Document/Exhibit Description Pages Size
1: 10KSB Bion Environmental June 30, 2007 10-Ksb 79± 265K
2: EX-31 Certification per Sarbanes-Oxley Act (Section 302) 2± 7K
3: EX-32 Certification per Sarbanes-Oxley Act (Section 906) 1 5K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended: June 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: _____ to ____
Commission File No. 000-19333
BION ENVIRONMENTAL TECHNOLOGIES, INC.
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(Name of Small Business Issuer in its Charter)
COLORADO 84-1176672
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(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication No.)
641 Lexington Avenue, 17th Floor, New York, New York 10022
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(Address of Principal Executive Offices, Including Zip Code)
Issuer's Telephone Number: (212) 758-6622
Securities Registered Pursuant to Section 12(b) of the Act: None.
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
--------------------------
(Title of each class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State issuer's revenues for its most recent fiscal year: $0.
As of September 30, 2007, 8,076,280 shares of common stock were outstanding,
and the aggregate market value of the common stock of the Registrant held by
non-affiliates was approximately $9,555,968.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Documents Incorporated By Reference: None.
PART I
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 a significant source of pollution in US
agriculture, Confined Animal Feeding Operations ("CAFO's"). Bion's
technology is "comprehensive" in that it surpasses current environmental
regulations for both nutrient releases to water and air emissions from
livestock waste streams based upon our research to date. Because Bion's
technology reduces the harmful emissions from a CAFO on which it is utilized,
the CAFO can increase its herd concentration while lowering or maintaining
its level of nutrient releases and atmospheric emissions. 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 (defined below), 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 (defined below) produces from the CAFO waste stream. Bion, as
developer of and participant in 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 System"
or "System") integrating large-scale CAFO's and ethanol production and/or
end-product facilities (cheese producers or other dairy processors, beef
processing facilities, etc.) ("Projects" or "Integrated Projects").
The financial statements for the years ended June 30, 2007 and 2006
included herein have been prepared assuming the Company will continue as a
going concern. The Company has not recorded any revenue for either of the
years ended June 30, 2007 or June 30, 2006. The Company has incurred net
losses of approximately $2,549,000 and $5,173,000 during the years ended June
30, 2007 and 2006, respectively. The Company had a working capital deficiency
and a stockholders' deficit, respectively, of approximately $1,219,000 and
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$4,663,000 as of June 30, 2007. The report of the independent registered
public accounting firm on the Company's financial statements as of and for
the years ended June 30, 2007 and 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 beef or 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 beef or dairy cows (or
waste stream equivalent of other species) on a single site and/or on sites
within an approximately 30 mile radius. Bion believes its technology
platform will allow integration of large-scale CAFO's with 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. Some
Projects may be developed from scratch while others may be developed around
either existing CAFOs or ethanol plants. Bion anticipates that some Projects
will also include end-product facilities.
Bion is currently working with local, state and federal officials and
with potential industry participants to evaluate opportunities and/or sites
for Projects and/or System installations in multiple states including without
limitation New York, Indiana, Pennsylvania, Nebraska, California and other
states. The Company anticipates selecting a site for its initial Project
during the current fiscal year. Bion anticipates that one of its initial
Integrated Projects will be located in upstate New York and will include a 42
million gallon per year ethanol plant balanced with an 84,000-head beef
cattle finishing facility that will be made up of six 14,000-head satellite
farm modules. Bion intends to commence development of its initial Integrated
Project during the 2008 fiscal year by optioning land and beginning the
permitting process.
In addition, Bion intends to choose sites for additional Projects through
2008 to create a pipeline of Projects. Management has a 5-year development
target (through fiscal year 2013) 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 has focused on establishing its implementation management team
(including both employees and consultants) with the intention of commencing
development and construction of an initial Project during the current fiscal
year. In September 2006, Jeremy Rowland joined the Company's subsidiary, Bion
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Dairy Corporation ("Bion Dairy") as its Chief Operating Officer and has
served in that capacity since that time. Mr. Rowland has further 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. Jeff
Kapell, who became a consultant to Bion and Bion Dairy in December 2003,
joined the Bion management team on a full-time basis in April 2006 as Bion
Dairy's Vice-President--Renewables. Mr. Zizza and Mr. Kapell have performed
these services for Bion Dairy since January 2006 and April 2006,
respectively. Mr. Zizza and Mr. Kapell have further agreed to serve the
Company in similar positions once it has secured adequate director and
officer liability insurance coverage. Bion will need to continue to hire and
engage additional management and technical personnel as it moves from the
technology re-development phase to the implementation phase during the 2008
fiscal 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 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
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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
through a balanced integration of technologies to provide a hedge of the
commodity risks associated with any of the separate enterprises. We believe
that Bion's Integrated Projects 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 and/or other
facilities, d) fees related to the utilization of the wet distillers grain
made possible by the integration, and e) fees for its "developer" role. If
Bion also participates in the ownership and/or operation of the ethanol
plant, it would further generate revenue from sales of ethanol and sales of
feed products to the CAFO. Sales of 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. It is likely that Bion will have differing ownership interests
(from 0% to 100%) in each component of an Integrated Project.
We believe that our technology platform and the proposed Projects do not
involve significant technology risk. Our waste handling technology has been
utilized efficiently in the past and has been verified by peer-reviewed data.
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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 fully integrated Project will probably
include:
* An ethanol plant and CAFO combination sized to balance the distillers
grain by-product of the ethanol production with the feed requirements
of the CAFO herd and the energy needs of the ethanol plant with the
renewable energy produced by Bion from the CAFO waste stream. Beyond
the production of ethanol, the ethanol facility will function as a
feed mill for the CAFO herd which will utilize the spent grain from
ethanol production in its feed ration, materially reducing the
operating expenses (energy and transportation) and capital
expenditure requirements (for items such as dryers) and increasing
the net energy efficiency of ethanol production;
* Additionally, the ethanol plant is potentially a source of waste heat
(which, if not productively utilized, would increase ethanol
production costs for required disposal) to be used to maintain
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;
* Processing, drying and combusting the coarse solids portion of
the CAFO's manure stream to produce heat used for solids drying and
to replace natural gas usage by the ethanol production process and
other co-located facilities; and
* Co-located end-product production facilities (cheese and/or other
dairy processors, beef processing facilities, etc.) which will
utilize the output of the CAFO and consume renewable energy produced
from the CAFO waste stream.
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In order to implement this plan, Bion must work with both CAFO's and
ethanol producers (and, in some cases, end-product 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(and other facilities) agree to locate in
geographic proximity to each other, b) Bion licenses, constructs and operates
its System to process the CAFO's waste stream and produce renewable energy
and other products therefrom, c) the CAFO agrees to purchase and utilize the
wet distillers grain by-product of the ethanol plant in its feed ration and
d)the ethanol plant 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
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.
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
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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.
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:
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* 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):
* 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 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;
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* 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
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, if
constructed, 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 Project. Certain technical and financial issues concerning this
facility remain unresolved between Bion and FODF and, therefore, permitting
and construction have not yet commenced. It is not possible to predict when
and if these matters will be resolved or whether this installation will ever
be constructed.
On August 18, 2007, Bion Environmental Technologies, Inc. ("Bion")
entered into a Letter of Intent with Evergreen Farms, Inc. ("Letter of
Intent") related to a Bion waste treatment system at Evergreen Farms, a
3,000-head dairy operation near Spruce Creek, Huntingdon County, Pennsylvania
(the "System"). Construction of any such System is subject to contingencies
including execution of a binding agreement between Bion and Evergreen Farms
upon terms which have not yet been negotiated. Pursuant to the Letter of
Intent, Bion intends to conduct initial planning on this project, which will
include a site survey and preliminary engineering.
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RECENT FINANCINGS
SERIES C NOTES AND CONVERSION OF OUTSTANDING DEBT TO EQUITY
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.
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;
* 691,528 shares to Centerpoint Corporation ("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
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.
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2007 SERIES A CONVERTIBLE PROMISSORY NOTES
In March and April 2007, Bion sold $800,000 of its 2007 Series A
Convertible Promissory Notes to existing investors. The notes earn interest
at the rate of 6%, payable on July 1, 2008, the maturity date of the notes.
Principal and accrued interest under the notes is convertible at $4.00 per
share. Additionally, Mark A. Smith, our President, agreed to accept $151,645
of the Company's 2007 Series A Convertible Notes in exchange for his deferred
compensation for the period from January 1, 2007 through March 31, 2007 and
the Company's promissory note issued on January 1, 2007 for Mr. Smith's
deferred compensation from April 1, 2006 through December 31, 2006.
Salvatore Zizza, Chairman and a Director of Bion's operating subsidiary, Bion
Dairy Corporation, and Bright Capital, Ltd. ("Brightcap"), which provide the
consulting services of Dominic Bassani to the Bion companies, agreed to
accept $379,389 and $455,486, respectively, of the Company's Series A Notes
in exchange for their respective deferred compensation for the period from
January 1, 2007 through March 31, 2007 and the Company's promissory notes
issued on January 1, 2007 for their respective deferred compensation owed by
Bion on December 31, 2006.
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.
12
Additionally, a number of companies, including without limitation, Panda
Ethanol, E3 BioFuels and Prime BioSolutions, are pursuing the development of
projects which combine CAFOs and ethanol plants and utilize the CAFO waste
stream to produce energy for the ethanol plant and the CAFO herd to consume
the distillers grain by-product of the ethanol production. While a very
limited number of entities (including those named above) have announced
projects and/or solutions that sound similar to the Company's Integrated
Projects, there appear to be significant differences including without
limitation, the use of technology that is based on either manure
'gasification' or capturing methane from the waste stream using anaerobic
digesters (ADs). Although ADs do produce methane that can be used to replace
some or all of the natural gas requirement of an ethanol plant, the AD
process produces only about one third of the energy per animal that is
produced by Bion's use of combustible solids extracted from the waste stream
based on Bion's internal analysis. Further, none of the technologies of which
the Company is aware appear to represent solutions to the nutrient and
atmospheric environmental problems of CAFOs addressed by Bion's technology,
or have any independent data supporting claimed environmental benefits, and,
therefore, the Company believes that their potential projects will be limited
to locations in which CAFOs have already been permitted and limited to the
existing CAFO size.
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 2008, 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, one patent from Mexico and one New Zealand patent:
* 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.
13
* Canadian Patent No. 1,336,623, Aqueous Stream Treatment Process,
expires August 2012.
* New Zealand Patent No. 526,342, Low Oxygen Organic Waste
Bioconversion System, expires November 8, 2021.
* Mexican Patent No. 240,124, Low Oxygen Organic Waste Bioconversion
System, expires November 8, 2021.
On April 15, 2005, we filed a patent application titled "Low Oxygen
Biologically Mediated Nutrient Removal." The application number is
11/106,751.
On November 3, 2006, we filed a patent application titled "Low Oxygen
Biologically Mediated Nutrient Removal." The application number is
11/592,513. On November 3, 2006, we also filed a patent application titled
"Environmentally Compatible Integrated Food and Energy Production System."
The application number is 11/592,511.
In addition to such factors as innovation, technological expertise and
experienced personnel, we believe that a strong patent position is
increasingly important to compete effectively in the businesses on which we
are focused. It is likely that we will file applications for additional
patents in the future. There is, however, no assurance that any such patents
will be granted.
It may become necessary or desirable in the future for us to obtain
patent and technology licenses from other companies relating to technologies
that may be employed in future products or processes. To date, we have not
received notices of claimed infringement of patents based on our existing
processes or products, but due to the nature of the industry, we may receive
such claims in the future.
We generally require all of our employees and consultants, including our
management, to sign a non-disclosure and invention assignment agreements upon
employment with us.
RESEARCH AND DEVELOPMENT
During the year ended June 30, 2007 we expended $1,510,000 (including
non-cash expenditures) on undertaking research and development related to our
technology platform applications in support of large-scale, economically and
environmentally sustainable Integrated Projects. Bion's main efforts were
directed at further development of our technology and its applications. In
addition, substantial research and development activity was focused on design
and refinement of all aspects of the technology and integration engineering
related to the energy balances, renewable energy production and on-site
utilization, related to Integrated Project issues and our business model.
Research activities have focused on factors related to renewable energy
production from CAFO waste including coarse solid recovery, 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.
14
During the year ended June 30, 2006 we expended $3,810,000 (including
non-cash expenditures) on undertaking similar research and development
related to our technology platform applications in support of large-scale,
economically and environmentally sustainable Integrated Projects.
Environmental Protection/Regulation
In regard to development of Projects, we will be subject to extensive
environmental regulations related to CAFO's and ethanol production. To the
extent that we are a provider of systems and services to others that result
in the reduction of pollution, we are not under direct enforcement or
regulatory pressure. However, we are involved in CAFO waste treatment and
are impacted by environmental regulations in at least four different ways:
* Our marketing and sales success depends, to a substantial degree,
on the pollution clean-up requirements of various governmental
agencies, from the Environmental Protection Agency (EPA) at
the federal level to state and local agencies;
* Our System design and performance criteria must be responsive to
the changes in federal, state and local environmental agencies'
effluent and emission standards and other requirements;
* Our System installations and operations require governmental permit
approvals in many jurisdictions; and
* To the extent we own or operate Integrated Projects including
CAFO facilities and ethanol plants, those facilities will be
subject to environmental regulations.
EMPLOYEES
As of September 15, 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.
ITEM 2. 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.
15
The Company holds eight United States patents, one Canadian patent, one
patent from Mexico and one New Zealand patent as described above. Three
patent applications have been filed and are pending.
ITEM 3. LEGAL PROCEEDINGS
Bion, our President Mark A. Smith and Bion Dairy were defendants in a
class action/derivative action lawsuit in Delaware Chancery Court (TCMP#3
Partners, LLP, et al v. Trident Rowan Group, Inc., et al, Civil Action No.
170-N) (the "TCMP Litigation"), which was settled on August 10, 2007.
Pursuant to the settlement, Bion, Bion Dairy Corporation and Mark Smith, paid
$165,000, through insurance, into a settlement fund. As part of the
settlement reached in the TCMP Litigation, Bion, its majority owned
subsidiary Centerpoint Corporation ("Centerpoint"), and Bion's shareholders
(as of January 15, 2002 other than the 'Released Parties' in these two
actions who are not current officers and/or directors of Bion) ("Shareholder
Class") filed an action against Comtech Group, Inc. ("Comtech") (formerly
known as Trident Rowan Group, Inc.), OAM S.p.A ("OAM") and others in the
Court of Chancery in the State of Delaware, case number 2968-VCP (the
"Comtech Litigation"), along with a stipulated settlement of the litigation.
Pursuant to that settlement, Comtech and OAM agreed to deliver to the
Shareholder Class: a) 144,240 shares of Bion common stock; b) a warrant to
purchase 100,000 shares of Bion's common stock, and c) 140,000 shares of the
common stock of Centerpoint Corporation. It is anticipated that delivery of
these securities (net of 10% attorneys' fees) will take place during the
fourth quarter of 2007 and each member of the Shareholder Class will receive
the equivalent of approximately .05 Bion shares for each share of Bion common
stock (split adjusted) owned on January 15, 2002. Additionally, Comtech and
OAM assigned to Bion and Centerpoint all of their rights to any proceeds of
an escrow established from the sale of Centerpoint's assets to Aprilia S.p.A.
(the "Aprilia Escrow") and any proceeds from litigation related to the
transaction with Aprilia. On September 18, 2007 Bion and Centerpoint
received $798,000 (before attorneys' fees and other expenses), in aggregate,
from the Aprilia Escrow. As part of the settlement, one of the other
defendants paid $150,000 into a settlement fund, through insurance, from
which funds Bion and Centerpoint received $110,000, in aggregate, on
September 10, 2007.
On May 6, 2002, Arab Commerce Bank Ltd. ("ACB"), an unaffiliated party,
filed a complaint against the Company in the Supreme Court of the State of
New York regarding $100,000 of the Company's convertible bridge notes ("ACB
Notes") that were purchased by ACB in March of 2000. The complaint includes
a breach of contract claim asserting that the Company owes ACB either
a)$265,400 plus interest or b) $121,028 including interest based on ACB's
interpretation of the terms of the ACB Notes and subsequent amendments.
Effective June 30, 2001, the Company issued ACB 5,034 shares of common stock
in full payment of its ACB Note based on the Company's interpretation of the
ACB Note, as amended. The Company has filed an answer to the complaint
denying the allegations. No activity has taken place in this lawsuit since
2002. The Company does not believe that the ultimate resolution of this
litigation will have a material adverse effect on the Company, its operations
or its financial condition.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES AND EQUITY SECURITIES.
(a) Market Information
During the past two fiscal 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.
Our common stock is now quoted on the Over-The-Counter Electronic
Bulletin Board under the symbol "BNET." The following quotations reflect
inter dealer prices, without retail mark up, markdown or commission and may
not represent actual transactions.
2007 2006
-------------- --------------
Fiscal Year Ending June 30, High Low High Low
--------------------------- ---- ----- ----- -----
First Fiscal Quarter $7.00 $5.20 $2.75 $1.15
Second Fiscal Quarter $6.00 $5.00 $6.00 $2.40
Third Fiscal Quarter $5.50 $3.55 $9.50 $4.00
Fourth Fiscal Quarter $3.90 $2.75 $7.00 $4.16
(b) Holders
The number of holders of record of our common stock at September 30,
2007 was approximately 754. 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 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Included in Part F/S are the audited Consolidated Financial Statements
for the fiscal years ended June 30, 2007 and 2006 ("Financial Statements").
17
Statements made in this Form 10K-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
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 2008 fiscal year.
18
The financial statements for the years ended June 30, 2007 and 2006 have
been prepared assuming the Company will continue as a going concern. The
Company has incurred net losses of approximately $2,549,000 and $5,173,000
during the years ended June 30, 2007 and 2006, respectively. At June 30,
2007, the Company had a working capital deficiency and a stockholders'
deficit of approximately $1,219,000 and $4,663,000, 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, 2007 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
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
19
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
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 Accounting Principles Board Opinion
No. 25 ("APB 25"), and generally requires that share-based compensation
transactions be accounted and recognized in the statement of income based on
their fair values. The Company adopted SFAS 123(R)using the modified
prospective application under which all share based awards granted on or
after the adoption date and modifications, repurchases or cancellation of
prior awards made after the adoption date shall be accounted for under SFAS
123(R). The modified prospective application does not require the Company to
restate prior period's financial results to reflect the adoption. Pro forma
disclosure for prior period issuances of share based grants have been made in
the notes to the financial statements and the Company has used the Black-
Scholes option pricing model for determining fair value of stock options
granted. As of June 30, 2007 the Company had $739,000 of unrecognized
compensation cost related to stock options that will be recorded over a
weighted average period of approximately 1.5 years.
Cumulative Effect of Change in Accounting Principle
In accordance with SFAF 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 a
cumulative effect of a change in accounting principle. The Company recorded
the cumulative effect of a change in accounting principle of $731,000 due to
the calculation of the fair value of convertible deferred compensation owed
Mark Smith ($1,522,000) and Brightcap ($2,081,000) as of July 1, 2006. The
Company re-measures the fair value of the convertible notes at each reporting
period after July 1, 2006, using a Black-Scholes model approach, and records
any adjustments as non-cash compensation expense in the re-measurement
period. At June 30, 2007, the fair value of deferred compensation owed Mark
Smith and Brightcap was re-measured at $766,000 and $1,047,000, respectively
and resulted in a credit to earnings of $779,000 and $1,066,000,
respectively, for the year June 30, 2007.
YEAR ENDED JUNE 30, 2007 COMPARED TO YEAR ENDED JUNE 30, 2006
General and Administrative
Total general and administrative expenses decreased $1,155,000 from
$1,343,000 to $188,000 for the years ended June 30, 2006 and 2007,
respectively.
20
General and administrative expenses, excluding stock-based compensation
(credits)/expenses of $(604,000) and $834,000 for the years ended June 30,
2007 and 2006, respectively, were $792,000 versus $509,000 for the years
ended June 30, 2007 and 2006, respectively. The increase of approximately
$283,000 was due primarily to higher rent, accounting and audit fees, and
salary and related payroll taxes for the year ended June 30, 2007 over the
same period in 2006. The Company incurred rent expense of $141,000 for
fiscal year 2007 due to the signing of a lease for office space in New York
City in August 2007, while no similar expense was incurred in fiscal year
2006. Accounting and audit fees were $124,000 higher for the year ended June
30, 2007 over the comparable period for 2006 due to the costs associated with
the fiscal year 2006 audit, preparation of the Company's Form 10-SB and
related responses to a Securities and Exchange Commission comment letter,
preparation and review of quarterly financial statements for December 31,
2006 and March 31, 2007, and the tax preparation fees for fiscal years 2002
through 2005. In addition, the Company had higher salary and payroll tax
costs of $57,000 for the year ended June 30, 2007 due to additional salary
costs being allocated to general and administrative expenses and the addition
of an investor relations manager in June 2007.
General and administrative stock-based compensation for the years ended
June 30, 2007 and 2006 respectively consist of the following:
2007 2006
---------- ---------
Fair value remeasurement of convertible
notes - affiliates $ (779,000) $ -
Intrinsic value remeasurement of
convertible notes - affiliates - 834,000
Amortization of expenses prepaid with
stock options granted to non-employees 10,000 -
Fair value of stock options expensed
under SFAS 123(R) 165,000 -
---------- ---------
Total $ (604,000) $ 834,000
========== =========
Stock-based compensation expenses decreased to ($604,000) for the year
ended June 30, 2007 from $834,000 for the year ended June 30, 2006. The
decrease in stock-based compensation expense relating to the President's
convertible deferred compensation is due to: a) 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, and b) the
decrease in the price of the Company's stock from $6.40 to $3.25 per share
for the year ended June 30, 2007 versus the increase from the $2.00 per share
floor to $6.40 per share for the year ended June 30, 2006.
Research and development
Total research and development expenses have decreased $2,300,000 from
$3,810,000 to $1,510,000 for the years ended June 30, 2006 and 2007,
respectively.
21
Research and development expenses, excluding stock-based compensation
(credits)/expenses of $(632,000) and $1,892,000 for the years ended June 30,
2007 and 2006, respectively, increased $224,000 from $1,918,000 to $2,142,000
for the years ended June 30, 2006 and 2007, respectively. Contributing to
the increase was salary and payroll taxes, consulting fees, and legal fees.
During fiscal year 2007, the company hired a chief operating officer and also
declared bonuses to the research and development employees which increased
salary and related payroll taxes by $292,000 over the prior year. Consulting
expenses increased approximately $170,000 when comparing fiscal year ended
June 30, 2007 to the same period in 2006 due to the Company's
consulting/employment agreement with the Chairman and director of Dairy which
was in effect for the full year during fiscal year 2007, versus six months in
the 2006 fiscal year. Offsetting the increases described above were
decreased expenditures of $177,000 relating to research and development
subcontractor and material expenses on the DeVries project due to the
majority of the project testing being completed in fiscal year 2006.
Research and development stock-based compensation for the years ended
June 30, 2007 and 2006 consist of the following:
2007 2006
----------- ----------
Fair value remeasurement of convertible
notes - affiliates $(1,066,000) $ -
Intrinsic value remeasurement of
convertible notes - affiliate - 1,140,000
Fair value remeasurement of options with
service conditions (16,000) 727,000
Amortization of expenses prepaid with
stock options granted to non-employees 33,000 25,000
Fair value of stock options expensed
under SFAS 123 (R) 417,000 -
----------- ----------
Total $ (632,000) $1,892,000
=========== ==========
Stock-based compensation expense decreased from $1,892,000 for the year
ended June 30, 2006 to ($633,000) for the same period in 2007. The decrease
is attributable to Brightcap's convertible deferred compensation and
compensation costs relating to the Company's options with service conditions
and graded vesting. Stock-based compensation (credit) expense of
($1,066,000) and $1,140,000 for the years ended June 30, 2007 and 2006,
respectively, was recorded to re-measure the fair value and to recognize the
intrinsic value of Brightcap's convertible deferred compensation at June 30,
2007 and 2006, respectively, due, in part, to the decrease in the price of
the Company's stock from $6.40 to $3.25 per share for the year ended June 30,
2007, compared to the increase from the $2.00 per share floor to $6.40 per
share for the year ended June 30, 2006. Stock-based compensation (credit)
expense of ($16,000) and $727,000 was recorded for the years ended June 30,
2007 and 2006, respectively for the non-employee options that include service
conditions and have graded vesting schedules. The decrease is due to the
decrease in the stock price from $6.40
22
per share at June 30, 2006 to $3.25 per share at June 30, 2007. The Company
recorded stock-based compensation expense of $417,000 under the provisions of
SFAS 123(R)for the year ended June 30, 2007 for options vested to research
and development employees. No similar expense was recorded for the prior
year as the Company adopted SFAS 123(R)effective July 1, 2006.
Loss from Operations
As a result of the factors described above, the loss from operations was
$1,697,000 and $5,153,000 for the years ended June 30, 2007 and 2006,
respectively.
Other expense
Other expense was $121,000 and $20,000 for the years ended June 30, 2007
and 2006, respectively. Interest expense increased $38,000 from $135,000 for
the year ended June 30, 2006 to $156,000 for the year ended June 30, 2007.
Interest expense increased due to the higher debt balances due to the 2006
and 2007 Series A Notes and higher convertible deferred compensation balances
from the prior year. Meanwhile interest income increased from $22,000 for
the year ended June 30, 2006 to $35,000 for the same period in 2007 due to
higher average cash balances during fiscal year 2007. During the year ended
June 30, 2006, the Company had other income of approximately $91,000 from the
settlement of debt with third party vendors.
Cumulative Effect of Change in Accounting Principle
During the year ended June 30, 2007, the Company recorded the cumulative
effect of a change in accounting principle of $731,000.
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, using the modified
prospective application. In accordance with SFAF 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 a cumulative effect of a change in accounting principle. The
Company recorded the cumulative effect of a change in accounting principle of
$731,000 due to the calculation of the fair value of convertible deferred
compensation owed Mark Smith and Brightcap as of July 1, 2006. The
cumulative effect of change in accounting principle resulted in a net loss
per common share of $0.09 for the year ended June 30, 2007.
Net Loss
As a result of the factors described above, the net loss was $2,549,000
and $5,173,000 for the years ended June 30, 2007 and 2006, respectively,
representing a $0.38 decrease in the net loss per common share from $0.70 for
the year ended June 30, 2006 to $0.32 for the same period in 2007.
23
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2007, the Company had cash and cash equivalents equal to
$373,000. 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, 2007 the Company used $79,000 of cash for
investing activities to purchase property and equipment for the New York City
office. In addition the Company used $172,000 of cash to secure a guarantee
for the office lease obligation.
Financing Activities
During the year ended June 30, 2007, $545,000 and $800,000 of cash was
provided by financing activities resulting from the sale of the 2006 Series A
and 2007 Series A convertible promissory notes, respectively.
As of June 30, 2007 the Company has significant debt obligations
consisting primarily of mandatorily convertible notes - affiliates of
$1,812,908, 2006 Series A convertible promissory notes - current of $737,974,
2007 Series A convertible promissory notes - affiliates of 1,001,116, 2007
Series A convertible promissory notes of $811,540 and deferred compensation
of $187,500. The Company has entered into an 88-month operating lease for
office space in New York City, with an average monthly lease expense of
$15,820.
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
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.
24
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%, a remaining contractual life of 3 years and a stock price
of $6.40 per share. At June 30, 2007 the fair value of deferred compensation
owed to Mark A. Smith was re-measured as $765,722 and resulted in a credit to
earnings of $778,859 for the year ended June 30, 2007. Fair value at June
30, 2007 was calculated utilizing the following assumptions: a dividend yield
of zero, a risk-free interest rate of 4.87%, volatility of 69%, a remaining
contractual life of 2 years and a stock price of $3.25 per share. Sums
accrued after April 1, 2006, ($150,000 through March 31, 2007), were
converted as of March 31, 2007 into the Company's 2007 Series A convertible
promissory notes and sums accrued after April 1, 2007 ($37,500 through June
30, 2007) have been recorded as deferred compensation. The President earns
compensation of $150,000 annually. 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%, a
remaining contractual life of 3 years and a stock price of $6.40 per share.
At June 30, 2007 the fair value of deferred compensation owed to Brightcap
was re-measured as $1,047,186 and resulted in a credit to earnings of
$1,065,569 for the year ended June 30, 2007. Fair value at June 30, 2007 was
calculated utilizing the following assumptions: a dividend yield of zero, a
risk-free interest rate of 4.87%, volatility of 69%, a remaining contractual
life of 2 years and a stock price of $3.25 per share. 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 $450,000 as of March 31, 2007, and were converted into the Company's
2007 Series A convertible promissory notes as of March 31, 2007, while sums
accrued after April 1, 2007 ($75,000 as of June 30, 2007) have been recorded
as deferred compensation.
25
Deferred Compensation
Prior to March 31, 2003, the Company incurred management fees under
various management agreements for management and consulting services. The
fees totaled $607,629 including interest at 6%, as of March 31, 2007. 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 issued
151,908 shares of common stock on March 31, 2007 to satisfy its obligation.
The Company has aggregate deferred compensation liabilities of $187,500
for three of its officers/directors/consultants as of June 30, 2007. 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.
Convertible Promissory Notes
2006 Series A Convertible Promissory Notes:
On September 13, 2006, the Company closed the offering of its 2006
Series A Convertible Promissory Notes, totaling $700,000 (the "2006 Notes").
The holders of the 2006 Notes earn interest on the unpaid principal balance
of the 2006 Notes at 6%, payable on May 31, 2008, the maturity date of the
2006 Notes. All of the principal and accrued interest under the 2006 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 2006 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, which occurred on January 13, 2007.
The 2006 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.
2007 Series A Convertible Promissory Notes:
During March and April 2007, the Company sold $800,000 of its 2007
Series A Convertible Notes (the "2007 Notes") for cash proceeds. In addition
the Company issued 2007 Notes to affiliates totaling $986,521 in exchange for
26
promissory notes with convertible features and deferred compensation. The
2007 Notes are convertible into shares of the Company's common stock at $4.00
per share until maturity on July 1, 2008, at the election of the 2007 Note
holder, and will accrue interest at 6% per annum. The note holders will have
the option to exchange the 2007 Notes, plus interest, into securities
substantially identical to securities the Company sells in any subsequent
offering of up to $3,000,000. The Company has the right to require the
2007 Notes (principal plus interest) be converted into its common shares at
the lesser of $4.00 per share or the price of an offering in which the
Company raises $3,000,000 or more. The conversion price of the 2007 Notes of
$4.00 per share was above the approximate market price of the Company's
common shares at the commitment date of the offering.
Plan of Operations and Outlook
As of June 30, 2007 the Company had cash and cash equivalents of
$373,109. During September 2007 the Company received gross proceeds of
$1,228,000 consisting of $798,000 from litigation settlements and $430,000
from the release of escrowed funds. 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 2008 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 2008 in the form of equity and/or debt.
The proceeds would be used to expand and accelerate the de