SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
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 001-19333
Bion Environmental Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Colorado 84-1176672
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 East 50th Street 10th Floor N.Y., N.Y. 10022
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(Address of principal executive offices) (Zip Code)
(212) 758-6622
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No___
As of April 30, 2003 the issuer had outstanding 5,276,802 shares of common
stock. This includes 1,900,000 shares held by a majority-owned subsidiary of
the registrant and 91,439 shares of common stock held in trust.
Transitional Small Business Disclosure Format (Check one): Yes ___ No X
BION ENVIRONMENTAL TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
PART I .................................................................. 3
Item 1. Financial Statements ...................................... 3
Unaudited consolidated balance sheet as
of March 31, 2003 ....................................... 4
Unaudited consolidated statements of operations
for the three and nine months ended
March 31, 2003 and 2002 .................................. 5
Unaudited consolidated statements of cash
flows for the nine months ended
March 31, 2003 and 2002 .................................. 6
Notes to unaudited consolidated financial statements ....... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 15
Item 3. Controls and Procedures ................................... 22
PART II ................................................................. 22
Item 1. Legal Proceedings ......................................... 22
Item 5. Other Information ......................................... 23
Item 6. Exhibits and Reports on Form 8-K .......................... 23
Signatures ......................................................... 24
Certifications ..................................................... 25
2
PART I
Item 1. Financial Statements
This Form 10-QSB has not been reviewed by BDO Seidman, LLP, our independent
certified public accountants, as required by Item 310(b) of Regulation S-B.
BDO Seidman, LLP has not performed the review because they have not yet
reviewed the impact on the Company's accounts and operations of the various
items disclosed in our Report on Form 8-K dated February 7, 2003. We are not
aware of any dispute with BDO Seidman, LLP as to any accounting matters. In
addition, we owe approximately $125,000 to BDO Seidman, LLP, which must be
paid or otherwise resolved in order to eliminate independence issues prior to
any review or audit of our financial statements.
3
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Consolidated Balance Sheet
As of March 31, 2003
ASSETS
Current assets:
Cash and cash equivalents $ 3,218
Accounts receivable, net of allowance for doubtful accounts
of $2,000 4,540
Inventory 98,608
Prepaid expenses and other current assets 50,804
Total current assets 157,170
------------
Property and equipment, net 190,605
Claims receivable 1,339,154
Other assets 157,000
------------
Total assets $ 1,843,929
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 795,353
Accrued expenses 129,102
Advances from affiliates 284,500
Capital lease obligation 1,020
------------
Total current liabilities 1,209,975
Deferred compensation 549,185
------------
Total liabilities 1,759,160
Minority interest 401,232
Commitments and contingencies
Stockholders' Deficit:
Preferred Stock, $.01 par value, 10,000 shares authorized,
-0- shares issued and outstanding
Common stock, no par value, 100,000,000 shares authorized,
4,184,791 shares issued and 4,093,352 outstanding
(this does not include 1,095,730 shares held by Centerpoint
which will be distributed to Bion and subsequently cancelled) -
Additional paid in capital 59,402,577
Accumulated deficit (58,898,563)
Treasury stock, at cost, 91,439 shares of common stock (820,477)
------------
Total stockholders' deficit (316,463)
------------
Total liabilities and stockholders' deficit $ 1,843,929
============
See notes to consolidated financial statements
4
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- ---------------------------
2003 2002 2003 2002
---------- ------------ ------------ ------------
Revenue:
Soil sales $ - $ 21,245 $ 109,264 $ 49,857
---------- ------------ ------------ ------------
Cost of soil 191,022 160,418 578,138 403,094
---------- ------------ ------------ ------------
Gross loss (191,022) (139,173) (468,874) (353,237)
---------- ------------ ------------ ------------
Expenses:
General and administrative (excluding non-
cash charges for services and compensation of
$37,494 and $4,252,599 for the three months
ended March 31, 2003 and 2002, respectively
and $29,571 and $4,753,229 for the nine
months ended March 31, 2003 and 2002,
respectively) 440,467 673,086 1,804,662 1,885,963
Research and development 180,964 219,062 516,158 616,227
Non-cash charges for services and compensation 37,494 4,252,599 29,571 4,753,229
---------- ------------ ------------ ------------
658,925 5,144,747 2,350,391 7,255,419
---------- ------------ ------------ ------------
Operating loss (849,947) (5,283,920) (2,819,265) (7,608,656)
---------- ------------ ------------ ------------
Other income and (expense):
Interest expense (including non-cash interest
charges of $0 and $1,421,048 for the three
months ended March 31, 2003 and 2002,
respectively and $2,250 and $2,539,766 for the
nine months ended March 31, 2003 and 2002,
respectively) (110) (6,082,428) (2,547) (8,622,987)
Interest income 1,031 11,928 8,821 22,621
Other income, net 67,425 4,496 46,812 73,106
---------- ------------ ------------ ------------
68,346 (6,066,004) 53,086 (8,527,260)
---------- ------------ ------------ ------------
Net loss before minority interest (781,601) (11,349,924) (2,766,179) (16,135,916)
---------- ------------ ------------ ------------
Minority interest 43,850 39,631 39,861 39,631
---------- ------------ ------------ ------------
Net loss and comprehensive loss $ (737,751) $(11,310,293) $ (2,726,318) $(16,096,285)
========== ============ ============ ============
Basic and diluted loss per common share:
Net loss per common share $ (0.18) $ (3.06) $ (0.66) $ (7.66)
========== ============ ============ ============
Weighted-average number of common shares
outstanding, basic and diluted loss 4,093,352 3,702,218 4,109,469 2,101,354
========== ============ ============ ============
See notes to consolidated financial statements
5
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
Nine Months Ended
March 31,
-------------------------------
2003 2002
------------ -------------
Cash flows from operating activities:
Net loss $ (2,726,318) $ (16,096,285)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in net loss of subsidiary (39,861) (39,631)
Depreciation and amortization 62,114 54,479
Beneficial conversion feature amortized to interest expense - 5,844,000
Gain on disposal of assets (24,272) -
Amortization of debt discount - 1,554,425
Amounts owed to Trust 487,500 -
Reduction in value of Trust (459,287) -
Interest expense for amounts owed to Trust 2,250 1,208,598
Reduction of note receivable for consulting services - 67,646
Compensation charge from variable options - (3,469)
Non-cash charges for equity instruments issued for compensation
and services (891) 4,689,052
Changes in:
Accounts receivable 12,755 11,285
Note receivable (3,008) (122,646)
Inventory (30,968) -
Prepaid expenses and other current assets 97,195 (79,764)
Deposits and other 56,399 -
Accounts payable 471,416 79,318
Accrued expenses 73,950 10,388
------------ -------------
Net cash used in operating activities (2,021,026) (2,822,604)
Cash flows from investing activities:
Proceeds from sale of assets 44,554
Purchases of property and equipment (116,152) (20,540)
Business acquisition, net of cash acquired - (3,641,548)
------------ -------------
Net cash used in investing activities (71,598) (3,662,088)
------------ -------------
Cash flows from financing activities:
Proceeds from advances from affiliates 284,500 -
Proceeds from stock issuance - 8,500,545
Payments of capital lease obligations (2,229) (11,477)
Payments of loan - (897,552)
Proceeds from the exercise of stock options - 120,000
Issuance of notes payable, related parties - 355,000
------------ -------------
Net cash provided by financing activities 282,271 8,066,516
------------ -------------
Net (decrease) increase in cash and cash equivalents (1,810,353) 1,581,824
Cash and cash equivalents, beginning of period 1,813,571 1,300,398
------------ -------------
Cash and cash equivalents, end of period $ 3,218 $ 2,882,222
============ =============
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 110 $ 1,152
============ =============
Supplemental disclosure of non-cash financing activities:
Issuance of stock for convertible bridge note $ - $ 112,740
See notes to consolidated financial statements
6
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to unaudited consolidated financial statements
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Bion
Environmental Technologies, Inc. (the "Company", "Bion", "we", "us" or "our")
have been prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP") for interim financial information.
In the opinion of management, such statements include all adjustments
(consisting only of normal recurring adjustments) necessary for the fair
presentation of the Company's financial position, results of operations and
cash flows at the dates and for the periods indicated. Pursuant to the
requirements of the Securities and Exchange Commission applicable to Quarterly
Reports on Form 10-QSB, the accompanying financial statements do not include
all the disclosures required by GAAP for annual financial statements. While
the Company believes that the disclosures presented are adequate to make the
information not misleading, these interim consolidated financial statements
should be read in conjunction with the audited financial statements and
related notes included in the Company's Annual Report on Form 10-KSB/A for the
year ended June 30, 2002. Operating results for the periods indicated are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2003.
Certain fiscal year 2002 items have been reclassified to conform to their
fiscal year 2003 presentation.
2. ORGANIZATION AND NATURE OF BUSINESS
Bion Environmental Technologies, Inc. ("Bion" or the "Company") was
incorporated in 1987 in the State of Colorado.
Bion is an environmental service company focused on the needs of confined
animal feeding operations (CAFOs). 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 CAFOs (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) 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 that are the basis of Bion's organic soil
and fertilizer business segment. Bion's BionSoil(R) 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.
7
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to unaudited consolidated financial statements
2. ORGANIZATION AND NATURE OF BUSINESS (CONTINUED)
The unaudited consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company incurred losses
totaling $2,726,318 during the nine months ended March 31, 2003 and has a
history of losses which has resulted in an accumulated deficit of $58,898,563
at March 31, 2003.
During the year ended June 30, 2002, through the Company's transactions with
Centerpoint Corporation and OAM S.p.A., the Company obtained $4,800,000 in
cash. The Company is currently engaged in seeking additional financing to
satisfy its current operating requirements.
There can be no assurance that sufficient funds required during the immediate
future or thereafter will be generated from operations or 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 HAVE ALREADY FORCED THE COMPANY TO SUBSTANTIALLY CURTAIL OPERATIONS,
CAUSED US TO REDUCE STAFF TO SIX EMPLOYEES, AND MAY CAUSE THE COMPANY TO 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.
We have a stockholders' deficit of $316,463, an accumulated deficit of
$58,898,563, limited current revenues, substantial current operating losses
and negative working capital. 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 is currently engaged in seeking additional capital to fund
operations until Bion system and BionSoil(R) sales are sufficient 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.
In connection with their report on our Consolidated Financial Statements as of
and for the year ended June 30, 2002, 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.
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly- and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
8
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to unaudited consolidated financial statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loss per share of common stock:
Basic earnings per share includes no dilution and is computed by dividing
income or loss available to common shareholders 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 periods ended March 31, 2003, 143,211 stock
options and 1,393,303 warrants having a weighted-average exercise price of
$10.48 and $7.66, respectively, were excluded in the net loss per share
calculation since the effect of inclusion would be anti-dilutive and for the
periods ended March 31, 2002, 214,480 stock options and 1,393,303 warrants
having a weighted-average exercise price of $13.27 and $7.66, respectively,
were excluded in the net loss per share calculation since the effect of
inclusion would be anti-dilutive.
Patents:
Patents are recorded at costs of $54,946 less accumulated amortization of
$28,849 for a net amount of $27,713, which is included in other assets.
Amortization 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 nine and three month periods ended March 31, 2003 and 2002 was $2,424 and
$808, respectively.
4. ADVANCES FROM AFFILIATES
As of March 31, 2003, Bright Capital LLC ("Brightcap"), an entity owned and
controlled by Dominic Bassani, a consultant whose services were provided to us
as part of our management agreement with D2CO, LLC ("D2"), advanced us
$219,500 so that we could pay operating expenses that are critical to our
operations, primarily consisting of salaries paid to retain critical
personnel, which now consists of six employees. Mr. David Mitchell has
advanced us $65,000, for total advances from affiliates of $284,500.
Subsequent to March 31, 2003, through April 25, 2003, Brightcap advanced the
Company an additional $54,000.
On March 28, 2003, we executed a promissory note in favor of Brightcap. The
note is in the initial principal sum of $42,500 plus the $27,000 that
Brightcap has loaned since then and any additional amounts that it may loan to
us in the future. The $42,500 sum represents amounts that had already been
loaned to us by Brightcap which enabled us to pay certain of our ongoing
operating expenses. The note bears interest on the unpaid principal at the
simple rate of six percent (6%) per annum. All principal and accrued interest
becomes payable on March 28, 2004. This promissory note is included in
advances from affiliates.
9
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to unaudited consolidated financial statements
4. ADVANCES FROM AFFILIATES (CONTINUED)
Repayment of amounts due under the note is secured by a lien on all of our
tangible assets, including without limitation, all of our computers, office
furniture, file cabinets, equipment and inventory. None of our intangible
assets, including our patents, intellectual property or trade secrets, is
pledged as collateral for the note.
5. DEFERRED COMPENSATION
On June 30, 2001, Bion and D2CO, LLC ("D2") agreed that the payments owed to
D2 under an existing management agreement be paid to a Rabbi Trust for the
benefit of D2. On July 31, 2001, Bion and Sam Spitz (the "Trustee") entered
into the Trust Under Deferred Compensation Plan for D2Co, LLC (the "Trust").
Under the Trust agreement, the Company shall contribute assets to the Trust.
Such assets are subject to claims of the Company's creditors in the event of
the Company's insolvency, at such times as specified in the management
agreement with D2. D2 shall have no preferred claim on, or any beneficial
ownership interest in, any assets of the Trust. Any rights created under the
management agreement with D2 and the Trust shall be unsecured contractual
rights of D2 against the Company. Payments of all amounts in the Trust are to
be made to D2 on January 2, 2011, as stated in the Trust agreement.
The Company accounts for the Trust under the provisions of Emerging Issues
Task Force ("EITF") 97-14 "Accounting for Deferred Compensation Arrangement
Where Amounts are Earned and Held in a Rabbi Trust and Invested" which
requires the Company to consolidate into its financial statements the net
assets of the Trust. The value of the Company's common stock held by the
Trust is classified in shareholders' equity and is accounted for in a manner
similar to treasury stock. The deferred compensation obligation has been
classified as a liability and is adjusted, with the corresponding charge or
credit to compensation expense, to reflect changes in fair value of the common
stock held by the Trust. As of March 31, 2003, $489,750 is owed to the Trust,
including interest of $2,250, and the Trust holds 91,439 shares of common
stock of the Company having a fair value of $59,435, for a total of $549,185
in deferred compensation.
The management agreement between us and D2 was terminated effective as of
March 25, 2003. The voting and shareholder agreements to which D2 was a party
were also terminated as of that same date. The Trust Under Deferred
Compensation Plan for D2CO, LLC (the "Trust") will remain in existence until
mutually agreed otherwise and, unless otherwise agreed in writing, the
"payable" balance of $487,500 currently owed by us to the Trust will be
converted into shares of our Common Stock upon the earlier to occur of (a) a
$5 million or greater equity financing(s) by us, in which case the amount
payable will be converted into shares of our common stock at the equity price
of the financing (or, in the event that the $5 million in equity financing is
obtained in a series of more than one financing, the price of the equity
financing which pushed the aggregate total of the financings above $5
million), or (b)March 31, 2005, at the then current market price of our common
stock.
10
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to unaudited consolidated financial statements
6. STOCKHOLDERS' EQUITY
Reverse stock split:
Effective July 8, 2002, the Company completed a one-for-ten reverse stock
split of its outstanding shares of common stock. The accompanying unaudited
consolidated financial statements have been retroactively adjusted to reflect
the reverse stock split.
Warrants:
As of March 31, 2003, the Company had the following common stock warrants
outstanding:
Number of Exercise
Shares Price Expiration Date
--------- -------- ---------------
Class D2C-W 2,455 $ 25.00 June 30, 2004
Class J-1 3,000 $ 20.00 December 31, 2004
Class J-1A 119,850 $ 6.00 December 31, 2004
Class J-1AA 17,596 $ 7.50 December 31, 2004
Class J-1B 30,047 $ 6.00 December 31, 2005
Class J-1C 45,770 $ 6.00 December 31, 2005
Class J-1D 30,832 $ 15.00 December 31, 2004
Class J-2 6,500 $ 15.00 December 31, 2004
Class SV 1,037,343 $ 7.50 February 16, 2006
Class O 100,000 $ 9.00 January 15, 2006
---------
1,393,393
=========
Stock options:
As of March 31, 2003, the Company had 143,211 stock options outstanding,
having a weighted exercise price of $10.54. As a result of the termination of
employees during the quarter, a significant number of options will expire in
May 2003, if not exercised.
7. COMMITMENTS AND CONTINGENCIES
Operating leases:
We amended our New York City office lease effective March 1, 2003. Under this
amendment the expiration date was changed to December 31, 2003, from the
previous expiration date of December 31, 2010. The amendment calls for the
drawdown of the letter of credit provided to the landlord for the full amount
of $120,561 to be used to pay arrearages and future rent. In addition, two of
our new subtenants, Mitchell & Co. and Zizza & Co., which are controlled by
David Mitchell and Salvatore Zizza, respectively, are former officers and
directors of Bion, and have personally guaranteed the lease with the landlord.
11
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to unaudited consolidated financial statements
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition we have entered into agreements with Mitchell & Co. and Zizza &
Co. whereby they will pay the remaining rental payments and hold Bion harmless
in case of default. As a result of these agreements, we will not incur
additional cash outflows in connection with this lease and have no further
commitment as to rental payments. Accordingly, the $120,561 letter of credit
has been expensed and the balance due for rents has been eliminated.
We vacated our Buffalo and North Carolina locations. Employees remaining from
those locations are working out of their homes.
Litigation:
On July 22, 2002, Thomas Keith Barefoot ("Barefoot"), doing business as Quin
Deca Farm ("Quin Deca"), an unaffiliated party, filed a complaint against the
Company in the Superior Court of the County of Harnett in the State of North
Carolina regarding the Company's first generation Bion NMS System on Quin Deca
Farm and the harvesting of BionSoil(R). The complaint includes breach of
contract claims asserting that the Company abandoned the NMS system on Quin
Deca Farm and the failure of the Company to harvest BionSoil(R). The second
claim is for fraud regarding misrepresentation of the state of the technology
of the first generation NMS. The third claim is for unfair and deceptive trade
practices for misrepresentation of the state of the technology of the NMS
System. The fourth claim is for negligent misrepresentation made by Bion in
connection with the work it performed and its suitability for the intended
purpose. The fifth claim is for equity/specific performance in that Bion left
Quin Deca with an economically and technically deficient waste management
system that cannot continue to be used without adequate and alternative
methods of waste removal. Quin Deca is seeking $830,000 in damages plus
punitive damages and to have its damages trebled, reasonable attorney fees and
principles of equity requiring Bion to install its second generation Bion NMS
system. We have filed an answer and counterclaims. Additionally, we have
filed a pending motion to remove the action to Federal court. The Company
does not believe that the claim has merit and, assuming that we have the funds
to properly defend this action, that the ultimate resolution of this
litigation will have a material adverse effect on the Company, its operations
or its financial condition.
On May 6, 2002, Arab Commerce Bank Ltd. ("ACB"), an unaffiliated party, filed
a complaint against the Company in the Supreme Court of the State of New York
regarding $100,000 of the Company's convertible bridge notes ("Notes") that
were issued to ACB in March of 2000. The complaint includes breach of
contract claim asserting that the Company owes ACB $265,400 plus interest or
$121,028 including interest based on ACB's interpretation of the terms of the
Notes and subsequent amendments. Effective June 30, 2001, the Company issued
ACB 5,034 shares of common stock on conversion in full payment of the Notes
based on the Company's interpretation of the Notes, as amended. The Company
has filed an answer to the complaint denying the allegations. Assuming that
we have the funds to properly defend this action, the Company does not believe
that the ultimate resolution of this litigation will have a material adverse
effect on the Company, its operations or its financial condition.
12
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to unaudited consolidated financial statements
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
We have been delinquent in paying our creditors due to our poor financial
condition. As a result, various creditors have threatened litigation,
although none have commenced litigation as of the date of the filing of this
report.
Commitments:
As of March 31, 2003, we have commitments to purchase approximately $82,000 in
equipment related to our research and development project at DeVries Dairy.
The Company may not be able to meet these commitments.
8. RELATED PARTY TRANSACTIONS
The Company issued to D2 11,953 and 35,374 shares of common stock for
management fees during the three and nine months ended March 31, 2002,
respectively. The management fees were valued at $125,000 and $400,000 during
the three and nine months ended March 31, 2002, respectively.
The Company and D2 orally agreed during January 2002, that in the event the
average price per common share is below $7.50 for any quarter in which
consulting fees are to be paid to the Trust, Bion will issue a convertible
note in lieu of the stock payment. The agreement was to remain in place
during the "Adjustment Period" noted in the Centerpoint and OAM Agreements.
Subsequently, D2 agreed to forgo the convertible notes and the amounts remain
owed to the Trust. The amounts owed to the trust are recorded as part of
deferred compensation.
On July 1, 2002, D2 returned to the Company 2,874 shares of the Company's
common stock that was issued as part of the consulting fee to D2 paid to the
Trust Under Deferred Compensation Plan for D2Co, LLC (the "Trust") for the
Benefit of D2. The shares were subsequently cancelled.
On September 30, 2002, the Company issued a convertible note for the D2
management fee to be paid to the Trust for the three months ended September
30, 2002. The convertible note was issued for the amount of the management
fee of $150,000 and pays interest at 6% per annum, payable in cash or in
shares of the Company's common stock. The convertible note is convertible
into shares of common stock in whole or in part at the time of the Company's
next equity financing, at the price of the next equity financing. As mentioned
above, D2 elected to forgo the convertible note and the amount remains owed to
the Trust and is recorded as deferred compensation.
On December 31, 2002, the Company issued a convertible note for the D2
management fee to be paid to the Trust for the three months ended December 31,
2002. The convertible note was issued for the amount of the management fee of
$150,000 and pays interest at 6% per annum, payable in cash or in shares of
the Company's common stock. The convertible note is convertible into shares
of common stock in whole or in part at the time of the Company's next equity
financing, at the price of the next equity financing. As mentioned above, D2
elected to forgo the convertible note and the amount remains owed to the Trust
and is recorded as deferred compensation.
13
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to unaudited consolidated financial statements
8. RELATED PARTY TRANSACTIONS
On March 31, 2003, the Company accrued $187,500 for amounts owed to the Trust
for the quarter ended March 31, 2003.
Also, see note 4, "Advances from Affiliates."
Agreement with Centerpoint Corporation:
Effective February 12, 2003, in order to eliminate an impediment to a possible
future financing, we entered into an agreement with Centerpoint Corporation,
our majority -owned subsidiary, to immediately cancel Section 2.4
"Post-Closing Adjustment" and Section 1.2(b) "Failure to Register or Lapse of
Effectiveness" from the January 2002 Subscription Agreement between us and
Centerpoint. Our management believes that it is in the best interests of all
of the shareholders of both companies that these obstacles to a possible
future financing be removed. As majority stockholder, we have a fiduciary
obligation to act in the best interests of the Centerpoint minority
stockholders.
As consideration to Centerpoint for canceling the sections noted above, we
will forgive all amounts due from Centerpoint, totaling approximately $450,000
(this amount has been eliminated in consolidation) and we will return to
Centerpoint, for cancellation, warrants to purchase one million shares of
Centerpoint's common stock. In addition, Bion will use its best efforts to
assist Centerpoint in distributing shares of Bion's common stock to its
shareholders; provide the services of its management, personnel and staff and
provide office space until 30 days after the distribution of the Bion common
stock and; advance to Centerpoint sums reasonably needed for the distribution
of the shares and a shareholder's meeting.
9. SUBSEQUENT EVENTS
On April 24, 2003, Hollandbrook Group, LLC, an entity affiliated with Mr.
Howard Chase, a former director of the Company, returned to the Company 350
shares for terminating a consulting arrangement.
On April 24, 2003, Stanley F. Freedman, our legal counsel, prepaid a secured
promissory note issued on August 9, 2001. The balance of the note on that
date was $58,977 and was prepaid by Mr. Freedman transferring to the Company
3,469 shares of our common stock previously held by him. The promissory note
was repaid according to its terms, whereby for the purpose of paying amounts
due under the promissory note, the shares of common stock are deemed to have a
value of $17.00 per share.
In a letter dated April 28, 2003, Mr. Lawrence R. Danziger resigned as Chief
Financial Officer of the Company, effective April 30, 2003. We are not aware
of any dispute with Mr. Danziger. Mr. Mark A. Smith, our President, has
accepted the position of Interim Chief Financial Officer as of April 30, 2003.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Statements made in this Form 10-QSB that are not historical or current
facts are "forward-looking statements" within the meaning of section 27A of
the Securities Act of 1933, as amended (the "Securities Act") and section 21E
of the Securities Exchange Act of 1934, as amended. These statements often
can be identified by the use of terms such as "may," "will," "expect,"
"believe," "anticipate," "estimate," or "continue" or the negative thereof.
Bion intends that such forward-looking statements be subject to the safe
harbors for such statements. We wish to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the
date made. Any forward-looking statements represent management's best
judgment as to what may occur in the future. However, forward-looking
statements are subject to risks, uncertainties and important factors beyond
our control that could cause actual results and events to differ materially
from historical results of operations and events and those presently
anticipated or projected.
These factors include adverse economic conditions, entry of new and
stronger competitors, inadequate capital, unexpected costs, failure to gain
product approval in the United States or foreign countries and failure to
capitalize upon access to new markets. Additional risks and uncertainties
that may affect forward-looking statements about Bion's business and prospects
include the possibility that a competitor will develop a more comprehensive or
less expensive environmental solution, delays in market awareness of Bion and
our systems and soil, or possible delays in Bion's marketing strategies, each
of which could have an immediate and material adverse effect by placing us
behind our competitors. Bion disclaims any obligation subsequently to revise
any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
The following discussion should be read in conjunction with our
consolidated financial statements and accompanying notes.
Lack of Review by Independent Certified Public Accountants
This Form 10-QSB has not been reviewed by BDO Seidman, LLP, our
independent certified public accountants, as required by Item 310(b) of
Regulation S-B. BDO Seidman, LLP has not performed the review because they
have not yet reviewed the impact on the Company's accounts and operations of
the various items disclosed in our Report on Form 8-K dated February 7, 2003.
We are not aware of any dispute with BDO Seidman, LLP as to any accounting
matters. In addition, we owe approximately $125,000 to BDO Seidman, LLP,
which must be paid or otherwise resolved in order to eliminate independence
issues prior to any review or audit of our financial statements.
Overview
Bion Environmental Technologies, Inc. provides waste management solutions
to the agricultural industry, focusing on livestock waste from confined animal
feeding operations ("CAFOs"), such as large dairy and hog farms. We are
currently engaged in two main areas of activity:
* waste stream remediation and reduction of atmospheric emissions and
* organic soil and fertilizer production.
15
Our waste remediation and reduction of atmospheric emissions service
business provides CAFOs (primarily in the swine and dairy industries) with
treatment for the animal waste outputs. In this regard, we microbiologically
treat their entire waste stream, reducing air emissions and nutrient
discharges, while creating value-added organic soil and fertilizer products.
Bion's soil and fertilizer products are being used for a variety of
topdressing applications including school athletic fields, golf courses and
home and garden applications. Our Nutrient Management System (NMS) 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 that are the basis
of our organic soil and fertilizer business segment. Our BionSoil(R) 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.
We have been conducting business since 1989. Our original systems were
wastewater treatment systems for dairy farms and food processing plants. The
basic design was modified in late 1994 to create a NMS that produces organic
soil products as a by-product of remediation of the waste stream when
installed on large dairies or swine farms. Through June 2000, we sold and
subsequently installed, in the aggregate, 32 of these first generation systems
in 7 states, of which 19 are still in operation through December 2002. Of
theses 19 systems, 12 are first generation Bion NMS soil production system
installations and 7 are waste only systems. Since June 30, 2000 we have not
installed any new NMS systems since our concentration has been on research and
the development of our second generation system.
We also have an ongoing research program related to our BionSoil(R) and
Bion Fertilizer product lines. This research and development includes work
related to harvest and processing, blending of specialty product mixes for
specific market segments and tests of the effectiveness of BionSoil(R) and
Bion Fertilizer blends in a number of plants in a variety of growing
environments.
As the development program described above moved forward during the 2001
and 2002 fiscal years, our focus shifted from sales of first generation
systems to pre-marketing the system capabilities and the economics of our
second generation NMS. We have recently initiated marketing Bion's second
generation system. We anticipate that we will begin leasing our first second
generation system in the summer of 2003 and receive approximately $22,000 a
month in lease revenue.
The nutrient management capabilities of this new generation of systems
will help break one of the major barriers facing those portions of the dairy
and protein growing businesses in the U.S. which desire to expand. Our second
generation system will allow businesses in these markets to meet ever stricter
environmental standards for larger farms and raise more animals on less land
while meeting or exceeding all requirements to protect the environment.
Critical Accounting Policies and Significant Use of Estimates in Financial
Statements
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a
16
result of the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods.
The following list of critical accounting policies is not intended to be
a comprehensive list of all of our accounting policies. Our significant
accounting policies are more fully described in Note 3 to the consolidated
financial statements included in this Quarterly Report on Form 10-QSB and in
Note 2 to the consolidated financial statements included in our Annual Report
on Form 10-KSB/A. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result. We have
identified the following to be critical accounting policies of the Company:
Revenue recognition: BionSoil(R) sales are recognized upon delivery of
soil to customer and all risks and rewards of ownership pass to the customer.
Stock-based compensation: The Company accounts for its stock-based
compensation arrangements with its employees in accordance with the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and complies with the disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 123 established a
fair-value-based method of accounting for stock-based compensation plans.
Stock-based awards to non-employees are accounted for at fair value in
accordance with the provisions of SFAS 123.
Income taxes: Deferred income taxes are determined by applying enacted
statutory rates in effect at the balance sheet date to the differences between
the tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements. A valuation allowance is provided based on
the weight of available evidence, if it is considered more likely than not
that some portion, or all, of the deferred tax assets will not be realized.
Claims receivable: Claims receivable are valued through an internal
allocation made by Bion management based on its own evaluation of the relevant
facts and circumstances and its review of a fairness opinion that was provided
by an investment banking firm with regard to the transaction as a whole. The
rights to 65% of these claims were ultimately assigned to OAM. The rights to
35% of the claims remained with Centerpoint and are included in the
consolidated financial statements of the Company. This analysis requires the
Company to make significant estimates, and changes in facts and circumstances
could result in material changes in the valuation of the claims receivable.
Contingencies: Management is unable to make a reasonable estimate of the
liabilities that may result from the final resolution of certain litigation
matters disclosed. Further assessments of the potential liability will be
made as additional information becomes available. Management currently does
not believe that these proceedings will have a material adverse affect on the
Company's consolidated financial position. It is possible, however, that
results of operations could be materially affected by changes in management's
assumptions relating to these proceedings or the actual final resolution of
these proceedings.
Results of Operations - Comparison of Nine Months Ended March 31, 2003 with
Nine Months Ended March 31, 2002
We recorded $109,000 of soil sales during the nine months ended March 31,
2003 (the "2003 Nine Months"). This compares to soil sales of $50,000 for
17
the nine months ended March 31, 2002 (the "2002 Nine Months"). In the 2003
Nine Months we began harvesting the solids from three of our first generation
nutrient management systems. We did not harvest any solids from these systems
in the 2002 Nine Months as we were focusing our efforts on the development of
our second generation system. The increase in solids allowed us to sell more
soil during the 2003 Nine Months compared to the 2002 Nine Months. Cost of
soil was $578,000 for the 2003 Nine Months and $403,000 for the 2002 Nine
Months. The increase in cost of goods sold was principally due to an increase
in sales. The decrease in the gross loss as a percentage of sales is
principally the result of economies of scale.
General and administrative expenses decreased to $1,805,000 for the 2003
Nine Months from $1,886,000 for the 2002 Six Months. The decrease is
primarily attributable to a decrease in salaries of $112,000, a decrease in
travel of $45,000 a decrease in investor relation fees of $68,000 and a
decrease in equipment expenses of $24,000. These decreased were partilally
offset by a an increase in legal fees of $94,000 due to increased legal costs
associated with structuring a future private placement and the preparation of
agreements with California State University, Fresno, DeVries Dairy and Dairy
Properties, LLC, an increase in tax and accounting fees of $59,000 primarily
due to expenses incurred to complete outstanding tax returns for Centerpoint
and an increase in licensing fees of $50,000 for the BioBalance patent.
Research and development costs decreased to $516,000 for the 2003 Nine
Months from $616,000 for the 2002 Nine Months. This decrease is primarily the
result of the construction during the 2002 Nine Months of the second
generation prototype system built at Dreammaker Dairy. We did not incur
construction costs on the prototype during the 2003 Nine Months.
Non-cash expenses for services and compensation decreased to $30,000 for
the 2003 Nine Months from $4,753,000 for the 2002 Nine Months. During the
2003 Nine Months, non-cash charges for services and compensation consisted of
$488,000 in amounts owed as management fees to the Trust Under Deferred
Compensation Plan for D2Co, LLC (the "Trust") and amortization for the value
of options previously issued of $31,000. These expenses were offset by income
in the amount of $459,000 from the reduction in the value of the Company's
common stock previously issued to the Trust. In addition, we recognized income
of $30,000 for stock issued in error during the 2002 fiscal year. During the
2002 Nine Months, non-cash expenses for services and compensation were
primarily attributable to charges of $3,710,000 for the issuance of warrants
as an inducement to convert debt, amortization of the value of options
previously issued to various individuals of $292,000, value of stock issued
for management fees to D2 of $400,000 and common stock issued to individuals
with a value of $278,000.
Interest expense decreased to $3,000 for the 2003 Nine Months from
$8,623,000 for the 2002 Nine Months. Interest expense for the 2002 Nine Months
included a charge for the beneficial conversion feature and interest of debt
converted to common stock of $5,844,000, amortization for debt discount of
$1,554,000 and interest expense of $1,209,000 on notes payable that were
subsequently converted into common stock.
Interest income decreased to $9,000 for the 2003 Nine Months from $23,000
for the 2002 Nine Months.
Other income decreased to $47,000 for the 2003 Nine Months from $73,000
for the 2002 Nine Months.
18
Results of Operations - Comparison of Three Months Ended March 31, 2003 with
Three Months Ended March 31, 2002
We recorded no soil sales during the three months ended March 31, 2003
(the "2003 Quarter"). This compares to soil sales of $21,000 for the three
months ended March 31, 2001 (the "2002 Quarter"). As a result of heavy rains
and frequent snow falls, we were not able to ship any soil in the 2003
Quarter.
General and administrative expenses decreased to $440,000 for the 2003
Quarter from $673,000 for the 2002 Quarter. The decrease in primarily
attributable to a decrease in salaries and related benefits of $239,000, a
decrease in travel of $24,000, a decrease in accounting fees of $42,000 and a
decrease in legal fees of $36,000. These decreases were primarily the result
of a decrease in operations due to our current liquidity position. These
decreases were partially offset by and increase in rent of $81,000 primarily
due to the forfeiture of our letter of credit as part of our renegotiation of
our New York City lease.
Research and development decreased to $181,000 for the 2003 Quarter from
$219,000 for the 2002 Quarter. The decrease was primarily the result of
decreased activity as a result of our liquidity position.
Non-cash expenses for services and compensation decreased to $37,000 for
the 2003 Quarter from $4,253,000 for the 2002 Quarter. During the 2003
Quarter, non-cash expenses for services and compensation were primarily
attributable to charges of $3,710,000 for the issuance of warrants as an
inducement to convert debt, amortization of the value of options previously
issued to various individuals of $156,000, value of stock issued for
management fees to D2 of $150,000 and common stock issued to individuals with
a value of $201,000.
Interest expense decreased to $0 for the 2003 Quarter from $6,082,000 for
the 2002 Quarter. The 2002 Quarter included a charge for the beneficial
conversion feature and interest of debt converted to common stock of
$5,844,000, and interest expense of $517,000 on notes payable that were
subsequently converted into common stock.
Interest income decreased to $1,000 for the 2003 Quarter from $12,000 for
the 2002 Quarter.
Other income increased to $67,000 for the 2003 Quarter from $4,000 for
the 2002 Quarter. The 2003 Quarter included $33,000 in gains from the sale of
assets.
Seasonality
Bion's installation capability is restricted in 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 shortly after harvesting. BionSoil(R) and Bion Fertilizer
product sales are expected to exhibit a somewhat seasonal sales pattern with
emphasis on spring, summer and fall sales.
19
Liquidity and Capital Resources
Our principal sources of liquidity, which consist of cash and cash
equivalents, are $3,000 as of March 31, 2003. We believe we will not generate
sufficient operating cash flow to meet our needs and we are currently seeking
external financing. THE LACK OF ADDITIONAL CAPITAL RESULTING FROM THE
INABILITY TO GENERATE CASH FLOW FROM OPERATIONS OR TO RAISE CAPITAL FROM
EXTERNAL SOURCES HAVE ALREADY FORCED THE COMPANY TO SUBSTANTIALLY CURTAIL
OPERATIONS, CAUSED US TO REDUCE STAFF TO SIX EMPLOYEES, AND MAY CAUSE THE
COMPANY TO CEASE OPERATIONS AND WOULD, THEREFORE, HAVE A MATERIAL ADVERSE
EFFECT ON ITS BUSINESS. There can be no assurances that any financing will be
available or that the terms will be acceptable to us, or that any financing
will be consummated.
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 over the next six months,
no less than approximately $650,000 will be required for continued research
and development efforts which includes construction of the system at Devries
Dairy and the engineering for the system at the California Agricultural
Technology Institute at California State University, Fresno. In addition, we
would need additional funds for continued general and administration expenses
and funds to satisfy our existing creditors.
Effective February 12, 2003, in order to eliminate an impediment to a
possible future financing, we entered into an agreement with Centerpoint
Corporation, our majority -owned subsidiary, to immediately cancel Section 2.4
"Post-Closing Adjustment" and Section 1.2(b) "Failure to Register or Lapse of
Effectiveness" from the January 2002 Subscription Agreement between us and
Centerpoint. Our management believes that it is in the best interests of all
of the shareholders of both companies that these obstacles to a possible
future financing be removed. As majority stockholder, we have a fiduciary
obligation to act in the best interests of the Centerpoint minority
stockholders.
As consideration to Centerpoint for canceling the sections noted above,
if approved by the Board of Directors of Bion, we will forgive all amounts due
from Centerpoint, totaling approximately $450,000 (this amount has been
eliminated in consolidation). In addition, we will return to Centerpoint, for
cancellation, warrants to purchase one million shares of Centerpoint's common
stock.
During the period from January 10, 2003 through April 11, 2003, Bright
Capital LLC ("Brightcap"), an entity owned and controlled by Dominic Bassani,
a consultant whose services were provided to us as part of our management
agreement with D2CO, LLC ("D2"), advanced us $249,500 so that we could pay
operating expenses that are critical to our operations, primarily consisting
of salaries paid to retain critical personnel, which now consists of six
employees. Mr. David Mitchell has advanced us $35,000. Also, as of April 25,
2003, we have accounts payable and accrued expenses of $924,000.
We amended our New York City office lease effective March 1, 2003. Under
this amendment the expiration date was changed to December 31, 2003, from the
previous expiration date of December 31, 2010. The amendment calls for the
drawdown of the letter of credit provided to the landlord for the full amount
of $120,561 to be used to pay arrearages and future rent. In addition, two of
our new subtenants, Mitchell & Co. and Zizza & Co., which are controlled by
David Mitchell and Salvatore Zizza, respectively, are former
20
officers and directors of Bion, and have personally guaranteed the lease with
the landlord. In addition, we have entered into agreements with Mitchell & Co.
and Zizza & Co. to make the remaining payments under the lease. We will not
incur additional cash outflows in connection with this lease as a result of
the drawdown of the letter of credit, the personal guarantees and the
agreements with Mitchell & Co. and Zizza & Co.
We vacated our Buffalo and North Carolina locations. Employees remaining
from those locations are working from their homes.
Going Concern
IN CONNECTION WITH THEIR REPORT ON OUR CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED JUNE 30, 2002, 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.
We have a stockholders' deficit of $316,000, an accumulated deficit of
$58,899,000, limited current revenues and substantial current operating
losses. 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 is currently engaged
in seeking additional capital or other financing arrangements to fund
operations until Bion system and BionSoil(R) sales are sufficient to fund
operations.
Consolidated Working Capital
Consolidated working capital is a negative $1,053,000 at March 31, 2003
compared to a positive $1,665,000 at June 30, 2002. This change is primarily
the result of operating cash outflows of $2,021,000 and purchases of property
and equipment of $116,000, and advances from affiliates of $284,500 during the
2003 Nine Months.
Analysis of Cash Flows
Cash used in operating activities decreased to $2,021,000 in the 2003
Nine Months from $2,823,000 in the 2002 Nine Months. The decrease is
primarily the result of an increase in accounts payable and accrued expenses
of $456,000 and amounts owed to affiliates of 284,500.
Cash used in investing activities increased to $72,000 in the 2003 Nine
Months compared to $3,662,000 cash used in investing activities in the 2002
Nine Months. The 2002 Nine Months included a business acquisition of
$3,642,000, net of cash acquired The increase is the result of property and
equipment purchases relating to soil processing made in the 2003 Six Months.
Cash provided by financing activities decreased to $282,000 in the 2003
Nine Months compared to $8,067,000 of cash provided by financing activities in
the 2002 Nine Months. The 2003 Nine Months includes $284,500 in advances from
affiliates. The 2002 Nine Months includes $8,500,000 proceeds from stock
issued to Centerpoint Corporation, $120,000 from the exercise of stock
options, $355,000 in proceeds from the issuance of notes payable to related
parties and payments of loan in the amount of $898,000.
As of March 31, 2003, we have commitments to purchase approximately
$82,000 in equipment related to our research and development project at
DeVries Dairy. The Company may not be able to meet these commitments.
21
Item 3. Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There were no significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
Disclosure controls and procedures are our controls and other procedures
that are designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
PART II
Item 1. Legal Proceedings
On July 22, 2002, Thomas Keith Barefoot ("Barefoot"), doing business as
Quin Deca Farm ("Quin Deca"), an unaffiliated party, filed a complaint against
the Company in the Superior Court of the County of Harnett in the State of
North Carolina regarding the Company's first generation Bion NMS System on
Quin Deca Farm and the harvesting of BionSoil(R). The complaint includes
breach of contract claims asserting that the Company abandoned the NMS system
on Quin Deca Farm and the failure of the Company to harvest BionSoil(R). The
second claim is for fraud regarding misrepresentation of the state of the
technology of the first generation NMS. The third claim is for unfair and
deceptive trade practices for misrepresentation of the state of the technology
of the NMS System. The fourth claim is for negligent misrepresentation made
by Bion in connection with the work it performed and its suitability for the
intended purpose. The fifth claim is for equity/specific performance in that
Bion left Quin Deca with an economically and technically deficient waste
management system that cannot continue to be used without adequate and
alternative methods of waste removal. Quin Deca is seeking $830,000 in
damages plus punitive damages and to have its damages trebled, reasonable
attorney fees and principles of equity requiring Bion to install its second
generation Bion NMS system. We have filed an answer and counterclaims.
Additionally, we have filed a pending motion to remove the action to Federal
court. The Company does not believe that the claim has merit and, assuming
that we have the funds to properly defend this action, that the ultimate
resolution of this litigation will have a material adverse effect on the
Company, its operations or its financial condition.
On May 6, 2002, Arab Commerce Bank Ltd. ("ACB"), an unaffiliated party,
filed a complaint against the Company in the Supreme Court of the State of New
York regarding the $100,000 of the Company's convertible bridge notes
("Notes") that were issued to ACB in March of 2000. The complaint includes
breach of contract claims asserting that the Company owes ACB $265,400 plus
interest or $121,028 including interest based on its interpretation of the
22
terms of the Notes and subsequent amendments. Effective June 30, 2001, the
Company issued ACB 5,034 shares of common stock on conversion in full payment
of the Notes based on the Company's interpretation of the Notes, as amended.
The Company has filed an answer to the complaint denying the allegations.
Assuming that we have the funds to properly defend this action. The Company
does not believe that the ultimate resolution of this litigation will have a
material adverse effect on the Company, its operations or its financial
condition.
We have been delinquent in paying our creditors due to our poor financial
condition. As a result, various creditors have threatened litigation,
although none have commenced litigation as of the date of the filing of this
report.
Item 5. Other Information
The following additional change in our management has recently occurred:
In a letter dated April 28, 2003, Mr. Lawrence R. Danziger resigned as
Chief Financial Officer of the Company, effective April 30, 2003. We are not
aware of any dispute with Mr. Danziger. Mr. Mark A. Smith, our President, has
accepted the position of Interim Chief Financial Officer as of April 30, 2003.
Item 6. Exhibits and Reports on Form 8-K
The following documents are filed as exhibits to this Form 10-QSB,
including those exhibits incorporated in this Form 10-QSB by reference to a
prior filing of Bion under the Securities Act or the Exchange Act as indicated
in parenthesis:
Exhibit No. Description
10.1 Promissory Note and Security Agreement between Bion
Environmental Technologies, Inc. and Bright Capital,
LLC (A)
10.2 First Amendment to Lease between Bion Environmental
Technologies, Inc. and Pan Am Equities Corp. (A)
10.3 Agreement between Bion Environmental Technologies, Inc. and
Bergen Cove (A)
10.4 Agreement between Bion Environmental Technologies, Inc. and
David Mitchell dated April 7, 2003 (A)
10.5 Amendment to agreement between Bion Environmental
Technologies, Inc. and Centerpoint Corporation (B)
10.6 Resignation letter of Lawrence Danziger as Chief Financial
Officer (B)
99.1 Certification by Mark A. Smith pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(B)
(A) Filed on April 15, 2003, as an exhibit to our Report on Form 8-K
dated March 25, 2003.
(B) Filed herewith.
23
Reports on Form 8-K
We filed a Report on Form 8-K dated February 19, 2003 reporting
information under Items 5 and 7 of that form concerning changes in management
and disclosing a letter sent to investors.
We filed a Report on Form 8-K dated March 25, 2003 reporting information
under Items 5 and 7 of that form concerning changes in management, a liquidity
update, our loan with Bright Capital, LLC, and changes to our consulting
agreement with D2Co, LLC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: May 1, 2003
BION ENVIRONMENTAL TECHNOLOGIES, INC.
by: /s/ Mark A. Smith
----------------------------------
Mark A. Smith
Chief Executive Officer and
Interim Chief Financial Officer
24
CERTIFICATIONS PURSUANT TO RULE 13a-14 UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Mark A. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Bion
Environmental Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 1, 2003 /s/ Mark A. Smith
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Name: Mark A. Smith
Title: Principal Executive Officer and
Interim Chief Financial Officer
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