30, 2015
Class SVB-4 75,000 $ 2.50 April 30, 2015
Class SVC 1-5 125,000 $ 4.25 December 31, 2012
Class SV-SEI 1-2 41,667 $ 1.50 June 30, 2009
Class C, D, E 725,000 $ 2.50 April 30, 2015
Class O 100,000 $ 3.00 December 31, 2008
---------
3,684,010
=========
Warrants (continued):
During the six months ended December 31, 2006, 10,573 warrants with an
exercise price of $6 expired. The weighted average exercise for the
outstanding warrants is $2.72 and the weighted average life as of December
31, 2006 is 6.5 years.
F-32
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
10. STOCKHOLDERS EQUITY (CONTINUED):
Stock options:
Prior to June 2006, the Company had various incentive plans (the "Plans")
that provided for incentive stock options to be granted to selected employees
and directors of the Company, and selected non-employee advisors to the
Company. Effective June 2006, the Company approved the 2006 Consolidated
Incentive Plan (the "2006 Plan"), which consolidated previously reserved
incentive stock options under the Plans into the 2006 Plan. The Company has
reserved 3,200,000 shares, the maximum number of shares of the common stock
of the Company issuable pursuant to the 2006 Plan. Terms of exercise and
expiration of options granted under the 2006 Plan may be established at the
discretion of the Board of Directors, but no option may be exercisable for
more than ten years.
During the year ended June 30, 2006, the Company granted options to purchase
17,000 shares of common stock at $3.00 to $6.00 per share to non-employees.
The fair value of the options, using the Black-Scholes option pricing model,
was $34,918, of which options totaling $32,738 vested immediately and were
recognized as non-cash stock compensation expense. The remaining $2,180 of
options vest over a year and $436 and $872 was amortized on a straight line
basis in the three and six months ended December 31, 2006, respectively, as
non-cash stock compensation.
Effective July 1, 2006, the Company adopted SFAS No. 123(R), using the
modified prospective method. SFAS 123(R) requires the recognition of the
cost of employee services received in exchange for an award of equity
instruments in the financial statements and is measured based on the grant
date fair value of the award. SFAS 123(R) also requires stock option
compensation expense to be recognized over the period during which an
employee is required to provide service in exchange for the award (the
vesting period). Prior to the adoption of SFAS 123(R), the Company accounted
for stock-based compensation awards under APB 25. Under APB 25, generally no
compensation expense is recorded when the terms of the award are fixed and
the exercise price of the employee stock option equals or exceeds the fair
value of the underlying stock on the date of grant.
During the three and six months ended December 31, 2006, the Company recorded
compensation expense related to stock options of $82,370 and $300,255,
respectively, and granted 235,000 options during the six months ended
December 31, 2006. The fair value of the options granted during the six
months ended December 31, 2006 is estimated on the grant date using the
Black-Scholes option-pricing model with the weighted average following
assumptions:
Volatility 147%
Dividend yield 0%
Risk-free interest rate 4.81%
Expected life (years) 3.1
F-33
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
10. STOCKHOLDERS' EQUITY (CONTINUED):
Stock options (continued):
As of December 31, 2006, options outstanding under the 2006 Plan are
summarized as follows:
Outstanding Options
Number of Weighted Average
Shares Exercise Price
---------- ----------------
Balance, July 1, 2006 1,410,833 $ 2.94
Options granted 235,000 $ 4.54
Options exercised - -
Options cancelled - -
--------- -------
Balance, December 31, 2006 1,645,833 $ 3.17
========= =======
There were 1,049,167 options exercisable as of December 31, 2006.
The following table presents information relating to stock options
outstanding and exercisable as of December 31, 2006:
Weighted- Weighted-
Average Average Weighted-
Remaining Outstanding Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices Shares Life Price Shares Price
------------------------ ----------- ----------- ----------- ----------- ---------
$2.00 - $2.50 812,500 7.2 $ 2.41 413,334 $ 2.32
$3.00 - $3.50 420,333 1.6 $ 3.00 420,333 $ 3.00
$4.00 - $4.75 190,000 7.9 $ 4.06 77,500 $ 4.15
$5.00 - $7.50 223,000 3.2 $ 5.52 138,000 $ 5.53
--------- --- ------- --------- -------
1,645,833 5.3 $ 3.17 1,049,167 $ 3.15
========= === ======= ========= =======
The total fair value of stock options that vested during the three and six
months ended December 31, 2006 and 2005 was $82,370 and $300,255, and
$177,406 and $213,781, respectively. The intrinsic value of stock options
exercised during both the three and six months ended December 31, 2006 and
2005 was $0 as there were no options exercised during these periods. As of
December 31, 2006 the Company had $793,528 of unrecognized compensation cost
related to stock options that will be recorded over a weighted average period
of approximately 3 years.
F-34
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
10. STOCKHOLDERS' EQUITY (CONTINUED):
Stock options (continued):
Prior to July 1, 2006, the Company accounted for stock-based compensation
awards under APB 25 and had adopted the disclosure-only provision of SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Had
compensation expense for stock option grants been determined based on the
fair value at grant dates consistent with the method prescribed by SFAS 123,
the loss attributable to common shareholders and loss per common share would
have been adjusted to the pro forma amounts for the three and six months
ended December 31, 2005 as follows:
Three months Six months
ended ended
December 31, December 31,
2005 2005
------------- ------------
Net loss:
As reported $(1,483,000) $(2,186,000)
Less: Stock-based compensation
expense determined under fair
value method (177,000) (214,000)
----------- -----------
Pro forma $(1,660,000) $(2,400,000)
=========== ===========
Basic and diluted net loss per
share:
As reported ($0.19) ($0.36)
=========== ===========
Pro forma ($0.21) ($0.39)
=========== ===========
11. OPERATING LEASE:
The Company entered into a non-cancellable operating lease commitment for
office space in New York, effective August 1, 2006 and expiring November 30,
2013. In conjunction with the signing of the lease, the Company provided the
lessor with a secured letter of credit in the amount of $171,945, which is
reflected as restricted cash as of December 31, 2006. The Company's
obligations under the lease are partially guaranteed by Salvatore Zizza,
chairman of Bion Dairy. The Company has entered into two separate agreements
to sub-lease approximately 32% of the Company's lease obligation and the
tenants have also agreed to reimburse the Company for leasehold improvements
and furnishings. As of December 31, 2006, the Company has outstanding
receivables from its tenants of approximately $39,000. The Company is
recognizing rent expense relating to the lease under the straight-line
method. The average monthly rent expense for the 88-month lease is $15,820.
F-35
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)
11. OPERATING LEASE (CONTINUED):
The Company is also recognizing the sub-lease rental income from its tenants
under the straight-line method, with a monthly average of $5,252. The
difference between the straight-line method, and the actual lease payments
have resulted in a deferred rent liability of $61,027 as of December 31,
2006. As of December 31, 2006, the Company also has deferred rent of $17,194
relating to a tenant's six-month rent prepayment.
12. COMMITMENTS:
Joint venture agreement:
In June 2006, the Company entered into an agreement with Fair Oaks Dairy Farm
("FODF") to construct a Bion facility ("Stage I System") at FODF. Bion has
been working with FODF since May 2005 for the purpose of installing a waste
treatment facility at FODF that could become the basis for a future
Integrated Project. The June 2006 agreement contemplates expansion beyond
the initial waste treatment facility. The Stage I System will initially be
used for testing necessary for: a) finalization of design criteria for
permitting and construction of, and b) optimization of renewable energy
production and utilization for the full scale Integrated Projects. The
Company is currently in negotiations toward an amended agreement with FODF
pursuant to which: a) the Company will construct a commercial scale Bion
System designed to handle the waste stream from approximately 3,500-6,200
milking cows ("Initial System") at existing FODF facilities in Indiana which
will incorporate and expand the scope of the Stage I System; and b) when the
Initial System has completed start-up phase and demonstrated environmental
results consistent with the published results achieved at Bion's DeVries
research facility, the Initial System will become the basis of expansion into
an Integrated Project at FODF through development stages including dairy
expansion, construction of additional Bion System modules, including
renewable energy production, solids processing facilities, and construction
of an ethanol plant. It is anticipated that the amended agreement will be
executed in early 2007. Preliminary engineering, design and site work at
FODF has begun pursuant to the existing agreement and the Company anticipates
completion of development of this Integrated Project during 2008. FOFD is
owned and controlled by Michael McCloskey and Timothy Den Dulk who have
served as consultants to the Company since May 2005.
13. RELATED PARTY TRANSACTIONS:
The Company has an accrued payable of $41,647 to a company controlled by
Salvatore Zizza for rental of office space in 2003.
14. SUBSEQUENT EVENTS:
On January 3, 2007 the Company declared bonuses totaling $170,467 to certain
employees and a consultant, which will be paid after the Company has in
excess of $2,000,000 cash or cash equivalents.
F-36