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 December 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.
------------------------------------------------------
(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 N.Y., N.Y. 10022
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 758-6622
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No___
The number of shares outstanding of registrant's classes of common stock, as
of February 6, 2002: Common Stock, No Par Value, 52,671,128.
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 Sheet as of December 31, 2001
(unaudited) F-1 - F-2
Unaudited Consolidated Statements of Operations for
the Six Months Ended December 31, 2001 and 2000 F-3
Unaudited Consolidated Statements of Operations for
the Three Months Ended December 31, 2001 and 2000 F-4
Unaudited Consolidated Statement of Changes in
Stockholders' Deficit for the Six Months Ended
December 31, 2001 F-5
Unaudited Consolidated Statements of Cash Flows for
the Six Months Ended December 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 Sheet
December 31,
2001
(Unaudited)
------------
Assets
Current:
Cash and cash equivalents $ 47,264
Accounts receivable, less allowance of $2,000
for possible losses 11,388
Prepaid expenses 8,333
---------
Total current assets 66,985
---------
Property and equipment:
Furniture and equipment 351,989
Computer equipment 75,845
Leasehold Improvement 30,174
---------
458,008
Less accumulated depreciation 298,536
---------
Net property and equipment 159,472
---------
Other assets:
Note receivable 80,341
Patents, net of accumulated amortization of $23,193 31,753
Deposits and other 135,859
---------
Total other assets 247,953
---------
Total Assets $ 474,410
=========
See accompanying notes to unaudited consolidated financial statements.
F-1
Bion Environmental Technologies, Inc. and
Subsidiaries
Consolidated Balance Sheet
December 31,
2001
(Unaudited)
------------
Liabilities and Stockholders' Deficit
Current:
Accounts payable $ 306,524
Convertible bridge notes payable (Note 3) 7,193,402
Notes payable, related parties - current (Note 4, Note 5) 5,874,162
Current portion of capital lease obligations 5,156
Accrued expenses 51,678
-----------
Total current liabilities 13,430,922
-----------
Long-term liabilities:
Long-term portion of capital lease obligations 1,974
-----------
Total long-term liabilities 1,974
-----------
Total liabilities 13,432,896
-----------
Commitments and contingencies
Stockholders' deficit:
Common stock, no par value, 100,000,000 shares authorized,
13,531,930 shares issued and outstanding 31,207,606
Accumulated deficit (44,166,092)
-----------
Total stockholders' deficit (12,958,486)
-----------
Total Liabilities and Stockholders' Deficit $ 474,410
============
See accompanying notes to unaudited consolidated financial statements.
F-2
Bion Environmental Technologies, Inc. and
Subsidiaries
Unaudited Consolidated Statements of Operations
Six Months Ended December 31, 2001 2000
----------------------------- ------------ ------------
Revenues:
Soil sales $ 28,612 $ 41,976
System contract revenues - -
------------ ------------
Total revenues 28,612 41,976
------------ ------------
Cost of goods and services sold:
Soil sales 242,676 296,592
System contract - -
------------ ------------
Total cost of goods sold 242,676 296,592
------------ ------------
Gross loss (214,064) (254,616)
------------ ------------
Expenses:
General and administrative (including $500,629
and $5,081,265, non-cash, respectively) 1,713,505 6,493,370
Research and development 397,167 633,222
------------ ------------
Total expenses 2,110,672 7,126,592
------------ ------------
Loss from operations (2,324,736) (7,381,208)
------------ ------------
Other income (expense):
Interest expense (including $2,539,766 and
$1,631,117, non-cash, respectively) (2,540,559) (1,633,340)
Interest income 10,693 66,541
Other income (expense), net 68,610 (14,388)
------------ ------------
Total other expense (2,461,256) (1,581,187)
------------ ------------
Net loss before cumulative effect of change in
accounting principle (4,785,992) (8,962,395)
Cumulative effect of change in accounting
principle - (481,250)
------------ ------------
Net loss and comprehensive loss $ (4,785,992) $ (9,443,645)
============ ============
Basic and diluted loss per common share:
Net loss before cumulative effect of change
in accounting principle $ (.36) $ (.70)
Loss on cumulative effect of change in
accounting principle - (.04)
------------ ------------
Loss per common share $ (.36) $ (.74)
============ ============
Weighted-average number of common shares outstanding,
basic and diluted 13,183,221 12,813,383
============ ============
See accompanying notes to unaudited consolidated financial statements.
F-3
Bion Environmental Technologies, Inc. and
Subsidiaries
Unaudited Consolidated Statements of Operations
Three Months Ended December 31, 2001 2000
------------------------------ ------------ ------------
Revenues:
Soil sales $ 15,610 $ 24,324
System contract revenues - -
------------ ------------
Total revenues 15,610 24,324
------------ ------------
Cost of goods and services sold:
Soil sales 123,586 207,686
System contract - -
------------ ------------
Total cost of goods sold 123,586 207,686
------------ ------------
Gross loss (107,976) (183,362)
------------ ------------
Expenses:
General and administrative (including $276,700
and $2,632,012, non-cash, respectively) 867,496 3,329,815
Research and development 183,698 250,903
------------ ------------
Total expenses 1,051,194 3,580,718
------------ ------------
Loss from operations (1,159,170) (3,764,080)
------------ ------------
Other income (expense):
Interest expense (including $1,421,048 and
$949,264, non-cash, respectively) (1,421,347) (950,239)
Interest income 1,494 24,588
Other income (expense), net 27,252 (7,588)
------------ ------------
Total other expense (1,392,601) (933,239)
------------ ------------
Net loss before cumulative effect of change in
accounting principle (2,551,771) (4,697,319)
Cumulative effect of change in accounting
principle (Note 3) - (481,250)
------------ ------------
Net loss and comprehensive loss $ (2,551,771) $ (5,178,569)
============ ============
Basic and diluted loss per common share:
Net loss before cumulative effect of change
in accounting principle $ (.19) $ (.36)
Loss on cumulative effect of change in
accounting principle - (.04)
------------ ------------
Net loss per common share $ (.19) $ (.40)
============ ============
Weighted-average number of common shares outstanding,
basic and diluted 13,298,050 13,056,039
============ ============
See accompanying notes to unaudited consolidated financial statements.
F-4
Bion Environmental Technologies, Inc. and
Subsidiaries
Unaudited Consolidated Statement of Stockholders' Deficit
Total
Six Months Ended Common Stock Accumulated Stockholders'
December 31, 2001 Shares Amount Deficit Deficit
------------------------------------------------------------------------------------------------------------------
Balance, July 1, 2001 13,062,324 $30,218,337 $(39,380,100) $(9,161,763)
Exercise of stock options (Note 6) 41,177 70,000 70,000
Issuance of stock options
and warrants for
consulting services (Note 6) 77,412 77,412
Issuance of stock for
Convertible bridge note (Note 6) 50,330 112,740 112,740
Adjustment for variable options (3,469) (3,469)
Net loss for the quarter ended
September 30, 2001 - - (2,234,221) (2,234,221)
------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2001 13,153,831 30,475,020 (41,614,321) (11,139,301)
Issuance of stock for
Management fee 234,199 250,000 250,000
Issuance of stock for
Consulting (Note 6) 93,900 77,019 77,019
Exercise of stock options (Note 6) 50,000 50,000 50,000
Issuance of stock options
and warrants for
consulting services (Note 6) 58,567 58,567
Modification of terms of
bridge warrants 297,000 297,000
Net loss for the quarter ended
December 31, 2001 - - (2,551,771) (2,551,771)
------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 13,531,930 31,207,606 (44,166,092) (12,958,486)
==================================================================================================================
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
Six Months Ended December 31, 2001 2000
------------------------------------------------ -------------- --------------
Operating activities:
Net loss $ (4,785,992) $ (9,443,645)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 37,569 37,545
Issuance of stock for services, compensation and
interest 327,019 54,675
Issuance of options and warrants for consulting services 135,979 -
Reduction of note receivable for consulting services 41,100
Issuance of convertible bridge note for management fee - 120,000
Issuance of note payable for interest expense 688,341 502,765
Beneficial value of warrants exchanged for
common stock - 2,179,182
Beneficial conversion feature amortized to interest
expense 297,000 262,500
Beneficial conversion feature recorded as
cumulative effect of change in accounting
principle 481,250
Amortization of debt discounts 1,554,425 865,852
Amortization of deferred consulting expense - 320,591
Cancellation of warrants previously issued for
services - 2,361,153
Issuance of options and warrants for consulting
services - 45,664
Adjustment for variable options (3,469)
Loss on sale of property and equipment - 10,265
Changes in operating assets and liabilities:
Accounts receivable 10,350 30,755
Note receivable (121,441) -
Prepaid expenses and other 114 (110,171)
Accrued interest receivable - (22,970)
Accounts payable 96,051 72,151
Accrued liabilities 16,406 (561)
-------------- --------------
Net cash used in operating activities (1,706,548) (2,232,999)
-------------- --------------
F-6
Bion Environmental Technologies, Inc. and
Subsidiaries
Unaudited Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Six Months Ended December 31, 2001 2000
------------------------------------------------ -------------- --------------
Investing activities:
Refund of equipment returned - 1,447
Proceeds from sale of computer equipment - 250
Purchase of fixed assets (12,575) (28,252)
-------------- --------------
Net cash used in investing activities (12,575) (26,555)
-------------- --------------
Financing activities:
Exercise of stock options 120,000 -
Proceeds from notes payable, related parties 355,000 -
Proceeds from sale of warrants - 2,700
Payments on note receivable - (70,000)
Payments on capital lease obligations (9,011) (15,111)
-------------- --------------
Net cash provided by (used in) financing activities 465,989 (82,411)
-------------- --------------
Net decrease in cash and cash equivalents (1,253,134) (2,341,965)
Cash and cash equivalents, beginning of period 1,300,398 2,604,933
-------------- --------------
Cash and cash equivalents, end of period $ 47,264 $ 262,968
============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 793 $ 2,225
Supplemental disclosure of non-cash financing activities:
Warrants issued for deferred consulting services - 737,005
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)
Debt converted to common stock 112,740
=============== ==============
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, 2001.
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 in
Note 7 were not included in diluted earnings (loss) per share for the six
months and three months ended December 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, 2001 financial statements, which included a paragraph emphasizing
the Company's ability to continue as a going concern. The Company incurred
losses totaling $4,785,992 during the six months ended December 31, 2001
(including non-cash interest expense and other non-cash expenses of $2,539,766
and $500,629, respectively) and has a history of losses that has resulted in
an accumulated deficit of $44,166,092 at December 31, 2001.
During the years ended June 30, 2001 and 2000, the Company successfully
obtained external financing through private placements of debt and equity and
the sale of its warrants. The Company also received financing from affiliated
companies (see Note 5). Subsequent to December 31, 2001, the Company
completed transactions with OAM, S.p.A. and Centerpoint Corporation
("Centerpoint"), which provided additional financing (See Note 8 Subsequent
Events). The Company continues to explore sources of additional financing to
satisfy its 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, as a result of our research
and development efforts during the last two years, the second generation of
our Bion Nutrient Management System (NMS(R)) has been developed. We intend to
undertake further NMS research and development which will incur additional
expenditures through fiscal year 2002 and will be focused on: 1) system
acceleration in order to further increase capacity and lower costs; 2)
integration of the Bion NMS System with a methane digestion system in order to
create additional revenue streams from the sale of electricity and natural
gas; 3) finalization of commercial designs for application in our second
generation NMS systems; and 4) possibly a clean water recycling loop. We also
have an ongoing research program related to our BionSoil(R) and Bion
Fertilizer product lines. 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(R) products. There can be no assurance that the next generation Bion
NMS system design or the BionSoil(R) 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 June 8, 2001 the Company completed a private offering of unsecured
convertible bridge notes ("2001 Notes") payable in the principal amount of
$2,527,218 with a current total, net of discount, of $2,159,509 including
accrued interest of $161,606 at December 31, 2001 which is included in current
convertible bridge notes accruing interest at 10% per annum due on April 30,
2002.
In connection with the sale of the Notes, the Company issued stock purchase
warrants ("2001 Warrants") exercisable for the purchase of up to 758,138
shares of the Company's common stock at $1.50 per share through December 31,
2004. The warrants were originally valued at $737,809 using the Black Scholes
option-pricing model and are being amortized as additional interest expense
over the term of the Notes.
On October 29, 2001, following acceptance by 58% of the 2001 Bridge Warrant
holders, the Company amended the 2001 Warrants as follows:
* adjusted the strike price to equal an amount equal to 80% of the
conversion price of the 2001 Convertible Notes that were issued in the
same offerings as the 2001 Bridge Warrants but in no event will the
exercise price be greater than the current exercise price of $1.50.
* the price at which the 2001 Warrants may be redeemed will be
reduced to an amount equal to 233% of the New Exercise Price.
* the warrants are redeemable solely at the discretion of the Company.
Additional 2001 Notes have been issued to the Trust Under Deferred
Compensation Plan for D2CO, LLC in lieu of payment for monthly management
fees. For the period of April 1, 2001 to June 30, 2001, $41,667 of notes per
month were issued.
The Company recorded interest expense on the 2001 Notes of $127,400 and
$63,700 for the six and three months ending December 31, 2001, which was added
to the balance of the notes. Interest expense of $793,973 and $396,987 was
also recorded during the six and three months ended December 31, 2001 for the
amortization of the discount. The unamortized discount at December 31, 2001 of
$529,315 will be amortized to interest expense through April 30, 2002.
On April 13, 2000 the Company completed a private offering of unsecured
convertible bridge notes payable (the "2000 Bridge Notes") in the principal
amount of $4,095,000.
The balance of the 2000 Bridge Notes totaling a principal of $3,995,000 for a
current total, net of discount, of $4,487,102 and including accrued interest
of $722,708 at December 31, 2001 is included in current convertible bridge
notes payable with interest accruing at 10% per annum due on April 30, 2002.
F-10
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
One note holder of the 2000 Bridge Notes, with an original principal in the
amount of $100,000, elected not to extend the due date. This note, with an
outstanding balance of $112,740 including accrued interest as of June 30,
2001, was converted into 50,330 shares of the Company's common stock on
September 24, 2001.
In connection with the sale of the 2000 Bridge Notes, the Company issued stock
purchase warrants ("2000 Bridge Warrants") exercisable for the purchase of up
to 1,213,500 shares of the Company's common stock at $1.50 per share through
December 31, 2004. The 2000 Bridge 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 2000 Bridge
Notes.
On October 29, 2001, following acceptance by 91% of the 2000 Bridge Warrant
holders, the Company amended the Convertible Bridge Warrants as follows:
* adjusted the strike price to equal an amount equal to 80% of the
conversion price of the 2001 Convertible Notes that were issued in the
same offerings as the 2001 Bridge Warrants but in no event will the
exercise price be greater than the current exercise price of $1.50.
* the price at which the 2001 Bridge Warrants may be redeemed will be
reduced to an amount equal to 233% of the New Exercise Price.
* the warrants are redeemable solely at the discretion of the Company.
On October 29, 2001 88% of the brokers possessing warrants ("Broker Warrants")
related to the sale of our 2000 Bridge Notes agreed to changes that will occur
only on conversion of our 2000 Bridge Notes and 2001 Notes. Until that time
the terms of the Broker Warrants will not change. The changes in terms of
these Broker Warrants as follows:
* the strike price will be an amount equal to 100% of the conversion
price of the 2000 Bridge Notes that were issued in the same offering
as the Broker Warrants but in no event will the exercise price be
greater than the current exercise price.
* the price at which the Broker Warrants may be redeemed will be reduced
to an amount equal to 150% of the new exercise price.
* The warrants are redeemable solely at the discretion of the Company.
The Company recorded interest expense on the 2000 Bridge Notes of $201,392 and
$206,433 for the six months ending December 31, 2001 and December 31, 2000,
which was added to the balance of the notes. Interest expense of $100,696 and
$103,216 was recorded on the 2000 Bridge Notes for the three months ending
December 31, 2001 and December 31, 2000. Interest expense of $357,157 and
$462,556 was also recorded during the six months ended December 31, 2001 and
December 31, 2000 for the amortization of the discount. The unamortized
discount at December 31, 2001 of a total of approximately $230,607 will be
amortized to interest expense through April 30, 2002
F-11
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
The Company recorded a charge to interest of $297,000 for the beneficial
conversion feature of the change in the terms of 2001 Warrants, the 2000
Bridge Warrants and the Broker Warrants for the quarter ending December 31,
2001.
Of the 2001 Notes and 2000 Bridge Notes issued, three directors purchased
$204,928 and D2 Co., LLC purchased $100,000 (Note 5). An additional $277,000
for management fees and accrued interest has been added to the balance of the
2000 Bridge Note for D2; management fees and accrued interest of $136,458 has
been added to the balance of the 2000 Bridge Note for the Trust Under Deferred
Compensation Plan for D2CO, LLC; and management fees and accrued interest of
$133,333 has been added to the balance of the 2001 Note for the Trust Under
Deferred Compensation Plan for D2CO, LLC.
On January 15, 2002 due to the transaction with Centerpoint(See Note 7 Capital
Structure and Note 8 - Subsequent Events), all the Convertible Bridge Notes
were converted to shares of the Company's common stock at $.75 per share and
adjustments were made to the warrants issued in connection therewith.
F-12
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
4. Notes/Advances Payable, Related Parties
Notes/Advances Payable, related parties, consisted of the following:
December 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 $843,507,
net of unamortized warrant discount of
$806,588. All outstanding principal and
accrued interest due is
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 at
a price of the lower of $1.80 or the conversion
price of the convertible bridge notes. During
the six months ended December 31, 2001,
the Company amortized $403,296 of the
discount to interest expense. All outstanding
principal and interest, computed at 1% per
month, is due and payable on or before
December 31, 2002. $ 3,112,717
Unsecured notes payable to two stockholders,
principal amount of $308,114 plus accrued
interest of $95,913. All outstanding principal
and interest, computed at 1% per month, is due
and payable on or before April 30, 2002.
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. Upon certain events the company may convert
these notes prior to maturity at the lower
of $1.80 or the conversion price of the convertible
bridge notes.(See note below) 404,027
F-13
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Unsecured notes payable to various stockholders,
principal amount of $1,121,911 plus accrued
interest of $340,759. All outstanding principal
and accrued interest at 1% per month is due
and payable on or before April 30, 2002.
The outstanding principal and accrued interest
due, is convertible into shares of the
Company's common stock at a price of $2.25
per share, under certain agreed upon conditions.
Upon certain events the company may convert
these notes prior to maturity at the lower
of $2.25 or the conversion price of the convertible
bridge notes. 1,462,670
Unsecured notes payable to Southview,
principal amount of $500,000 plus accrued
interest of $37,807. All outstanding principal
and accrued interest at .67% per month is due
upon completion of financing to the Company and
is therefore classified as short-term 537,807
Unsecured advances from to D2,
principal amount of $177,500 plus accrued
interest of $957. All outstanding principal
and accrued interest at .67% per month is due
upon completion of financing to the Company and
is therefore classified as short-term 178,457
Unsecured advances from Dublin Holding, Ltd.
principal amount of $150,000 plus accrued
interest of $954. All outstanding principal
and accrued interest at .67% per month is due
upon completion of financing to the Company and
is therefore classified as short-term 150,954
Unsecured advances from Peaches Trust,
principal amount of $27,500 plus accrued
interest of $30. All outstanding principal
and accrued interest at .67% per month is due
upon completion of financing to the Company and
is therefore classified as short-term 27,530
---------------
Total notes payable, related parties - current 5,874,162
===============
Note: Total notes payable - related parties excludes convertible bridge
notes payable to related parties (see Note 3).
On January 15, 2002 due to the transaction with Centerpoint (See Note 7 -
Capital Structure and Note 8 - Subsequent Event), all Notes Payable, Related
Parties were converted to shares of the Company's common stock at $.75 per
share. All unsecured advances of related parties set forth above were repaid
during January 2002
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 to the balance of their convertible bridge notes payable
(Note 3). As of December 31, 2001 compensation of $277,000 has been added to
the balance of the 2000 D2 Convertible Bridge Note; compensation of $136,458
has been added to the balance of the 2000 Convertible Bridge Note for the
Trust Under Deferred Compensation Plan for D2CO, LLC; and compensation of
$133,333 has been added to the balance of the 2001 Convertible Bridge Note for
the Trust Under Deferred Compensation Plan for D2CO, LLC.
On September 6, 2001, the Company entered into an agreement with D2,
Southview, Inc. and Atlantic Partners, LLC, all of which are affiliates of
David Mitchell, the Company's President and CEO (collectively "D2") in which,
among other things, the Company agreed to:
* provide that certain compensation to D2 be paid in a deferred manner to
the Deferred Trust under the Deferred Compensation Plan to D2 Co., LLC.
* amend certain Southview warrants ("SV1" and "SV2") so that upon earlier
of (i) completion of financing or series of financings large enough to
"trigger" the conversion of the Company's outstanding Bridge Notes and
2001 Convertible Notes (collectively "CV Notes") into the Company's
common stock; or (ii) conversion of the CV Notes into the Company's
common stock on April 29, 2002, the outstanding Class SV1 and SV2
Warrants owned by D2 will be adjusted ("Adjusted Warrants") so that D2
owns Adjusted Warrants to purchase a number of shares of the Company's
Common Stock equal to 20% of the "fully-diluted" outstanding shares.
Upon completion of the transaction with Centerpoint on January 15,
2002, the Southview Warrants were adjusted to equal 20% (10,373,427) of
the "fully-diluted" outstanding shares of the Company. (See Note 7
Capital Structure and Note 8 - Subsequent Events)
As partial consideration for Bion agreeing to the adjustment to the warrants,
Southview agreed to extend the term of the outstanding promissory note due
July 31, 2001 with a balance of $521,039 including accrued interest so that
such promissory note could be repaid from the proceeds of a new financing.
Upon completion of the transaction with Centerpoint on January 15, 2002, the
Company repaid this promissory note. (See Note 7 - Capital Structure and Note
8 - Subsequent Events)
F-15
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
On August 1, 2001 Mark Smith and certain entities related to him which owned
shares of our Common Stock (the "Smith Shares") entered into a voting
agreement that gives David Mitchell, our President and CEO, the power to vote
all of the Smith Shares as to most matters, but Mr. Smith will still have the
right to vote the Smith Shares with respect to a sale of substantially all of
our assets or a merger. The voting agreement is purely contractual and is not
a formal voting trust.
In addition, Mr. Smith and certain related entities entered into a separate
agreement with the Company which imposes certain restrictions on the sale and
transfer of the Smith Shares and amends the respective terms of five
convertible promissory notes payable to Dublin Holding, Ltd, the Mark A. Smith
Rollover IRA and the Kelly Smith Rollover IRA to provide that all five of
these notes will be automatically and fully converted (with all principal and
accrued interest calculated as if they had been held to maturity) into shares
of our Common Stock upon the conversion of our outstanding Convertible Bridge
Notes and 2001 Convertible Notes at a conversion rate equal to the lesser of
(i) $1.80 per share or (ii) the conversion price of our outstanding
Convertible Bridge Notes and 2001 Convertible Notes. Upon completion of the
transaction with Centerpoint on January 15, 2002, these notes were converted
into shares of the Company's stock at $.75 per share. (See Note 7 - Capital
Structure and Note 8 - Subsequent Event)
Under the terms of the Deferred Trust under the Deferred Compensation Plan to
D2 Co., LLC (the "Trust") the Company has issued shares of Convertible Bridge
Notes and common stock to the Trust as payment for management fees due D2.
The assets of the Trust are held for the benefit of D2 LLC. (See Note
3-Convertible Bridge Notes Payable and Note 6-Stockholders Deficit)
6. Stockholders' Deficit
During the quarter the following transactions occurred:
On December 31, 2001 we issued 153,215 shares of the Company's common stock to
the Trust Under Deferred Compensation Plan for D2CO, LLC for $125,000 of
management fees earned for the three months ending December 31, 2001, based on
an average closing price of the Company's common stock for the quarter of
$0.82.
On October 22, 2001 we issued 80,984 shares of the Company's common stock to
the Trust Under Deferred Compensation Plan for D2CO, LLC for $125,000 of
management fees earned for the three months ending September 30, 2001, based
on an average closing price of the Company's common stock for the quarter of
$1.54.
On October 1, 2001 and November 15, 2001 we issued 40,000 and 7,000 shares of
the Company's common stock, respectively, to Jon Northrop towards the balance
of consideration due for consulting services. Common stock was increased by
$39,370 for the value of the shares issued.
F-16
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
On October 1, 2001 and November 15, 2001 we issued 29,000 and 17,900 shares of
the Company's common stock, respectively, to certain employees towards the
balance of consideration due for severance agreements. Common stock was
increased by $37,649 for the value of the shares issued.
On December 17, 2001 we granted 50,000 options to the Company's attorney.
Using the Black Scholes model the Company valued the options at $11,990, which
was expensed to general and administrative during the quarter. These options
were exercised December 31, 2001 to purchase 50,000 shares of our common stock
at $1.00 per share. For payment of the shares, $50,000 was added to the
outstanding promissory note due to the Company on August 9, 2011 bringing the
total balance to $80,341 as of December 31, 2001
On December 17, 2001 we granted Dennis Tristao, who joined the Company's
Advisory Board, 10,000 options to purchase shares of the Company's common
stock at $1.00 per share expiring December 31, 2003. We also granted 90,000
options to purchase shares of the Company's common stock to Mr. Tristao for
consulting services to be provided to the Company. These options vest upon
completion of certain events and expire December 31, 2003. These options were
valued using the Black Scholes model at $16,062 and are being amortized over
the life of the consulting agreement. An expense of $892 was taken for the
current quarter.
On December 17, 2001, we granted Jarold Glick who joined the Company's
Advisory Board, 15,000 options to purchase shares of the Company's common
stock at $1.00 per share expiring December 31, 2003. These options were
valued using the Black Scholes model at $3,597 and have been expensed during
the quarter.
An expense of $42,088 related to the vesting of previously issued options has
been recorded during the quarter ended December 31, 2001.
7. Capital Structure
Because the Company has a relatively complex capital structure which underwent
recent substantial changes, the following capital structure details are set
forth as of February 6, 2002:
F-17
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Common Stock
As of February 6, 2002 the Company had 52,671,128 (this includes 10,957,300
shares owned by Centerpoint that will be returned to the Company on
distribution of the Company's common stock to Center point shareholders)
shares of common stock issued and outstanding.
Options
As of February 6, 2002, 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
---------
Total Directors 43,336
=========
Exercise Price Shares Expiration
-------------- --------- ----------
Employee $ .95 667 12/31/03
Plans $ 1.00 25,000 12/31/03
$ 1.10 162,524 12/31/02
$ 1.10 37,500 06/30/03
$ 1.10 332,334 12/31/03
$ 1.10 125,000 12/31/04
$ 1.22 5,000 12/31/03
$ 1.25 169,445 12/31/03
$ 1.50 66,000 08/17/03
$ 1.50 50,502 12/31/03
$ 2.00 159,513 12/31/02
$ 2.00 25,000 07/31/03
$ 2.00 90,000 07/31/04
$ 2.25 10,000 12/31/03
$ 2.50 5,000 12/31/02
$ 2.50 75,000 06/30/03
$ 2.50 40,000 12/31/03
$ 2.70 55,556 12/31/02
---------
Total Employees 1,434,041
=========
Total (Directors
and Employees) 1,477,377
=========
F-18
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Options Non-Vested
Exercise
Price Shares Vesting Dates Expiration
-------- --------- ----------------- ---------------
Employee Plans $ 1.00 90,000 12/17/02 12/31/03
$ 1.10 49,201 04/30/02 12/31/02
$ 1.10 37,500 12/31/02 06/30/03
$ 1.10 54,666 03/01/02-07/15/03 12/31/03
$ 1.10 290,000 03/31/02-12/31/03 12/31/04
$ 1.22 10,000 04/09/02-01/09/03 12/31/03
$ 1.50 37,165 02/01/02-11/01/02 12/31/03
$ 1.50 20,000 06/06/02-06/06/03 12/31/05
$ 1.60 35,000 07/13/02 07/13/04
$ 1.60 35,000 07/13/03 07/13/05
$ 2.00 20,000 04/21/02 12/31/03
$ 2.50 20,000 04/21/02 12/31/03
---------
Total 698,532
---------
Total Vested
and Non-Vested 2,175,909
=========
F-19
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Warrants
As of February 6, 2002, the Company had the following warrants outstanding:
Warrant Shares Expiration Date Exercise Price
------- --------- --------------- --------------
Class D2C-W 24,550 06/30/04 $ 2.50
Class G-6 3,148 04/20/02 $ 5.40
Class J-1 30,000 12/31/04 $ 2.00
Class J-1A (1) 1,198,500 12/31/04 $ .60
Class J-1AA(2) 175,950 12/31/04 $ .75
Class J-1B (3) 300,450 12/31/05 $ .60
Class J-1C (4) 457,688 12/31/05 $ .60
Class J-1D (5) 308,264 12/31/04 $ 1.50
Class J-2 65,000 12/31/04 $ 1.50
Class SV 10,373,427 02/16/06 $ .75
Class O 1,000,000 01/15/06 $ .90
---------- -----------
13,936,977 $ .60-5.40
========= ===========
1. Class J-1A Warrants may be called for redemption at the Company's option if
the bid price for our common stock is above $1.40 and certain other conditions
are met.
2. Class J-1AA Warrants may be called for redemption at the Company's option
if the bid price for our common stock is above $1.50 and certain other
conditions are met.
3. Class J-1B Warrants may be called for redemption at the Company's option if
the bid price for our common stock is above $1.40 and certain other conditions
are met.
F-20
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
4. Class J-1C Warrants may be called for redemption at the Company's option if
the bid price for our common stock is above $1.40 and certain other conditions
are met.
5. Class J-1D Warrants may be called for redemption at the Company's option if
the bid price for our common stock is above $3.50 and certain other conditions
are met.
At February 6, 2002, there were warrants exercisable to purchase 13,936,977
shares of Common Stock.
F-21
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
8. Subsequent Events
On January 15, 2002, the Company issued 19,000,000 shares of its restricted
common stock to Centerpoint Corporation, a publicly held Delaware corporation
("Centerpoint"), that has not been current in its filings with the Securities
and Exchange Commission since it ceased business activities after the sale of
its motorcycle business approximately two years ago, in exchange for
approximately $8.5 million in cash and the assignment of certain claims and
other rights owned by Centerpoint. The 19,000,000 shares currently held by
Centerpoint represent approximately 36.2% of our currently outstanding common
stock. Immediately upon consummation of the transaction with Centerpoint, we
purchased a 57.7% majority interest in Centerpoint from its Italian parent,
OAM, S.p.A. ("OAM") by issuing 1,000,000 additional shares to OAM, a warrant
to purchase an additional 1,000,000 shares, paying $3.7 million of cash and
reassigning all of the other assets that we obtained from Centerpoint.
As a net result of these two transactions, we obtained $4.8 million in
cash and own a majority of Centerpoint's currently issued and outstanding
shares. During 2002, we intend to file a registration statement to allow
Centerpoint to distribute to its stockholders the 19 million shares that we
issued to it in connection with the acquisition. We expect the distribution
to occur during the second half of calendar 2002. When that distribution
occurs, approximately 11 million of our shares will be distributed back to us
and cancelled. After we cancel these shares, the two transactions will have
resulted in a net increase of approximately 9 million of our issued and
outstanding shares, which includes one million shares issued by us to OAM as
partial consideration for our obtaining control of Centerpoint.
Other than the 19,000,000 shares of our common stock, Centerpoint currently
has only minimal cash, no other significant assets and no business operations.
Centerpoint does continue to hold 35% of the rights to a litigation claim and
an escrow account which are carried on Centerpoint's books at no value.
David Mitchell, our CEO and a Director, is also a founder, stockholder and
option holder of Centerpoint, and currently serves as its President and a
director (Prior to the acquisition, Mr. Mitchell on a fully diluted basis,
held approximately 1% of the outstanding common stock and warrants of
Centerpoint). William Spier, who was a director of Centerpoint prior to
January 25, 2002, also serves on our advisory board. Prior to this
transaction, Howard Chase, who became a director of Bion on January 21, 2002,
served on the board of directors of Centerpoint. Effective January 15, 2002,
however, he resigned his position as a director of Centerpoint. David Fuller,
our Principal Accounting Officer, serves as Secretary and Principal
Accounting Officer of Centerpoint.
F-22
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
The transaction with Centerpoint also caused the automatic conversion of
more than $14.2 million in outstanding convertible debt which will result in
our issuance of slightly in excess of 19 million additional shares of our
Common Stock. All of this debt was automatically converted into shares of our
Common Stock in accordance with the terms of the various debt instruments at a
conversion rate of $0.75 per share, which is the same price for which we sold
shares to Centerpoint. This conversion will result in the company taking a
charge of $7,000,000 for the beneficial conversion feature of this debt.
Salvador Zizza (a Director), Andrew Gould (a Director), Jere Northrop (a
Director), Mark Smith, his wife and entities related to him, D2 and D2
Trust(both of which entities are affiliates of David Mitchell, our CEO and
Director) owned convertible debt instruments that were converted into shares
of our Common Stock as a result of the transaction with Centerpoint. The
following table sets forth the amounts of principal and interest converted and
the number of shares issued to these persons:
Amount of Prin- Number of
Name cipal and Interest of Shares
---- ------------------ ---------
Salvatore Zizza $ 163,839 218,453
Andrew Gould $ 8,350 11,134
Jere Northrop $ 504,461 672,616
Mark Smith:
Mark A. Smith Rollover IRA $ 393,567 524,743
Kelly Smith Rollover IRA $ 339,870 453,161
Dublin Holding $3,682,944 4,910,593
David Mitchell:
D2Co., LLC $ 395,493 527,326
Trust for D2Co., LLC $ 270,477 360,636
As a result of the transactions involving Centerpoint, effective January 15,
2002, in accordance with the terms of an existing agreement with D2CO, LLC,
Southview, Inc. and Atlantic Partners, LLC, all of which are affiliates of
David Mitchell, our President and CEO we amended the SV1 and SV2 Warrants so
that the warrants now provide for the purchase, in the aggregate, of
10,373,427 shares of our common stock at a purchase price of $.75. All other
terms of the SV1 and SV2 Warrants remain the same. The Company will take a
non-cash expense of $3,700,000 for the change in the amount and terms of
warrants which were valued using the Black Scholes pricing model.
As a result of these transactions and the repayment of debt to affiliates
from the proceeds, the Company as of January 15, 2002 is debt-free (with the
exception of trade payables), has 52,671,128 shares outstanding (this includes
10,957,300 shares owned by Centerpoint that will be returned to the Company on
distribution of the Company's common stock to Center point shareholders) and
has in excess of $3.5 million in cash.
F-23
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
The following Proforma Balance Sheet adjusts our December 31, 2001 Balance
Sheet with proforma adjustments to reflect the Centerpoint transaction, the
consolidation and elimination of the Centerpoint investment, the conversion of
all convertible debt and the payment of non-convertible debt as if they had
all occurred on December 31, 2001. This proforma Balance Sheet assumes that
Centerpoint has no assets other than 19,000,000 Bion shares and no
liabilities, and does not account for "Goodwill", if any, and value which
might be assigned to Centerpoint's remaining assets which are related to the
administrating of a litigation claim and a receivable whose value cannot
currently be determined.
Unaudited Proforma Consolidated
Balance Sheet as of December 21, 2001
Centerpoint Bion
Purchase of Purchase of
Bion 19,000,000 57.7% of Conversion
Balance Bion Shares Centerpoint of all
December 31, Proforma Proforma Proforma Proforma Outstanding Proforma
2001 Adjustments Financing Adjustments Consolidated Bion Debt As Adjusted
----------- ----------- ---------- ---------- ------------ ----------- -----------
Assets
Current:
Cash and cash
equivalents 47,264 8,500,000 8,547,264 (3,700,000) 4,847,264 (894,748) 3,952,516
Accounts receivable,
less allowance of
$2,000 for
possible losses 11,388 3,900,000 3,911,388 (3,900,000) 11,388 11,388
Investment in
Centerpoint 0
Prepaid expenses 8,333 8,333 8,333 8,333
----------- ---------- ---------- ---------- ---------- ----------- ---------
Total current assets 66,985 12,400,000 12,466,985 (7,600,000) 4,866,985 (894,748) 3,972,237
----------- ---------- ---------- ---------- ---------- ----------- ---------
Net property and
equipment 159,472 159,472 159,472 159,472
----------- ---------- ---------- ---------- ---------- ----------- ---------
Other assets:
Note Receivable 80,341 1,850,000 1,930,341 (1,850,000) 80,341 80,341
Patents, net of
accumulated
amortization of
$23,193 31,753 31,753 31,753 31,753
Deposits and other 135,859 135,859 135,859 135,859
----------- ---------- ---------- ---------- ---------- ----------- ---------
Total other assets 247,953 1,850,000 2,097,953 (1,850,000) 247,953 0 247,953
----------- ---------- ---------- ---------- ---------- ----------- ---------
Total Assets 474,410 14,250,000 14,724,410 (9,450,000) 5,274,410 (894,748) 4,379,662
=========== ========== ========== ========== ========== =========== =========
F-24
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Unaudited Proforma Consolidated
Balance Sheet as of December 21, 2001 (Continued)
Liabilities and
Stockholders' Deficit
Current:
Accounts payable 306,524 306,524 306,524 306,524
Convertible bridge
notes payable 7,193,402 7,193,402 7,193,402 (7,193,402) 0
Notes payable,
related parties -
current 5,874,162 5,874,162 5,874,162 (5,874,162) 0
Stock subscription
payable 0 0 0 0
Current portion of
capital lease
obligations 5,156 5,156 5,156 5,156
Accrued expenses
and note payable 51,678 51,678 51,678 51,678
----------- ---------- ---------- ---------- ---------- ----------- ---------
Total current
liabilities 13,430,922 0 13,430,922 0 13,430,922 (13,067,564) 363,358
----------- ---------- ---------- ---------- ---------- ----------- ---------
Long-term liabilities:
Long-term portion
of capital lease
obligations 1,974 1,974 1,974 0 1,974
----------- ---------- ---------- ---------- ---------- ----------- ---------
Total long-term
liabilities 1,974 0 1,974 0 1,974 0 1,974
----------- ---------- ---------- ---------- ---------- ----------- ---------
Total liabilities 13,432,896 0 13,432,896 0 13,432,896 (13,067,564) 365,332
----------- ---------- ---------- ---------- ---------- ----------- ---------
Commitments and
contingencies
Total stockholders'
equity (deficit) (12,958,486) 14,250,000 1,291,514 (9,450,000) (8,158,486) 12,172,816 4,014,330
----------- ---------- ---------- ---------- ---------- ----------- ---------
Total Liabilities
and Stockholders'
Equity (Deficit) 474,410 14,250,000 14,724,410 (9,450,000) 5,274,410 (894,748) 4,379,662
=========== ========== ========== ========== ========== =========== =========
F-25
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Footnotes to Proforma Balance Sheet
1) Centerpoint purchase of 19,000,000 shares of the Company's common
stock at $0.75 per share paid as follows:
Cash $ 8,500,000
Account receivable $ 3,900,000
Note receivable $ 1,850,000
Stockholders' equity $14,250,000
2a) Bion's purchase of 57.67% of Centerpoint from OAM S.p.A. as
follows:
Investment in Centerpoint $10,580,000
Cash $ 3,700,000
Account receivable $ 3,900,000
Note receivable $ 1,850,000
Stockholders' equity(a) $ 1,130,000
(a) 1,000,000 shares of the Company's stock issued to OAM S.p.A. at $0.75 per
share. Additionally, 1,000,000 warrants were issued to OAM and are
included in Stockholders' equity at $380,000. These warrants were valued
using the Black Scholes pricing model.
2b) Elimination of investment in Centerpoint:
Stockholders' equity $10,580,000
Investment in Centerpoint $10,580,000
3a) Notes payable, related parties - current of $4,979,414 of convertible debt
including accrued interest of $1,280,179 has been converted into 8,378,999
shares of the Company's common stock and non-convertible debt of $894,748
has been paid.
Notes payable, related parties, - current $5,874,162
Cash $894,748
Stockholders' equity $4,979,414
3b) Convertible bridge notes of $7,953,324 including unamortized debt discount
of $759,919 has been converted into 10,630,078 shares of the Company's
common stock.
Convertible bridge notes payable $7,193,405
Stockholders' equity $7,193,405
4) After the above transactions, the Company has outstanding common
stock totaling 41,713,828 shares (net of 10,957,300 shares
(57.67%) of the 19,000,000 shares of the Company's common stock
owned by Centerpoint).
F-26
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Effective January 15, 2002, pursuant to existing agreements, we amended the
terms of our 2000 Bridge Warrants and 2001 Warrants as follows:
*the exercise price was changed to $.60 and the call price was changed
to $1.40.
*the terms of the J-1AA Warrants issued to brokers as compensation in
connection with our private placement were changed to an exercise price
of $.75 with a call price of $1.50.
In conjunction with the conversion of certain of our convertible bridge notes
effective January 15, 2002, pursuant to their existing agreements with us, we
issued 308,264 warrants to unaffiliated brokers. These warrants (J-1D
warrants) are exercisable at a price of $1.50 per share until December 31,
2004 with a call price of $3.50.
Effective January 15, 2002, in accordance with the terms of an existing
agreement with D2CO, LLC, Southview, Inc. and Atlantic Partners, LLC, all of
which are affiliates of David Mitchell, our President and CEO (collectively,
"D2"), we amended the SV1 and SV2 Warrants held by D2 so that warrants now
provide for the purchase, in the aggregate, of 10,373,427 shares of our common
stock at a purchase price of $.75. All other terms of the SV1 and SV2
Warrants remain the same.
We issued and amended the following options to our Directors and employees:
Effective January 15, 2002, two employees were granted options to purchase a
total of 240,000 shares for three years at an exercise price of $1.10 per
share;
Effective January 15, 2002, 169,445 outstanding options owned by an employee
who rejoined the Company were extended until December 31, 2003, with a reduced
exercise price of $1.25 per share. Additional options were granted to the
same employee to purchase 10,000 shares at $1.50 per share, 20,000 shares at
$2.00 per share and 20,000 shares at $2.50 per share, all of which are
exercisable until December 31, 2003.
Effective January 15, 2002, Mark Smith was granted an option to purchase
25,000 shares at an exercise price of $1.10 per share until December 31, 2004;
Effective January 15, 2002, Jere Northrop was granted an option to purchase
25,000 shares at an exercise price of $1.10 per share until December 31, 2003;
Effective January 15, 2002, The 100,000 "J" Warrants held by Sal Zizza were
cancelled and he was issued an option to purchase 100,000 shares under our
Incentive Plan at an exercise price of $1.10 until December 31, 2004;
All of the options, having an exercise price in excess of $1.50 per share,
that are held by fourteen of our employees and two of our Directors, were
reduced to $1.10 per share. As a result, we reduced the exercise price of
options to purchase an aggregate of 636,725 shares;
F-27
Bion Environmental Technologies, Inc. and
Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Effective January 21, 2002, we granted employee bonuses to fifteen of our
employees in the aggregate amount of $112,650, all of which were paid in
shares of our Common Stock valued at $1.25 per share for a total of 90,120
shares.
On January 31, 2002, the Company entered into a licensing agreement with
BioBalance A/S. This agreement allows the Company to license the BioBlance
technology for use in the field of agricultural applications for
treating/converting animal waste in to soil-like products with a content of
nutrients and organic matter. The agreement exclusively covers the United
States and its territories. This licensing agreement is for ten years and can
be cancelled by the Company with 120 days notice.
F-28
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 $31,207,606
being invested in or contributed to Bion as of December 31, 2001. We had a
shareholder deficit of $12,958,486, accumulated deficit of $44,166,092,
limited current revenues and substantial current operating losses. (Note that
$5,874,162 of the related parties notes payable and $7,193,402 of convertible
bridge notes payable, approximately 101% of the negative net worth, have been
converted to shares of the Company's common stock on January 15, 2002 due to
the transaction with Centerpoint. Therefore, upon conversion, our negative
net worth was eliminated. (See Note 7 Capital Structure and Note 8 -
Subsequent Events) 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. Due to the transaction with Centerpoint, we have
enough funds for our operations for the current fiscal year ending June 30,
2002. (See Note 8 - Subsequent Events) We anticipate spending $550,000 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 December 31, 2001 shows current
assets of $66,985 and total assets of $474,410. Our current and total
liabilities as of December 31, 2001 are $13,430,922 and $13,432,896,
respectively. Total assets decreased by $1,208,252 from June 30, 2001. The
change is primarily attributable to the $1,253,134 decrease in cash and cash
3
equivalents primarily as a result of net cash used in operating activities.
Our current ratio is 0.005:1 as of December 31, 2001 as compared to 0.16:1 as
of June 30, 2001. The reduction in the current ratio results from the
reduction in cash and cash equivalents and the reclassification of Notes
payable, related parties from long-term to current.
Total liabilities increased by $2,588,472 in the six-month period ended
December 31, 2001. This increase was due to additions to the convertible
bridge notes and related parties notes payable for accrued interest of
$985,341 and amortization of the debt discount of $1,554,426, a further
increase on the convertible bridge notes of $24,500 for interest due D2 and
the Trust Under Deferred Compensation Plan for D2CO, LLC. An increase in
accounts payable of $96,051 and an increase in accrued liabilities of $16,406
also added to the increase in total liabilities. These amounts were reduced
by the conversion of one of the convertible bridge notes with a balance
including accrued interest of $112,740.
We believe that during the balance of the fiscal year ending June 30, 2002, we
will not generate sufficient operating cash flow to meet our needs. However,
due to the transaction with Centerpoint we now have approximately $3,900,000
in working capital, which will be sufficient for the remainder of the fiscal
year ending June 30, 2002. We are in the process of attempting to obtain
additional financing for operations in the next fiscal year, 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 after June 30, 2002.
We do not currently have any commitments for any material capital
expenditures.
Results of Operations
---------------------
Comparison of the Six Months Ended December 31, 2001 with the Six Months Ended
December 31, 2000
We recorded $28,612 of BionSoil(R) sales during the six months ended
December 31, 2001. This compares to $41,976 BionSoil(R) sales during the six
months ended December 31, 2000. The decrease of $13,364 is attributable to
lower BionSoil(R) sales to customers, as a larger quantity of BionSoil(R) was
used for testing and turf trials. As a result of our research and development
efforts during the last two years, the second generation of our technology has
completed development. We have designed and/or tested NMS systems, which use
state-of-the-art, computerized, real-time monitoring and system control that
can 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 focus on the new system
design has had a negative effect on system sales. Cost of goods sold decreased
$53,916 for the soil sales primarily as a result of a decrease in
subcontractors' costs of $75,190 and a decrease in travel, lodging and meals
of $14,458. These decreases were offset by increases in freight of $24,484
and equipment rental of $18,012.
4
We incurred gross losses of $214,064 and $254,616 during the six months ended
December 31, 2001 and 2000, respectively. The gross losses are primarily a
result of the fact that much of the soil produced was sold at below cost to
help gain market acceptance. We believe that this trend will reverse as we
enter the final phase of system testing and revenues will increase with new
sales.
General and administrative expenses decreased $4,779,865 (74%) for the six
months ended December 31, 2001 as compared to the six months ended December
31, 2000. $2,173,460 of the decrease is attributable to December 31, 2000
non-cash expense related to the beneficial value of the stock consideration
received over the value of the warrants surrendered in connection with
warrant/stock exchange transactions and amortization of the remaining deferred
consulting expense to D2 of $2,648,882, partially offset by other individually
insignificant increases.
Research and development costs decreased $236,055 during the six months
ended December 31, 2001 as compared to the six months ended December 31, 2000.
This decrease is due to winding down the design and testing of the
second-generation system.
Interest expense increased $907,219 for the six months ended December 31,
2001 as compared to the six months ended December 31, 2000 due to additional
borrowings from private placements. Of this increase, $908,649 was for
non-cash interest expenses offset slightly by lower cash interest expenses.
We had a decrease in interest income of $55,848 due to lower average cash
balances associated with cash flow generated from financing activities.
The net loss and comprehensive loss decreased by $4,657,653(49%)
during the six months ended December 31, 2001. The decrease primarily related
to the decrease of $4,779,865 of general and administrative expenses
(primarily for the beneficial value of the stock consideration received over
the value of the warrants surrendered in connection with warrant/stock
exchange transactions and the amortization of the deferred consulting expense
in the period ending December 31, 2000), the decrease in research and
development of $236,055, the decrease in cumulative effect of change in
accounting principle of $481,250 and an increase of other income (expense) of
$82,998 of income. This was offset by the increase of $907,219 of interest
expense and the decrease of $55,848 of interest income.
Basic and diluted loss per common share decreased by $0.34, from $0.70 to
$0.36. The decrease in the loss per share is attributable to the
aforementioned decrease in the net loss.
Comparison of the Three Months Ended December 31, 2001 with the Three Months
Ended December 31,2000
We recorded $15,610 of BionSoil(R) sales during the three months ended
December 31, 2001. This compares to $24,324 BionSoil(R) sales during the three
months ended December 31, 2000. We had been in the design and testing phase
of the second-generation system, which had a negative effect on sales and are
now beginning to start to increase efforts for greater sales of Bionsoil(R).
The focus on the new system design has had a short-term negative effect on
system sales as well. Cost of goods sold decreased $84,100 primarily as a
result more testing and research of BionSoil(R).
5
We incurred gross losses of $107,976 and $183,362 during the three months
ended December 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 decreased $2,462,319 (74%) for the
three months ended December 31, 2001 as compared to the three months ended
December 31, 2000. Of the decrease, consulting fee decreased by $2,404,550
and compensation and supplemental compensation decreased $110,779. These
decreases were partially offset by an increase in rent of $32,801.
Research and development costs decreased $67,205 during the three months
ended December 31, 2001. This decrease is due to winding down the design and
testing of the second-generation system.
Interest expense increased $471,108 due to additional borrowings from
private placements and value attributed to the adjustment in terms of certain
warrants that was expensed to interest. Non-cash interest expense for the
three months ended December 31, 2001 and 2000 was $1,421,048 and $949,264,
respectively.
We had a decrease in interest income of $23,094 due to lower cash
balances associated with cash flow generated from financing activities.
The net loss and comprehensive loss decreased $2,626,798 (51%) during the
three months ended December 31, 2001. The decrease primarily related to
decrease in general and administrative expenses of $2,462,319, a decrease in
cost of goods sold of $84,100, a decrease in research and development costs of
$67,205 and the decrease in cumulative effect of change in accounting
principle of $481,250. These decreases are offset by an increased in interest
expense of $471,108.
Basic and diluted loss per common share is decreased by $0.17 from $0.36
to $0.19. The increase in loss per share is attributable to the
aforementioned increase in net loss.
Seasonality
-----------
Bion's installation capability is restricted in all cold weather climates
to approximately eight months per year. However, when weather conditions
limit construction activity in southern market areas, projects in northern
markets can proceed, and when northern area weather is inappropriate, southern
projects can proceed. BionSoil(R) harvests on the existing installed base is
semi-annual and is timed for spring and fall with harvested soils being
available for sale during the next spring or fall. BionSoil(R) and
BionSoil(R) product sales are expected to exhibit a somewhat seasonal sales
pattern with emphasis on spring, summer and fall sales.
6
Impact of Recently Issued Accounting Pronouncements
---------------------------------------------------
In July 2001, the FASB issued Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141"), which supersedes APB Opinion No. 16.
SFAS 141 eliminates the pooling-of-interests method of accounting for business
combinations and modifies the application of the purchase accounting method.
The elimination of the pooling-of-interests method is effective for
transactions initiated after June 30, 2001. The remaining provisions of SFAS
141 will be effective for transactions accounted for using the purchase method
that are completed after June 30, 2001. The new standard will not have any
affect on the Company's financial statements.
In July 2001, the FASB also issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Intangible Assets," ("SFAS 142"), which
supersedes APB Opinion No. 17. SFAS 142 eliminates the current requirement to
amortize goodwill and indefinite-lived intangible assets, addresses the
amortization of intangible assets with a defined life and addresses the
impairment testing and recognition for goodwill and intangible assets. SFAS
142 will apply to goodwill and intangible assets arising from transactions
completed before and after the statement's effective date. SFAS 142 is
effective for fiscal 2002. The new standard will not have any affect on the
Company's financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that
those long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discounted operations. Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses that
have not yet occurred. SFAS No. 144 is effective for financial statements
issued for fiscal years beginning after December 14, 2001 and generally, is to
be applied prospectively.
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.
7
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 December 31, 2001
without registration under the Securities Act of 1933, as amended:
Common Stock
------------
On December 31, 2001 we issued 153,215 shares of the Company's common
stock to the Trust Under Deferred Compensation Plan for D2CO, LLC for $125,000
of management fees earned for the three months ending December 31, 2001, based
on an average closing price of the Company's common stock for the quarter of
$0.82.
On October 22, 2001 we issued 80,984 shares of the Company's common stock
to the Trust Under Deferred Compensation Plan for D2CO, LLC for $125,000 of
management fees earned for the three months ending September 30, 2001, based
on an average closing price of the Company's common stock for the quarter of
$1.54.
The shares issued to the Trust Under Deferred Compensation Plan for D2CO,
LLC ("the Trust") 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. The Trust was established by the Company
and D2 under a deferred compensation arrangement. D2 is wholly-owned by David
Mitchell, the Company's Chairman, CEO and President. Mr. Mitchell is an
accredited investor and has knowledge and experience in financial and business
matters such that he was capable of evaluating the merits and risks of the
acquisition of our Common Stock in connection with these transactions. All
certificates representing 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.
ITEM 3. Defaults Upon Senior Securities. None
ITEM 4. Submission of Matters to a Vote of Security Holders. None
ITEM 5. Other Information.
9
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 December 31, 2001.
Form 8-K dated December 12, 2001: Items 2,5 & 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, Authorized Officer and
Principal Accounting Officer
Dated: February 14, 2001
11