UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB/A
AMENDMENT NO. 2
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 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
New York, NY 10022
(Address of principal executive offices, including zip code)
(212) 758-6622
(Registrant's telephone number, including area code)
Securities Registered under Section 12(b) of the Exchange Act:
Common Stock, no par value
(Title of Class)
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-K contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The Issuer's revenues for the fiscal year ended June 30, 2001 were $84,322.
The aggregate market value as of September 25, 2001 of voting stock held by
non-affiliates of the Registrant was $8,048,000 based upon the average of the
closing bid and asked prices on the OTC Electronic Bulletin Board on that
date.
As of September 25, 2001, 13,153,831 shares of Registrant's Common Stock, no
par value, were issued and outstanding.
Documents incorporated by reference: None
PART II
ITEM 5. MARKET FOR BION ENVIRONMENTAL TECHNOLOGIES, INC.
COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
------------------
During the past two years, we have had only limited volumes of trading in
our Common Stock in the over-the-counter market, and there is no assurance
that such trading will expand or even continue.
At present, our Common Stock trades under the symbol "BION" on the OTC
Bulletin Board. The following quotations reflect inter-dealer prices, without
retail mark-up, markdown or commission and may not represent actual
transactions.
Quarter Ended High Bid Low Bid
------------- -------- -------
September 30, 1999 $2.56 $1.44
December 31, 1999 $3.44 $1.38
March 31, 2000 $4.09 $2.06
June 30, 2000 $3.06 $1.75
September 30, 2000 $2.69 $1.97
December 31, 2000 $2.00 $0.85
March 31, 2001 $1.44 $0.75
June 30, 2001 $3.00 $0.88
Holders
-------
The number of holders of record of our Common Stock at September 25, 2001
was approximately 1,500.
The transfer agent for our Common Stock is Corporate Stock Transfer,
Inc., 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209.
Dividends
---------
We have never paid any cash dividends on our Common Stock. The Board of
Directors does not intend to declare any cash dividends in the foreseeable
future, but instead intends to retain earnings, if any, for use in our
business operations. The payment of dividends, if any, in the future is
within the discretion of the Board of Directors and will depend on our future
earnings, if any, our capital requirements and financial condition, and other
relevant factors.
Recent Sales of Unregistered Securities
---------------------------------------
The following securities were sold in the three-month period ended June
30, 2001 without registration under the Securities Act of 1933, as amended:
2
Warrants
--------
We sold 758,138 J-1B Warrants at $.05 per warrant to purchase restricted
and legended Common Stock at $1.50 per share in our private placement of
convertible bridge notes to accredited investors. The warrants are
exercisable from June 6 2001 to December 31, 2005. We received $37,907 in
cash for use in operations for these warrants. See Exhibits 10.1, 10.2 and
10.3 to our Form 8-K dated April 26, 2001.
Common Stock
------------
We issued 5,000 shares of unrestricted Common Stock to a shareholder upon
the exercise of options in exchange for legal services valued at $10,000. The
value attributed to the Common Stock represented the fair market value of the
services provided.
Convertible Notes
-----------------
During the three months ended June 30, 2001, we received $2,527,218 from
the sale of convertible bridge notes sold to 16 accredited investors. We also
issued a convertible bridge note to a trust on behalf of D2 Co., LLC for
$127,083 for management fees.
The securities that were issued pursuant to the transactions set forth
above were issued in reliance upon the exemptions from registration afforded
by Sections 3(a)(9), 3(b), 4(2), 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 and was provided with appropriate
offering documents and access to material information. 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 shares. Transfer instructions have been provided to our
transfer agent in accordance therewith.
ITEM 6. 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 audited financial statements contained in this Form 10-KSB show
$30,218,339 being invested in or contributed to Bion as of June 30, 2001. We
have a stockholders' deficit of $9,161,762, cumulative deficit of $39,380,101,
which includes non-cash charges of $10,659,214 during the year ended June 30,
2001, limited current revenues and substantial current operating losses.
(Note that the related parties notes payable of $4,780,817 are approximately
52% of the negative net worth, of which $4,263,174 is convertible into our
Common Stock with an effective registration statement related to the resale of
such shares. Note further that all but $517,643 of our debt will be
3
automatically converted into our Common Stock no later than April 29, 2002,
with an effective resale registration statement, which would eliminate most or
all of our stockholders' deficit.) The convertible debt and accrued interest
will be converted into shares in the event that we issue any capital stock or
securities convertible into capital stock for an aggregate purchase price of
at least $5,000,000 in a public or private offering. If no such offering
occurs, the convertible debt will be converted into shares on April 29, 2002.
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.
The level of funding required to accomplish our objectives is ultimately
dependent on the success of our research and development efforts which, at
this time, is unknown. Currently, we estimate that no less than approximately
$3,000,000 will be required during the year ending June 30, 2002. We
anticipate spending $750,000 on research and development efforts and the
balance on compensation and general business overhead.
In connection with their report on our Consolidated Financial Statements
as of and for the year ended June 30, 2001, BDO Seidman, LLP, our independent
certified public accountants, expressed substantial doubt about our ability to
continue as a going concern because of recurring net losses and negative cash
flow from operations.
Financial Condition and Results of Operations
---------------------------------------------
Liquidity and Capital Resources
-------------------------------
Our operating activities used $4,287,762 and $3,498,506 of cash during
the years ended June 30, 2001 and 2000, respectively. The net loss of
$15,553,223 for the year 2001 compared to a net loss of $8,897,385 in 2000.
The loss of $15,553,223 included non-cash general and administrative expenses
of $7,645,570 and non-cash interest expense of $3,013,644. Included in the
non-cash general and administrative expenses of $7,645,570 are charges of
$2,332,000 for warrants issued as compensation for consulting to Southview,
Inc., a company owned by David Mitchell, our Chairman, CEO and President.
Charges of $2,361,153 and $320,000 were taken for the cancellation of warrants
issued to D2 for consulting, which is also owned by David Mitchell, and
amortization of deferred consulting expenses for D2, respectively. An
additional expense for management fees to D2 of $370,000 is also included in
the total expense. A charge of $2,179,182 for the beneficial value of
warrants exchanged for common stock was also recorded as a non-cash general
and administrative expense. This amount includes $453,549 for Dublin
Holdings, $53,322 for LTLK Defined Benefit Plan and $919,547 for LTLK
Foundation, companies related to Mark Smith, an Officer and Director of Bion.
This amount also includes $61,418 for Craig Scott, $143,988 for Jere Northrop
(and parties related to him), $177,936 for Jon Northrop and $36,402 for Duane
Stutzman, who were Officers of Bion. Non-cash general and administrative
expense and non-cash interest expense of $3,590,191 and $2,244,028 were
included in the 2000 loss of $8,897,385. During the years ended June 30, 2001
and 2000, our accounts payable and accrued expenses were increased by $118,114
and decreased by $581,696 respectively. The increase is due to the timing of
4
our payment cycle while the decrease in the prior year is due to the payment
of accounts using the proceeds from the private placement of our convertible
bridge notes payable.
Our investing activities used cash of $58,829 during the year ended June
30, 2001, compared with cash provided totaling $107,371 during the year ended
June 30, 2000. During the year ended June 30, 2000, we sold mortgage assets
generating $202,750.
We have been successful during the past two years in raising working
capital through the sale of warrants and convertible debt. During the year
ended June 30, 2001 we raised $2,527,218 in a private placement in the form of
convertible bridge notes. In addition, Southview, Inc., a related party, has
advanced the Company funds totaling $517,643 as of June 30, 2001.
All outstanding convertible debt of the Company will be converted into
shares of the Company's Common Stock based upon agreed terms on or before
April 29, 2002.
We believe that beyond June 30, 2001, we will not generate sufficient
operating cash flow to meet our needs without additional external financing.
There is no assurance that our efforts to obtain such financing will be
successful. Any failure on our part to do so will have a material adverse
impact on us and may cause us to cease operations.
As of June 30, 2001, we had a negative working capital of $7,028,315.
Included in our current liabilities are $5,801,721 of convertible bridge
notes payable and $2,298,538 of notes payable to related parties. These
amounts are offset by cash of $1,300,398 which is the remaining balance of
proceeds generated from our private placement of convertible bridge notes.
Financing activities provided cash of $3,042,056 during the year ended
June 30, 2001, compared with $5,940,485 during the year ended June 30, 2000.
We raised $3,569,279 during the year ended June 30, 2001, compared to
$6,241,564 during the year ended June 30, 2000. During the year ended June
30, 2001, we repaid $500,000 for the cancellation of warrants previously
issued. $27,223 of capital lease obligations were paid during the year ended
June 30,2001 compared to $49,520 during the year ended June 30, 2000.
We currently have no commitments for material capital expenditures.
Results of Operations - Comparison of Fiscal Year Ended June 30, 2001
with Fiscal Year Ended June 30, 2000
---------------------------------------------------------------------
We recorded $74,322 of BionSoil(R) sales and $10,000 of system sales
during the fiscal year ended June 30, 2001. This compares to total sales of
$158,445 for our prior year, $135,945 BionSoil(R) sales and $22,500 system
sales. The decrease of $74,123 is attributable to our concentration on
research and development on our second generation system, the decision to stop
actively soliciting sales of our first generation system and further
BionSoil(R) testing and analysis. Cost of goods sold increased $91,512 (26%)
for the soil sales and decreased $41,997 (100%) for system sales.
We incurred gross losses of $355,495 and $231,857 during the years ended
June 30, 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
5
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 increased $4,645,370 (80%). The
increase is primarily ($4,055,379) attributable to non-cash expenses as part
of the issuance of stock and warrants associated with the various transactions
discussed below. (See Notes 2, 3, 4 and 11 to the financial statements.)
In connection with our convertible bridge notes we have issued, during
the year ended June 30, 2001, we incurred non-cash interest expenses of
$443,707 and an additional $1,129,085 of amortization of debt discount. Non-
cash interest of $29,458 was incurred on accrued management fees that have not
been paid. Interest of $415,556 and amortization of debt discount of $806,592
was incurred as non-cash interest on promissory notes payable to a related
party. We incurred an additional $171,603 of non-cash interest on notes
payable to related parties. In addition, $17,643 was incurred on a promissory
note to Southview, Inc., also a related party.
Non-cash and administrative expenses incurred on issuance of stock for
services, compensation and interest totaled $79,175. The issuance of a note
payable for management fees added $370,000 to non-cash general and
administrative expenses. The beneficial value of warrants exchanged for
Common Stock of $2,179,182, the amortization of deferred consulting expense of
$320,591, and the adjustments for variable options of $3,469 also added to
non-cash general and administrative expenses. Additional non-cash general and
administrative expenses were incurred for the cancellation of warrants
previously issued for services of $2,361,153 and issuance of options and
warrants for consulting services of $2,332,000.
Research and development costs increased $663,706 during the year ended
June 30, 2001. This increase is due to the design and testing of the second-
generation system and increased BionSoil(R) research and testing expenses.
Interest expenses increased $757,013, of which $769,616 was for non-cash
expenses associated with amortization of debt discount on promissory notes.
Non-cash interest expense for the years ended June 30, 2001 and 2000 was
$3,013,644 and $2,244,028, respectively. (See Notes 2, 3, 4 and 11 to the
June 30, 2001 financial statements).
We did not record income tax expense during the years ended June 30, 2001
and 2000, as a result of our net losses. The valuation allowance of
$15,390,000 at June 30, 2001, was established because we have not been able to
determine that it is more likely than not that the deferred tax asset will be
realized.
At June 30, 2001, we had net operating loss carryforwards of
approximately $25,517,739, with expirations through 2021. The utilization of
certain of the loss carryforwards may be limited under Section 382 of the
Internal Revenue Code.
The net loss and comprehensive loss increased $6,655,838 (75%) during the
year ended June 30, 2001. The increase primarily related to an increase of
$4,055,379 of non-cash general and administrative expenses and an increase of
$769,616 of non-cash interest expense incurred during the year ended June 30,
2001. There were additional increases of $663,706 for research and
development and the effect of a change in accounting of $481,250. During the
year ended June 30, 2001, the Company adopted Emerging Issues Task Force Issue
6
No. 00-27 ("EITF 00-27"), "Application of EITF Issue No. 98.5, Accounting for
Convertible Securities with Beneficial Conversion Features of 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. As a result of this adoption, the Company modified the
previous calculation of the beneficial conversion features associated with
previously issued convertible bridge notes and recorded an additional warrant
discount on the convertible bridge notes issued during the year ended June 30,
2000 of $1,050,000 due to the beneficial conversion feature calculated on the
intrinsic value of the allocated proceeds received in the financing. Since
the notes automatically convert into Common Stock one year from the date of
issuance, the Company recorded $481,250 as a cumulative effect of change in
accounting principle for the year ended June 30, 2001. The Company has also
recorded a discount on convertible bridge notes issued during the year ended
June 30, 2001 of $701,000.
Basic and diluted loss per common share increased by $.41, from $.79 to
$1.20. The increase in the loss per share is attributable to the
aforementioned increase in the 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.
Impact of Recently Issued Accounting Pronouncements
---------------------------------------------------
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 is effective for fiscal years beginning
after June 15, 2000. The adoption of SFAS No. 133 had no material effect on
our financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation" ("FIN 44"), which was
effective July 1, 2000, except that certain conclusions in this Interpretation
which cover specific events that occur after either December 15, 1998, or
January 12, 2000, are recognized on a prospective basis from July 1, 2000.
This Interpretation clarifies the application of APB Opinion 25 for certain
issues related to stock issued to employees. We believe our existing stock-
based compensation policies and procedures are in compliance with FIN 44 and,
therefore, the adoption of FIN 44 had no material impact on our financial
condition, results of operation or cash flows.
7
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 Company is currently reviewing
the statement, but does not anticipate the new standard will have any effect
on its 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 Company is currently reviewing the statement
and has not yet determined the impact adoption of SFAS 142 will have on its
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.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements are included on Pages F-1 through F-36.
The Table of Contents to the Financial Statements is as follows:
Report of Independent Certified Public Accountants-
BDO Seidman, LLP F-2
Consolidated Balance Sheet as of June 30, 2001 F-3 to F-4
Consolidated Statements of Operations for the Years Ended
June 30, 2001 and 2000 F-5
Consolidated Statements of Stockholders' Deficit
for the Years Ended June 30, 2000, and 2001 F-6 to F-7
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2001 and 2000 F-8 to F-9
Summary of Accounting Policies F-10 to F-16
Notes to Consolidated Financial Statements F-17 to F-37
8
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation
--------------------
The following table shows the aggregate direct remuneration for the
fiscal years ended June 30, 2001, 2000, and 1999 to each executive officer and
two additional individuals:
Summary Compensation Table
--------------------------
Long Term Compensation
----------------------------------------
Annual Compensation Awards(12) Payouts
---------------------------------- ---------------------- ----------------
Securities All
Other Underlying Other
Annual Restricted Options/ LTIP Compen-
Name and Principal Salary(1) Compen- Stock SARs Payouts sation
Position Year ($) Bonus($) sation($) Award(s) (#) ($) ($)
------------------ ---- --------- -------- ------------ --------- ---------- ------- -------
David J. Mitchell(A) 2001 370,000(2) 0 2,230,000(4) 0 0 0 0
Chief Executive 2000 120,000(3) 0 3,811,057(5) 0 0 0 0
Officer and
President
Mark A. Smith(A) 2001 0 0 0 0 0 0 0
Chairman 2000 600,000(6) 0 0 0 0 0 0
Director 1999 26,667(7) 0 0 0 626,667 0 0
Jon Northrop(B) 2001 150,000 0 0 0 0 0 0
Executive V.P. 2000 150,000 0 0 0 0 0 0
Asst. Secretary 1999 150,000(8) 0 0 0 0 0 0
Director
Jere Northrop 2001 150,000 0 0 0 0 0 0
Chief Technology 2000 150,000 0 0 0 0 0 0
Officer 1999 150,000(8) 0 0 0 0 0 0
Craig Scott 2001 33,500(9) 0 0 0 0 0 0
2000 132,000 0 0 150,000 0 0 0
1999 132,000 0 0 10,000 0 0 0
M. Duane Stutzman 2001 120,000(10) 0 0 0 0 0 0
2000 120,000 0 0 75,000 0 0 0
1999 120,000(11) 0 0 227,452 0 0 0
------------------
(A) David Mitchell replaced Mark A. Smith as Chairman of the Company on
September 6, 2001.
(B) Jon Northrop resigned from the Company on August 31,2001.
(1) Includes compensation paid by Bion Technologies, Inc., our wholly owned
subsidiary.
(2) Includes compensation of $120,000 that has been added to the balance of
the 2000 D2 Convertible Bridge Note; compensation of $125,000 has been
added to the balance of the 2000 Convertible Bridge Note for the Trust
Under Deferred Compensation Plan for D2 Co., LLC; and compensation of
9
$125,000 has been added to the balance of the 2001 Convertible Bridge
Note for the Trust Under Deferred Compensation Plan for D2 Co., LLC.
(3) Compensation for the period January 1, 2000 (inception of agreement),
through June 30, 2000, which has been added to the balance of the D2
2000 Convertible Bridge Note.
(4) Represents the difference between the value of warrants to purchase
6,500,000 shares purchased by Southview, Inc., a company owned by
David J. Mitchell, and the amount paid therefor.
(5) Represents the difference between the value of warrants to purchase
5,000,000 shares purchased by D2 Co., LLC, a company owned by David J.
Mitchell, and the amount paid therefor.
(6) Consulting fees received according to the agreements between
LoTayLingKyur,Inc., Mark A. Smith, and Bion as reported in our Forms 8-K
dated December 11, 1999, (Item 10.4) and May 21, 1999, (Item 5.1).
(7) Compensation for the period May 21, 1999 (inception of agreement),
through June 30, 1999.
(8) Management deferred and accrued $50,000 of fiscal year
1999 salary as a liability to conserve cash.
(9) The employment of Craig Scott was terminated on April 15, 2001.
(10) The employment of Duane Stutzman was terminated on December 31, 2000.
The salary amount for 2001 includes $60,000 in severance pay through
June 30, 2001.
(11) Management deferred and accrued $30,000 of fiscal year 1999
salary as a liability to conserve cash.
(12) Does not include any options or warrants received in financing
transactions or otherwise purchased.
Compensation of Directors
-------------------------
Effective September 1, 1993, until December 31, 1999, outside directors
were compensated at a rate of $75 per month for their contributions. Members
of the Board of Directors do not currently receive any cash compensation for
their services as Directors, but are entitled to be reimbursed for their
reasonable expenses in attending meetings of the Board.
During the fiscal year ended June 30, 2001, we granted, pursuant to our
2000 Incentive Plan, the following options to our outside directors:
Number of Exercise Expiration
Name of Director Shares Price Date
---------------- --------- -------- ----------
Ronald G. Cullis* 10,000 $2.25 12/31/03
Andrew Gould 75,000 $2.25 12/31/03
Salvatore Zizza 75,000 $2.25 12/31/03
Joseph Wright 20,000 $1.50 12/31/05
------------------
* Mr. Cullis resigned effective September 6, 2001.
10
Employment Contracts and Termination of Employment and Change in
Control Arrangements
----------------------------------------------------------------
On December 1, 1997, we entered into separate employment agreements with
Jon Northrop, Jere Northrop and M. Duane Stutzman pursuant to which Jon
Northrop and Jere Northrop were each entitled to receive an annual salary of
$150,000 and M. Duane Stutzman was entitled to receive an annual salary of
$120,000. All of the employment agreements were for the period beginning on
December 1, 1997, and ending on December 31, 2002. The employment agreement
with Duane Stutzman was terminated December 31, 2000. The employment
agreement with Jon Northrop was terminated August 31, 2001.
The remaining employment agreement provides that Jere Northrop's
compensation will be reviewed no less than once per year with a view to making
such increases in his salary or declaring such bonuses or other benefits as
may be merited and warranted in light of factors considered pertinent by our
Board of Directors. Mr. Northrop is entitled to receive free of cost parking
for his automobile, health, hospitalization and life insurance with coverage
exceeding or equal to that which was then in force through us, as well as such
other benefits as our Board may deem appropriate from time to time. The
subject agreement provides that in the event Mr. Northrop is terminated by us
for any reason other than "for cause," he will continue to be compensated by
us for the duration of the term of the agreement. The agreement also provides
that in the event that we have a change in control at any time during his
term, as a result of which the Board of Directors appoints any person other
than Mr. Northrop to serve in the capacity for which he is entitled to receive
compensation under his agreement, Mr. Northrop will nevertheless be entitled
to receive all of his compensation and benefits under his agreement regardless
of whether he continues to perform any services for us. In addition, the
agreement provides that in the event that Jere Northrop is terminated upon
death or disability, terminated without cause, or terminated upon change in
management, all warrants, options or shares issued but unvested at the date of
termination will become fully vested as of the date of termination.
On May 21, 1999, we also entered into a consulting agreement with Mark A.
Smith and LTLK to perform consulting services for us during the period
beginning on May 21, 1999, and ending on December 31, 2001. In accordance
with the consulting agreement, LTLK received compensation in the form of a
convertible promissory note in the amount of $626,667 and warrants to purchase
626,667 shares of our Common Stock. The terms of the promissory note and
warrants were later modified when the transaction with D2 was consummated (see
"Certain Relationships and Related Transactions").
On December 23, 1999, we entered into a three year management agreement
with D2 pursuant to which D2 provides us with specific management and
consulting services and David J. Mitchell has been appointed to serve as our
Chief Executive Officer, Chairman of our Executive Committee and as one of our
Directors. In accordance with this agreement, D2 received warrants to
purchase 2,500,000 shares of our Common Stock at an exercise price of $2.50
per share until December 31, 2004, and receives ongoing compensation of
$240,000 per year payable in shares of our Common Stock or cash. Also in
accordance with this agreement, we added three members to our Board of
Directors (David J. Mitchell and Salvatore J. Zizza added December 23, 1999,
and Andrew G. Gould added August 10, 2000), and receive consulting services
from Summerwind Restructuring, Inc., which provides the services of consultant
Dominic Bassani, who is acting as Vice President of Operations of Bion
Technologies, Inc. and BionSoil, Inc. at present. We amended this agreement
on August 10, 2000, including (but not limited to) extending the term for one
11
additional year, issuing additional warrants to D2, and amending certain
provisions of the Shareholders Agreement. See our Form 8-K dated August 3,
2000.
Effective December 1, 2000, the Company amended the D2 management and
consulting agreement by extending the term of the agreement by 18 months,
canceling 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 and
increasing the annual base consideration from $240,000 as follows: calendar
year 2001 - $500,000; calendar year 2002 - $600,000; and calendar year 2003 -
$750,000. See our Form 8-K dated December 1, 2000.
The original agreement and amendments may be referenced in our Forms 8-K
dated December 11, 1999, August 3, 2000, December 1, 2000 and September 6,
2001.
Incentive Compensation Plans
----------------------------
On July 9, 1993, the Board of Directors adopted the Fiscal Year 1994
Incentive Plan ("Plan"), which was ratified by our shareholders on August 30,
1993. The maximum number of shares of Common Stock that may be issued under
the Plan is the greater of 250,000 shares or 20% of our outstanding Common
Stock. See Item 10 of our Form 10-KSB dated June 30, 1998, for specific
details of this Plan.
On June 14, 1996, the Board of Directors adopted the 1996 Nonemployee
Director Stock Plan ("Director Plan"). The maximum number of shares of Common
Stock that may be issued under the Director Plan is 100,000 shares. See Item
10 of our Form 10-KSB dated June 30, 1998, for specific details of this
Director Plan.
On May 16, 2000, the Board of Directors adopted the 2000 Incentive Plan
("2000 Plan"), which will be submitted for ratification by our shareholders at
the next meeting of the shareholders. The maximum number of shares of Common
Stock, that may be issued under the 2000 Plan is 1,000,000 shares. See
Exhibit 99.5 of our Form 8-K dated August 10, 2000, for specific details of
this 2000 Plan.
On June 5, 2001, the Board of Directors adopted the 2001 Incentive Plan
("2001 Plan"), which will be submitted for ratification by our shareholders at
the next meeting of the shareholders. The maximum number of shares of Common
Stock, that may be issued under the 2001 Plan is 1,500,000 shares. See
Exhibit 10.12 to our Form 8-K dated September 6, 2001.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a list of certain relationships and related party
transactions in the previous two years:
During the period beginning July 1, 1999, we entered into numerous
transactions with Mark A. Smith (our Chairman) and/or entities controlled hy
him: LoTayLingKyur, Inc. ("LTLK"), LTLK Defined Benefit Plan, LoTayLingKyur
Foundation, and Dublin Holding Ltd. (collectively "First Parties"), including
the following:
12
i) From July 1, 1999, to December 21, 1999, we received advances from
LTLK, aggregating $1,035,681, for which LTLK received convertible notes (plus
one Class X Warrant for each $1.00 advanced).
ii) Effective December 20, 1999, pursuant to an agreement between
First Parties and us, (see our Form 8-K dated December 11, 1999):
(a) First Parties exchanged all the convertible promissory notes
for new convertible promissory notes with aggregate principal
of $3,075,798 (which amount equaled the principal plus
accrued interest of the prior promissory notes) due at
December 31, 2002;
(b) we received the right to convert such new notes to Common Stock
upon conclusion of aggregate financing of at least $10,000,000
if portions of that financing convert into Common Stock;
(c) First Parties' Class X Warrants were exchanged for 0.3
restricted shares of Common Stock plus 0.7 Class Z Warrants for
each Class X (in aggregate, 1,172,426 restricted shares of
Common Stock and 2,735,660 Class Z Warrants were issued and
exchanged for 3,908,084 Class X Warrants); and
(d) First Parties agreed to participate in and support a future
warrant exchange involving our X and Z Warrants, described
below.
iii) Commencing August 3, 2000, and at various other effective dates
through the month of August 2000, the First Parties (and certain related
holders of our Class X Warrants and Class Z Warrants) exchanged, in aggregate,
165,198 Class X Warrants and 5,425,440 Class Z Warrants for 863,399 restricted
shares of our Common Stock. This exchange occurred pursuant to an agreement
we had with the warrant holders dated December 20, 1999. See our Form 8-K
dated December 11, 1999, Exhibits 10.4, 10.9, and 10.13. Mark A. Smith,
Chairman, (and affiliates and extended family members of Mr. Smith)
participated in this warrant exchange agreement. For further details see our
Form 8-K dated August 3, 2000, and Exhibit 99.4 thereto.
On December 23, 1999, we entered into the following transactions with D2
Co., LLC and Southview, Inc., which was formerly unaffiliated with us (see our
Forms 8-K dated December 11, 1999 and December 1, 2000):
i) We entered into a three year Management Agreement with D2 Co., LLC
("D2") of which David Mitchell, Chairman, CEO and President of the Company, is
sole member, pursuant to which D2 agreed to provide us specific management and
consulting services; compensation to D2 for such services consists of:
$240,000 per year payable in our Common Stock or cash; and 2,500,000 warrants
exercisable at $2.50 expiring on December 31, 2004.
ii) We entered into a Warrant Purchase Agreement and other agreements
with D2, pursuant to which D2 purchased 2,500,000 warrants, exercisable at
$1.75 expiring on December 31, 2004, for $1,000,000 ($500,000 in cash and
%500,000 in a non-recourse promissory note to us that is secured by the
subject warrants).
iii) On December 23, 1999, D2, Mark A. Smith, Jere Northrop, Jon
Northrop, LoTayLingKyur, Inc., and Dublin Holding, Ltd. entered into a
Shareholders' Agreement which, among other things, provides that D2 will
receive warrants to purchase additional shares of Common Stock, allows D2 to
receive additional shares of Common Stock in lieu of cash payments for its
13
fee, and grants D2 2,500,000 warrants to purchase additional shares of Common
Stock for an aggregate purchase price of $1,000,000. Effective August 31,
2001 this agreement was amended to remove Jon Northrop as a party.
iv) On August 10, 2000, we amended the Management Agreement with D2
that we entered into on December 23, 1999, which amendment (1) extended the
agreement for D2's services for an additional year; and (2) issued D2
1,500,000 additional warrants (1,000,000 exercisable at $3.50 per share and
500,000 exercisable at $6.00 per share, both exercisable from January 1, 2002,
until August 10, 2005). See our Form 8-K dated August 3, 2000.
v) On December 1, 2000, the Company made additional amendments to the
D2 management and consulting agreement by extending the term of the agreement
by 18 months, canceling 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 and
increasing the annual base consideration from $240,000 as follows: calendar
year 2001 - $500,000; calendar year 2002 - $600,000; and calendar year 2003 -
$750,000. See our Form 8-K dated December 1, 2000.
vi) Effective January 1, 2001, the Company agreed to make the payments
due under the consulting agreement under a deferred compensation plan to a
"Rabbi Trust" (Trust Under Deferred Compensation Plan for D2 Co., LLC) for the
benefit of D2. The payments to the trust for the six months ended June 30,
2001 totaling $250,000 were made in the form of 2000 and 2001 Convertible
Bridge Notes. Commencing July 1, 2001, payments are to be made by the
issuance to the trust of shares of Common Stock on a quarterly basis, based on
the average closing price of the Common Stock during the quarter.
(vii) Effective January 8, 2001, Southview, Inc. ("Southview"), a
corporation wholly owned by David J. Mitchell, Chairman, 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 completed 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.
On May 21, 1999, we made agreements with five parties, including Jon
Northrop, CEO, Jere Northrop, CTO, M. Duane Stutzman, CFO, the Family Trust
U/A 3rd U/W Catherine Northrop and one other employee, whereby we issued long-
term promissory notes to each party in exchange for payables aggregating
$793,500 owed to such parties. See our Form 8-K dated May 21, 1999.
Effective December 15, 1999, we entered into agreements with eight
holders of outstanding promissory notes (Jon Northrop, Jere Northrop, Northrop
Family Trust, M. Duane Stutzman, Harley Northrop, Edward Hennig, William
Crossetta and Craig Scott), pursuant to which each note holder agreed to
exercise either outstanding options or warrants owned by the note holder by
cancellation of the promissory note owned by the holder under certain
specified conditions. Additionally, each note holder agreed to participate in
and support a future registered warrant exchange under specified terms and
conditions. See our Form 8-K dated December 11, 1999.
Effective August 29, 2001, we amended the above agreements with holders
of the outstanding promissory notes, pursuant to which each note holder agreed
extend the maturity date to April 30, 2002, cancel certain outstanding options
14
owned by the note holder, and change the terms of the note so that outstanding
principal and interest shall be completely converted to shares of the
Company's Common Stock upon the earlier of April 29, 2002 or the conversion of
the Company's outstanding Convertible Bridge Notes which conversion shall take
place at the lower of: i) $2.25 per share, or ii) the conversion price of the
convertible bridge notes. See our Form 8-K dated September 6, 2001.
Effective August 23, 2000, certain holders of our Class X Warrants and
Class Z Warrants, including without limitation, Jon Northrop, who was then a
Director and President, and Jere Northrop, Director and Chief Technology
Officer (and their extended families), agreed to exchange, in aggregate,
471,545 Class X Warrants and 855,696 Class Z Warrants for 269,831 restricted
shares of our Common Stock. This exchange occurred pursuant to the terms of
agreements dated December 20, 1999. See our Forms 8-K dated December 11,
1999, and August 10, 2000.
Andrew G. Gould joined our Board of Directors on August 10, 2000. In
addition to his duties as a director, Mr. Gould, through Arthur P. Gould &
Co., Inc., a company that he owns, will provide us with an average of
approximately ten (10) hours per month of technology consulting services
through August 31, 2002, at no cost to us. We have granted Mr. Gould options
to purchase 75,000 shares of our Common Stock at a price of $2.25 per share,
exercisable until December 31, 2003. See our Form 8-K dated August 3, 2000.
Beginning August 10, 2000, Salvatore J. Zizza, one of our directors, has
served as our governmental affairs liaison and provide additional consulting
services through September 1, 2002 for which he receives no additional
compensation. We granted Mr. Zizza options to purchase 75,000 shares of our
Common Stock at a price of $2.25 per share, exercisable until December 31,
2003, and issued him 100,000 Class J-2 warrants purchasing Common Stock at a
price of $2.375 per share. We will provide Mr. Zizza with office space in our
New York City office. See our Form 8-K dated August 3, 2000.
Effective June 6, 2001, Joseph R. Wright, Jr. was elected to our
Board of Directors. Mr. Wright received options to purchase 20,000 shares of
unrestricted common stock at $1.50 per share, with 10,000 shares vesting on
June 6, 2002 and 10,000 shares vesting on June 6, 2003, and all shares are
exercisable until December 31, 2005. See our Form 8-K dated April 26,2001.
On April 13, 2000, we completed a private placement offering of
$4,156,425 consisting of $4,095,000 in long term convertible bridge debt and
$61,425 for the purchase of 1,213,500 warrants exercisable at $2.375 per share
until December 31, 2004. See our Form 8-K dated April 13, 2000. D2 and
Salvatore Zizza participated in this offering on the same terms as
unaffiliated third parties. D2 purchased four units ($100,00 convertible debt
and 30,000 warrants) and Mr. Zizza purchased two units ($50,000 convertible
debt and 15,000 warrants). Effective September 15, 2000, we amended certain
terms of the convertible bridge notes upon approval of the holders of a
majority of the notes concerning changes to the conversion procedure and
amended exercise prices on the Bridge Warrants. See our Form 8-K dated August
10, 2000. Effective February 24, 2001, we further amended certain terms of
the convertible bridge notes upon approval of the holders of a majority of the
notes concerning changes to the conversion procedure and maturity date and
amended the call price and exercise prices on the Bridge Warrants. See our
Form 8-K dated February 6, 2001.
On June 8, 2001, we completed private placement offerings of $2,565,125
consisting of $2,527,218 in short term convertible debt and $37,906 for the
purchase of 758,138 warrants exercisable at $1.50 per share until December 31,
15
2005. See our Form 8-K dated April 26, 2001. Salvatore Zizza, Andrew Gould
and Joseph Wright each participated in this offering on the same terms as
unaffiliated third parties. Messrs. Zizza and Wright each purchased
convertible notes of $98,552 and 29,550 warrants. Mr. Gould purchased a
convertible note of $7,882 and 2,363 warrants.
Directors and officers were issued options and warrants as disclosed in
Item 10 Executive Compensation in this Form 10-KSB, above.
The following transactions occurred effective on September 6, 2001:
(a) Severance Agreements. We entered into severance agreements with Jon
Northrop and the only other employee that remained in our Denver, Colorado
office. As a result, we no longer have any employees in Denver and
substantially all of our business operations are conducted out of our office
in New York City, although we will continue to have a small office in Denver
which will be used by Mr. Northrop in his capacity as our consultant.
(b) Restructuring of Notes to Related Parties and Cancellation of
Options and Warrants. We have amended the terms of certain notes that we owe
to certain related parties and have cancelled certain outstanding options and
warrants held by them. The accrued amounts due under notes that we amended
are as follows:
Amount of Accrued Debt
Holder (Accrued to November 1, 2001)
------ -----------------------------
Jon Northrop $ 337,466
Jere Northrop $ 297,531
Harley Northrop $ 397,865
Northrop Family Trust $ 136,150
Edward A. Hennig $ 159,173
M. Duane Stutzman $ 181,106
William J. Crossetta $ 279,000
S. Craig Scott $ 49,804
Dublin Holding Ltd. $3,682,944
Mark Smith Rollover IRA $ 393,556
Kelly Smith Rollover IRA $ 339,870
----------
TOTAL $6,254,465
The provisions of the agreements vary for each debt holder, with
cancellations of certain options and warrants. All of the subject debt is
convertible to shares of our Common Stock or before April 29, 2002, subject to
certain conditions precedent.
(c) Mark Smith Agreements.
- Mark Smith and certain entities related to him which own 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.
16
- In addition, Mr. Smith and certain entities that he controls
entered into a separate agreement with us 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.
(d) D2 Co., LLC Agreements.
We entered into an agreement with D2 Co., LLC, Southview, Inc. and
Atlantic Partners, LLC, all of which are affiliates of David Mitchell, our
President and CEO (collectively, "D2") in which, among other things, we agreed
to:
- provide that the compensation payable to D2 be paid in a deferred
manner as set forth in an exhibit to the agreement;
- be a party to the voting agreement that gives David Mitchell the
power to vote all of the Smith Shares as to most matters;
- release Jon Northrop from the restrictions related to the sale of
shares of our Common Stock owned by him that are contained in the
Shareholders Agreement dated December 23, 1999, as amended; and
- amend the SV1 and SV2 Warrants held by D2 so that upon earlier of
(i) completion of financing or series of financings large enough
to "trigger" the conversion of Bion's outstanding Bridge Notes
and 2001 Convertible Notes (collectively "CV Notes") into Bion
Common Stock; or (ii) conversion of the CV Notes into Bion 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
Bion Common Stock equal to 20% of the "fully-diluted" outstanding
shares, calculated by including (i) the Adjusted Warrants, (ii)
the securities issued in the conversion of the CV Notes and other
notes, (iii) the securities issued in connection with the subject
financing, and (iv) other outstanding options, warrants and/or
convertible promissory notes which are exercisable or
convertible, as applicable, at a price equal to or lower than the
exercise price of the Adjusted Warrants, which Adjusted Warrants
will have the same expiration date as the current SV1 and SV2
Warrants and will have an exercise price equal to the lower of
$1.00 per share or the conversion price of the CV Notes;
provided, however, that for purposes of calculating the number of
Adjusted Warrants, no securities outstanding related to any
portion of a financing aggregating greater than $10,000,000 will
be included in the calculation. As partial consideration for our
agreeing to the adjustment to the warrants, Southview agreed to
extend the term of the outstanding promissory note (with an
17
accrued balance of $521,040 as of July 31, 2001)so that such
promissory note could be repaid from the proceeds of a new
financing.
All past and future and ongoing transactions with affiliates are and will
be on terms which our management believes are no less favorable than could be
obtained from non-affiliated parties. All future and ongoing loans to our
affiliates, officials and shareholders will be approved by the majority vote
of disinterested directors.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
--------
3.1 Articles of Incorporation previously filed and incorporated
herein by reference.
3.2 Bylaws previously filed and incorporated by reference.
10.1 Management Agreement and Management Compensation Warrant dated
December 23, 1999, between Bion Environmental Technologies, Inc.
and D2 Co., LLC. Incorporated by reference to Exhibit 10.1
to our Form 8-K dated December 11, 1999.
10.2 Warrant Purchase Agreement dated December, 1999, between Bion
Environmental Technologies, Inc. and D2 Co., LLC.; Promissory
Note dated December 23, 1999; Warrant between Bion Environmental
Technologies, Inc. and D2 Co., LLC.; and Pledge Agreement dated
December 23, 1999, between Bion Environmental Technologies, Inc.
and D2 Co., LLC. Incorporated by reference to Exhibit 10.2 to
our Form 8-K dated December 11, 1999.
10.3 Shareholders' Agreement dated December 23, 1999, among D2 Co.,
LLC, Mark A. Smith, Jere Northrop, Jon Northrop, LoTayLingKyur,
Inc., LTLK Defined Benefit Plan, and Dublin Holding, Ltd.
Incorporated by reference to Exhibit 10.3 to our Form 8-K
dated December 11, 1999.
10.4 Agreement dated December 15, 1999, between Bion Environmental
Technologies, Inc. and First Parties. Incorporated by reference
to Exhibit 10.4 to our Form 8-K dated December 11, 1999.
10.5 Agreement dated December 11, 1999, between Bion Environmental
Technologies, Inc. and Jon Northrop. Incorporated by reference
to Exhibit 10.5 to our Form 8-K dated December 11, 1999.
10.6 Agreement dated December 14, 1999, between Bion Environmental
Technologies, Inc. and Jere Northrop. Incorporated by reference
to Exhibit 10.6 to our Form 8-K dated December 11,
1999.
10.7 Agreement dated December 13, 1999, between Bion Environmental
Technologies, Inc. and Northrop Family Trust. Incorporated by
reference to Exhibit 10.7 to our Form 8-K dated December 11,
1999.
18
10.8 Agreement dated December 11, 1999, between Bion Environmental
Technologies, Inc. and M. Duane Stutzman. Incorporated by
reference to Exhibit 10.8 to our Form 8-K dated December 11,
1999.
10.9 Agreement dated December 14, 1999, between Bion Environmental
Technologies, Inc. and Harley E. Northrop. Incorporated by
reference to Exhibit 10.9 to our Form 8-K dated December 11,
1999.
10.10 Agreement dated December 11, 1999, between Bion Environmental
Technologies, Inc. and Edward A. Hennig. Incorporated by
reference to Exhibit 10.10 to our Form 8-K dated December 11,
1999.
10.11 Agreement dated December 14, 1999, between Bion Environmental
Technologies, Inc. and William J. Crossetta, Jr. Incorporated
by reference to 10.11 to our Form 8-K dated December 11, 1999.
10.12 Agreement dated December 11, 1999, between Bion Environmental
Technologies, Inc. and S. Craig Scott. Incorporated by
reference to Exhibit 10.12 to our Form 8-K dated December 11,
1999.
10.13 Agreement dated August 10, 2000 between Bion Environmental
Technologies, Inc. and D2CO, LLC. Incorporated by reference to
Exhibit 99.2 to our Form 8-K dated August 3, 2000.
10.14 Agreement dated August 16, 2000 between Bion Environmental
Technologies, Inc. and Salvatore Zizza. Incorporated by
reference to Exhibit 99.3 to our Form 8-K dated August 3, 2000.
10.15 Agreement dated August 17, 2000 between Bion Environmental
Technologies, Inc. and James W. Morris & Associates, Inc.
Incorporated by reference to Exhibit 99.4 to our Form 8-K dated
August 3, 2000.
10.16 Agreement dated August 6, 2000 among Bion Environmental
Technologies, Inc., Dream Maker Dairy and Chris Northrop.
Incorporated by reference to Exhibit 99.7 to our Form 8-K dated
August 3, 2000.
10.17 2000 Incentive Plan. Incorporated by reference to Exhibit 99.5
to our Form 8-K dated August 10, 2000.
10.18 Amendment to Management Agreement with D2CO, LLC. Incorporated
by reference to Exhibit 99.1 to our Form 8-K dated December 1,
2000.
10.19 Agreement dated February 7, 2001 between Bion Technologies,
Inc. and Southview, Inc. Incorporated by reference to Exhibit
99.2 to our Form 8-K dated December 1, 2000.
10.20 Agreement dated October 31, 2000 between Bion Environmental
Technologies, Inc. and George Bloom. Incorporated by reference
to Exhibit 99.3 to our Form 8-K dated December 1, 2000.
19
10.21 Note and Warrant Purchase Agreement. Incorporated by reference
to Exhibit 10.1 to our Form 8-K dated April 26, 2001.
10.22 Convertible Bridge Note. Incorporated by reference to Exhibit
10.2 to our Form 8-K dated April 26, 2001.
10.23 Bridge Warrant. Incorporated by reference to Exhibit 10.3 to
our Form 8-K dated April 26, 2001.
10.24 Severance Agreement of Jon Northrop. Incorporated by reference
to Exhibit 10.1 to our Form 8-K dated September 6, 2001.
10.25 Severance Agreement of Edward Hennig. Incorporated by
reference to Exhibit 10.2 to our Form 8-K dated September 6,
2001.
10.26 Agreement of Harley E. Northrop. Incorporated by reference
to Exhibit 10.3 to our Form 8-K dated September 6, 2001.
10.27 Agreement of Jere Northrop. Incorporated by reference
to Exhibit 10.4 to our Form 8-K dated September 6, 2001.
10.28 Agreement of William J. Crossetta, Jr. Incorporated by
reference to Exhibit 10.5 to our Form 8-K dated September 6,
2001.
10.29 Agreement of S. Craig Scott. Incorporated by reference
to Exhibit 10.6 to our Form 8-K dated September 6, 2001.
10.30 Agreement of Northrop Family Trust. Incorporated by reference
to Exhibit 10.7 to our Form 8-K dated September 6, 2001.
10.31 Agreement of M. Duane Stutzman. Incorporated by reference
to Exhibit 10.8 to our Form 8-K dated September 6, 2001.
10.32 Stock Voting Agreement dated August 1, 2001. Incorporated by
reference to Exhibit 10.9 to our Form 8-K dated September 6,
2001.
10.33 Mark Smith and Related Entities Agreement dated August 1,
2001. Incorporated by reference to Exhibit 10.10 to our
Form 8-K dated September 6, 2001.
10.34 D2 Agreement dated August 1, 2001. Incorporated by reference
to Exhibit 10.11 to our Form 8-K dated September 6, 2001.
10.35 2001 Incentive Plan. Incorporated by reference to Exhibit
10.12 to our Form 8-K dated September 6, 2001.
10.36 Lease Agreement with Pamela Equities Corp. dated August 2001.
Filed herewith electronically.
21 Subsidiaries of the Registrant. Incorporated by reference to
our Form 10-KSB for the fiscal year ended June 30, 2000.
20
23.1 Consent of BDO Seidman, LLP. Previously filed.
99.1 Bion Environmental Technologies, Inc.'s Capital Structure.
Incorporated by reference to Exhibit 10.13 to our Form 8-K/A
dated December 28, 1999.
99.2 Form of Note and Warrant Purchase Agreement. Incorporated by
reference to Exhibit 10.1 to our Form 8-K dated April 13,
2000.
99.3 Form of Convertible Bridge Note. Incorporated by reference to
Exhibit 10.2 to our Form 8-K dated April 13, 2000.
99.4 Form of Bridge Warrant. Incorporated by reference to Exhibit
10.3 to our Form 8-K dated April 13, 2000.
Reports on Form 8-K
-------------------
The following Report on Form 8-K was filed during the quarter ended June
30, 2001:
Form 8-K dated April 26, 2001 reporting information under Items 5 and 7.
21
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Independent Certified Public Accountants
BDO Seidman, LLP F-2
Consolidated Balance Sheet as of June 30, 2001 F-3 to F-4
Consolidated Statements of Operations for the Years Ended
June 30, 2001 and 2000 F-5
Consolidated Statements of Stockholders' Deficit
for the Years Ended June 30, 2000 and 2001 F-6 to F-7
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2001 and 2000 F-8 to F-9
Summary of Accounting Policies F-10 to F-16
Notes to Consolidated Financial Statements F-17 to F-37
F-1
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Bion Environmental Technologies, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of Bion
Environmental Technologies, Inc. and Subsidiaries as of June 30, 2001 and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the years ended June 30, 2001 and 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bion
Environmental Technologies, Inc. and Subsidiaries as of June 30, 2001 and the
results of their operations and their cash flows for the years ended June 30,
2001 and 2000 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company's significant operating losses and
stockholders' deficit raise substantial doubt about its ability to continue as
a going concern. Management's plans regarding those matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
August 10, 2001 (except for Note 6, which is as of August 31, 2001 and Note
10, which is as of September 6, 2001)
F-2
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2001
-------------
ASSETS
Current:
Cash and cash equivalents $ 1,300,398
Accounts receivable, less allowance of $12,000
for possible losses 21,738
Prepaid expenses, note receivable and accrued interest 8,446
------------
Total current assets 1,330,582
------------
Property and equipment (Note 6):
Furniture and equipment 339,414
Computer equipment 75,845
Leasehold Improvements 30,174
------------
445,433
Less accumulated depreciation and amortization 262,582
------------
Net property and equipment 182,851
------------
Other assets:
Patents, net of accumulated amortization of $18,344 33,370
Deposits and other 135,859
------------
Total other assets 169,229
------------
$ 1,682,662
============
See accompanying Notes to Consolidated Financial Statements
F-3
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2001
-------------
Liabilities and Stockholders' Deficit
Current:
Accounts payable $ 210,473
Convertible bridge notes payable (Note 2) 5,801,721
Notes payable, related parties - current(Note 3) 2,298,538
Current portion of capital lease obligations (Note 6) 12,893
Accrued expenses 35,272
------------
Total current liabilities 8,358,897
------------
Long-term liabilities:
Notes payable, related parties (Note 3) 2,482,279
Long-term portion of capital lease obligations (Note 6) 3,248
------------
Total long-term liabilities 2,485,527
------------
Total liabilities 10,844,424
------------
Commitments and contingencies (Note 6)
Stockholders' deficit (Note 7):
Common stock, no par value, 100,000,000 shares
authorized, 13,062,324 shares issued and
outstanding 30,218,339
Accumulated deficit (39,380,101)
------------
Total stockholders' deficit (9,161,762)
------------
$ 1,682,662
============
See accompanying Notes to Consolidated Financial Statements
F-4
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 2001 2000
------------- ------------
Revenues:
Soil $ 74,322 $ 135,945
System contracts 10,000 22,500
------------- ------------
Total revenues 84,322 158,445
------------- ------------
Cost of goods sold:
Soil 439,817 348,305
System contract - 41,997
------------- ------------
Total cost of goods sold 439,817 390,302
------------- ------------
Gross loss (355,495) (231,857)
------------- ------------
Expenses:
General and administrative (including
$7,645,570 and $3,590,191 of non-cash
expenses, respectively) 10,424,451 5,779,081
Research and development 1,262,010 598,304
------------- ------------
Total expenses 11,686,461 6,377,385
============= ============
Loss from operations (12,041,956) (6,609,242)
------------- ------------
Other income (expense):
Interest expense (including $3,013,644 and
$2,244,028 of non-cash expenses, respectively) (3,016,149) (2,259,136)
Interest income 36,598 79,411
Loss on sale of mortgage receivable - (57,250)
Other expense, net (50,466) (51,168)
------------- ------------
Total other expense (3,030,017) (2,288,143)
------------- ------------
Net loss before cumulative effect of change in
accounting principle (15,071,973) (8,897,385)
Cumulative effect of change in accounting
principle (Note 9) (481,250) -
------------- ------------
Net loss and comprehensive loss $ (15,553,223) $ (8,897,385)
============= ============
Basic and diluted loss per common share:
Net loss before cumulative effect of
change in accounting principle $ (1.16) $ (.79)
Cumulative effect of change in
accounting principle (0.04) -
------------- ------------
Net loss per common share $ (1.20) $ (.79)
============= ============
Weighted-average number of common shares
outstanding, basic and diluted 12,937,188 11,196,912
============= ============
See accompanying Notes to Consolidated Financial Statements
F-5
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Non-Recourse Common Deferred Total
Years Ended June 30, 2001 Common Stock Promissory Stock Consulting Unearned Accumulated Stockholders'
and 2000 Shares Amount Note Subscribed Expense Compensation Deficit Deficit
--------------------------------------------------------------------------------------------------------------------------------
Balance, July 1, 1999 10,092,795 $12,060,705 $ - $ 60,000 $ - $ - $(14,929,493) $(2,808,788)
Conversion of common
stock subscriptions to
note payable - - - (60,000) - - - (60,000)
Issuance of common stock
for cash (Note 7) 282,686 426,460 - - - - - 426,460
Issuance of common stock
for services and note
payable (Note 7) 294,762 643,503 - - - (90,000) - 553,503
Issuance of warrants for
cash and non- recourse
promissory note (Note 4) - 2,477,370 (500,000) - - - - 1,977,370
Issuance of stock to
employees for cash (Note 7) 60,000 127,605 - - - - - 127,605
Issuance of stock and
warrants in related party
note payable and warrant
exchange (Note 3) 1,172,426 2,419,771 - - - - - 2,419,771
Beneficial conversion
feature on convertible
note payable (Note 3 - 656,027 - - - - - 656,027
Issuance of warrants as
additional consideration
to note holders (Note 3) - 349,492 - - - - - 349,492
Warrants issued for
consulting services
(Note 4) - 2,477,820 - - (2,333,687) - - 144,133
Issuance of warrants in
connection with
convertible bridge
notes (Note 2) - 1,110,118 - - - - - 1,110,118
Deferred consulting and
compensation expense
(Notes 4 and 7) - - - - 388,948 22,500 - 411,448
Net loss for the year
ended June 30, 2000 - - - - - - (8,897,385) (8,897,385)
--------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 11,902,669 22,748,871 (500,000) - (1,944,739) $(67,500) (23,826,878) (3,590,246)
Compensation associated
with warrants exchanged
for common stock (Note 7) 1,145,128 2,179,182 2,179,182
Issuance of stock options
and warrants for
consulting services 2,834,702 2,834,702
(Note 4)
Modification of terms of
convertible bridge notes 213,172 213,172
(Note 7)
Warrants issued for
consulting services 737,005 (737,005)
(Note 4)
Deferred consulting expense 320,591 320,591
(Note 4)
See accompanying Notes to Consolidated Financial Statements
F-6
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (Concluded)
Issuance of common stock for
consulting services 25,000 42,175 42,175
(Note 7)
Deferred salaries expense 27,000 27,000
Beneficial conversion feature
on convertible bridge
notes (Note 9) 1,751,000 1,751,000
Beneficial value of warrants
issued (Notes 2 and 7) 699,902 699,902
Deferred compensation charged
to operations in connection
with renegotiation of
management agreement (Note 4) 2,361,153 2,361,153
Repurchase of warrants
previously issued for cash
and non-recourse (Note 4)
promissory note (1,000,000) 500,000 (500,000)
Cancellation of shares
previously issued for
services (Notes 2 and 7) (16,200) (40,500) 40,500
Issuance of warrants for
cash as additional
consideration to
convertible note holders 37,907 37,907
(Note 7)
Issuance of shares on
exercise of options in
exchange for legal
services (Note 7) 5,000 10,000 10,000
Exercise of stock options 727 1,454 1,454
Adjustment for variable options 3,469 3,469
Net loss for the year ended
June 30, 2001 (15,553,223) (15,553,223)
--------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 13,062,324 $30,218,339 $ - $ - $ - $ - $(39,380,101) $(9,161,762)
--------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
F-7
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Years Ended June 30, 2001 2000
-------------------- ----------- -----------
Operating activities:
Net loss $(15,553,223) $(8,897,385)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 76,954 60,919
Issuance of stock for services and compensation 79,175 459,321
Issuance of warrants for consulting expenses 2,230,000 -
Amortization of prepaid consulting expenses 770,800
Beneficial value of warrants issued 1,477,370
Amortization of debt discounts 1,673,178 944,187
Amortization of deferred consulting expense 320,591 388,948
Compensation charge for warrants issued for services 2,361,153 -
Beneficial conversion feature amortized to interest expense 262,500 656,027
Compensation associated with warrants exchanged for
common stock 2,179,182 -
Issuance of options and warrants for consulting services 102,000 -
Adjustment for variable options 3,469 -
Loss on sale of property and equipment 10,691 -
Beneficial conversion feature recorded as cumulative effect
of change in accounting principle 481,250 -
Amortization of deferred compensation 22,500
Loss on sale of mortgage assets 57,250
Changes in operating assets and liabilities:
Accounts receivable 4,957 67,067
Prepaid expenses and other (85,719) 42,039
Accrued interest receivable (20,000)
Accounts payable 109,307 (256,960)
Accrued liabilities 8,807 (324,736)
Issuance of note payable for management fee 370,000 120,000
Issuance of note payable for legal services rendered 225,000
Issuance of note payable for officer compensation 65,333
Issuance of note payable for interest expense 1,077,966 643,814
----------- -----------
Net cash used in operating activities (4,287,762) (3,498,506)
----------- -----------
See accompanying Notes to Consolidated Financial Statements
F-8
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
Years Ended June 30, 2001 2000
-------------------- ----------- -----------
Investing activities:
Purchases of equipment (60,801) (95,379)
Refund of equipment returned 1,447 -
Proceeds from sale of computer equipment 525 -
Proceeds on sale of mortgage assets - 202,750
----------- -----------
Net cash provided by (used in) investing activities (58,829) 107,371
----------- -----------
Financing activities:
Proceeds from notes payable, related parties 500,000 1,031,074
Proceeds from issuance of notes payable in private placement 2,527,218 4,095,000
Proceeds from issuance of warrants 540,607 561,425
Proceeds from stock issuances and subscriptions - 426,460
Proceeds from sale of stock to officers - 127,605
Proceeds from exercise of options and warrants 1,454 -
Payments for cancellation of warrants previously issued (500,000)
Payments in exchange for note receivable (10,000)
Payments on notes payable - (241,559)
Payments on capital lease obligations (27,223) (49,520)
----------- -----------
Net cash provided by financing activities 3,042,056 5,940,485
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,304,535) 2,549,350
Cash and cash equivalents, beginning of year 2,604,933 55,583
----------- -----------
Cash and cash equivalents, end of year $ 1,300,398 $ 2,604,933
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,504 $9,323
Supplemental disclosure of non-cash financing activities:
Warrants issued in private placement 699,902 1,110,118
Warrants issued for deferred consulting services - 2,333,687
Warrants and stock issued in exchange for warrants - 2,419,771
Conversion of note payable to common stock for legal services - 94,182
Issuance of stock for unearned compensation - 90,000
Issuance (cancellation) of note receivable for sale of warrants (500,000) 500,000
Conversion of common stock subscribed - 60,000
Beneficial conversion feature on convertible bridge notes 1,751,000 -
See accompanying Notes to Consolidated Financial S
F-9
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Business
Bion Environmental Technologies, Inc. ("Bion" or the "Company") is an
environmental service company focused on the needs of confined animal feeding
operations (CAFO's). Bion is engaged in two main areas of activity: waste
stream remediation and organic soil and fertilizer production. Bion's waste
remediation service business provides CAFO's (primarily in the swine and dairy
industries) with treatment for the animal waste outputs. In this regard, Bion
treats their entire waste stream in a manner which cleans and reduces the
waste stream thereby mitigating pollution of the air, water (both ground and
surface) and soil, while creating value-added organic soil and fertilizer
products. Bion's soil and fertilizer products are being used for a variety of
applications including school athletic fields, golf courses and home and
garden applications.
The Company's Nutrient Management System (NMS) solution is a patented
biological and engineering process that treats water, nutrient and air
pollution associated with animal waste. The system also provides a use for
the waste materials and solids by biologically converting them into
environmentally friendly, time-release organic-based solids which are the
basis of Bion's organic soil and fertilizer business segment. Bion's BionSoil
and Bion Fertilizer product lines contain a unique mix of organic nutrients,
bacteria and other microbes that extensive testing has shown produces superior
plant growth with reduced leaching of nutrients when compared to traditional
chemical fertilizers.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Bion Technologies, Inc. and BionSoil, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash Equivalents
The Company considers cash and all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
F-10
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives
(ranging from three to seven years) of the assets. Maintenance and repairs
are expensed as incurred. Major renewals and improvements are capitalized.
When property and equipment is retired or otherwise disposed of, the asset and
accumulated depreciation or amortization are removed from the accounts and the
resulting profit or loss is reflected in operations.
Depreciation and amortization expense for property and equipment for the years
ended June 30, 2001 and 2000 was $73,722 and $57,687.
Property and equipment at June 30, 2001 and 2000 included equipment under
capital lease obligations with an original cost of $102,599 and accumulated
depreciation of $83,209 and $101,157.
Long-Lived Assets
The Company applies Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets. Under SFAS No. 121,
long-lived assets and certain intangibles are evaluated for impairment when
events or changes in circumstances indicate that the carrying value of the
assets may not be recoverable through the estimated undiscounted future cash
flows resulting from the use of these assets. When any such impairment exists,
the related assets will be written down to fair value.
F-11
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Revenue Recognition
Revenues from fixed-price system development and construction projects are
recognized on the percentage-of-completion method. For contracts accounted
for under the percentage-of-completion method, the amount of revenue
recognized is the percentage of the total contract price that the cost
expended to date bears to the anticipated final total cost based upon current
estimates of the cost to complete the contract. Contract cost includes all
labor and benefits, materials unique to or installed in the project,
subcontract costs and allocations of indirect costs. General and
administrative costs are charged to expense. Provisions for estimated losses
on uncompleted contracts are provided when determined, regardless of the
completion percentage. As contracts can extend over one or more accounting
periods, revisions in costs and earnings estimated during the course of the
work are reflected during the accounting period in which the facts that
require such revisions become known. Project managers make assumptions
concerning cost estimates for labor hours, consultant hours and other project
costs. Due to uncertainties inherent in the estimation process and potential
changes in customer needs as projects progress, it is at least reasonably
possible that completion costs for some uncompleted projects may be further
revised in the near term, and that such revisions may be material.
Revenue from the sale of BionSoil products and associated fees are recognized
when shipped, as the Company has no continuing obligations. Fees and royalties
paid on BionSoil production are negotiated as a fixed price per cubic yard of
product produced and are included in the cost of the BionSoil.
Advertising
The Company expenses advertising and promotional costs as incurred. For the
years ended June 30, 2001 and 2000, the Company recorded $2,315 and $2,402 in
advertising expense.
F-12
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Income Taxes
The Company accounts for income taxes under the liability method, which
requires an entity to recognize deferred tax assets and liabilities. Deferred
taxes are temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements that will
result in taxable or deductible amounts in future years.
Net Loss Per Share
The Company follows the provisions of SFAS No. 128, "Earnings Per Share."
SFAS No. 128 provides for the calculation of "Basic" and "Diluted" earnings
per share. Basic earnings per share includes no dilution and is computed by
dividing income or loss available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share reflect the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. In loss
periods, dilutive common equivalent shares are excluded, as the effect would
be anti-dilutive. Therefore, basic and diluted earnings per share are the
same for all periods presented.
For the years ended June 30, 2001 and 2000, stock options exercisable into
1,904,964 and 1,786,445 shares of common stock and stock warrants exercisable
into 9,397,608 and 14,069,173 shares of common stock and debt convertible into
5,959,378 and 3,910,334 shares of common stock were not included in the
computation of diluted earnings per share because their effect was
antidilutive.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosures of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates and assumptions.
F-13
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Concentrations of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable.
The Company's cash and cash equivalents are in demand deposit accounts placed
with federally insured financial institutions and selected brokerage accounts.
Such deposit accounts at times may exceed federally insured limits. The
Company has not experienced any losses on such accounts.
Concentrations of credit risk with respect to trade accounts receivable are
generally limited since customers are dispersed across geographic areas. The
Company reviews a customer's credit history before extending credit and
establishes an allowance for doubtful accounts based upon the credit risk of
specific customers, historical trends and other information. Generally, the
Company does not require collateral from its customers.
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined using
available market information or other appropriate valuation methodologies,
including the Black Scholes model. However, considerable judgment is required
in interpreting market data to develop estimates of fair value. Consequently,
the estimates are not necessarily indicative of the amounts that could be
realized or would be paid in a current market exchange. The carrying amounts
reported on the consolidated balance sheets approximate their respective fair
values.
Segment Information
The Company follows the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement establishes
standards for the reporting of information about operating segments in annual
and interim financial statements. Operating segments are defined as components
of an enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision maker(s) in deciding how
to allocate resources and in assessing performance. See Note 11 for
disclosure.
F-14
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Stock Option Plan
The Company applies Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees" ("APB Opinion 25") and related Interpretations in
accounting for all stock option plans. Under APB Opinion 25, compensation cost
is recognized for stock options issued to employees when the exercise price of
the Company's stock options granted is less than the market price of the
underlying common stock on the date of grant. SFAS No. 123, "Accounting for
Stock-Based Compensation" requires the Company to provide pro forma
information regarding net income (loss) as if compensation cost for the
Company's stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. To provide the required pro
forma information, the Company estimates the fair value of each stock option
at the date of grant by using the Black-Scholes option pricing model (Note 8).
Patents
Patents are recorded at cost less accumulated amortization, which is
calculated on a straight-line basis over a period of the estimated economic
life or legal life of 17 years. Amortization expense for the years ended June
30, 2001 and 2000 was $3,232 each year.
Comprehensive Loss
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income".
Comprehensive loss is comprised of net loss and all changes to the
consolidated statement of stockholders' deficit, except those changes made due
to investment by stockholders, changes in paid in capital and distributions to
stockholders. The Company had no components of comprehensive loss except for
net losses for the years ended June 30, 2001 and 2000.
F-15
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Impact of Recently Issued
Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
requires 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 is effective for fiscal years beginning after June 15, 2000. The
adoption of SFAS No. 133 had no material effect on the Company's financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"), which was
effective July 1, 2000, except that certain conclusions in this Interpretation
which cover specific events that occur after either December 15, 1998 or
January 12, 2000 are recognized on a prospective basis from July 1, 2000. This
Interpretation clarifies the application of APB Opinion 25 for certain issues
related to stock issued to employees. The Company's existing stock based
compensation policies and procedures are in compliance with FIN 44 and
therefore, the adoption of FIN 44 had no material impact on the Company's
financial condition, results of operations or cash flows.
In July 2001, the FASB issued Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141"), which supersedes APB Opinion No. 16,
"Business Combinations". 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
Company is currently reviewing the statement, but does not anticipate the new
standard will have any effect on its 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 Company is currently reviewing the statement
and has not yet determined the impact of the adoption of SFAS 142 will have on
its financial statements.
Reclassifications
Certain consolidated financial amounts as of June 30, 2000 have been
reclassified for consistent presentation.
F-16
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Going Concern
The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. The Company incurred losses totaling
$15,553,223 during the year ended June 30, 2001 (including non-cash interest
expense and other non-cash expenses of $3,013,644 and $7,645,570,
respectively) and a history of losses has resulted in an accumulated deficit
of $39,380,101 at June 30, 2001.
During the year ended June 30, 2001, the Company has successfully obtained
external financing through a private placement of debt and equity and the sale
of its warrants. The Company continues to explore sources of additional
financing to satisfy its current operating requirements.
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 developing the next generation Bion
system design, which will include system monitoring and controls and a clean
water recycling loop; an expanded 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. 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.
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-17
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Convertible Bridge Notes Payable
On June 8, 2001, the Company completed a private offering of unsecured
convertible bridge notes payable (the "2001 Notes") in the principal amount of
$2,527,218. The 2001 Notes bear interest at the rate of ten percent per year
(accrued interest of $34,207 at June 30, 2001 is included in convertible
bridge notes) and mature on April 30, 2002. The Company can prepay the notes
at any time with no penalty. In general, if the Company sells $5,000,000 of
equity securities prior to April 29, 2002, each note will convert into the
number of shares that is obtained by dividing the aggregate principal amount
of each note plus accrued but unpaid interest by the price of one share of the
equity security which triggers the conversion; provided, however, that in no
event may the conversion price be greater than $2.50 per share. If prior to
midnight on April 29, 2002 the notes are not paid in cash or converted into
shares of common stock as the result of an offering, then at that time each
note will be automatically converted into the number of shares that is
obtained by dividing the aggregate principal amount of each note plus accrued
but unpaid interest by the average of the closing bid prices of the common
stock for the preceding 20 business days; provided, however, that in no event
may the conversion price be greater than $2.50 per share. In connection with
the sale of the 2001 Notes, the Company issued stock purchase warrants
exercisable to purchase 758,138 shares of the Company's common stock at $1.50
per share through December 31, 2005. 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. The unamortized
value of the warrants at June 30, 2001 was $622,289. As a result of the
issuance of EITF 00-27, the Company has recorded an additional discount on the
2001 Notes of $701,000 due to the beneficial conversion feature calculated on
the instrinsic value of the allocated proceeds received in the financing.
For the three months ended June 30, 2001, $127,083 (including accrued interest
of $2,083 through June 30, 2001) of 2001 Notes has been issued for payment of
management fees to the Trust Under Deferred Compensation Plan for D2CO, LLC in
accordance with agreement with the Company and D2.
On April 13, 2000, the Company completed a private offering of unsecured
convertible bridge notes payable (the "Notes") in the original principal
amount of $4,095,000. As of June 30, 2001, accrued interest included in
convertible bridge notes payable amounted to $534,056. In connection with the
sale of the Notes, the Company issued stock purchase warrants exercisable to
purchase 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. The unamortized
warrant discount at June 30, 2001 was $587,763. Principal and accrued
interest on this offering bears interest at 10% per annum and are due on April
30, 2002.
F-18
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additional 2000 Notes totaling $265,000 (including accrued interest of $25,000
through June 30, 2001) were issued to D2 for payment of monthly management
fees for the twelve months ending December 31,2000.
2000 Notes totaling $130,208 (including accrued interest of $5,208 through
June 30, 2001) for management fees for the three-month period ending March 31,
2001 have been issued to the Trust Under Deferred Compensation Plan for D2CO,
LLC pursuant to the agreement with the Company and D2.
Following acceptance by the 2000 Notes holders on August 24, 2000, the Company
amended the 2000 Notes 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.
Following acceptance by 87.80% of the holders of the 2000 Notes 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 Bion's 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.
On June 30,2001 two of the three holders of the convertible bridge notes
payable and associated warrants who did not extend the maturity date of their
notes agreed to extend the maturity date to April 30, 2002 and also agreed to
all the other changes in terms from the prior amendments.
The amendments in terms of the convertible bridge notes payable and associated
warrants resulted in an additional $143,093 of value attributable to the
warrants. Such amount has been reflected as an additional discount on the
convertible bridge notes.
F-19
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
One note holder who did not agree to extend the maturity has been issued
common stock of the Company subsequent to June 30, 2001.
Of the 2000 Notes, $100,000 was issued to D2 and $50,000 was issued to
Salvatore Zizza, a director of the Company. Of the 2001 Notes payable,
$100,000 was issued to each of Salvatore Zizza and Joseph Wright, both
directors of the Company. $240,000 of the 2000 Notes payable were issued to
D2 in accordance with the management agreement between the Company and D2.
The Company also issued $125,000 of the 2000 Notes payable and $125,000 2001
Notes payable to the Trust Under Deferred Compensation Plan for D2CO, LLC for
additional management fees.
Total interest accrued on the 2001 and 2000 Notes for the year ended June 30,
2001 was $436,875 and $36,290, respectively. These amounts were added to the
total of the outstanding balances of the 2001 and 2000 Notes for the year
ended June 30, 2001.
Below is a summary of the outstanding Convertible Bridge Notes as of June 30,
2001:
Non-affiliated Third Parties (including accrued
interest of $547,218 and unamortized discount
of $1,782,627) $5,031,884
Directors (including accrued interest of $8,526
and unamortized discount of $114,141) 149,311
D2 (including accrued interest of $12,521) (1) 98,235
D2 Management Fee (including accrued interest
of $25,000) (2) 265,000
Trust Under Deferred Compensation For D2, LLC.
(including accrued interest of $7,291) (3) 257,291
----------
Total $5,801,721
==========
(1) This note was purchased by D2.
(2) These notes were issued to D2 as payment for management fees.
(3) These notes were issued to Trust Under Deferred Compensation For
D2, LLC. as payment for D2 management fee.
F-20
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Convertible Bridge Notes bear interest at the rate of ten percent per year
and mature on April 30, 2002. The Company can prepay the notes at any time
with no penalty. In general, if the Company sells $5,000,000 of equity
securities prior to April 29,2002, each note will convert into the number of
shares that is obtained by dividing the aggregate principal amount of each
note plus accrued but unpaid interest by the price of one share of the equity
security which triggers the conversion; provided, however, that in no event
may the conversion price be greater than $2.50 per share.
If prior to midnight on April 29, 2002 the notes are not paid in cash or
converted into shares of common stock as the result of an offering, then at
that time each note will be automatically converted into the number of shares
that is obtained by dividing the aggregate principal amount of each note plus
accrued but unpaid interest by the average of the closing bid prices of the
common stock for the preceding 20 business days; provided, however, that in no
event may the conversion price be greater than $2.50 per share.
3. Notes Payable, Related Parties
Notes payable, related parties, consisted of the following:
June 30, 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 $616,365
(including accrued interest of $415,556 for the year
ended June 30, 2001 added to the balance of the notes),
net of unamortized warrant discount of $1,209,884.
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. All outstanding principal and interest,
computed at 1% per month, is due and payable on or before
December 31, 2002. (1) (See Note 10) $2,482,279
Unsecured notes payable to a stockholder, principal
amount of $308,114 plus accrued interest of $77,426
(including accrued interest of $36,974 for the year
ended June 30, 2001 added to the balance of the notes).
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. Subsequent to June 30, 2001, the
conversion provisions of this note were amended.
(See Note 10) 385,540
F-21
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unsecured notes payable to various stockholders,
principal amount of $1,171,081 plus accrued interest
of $224,274 (included accrued interest of $134,628
for the year ended June 30, 2001 added to the balance
of the notes). 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.
Subsequent to June 30, 2001 conversion provisions of
these notes were amended. (See Note 10) 1,395,355
Unsecured notes payable to Southview,
principal amount of $500,000 plus accrued
interest of $17,643. All outstanding principal
and accrued interest at .67% per month is due
and payable on July 30, 2001.(2)(See Note 10) 517,643
----------
Total notes payable - related parties (3) 4,780,817
Less current maturities - Note payable related parties 2,298,538
----------
Total long-term debt - related parties $2,482,279
==========
(1) In August 2000, the LoTayLingKyur, Inc. note was cancelled and the
balance was added to the LTLK Defined Benefit Plan and the Dublin Holding LTD.
notes. In December 2000, the LTLK Defined Benefit Plan note was cancelled and
reissued as the Mark A. Smith Rollover IRA and the Kelly Smith Rollover
IRA notes. The Company amortized $1,209,887 of discount through June 30,
2001, resulting in a $ 1,209,884 discount balance at that time.
During the year ended June 30, 2000, the Company exchanged its previous
note obligation including related accrued interest for a total of $3,075,798,
and extended the terms of the notes. In connection with the note exchange,
The Company issued 1,172,426 shares of common stock valued at $3,089,343 and
2,735,660 Class Z warrants, exercisable into common stock at $13.50 per share
through December 31, 2001, valued at $218,853, in exchange for 3,908,084 Class
X warrants previously issued to the entities in connection with various
events, including the original note issuances. The total value of the
3,908,084 warrants using the Black Scholes option-pricing model was $888,425,
of which $349,492 related to the warrants issued with the original notes
payable. On the date of the exchange, the Company expensed the remaining
balance of the unamortized discount, and recorded a new discount of
$2,419,771, representing the excess of the value of the stock and warrants
issued over the value of the warrants surrendered. Additionally, a beneficial
conversion feature of $656,027 was recorded and charged to interest expense as
the Company's common stock price exceeded the $1.80 conversion price on the
date the notes were exchanged.
F-22
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) This note was extended on August 1, 2001 until proceeds from financing
are available for repayment.
(3) This figure does not include Convertible Bridge Notes Payable purchased
by Salvatore Zizza and Joseph Wright, directors of the Company, and D2, a
company owned by David Mitchell. Convertible Bridge Notes Payable issued to
D2 and D2 Trust Under Deferred Compensation Plan for D2CO, LLC as compensation
to D2 are also not included in these amounts. See Note 2.
4. Related Party Transactions
The Company's notes payable and equity transactions with stockholders and
other related parties are included in Notes 3 and 7, respectively.
In December 1999 the Company entered into a three year agreement for
management and consulting services with D2 Co., LLC ("D2"). The agreement
requires 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
monthly fees aggregating to $522,292 at June 30, 2001, to the balance of their
convertible bridge notes payable (Note 3). Starting January 1, 2001 through
March 31, 2001, $125,000 of the total management fee due was issued in the
form of 2000 Convertible Bridge Notes to the Trust Under Deferred Compensation
Plan For D2CO, LLC. From April 1, 2001 through June 30, 2001, $125,000 of the
total management fee due was issued in the form of 2001 Convertible Bridge
Notes to the Trust Under Deferred Compensation Plan For D2CO, LLC. 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. The warrants were valued at $2,333,687 using the Black Scholes
option-pricing model and have been reflected as deferred consulting expense
for the year ended June 30, 2000 in the accompanying Consolidated Statement of
Stockholders' Deficit and are being amortized to consulting expense over the
three year term of the agreement. In a separate transaction with D2, the
Company issued warrants exercisable into 2,500,000 shares of the Company's
common stock at $1.75 per share through December 31, 2004 for $500,000 in cash
and a $500,000 non-recourse note receivable which bears interest at 8% per
annum and is due December 31, 2004. The warrants were valued at $2,477,370
using the Black Scholes option-pricing model. The $1,477,370 value of the
warrants in excess of the consideration received has been expensed in the
accompanying Consolidated Statement of Operations for the year end June 30,
2000 (included in general and administrative expenses).
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 year ended June 30, 2001, the Company
recorded $320,591 to consulting expense as a result of amortizing the deferred
consulting expense.
F-23
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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;
* 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;
* agreed to pay future compensation on a deferred basis.
As a result of the cancellation of the D2 warrants, the Company wrote off 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, Chairman, 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. 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
as non-cash compensation in the year ended June 30, 2001.
During the year ended June 30, 2001 Southview advanced the Company $871,000
under a promissory note accruing interest at 8% per annum and due on July 30,
2001. Of this $871,000, the Company re-paid $371,000 on April 13, 2001
leaving a balance at June 30, 2001 of $517,643 including accrued interest of
$17,643 added to the balance of the note.
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 year ended June 30, 2001, the Company recorded $102,000 as
consulting expense related to the options and warrants.
In June 2001, the Company granted stock options to a member of the Company's
Board of Directors. In total, options were granted to purchase 20,000 shares
of common stock at $1.50 per share, with 10,000 shares vesting on June 6, 2002
and 10,000 shares vesting on June 6, 2003, all shares are exercisable until
December 31, 2005.
F-24
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Income Taxes
The provision for income taxes consisted of the following:
Years Ended June 30, 2001 2000
-------------------- ----------- ----------
Deferred benefit:
Federal $ 5,282,000 $2,751,000
State 1,014,000 562,000
----------- ----------
6,296,000 3,313,000
Increase in valuation
allowance (6,296,000) (3,313,000)
----------- -----------
$ - $ -
=========== ==========
A reconciliation of the effective tax rate and the statutory U.S. federal
income tax rate is as follows:
Years Ended June 30, 2001 2000
-------------------- ----------- -----------
Benefit computed at the federal
statutory rate
$(5,288,000) $(3,025,000)
Change in valuation allowance 6,296,000 3,313,000
State income tax benefit,
net of federal tax amount (1,081,000) (618,000)
Permanent differences 6,000 275,000
Other 67,000 55,000
----------- -----------
Taxes on income $ - $ -
=========== ===========
F-25
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Temporary differences that give rise to a significant portion of the deferred
tax assets and liabilities are as follows:
Years Ended June 30, 2001 2000
-------------------- ----------- -----------
Deferred tax asset:
Net operating loss
carryforwards $12,014,000 $ 8,285,000
Accounts receivable
allowance 5,000 5,000
Accrued liabilities 14,000 9,000
Compensation expense for
common stock options and
warrants not allowed for
income tax purposes 3,357,000 795,000
----------- -----------
Deferred tax asset 15,309,000 9,094,000
Valuation allowance (15,390,000) (9,094,000)
----------- -----------
Net deferred tax asset
(liability) $ - $ -
=========== ===========
The valuation allowance of $15,390,000 at June 30, 2001 was established
because the Company has not been able to determine that it is more likely than
not that the deferred tax asset will be realized.
At June 30, 2001, the Company had net operating loss carryforwards of
approximately $28,025,000 with expirations from 2004 through 2021. The
utilization of certain of the loss carryforwards may be limited under Section
382 of the Internal Revenue Code.
F-26
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Commitments and Contingencies
Leases
Rent expense for the years ended June 30, 2001 and 2000 was $247,059 and
$95,519, respectively. The Company leases certain equipment, office space and
operating facilities under noncancellable operating and capital leases. At
June 30, 2001 future minimum rental commitments under operating and capital
leases are as follows:
Years Ending June 30, Operating Leases Capital Leases
--------------------- ---------------- --------------
2002 $ 220,611 $ 13,896
2003 210,858 3,122
2004 214,539 400
2005 218,366 0
2006 240,394 0
Thereafter 1,226,660 0
--------- ---------
Total minimum lease payments $2,331,428 $ 17,418
=========
Less amounts representing interest 1,277
----------
Present value of minimum lease
payments 16,141
Less current maturities 12,893
----------
Long-term obligation, net $ 3,248
==========
F-27
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employment Agreements
As of June 30, 2001 there are two employment agreements with officers for a
period commencing December 1, 1997 and ending December 31, 2002. The
agreements each provide for base salaries of $150,000 per year and various
benefits, with annual reviews for increases, bonuses and benefits. Of the base
salaries, $30,000 to $50,000 may be accrued annually and paid when the Company
has sufficient cash flow from future operations. One of these agreements was
terminated August 31, 2001. (See Note 10.)
7. Stockholders' Deficit
Private Placements - Common Stock and Warrants
During the years ended June 30, 2001 and 2000, the Company issued, for cash
consideration, -0- and 282,686 shares of restricted common stock for $0 and
$426,460, respectively.
During the years ended June 30, 2001 and 2000, in connection with the
Company's private placements of its convertible notes payable (Note 2), the
Company issued 758,138 and 1,213,500 warrants with a value of $737,809 and
$1,110,118, respectively. These values were obtained using the Black Scholes
model of pricing, and have been charged to stockholders' deficit, and are
reflected as a discount on the convertible notes. Increases in value totaling
$213,172 have been made to the warrants issued during the year ending June 30,
2001 due to various changes in terms of these warrants.
Common Stock Issued for Services
During the years ended June 30, 2001 and 2000, the Company issued 30,000 and
294,762 shares of its common stock in return for services totaling $52,175 and
$643,503, respectively. Of the shares issued in fiscal 2000, 36,000 shares of
common stock valued at $90,000 were issued as compensation to certain
employees and have been reflected as unearned compensation at June 30, 2000 to
be amortized through stockholders' deficit to expense over the one year
contract terms. As of February 28, 2001, 16,200 of these shares of common
stock valued at $40,500 were cancelled in accordance with termination
agreements with these employees.
During October 1999, the Company issued 60,000 shares of common stock to two
employees and received short-term notes receivable for the value of the stock
($127,605). The employees repaid the notes during the year ended June 30,
2000.
During the year ended June 30, 2001, certain holders of Class X warrants and
Class Z warrants exchanged 634,656 Class X warrants and 6,323,884 Class Z
warrants for 1,145,128 shares of restricted common stock. For the year ended
June 30, 2001, the Company recorded $2,179,182 as additional expense related
to the beneficial value of the consideration received over the value of
warrants surrendered.
F-28
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stock Option Plan and Warrants
The 1994 Incentive Plan (the "Plan") provides for incentive stock options to
be granted to employees. Options to purchase up to 2,380,553 shares of the
Company's common stock (or 20% of the Company's outstanding stock which ever
is greater) may be granted under the Plan. Terms of exercise and expiration of
options granted under the Plan may be established at the discretion of an
administrative committee appointed to administer the Plan, or by the Board of
Directors if no committee is appointed, but no option may be exercisable for
more than ten years. As of June 30, 2001, options to purchase 879,001 shares
of the Company's common stock are outstanding under the Plan.
The 1996 Non-employee Director Stock Plan ("the Director Plan") provides for
each non-employee director to receive annually, an option to purchase 5,000
shares of the Company's common stock at an exercise price of 50% of the
average market price of the Company's common stock for the preceding twelve
months. The options were ultimately issued with an exercise price equal to the
market value of the Company's common stock at its issuance date, and therefore
no compensation had been recorded. No option may be exercisable for more than
five years. Options to purchase up to 100,000 shares of the Company's common
stock may be granted under the Director Plan. As of June 30, 2001, options to
purchase 43,336 shares of the Company's common stock are outstanding under the
Director Plan.
In April 2000, the Company established the 2000 Incentive Plan (the "2000
Plan"), which provides for incentive stock options to be granted to selected
employees and directors of the Company, and selected non-employee advisors to
the Company. Options to purchase up to 1,000,000 shares of the Company's
common stock may be granted under the 2000 Plan. Terms of exercise and
expiration of options granted under the 2000 Plan may be established at the
discretion of an administrative committee appointed to administer the 2000
Plan, but no option may be exercisable for more than five years. As of June
30, 2001, options to purchase 982,627 shares of the Company's common stock are
outstanding under the 2000 Plan.
In June 2001, the Company established the 2001 Incentive Plan (the "2001
Plan"), which provides for incentive stock options to be granted to selected
employees and directors of the Company, and selected non-employee advisors to
the Company. Options to purchase up to 1,500,000 shares of the Company's
common stock may be granted under the 2001 Plan. Terms of exercise and
expiration of options granted under the 2001 Plan may be established at the
discretion of an administrative committee appointed to administer the 2001
Plan, but no option may be exercisable for more than ten years. As of June 30,
2001, no options are outstanding under the 2001 Plan.
F-29
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company applies APB Opinion 25 in accounting for stock options and stock
purchase warrants granted to employees. Had compensation expense been
determined based upon the fair value of the awards at the grant date and
consistent with the method under SFAS 123, the Company's net loss and basic
and diluted loss per share would have been increased to the pro forma amounts
indicated in the following table.
The following table provides detail as to Pro forma amounts:
Years Ended June 30, 2001 2000
-------------------- ----------- -----------
Net loss as reported $(15,553,223) $(8,897,385)
Net loss pro forma (16,095,907) (9,597,939)
Loss per share basic and diluted,
as reported (1.20) (.79)
Loss per share basic and diluted,
pro forma (1.24) (.86)
Years Ended June 30, 2001 2000
-------------------- ----------- -----------
Dividend yield 0% 0%
Expected volatility 60% 74%
Risk free interest rates 4.09 to 6.02% 5.55 to 6.66%
Expected lives in years .50 to 5 years .50 to 5 years
F-30
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plan and warrants issued
as of June 30, 2001 and 2000 are presented below:
Options Warrants
----------------------------- -----------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
--------- -------------- ---------- --------------
Outstanding,
July 1, 1999 504,850 $5.87 8,430,649 $10.14
Granted 1,453,094 3.94 10,407,868 5.74
Canceled - - (4,769,344) 7.33
Exercised (171,499) 6.03 -
--------- ----- ---------- -----
Outstanding
July 1, 2000 1,786,445 4.28 14,069,173 7.77
Granted 979,357 1.95 8,886,513 1.81
Exercised 5,727 2.00 - -
Canceled 855,111 6.39 13,558,078 7.99
--------- ----- ---------- -----
Outstanding
June 30, 2001 1,904,964 $2.16 9,397,608 1.68
========= ===== ========== =====
Exercisable
June 30, 2000 1,176,338 $3.48 14,069,173 $7.77
========= ===== ========== =====
Exercisable
June 30, 2001 1,561,434 $2.22 9,397,608 1.68
========= ===== ========== =====
Options Warrants
------- --------
Weighted average fair value of options and
warrants granted during 2000 $0.55 $0.67
Weighted average fair value of options and
warrants granted during 2001 $0.82 $0.56
F-31
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about exercisable stock options and
warrants at June 30, 2001:
Outstanding Exercisable
-------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercisable Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------- ----------- ----------- -------- ----------- --------
Options $1.55-2.25 1,443,851 3.13 $ 2.06 1,175,321 $ 2.12
2.50-3.04 461,113 3.45 2.57 386,113 2.54
----------- ----------- ----------- -------- ----------- --------
$1.50-3.04 1,904,964 3.21 $ 2.16 1,561,434 $ 2.22
=========== =========== =========== ======== =========== ========
Warrants 1.00 - 2.50 8,890,138 5.81 $ 1.36 8,890,138 $ 1.36
2.70 - 3.60 17,031 0.39 2.70 17,031 2.70
4.50 - 5.40 29,260 2.10 5.06 29,260 5.06
7.20 -11.25 461,179 4.00 8.00 461,179 8.00
----------- ----------- ----------- -------- ----------- --------
1.00-11.25 9,397,608 5.70 $1.68 9,397,608 $ 1.68
=========== =========== =========== ======== =========== ========
F-32
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Change in Accounting Principle
During the year ended June 30, 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 of
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. Based on further clarification,
the beneficial conversion feature should be calculated by allocating the
proceeds received in the financing to the convertible instruments and to any
detachable warrants issued in the transactions, 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 Note of $1,050,000
due to the beneficial conversion feature calculated on the intrinsic value of
the allocated proceeds received in the financing. Since the notes
automatically convert into common stock one year from the date of issuance,
the Company has recorded $481,250 as a cumulative effect of change in
accounting principle and $262,500 as interest expense of the Note for the
three months ended December 31, 2000, which represents the amortization of the
new warrant discount in that period. The remaining discount of $306,250 will
be amortized to interest expense over the remaining conversion period.
10. Subsequent Events
(a) Severance Agreements. On September 6, 2001, the Company entered into
severance agreements with Jon Northrop and the only other employee that
remained in the Company's Denver, Colorado office. As a result, the Company
no longer has any employees in Denver, although the Company will continue to
have a small office in Denver which will be used by Mr. Northrop in his
capacity as our consultant.
(b) Restructuring of Notes to Related Parties and Cancellation of Options and
Warrants. On September 6, 2001, the Company has amended the terms of certain
notes that it owes to certain related parties and has cancelled certain
outstanding options and warrants held by them. The accrued amounts due under
the notes that were amended are as follows:
F-33
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Holder Amount of Accrued Debt
(Accrued to November 1, 2001)
Jon Northrop $ 337,466
Jere Northrop $ 297,531
Harley Northrop $ 397,865
Northrop Family Trust $ 136,150
Edward A. Hennig $ 159,173
M. Duane Stutzman $ 181,106
William J. Crossetta $ 279,000
S. Craig Scott $ 49,804
Dublin Holding Ltd. $3,682,944
Mark Smith Rollover IRA $ 393,556
Kelly Smith Rollover IRA $ 339,870
TOTAL $6,254,465
As the result of these amendments the Company now has approximately $14.2
million of debt (without non-cash discounts reflected in the balance sheet) in
instruments (including accrued interest to November 1, 2001)that are now all
convertible at the same time and at the same price, subject to conversion
price caps which differ for the various debt instruments from $1.80 to $2.50
per share. The provisions of the agreements vary for each debt holder, with
cancellations of certain options and warrants. All of the subject debt is
convertible to shares of Common Stock on or before April 29, 2002, subject to
certain conditions precedent.
(c) D2 Agreements. 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
F-34
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, calculated by including (i) the Adjusted Warrants, (ii)
the securities issued in the conversion of the CV Notes and other
notes, (iii) the securities issued in connection with the subject
financing, and (iv) other outstanding options, warrants and/or
convertible promissory notes which are exercisable or conver-
tible, as applicable, at a price equal to or lower than the
exercise price of the Adjusted Warrants, which Adjusted Warrants
will have the same expiration date as the current SV1 and SV2
Warrants and will have an exercise price equal to the lower of
$1.00 per share or the conversion price of the CV Notes;
provided, however, that for purposes of calculating the number
of Adjusted Warrants, no securities outstanding related to any
portion of a financing aggregating greater than $10,000,000 will
be included in the calculation. As partial consideration for
Bion agreeing to the adjustment to the warrants, Southview
agreed to extend the term of the outstanding promissory note
(with an accrued balance of $521,039 as of July 31, 2001)so
that such promissory note could be repaid from the proceeds of
a new financing.
F-35
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. 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 income.
Year Ended June 30, 2001 2000
------------ -----------
Revenues:
Soil $ 74,322 $ 135,945
Systems 10,000 22,500
------------ -----------
$ 84,322 $ 158,445
============ ===========
Operating Income (Loss):
Soil $ (5,320,737) $(3,017,623)
Systems (6,721,219) (3,591,619)
------------ -----------
$(12,041,956) $(6,609,242)
============ ===========
Depreciation and amortization:
Soil $ 48,225 $ 49,024
Systems 28,729 11,895
------------ -----------
$ 76,954 $ 60,919
============ ===========
Total Assets:
Soil $ 842,146 $ 1,460,812
Systems 840,516 1,474,437
------------ -----------
$ 1,682,662 $ 2,935,249
============ ===========
Expenditures for additions and
long-lived assets:
Soil $ 24,414 $ 95,379
Systems 34,940 -
------------ -----------
$ 59,354 $ 95,379
============ ===========
F-36
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Fiscal Year 2000 Fourth Quarter Adjustments
The Company recorded in the quarter ended June 30, 2000 certain adjustments
relative to non-cash interest expense related to the valuations of detachable
warrants issued with certain promissory notes payable and the beneficial
conversion feature of certain related party notes payable amounting to $1.6
million, non-cash miscellaneous expense related to the excess of the valuation
of warrants purchased over the purchase consideration received by the Company
amounting to $1.5 million and non-cash consulting expense related to the
valuation of warrants issued for consulting services amounting to $533,000.
Of the aggregate amount, approximately $180,000, $2.4 million and $396,000
relate to the first, second and third quarters, respectively. The Company
filed amended Forms 10-QSB for the quarters ended September 30, 1999, December
31, 1999 and March 31, 2000.
The following summarizes the effect of the changes on earnings (loss) per
share as previously reported:
Previously Reported Restated
------------------- --------
Three months ended
September 30, 1999 $(.12) $(.13)
Three months ended
December 31, 1999 (.09) (.32)
Six months ended
December 31, 1999 (.12) (.46)
Three months ended
March 31, 2000 (.11) (.14)
Nine months ended
March 31, 2000 (.32) (.60)
F-37
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has caused this Amendment to be signed on its behalf
by the undersigned thereunto duly authorized.
BION ENVIRONMENTAL TECHNOLOGIES, INC.
Date: February 20, 2002 By: /s/ David Fuller
---------------------------------
David Fuller, Authorized Officer
and Principal Accounting Officer