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,
1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 OR THE TRANSITION PERIOD FROM ______ TO _____
COMMISSION FILE NUMBER 0-19333
-------------
Bion Environmental Technologies, Inc.
---------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Colorado 84-1176672
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 May 11, 1998:
Common Stock, No Par Value, 8,691,821
<PAGE>
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets:
June 30, 1997 and
March 31, 1998 F2
Consolidated Statements of Operations:
For the Nine Month Periods Ended
March 31, 1997 and March 31, 1998 F3
Consolidated Statements of Operations:
For the Three Month Periods Ended
March 31, 1997 and March 31, 1998 F4
Consolidated Statement of Changes in
Stockholders' Equity F5-F6
Consolidated Statements of Cash Flows:
For the Nine Month Periods Ended
March 31, 1997 and March 31, 1998 F7-F8
Notes to Consolidated Financial Statements F9-F12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION 3
PART II OTHER INFORMATION
- -------- ------------------
ITEMS 1-6 21
FINANCIAL INFORMATION
PART I
ITEM 1. FINANCIAL STATEMENTS
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
---------- ------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 19,996 $ 9,232
Accounts receivable/contract receivable
(net of allowance of $32,000) 27,587 72,963
Work in progress (net of allowance
of $30,000) 318,962 168,000
Assets held for resale 338,000 600,000
Total current assets 704,545 850,195
Property and equipment, net 219,549 244,824
Other assets
Patents, net 43,874 38,660
Deferred long-term contract costs 77,333 77,333
Other 11,694 11,694
Total other assets 132,901 127,687
---------- ----------
Total assets $1,056,995 $1,222,706
========== ==========
Liabilities and Stockholder (Equity)
Current liabilities
Accounts payable $ 300,519 $ 302,820
Accounts payable - related party 9,873 29,426
Line-of-credit - stockholder 160,000 105,000
Notes payable 192,000 325,000
Notes payable - stockholders 82,171 82,171
Capital lease obligations 64,973 62,546
Accrued expenses 20,479 36,359
Accrued payroll 251,750 135,500
-------- ----------
Total current liabilities 1,081,765 1,078,822
Long-term liabilities
Capital lease obligation 99,095 149,488
Deferred contract revenue 181,000 181,000
--------- ----------
Total liabilities 1,361,860 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, 8,650,321 (March 31,
1998) and 3,696,816 (June 30, 1997)
shares issued and outstanding 10,128,782 7,983,274
Common stock subscribed 11,500 627,822
Accumulated deficit (10,445,147) (8,893,182)
---------- ---------
Total stockholders' (deficit) (304,865) (186,604)
---------- ---------
Total liabilities and
stockholders'(deficit) $1,056,995 $1,222,706
========== =========
</TABLE>
See Notes to Consolidated Financial Statements
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended
March 31
-----------------------
1998 1997
----------- --------
<S> <C> <C>
(Unaudited) (Unaudited)
Contract revenues $ 357,916 $ 99,646
Contract costs 409,222 396,169
---------- -----------
Gross profit (loss) (51,306) (296,523)
General and administrative expenses 1,258,494 1,267,632
----------- ----------
Loss from operations (1,309,800) (1,564,155)
Other income (expense)
Interest income 2,454 107,200
Interest expense (71,483) (212,811)
Research and development (168,244) (118,855)
Gain (loss) on sale of assets (239) 0
------------ -----------
Net (loss) $(1,547,312) $(1,788,621)
============ =============
Basic (Loss) per weighted average
share of common stock $ (0.28) $ (0.97)
============ =============
Weighted common shares outstanding 5,447,590 1,836,763
============ =============
</TABLE>
See notes to consolidated financial statements.
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------
1998 1997
---------- ---------
(Unaudited)(Unaudited)
<S> <C> <C>
Contract revenues $ 217,168 $ 37,839
Contract costs 128,229 110,467
---------- ---------
Gross profit (loss) 88,939 (72,628)
General and administrative expenses 483,060 471,100
---------- ---------
Loss from operations (394,121) (543,728)
Other income (expense)
Interest income 333 6
Interest expense (24,668) (71,477)
Research and development (58,389) (51,968)
Gain (loss) on sale of assets 0 0
------------ -----------
Net (loss) $(476,845) $(667,167)
============ ===========
Basic (Loss) per weighted average share of
common stock $ (0.06) $ (0.34)
============ ===========
Weighted common shares outstanding 8,611,744 1,972,895
============ ============
</TABLE>
See notes to consolidated financial statements.
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Series "B"
Preferred Stock Common Stock
------------------- -------------------
Shares Amount Shares Amount
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Balances at June 30, 1997 18,834 $ 95,482 3,696,816 7,983,274
Conversion of common stock
subscriptions to common stock -- -- 598 2,503
Common stock subscriptions
for services -- -- -- --
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
Conversion of common stock
subscriptions to common
stock -- -- 723 2,504
Common stock subscriptions
for services -- -- -- --
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
Common stock subscriptions
for services -- -- -- --
Conversion of common stock
subscriptions for services -- -- 188,572 600,815
Issuance of common stock
for cash -- -- 81,478 378,402
Issuance of common stock
for services -- -- 9,054 30,725
Transfer of property pursuant
to section 351 of
the Internal Revenue Code
of 1986 -- -- 4,351,348 --
Net (loss) for the period ended
March 31, 1998 -- -- -- --
Balances at March 31, 1998 $-- $-- $8,650,321 $10,128,782
</TABLE>
Continued below
<TABLE>
<CAPTION>
Common Stock Accumulated
Subscribed (Deficit) Total
-------------- ------------ ------------
<S> <C> <C> <C>
Balances at June 30, 1997 $ 627,822 $(8,893,182) $(186,604)
Conversion of common stock
subscritions to common
stock (2,503) - -
Common stock subscriptions for
services 47,500 - 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 672,819 (9,509,226) (337,874)
Conversion of common stock
subscriptions to common stock (2,504) - -
Common stock subscriptions
for services (69,500) - (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) (456,966)
Balances at December 31, 1997 600,815 (9,968,302) (248,647)
Common stock subscriptions for
services 11,500 - 11,500
Conversion of common stock
subscriptions for services (600,815) - -
Issuance of common stock for cash - - 378,402
Issuance of common stock for services - - 30,725
Issuance of common stock in exchange
transaction pursuant to section
351 of the Internal Revenue Code
of 1986 - - -
Net (loss) for the period ended
March 31, 1998 - (476,845) (476,845)
Balances at March 31, 1998 $11,500 $(10,445,147) $ (304,865)
</TABLE>
See Notes to Consolidated Financial Statements
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------
1998 1997
-------- ------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net (loss) $(1,547,312) $(1,788,621)
Adjustments to reconcile net loss
to net cash provided/used by
operating activities -
Depreciation and amortization 41,464 22,785
Issuance of stock and increase in
subscribed stock for services
and interest 108,628 471,228
Change in assets and liabilities -
Contract receivables and work-in
progress (105,586) (35,849)
Prepaid expenses 0 (14,782)
Accounts payable and accrued
liabilities (11,426) 168,718
Accrued payroll 116,250 (99,501)
--------- ---------
Net cash (used in) operating
activities (1,397,982) (1,276,022)
---------- ----------
Cash flows from investing activities
Investments in patents (7,707) 0
Investments in equipment (13,696) (20,662)
Proceeds from the sale of assets 262,000 0
---------- -----------
Net cash (used in) provided
by investing activities 240,597 (20,662)
---------- -----------
Cash flows from financing activities
Payments on notes payable (133,000) 0
Line of credit 55,000 445,991
Proceeds from sale of stock 1,294,115 741,768
Payments on capital lease obligations (47,966) (29,912)
Proceeds from the sale of warrants 0 31,250
--------- ----------
Net cash provided by financing
activities 1,168,149 1,189,097
--------- ---------
Net increase (decrease) in cash and
cash equivalents 10,764 (107,587)
Cash and cash equivalents at
beginning of period 9,232 118,612
-------- -------
Cash and cash equivalents at
end of period $ 19,996 $ 11,025
======== =======
</TABLE>
Footnote:
Supplemental disclosure of cash flow information
Cash paid for interest was $9,457 (1998) and $100,522 (1997).
Supplemental disclosure of non-cash financing activities
For the nine months ended March 31, 1998 -
Declared and accrued dividends of $4,653 for preferred stock Series
B.
Converted $605,822 of common stock subscribed into 189,893 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.
Issued 4,351,348 shares of restricted stock and 2,832,909 Class Z
warrants at $15.00 per share in an exchange transaction (see note 4).
For the nine months ended March 31, 1997 -
Entered into a capital lease for equipment for $165,801.
Declared and accrued dividends of $7,629 for preferred stock Series B.
Converted $261,000 of shareholders' notes payable into common stock.
See notes to consolidated financial statements.
BION AND ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<PAGE>
- ------
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 dis-closures
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 March 31, 1998, the Company has incurred accumulated losses totaling
$10,445,147, resulting in a accumulated stockholders' deficit of $304,865.
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>
March 31, June 30,
1998 1997
------------- ------------
<S> <C> <C>
Costs incurred on contracts $1,829,777 $1,434,719
Estimated (losses) (588,164) (536,858)
--------- ---------
1,241,613 897,861
Less billings to date (1,026,318) (833,528)
--------- ---------
$ 215,295 $ 64,333
========= =========
</TABLE>
Note 4 - Capital Structure
- ------------------------------
The following details the capital structure of the Company as of May 11, 1998:
Common Stock
-------------
The Company had 8,691,821 shares of Common Stock issued and outstanding
and 2,300 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 ($6.00) 21,556
Employee ($6.25) 10,000
Employee ($6.75) 5,000
Employee ($7.25) 32,500
Employee ($7.50) 25,000
Employee ($7.75) 25,000
Employee ($8.00) 25,554
Employee ($10.00) 10,000
Employee ($12.50) 10,000
Employee ($15.00) 10,000
-------
228,672
</TABLE>
Warrants outstanding as of May 11, 1998 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
$3.00 warrants:
exercisable 1/22/96 through 1/21/01: 1,003
exercisable 8/21/96 through 8/20/01: 14,500
exercisable 9/13/96 through 9/12/01: 827
-----------
Total $3.00 warrants 16,330
$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
Total $8.00 warrants 10,000
$10.00 warrants:
exercisable 2/1/97 through 12/31/01: 10,000
Total $10.00 warrants 10,000
$12.50 warrants:
exercisable 2/1/97 through 12/31/01: 10,000
Total $12.50 warrants 10,000
$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 3,127,161
</TABLE>
Effective January 1, 1998, holders of 84% of the Company's common stock (post
transaction) transferred property to the Company pursuant to Section 351 of
the Internal Revenue Code of 1986, as amended. The transaction resulted in the
transfer 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 5 - Subsequent Events
- ------------------------------
Effective April 17, 1998 the Company made awards to five employees under the
1994 Incentive Stock Plan. The Company granted 25,000 options at an exercise
price of $7.75 per share (exercisable from 4/17/98 - 12/31/98).
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.
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 March 31, 1998 was 0.65 : 1.0 as
compared to 0.79 : 1.0 as of June 30, 1997. Cash and cash equivalents
as of March 31, 1998 increased to $19,996 as compared to $9,232 as of
June 30, 1997.
During the nine months ended March 31, 1998, 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 March 31, 1998 the Company has drawn $160,000 against the October
26, 1996 line-of-credit with a shareholder. (See 8-K dated December 1, 1996.)
Also, during the nine months ended March 31, 1998 the Company sold
349,701 shares of restricted and legended common stock for net cash of
$1,294,115, issued 33,405 shares of restricted and legended common stock
valued at $119,128 for services, and converted 189,893 shares of subscribed
stock to 189,893 shares of restricted and legended common stock valued at
$605,822. The Company had additional subscribed stock of $59,000 for legended
and restricted common stock awarded but not issued to certain employees and an
officer as additional compensation.
<PAGE>
Effective January 1, 1998, holders of 84% of the Company's common stock
(post transaction) transferred property to the Company pursuant to Section
351 of the Internal Revenue Code of 1986, as amended. The transaction resulted
in the transfer 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.)
During the nine months ended March 31, 1998, 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 September 15, 1997, and the
second and last third shall vest twelve and twenty-four months thereafter
respectively. The Company also made nine awards to employees under the 1994
Incentive Stock Plan. The Company granted 25,000 options at an exercise price
of $7.25 per share (exercisable from 1/26/98 - 12/31/98) and 25,000 options at
an exercise price of $7.50 per share (exercisable from 2/23/98 - 12/31/98).
During the nine months ended March 31, 1998, 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
<PAGE>
in this paragraph are to purchase restricted and legended shares of common
stock of the Company and will expire on December 31, 2001. The Company also
issued to M. Duane Stutzman 20,000 options under the 1994 Incentive Stock Plan
at an exercise price of $7.25 per share (exercisable from 1/26/98 - 12/31/98).
During the nine months ended March 31, 1998, 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.
During the nine months ended March 31, 1998 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 $10,445,147 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 Nine Months Ended March 31, 1998 with
----------------------------------------------------------------
Nine Months Ended March 31, 1997
-------------------------------------
Revenue in the nine months ended March 31, 1998 was $357,916 compared to
$99,646 for the corresponding nine month period in 1997, an increase of
$258,270. Contract costs were higher $13,053 in the 1998 nine month period
due to increased expenses associated with system design and BionSoil
processing.
General and administrative expenses were lower by $9,138 in the nine
month period ended March 31, 1998 due to lower consulting
expenses ($293,000). 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 ($89,000), public relations
($115,000), and marketing and selling expenses ($58,000).
The Company recorded $104,746 less in interest income for the nine months
ended March 31, 1998. 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 $71,483 in interest expense on its notes to
shareholders and capital equipment leases, and $168,244 in research and
development costs. As a result of the above, the Company recorded a net loss
of $1,547,312 in the nine month period ended March 31, 1998, compared to a net
loss of $1,788,621 for the nine month period ended March 31, 1997.
The Company will need to increase sales significantly to obtain
profitability.
Comparison of the Three Months Ended March 31, 1998 with
-----------------------------------------------------------------
Three Months Ended March 31, 1997
--------------------------------------
Revenue in the three months ended March 31, 1998 was $217,168 compared to
$37,839 for the corresponding three month period in 1997, an increase of
$179,329. Contract costs were higher by $17,762 in the three month period.
The higher contract costs were due to increased activities associated with
system design and New York BionSoil processing. The above resulted in a gross
profit for the period ended March 31, 1998 of $88,939 as compared to a gross
loss of $72,628 for the same three month period in 1997.
General and administrative expenses increased by $11,960 in the period.
The Company recorded $24,668 in interest expense on its notes to
shareholders and capital equipment leases and $58,389 in research and
development costs. As a result of the above, the Company recorded a net loss
of $476,845 for the three months ended March 31, 1998, compared to a net loss
of $667,167 for the three months ended March 31, 1997.
<PAGE>
Year 2000 Issue
- -----------------
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The
"year 2000" problem is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two-digit year
value to 00. The issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. After a review of the Company's computer systems and
associated software, management does not believe year 2000 will have a
material effect on the operations or financial condition of the Company.
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 $10,000,000 of equity has been invested in the Company through the
close of the fiscal quarter ended March 31, 1998. These financial statements
also show that, as of that date, the Company had a negative net worth of
$304,865, cumulative losses of $10,445,147, 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.
Business Development
---------------------
The Company's mission is to provide services, systems and products, which
solve environmental problems with wastes and wastewater. In appropriate
applications, the biological processes utilized will produce a nutrient rich,
organic soil product, BionSoil. 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 solids 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 solids 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 performed studies for, sold, had
under construction and/or in operation systems in four distinct regions: North
Carolina, New York, Florida, and the Pacific Northwest (see footnote 1,
below). As of March 31, 1998 the Company's business activities have expanded
into eight additional states including Colorado, Kansas, Illinois, Iowa,
Missouri, Nebraska, Oklahoma and Utah (see footnote 2, below).
Geographic Expansion
---------------------
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. With the
establishment of this credibility and recent contract signings, the Company is
positioned to attempt to gain significant market penetration in these new
geographic areas*. To date the Company's geographic expansion has been limited
due to financial and personnel constraints. However, as a result of
heightened awareness about the major problem facing the animal raising
industry and due to the current proliferation of state and national
legislation being considered, management believes that major geographic
expansion is now essential to the Company's ongoing success*.
The Company estimates that the cost associated with the required
staffing, servicing, and marketing for expansion into 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*. Management believes that
achieving a greater rate of geographic expansion will require capital
expenditures greater than those expensed for previous expansion*. (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).
As the Company continues its expansion into new areas in the future, and
this expansion requires similar or greater additional cash resources to be
spent, these cash amounts, when expended, will 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 quarter 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 may occur based
on this review and as further applications of the technology are developed*.
The Company anticipates additional 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 technologies than for existing dairy or swine waste
systems*.
Other factors that management has considered in relation to the expansion of
technology include, but are not limited to: current and/or new local, state,
and federal regulations, proximity to current online systems or systems under
contract and the market size of poultry and cattle feedlot operations.
Just as there are additional expenses associated with geographic
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. 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*.
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. The Company has expensed all of these
costs.
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 or tech-nology 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
animal waste production 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>
<CAPTION>
Table 1
Animal Approximate Equivalent BionAnimals
------ ------------------------------------
New Definition Old Definition
--------------- ---------------
<S> <C> <C>
One dairy cow 10.00 1.000
One steer 4.50 0.450 (2.2 = 1)
One sow 1.35 0.135 (7.4 = 1)
One market hog 0.90 (1.1 = 1) 0.090 (11 = 1)
One nursery pig 0.225 (4.4 = 1) 0.0225 (44 = 1)
One layer chicke 0.02 (50 = 1) 0.002 (500 = 1)
</TABLE>
As Bion NMS systems are brought on-line and biosolids are harvested, BionSoil,
Inc. (the Company's other wholly-owned sub-sidiary) 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 potentially 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 sub-stantial
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 may 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 appro-priate
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 in bulk, prices ranged from $15.00 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 $50.00 to $150.00 per cubic
yard. The Company currently is distributing bagged BionSoil to retail outlets
in western New York for the spring 1998 season. The material is being
processed, blended with Sphagnum peat moss and bagged in both 20 pound and 40
pound bags at the Company's Hermitage New York facility. The product is being
sold 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). It should be noted that a large portion of material harvested from
many systems has been devoted to both university and private studies intended
to determine physical characteristics, blends, and growth results using
BionSoil.
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 13 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 current BionSoil sales results, an analysis of the Company's
potential markets, the large number of proposals and preliminary agreements
currently being prepared (many at the specific request of potential clients),
the recent signing of major Bion NMS system installation contracts (see
footnote 6, below) 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 have been established by the Company. In June
1997 the primary long range goal established by Company management set 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 established the addition of 40
systems under contract (containing 300,000 BionAnimals) as its sales target
for June 30, 1998*. Achieve-ment 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*. 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 re-negotiate 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 re-negotiations
result in new signed contracts).
However, in the first nine months of fiscal year 1998 (which period ended
March 31, 1998), the Company has signed contracts for up to 60 systems
containing approximately 860,000 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 March 31, 1998, has a total of 76 systems
with approximately 950,000 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 nine 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*.
Market Size
- ------------
The long-range sales goals outlined above represent 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 (as shown
below), 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) as well as additional state by state information,
in some cases current as of December 1997, 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 7, 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's systems sales program has
achieved (through March 31, 1998) approximately a 0.7% market penetration,
and the existing system sales 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 8, below)*. Batelle calculated that the demand for compost and
compost-like products (including products ranging from manure to composted
organic wastes to manufactured potting soils and soil enhancers) in selected
areas of 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 appli-cation
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
950,000 BionAnimals currently under contract (in excess of 900,000 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 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 $15 per cubic yard when sold unprocessed in bulk, and
will sell for higher prices when processed and bagged, prices which may rise
to $120 per cubic yard*. It should be noted that all prices quoted within
this Form 10-QSB are wholesale only and may not be representative of actual
retail prices. 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 9, 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 footnotes 10
and 11, below)*.
<TABLE>
<CAPTION>
Table 2*
Projected BionSoil Projected Projected Annual
Wholesale Price Per Bion Gross Margin
Per Cubic Yard* Expenses* Per Cubic Yard*
- ------------------ --------- -----------------
<S> <C> <C>
$ 20* 15* 5*
40* 30* 10*
60* 40* 20*
80* 49* 31*
100* 61* 39*
120* 72* 48*
</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*.
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 contri-bute $40 of revenue per year to the Company, resulting in
projected gross margins of $10 per year*. Under the terms of most Bion NMS
agreements, this contribution to revenue and gross margin is anti-cipated 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 $84 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 10, below)*.
<PAGE>
<TABLE>
<CAPTION>
Table 3*
Projected BionSoil Projected 15 Year Net
Selling Price Per Present Value of Per
Cubic Yard* BionAnimal Annual Gross Margins*
------------ -----------------------------------
<S> <C>
$ 20* $ 42*
40* 84*
60* 167*
80* 259*
100* 326*
120* 402*
</TABLE>
In the past the Company has lost money on system design, permitting
support, construction oversight and initial system operation. However, through
installing these systems at a loss the Company has been able to establish a
number of Bion NMS systems to use for test sites, demonstrations and to refine
the technology. Based on experience to date, the Company is establishing
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*.
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.
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
pro-cessing 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; and,
(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.
2. The systems in these states are primarily 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, an additional
engineer, 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, has signed agreements for five additional system
instal-lations, and has one additional Bion NMS that has come on line for a
9,600 finishing hog farm. Management estimates that, to date, in excess of
$800,000 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. Representatives of North Carolina State University ("NCSU"), North
Carolina Department of Agriculture ("NCDA") and the North Carolina Cooperative
Extension Service conducted an independent on-farm research trial in 1996.
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. Representatives of NCSU, NCDA, and Bion
Technologies, Inc conducted a further independent study in 1997. 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
plus other additives. 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. The Company has an extensive program of additional
university and company tests designed and being implemented for the 1998
summer growing season.
6. As reported in the Company's February 23, 1998, Form 8-K, the Company
entered into an agreement with Murphy Family Farms, Inc. of Rose Hill, North
Carolina, to design, install and operate multiple Bion NMS swine waste
treatment systems in six additional states. Also, as reported in the Company's
December 31, 1997, Form 10-QSB, the Company entered into an agreement with
Bowman Family Farms, Inc. of Wray, Colorado, to design, install and operate
approximately thirty-six Bion NMS swine waste treatment systems in two
additional states.
7. All numbers of animals are taken from the 1992 Census of Agriculture
published by 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
* Poultry (chickens and turkeys) based on layers, broilers and turkeys
8. 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.
-----------------------
9. 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.
10. 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.
11. Due to the Company's lack of experience and start-up nature in the soil
processing area, the profit margins are based on management's estimate and
therefore are subject to significant variation. Actual production costs to
date are higher than those shown in Table 2 due to significant start-up
inefficiencies. Management believes, however, that as greater quantities of
BionSoil are harvested and the processing techniques become more efficient,
the profit margins will equal or exceed the projected Annual Gross Margins
shown in Table 2*.
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 nine month period ended
March 31, 1998 without registering the securities under the
Securities Act.:
210,475 shares of restricted and legended Common Stock to six private
investors and fourteen existing shareholders in privately negotiated
transactions for an aggregate amount of $711,425.
32,826 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 $63,938.65.
206,600 shares of restricted and legended Common Stock to four employees in
lieu of cash for services rendered valued at, in aggregate, $672,775.34.
16,698 shares of restricted and legended Common Stock to an existing
shareholder for rent and services valued in aggregate at $52,175.
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.
None
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.1 Agreement between Bion Technologies, Inc. and Murphy Family Farms, Inc.
dated March 3, 1998.
27 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K (dated February 23, 1998)
reporting on item 5 & 7.
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: May 13, 1998
------------------
EXHIBIT 10.1
AGREEMENT
IT IS AGREED effective the 3rd day of March, 1998 by, between and among Murphy
Family Farms, Inc. ("MFF") and Bion Technologies, Inc. ("BION") as follows:
1) BION shall design and supervise permitting, construction and operation
of BION Nutrient Management Systems (NMS" or "System") at the locations and in
the approximate sizes as set forth herein:
a) Multiple NMS installations at Circle Four Farm, Phase II, Milford,
Utah including facilities adequate to process excess nutrients from not less
than 10,000 sows, 32,000 nursery pigs and 40,000 finishing hogs, in aggregate;
b) Three NMS installations in Kansas (two in Lane County, one in Hodgeman
County), each including facilities adequate to process excess nutrients from
not less than 11,000 sows;
c) One NMS installation in Barton County, Missouri including facilities
adequate to process excess nutrients from not less than 75,000 sows;
d) Two to four NMS installations in the area of Laverne, Oklahoma
including facilities adequate to process excess nutrients from not less than
40,000 finishing hogs, in aggregate;
e) An NMS for the Squire sow farm in Bladen County, North Carolina
adequate to process excess nutrients from not less than 3,600 sows;
f) One demonstration NMS system in Iowa adequate to process excess
nutrients from not less than 3,300 finishing hogs which NMS shall include a
polishing ecoreactor and other components adequate to allow recycling and/or
discharge of water from NMS;
g) Additionally, MFF shall have the right to designate one existing hog
facility in North Carolina for a demonstration NMS system which shall include
a polishing ecoreactor and other components adequate to allow recycling and/or
discharge of water from NMS.
2) This Agreement (the "AGREEMENT") and, each NMS created pursuant
hereto, shall be subject to each and every provision of the existing agreement
concerning the Squire sow farm set forth at Exhibit A hereto (except the
provisions which are site specific to the Squire sow farm) provided, however
that the provisions concerning fees shall be controlled by the terms set forth
herein.
<PAGE>
3) MFF (or the actual owner of each facility) shall sign a note payable
for BION fees calculated as follows:
<TABLE>
<CAPTION>
Finishing Nursery
Sow Hog Hog
--- --- ---
<S> <C> <C> <C>
Basic fees (one time) $7.00 $4.00 $1.00
Monitoring fees (monthly) $0.175 $0.10 $0.025
</TABLE>
Fees shall be on a per animal "slot"basis. Fees shall be due under the note
as set forth in Exhibit B hereto. Monitoring fees shall be due under the note
for each of the first 48 months of operation of each NMS as per Exhibit B
hereto.
4) Until June 30, 1998 MFF may designate additional swine facilities for
which, subject to BION's right to reject such facilities on the basis of
economic, geographic or site specific characteristics, BION shall design and
supervise permitting, construction and operation upon the terms and conditions
set forth herein. MFF shall make such additional designation in writing
delivered to BION's Colorado executive offices.
5) On the last day of each of the first four years in which BION harvests
bio-solids from each NMS, BION shall pay and offset against the note (at
Exhibit B hereto) to MFF (or the actual owner of each facility on which the
NMS had been installed) a royalty of $3.85 per sow slot; $2.20 per finishing
hog slot; and $0.55 per nursery hog slot. BION shall have the right and
obligation to offset these royalties against any sums then due to BION with
respect to each such NMS including without limitation fees due on the note to
BION pursuant to paragraph 3 above. In the event BION does not harvest
bio-solids, then no sums under the note become due and payable.
6) Notwithstanding any language or implication of any sort whatsoever
herein or elsewhere, MFF acknowledges that:
a) all technologies (existing or as modified, extended, etc. in the future)
involved or embodied in the NMS installation are the sole property of BION;
and
b) all bio-solids (and/or "BionSoil") produced by each NMS are the sole
property of BION (subject to the limited royalty set forth above).
7) This AGREEMENT immediately binds the parties as to the NMS
installations set forth at paragraph 1 c), e), and g) above, provided such
installation locations are available to MFF on a reasonable and practical
basis. MFF shall use its best efforts to amend permit appli-cations in process
or take such other steps to facilitate use of BION NMS systems on the proposed
swine farms. MFF shall use its best efforts to obtain necessary consents and
approvals from its partners, co-owners and/or growers for the NMS
installations set forth at paragraph 1 a), b), d), and f) above within the
next thirty days.
<PAGE>
8) In the event BION shall cease business for any reason whatsoever
during the term of the Agreement and there is no successor business, MFF is
hereby granted a limited license to use the technology owned by BION which is
incorporated in the NMS's set forth at paragraph 1 a) through g) above and any
additional NMS's for systems added pursuant to paragraph 4 above for operation
of the NMS's during the balance of the term of the Agreement. Additionally, in
such event, MFF may hire (as employees and/or consultants) persons who were
formerly employed by BION to aid MFF in the operation of the NMS'S.
9) MFF and BION agree to execute such other documents as may be
reasonably required to carry out the terms of this agreement as set forth
above.
MURPHY FAMILY FARMS BION TECHNOLOGIES, INC.
by: /s/ J. Turner by: /s/ J. Northrop
--------------------- -----------------------
Authorized Officer Authorized Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 19,996
<SECURITIES> 0
<RECEIVABLES> 59,580
<ALLOWANCES> 32,000
<INVENTORY> 0
<CURRENT-ASSETS> 704,545
<PP&E> 219,549
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,056,995
<CURRENT-LIABILITIES> 1,081,765
<BONDS> 0
0
0
<COMMON> 10,128,782
<OTHER-SE> (10,433,647)
<TOTAL-LIABILITY-AND-EQUITY> 1,056,995
<SALES> 357,916
<TOTAL-REVENUES> 357,916
<CGS> 0
<TOTAL-COSTS> 409,222
<OTHER-EXPENSES> 1,258,494
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,483
<INCOME-PRETAX> (1,547,312)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,547,312)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,547,312)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> 0
</TABLE>
