SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED December 31, 1997 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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
555 17th Street, Suite 3310
Denver, Colorado 80202
- ---------------------- ------------------
ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
(303) 294-0750
- ----------------------------------------
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No___
---
The number of shares outstanding of registrant's classes of common equity, as
of February 12, 1998:
Common Stock, No Par Value, 8,602,455
<PAGE>
Bion Environmental Technologies, Inc. Form 10-QSB
December 31, 1997
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets:
June 30, 1997 and
December 31, 1997 F2
Consolidated Statements of Operations:
For the Six Month Periods Ended
December 31, 1996 and
December 31, 1997 F3
Consolidated Statements of Operations:
For the Three Month Periods Ended
December 31, 1996 and
December 31, 1997 F4
Consolidated Statement of Changes in
Stockholders' Equity F5
Consolidated Statements of Cash Flows:
For the Six Month Periods Ended
December 31, 1996 and
December 31, 1997 F6-F7
Notes to Consolidated Financial Statements F8-F11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION 3
PART II OTHER INFORMATION
- -------- ------------------
ITEMS 1-6 20
<PAGE>
FINANCIAL INFORMATION
PART I
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 56,939 $ 9,232
Accounts receivable/contract receivable
(net of allowance of $32,000) 56,057 72,963
Work in progress (net of allowance
of $30,000) 224,612 168,000
Assets held for resale 338,000 600,000
Total current assets 675,608 850,195
Property and equipment, net 227,712 244,824
Other assets
Patents, net 44,654 38,660
Deferred long-term contract costs 77,333 77,333
Other 21,694 11,694
Total other assets 143,681 127,687
Total assets $ 1,047,001 $ 1,222,706
Liabilities and Stockholder (Equity)
Current liabilities
Accounts payable $ 282,779 $ 302,820
Accounts payable - related party 13,251 29,426
Line-of-credit - stockholder 130,000 105,000
Notes payable 192,000 325,000
Notes payable - stockholders 82,171 82,171
Capital lease obligations 65,198 62,546
Accrued expenses 14,741 36,359
Accrued payroll 219,250 135,500
Total current liabilities 999,390 1,078,822
Long-term liabilities
Capital lease obligation 115,258 149,488
Deferred contract revenue 181,000 181,000
Total liabilities 1,295,648 1,409,310
Commitments and contingencies
Stockholders' (deficit)
Preferred stock, $.001 par
value 10,000,000 Series B
shares authorized, 0
(December 31, 1997) and
18,834 June 30, 1997
shares issued and outstanding 0 95,482
Common stock, no par value, 100,000,000
shares authorized, 4,019,869 (December 31,
1997) and 3,696,816 (June 30, 1997)
shares issued and outstanding 9,118,840 7,983,274
Common stock subscribed 600,815 627,822
Accumulated deficit (9,968,302) (8,893,182)
Total stockholders' (deficit) (248,647) (186,604)
Total liabilities and
stockholders'(deficit) $ 1,047,001 $ 1,222,706
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended
December 31
-----------------------
1997 1996
--------- ---------
(Unaudited) (Unaudited)
<S> <C> <C>
Contract revenues $ 140,749 $ 61,807
Contract costs 280,992 285,702
----------- ----------
Gross profit (loss) (140,243) (223,895)
General and administrative expenses 776,102 796,533
---------- ----------
Loss from operations (916,345) (1,020,428)
Other income (expense)
Interest income 2,786 107,194
Interest expense (46,814) (141,334)
Research and development (109,855) (66,887)
Gain (loss) on sale of assets (239) 0
Net (loss) $(1,070,467) $(1,121,455)
========== ==========
Basic (Loss) per weighted average share of
common stock $ (0.28) $ (0.63)
========== ==========
Weighted common shares outstanding 3,865,514 1,768,698
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
December 31
---------------------
1997 1996
-------- --------
(Unaudited) (Unaudited)
<S> <C> <C>
Contract revenues $ 115,912 $ 26,260
Contract costs 187,423 173,520
--------- ---------
Gross profit (loss) (71,511) (147,260)
General and administrative expenses 305,005 455,101
--------- ---------
Loss from operations (376,516) (602,361)
Other income (expense)
Interest income 927 2,064
Interest expense (23,910) (73,399)
Research and development (57,098) (32,336)
Gain (loss) on sale of assets (369) 0
-------- ---------
Net (loss) $(456,966) $(706,032)
======== ========
Basic (loss) per weighted average share of
common stock $ (0.12) $ (0.39)
======== ========
Weighted common shares outstanding 3,957,371 1,819,820
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Series B Common
Preferred Stock Common Stock Stock
Shares Amount Shares Amount Subscribed
-------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balances at June 30,
1997 18,834 $ 95,482 3,696,816 $7,983,274 $ 627,822
Conversion of common
stock subscriptions
to common stock -- -- 598 $2,503 (2,503)
Common stock subscriptions
for services -- -- -- -- 47,500
Issuance of common stock
for cash -- -- 123,849 340,721 --
Issuance of common stock
for services -- -- 19,659 76,553 --
Dividends declared, preferred
stock Series B -- -- -- -- --
Net (loss) for the period
ended September 30, 1997 -- -- -- -- --
Balances at September 30,
1997 18,834 95,482 3,840,922 8,403,051 672,819
Conversion of common stock
subscriptions to common
stock -- -- -- 723 2,504
Common stock subscriptions
for services -- -- -- -- (69,500)
Dividends declared, preferred
stock Series B -- -- -- -- --
Conversion of Preferred B
Stock into common stock (18,834) (95,482) 18,834 95,482 --
Issuance of common stock
for cash -- -- 144,374 574,992 --
Issuance of common stock
for services -- -- 4,692 11,850 --
Issuance of common stock for
series B preferred
dividends -- -- 10,324 30,961 --
Net (loss) for the period
ended December 31, 1997 -- -- -- -- --
Balances at December 31,
1997 $ -- $ -- 4,019,869 $9,118,840 $600,815
continued below
Accumulated
(Deficit) Total
-------------- -----------
Balances at June 30, 1997 $(8,893,182) $ (186,604)
Conversion of common stock subscriptions
to common stock -- --
Common stock subscriptions
for services -- 47,500
Issuance of common stock for cash -- 340,721
Issuance of common stock for services -- 76,553
Dividends declared, preferred stock
Series B (2,543) (2,543)
Net (loss) for the period ended
September 30, 1997 (613,501) (613,501)
Balances at September 30, 1997 (9,509,226) (337,874)
Conversion of common stock
subscriptions to common stock -- --
Common stock subscriptions for
services -- (69,500)
Dividends declared, preferred
stock Series B (2,110) (2,110)
Conversion of Preferred B Stock
into common stock -- --
Issuance of common stock for cash -- 574,992
Issuance of common stock for services -- 11,850
Issuance of common stock for series B
preferred dividends -- 30,961
Net (loss) for the period ended
December 31, 1997 (456,966) --
Balances at December 31, 1997 ($248,647) $ --
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
December 31,
---------------------
1997 1996
-------- -------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net (loss) $(1,070,467) $(1,121,455)
Adjustments to reconcile net loss to
net cash provided/used by operating
activities -
Depreciation and amortization 26,586 15,850
Issuance of subscribed stock
for services (27,007) 0
Issuance of stock for services
and interest 93,410 641,145
Change in assets and liabilities -
Contract receivables (39,706) (12,785)
Prepaid expenses (10,000) (767)
Accounts payable and accrued
liabilities (31,526) 140,722
Accrued payroll 83,750 (139,917)
---------- --------
Net cash (used in) operating activities (974,960) (477,207)
-------- --------
Cash flows from investing activities
Investments in patents (7,706) 0
Investments in equipment (7,762) 0
-------- --------
Net cash (used in) provided by
investing activities (15,468) 0
-------- ---------
Cash flows from financing activities
Payments on notes payable (133,000) 0
Line of credit 25,000 71,120
Proceeds from sale of stock 915,713 304,691
Payments on capital lease obligations (31,578) (40,431)
Proceeds from the sale of warrants 0 31,250
Proceeds from the sale of assets 262,000 0
--------- --------
Net cash provided by financing
activities 1,038,135 366,630
--------- --------
Net increase (decrease) in cash and
cash equivalents 47,707 (110,577)
Cash and cash equivalents at
beginning of period 9,232 118,612
-------- -------
Cash and cash equivalents at end
of period $ 56,939 $ 8,035
======== =======
</TABLE>
See notes to consolidated financial statements.
Footnote:
Supplemental disclosure of cash flow information
Cash paid for interest was $26,869 (1997) and $73,337 (1996).
Supplemental disclosure of non-cash financing activities
For the six months ended December 31, 1997 -
Declared and accrued dividends of $4,653 for preferred stock Series B.
Converted $5,007 of common stock subscribed into 1,321 shares of common
stock.
Converted 18,834 shares of Series B preferred stock to 18,834 shares of
common stock valued at $95,482.
Issued $30,961 of common stock (10,324 shares) as payment of accrued
Series B preferred dividends.
For the six months ended December 31, 1996 -
Entered into a capital lease for equipment for $135,052.
Declared and accrued dividends of $5,085 for preferred stock
Series B.
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Summary of Accounting Policies
- ---------------------------------------------
The summary of the significant accounting policies of Bion Environmental
Technologies, Inc. ("Company") is incorporated by reference to the Company's
annual report on Form 10-KSB at June 30, 1997.
The accompanying unaudited condensed financial statements and disclosures
reflect all adjustments (all of which are normal recurring accruals) in the
ordinary course of business which in the opinion of management are necessary
for a fair presentation of the results of operations, financial positions, and
cash flow of the Company. The results of operations for the periods indicated
are not necessarily indicative of the results for a full year.
Note 2 - Continued Operations
- ---------------------------------
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and liquidation of
liabilities in the ordinary course of business. In prior years, the Company
had been in the development stage and its principal activities had consisted
of raising capital, performing research and development activities and the
development of their products. The Company has not yet begun earning
significant revenue from its planned principal operations. Consequently, as
of December 31, 1997, the Company has incurred accumulated losses totaling
$9,968,302, resulting in a accumulated stockholders' deficit of $248,647.
Cash flows from current operations are not sufficient to meet the obligations
of the Company. Management plans include continuing efforts to obtain
additional capital to fund operations until contract sales along with sales of
BionSoil' are sufficient to fund operations. There can be no assurance that
the Company will be able to successfully attain profitable operations or raise
sufficient capital.
Note 3 - Cost and Estimated Earnings on Uncompleted Contracts
- ----------------------------------------------------------------------
The Company's costs and estimated earnings on uncompleted treatment system
contracts consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ -----------
<S> <C> <C>
Costs incurred on contracts $1,710,766 $1,434,719
Estimated (losses) (677,101) (536,858)
---------- ---------
1,033,665 897,861
Less billings to date (905,318) (833,528)
---------- ---------
$ 128,347 $ 64,333
========= ========
</TABLE>
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 4 - Capital Structure
- ------------------------------
The following details the capital structure of the Company as of February 5,
1998:
Common Stock
-------------
The Company had 8,586,455 shares of Common Stock issued and outstanding
and 334 shares of subscribed stock.
Options and Warrants
----------------------
The Company has outstanding options and warrants (including all options
listed in Footnote 5, Subsequent Events) as follows:
Options outstanding under the Fiscal Year 1994 Incentive Compensation Plan and
the Non Employee Director Compensation Plan:
<TABLE>
<CAPTION>
<S> <C>
Director ($1.72) 10,000
Director ($2.27) 10,000
--------
20,000
Employee ($4.00) 34,062
Employee ($5.00) 17,500
Employee ($6.00) 26,556
Employee ($6.25) 15,000
Employee ($6.75) 21,000
Employee ($7.25) 55,000
Employee ($8.00) 26,554
Employee ($10.00) 10,000
Employee ($12.50) 10,000
Employee ($15.00) 10,000
------
225,672
</TABLE>
Warrants outstanding as of November 5, 1997 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
$3.00 warrants:
exercisable 1/22/96 through 1/21/01: 3,678
exercisable 8/21/96 through 8/20/01: 14,500
exercisable 9/13/96 through 9/12/01: 827
-----------
Total $3.00 warrants 19,005
$4.00 warrants:
exercisable 6/5/97 through 6/30/99: 35,000
--------
Total $4.00 warrants 35,000
$5.00 warrants:
exercisable 6/20/96 through 6/20/99: 25,000
exercisable 8/21/96 through 8/20/01: 10,000
--------
Total $5.00 warrants 35,000
$6.00 warrants:
exercisable 6/5/97 through 6/30/00: 100,000
exercisable 3/1/98 through 10/1/99: 50,000
exercisable 6/9/98 through 12/31/01: 3,750
exercisable 2/1/97 through 12/31/01: 10,000
exercisable 4/21/97 through 4/20/02: 4,172
---------
Total $6.00 warrants 167,922
$8.00 warrants:
exercisable 2/1/97 through 12/31/01: 10,000
exercisable 6/9/99 through 12/31/01: 3,750
---------
Total $8.00 warrants 13,750
$10.00 warrants:
exercisable 2/1/97 through 12/31/01: 10,000
exercisable 6/9/99 through 12/31/01: 3,750
---------
Total $10.00 warrants 13,750
$12.50 warrants:
exercisable 2/1/97 through 12/31/01: 10,000
exercisable 6/9/99 through 12/31/01: 3,750
---------
Total $12.50 warrants 13,750
$15.00 warrants:
exercisable 2/1/97 through 12/31/01: 10,000
exercisable 1/1/00 through 12/31/01: 2,832,909
---------
Total $15.00 warrants 2,842,909
Total of all warrants currently outstanding 3,141,086
</TABLE>
NOTE 5 - Subsequent Events
- ------------------------------
Effective January 26, 1998 the Company made awards to four employees under the
1994 Incentive Stock Plan. The Company granted 25,000 options at an exercise
price of $7.25 per share (exercisable from 01/26/98 - 12/31/98).
Effective January 26, 1998 the Company issued to M. Duane Stutzman, the
Company's Chief Financial Officer, 20,000 options at an exercise price of
$7.25 per share (exercisable from 01/26/98 - 12/31/98).
<PAGE>
- ------
Effective January 1, 1998 the Company converted 188,238 shares of subscribed
stock to 188,238 shares of common stock. The subscribed stock was for
deferred compensation to various officers and employees.
Effective January 1, 1998, holders of 84% of the Company's common stock (post
transaction) participated in an exchange transaction (the "EXCHANGE")
conducted pursuant to Section 351 of the Internal Revenue Code of 1986 as
amended that resulted in the exchange of 7,463,012 warrants of various classes
for 4,351,348 shares of restricted stock and 2,832,909 Class Z Warrants at
$15.00 per share for a 24 month period commencing on January 1, 2000. ( See
8K/A dated December 1, 1997.)
Note 6 - Basic and Fully Diluted Loss Per Common Share
- ----------------------------------------------------------------
During the second quarter of fiscal 1998, the Company adopted the provisions
of Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
(FAS 128). FAS 128 established new definitions for calculating and disclosing
basic and diluted earnings per share. In accordance with FAS 128, all prior
periods have been restated to conform to the new methodology. The restated
amounts did not differ materially from amounts previously reported. Due to
the Company's loss from operations, all dilutive potential common stock is
antidilutive and therefore no diluted earnings per share is presented.
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company designs, installs and operates advanced waste and wastewater
treatment systems. These systems, which incorporate patented biological
technologies, are capable of removing solids, nutrients and other contaminants
from agricultural, industrial and municipal wastewater. In addition, the
agricultural systems installed on animal raising facilities produce a
marketable, nutrient-rich soil-like product, BionSoil.
The Company currently has systems treating swine, dairy, fruit and juice
processing, and sugar cane plantation waste streams in Florida, New York,
North Carolina, and Washington. The Company is in the process of designing or
monitoring the installation of over forty additional systems, raising capital
for operations and future growth, reviewing strategic partners for various
aspects of the business, continuing a research and development effort on both
systems applications and byproducts, and strengthening its patent coverage.
Liquidity and Capital Resources
- ----------------------------------
The Company's current ratio as of December 31, 1997 was 0.68 : 1.0 as
compared to 0.79 : 1.0 as of June 30, 1997. Cash as of December 31, 1997
increased to $56,939 as compared to $9,232 as of June 30, 1997.
During the six months ended December 31, 1997, the Company borrowed
$7,000 from a shareholder at 1% interest per month. The Company also sold two
of the three Properties Held For Resale for $262,000. As a result of this
transaction the Company repaid a note payable plus interest in the amount of
$145,401, received cash in the amount of $116,360, and recorded a loss on the
sale of assets of $239.
As of December 31, 1997 the Company has drawn $130,000 against the
October 26, 1996 line-of-credit with a shareholder. (See 8-K dated December 1,
1996.)
Also, during the six months ended December 31, 1997 the Company sold
268,223 shares of restricted and legended common stock for net cash of
$915,713, issued 24,351 shares of restricted and legended common stock valued
at $88,403 for services, and converted 1,321 shares of subscribed stock to
1,321 shares of restricted and legended common stock valued at $5,007. The
Company has increased subscribed stock by $47,500 for legended and restricted
common stock awarded but not issued to certain employees and an officer as
additional compensation.
<PAGE>
During the six months ended December 31, 1997, the Company issued awards
to all current employees (excluding the Company's officers and directors)
under the Company's Fiscal Year 1994 Incentive Plan totaling 27,762 options
with an exercise price of $4.00 per share, 27,756 options with an exercise
price of $6.00 per share, 27,754 options with an exercise price of $8.00 per
share, 10,000 options with an exercise price of $10.00 per share, 10,000
options with an exercise price of $12.50 per share, and 10,000 options with an
exercise price of $15.00 per share; all of the above options expire on
December 31, 2001. The options will vest as follows: for employees with less
than one year of service, the first third shall vest on their one year
employment anniversary date, the second third shall vest on the second
anniversary date, and the last third on their third anniversary. For
employees with more than one year of service, the first third shall vest on
the above effective date, and the second and last third shall vest twelve and
twenty-four months thereafter respectively.
During the six months ended December 31, 1997, the Company authorized the
issuance of restricted stock and warrants to purchase stock to M. Duane
Stutzman, the Company's Chief Financial Officer, as follows: (a) 10,000 shares
of the Company's restricted and legended common stock (subscribed stock), (b)
20,000 warrants with an exercise price of $6.00 per share commencing on
January 1, 2001, (c) 25,000 warrants with an exercise price of $4.00 per
share, 25,000 warrants with an exercise price of $6.00 per share, and 20,000
warrants with an exercise price of $8.00 per share, all three classes of
warrants will vest and become exercisable commencing September 15, 1997; (d)
40,000 warrants with an exercise price of $10.00 per share which will vest and
become exercisable on September 15, 1998; (e) 30,000 warrants with an exercise
price of $12.50 per share and 30,000 warrants with an exercise price of $15.00
per share which will vest and become exercisable on September 15, 1999. All
classes of warrants discussed in this paragraph are to purchase restricted and
legended shares of common stock of the Company and will expire on December 31,
2001.
During the six months ended December 31, 1997, the Company issued the
following: to Jon Northrop, the Company's Chief Executive Officer, and to Jere
Northrop, President of the Company, 75,000 Class E-1 warrants each to purchase
the Company's restricted and legended common stock at $6.00 per share with the
exercise period commencing on January 1, 2001 and expiring on December 31,
2001, and 150,000 Class X warrants each to purchase restricted and legended
common stock of the Company at a price of $10.00 per share with the exercise
period commencing January 1, 2003 and expiring December 31, 2003.
<PAGE>
During the six months ended December 31, 1997 the Company granted,
pursuant to the Company's 1996 Nonemployee Director Stock Option Plan, options
to the two outside directors Mr. Cullis and Mr. Schwanekamp for 10,000 shares
each (5,000 shares for the year ended June 30, 1996 and 5,000 for the year
ended June 30, 1997) at an exercise price of $1.72 and $2.27 per share,
respectively commencing on August 20, 1997 and expiring on August 19, 2002.
The Company has incurred losses since inception of $9,968,302 and is
currently experiencing liquidity problems. Continued losses without the
infusion of additional capital raise doubt about its ability to continue as a
going concern. Management plans include continuing efforts to obtain
additional capital to fund operations until such time, if ever, as contract
sales and the sale of BionSoil are sufficient to fund operations. No
assumptions can be made that the Company will be able to successfully attain
profitable operations and/or raise sufficient capital to sustain operations.
Results of Operations
- -----------------------
Comparison of the Six Months Ended December 31, 1997 with
------------------------------------------------------------------
Six Months Ended December 31, 1996
---------------------------------------
Revenue in the six months ended December 31, 1997 was $140,749 compared
to $61,807 for the corresponding six month period in 1996, an increase of
$78,942. Contract costs were lower ($4,710) in the 1997 six month period due
to reduced costs associated with the BionSoil processing in New York and
Florida.
General and administrative expenses were lower by $20,421 in the six
month period ended December 31, 1997 due to lower con-sulting expenses
($279,000). The lower consulting expenses are due to reduced use of
consultants and the cancellation of a consulting agreement that was recorded
as an expense in the fourth quarter of the prior year ($231,000). This credit
was partially offset by increased compensation ($144,000), public relations
($84,000), and marketing and selling expenses ($27,000).
<PAGE>
The Company recorded $104,412 less in interest income for the six months
ended December 31, 1997. This is the result of the one time sale of Delta
Petroleum, Inc. stock associated with the Settlement Agreement and General
Release on the UFG note in the first quarter of 1996 (see Form 10-KSB/A dated
June 30, 1996). This was the final amount to be collected on the UFG note. The
total amount collected is $191,581 in excess of the original principal of the
note. The Company also recorded $46,814 in interest expense on its notes to
shareholders and capital equipment leases, and $109,855 in research and
development costs. As a result of the above, the Company recorded a net loss
of $1,070,467 in the six month period ended December 31, 1997, compared to a
net loss of $1,121,455 for the six month period ended December 31, 1996.
The Company will need to increase sales significantly to obtain
profitability.
Comparison of the Three Months Ended December 31, 1997 with
--------------------------------------------------------------------
Three Months Ended December 31, 1996
-----------------------------------------
Revenue in the three months ended December 31, 1997 was $115,912 compared
to $26,260 for the corresponding three month period in 1996, an increase of
$89,652. Contract costs were higher by $13,903 in the three month period. The
higher contract costs were due to increased activities associated with the
bagging operations at the New York processing site. The above resulted in a
gross loss for the period ended December 31, 1997 of $71,511 as compared to a
gross loss of $147,260 for the same three month period in 1996.
General and administrative expenses were lower by $150,096 in the period.
The lower consulting expenses ($297,000) were due to reduced use of
consultants and the cancellation of a consulting agreement that was recorded
as an expense in the fourth quarter of the prior year ($231,000). This credit
was partially offset by increased compensation ($83,000), public relations
($47,000), and marketing and selling expenses ($25,000).
The Company recorded $73,399 in interest expense on its notes to
shareholders and capital equipment leases and $32,336 in research and
development costs. As a result of the above, the Company recorded a net loss
of $456,966 for the three months ended December 31, 1997, compared to a net
loss of $706,032 for the three months ended December 31, 1996.
<PAGE>
General Discussion of Current and Proposed Operations
- -----------------------------------------------------------
THE DISCUSSION BELOW CONTAINS FORWARD-LOOKING STATEMENTS (IDENTIFIED WITH
AN ASTERISK "*" AT THE END OF EACH SUCH STATEMENT) MADE IN RELIANCE UPON THE
PROVISIONS OF RULE 175 PROMULGATED UNDER THE SECURITIES ACT OF 1933 AND SHOULD
BE READ IN CONJUNCTION WITH THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS
AND THE NOTES THERETO.
The unaudited financial statements contained in this Form 10-QSB show
that over $9,700,000 of equity has been invested in the Company through the
close of the fiscal quarter ended December 31, 1997. These financial
statements also show that, as of that date, the Company had a negative net
worth of $248,647, cumulative losses of $9,968,000, limited current revenues
and substantial current operating losses. Continued losses without additional
outside funding raise doubt about the Company*s ability to continue as a going
concern. Management plans to continue raising additional capital to fund
operations until such time, if ever, as systems sales along with the sales of
BionSoil and BionSoil products are sufficient to fund operations.
Management believes, however, that additional information is necessary to
evaluate the Company and its progress relative to the business it is pursuing,
its plans, and the associated value the Company has developed during the last
several years. Therefore, the following section of this Form 10-QSB is
presented by management to give the reader a better understanding of the
development of the business of the Company to date, and its goals for growth
in the future.
WHILE THIS 10-QSB IS FOR THE PERIOD ENDED DECEMBER 31, 1997, FOR
TIMELINESS, CLARITY AND ACCURACY, THE DISCUSSION IN THIS SECTION WILL BE BASED
ON OPERATIONS THROUGH JANUARY 31, 1998 AND THE CONDITION OF THE COMPANY ON
THAT DATE.
Business Development
---------------------
<PAGE>
The Company's mission is to provide services, systems and products which
solve environmental problems with wastes and wastewater and, in appropriate
situations, recycle wastes into high value horticultural products which
produce superior plant growth performance. The Company currently conducts its
business in two complimentary areas: first, the Company designs, markets,
installs and oversees the operation of waste, wastewater and storm water
treatment systems, primarily in the agricultural and food processing area; and
second, markets BionSoil products such as organic fertilizers, potting soils
and soil amendments which are produced from the nutrient rich biosolids
harvested from certain types of the Company's agricultural systems installed
on large dairy and swine farms.
The main emphasis of the Company's business during the past two years has
been on the application of the Bion NMS for large animal raising agricultural
facilities. As a result, the Company's focus has been more specifically on:
first, the design, sales, installation oversight, operations management, and
material harvesting of Bion NMS systems for large dairy and swine facilities;
and, second, BionSoil: the processing, blending, packaging, marketing,
distribution and sales of BionSoil and BionSoil-based products which are
produced from the biosolids harvested from these Bion NMS systems.
From prior to September 20, 1989, (when Bion Technologies, Inc., one of
the subsidiaries of the Company, was incorporated) through at least June 30,
1997, the Company was in the technology development mode with limited sales of
primarily first-of-a-kind wastewater and/or Bion NMS systems.
As of June 30, 1997 the Company had, in the aggregate, performed studies
for, sold, had under construction or in operation systems in four distinct
regions: North Carolina, New York, Florida, and the Pacific Northwest (see
footnote 1 , below). As of January 31, 1998 the Company's business activities
have expanded into Illinois, and western Nebraska in addition (see footnote 2,
below).
Geographic Expansion
---------------------
<PAGE>
The activities of the Company to design, permit, install and operate
these systems have established credibility with federal, state, and local
regulators and environmental and agricultural professionals. The Company
estimates that the cost associated with the required staffing, servicing, and
marketing for its systems in new geographic regions, including initial sales
calls, design, regulatory approvals, installation and operation through the
cash-flow break-even point (the Company has not yet achieved cash-flow
break-even in any of its regional operations), is not less than $500,000 per
region, and may exceed $1,500,000. Based on experience to date in the regions
where system sales and installation activity have been focused, the Company
estimates that approximately $5.0 million has been expensed related to these
matters which has created what might be called "good will," "marketing" and/or
"regulatory" value *. (An example of the accumulation of these costs can be
understood by reference to the development and installation of the Company's
initial hog farm Bion NMS system in North Carolina which is described in more
detail in footnote 3, below.)
The Company anticipates continuing its expansion into new
areas in the future, and this expansion will require similar additional cash
resources which, when expended, will also be expensed and not shown as balance
sheet assets *.
Technology Expansion
---------------------
The Company has six issued patents (see footnote 4, below) which provide
broad coverage of the fundamental technology that underlies the Company's
systems and processes. During the remaining two quarters of fiscal year 1998
(which will end on June 30, 1998) the Company is conducting a review of its
existing patent position and anticipates that additional patent filings will
occur based on this review and as further applications of the technology are
developed.
The Company estimates that a large portion of the net loss through fiscal
year 1995 (then shown on the financial statements as approximately $4.0
million) was actually expended on system development and the enhancement of
the technology and construction of prototype systems that are the basis of the
Company's planned future expansion. All of these costs have been expensed by
the Company.
Just as there are additional expenses associated with geographical
expansion, there also are additional expenses associated with the adaptation
of existing technology for use in regions where climate, soil, and regulatory
conditions are different from those experienced in other already established
installations. Further, the Company anticipates additional expenditures in
the near future associated with expansions of the technology into the cattle
feedlot and poultry raising businesses where adaptation of the technology is
necessary to treat waste with both different characteristics and different
collection tech-nologies than for existing dairy or swine waste systems *.
The majority of such expenses (which are investments in the Company's future)
will not show as balance sheet assets despite the fact that long term
technological value is being created *.
Financial Discussion
---------------------
The Company receives two distinct revenue streams from Bion NMS systems:
1) fees for system design, permitting, start-up and initial operation (and,
for selected systems, periodic management
<PAGE>
or technology license fees); and, 2) after the initial start-up period for a
system (commencing approximately 12 to 15 months after the agreement is
signed), revenue from the sale of BionSoil and BionSoil-based products
produced from the systems.
BionSoil Economics
-------------------
THE COMPANY TRACKS ITS BIONSOIL BUSINESS ON THE BASIS OF A COMPANY
DEFINED STANDARD UNIT (A "BIONANIMAL"), WHICH RELATES BIONSOIL PRODUCTION TO
CONFINED ANIMAL WEIGHT. WHEN ALL THE MANURE AND URINE PRODUCED BY ONE
BIONANIMAL IS COLLECTED AND CONVERTED INTO BIONSOIL, THE COMPANY ESTIMATES
THAT EACH BIONANIMAL WILL YIELD APPROXIMATELY 1 CUBIC YARD OF PROCESSED
BIONSOIL PER YEAR *. [NOTE: PRIOR TO JANUARY 31, 1998, THE BIONANIMAL UNIT
WAS DEFINED SUCH THAT EACH BIONANIMAL PRODUCED APPROXIMATELY 10 CUBIC YARDS OF
PROCESSED BIONSOIL PER YEAR.] THE DEFINITION WAS CHANGED BY THE COMPANY ON
--------------------------------------------
JANUARY 31, 1998 TO MAKE THE TRACKING OF THE NUMBER OF BIONANIMALS AND THE
----------------------------------------------------------------------------
ANNUAL PRODUCTION OF BIONSOIL ESSENTIALLY IDENTICAL.
-------------------------------------------------------
Using this definition of BionAnimal the Company has developed the
following table relating the number of confined animals in agricultural
installations to the number of BionAnimal equivalents they represent based on
data available from the American Society of Agricultural Engineers (ASAE
D384.1 - 1989) to show the BionAnimal count of animals raised in typical large
animal raising facilities where all wastes are captured:
Table 1
<TABLE>
<CAPTION>
Animal Approximate Equivalent BionAnimals
------ -----------------------------------
<S> <C> <C>
New Definition Old Definition
One dairy cow 10.00 1.000
One steer 4.50 0.450 (2.2 = 1)
One market hog 0.90 0.090 (11 = 1)
One turkey 0.05 (20 = 1) 0.005 (200 = 1)
One layer chicken 0.02 (48 = 1) 0.002 (475 = 1)
</TABLE>
As Bion NMS systems are brought on-line and biosolids are harvested,
BionSoil, Inc. (the Company's other wholly-owned subsidiary) will purchase the
harvested material from Bion Technologies, Inc. to process it into final
products for sale to customers *. Subsequently, some farms may be paid fees
as royalty for the biosolids *. These payments may represent an important
part of the strategy developed by the Company for the successful marketing of
Bion NMS systems *. Most large animal raising facilities have substantial
operating costs associated with the disposal of waste products which are
produced in large quantities at these facilities *. With the construction and
operation of a Bion NMS on a farm site, many of these costs can be
substantially reduced or eliminated, and the farm may also receive a revenue
stream from the cash payments made by the Company to the farm *.
BionSoil harvests to date have been from relatively new systems and the
Company has been devoting substantial effort to develop appropriate technology
and sites for processing the material for sale. Relatively small quantities
of BionSoil have been sold during the last twelve months. Of the amount sold
approximately 1,640 cubic yards of BionSoil were sold in bulk at prices
ranging from $10.00 to $25.00 per yard. Small quantities of processed and
bagged BionSoil, in 20 to 75 pound bags, have been sold to organic farmers,
nurseries, and at farmers markets and green markets in New York and Florida
for the equivalent of $40.00 to $100.00 per cubic yard. The Company's first
distribution to retail outlets was initiated in 1997 with Agway stores in
western New York. Deliveries averaging six pallets per store were made to 15
Agway retail stores. This product was sold to Agway at introductory prices of
$65.00 per cubic yard ($1.625 per 25-pound bag). Additionally, at the
Company's Hermitage New York facility, BionSoil is being processed, blended
with Sphagnum peat moss and bagged in both 20 pound and 40 pound bags. The
Company estimates it will manufacture approximately 200,000 bags in
preparation for sale to the retail market in the Spring of 1998 at wholesale
prices to the Company of $1.97 and $2.97 for 20 and 40 pounds respectively
(resulting in prices per cubic yard of $80.00 and $108.00 *. The average
selling price for BionSoil during the past fiscal year was $12.40 per cubic
yard for bulk, unprocessed BionSoil, and $68.50 per cubic yard for processed
and bagged BionSoil. It should be noted, however, that a large part of this
BionSoil was from first harvests of various systems which, due to start-up
issues, yield a lower quantity of high quality product.
While sales of Bion NMS systems have been sporadic over the last four
years, and significant quantities of BionSoil have only recently become
available, the Company believes it has clearly demonstrated the success of the
technology with 12 agricultural Bion NMS systems in operation, 7 of which have
been on line for more than two years. Additionally, through both Company
performed and independent university sponsored testing, BionSoil has been
shown to clearly enhance plant growth performance (see footnote 5, below).
Based on these results, an analysis of the Company's potential markets,
historical sales during the past year, the large number of proposals and
preliminary agreements currently being prepared, and the apparent steadily
increasing interest in Bion NMS systems in the large animal agriculture area,
a series of aggressive goals for system sales and installations were
established by the Company at the start of the current fiscal year *.
The primary long range goal established by Company management in June
1997 sets as a target a level of 250 systems under contract containing
2,000,000 BionAnimals by June 30, 2000, the end of the Company's fiscal year
2000 *. To support achievement of this long range goal the Company has
established the addition of 40 systems under contract (containing 300,000
BionAnimals) as its sales target for June 30, 1998 *. Achievement of this
short term goal would result in the Company having contracts for a total of 64
systems containing 389,000 BionAnimals by June 30, 1998. The Company is
developing strategic plans with each of its regional offices to achieve the
fiscal year 2000 sales goal as well as the short range plans to accomplish the
fiscal year 1998 goal *. If the Company's goal for growth through fiscal 2000
is met and all of the targeted systems are brought into production in
accordance with the goals established by management, after appropriate
start-up period, approximately 2,000,000 cubic yards per year of BionSoil and
BionSoil products would be available for sale in fiscal years commencing after
fiscal year 2000 *.
Note that the Company did not meet the systems sales and BionAnimal
--------
projections it had established for the fiscal year ended June 30, 1997 due to
a number of factors, including but not limited to capital availability, the
decision to close the Company's Washington state operations, uncertainty
created in certain markets due to pending legislation which could directly
impact animal waste treatment and disposal practices, the decision to cancel
certain agreements and/or contracts for systems that were not profitable, and
the decision to renegotiate certain of its existing agreements for systems to
establish more equitable terms (which systems have been removed from all
system and BionAnimal totals until such time, if ever, as the renegotiations
result in new signed contracts).
However, in the first seven months of fiscal year 1998 (which period
ended January 31, 1998), the Company has signed contracts for 45 systems
containing 620,000 BionAnimals as compared to its goal of signing 40
additional systems containing 300,000 BionAnimals for the fiscal year ended
June 30, 1998. As a result the Company has currently exceeded its target for
June 30, 1998 and as of January 31, 1998, has a total of 55 systems with
710,000 BionAnimals under contract. In response to this accelerated growth,
management is currently reviewing the goals it had established and anticipates
establishing revised plans to attempt to continue the accelerated growth trend
experienced the last seven months *. Further, management anticipates
formalizing such new goals for the period through June 30, 2000 for inclusion
in the Company's 10-KSB for the year ended June 30, 1998.
<PAGE>
Market Size
------------
The long range sales goal outlined above represents aggressive growth for
the Company *. Although an examination of the size of the target markets for
system sales and installations and BionSoil sales shows that the percent of
total market penetration which these goals represent are very modest, there
can be no assurance that the Company will be successful in achieving its
targeted goals *.
The Company has analyzed the 1992 U.S. Department of Agriculture Census
statistics (the most recent detailed information available from the U.S.
Department of Agriculture) and developed the data presented below for the
target market segments for system sales. The Company has analyzed the
economics of system installation and operation as they relate to the size of
farms, and based on this analysis has established a potential target universe
of not less than 140 million BionAnimals which are on large farms (see
footnote 6, below), and therefore are believed by the Company to be potential
candidates for system installation *. On the basis of these assumptions and
the analysis done, the Company has achieved (through January 31, 1998)
approximately a 0.5% market penetration, and the existing goal for fiscal year
2000, if achieved, would represent approximately a 1.4% market penetration *.
The Company believes that the potential market for BionSoil and blended
BionSoil products can be illustrated and quantified based on research by the
Battelle Institute in a study conducted for the Solid Waste Composting Council
(see footnote 7, below) *. Batelle calculated that the demand for compost and
compost-like products (including products ranging from manures to composted
organic wastes to manufactured potting soils and soil enhancers) in the U.S.
alone is projected to be in excess of one billion cubic yards per year. This
demand far exceeds projected supply in nine application segments: landscapers,
delivered topsoil, bagged retail, nurseries, landfill final cover, surface
mine reclamation, sod production, silvaculture, and agriculture *. Targeted
markets for BionSoil include these segments in addition to state and municipal
park and transportation departments, golf courses, athletic fields, home
gardeners, reforestation projects for timber and mining companies, and the
U.S. Park Service *. On the basis of this projected market potential, the
BionSoil that the Company anticipates will be produced from the 710,000
BionAnimals currently under contract (in excess of 700,000 cubic yards) would
result in less than a 0.1% market penetration, and the goal for fiscal year
2000, if achieved, would represent approximately a 0.2% market penetration in
this broadly defined market *. As part of its
<PAGE>
current planning process the Company is developing a detailed analysis of
targeted market segments and is establishing plans to penetrate these segments
with appropriate BionSoil products *.
Based on current pricing experience, a review of prices for soils and
soil-enhancing products in the market, target market segment strategies being
developed, and limited sales to date, the Company believes that BionSoil will
sell at no less than $10 per cubic yard when sold unprocessed in bulk, and
will sell for higher prices when processed and bagged, prices which may rise
to $100 per cubic yard *. Additionally, based on actual costs experienced in
BionSoil harvesting and processing to date, anticipated improvements in
processing technologies and efficiencies, and projected lower unit costs as
volume levels increase to the forecast levels, the Company has established
projected costs for the various levels of processing required to sell BionSoil
products *. Therefore, given the contract terms and projected costs of
production and sales, the potential gross margin (see footnote 8, below)
returned to the Company from BionSoil products sales alone has been projected
for a series of potential price points (and the implied processing levels
required to achieve the products to be sold at these price points) *. Table 2
presents this information for six selected price points *. This table has
been prepared based on the Company's limited experience to date with the
harvesting and processing of BionSoil and BionSoil products *. While this
information represents management's best estimates for possible future
performance, there can be no guarantee that these projections will be achieved
(see footnote 9, below) *.
Table 2 *
<TABLE>
<CAPTION>
Projected
BionSoil Selling Projected Projected
Price Per Cubic Bion Annual Gross Margin
Yard * Expenses * Per Cubic Yard *
------------ ----------- ---------------------
<S> <C> <C>
$ 10 * $ 8 * $ 2 *
20 * 13 * 7 *
40 * 28 * 12 *
60 * 37 * 23 *
80 * 40 * 40 *
100 * 43 * 57 *
</TABLE>
Revenue to the Company from BionSoil sales is anticipated to begin in an
average of one and a half to two years after the signing of an agreement for a
Bion NMS system *. These gross margins would be expected to be repeated each
year thereafter for as long as the installations remain in operation *. No
fees for system installation, licensing, or management are included in these
projections *.
<PAGE>
If the Company is successful in bringing targeted systems on line
producing BionSoil within the 12 to 15 month start-up time frame (which cannot
be assured and is subject to numerous and substantial risks as explained
below) and is successful in realizing a target average sales price of $40 per
cubic yard (starting in fiscal year 1998)(which also cannot be assured and is
subject to numerous and substantial risks as explained below), each BionAnimal
would contribute $40 of revenue per year to the Company, resulting in
projected gross margins of $12 per year *. Under the terms of most Bion NMS
agreements, this contribution to revenue and gross margin is anticipated to
continue for at least a 15-year period (the term of most Bion NMS system
contracts before extension (if any) for additional years) *. If the net
present value (discounted at 10%) of this gross margin cash flow is calculated
for this 15-year period, the Company projects that each BionAnimal under
contract is anticipated to have approximately $95 net present value to the
Company *.
Table 3, below, summarizes this net present value projection for the
BionSoil selling prices reflected in Table 2, above (see footnote 9, below) *.
Table 3 *
<TABLE>
<CAPTION>
Projected Projected
BionSoil Selling 15 Year Net Present
Price Per Value of Per BionAnimal
Cubic Yard * Annual Gross Margins *
- --------------- -------------------------
<S> <C>
$ 10 * $ 16 *
20 * 56 *
40 * 96 *
60 * 183 *
80 * 318 *
100 * 453 *
</TABLE>
In the past the Company has lost money on system design, permitting
support, construction oversight and initial system operation. However, based
on experience to date, the Company has established pricing for its contracts
that the Company believes will, independent of BionSoil revenues, be
sufficient to cover direct expenses (such as system design, permitting
support, construction oversight and initial system operation) related to these
system installations *. Even though the Company is extremely small at
present, has not yet developed substantial market penetration, needs to raise
additional capital, and has (and is continuing to accrue) losses to date, the
potential return based on the Company's growth goals is apparent if the
Company is successful in achieving its targets *.
<PAGE>
As the discussion above includes forward looking statements made in
reliance upon the provisions of Rule 175 promulgated under the Securities Act
of 1933, readers are cautioned that, although management believes it currently
has a reasonable good faith basis for disclosing the substance of some of its
internal projections to the public at this time, there can be no assurance
given that the Company will ever be successful in achieving any of its stated
goals. The Company intends to periodically report on its progress, or lack
thereof, in attaining the goals set forth above. The ultimate realization of
most (if not all) of the Company's goals will require significant expenditures
of funds which as of this date are not currently available to the Company.
It is currently anticipated that the selling and installation of
additional BionSoil systems will require the Company to hire additional
personnel, make significant capital expenditures and generally increase its
overhead. Further, the marketing and sale of BionSoil products will require
the implementation of a distribution network of wholesalers and/or retailers
and a transportation system for delivery of the product to the intended
recipients, and may require permitting in some locations, none of which the
Company may be successful in achieving. Additional expenditures for personnel
and equipment will be necessary to harvest, process, package, sell and deliver
the product. The projections stated by management assume that the Company
will be successful in obtaining the requisite funds on commercially reasonable
terms and that the other stated obstacles will be successfully overcome in the
process of making sales of products in the future.
As the Company has never operated at a profit and has a negative net
worth at the present time, its ability to successfully confront even the
currently identified challenges which lie ahead in meeting its stated goals is
far from certain. It is likely that the Company will face additional
challenges which have not as yet even been identified. In the event the
Company is not able to obtain sufficient outside funding to accomplish its
goals within the time periods indicated, the goals will not be met. In the
event the Company is not able to successfully overcome the other stated
obstacles in the process of making future sales within the time periods
indicated, the goals will not be met. As the Company's operations are not
currently profitable, readers are further cautioned that, if the Company is
not successful in obtaining outside funding in an amount sufficient for it to
meet its operating expenses even at its current level, the Company's continued
existence is uncertain.
<PAGE>
FOOTNOTES to General Discussion of Current and Proposed Operations
- --------------------------------------------------------------------------
1. The systems in these regions establish multiple applications for the
Company's technology including:
(a) Dairy farm wastewater treatment and nutrient reduction systems
which treat wastewater from dairy farms to remove phosphorus, nitrogen and
other nutrients and create water suitable for discharge or reuse;
(b) Dairy farm Bion NMS systems which solve the environmental
problems associated with dairy farms and also create BionSoil;
(c) Hog farm Bion NMS systems which solve odor, waste and wastewater
problems associated with hog farms and also create BionSoil;
(d) Combination food processing and manure waste treatment systems
which treat nutrients and solid wastes in waste streams from combined food
processing plants and animal confinement areas;
(e) Fruit processing wastewater treatment systems which treat wastewater
from fruit processing plants to remove solids, nutrients and other
contaminants to create water suitable for discharge or reuse;
(f) Storm water and surface water run-off treatment systems which treat
storm water run-off from agricultural and industrial installations to remove
nutrients and other contaminants to create water suitable for discharge or
reuse; and,
(g) A feasibility study for the installation of a Bion system for the
treatment of all wastewater generated in a small mobile home community.
2. The systems in these regions currently are all additional hog farm Bion
NMS systems which solve odor, waste and wastewater problems associated with
hog farms and also create BionSoil.
3. During February 1994 the Company opened its office in Smithfield, North
Carolina with one full time sales employee. Numerous contacts were made in
both the hog raising and dairy farming industries, and the first agreement
(for a hog system) was signed in December 1994. A second full time employee,
required to provide design, engineering, construction and system operation
expertise, was transferred to North Carolina in February 1995. Adverse
weather conditions during the construction period resulted in a longer
construction time than anticipated; however, system start-up was achieved in
June of 1995, and the system has been in continuous operation since. Based on
this investment of time and effort and the successful operation of the system,
the Company has expanded its efforts in North Carolina including hiring a
horticulturist for BionSoil product development and testing and a manager for
the region. Currently, the Company has submitted proposals to a number of
potential customers, is engaged in discussions with several of these, and has
signed agreements for five additional system installations. Management
estimates that, to date, in excess of $600,000 has been devoted to the effort
to build the Company's business in North Carolina. Current projections are
that it will require, at a minimum, an additional nine to twelve months before
sufficient cash flow will be generated from system and BionSoil sales in North
Carolina to offset ongoing expenses for operations conducted in that state *.
4. Issued U.S. patents include the following titles: "Bioconversion Reactor
and System", "Animal Waste Bioconversion System", "Bioconverted Nutrient Rich
Humus", "Phosphorous Treatment Process", and "Storm Water Remediatory
Bioconversion System". In addition, the Canadian Patent Office has issued
"Aqueous Stream Treatment Process".
5. An independent on-farm research trial was conducted in 1996 by
representatives of North Carolina State University ("NCSU"), North Carolina
Department of Agriculture ("NCDA") and the North Carolina Cooperative
Extension Service. The test compared the plant growth of four woody
ornamental species grown in three BionSoil product mixes to that of the same
species grown in a high grade commercial nursery potting soil with soluble
fertilizer additives. The performance of the plants in the BionSoil mixes
exceeded that of the plants in the commercial mix in all trials. A further
independent study was conducted in 1997 by representatives of NCSU, NCDA, and
Bion Technologies, Inc. The experiment, located at a research facility on
NCSU's Raleigh, North Carolina campus, compared the plant growth of four
different species (a flowering shrub, an annual, a woody ornamental and a
perennial) grown in three mix rates of BionSoil with pine bark to that of the
same species grown in a standard mix fertilized with a national brand of
synthetic controlled release fertilizer. The evaluation also evaluated the
performance of the plants in all mixes under four irrigation regimes.
BionSoil supplied a steady release of plant nutrients over a three month
period and proved to be a more efficient source of plant fertility under
limited water availability than did the control fertilizer. These study
results support other studies performed by the Company and anecdotal evidence
gathered through plant trials from homeowners and others.
6. All numbers of animals are taken from the 1992 Census of Agriculture
published be the United States Department of Agriculture. The numbers used
are for the animal populations of farms above a specific size as follows:
* Dairy cows: farms with 200 or more cows
* Beef cattle (steers): farms with 200 or more cattle fattened on grain and
concentrate
* Hogs and pigs: farms with 1,000 or more including hogs and pigs, sows for
breeding and other hogs and pigs
* Poultry (chickens and turkeys) based on layers, broilers and turkeys
7. Battelle estimated the total U.S. market for compost to be 1.04 billion
cubic yards per year. See "Compost: United States Supply and Demand
Potential" in Biomass and Bioenergy Vol.3, Nos 3-4, pp. 281-299, 1992.
-----------------------
8. The Company's gross margin (prior to deduction of G&A expenses, interest,
depreciation, taxes, etc.) per cubic yard of BionSoil is calculated from the
projected price per yard obtained from sales of bulk or bagged product after
deducting the amount paid to the Producer, if appropriate, and the projected
costs which the Company expects to incur for harvesting, processing, bagging,
and marketing.
9. The following risk factors should be considered when reviewing the
projections in these tables: the Company has not made significant sales or
earnings to date, and the projections herein represent very large advances
which management believes are attainable since the Company is now emerging
from the development stage; there are many difficulties that may be
encountered by the Company (as it is a start-up), especially in view of the
intense competition from existing and more established companies in the
wastewater, waste management, the environmental control and organic soils and
products businesses; the Bion NMS system has had limited development and
market acceptance is uncertain; the Company is in direct competition with
consulting and engineering firms (which may be better capitalized than the
Company) that may be capable of developing competitive technologies and
products; the business is susceptible to changing technology and the Company
may not have adequate patent and proprietary information protection; the
Company may become subject to unfavorable governmental regulations, and may
have, in the future, liability (with no insurance coverage) for damage to the
environment; and, the costs and expenses used for all calculations are
estimates made on the basis of limited information available.
<PAGE>
OTHER INFORMATION
------------------
PART II
- --------
ITEM 1. Legal Proceedings.
The Company knows of no material pending legal proceedings to which the
Company (or the Subsidiary) is a party or to which any of its systems is the
subject and no such proceedings are known to the Company.
ITEM 2. Changes in Securities.
(c) The following securities were sold in the six month period ended
December 31, 1997 without registering the securities under the Securities
Act.:
197,800 shares of restricted and legended Common Stock to six private
investors and fourteen existing shareholders in privately negotiated
transactions for an aggregate amount of $653,400.
31,523 shares of restricted and legended Common Stock to one existing
shareholder under the terms of a 1992 agreement granting such investor a
preemptive right to acquire such shares for an aggregate amount of $60,242.65.
18,028 shares of restricted and legended Common Stock to four employees in
lieu of cash for services rendered valued at, in aggregate, $71,960.
7,644 shares of restricted and legended Common Stock to an existing
shareholder for rent and services valued in aggregate at $21,450.
18,834 shares of restricted and legended Common Stock to seven existing
shareholders in exchange of 18,834 shares of Series B preferred stock in an
aggregate amount of $95,481.25.
10,324 shares of restricted and legended Common Stock to seven existing
shareholders as payment of Series B preferred dividends valued in aggregate at
$30,961.11.
The shares of the Company's Common Stock which were issued pursuant to the
transactions set forth above were issued in reliance upon the exemptions from
registration afforded by Sections 3(b), 4(2), or other provisions of the
Securities Act of 1933, as amended. Each of the persons to whom such
securities were issued made an informed investment decision based upon
negotiation with the Company and was provided with appropriate offering
documents and access to material information regarding the Company. The
Company believes 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 the Company's Common Stock in connection with
these transactions. All certificates representing such common shares bear an
appropriate legend restricting the transfer of such securities, except in
accordance with the Securities Act of 1933, as amended, and stop transfer
instructions have been provided to the Company's transfer agent in accordance
therewith.
ITEM 3. Defaults Upon Senior Securities. None
ITEM 4. Submission of Matters to a Vote of Security Holders. None
ITEM 5. Other Information.
On January 16, 1998 the Company executed an Agreement for Phase II of the
project with Bowman Family Farms, Inc. and Crystal Springs Farms, LLC for an
additional 330,000 finishing hogs in eastern Colorado and western Nebraska.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.1 Agreement for Phase II of the project between Bion Technologies, Inc. and
Bowman Family Farms, Inc. and Crystal Springs Farms, LLC.
27 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K (dated December 1, 1997)
reporting on item 5 & 7.
Form 8-K/A (dated December 1, 1997)
reporting on items 5 & 7.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
Bion Environmental Technologies, Inc.
/s/ M. Duane Stutzman
-----------------------------
M. Duane Stutzman, Chief Financial
Officer
Dated: February 17, 1998
-----------------------
<PAGE>
Exhibit 10.1
BION NMS' INSTALLATION AGREEMENT
ADDENDUM #4
PHASE II OPTION AGREEMENT
It is AGREED this 16th day of January, 1998, between the undersigned that
the agreements (collectively the "AGREEMENT") attached hereto at EXHIBIT A are
amended as set forth herein (EXHIBIT A is incorporated herein by reference):
1) Section 4 (Option for Phase II) B. of the Addendum of EXHIBIT A shall be
amended as follows:
"B. Under the terms of this OPTION, BION and BFF agree that all of the terms
and conditions of the AGREEMENT shall apply to the agreement covering PHASE II
of the PROJECT (the "PHASE II AGREEMENT") when the PHASE II AGREEMENT is
executed with the following changes and/or exceptions:
i. SECTION 5, BION COMPENSATION shall be amended in the PHASE II AGREEMENT to
read:
"A. Each site where a Bion NMS' is being installed has its unique character.
This requires BION to individually design the application of the Bion NMS for
each site at which it is to be installed. BION's goal is to design each Bion
NMS application to complement the existing site as much as practicable. BION
agrees to perform the services described in Attachment A and such other
activities as required by this PHASE II AGREEMENT. BFF agrees to pay BION in
consideration of this PHASE II AGREEMENT the aggregate sum of $800,000 payable
as follows:
i. $100,000 on July 15, 1998,
ii. $100,000 on August 15, 1998,
iii. $100,000 on September 15, 1998,
iv. $31,250 on the 15th day of October 1998 through January 2000,
provided, however, if BION and BFF agree on a schedule of development whereby
PHASE II of the PROJECT is anticipated to be completed in less than the 18
months of this payment schedule, then this payment schedule shall be
compressed on a ratable basis. Not withstanding any of the above, upon
completion of the construction of all of the systems contemplated by this
PHASE II AGREEMENT, all amounts are due and payable.
B. Late payment charges of 1.5% per month or part thereof, payable to BION,
will be due if payments are not received within 15 days of due date. BFF will
be responsible for any and all reasonable legal and/or court expenses incurred
by BION in BION's attempt to recover any unpaid amounts in case of failure of
BFF to pay BION for services performed and/or expenses incurred for BFF's
account.
<PAGE>
C. For WORK provided by BION beyond the scope of services described in
ATTACHMENT A, or for unforeseen circumstances or changes in the scope of
services required by BFF, BION shall be compensated for such services as
negotiated by BION and BFF.
D. To the extent that the actual capital cost to design and construct the Bion
NMS systems contemplated in PHASE II is less than the aggregate standard cost
in the "Murphy Model" for waste handling installation, BFF shall make
available to BION a revolving credit line on commercial terms (prime plus 1/2
point) an amount equal to one half of such capital savings on a cumulative
basis.
E. If greater than 12 BION NMS Systems are required for the performance of
PHASE II, the total fees due BION pursuant to Section A above shall increase
by $20,000 for each such system above 12. For each system above 12, the
increased fees due will be spread equally over the payments scheduled to be
made commencing October 15, 1998 through January 15, 2000."
ii. The terms and conditions of SECTION 6, BION NMS SYSTEM OPERATION
COMPENSATION AND PAYMENT, paragraph A shall be amended as follows:
"A. BFF agrees to pay BION for start-up and operational services for PHASE II
as described in ATTACHMENT A the amount of $1,115 per month for each system in
PHASE II as each system enters start-up."
iii. The terms and conditions of SECTION 6, BION NMS SYSTEM OPERATION
COMPENSATION AND PAYMENT, paragraph C shall be amended as follows:
"C. On a date one year after the start-up of the first Bion NMS for PHASE I,
and similarly, on a date one year after the start-up of the first Bion NMS for
PHASE II, BION and BFF shall evaluate the monthly payments for start-up and
operational services and negotiate any revisions that may be necessary.
During the pendency of such negotiations payments will continue at the
previously authorized level.""
2) Upon signing of this ADDENDUM #4 the parties agree that BFF has exercised
the Option for PHASE II contained in the AGREEMENT attached hereto as EXHIBIT
A.
BOWMAN FAMILY FARMS, INC. BION TECHNOLOGIES, INC.
By: /s/ Michael A Bowman By: /s/ Jon Northrop
----------------------------- ----------------------
Authorized Officer Authorized Officer
CRYSTAL SPRINGS FARMS, LLC
By: /s/ Michael A. Bowman
----------------------------
Authorized Officer
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 56,939
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<RECEIVABLES> 88,057
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