SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31,2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 OR THE TRANSITION PERIOD FROM _______ TO _______
Commission file number 0-19333
Bion Environmental Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Colorado 84-1176672
----------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 East 50th Street 10th Floor 10022
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 758-6622
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No___
The number of shares outstanding of registrant's classes of common stock, as
of May 9, 2001: Common Stock, No Par Value, 13,056,597.
Transitional Small Business Disclosure Format (Check one): Yes ___ No X
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 2001
(unaudited) and June 30, 2000 (audited) F-1 - F-2
Unaudited Consolidated Statements of Operations for
the Nine Months Ended March 31, 2001 and 2000 F-3
Unaudited Consolidated Statements of Operations for
the Three Months Ended March 31, 2001 and 2000 F-4
Unaudited Consolidated Statement of Changes in
Stockholders' Deficit for the Nine Months Ended
March 31, 2001 F-5
Unaudited Consolidated Statements of Cash Flows for
the Nine Months Ended March 31, 2001 and 2000 F-6 - F-7
Notes to Unaudited Consolidated Financial Statements F-8 - F-26
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 3-8
PART II - Other Information
Items 1 - 6 9-10
Index to Exhibits 10
Reports on Form 8-K 10
Signature Page 11
2
Bion Environmental Technologies, Inc. and
Subsidiaries
Consolidated Balance Sheets
March 31,
2001 June 30,
(Unaudited) 2000
------------ -----------
Assets
Current:
Cash and cash equivalents $ 114,950 $ 2,604,933
Accounts receivable, less allowance of $12,000
for possible losses - 26,695
Work in Process 37,687 -
Prepaid expenses, note receivable and accrued interest 129,172 46,702
--------- -----------
Total current assets 281,809 2,678,330
--------- -----------
Property and equipment:
Furniture and equipment 339,414 319,499
Computer equipment 77,786 92,828
Leasehold Improvement 18,774 -
--------- -----------
435,974 412,327
Less accumulated depreciation 244,693 203,894
--------- -----------
Net property and equipment 191,281 208,433
--------- -----------
Other assets:
Patents, net of accumulated amortization of $20,768 and $18,344 34,178 36,602
Deposits and other 138,756 11,884
--------- -----------
Total other assets 172,934 48,486
--------- -----------
Total Assets $ 646,024 $ 2,935,249
========= ===========
See accompanying notes to unaudited consolidated financial statements.
F-1
Bion Environmental Technologies, Inc. and
Subsidiaries
Consolidated Balance Sheets
March 31,
2000 June 30,
(Unaudited) 2000
------------ -----------
Liabilities and Stockholders' Deficit
Current:
Accounts payable $ 221,994 $ 101,166
Current portion of convertible bridge notes payable (Note 3) 496,661 -
Notes payable, related parties - current (Note 4, Note 5) 2,590,831 -
Current portion of capital lease obligations 17,469 26,627
Accrued expenses and note payable 50,718 49,419
----------- -----------
Total current liabilities 3,377,673 177,212
----------- -----------
Long-term liabilities:
Long-term portion of Convertible bridge notes payable (Note 3) 3,787,298 3,485,075
Notes payable, related parties (Note 4) 2,172,045 2,846,471
Long-term portion of capital lease obligations 5,086 16,737
----------- -----------
Total long-term liabilities 5,964,429 6,348,283
----------- -----------
Total liabilities 9,342,102 6,525,495
----------- -----------
Commitments and contingencies
Stockholders' deficit:
Common stock, no par value, 100,000,000 shares authorized,
13,056,597 and 11,902,669 shares issued and outstanding 28,597,176 22,748,871
Non-recourse promissory note - (500,000)
Deferred consulting expense - (1,944,739)
Unearned compensation - (67,500)
Accumulated deficit (37,293,254) (23,826,878)
----------- -----------
Total stockholders' deficit (8,696,078) (3,590,246)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 646,024 $ 2,935,249
============ ===========
See accompanying notes to unaudited consolidated financial statements.
F-2
Bion Environmental Technologies, Inc. and
Subsidiaries
Unaudited Consolidated Statements of Operations
Nine Months Ended March 31, 2001 2000
----------------------------- ------------ ------------
Revenues:
Soil sales $ 43,244 $ 78,771
System contract revenues - 16,000
------------ ------------
Total revenues 43,244 94,771
------------ ------------
Cost of goods and services sold:
Soil sales 363,720 241,803
System contract - 29,099
------------ ------------
Total cost of goods sold 363,720 270,902
------------ ------------
Gross loss (320,476) (176,131)
------------ ------------
Expenses:
General and administrative (including $7,450,765
and $3,041,735, non-cash, respectively) 9,536,871 4,308,455
Research and development 935,954 295,298
------------ ------------
Total expenses 10,472,825 4,603,753
------------ ------------
Loss from operations (10,793,301) (4,779,884)
------------ ------------
Other income (expense):
Interest expense (including $2,270,119 and
$1,372,829, non-cash, respectively) (2,273,787) (1,622,994)
Interest income 71,239 26,738
Loss on sale of mortgage receivable - (57,250)
Other income (expense), net 10,722 (7,037)
------------ ------------
Total other expense (2,191,826) (1,660,543)
------------ ------------
Net loss before cumulative effect of change in
accounting principle (12,985,127) (6,440,427)
Cumulative effect of change in accounting
principle (Note 3) (481,250) -
------------ ------------
Net loss and comprehensive loss $(13,466,377) $ (6,440,427)
============ ============
Basic and diluted loss per common share:
Net loss before cumulative effect of change
in accounting principle $ (1.00) $ (.59)
Loss on cumulative effect of change in
accounting principle (.04) -
------------ ------------
Loss per common share $ (1.04) $ (.59)
============ ============
Weighted-average number of common shares outstanding,
basic and diluted 12,897,064 10,963,021
============ ============
See accompanying notes to unaudited consolidated financial statements.
F-3
Bion Environmental Technologies, Inc. and
Subsidiaries
Unaudited Consolidated Statements of Operations
Three Months Ended March 31, 2001 2000
----------------------------- ------------ ------------
Revenues:
Soil sales $ 1,268 $ 23,509
System contract revenues - -
------------ ------------
Total revenues 1,268 23,509
------------ ------------
Cost of goods and services sold:
Soil sales 67,128 109,707
System contract - -
------------ ------------
Total cost of goods sold 67,128 109,707
------------ ------------
Gross loss (65,860) (86,198)
------------ ------------
Expenses:
General and administrative (including $2,369,500
and $294,474, non-cash, respectively) 3,043,500 1,020,832
Research and development 302,732 135,158
------------ ------------
Total expenses 3,346,232 1,155,990
------------ ------------
Loss from operations (3,412,092) (1,242,188)
------------ ------------
Other income (expense):
Interest expense (including $639,002 and
$367,310, non-cash, respectively) (640,447) (370,096)
Interest income 4,699 22,266
Other expense, net 25,109 (7,898)
------------ ------------
Total other expense (610,639) (355,728)
------------ ------------
Net loss before cumulative effect of change in
accounting principle (4,022,731) (1,597,916)
Cumulative effect of change in accounting
principle (Note 3) - -
------------ ------------
Net loss and comprehensive loss $ (4,022,731) $ (1,597,916)
============ ============
Basic and diluted loss per common share:
Net loss before cumulative effect of change
in accounting principle $ (.31) $ (.14)
Loss on cumulative effect of change in
accounting principle - -
------------ ------------
Net loss per common share $ (.31) $ (.14)
============ ============
Weighted-average number of common shares outstanding,
basic and diluted 13,067,217 11,822,388
============ ============
See accompanying notes to unaudited consolidated financial statements.
F-4
Bion Environmental Technologies, Inc. and
Subsidiaries
Unaudited Consolidated Statement of Stockholders' Deficit
Non-
Recourse Deferred Unearned Total
Nine Months Ended Common Stock Promissory Consulting Compen- Accumulated Stockholders'
March 31, 2001 Shares Amount Note Expense sation Deficit Deficit
---------------------------------------------------------------------------------------------------------------------------------
Balance, July 1, 2000 11,902,669 $22,748,871 $(500,000) $(1,944,739) $(67,500) $(23,826,878) $(3,590,246)
Beneficial value of
warrants exchanged for
common stock (Note 6) 1,139,016 2,173,460 - - - - 2,173,460
Issuance of stock options
and warrants for consulting
services (Note 5) - 22,832 - - - - 22,832
Modification of terms of
convertible bridge notes
(Note 3) - 70,079 - - - - 70,079
Warrants issued for consulting
services (Note 5) - 737,005 - (737,005) - - -
Deferred consulting expense
(Note 5) - - - 192,961 - - 192,961
Net loss for the quarter ended
September 30, 2000 - - - - - (4,265,076) (4,265,076)
---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 13,041,685 25,752,247 (500,000) (2,488,783) (67,500) (28,091,954) (5,395,990)
Beneficial value of
warrants exchanged for
common stock (Note 6) 6,112 5,722 - - - - 5,722
Issuance of stock options
and warrants for consulting
services (Note 5) - 25,532 - - - - 25,532
Issuance of common stock for
consulting services (Note 6) 25,000 42,175 - - - - 42,175
Deferred salaries expense - - - - 12,500 - 12,500
Deferred consulting expense
(Note 5) - - - 127,630 - - 127,630
Beneficial conversion feature
on convertible bridge notes
(Note 3) - 1,050,000 - - - - 1,050,000
Cancellation of warrants
previously issued for
services (Note 5) - - - 2,361,153 - - 2,361,153
Repurchase of warrants
previously issued for cash
and non-recourse promissory
note (Note 5) - (1,000,000) 500,000 - - - (500,000)
Net loss for the quarter ended
December 31, 2001 - - - - - (5,178,569) (5,178,569)
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 13,072,797 25,875,676 - - (55,000) (33,270,523) (7,449,847)
Issuance of stock options
and warrants for consulting
services (Note 5) - 2,730,000 - - - - 2,730,000
Deferred salaries expense - - - - 14,500 - 14,500
Cancellation of shares
previously issued for
services (16,200) (40,500) 40,500 -
Modification of terms of
convertible bridge notes 32,000 32,000
Net loss for the quarter ended
March 31, 2001 - - - - - (4,022,731) (4,022,731)
---------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 13,056,597 28,597,176 - - - (37,293,254) (8,696,078)
=================================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
F-5
Bion Environmental Technologies, Inc. and
Subsidiaries
Unaudited Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Nine Months Ended March 31, 2001 2000
------------------------------------------------ -------------- --------------
Operating activities:
Net loss $ (13,466,377) $ (6,440,427)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 57,016 43,783
Issuance of stock for services, compensation and
interest 69,175 527,269
Issuance of warrants for consulting expenses 2,230,000 144,133
Issuance of subscribed stock for services - (60,000)
Issuance of note payable for consulting services - 180,000
Issuance of convertible bridge note for management fee 245,000 -
Issuance of note payable for interest expense 766,118 -
Beneficial value of warrants exchanged for
common stock 2,179,182 -
Beneficial value of warrants issued - 1,477,370
Beneficial conversion feature amortized to interest
expense 262,500 656,027
Beneficial conversion feature recorded as
cumulative effect of change in accounting
principle 481,250 -
Amortization of debt discounts 1,241,501 551,138
Amortization of deferred consulting expense 320,591 194,474
Cancellation of warrants previously issued for
services 2,361,153 -
Issuance of options and warrants for consulting
services 45,664 -
Loss on sale of property and equipment 10,265 -
Loss on sale of mortgage assets - 57,250
Changes in operating assets and liabilities:
Accounts receivable and work-in-progress (6,695) 67,445
Prepaid expenses and other (110,170) (114,059)
Accrued interest receivable (24,970) (10,000)
Accounts payable 120,828 (338,750)
Accrued liabilities (498,701) (327,797)
-------------- --------------
Net cash used in operating activities (3,716,670) (3,392,144)
-------------- --------------
F-6
Bion Environmental Technologies, Inc. and
Subsidiaries
Unaudited Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Nine Months Ended March 31, 2001 2000
------------------------------------------------ -------------- --------------
Investing activities:
Refund of equipment returned 1,447 -
Proceeds from sale of computer equipment 250 -
Purchase of fixed assets (49,401) (7,546)
-------------- --------------
Net cash used in investing activities (47,704) (7,546)
-------------- --------------
Financing activities:
Proceeds from notes payable, related parties 871,000 -
Proceeds from notes payable - (199,388)
Proceeds from sale of mortgages - 202,750
Proceeds from notes payable - 5,703,882
Proceeds from stock issuances and subscriptions - 426,460
Proceeds from sale of warrants 502,700 547,905
Payments on note receivable (78,500) -
Payments on capital lease obligations (20,809) (38,653)
-------------- --------------
Net cash provided by (used in) financing activities 1,274,391 6,642,956
-------------- --------------
Net increase (decrease) in cash and cash equivalents (2,489,983) 3,243,266
Cash and cash equivalents, beginning of period 2,604,933 55,583
-------------- --------------
Cash and cash equivalents, end of period $ 114,950 $ 3,298,849
============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,668 $ 27,812
Supplemental disclosure of non-cash financing activities:
Warrants issued for deferred consulting services 1,233,218 2,333,687
Converted stock subscription to note payable 60,000
Converted common stock subscription into common stock 4,500
Converted note payable and interest into common stock 77,710
Repurchase of warrants with cash and cancellation of non-
recourse promissory note 1,000,000 -
Beneficial conversion feature on convertible bridge notes 1,050,000 -
Issuance (cancellation) of note receivable in
consideration for sale (cancellation) of warrants (500,000) 500,000
Warrants issued in connection with related party note
payable - 349,392
Warrants issued in connection with private placement 1,110,118
=============== ==============
See accompanying notes to unaudited consolidated financial statements.
F-7
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. Accounting Policies
The accompanying unaudited financial statements and disclosures reflect all
adjustments (all of which are normal recurring adjustments) in the ordinary
course of business, which in the opinion of management are necessary for a
fair presentation of the results of operations, financial positions, and cash
flow. The results of operations for the periods indicated are not necessarily
indicative of the results for a full year. It is suggested that these
condensed financial statements be read in conjunction with the audited
financial statements and accompanying notes for the year ended June 30, 2000.
Basic earnings (loss) per share are calculated as income (loss) available to
common stockholders divided by the weighted average number of common shares
outstanding. Diluted earnings per share are calculated as income (loss)
divided by weighted average number of common shares and the assumed conversion
of common stock equivalents. The common stock options and warrants listed at
Note 7 were not included in diluted earnings (loss) per share for the nine
months and three months ended March 31, 2001 and 2000, as the effect was
antidilutive due to the Company recording a loss for these periods.
2. Liquidity
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. Our independent CPA issued an opinion on
our June 30, 2000 financial statements, which included a paragraph emphasizing
the Company's ability to continue as a going concern. The Company incurred
losses totaling $13,466,377 during the nine months ended March 31, 2001
(including non-cash interest expense and other non-cash expenses of $2,270,119
and $7,450,765, respectively) and has a history of losses that has resulted in
an accumulated deficit of $37,293,254 at March 31, 2001.
During the year ended June 30, 2000, the Company successfully obtained
external financing through private placements of debt and equity and the sale
of its warrants. Additional external financing of $1,016,750 was obtained
during April 2001 through private placements of debt and the sale of its
warrants. The Company also received financing from affiliated companies (see
Note 5). The Company continues to explore sources of additional financing to
satisfy its current operational requirements, and is currently attempting to
place additional private placements of debt and equity under the most
favorable terms available.
F-8
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
There can be no assurance that any funds required during the next twelve
months or thereafter can be generated from operations or that if such required
funds are not internally generated that funds will be available from external
sources such as debt or equity financings or other potential sources. The lack
of additional capital resulting from the inability to generate cash flow from
operations or to raise capital from external sources, would force the Company
to substantially curtail or cease operations and would, therefore, have a
material adverse effect on its business. Further, there can be no assurance
that any such required funds, if available, will be available on attractive
terms or that they will not have a significantly dilutive effect on the
Company's existing shareholders.
To enhance the Company's longer term prospects, since January 2000, management
has committed significant resources to develop the next generation Bion system
design, which will include system monitoring and controls and possibly a clean
water recycling loop; expanded its research program for BionSoil; and retained
consultants to support these efforts. The expenditures related to these
efforts are anticipated to continue until the next generation design is
completed, which is anticipated during the fiscal year 2002. Management's
decision to pursue these efforts is the result of both the increasing
environmental and regulatory pressure on large dairy and swine farms and
positive results of limited market tests of BionSoil products. There can be no
assurance that the next generation Bion system design or the BionSoil program
will be successful or that sufficient capital will be available to fund
operations.
As noted earlier, there is substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability or
classification of asset carrying amounts or the amounts and classification of
liabilities that may result should the Company be unable to continue as a
going concern.
F-9
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
3. Convertible Bridge Notes Payable
On April 13, 2000, the Company completed a private offering of unsecured
convertible bridge notes payable (the "Notes") in the principal original
amount of $4,095,000. On February 24, 2001 the due date of $3,595,000 of
these Notes was extended to April 30, 2002.
Notes totaling an original principal amount of $500,000 for a current total,
net of discount, of $496,661, including accrued interest of $51,233, at March
31, 2001 is included in short-term convertible bridge notes with interest
accruing at 10% per annum and remaining due on July 1, 2001. At the
discretion of the Company, on maturity, these short-term Notes will either be
converted to common stock or repaid.
The balance of the original Notes totaling a principal of $3,595,000 for a
current total, net of discount, of $3,3401,215 and including accrued interest
of $380,728 at March 31, 2001 is included in long-term convertible bridge
notes with interest accruing at 10% per annum due on April 30, 2002.
In connection with the sale of the Notes, the Company issued stock purchase
warrants exercisable for the purchase of up to 1,213,500 shares of the
Company's common stock at $2.375 per share through December 31, 2004. The
warrants were originally valued at $1,110,118 using the Black Scholes
option-pricing model and are being amortized as additional interest expense
over the term of the Notes.
Additional convertible bridge notes have been issued to D2 in lieu of payment
for monthly management fees. For the calendar year 2000, $20,000 per month
was issued and for the calendar year 2001, $41,667 per month is to be issued.
On September 15, 2000, following acceptance by the note-warrant holders on
August 24, 2000, the Company amended the convertible bridge notes payable and
associated warrants as follows:
* adjusted the conversion rate to equal the market price of the Company's
common stock at the date of conversion;
* limited the conversion rate on the notes to $5.00 per share;
* adjusted the exercise price of the warrants from $2.375 to $2.00 per
share; and,
* provided for automatic conversion one year from date of note.
The reduction of the exercise price of the warrants to $2.00 per share,
resulted in an additional $70,079, of value attributable to the warrants. Such
amount has been reflected as an additional discount on the convertible bridge
notes payable.
F-10
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
On February 24, 2001, following acceptance by 87.80% of the holders of the
convertible bridge notes payable and associated warrants for the holders who
indicated acceptance the terms were amended as follows:
* extended the maturity date to April 30, 2002;
* requires automatic conversion of the notes (principal and interest) to
our common stock on April 29, 2002, if not previously converted or
paid;
* reduced the maximum conversion price from $5.00 to $2.50 per share;
* reduced the call price of the warrants to $3.50; and,
* reduced the warrant exercise price of the warrants from $2.00 to $1.50.
For holders who did not indicate acceptance:
* the existing July 1, 2001 maturity date remains unchanged;
* the maximum conversion price of $5.00 remains unchanged;
* the warrant exercise price of $2.00 remains unchanged;
* the notes will automatically convert to our common stock at June 30,
2001 if not previously paid or converted; and,
* reduces the call price of the warrants to $3.50.
The reduction of the exercise price of the warrants to $1.50 resulted in an
additional $32,000 of value attributable to the warrants. Such amount has
been reflected as an additional discount on the convertible bridge notes.
The Company recorded $636,556 and $174,000 of interest expense during the nine
months and three months ended March 31, 2001 respectively for the amortization
of the warrant discount. The unamortized warrant discount at March 31, 2001 of
a total of approximately $629,086 will be amortized to interest expense
through June 30, 2001 for the current portion of the notes and through April
30, 2002 for the long-term portion of the notes.
F-11
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
During the nine months ended March 31, 2001, the Company adopted Emerging
Issues Task Force Issue No. 00-27 ("EITF 00-27"), "Application of EITF Issue
No. 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, to Certain Convertible
Instruments", which is effective for all such instruments. This issue
clarifies the accounting for instruments with beneficial conversion features
or contingently adjustable conversion ratios. The Company has modified the
previous calculation of the beneficial conversion features associated with
previously issued Convertible Bridge Notes Payable. Based on further
clarification, the beneficial conversion feature is now calculated by
allocating the proceeds received in the financing to the convertible
instruments and to any detachable warrants issued in the transaction, and
measuring the intrinsic value based on the effective conversion price based on
the allocated proceeds. The previous calculation was based on a comparison of
the stated conversion price in the term of the instrument to the fair value of
the issuer's stock at the commitment date.
As a result of the issuance of EITF 00-27, effective October 1, 2000, the
Company has recorded an additional warrant discount on the Notes of $1,050,000
due to the beneficial conversion feature calculated on the intrinsic value of
the allocated proceeds received in the financing. The Company has recorded
$481,250 as a cumulative effect of change in accounting principle and $ 69,107
as interest expense on the Notes for the nine months ended March 31, 2001,
which represents the amortization of the warrant discount in that period. The
remaining discount of $237,143 will be amortized to interest expense through
June 30, 2001 for the current portion of the notes and through April 30, 2002
for the long-term portion of the notes.
Upon issuance of its capital stock in a public or private offering, with gross
proceeds greater than $5,000,000, the Company, at its option, must either
prepay the notes without penalty or convert the notes into shares of common
stock, at a conversion rate equal to the market price of the Company's common
stock on the date of conversion, not to exceed $2.50 per share.
Of the original convertible bridge notes payable issued, $50,000 was purchased
by a director and $100,000 was purchased by D2 Co., LLC (Note 5). An
additional $386,083 was accrued as management fees to D2 and added to the
balance of the convertible bridge notes payable.
F-12
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
4. Notes Payable, Related Parties
Notes payable, related parties, consisted of the following:
March 31, 2001
Unsecured notes payable to Mark A. Smith -
Rollover IRA, Kelly Smith - Rollover IRA
and Dublin Holding, Ltd., entities controlled
by a stockholder/director, principal amount of
$3,075,798 plus accrued interest of $507,779,
net of unamortized warrant discount of
$1,411,532. All outstanding principal and
accrued interest due is immediately
convertible into shares of the Company's
common stock at a price of $1.80 per share.
Upon certain events the company may convert
these notes into the number of shares into
which they would be convertible upon maturity.
During the nine months and three months ended
March 31, 2001, the Company amortized
$604,944 and $201,648 of the warrant
discount to interest expense. All outstanding
principal and interest, computed at 1% per
month, is due and payable on or before
December 31, 2002. $ 2,172,045
Unsecured notes payable to a stockholder,
principal amount of $308,114 plus accrued
interest of $68,183. All outstanding principal
and interest, computed at 1% per month, is due
and payable on or before December 31, 2001.
The outstanding principal and accrued interest
due, is convertible into shares of the
Company's common stock at a price of $1.80
per share, under certain agreed upon conditions. 376,297
F-13
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Unsecured notes payable to various stockholders,
principal amount of $1,150,833 plus accrued
interest of $186,089. All outstanding principal
and accrued interest at 1% per month is due
and payable on or before December 31, 2001.
Under the terms of the agreement, options or
warrants held by these stockholders may be
exercised, as repayment for the existing notes. 1,336,922
Unsecured notes payable to Southview,
principal amount of $871,000 plus accrued
interest of $6,612. All outstanding principal
and accrued interest at .67% per month is due
and payable on July 30, 2001. $371,000 of the
principal balance was repaid April 13, 2001.
See subsequent events. 877,612
---------------
Total notes payable - related parties 4,762,876
Less current maturities Note payable related parties 2,590,831
---------------
Total long-term debt - related parties $ 2,172,045
===============
Note: Total notes payable - related parties excludes convertible bridge
notes payable to related parties (see Note 3).
F-14
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
5. Related Party Transactions
The Company's equity and notes payable transactions with stockholders and
other related parties are included in Notes 3 and 4, respectively.
In December 1999 the Company entered into a three year agreement for
management and consulting services with D2 Co., LLC ("D2"). The agreement
required total annual consideration of $240,000 payable in common stock of
Bion or cash, at the option of the Company. In January 2000, D2 agreed to add
the monthly fees, aggregating to $386,083 at March 31, 2001, to the balance of
their convertible bridge notes payable (Note 3). In connection with the
agreement the Company granted warrants exercisable into 2,500,000 shares of
the Company's common stock at $2.50 per share through June 30, 2004 and D2
purchased 2,500,000 warrants exercisable at $1.75 per share for $500,000 cash
and a $500,000 promissory note. The warrants were valued at $2,333,687 using
the Black Scholes option-pricing model and have been reflected as deferred
consulting expense in the accompanying Consolidated Statement of Stockholders'
Deficit and were amortized to consulting expense.
During August 2000, the Company amended the management agreement with D2,
whereby the Company extended the consulting services for an additional year
and issued 1,500,000 additional warrants (1,000,000 warrants exercisable at
$3.50 per share and 500,000 exercisable at $6.00 share, both from January 1,
2002 until August 10, 2005). The Company valued the warrants issued under the
Black-Scholes option-pricing model and has added the value of $737,005 to the
deferred consulting expense. During the nine months ended March 31, 2001, the
Company recorded $320,591 to consulting expense as a result of amortizing the
deferred consulting expense.
In August 2000, the Company granted stock options and issued warrants to three
members of the Company's Board of Directors for additional services to be
performed by the directors. In total, options were granted to purchase 160,000
shares of common stock at $2.25 per share, exercisable immediately until
December 31, 2003 and warrants were issued to purchase 100,000 shares of
common stock at $2.375 per share, exercisable immediately until December 31,
2003. During the nine months and three months ended March 31, 2001, the
Company recorded $45,664 and $22,832 as consulting expense related to the
options and warrants.
Effective December 1, 2000, the Company amended the D2 management and
consulting agreement as follows:
* extended the term of the agreement by another 18 months;
* cancelled all outstanding warrants owned by D2 by agreeing to repay to
D2 $1,000,000 with $500,000 cash and cancellation of the existing
$500,000 non-recourse promissory note receivable and accrued interest;
F-15
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
* increased the annual base consideration from $240,000 to: calendar
year 2001 - $500,000; calendar year 2002 - $600,000; and calendar year
2003 - $750,000.
As a result of the cancellation of the D2 warrants, the Company reversed
unamortized the remaining deferred consulting expense of $2,361,153 to
consulting expense as of December 1, 2000, recorded a payable to D2 and
cancelled the non-recourse promissory note.
Effective January 8, 2001, Southview, Inc. ("Southview"), a corporation wholly
owned by David J. Mitchell, CEO and President of the Company, agreed to
purchase warrants to purchase 6,500,000 shares of the Company's common stock
for the sum of $500,000 cash payable on or before February 16, 2001. On
February 16, 2001, Southview closed the purchase. Warrants to purchase
3,250,000 shares of common stock are exercisable at $1.00 per share and
warrants to purchase another 3,250,000 shares of common stock are exercisable
at varying prices between $1.00 and $2.00 per share, depending on the market
price of the Company's common stock. All warrants purchased are exercisable
from February 16, 2001 to February 16, 2006. The 6,500,000 warrants were
valued using the Black-Scholes model at $2,730,000, $2,230,000 of which was
charged to expense in the three months ended March 31, 2001.
The Company reported in the December 31, 2000 financial statements a
subsequent event valuing the above mentioned 6,500,000 warrants at $1,600,000.
That valuation was adjusted to $2,730,000 for the 9 months ended March 31,
2001. The change in valuation was due to the use of more appropriate Black-
Scholes assumptions.
In February 2001, in accordance with the amended management and consulting
agreement with D2, the Company repaid $500,000 to D2 and cancelled a $500,000
unsecured promissory note for the cancellation of all of the D2 outstanding
warrants.
During the three months ended March 31, 2001 Southview advanced the Company
$871,000 under a promissory note accruing interest at 8% per annum and due on
July 30, 2001.
6. Stockholders' Deficit
Exchange of Warrants for Common Stock
Effective August 3, 2000, certain holders of Class X warrants and Class Z
warrants exchanged 165,198 Class X warrants and 5,425,440 Class Z warrants for
863,399 shares of restricted common stock. For the nine months and three
months ended March 31, 2001, the Company recorded $1,662,340 and $0,
respectively, as additional expense related to the beneficial value of the
consideration received over the value of warrants surrendered.
F-16
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Effective August 23, 2000, certain holders of the Class X warrants and Class Z
warrants, including certain officers, employees and stockholders exchanged, in
aggregate, 469,458 Class X warrants and 898,444 Class Z warrants for 275,617
shares of restricted common stock. For the nine months and three months ended
March 31, 2001, the Company recorded $511,120 and $0, respectively, as
additional expense related to the beneficial value of the consideration
received over the value of warrants surrendered.
On November 13, 2000, an unaffiliated investor purchased, pursuant to a
preemptive right which has since been terminated, warrants to purchase 24,550
shares of Bion common stock at $2.50 per share, exercisable from October 30,
2000 to June 30, 2004, for $2,700 cash.
On November 16, 2000, the Company issued 25,000 shares of common stock valued
at $42,175 to an individual in return for consulting services performed and
termination of a preemptive right.
On November 29, 2000, an individual holder exchanged 20,373 Class X Warrants
for 6,112 shares of restricted Bion common stock. The warrants had an
exercise price of $8.00 per share and were issued on January 1, 2000, with an
expiration date of December 31, 2001. For the nine months ended March 31,
2001, the Company recorded $5,722 as additional expense related to the
beneficial value of the consideration received over the value of warrants
surrendered.
On December 4, 2000, the Company hired George Bloom to fill the position of
Senior Technical Officer of Bion. As partial consideration for Mr. Bloom's
services, Bion granted him stock options to purchase 80,000 shares of common
stock exercisable at $1.50 per share until 12/31/03. One-third of these
options (26,667) vest on 12/4/00, 11/1/01 and 11/1/02, respectively.
On February 28, 2001, in accordance with the termination agreement with Carla
Seeliger, the Company vested 2,310 non-vested options and cancelled 9,231 non-
vested options. Additionally, the company will issue 800 shares of stock
earned as compensation and cancel 7,200 shares remaining as authorized but
unearned. Prior to termination, on February 1, 2001, an additional 4,000
shares were earned as compensation.
On February 28, 2001, in accordance with the termination agreement with
Barbara Greenspahn, the Company vested 2,886 non-vested options and cancelled
11,540 non-vested options. Additionally, the company will issue 1,000 shares
of stock earned as compensation and cancel 9,000 shares remaining as
authorized but unearned.
On March 1, 2001, the Company hired Gerard W. Ferrentino to fill the position
of Director of Product Development of BionSoil. As partial consideration for
Mr. Ferrentino's services, the Company granted him stock options to purchase
40,000 shares of common stock exercisable at $1.50 per share (which is greater
than the market value of the shares on March 1, 2001) until 12/31/03.
One-third (13,333) of theses options vests on 3/1/01, 12/1/01 and 9/1/02,
respectively.
F-17
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
7. Capital Structure
Because the Company has a relatively complex capital structure the following
capital structure details are set forth:
Common Stock
As of May 9, 2001 the Company had 13,056,597 shares of common stock issued and
outstanding.
Options
On August 10, 2000, the Company initiated an exchange offer with holders
(current and former employees and consultants) of certain classes of options
issued under the Company's existing option plans, which was completed on
August 31, 2000. In aggregate, the Company issued 404,107 new options,
exercisable at $2.00 per share until December 31, 2002 and canceled 775,772
existing options with various exercise prices between $3.60 to $13.50 and
expiration dates from October 31, 2000 to June 30, 2003. There are no
immediate accounting implications related to the option exchange, as the
Company's stock price was less than the new exercise price as of March 31,
2001. The Company will monitor the changing stock price each quarter and
record additional compensation expense if applicable.
F-18
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
As of May 9, 2001, the Company had the following options outstanding:
Options Vested
Exercise Price Shares Expiration
-------------- --------- ----------
Directors $ 1.55 11,112 08/19/02
Plan $ 2.04 11,112 08/19/02
$ 2.91 11,112 11/17/03
$ 1.61 10,000 08/04/04
$ 2.25 10,000 12/20/03
---------
Total Directors 53,336
=========
Exercise Price Shares Expiration
-------------- --------- ----------
Employee $ 1.50 35,500 05/02/03
Plans $ 1.50 27,503 12/31/03
$ 2.00 284,661 12/31/02
$ 2.20 106,667 12/31/03
$ 2.25 160,000 12/31/03
$ 2.25 474,000 (1) 10/15/02
$ 2.50 359,445 06/30/03
$ 2.70 55,556 12/31/02
---------
Total Employees 1,503,332
=========
Total (Directors
and Employees) 1,556,668
=========
(1) Each holder has agreed to exercise these options with outstanding
promissory notes of the Company under certain conditions.
F-19
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Options Non-Vested
Exercise
Price Shares Vesting Dates Expiration
-------- --------- ----------------- ---------------
Employee Plans $ 1.50 71,000 03/31/01-10/31/02 05/02/05
$ 1.50 54,997 03/31/01-10/31/02 12/31/05
$ 2.00 49,693 11/19/00-10/31/02 12/31/02
$ 2.50 75,000 03/01/01-06/30/02 2/31/01-06/30/03
$ 2.20 53,333 11/01/01-11/01/02 12/31/03
---------
Total 304,023
---------
Total Vested
and Non-Vested 1,860,691
=========
F-20
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Warrants
As of May 9, 2001, the Company had the following warrants outstanding:
Warrant Shares Expiration Date Exercise Price
------- --------- --------------- --------------
Class AA.01 15,000 (1) $ 5.40
Class D2C-W 24,550 (2) $ 2.50
Class G-5.2 919 (3) $ 2.70
Class G-6 3,148 (4) $ 5.40
Class H-1 11,112 (5) $ 4.50
Class H-2 16,112 (6) $ 2.70
*Class H-16 38,000 (7) $ 2.25
Class J-1 150,000 (8) $ 2.00
Class J-1A 1,254,450 (9) $ 1.50
Class J-1B 300,450 (10) $ 1.50
Class J-2 165,000 (11) $ 2.375
Class SV-1 3,250,000 (12) $ 1.00
Class SV-2 3,250,000 (13) $ 1.00-2.00
Class X 481,552 (14) $ 8.00
--------- -----------
8,960,293 $ 1.00-8.00
========= ===========
*Holder has agreed to exercise by cancellation of promissory note of the
Company on certain conditions.
1. Class AA.01 Warrants may be exercised to purchase 15,000 shares of
Common Stock for a period beginning August 12, 1999 and ending
December 31, 2001.
2. Class D2C-W Warrants may be exercised to purchase 24,550 shares of
Common Stock for a period beginning October 30, 2000 and ending
June 30, 2004.
3. Class G-5.2 Warrants may be exercised to purchase 919 shares of
Common Stock for a period beginning September 13, 1996 and ending
September 12, 2001.
4. Class G-6 Warrants may be exercised to purchase 3,148 shares of
Common Stock for a period beginning April 21, 1997 and ending
April 20, 2002.
F-21
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
5. Class H-1 Warrants may be exercised to purchase 11,112 shares of
Common Stock for a period beginning August 21, 1996 and ending
August 20, 2001.
6. Class H-2 Warrants may be exercised to purchase 16,112 shares of
Common Stock for a period beginning August 21, 1996 and ending
August 20, 2001.
7. Class H-16 Warrants may be exercised to purchase 38,000 shares
of Common Stock for a period beginning January 1, 2000 and ending
December 31, 2001.
8. Class J-1 Warrants may be exercised to purchase 150,000 shares of
Common Stock for a period beginning March 31, 2000 and ending
December 31, 2004.
9. Class J-1A Warrants may be exercised to purchase 1,254,450 shares of
Common Stock for a period beginning March 31, 2000 and ending
December 31, 2004.
10. Class J-1B Warrants may be exercised to purchase 300,450 shares of
Common Stock for a period beginning April 13, 2001 and ending
December 31, 2005.
11. Class J-2 Warrants may be exercised to purchased 165,000 shares of
Common Stock for a period beginning March 31, 2000 and ending
December 31, 2004.
12. Class SV-1 Warrants may be exercised to purchased 3,250,000 shares of
Common Stock for a period beginning February 16, 2001 and ending
February 16, 2006.
13. Class SV-2 Warrants may be exercised to purchased 3,250,000 shares of
Common Stock for a period beginning February 16, 2001 and ending
February 16, 2006.
14. Class X Warrants may be exercised to purchase 481,552 shares of
Common Stock for a period beginning January 1, 2000 and ending
December 31, 2001.
At May 9, 2001, there were warrants exercisable to purchase 8,960,293 shares
of Common Stock.
F-22
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Convertible Notes
As of March 31, 2001 the following notes can be converted, in whole or in
part, at the holders' option into shares of Common Stock at a price of $1.80
per share:
Underlying
Shares of Stock Shares if Held
Note Amount (at 03/31/01) to Maturity
----------- --------------- --------------
Dublin Holding, Ltd. $ 2,988,452 1,660,251 2,046,081
Mark A. Smith
Rollover IRA 319,344 177,413 218,643
Kelly Smith Rollover
IRA 275,781 153,212 188,817
H. Northrop 376,297 209,054 224,460
----------- --------- ---------
TOTAL $ 3,959,874 2,199,930 2,678,001
=========== ========= =========
Holders of the above convertible notes have agreed to convert under certain
conditions.
The Company has $1,713,219 (Principal and Interest) in current notes due on
December 31, 2001 (including the H. Northrop note above). Holders of
$1,336,922 of the current notes have agreed to exercise outstanding
options/warrants under certain conditions. These notes are held by seven
individuals, including Jon Northrop, Executive V.P., and Jere Northrop, CTO.
Convertible Bridge Notes
On April 13, 2000 the Company completed a private offering of unsecured
convertible bridge notes payable (the "Notes") in the principal amount of
$4,095,000. See Note 3.
On April 13, 2001 the Company completed an additional private offering of
unsecured convertible bridge notes payable in the principal amount of
$1,001,000. See Note 10 - Subsequent Events.
Management fee of $365,000 and accrued interest of $21,083 on this balance has
been issued as convertible bridge notes in lieu of payment to D2 as of March
31, 2001.
F-23
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
8. Office Lease Agreement
On August 28, 2000, the Company entered into a lease agreement for office
facilities in New York City. The term of the lease is eleven years and the
aggregate cost is approximately $2.8 million. The Company also entered into a
sublease for a portion of the facilities with an unrelated party for an
aggregate rent of approximately $576,000 over the eleven-year term. The
Company entered into an additional sublease agreement for a portion of the
facilities with an unrelated party for an aggregate rent of $30,000 over 5
months beginning January 1, 2001. The sublease can be renewed at the
discretion of the Company.
9. Segment Information
The Company operates in two business segments as follows:
Systems: The Company designs, markets, installs and manages waste, wastewater
and storm water systems, primarily in the agricultural and food processing
industries.
Soil: The Company produces and markets BionSoil products such as organic
fertilizers, potting soils and soil amendments which are produced from the
nutrient rich Bion Solids harvested from certain types of agricultural systems
installed on large dairy and hog farms.
The Company's reportable operating segments have been determined in accordance
with the Company's internal management structure, which is organized based on
operating activities. The accounting policies of the operating segments are
the same as those described in the summary of accounting policies. The Company
evaluates performance based upon several factors, of which the primary
financial measure is segment-operating results.
F-24
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended
March 31, 2001 2000
----------------------------------------------------------------------
Revenues:
Soil $ 43,244 $ 78,771
Systems - 16,000
----------------------------------------------------------------------
$ 43,244 $ 94,771
======================================================================
Operating Loss:
Soil $ 4,902,443 $ 2,133,008
Systems 5,890,858 2,646,876
----------------------------------------------------------------------
$ 10,793,301 $ 4,779,884
======================================================================
Depreciation and amortization:
Soil $ 35,960 $ 37,405
Systems 21,056 6,378
----------------------------------------------------------------------
$ 57,016 $ 43,783
======================================================================
Expenditures for additions and
long-lived assets:
Soil $ 18,714 $ 4,437
Systems 29,240 3,109
----------------------------------------------------------------------
$ 47,954 $ 7,546
======================================================================
Three Months Ended
March 31, 2001 2000
----------------------------------------------------------------------
Revenues:
Soil $ 1,268 $ 23,509
Systems - -
----------------------------------------------------------------------
$ 1,268 $ 23,509
======================================================================
Operating Loss:
Soil $ 1,515,097 $ 587,093
Systems 1,896,995 655,095
----------------------------------------------------------------------
$ 3,412,092 $ 1,242,188
======================================================================
F-25
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Depreciation and amortization:
Soil $ 11,843 $ 11,955
Systems 7,628 2,368
----------------------------------------------------------------------
$ 19,471 $ 14,323
======================================================================
Expenditures for additions and
long-lived assets:
Soil $ 10,575 $ 4,437
Systems 10,575 3,109
----------------------------------------------------------------------
$ 21,150 $ 7,546
======================================================================
10. Subsequent Events
On April 13, 2001, the Company received proceeds of $1,001,000 in long-term
convertible bridge debt and $15,750 in equity for the purchase of 300,450
warrants. The value of the warrants of $100,000 will be recorded as a warrant
discount on the convertible bridge notes payable, to be amortized over the
life of the notes.
On April 13, 2001, the Company paid $371,000 on the Promissory Note due
Southview.
On April 15, 2001, in accordance with the termination agreement with Craig
Scott the expiration date on 187,445 vested was extended to 10/15/02.
F-26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements and accompanying notes.
Going Concern
-------------
The financial statements contained in this Form 10-QSB show $28,597,176
being invested in or contributed to Bion as of March 31, 2001. We have a
shareholder deficit of $8,696,078, accumulated deficit of $37,293,254, limited
current revenues and substantial current operating losses. (Note that
$4,762,876 of the related parties notes payable, approximately 55% of the
negative net worth, is convertible into our restricted and legended Common
Stock.) Our operations are not currently profitable; therefore, readers are
further cautioned that our continued existence is uncertain if we are not
successful in obtaining outside funding in an amount sufficient for us to meet
our operating expenses at our current level. Management plans to continue
raising additional capital to fund operations until Bion system and
BionSoil(R) sales are sufficient to fund operations.
Bion NMS system and BionSoil(R) sales require additional expenditures.
Our system sales require additional personnel and significant capital
expenditures, which will generally increase our overhead. BionSoil(R) product
sales and marketing require wholesaler and retailer distribution networks
(which may require permitting in some locations) and additional expenditures
for personnel and equipment to harvest, process, package, sell and deliver our
products. We are in the process of obtaining the necessary additional funding
from independent third parties and related parties. Although management
believes that there is a reasonable basis to remain optimistic, no assumption
can be made that we will be able to attain profitable operations and/or raise
sufficient capital to sustain operations.
The level of funding required to accomplish our objectives is ultimately
dependent on the success of our research and development efforts, which at
this time, are unknown. Currently, we estimate that an additional $2,000,000
will be required during the period ending September 30, 2001. We anticipate
spending $600,000 on research and development efforts and the balance on
compensation and general business overhead.
Financial Condition and Results of Operations
---------------------------------------------
Liquidity and Capital Resources
Our Consolidated Balance Sheet as of March 31, 2001 shows Current assets
of $281,809 and Total assets of $646,024. Our current and total liabilities
as of March 31, 2001 are $3,377,673 and $9,342,102, respectively. Total
assets decreased by $2,289,225 from June 30, 2000. The change is primarily
attributable to the $2,489,983 decrease in cash and cash equivalents primarily
3
as a result of net cash used in operating activities. Our current ratio is
0.08:1 as of March 31, 2001 as compared to 15.1:1 as of June 30, 2000. The
reduction in the current ratio results from the classification of a portion of
the convertible bridge notes payable of $496,661 as a current liability, the
classification of $1,713,219 of notes payable to related parties as current as
the notes are due on December 31, 2001, and the $877,612 due Southview also
classified as notes payable to related parties. Deposits and other assets
increased $126,872 during the nine months ended March 31, 2001 of which
$120,561 was for a letter of credit on the New York City office lease.
Total liabilities increased by $2,816,607 in the nine month period ended
March 31, 2001. This increase was due to an addition to the convertible
bridge notes and related parties notes payable of $766,118 for accrued
interest, a further increase on the convertible bridge notes of $263,250 for
management fee and interest due D2, an increase on the amortization of the
debt discount by $1,241,501, the amortization of the beneficial conversion
feature increasing the convertible bridge notes by $262,500, the beneficial
conversion feature recorded as cumulative effect of change in accounting
increasing the convertible bridge notes by $481,250, an increase of $877,612
due to Southview, and accounts payable increasing by $120,828. These amounts
were reduced by an additional discount of $1,050,000 on the convertible bridge
notes and a reduction in the convertible bridge notes of $102,079 due to the
change in the exercise price of the related warrants.
Our Stockholders' Equity account reflects a total of 1,170,128 shares of
restricted common stock issued in the nine months ended March 31, 2001. We
issued the restricted common stock primarily in the exchange of 634,656 Class
X warrants and 6,323,884 Class Z warrants. We valued the warrants in
accordance with the Black-Scholes model and recorded $2,173,460 of additional
non-cash expense related to the beneficial value of the consideration received
over the value of the warrants surrendered. We cancelled 16,200 shares of
common stock due as unearned compensation to employees.
We believe that during the balance of the fiscal year ending June 30,
2001, we will not generate sufficient operating cash flow to meet our needs
without additional external financing. We are in the process of obtaining
such financing but there is no assurance that our efforts 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.
Results of Operations
---------------------
Comparison of the Nine Months Ended March 31, 2001 with the Nine Months Ended
March 31, 2000
We recorded $43,244 of BionSoil(R) sales during the nine months ended
March 31, 2001. This compares to $78,771 BionSoil(R) sales during the nine
months ended March 31, 2000. The decrease of $35,527 is attributable to lower
BionSoil(R) sales to customers, as a larger quantity of BionSoil(R) was used
for testing and turf trials. We have been in the design and testing phase of
the second-generation system that will include computerized real-time
4
monitoring and controls and will also reduce the size of the system. We have
now moved to the 2nd phase of the second generation system with the
installation of the fully contained system. The focus on the new system
design has had a short-term negative effect on system sales. Cost of goods
sold increased $92,818 for the soil sales primarily as a result of payments to
subcontractors ($68,266) and equipment rental ($51,053) for the harvest of
materials not sold during the nine months ended March 31, 2001.
We incurred gross losses of $320,476 and $176,131 during the nine months
ended March 31, 2001 and 2000, respectively. The increase in gross loss
results from the inefficiencies associated with the disproportionate
relationship between harvesting costs and revenues associated with a
technological growth-oriented company. We believe that this trend will
reverse as revenues increase.
General and administrative expenses increased $5,228,416 (121%) for the
nine months ended March 31, 2001 as compared to the nine months ended March
31, 2000. The increase is primarily attributable to the excess non-cash
expense related to the amortization of the remaining deferred consulting
expense to D2 and consulting expense to Southview in the nine months ended
March 31, 2001 for a total increase of $4,911,709 compared to the consulting
fees incurred in the nine months ended March 31, 2000 and the excess amount of
the beneficial value of the warrants surrendered in connection with
Warrant/stock exchange transactions in the nine months ended March 31, 2001
over the intrinsic value of the D2 warrants purchased in the nine months ended
March 31, 2000 ($701,856), offset by lower investor relations expense in the
nine months ended March 31, 2001 ($410,284).
Research and development costs increased $640,656 during the nine months
ended March 31, 2001. This increase is due to the design and testing of the
second-generation system and increased BionSoil(R) research and testing
expenses.
Interest expense increased $650,793, of which $897,290 was for non-cash
expenses associated with certain promissory notes, $262,500 additional
interest required under the change of accounting principle resulting from the
issuance of EITF 00-27 (see Note 3 to the financial statements), partially
offset by other individually insignificant decreases.
We had an increase in interest income ($44,501) due to higher average
cash balances associated with cash flow generated from financing activities.
We sold the two mortgages we received from the LTLK Defined Benefit Plan
during the nine months ended March 31, 2000. We incurred a non-recurring loss
of $57,250 on the sale of the two mortgages.
The net loss and comprehensive loss increased $7,025,950 (109%) during
the nine months ended March 31, 2001. The increase primarily related to the
increase of $5,228,416 of general and administrative expenses (for the
amortization of the remaining deferred consulting expense and the issuance of
stock and warrants associated with various transactions discussed above), the
5
increase of $650,793 of interest expense, the $640,656 increase in Research
and Development expense, and the $481,250 cumulative effect of change in
accounting principle resulting from the issuance of EITF 00-27 incurred during
the nine months ended March 31 2001, partially offset by other individually
insignificant decreases.
Basic and diluted loss per common share is increased by $0.45, from $0.59
to $1.04. The increase in the loss per share is attributable to the
aforementioned increase in the net loss.
Comparison of the Three Months Ended March 31, 2001 with the Three Months
Ended March 31,2000
We recorded $1,268 of BionSoil(R) sales during the three months ended
March 31, 2001. This compares to $23,509 BionSoil(R) sales during the three
months ended March 31, 2000. We have been in the design and testing phase of
the second-generation system that will include computerized real-time
monitoring and controls and will also reduce the size of the system. The
focus on the new system design has had a short-term negative effect on system
sales. Cost of goods sold decreased $42,579 primarily as a result more testing
and research of BionSoil(R).
We incurred gross losses of $65,860 and $86,198 during the three months
ended March 31, 2001 and 2000, respectively. The gross losses result from
inefficiencies associated with the disproportionate relationship between cost
of good sold and revenues associated with a technological growth-oriented
company. We believe that this trend will reverse as revenues increase.
General and administrative expenses increased $2,022,668 (198%) for the
three months ended March 31, 2001 as compared to the three months ended March
31, 2000. Of the increase, consulting fee increased by $2,469,396 and rent
increased by a total of $45,319. These increases were partially offset by a
decrease in compensation and supplemental compensation for a total of 177,991.
Research and development costs increased $167,574 during the three months
ended March 31, 2001. This increase is due to the design and testing of the
second-generation system and increased BionSoil(R) research and testing
expenses.
Interest expense increased $270,351 due to the expenses of amendment of
the first parties note payable plus interest on convertible notes in the three
months ended March 31, 2000 exceeding the interest on convertible notes in the
three months ended March 31, 2001. Non-cash interest expense for the three
months ended March 31, 2001 and 2000 was $639,002 and $367,310, respectively.
We had a decrease in interest income ($17,567) due to lower cash balances
associated with cash flow generated from financing activities.
The net loss and comprehensive loss increased $2,424,815 (152%) during
the three months ended March 31, 2001. The increase primarily related to
increase in general and administrative expenses of $2,022,668, increase in
research and development costs of $167,574, and increased in interest expense
of $270,351.
6
Basic and diluted loss per common share is increased by $0.17 from $0.14
to $0.31. The increase in loss per share is attributable to the
aforementioned increase in net loss.
Seasonality
-----------
Our system sales and installation business is not seasonal in nature,
except to the extent that weather conditions at certain times of the year in
certain geographic areas may temporarily affect construction and installation
of our systems. However, our projects and markets are geographically spread
so that when weather conditions limit construction activity in southern market
areas, projects in northern markets can proceed, and when northern area
weather is inappropriate, southern projects can proceed. BionSoil(R) and
BionSoil(R) product sales are expected to exhibit a somewhat seasonal sales
pattern with emphasis on spring, summer and fall sales.
7
Impact of Recently Issued Accounting Pronouncements
---------------------------------------------------
During the three months ended December 31, 2000 we adopted Emerging
Issues Task Force Issue No. 00-27 ("EITF 00-27"), "Application of EITF Issue
No. 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingency Adjustable Conversion Ratios, to Certain Convertible
Instruments", which is effective for all such instruments, and which clarifies
the accounting for instruments with beneficial conversion features or
contingently adjustable conversion ratios. We have modified previous
calculations of the beneficial features associated with previously issued
Convertible Bridge Notes Payable.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," required companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair market value. Gains or losses
resulting from changes in the values of those derivatives are accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133 was effective for the Company's 2000 fiscal
year. The adoption of SFAS No. 133 will have no material effect on our
financial statements.
Inflation and Changes in Prices
-------------------------------
We are unable to predict the impact of inflation on our activities;
however, at this time we believe it is minimal.
8
PART II
ITEM 1. Legal Proceedings
We are not a party to any pending legal proceeding that is material to
our business.
ITEM 2. Changes in Securities and Use of Proceeds
The following securities were sold in the quarter ended March 31, 2001
without registration under the Securities Act of 1933, as amended:
Warrants
------------
We issued 3,250,000 SV-1 Warrants on February 16, 2001 to Southview to
purchase restricted and legended stock at $1.00 per share. These warrants are
exercisable from February 16, 2001 to February 16, 2006. The warrants were
purchased for $250,000 of cash.
We issued 3,250,000 SV-1 Warrants on February 16, 2001 to Southview to
purchase restricted and legended stock at prices ranging between $1.00-$2.00
per share. These warrants are exercisable from February 16, 2001 to February
16, 2006. The warrants were purchased for $250,000 of cash.
Convertible Notes
-----------------
We added $125,000 of management fee due D2 to the convertible bridge
notes listed in Note 3 of the financial statements during the three months
ended March 31, 2001.
The securities, which were issued pursuant to the transactions set forth
above, were issued in reliance upon the exemptions from registration afforded
by Sections 3(b), 4(2), and/or other provisions of the Securities Act of 1933,
as amended. Each of the persons to whom such securities were issued made an
informed investment decision based upon negotiation with us and was provided
with appropriate offering documents and/or access to material information
regarding Bion. We believe that such persons had knowledge and experience in
financial and business matters such that they were capable of evaluating the
merits and risks of the acquisition of our Common Stock in connection with
these transactions. All certificates representing such common shares bear an
appropriate legend restricting the transfer of such securities, except in
accordance with the Securities Act of 1933, as amended, and stop transfer
instructions have been provided to our transfer agent in accordance therewith.
9
ITEM 3. Defaults Upon Senior Securities. None
ITEM 4. Submission of Matters to a Vote of Security Holders. None
ITEM 5. Other Information.
On March 1, 2001 the Company hired David Fuller to fill the position
of Principal Accounting Officer. As partial consideration for Mr. Fuller's
services, the Company subsequently granted him stock options on May 2, 2001,
to purchase 2,500 shares of common stock exercisable at $1.50 per share (which
is greater than the market value of the shares on May 2, 2001) until May 2,
2005. One-third (833) of theses options vests on May 2, 2001, one-third (833)
on May 2, 2002 and one-third (833) on May 2, 2003.
On May 2, 2001 the Company hired Bart Chilton to fill the position of
Senior Vice-President. As partial consideration for Mr. Chilton's services,
the Company granted him stock options to purchase 100,000 shares of common
stock exercisable at $1.50 per share (which is greater than the market value
of the shares on May 2, 2001) until May 2, 2005. One-third (33,333) of theses
options vests on May 2, 2001, one-third (33,333) on May 2, 2002 and one-third
(33,333) on May 2, 2003. Prior to his employment, Mr. Chilton was granted
options for 10,000 shares of common stock as of March 10, 2001 as part of as
consulting arrangement exercisable at $1.50 per share (which is greater than
the market value of the shares on March 10, 2001) until March 10, 2005.
One-third (3,333) of theses options vests on March 10, 2001, one-third (3,333)
on March 10, 2002 and one-third (3,333) on March 10, 2003.
ITEM 6. Exhibits and Reports on Form 8-K.
Index to Exhibits
-----------------
Exhibits
--------
None
Reports on Form 8-K
-------------------
The following current reports on Form 8-K were filed during the three
months ended March 31, 2001.
Form 8-K dated February 6, 2001: Items 5 & 7
10
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
Bion Environmental Technologies, Inc.
By: /s/ David Fuller
David Fuller, Principal Accounting Officer
Dated: May 14, 2001
11