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
September 30, 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 stock, as of
November 11, 1998:
Common Stock, No Par Value, 8,906,372
<PAGE>
Bion Environmental Technologies, Inc. Form 10-QSB
September 30, 1998
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
ITEM 1 FINANCIAL STATEMENTS
Balance Sheets:
June 30, 1998 and
September 30, 1998................. F2
Statements of Operation:
For the Three Month Periods Ended
September 30, 1997 and
September 30, 1998................. F3
Statements of Cash Flows:
For the Three Month Periods Ended
September 30, 1997 and
September 30, 1998................. F4-F5
Statement of Changes in Stockholders
Equity for the Period June 30, 1998
through September 30, 1998............... F6
Notes to Financial Statements............ F7-F10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................ 3
PART II OTHER INFORMATION
ITEM 1-6 ......................................... 23
<PAGE>
FINANCIAL INFORMATION
PART I
ITEM 1. FINANCIAL STATEMENTS
F - 1
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, June 30,
1998 1998
------------- ------------
(Unaudited) (Audited)
Assets
Current assets
Cash and cash equivalents .......... $ 13,830 $ 19,104
Accounts receivable ................ 21,349 13,986
Contract receivable(net of allowance
of $30,000) ....................... 20,902 22,902
Work in progress (net of allowance
of $30,000) ....................... 385,212 389,712
------------ ------------
Total current assets ............. 441,293 445,704
------------ ------------
Property and equipment
Computers and equipment ............ 301,751 298,782
Accumulated depreciation ........... (104,963) (91,727)
------------ ------------
196,788 207,055
Other assets
Patents, net ....................... 42,258 43,066
Deferred long-term contract costs .. 71,333 71,333
Deposits and other ................. 13,015 13,044
------------ ------------
Total other assets .............. 126,606 127,443
------------ ------------
Total assets ........................ $ 764,687 $ 780,202
============ ============
Liabilities and Stockholder (Equity)
Current liabilities
Accounts payable ................... $ 273,506 $ 241,384
Accounts payable - related party ... 23,034 20,324
Notes payable - stockholders ....... 159,171 89,171
Capital lease obligations .......... 62,158 67,137
Accrued expenses ................... 384 24,368
Accrued payroll .................... 359,727 284,250
------------ ------------
Total current liabilities ...... 877,980 726,634
------------ ------------
Long-term liabilities
Note payable - stockholder ......... 315,000 210,000
Capital lease obligation ........... 71,100 83,127
Deferred contract revenue .......... 151,000 151,000
------------ ------------
Total liabilities .............. 1,415,080 1,170,761
------------ ------------
Commitments and contingencies
Stockholders' (deficit)
Common stock, no par value,
100,000,000 shares authorized,
8,875,384 (September 30, 1998)
and 8,764,827 (June 30, 1998)
shares issued and outstanding ..... 11,119,868 10,863,469
Common stock subscribed ............ 31,500 21,500
Accumulated deficit ................ (11,801,761) (11,275,528)
------------ ------------
Total stockholders' (deficit) ... (650,393) (390,559)
------------ ------------
Total liabilities and stockholders'
(deficit) .......................... $ 764,687 $ 780,202
============ ============
See Notes to Consolidated Financial Statements
F - 2
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended
September 30
----------------------------
1998 1997
------------ -----------
(Unaudited) (Unaudited)
Contract revenues ................. $ 63,872 $ 24,837
Contract costs .................... 122,841 93,554
----------- -----------
Gross profit (loss) ........... (58,969) (68,717)
General and administrative expenses 382,475 469,267
Research and development .......... 66,999 52,757
----------- -----------
Loss from operations .............. (508,443) (590,741)
Other income (expense)
Interest expense ................. (15,148) (22,904)
Other income and expense, net .... (2,642) 144
----------- -----------
Net (loss) ........................ $ (526,233) $ (613,501)
=========== ===========
Basic (Loss) per weighted average
share of common stock ............ $ (0.06) $ (0.16)
=========== ===========
Weighted common shares outstanding 8,833,960 3,773,656
=========== ===========
See Notes to Consolidated Financial Statements.
F - 4
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended
September 30,
--------------------------
1998 1997
----------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net (loss) .............................. $(526,233) $(613,501)
Adjustments to reconcile net loss to
net cash used in operating activities -
Depreciation and amortization .......... 14,044 12,724
Issuance of subscribed stock for
services, compensation and interest ... 10,725 76,553
Issuance of subscribed stock for
services .............................. 11,500 47,500
Change in assets and liabilities -
Receivables and work in progress ...... (863) 27,421
Prepaid expenses and other ............ 29 3,000
Accounts payable ...................... 34,832 (27,037)
Accrued liabilities ................... 51,493 52,750
--------- ---------
Net cash used in operating
activities ....................... (404,473) (420,590)
Cash flows from investing activities
Purchases of equipment .................. (2,969) --
Investments in patents .................. -- (700)
--------- ---------
Net cash used in investing
activities ....................... (2,969) (700)
Cash flows from financing activities
Payments on notes payable ............... -- (133,000)
Proceeds from notes payable ............. 175,000 --
Proceeds from sale of stock/warrant
issuances .............................. 161,674 340,721
Proceeds from exercise of options ....... 82,500 --
Payments on capital lease obligations ... (17,006) (16,494)
Proceeds from the sale of assets,
net of selling expenses ................ -- 227,000
--------- ---------
Net cash provided by financing
activities ....................... 402,168 418,227
Net increase (decrease) in cash and
cash equivalents ......................... (5,274) (3,063)
Cash and cash equivalents at beginning
of period ............................... 19,104 9,232
--------- ---------
Cash and cash equivalents at end of period $ 13,830 $ 6,169
========= =========
Footnote:
Supplemental disclosure of cash flow information
Cash paid during the quarter for interest was $4,437 (1998)
and $22,904 (1997).
See Notes to Consolidated Financial Statements.
F - 5
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Continued from previous page.
Supplemental disclosure of non-cash financing activities
For the quarter ended September 30, 1998 -
Converted $1,500 of common stock subscribed into 300 shares
of common stock.
For the quarter ended September 30, 1997 -
Declared and accrued dividends of $2,543 for preferred stock Series B.
Converted $2,503 of common stock subscribed into 598 shares
of common stock.
See Notes to Consolidated Financial Statements.
F - 6
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Common
-------------------------- Stock Accumulated
Shares Amount Subscribed Deficit Total
--------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1998 ..... 8,764,827 $ 10,863,469 $ 21,500 ($11,275,528) ($ 390,559)
Conversion of common stock
subscriptions to common
stock ....................... 300 1,500 (1,500) -- --
Common stock subscriptions
for services ................ -- -- 11,500 -- 11,500
Issuance of common stock
for cash .................... 97,942 161,674 -- -- 161,674
Issuance of common stock
for services ................ 2,315 10,725 -- -- 10,725
Exercise of stock options ..... 10,000 82,500 -- -- 82,500
Net (loss) for the period ended
September 30, 1998 .......... -- -- -- ( 526,233) ( 526,233)
---------- ------------ ------------ -------------
Balances at
September 30, 1998 .......... 8,875,384 $ 11,119,868 $ 31,500 ($11,801,761) ($ 650,393)
========== ============ ============ =============
See Notes To Consolidated Financial Statements
F - 7
</TABLE>
<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,
1998.
The accompanying unaudited 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 con-cern
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 its products. The Company has not yet begun earning significant
revenue from its planned principal operations. Consequently, as of September 30,
1998, the Company has incurred accumulated losses totaling $11,801,761,
resulting in an accumulated stockholders' deficit of $650,393. 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(TM) 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:
September 30, June 30,
1998 1998
------------- ------------
Costs incurred on contracts $1,985,410 $1,927,813
Estimated (losses) (570,547) (548,450)
----------- -----------
1,414,863 1,379,363
Less billings to date (1,109,318) (1,069,318)
----------- -----------
$ 305,545 $ 310,045
=========== ===========
Note 4 - Capital Structure
- --------------------------
Because the Company has a relatively complex capital structure for its size, the
following capital structure details are set forth:
<PAGE>
Common Stock
------------
As of November 11, 1998 the Company had 8,906,372 shares of Common Stock
issued and outstanding and 7,653 shares of subscribed stock.
Options and Warrants
--------------------
As of November 11, 1998 the Company has outstanding options and warrants
as follows:
Options outstanding under the Fiscal Year 1994 Incentive
Compensation Plan and the Non Employee Director Compensation
Plan:
Commences Expires
--------- -------
Director ($1.72) 10,000 8/20/97 8/19/02
($2.27) 10,000 8/20/97 8/19/02
------
20,000
Employee ($3.25) 30,000 11/2/98 12/31/98
($4.00) 1,247 10/21/97 12/31/01
($4.00) 1,200 2/3/98 12/31/01
($4.00) 8,519 9/15/97 12/31/01
($4.00) 834 6/2/98 12/31/01
($4.00) 694 12/16/97 12/31/01
($4.00) 1,734 8/4/98 12/31/01
($4.00) 17,500 8/1/97 8/1/00
($4.00) 1,000 3/31/98 3/31/99
($4.00) 1,334 8/11/98 12/31/01
($6.00) 1,000 3/31/98 3/31/99
($6.00) 8,517 9/15/98 12/31/01
($6.00) 5,000 9/15/97 12/31/01
($6.00) 1,247 10/21/98 12/31/01
($6.00) 1,200 2/3/99 12/31/01
($6.00) 693 12/16/98 12/31/01
($6.00) 1,733 8/4/99 12/31/01
($6.00) 1,333 8/11/99 12/31/01
($6.25) 1,000 6/1/98 5/31/00
($6.25) 5,000 10/6/97 12/31/98
($6.75) 5,000 10/6/97 3/31/99
($7.25) 22,500 1/26/98 12/31/98
($7.25) 10,000 10/6/97 3/31/99
($7.50) 23,000 2/23/98 12/31/98
($7.75) 25,000 4/17/98 12/31/98
($8.00) 10,000 9/15/98 12/31/01
($8.00) 1,246 10/21/99 12/31/01
($8.00) 1,200 2/3/00 12/31/01
($8.00) 693 12/16/99 12/31/01
($8.00) 1,733 8/4/00 12/31/01
($8.00) 1,333 8/11/00 12/31/01
($8.00) 8,516 9/15/99 12/31/01
($10.00) 10,000 9/15/98 12/31/01
($12.50) 10,000 9/15/99 12/31/01
($15.00) 10,000 9/15/99 12/31/01
-------
251,006
<PAGE>
Warrants outstanding as of November 11, 1998 consist of the following:
$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
$7.00 warrants:
exercisable 7/1/98 through 6/30/99: 1,000,000
---------
Total $7.00 warrants 1,000,000
$7.50 warrants:
exercisable 7/1/98 through 12/31/00: 187,500
---------
Total $7.50 warrants 187,500
$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 4,314,661
=========
<PAGE>
Note 5 - 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.
Note 6 - Subsequent Events
- --------------------------
On October 31, 1998 the Company borrowed $20,000 from a related party. The short
term note accrues interest at 1% per month.
Effective November 2, 1998 the Company made awards to five employees under the
1994 Incentive Stock Plan. The Company granted 30,000 options at an exercise
price of $3.25 per share (exercisable from 11/2/98 - 12/31/98).
Effective November 5, 1998 LoTayLingKyur,Inc. converted the outstanding
principal and interest totalling $77,174 on the existing Credit Facility into
12,863 shares of restricted and legended stock and 37,500 warrants exercisable
at $7.50 per share commencing on November 5, 1998 and expiring on December 31,
1999. On November 5, 1998 the entire balance was converted. (See 8-K dated May
21, 1998.)
Effective November 6, 1998 the Company and LoTayLingKyur, Inc. ("LTLK") agreed
that LTLK may subscribe from time to time to purchase units at $3.25 per unit,
each unit consisting of:
a) 1 share of restricted and legended common stock
b) 2 Class "Z" Warrants (Class "Z" Warrant is exercisable at $15.00 per
share commencing January 1, 2000 and expiring on December 31, 2001).
<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 waste-water. In addition, the
agricultural systems installed on animal raising facilities produce a
marketable, nutrient-rich soil-like product, BionSoil(TM).
The Company currently has systems treating swine, dairy, and fruit and juice
processing waste streams in Florida, Illinois, New York, North Carolina, and
Washington. The Company has approximately 380,000 BionAnimals in design,
permitting, construction and/or operations with an additional 765,000
BionAnimals under contract. The Company is in the process of 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.
The Company has incurred losses since inception of $11,801,761 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 opera-tions. No assumptions can be made that the Company
will be able to successfully attain profitable operations and/or raise
sufficient capital to sustain operations.
Liquidity and Capital Resources
- -------------------------------
The Company's current ratio as of September 30, 1998 was 0.50 : 1.0 as compared
to 0.61 : 1.0 as of June 30, 1998. Cash as of September 30, 1998 decreased to
$13,830 as compared to $19,104 as of June 30, 1998.
During the three months ended September 30, 1998, the Company borrowed $70,000
from two shareholders at 1% interest per month.
As of September 30, 1998 the Company has drawn $240,000 against the October 26,
1996 line-of-credit with a shareholder. (See 8-K dated December 1, 1996.)
<PAGE>
On May 21, 1998 the Company entered into a credit facility with a shareholder
for a maximum amount not to exceed $1,500,000. On June 30, 1998 the Company
converted all of the outstanding debt ($300,000 of principal and $677 of
interest) into 50,113 shares of common stock at $6.00 per share and 150,000
warrants at $7.50 per share commencing July 1, 1998 and expiring December 31,
1999. (See 8-K dated May 21, 1998.) As of September 30, 1998 the Company had an
outstanding note payable of $75,000 against this credit facility. On November 5,
1998 the entire balance was converted (See Note 6).
For the three months ended September 30, 1998 the Company issued 97,942 shares
of common stock for cash ($161,674), 2,315 shares of common stock for services
($10,725), and converted 300 shares of subscribed stock to 300 shares of common
stock valued at $1,500. All of the above is legended and restricted common
stock. The Company also issued 10,000 shares of free trading common stock for
the exercise of options ($82,500). The Company has increased subscribed stock by
$10,000 for legended and restricted common stock awarded but not issued to
certain employees as additional compensation.
Results of Operations
- ---------------------
Comparison of the Three Months Ended September 30, 1998 with Three Months Ended
September 30, 1997
- --------------------------------------------------------------------------------
Revenue in the three months ended September 30, 1998 was $63,872 compared to
$24,837 for the corresponding three month period in 1997, an increase of
$39,035. Contract costs were higher in the 1998 three month period by $29,287
due to the increased expenses associated with system design and New York
BionSoil processing. The above resulted in a gross loss for the period ended
September 30, 1998 of $58,969 as compared to a gross loss of $68,717 for the
same three month period in 1997.
General and administrative expenses were lower by $86,792 due to a decrease in
compensation and professional expenses ($110,000) partially offset by an
increase in investor relations expenses ($14,000).
The Company recorded $15,148 in interest expense on its notes payable and
$66,999 in research and development costs. As a result of the above, the Company
recorded a net loss of $526,233 in the three month period ended September 30,
1998, compared to a net loss of $613,501 for the three month period ended
September 30, 1997.
The Company will need to increase sales significantly to obtain profitability.
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. The Company cannot predict the
impact that "Year 2000" will have on its customers and vendors.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ---------------------------------------------------------
The discussion below contains forward-looking statements (denoted with an
asterisk *) 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 footnotes set forth
below (at pages 19 to 23) are an integral part of this discussion and should be
carefully reviewed to properly understand this section. This discussion is
qualified in its entirety by the risk factors discussed herein.
(a) Plan of Operation
General Discussion of Current and Proposed Operations
-----------------------------------------------------
The audited financial statements contained in this Form 10-QSB show that
over $11,151,368 of equity has been invested in the Company through the
close of the fiscal quarter ended September 30, 1998. These financial
statements also show that, as of that date, the Company had a negative net
worth of $650,393, cumulative losses of $11,801,761, 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 Bion NMS
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 for the future, 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, 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, and oversees the installation and 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. Through
September 30, 1998 the Company has sold, designed or has under contract a
total of 80 Bion NMS waste or wastewater treatment systems. These systems
include 5 food processing or storm water run off systems, as well as 75
Bion NMS, BionSolids (see footnote 1, below), producing systems that are
designed to contain approximately 1.1 million BionAnimals (see definition
below) when completed. Eventually the Company anticipates emphasizing
additional business areas including without limitation municipal and
industrial wastewater treatment.*
Prior to September 20, 1989, (when Bion Technologies, Inc., 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. Initial sales and installations were
wastewater treatment NMS (no BionSolids production) until 1993 when the
emphasis shifted to Bion NMS (BionSolids production) applications.
During the past two years the Company has been working to emerge from the
research and development stage and transition into the sales and marketing
of the Bion NMS systems and the BionSoil products produced by those
systems. The Company has focused the majority of its efforts and
expenditures in these two areas and is beginning to see positive progress
in both, as described below.* The Company has defined a method for tracking
both the sale and start-up of Bion NMS systems and the production of
BionSoil based on a Company defined standard unit, the BionAnimal, which
relates BionSoil production to confined animal weight. When all the manure
and urine produced by one BionAnimal is collected as BionSolids and
subsequently converted into BionSoil, the Company estimates that each
BionAnimal will yield approximately 1 cubic yard of processed BionSoil per
year.*
Using this definition of BionAnimal the Company has developed the following
table relating the number of animals in full confinement installations to
the number of BionAnimal equivalents they represent. (See footnote 2,
below):
Table 1
Animal Approximate Equivalent BionAnimals
- ------------- -----------------------------------
One dairy cow 10.00
One steer 4.50
One sow 1.35
One market hog 0.90 (1.1 = 1)
One nursery pig 0.225 (4.4 = 1)
One layer chicken 0.02 (50 = 1)
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 development
efforts associated with testing, processing, blending, packaging,
marketing, distribution and sales of BionSoil and BionSoil-based products
which are produced from the solids harvested from the Company's Bion NMS
systems.
<PAGE>
For fiscal year 1998 (see the Company's Form 10-KSB dated June 30, 1998),
the Company exceeded its' internal goals by more than 100% by adding
approximately 650,000 BionAnimals under contract. During the first quarter
of fiscal year 1999, the Company has added an additional 315,000
BionAnimals, approximately 40% of the Company's internal goals for the year
(see management's goals and targets below).
Market Size
-----------
Management has devoted significant effort to defining markets for both Bion
NMS systems and potential markets for BionSoil and BionSoil products. These
efforts have included formal and informal studies, creation of models as
well as analysis of available statistical data.
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
following size estimates for the target market segments for system sales
(see footnote 3, below).
The total United States animal population, based on data contained in the
1992 U.S. Department of Agriculture Census statistics shows that there were
over 96 million cattle and calves, 57 million hogs and in excess of 1.2
billion fowl on farms in the United States. These numbers if converted
based on the Company defined BionAnimal unit, yield approximately 455
million BionAnimals.
However, not all of these BionAnimals are on farms that are potential
candidates for a Bion NMS installation. The Company has analyzed the
economics of system installation, minimum system size requirements and
system operation factors related to the size of farms. Based on this review
and further analysis of the census data, the Company estimates that the
total number of BionAnimals on larger farms, which meet size criteria, is
approximately 140 million (see footnote 4, below). Based on this review,
these animals are believed by the Company to be the potential candidates
for system installation in the U.S.* Further, the number of large animal
farms is increasing as the move to consolidate livestock operations into
larger more efficient farm units is accelerating (see footnote 5, below).
<PAGE>
Management's review of the potential market for BionSoil and BionSoil
products has included research by the Battelle Institute in a study
conducted for the Solid Waste Composting Council (see footnote 6, below),
as well as initial market sector analysis.* Battelle 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, categorized in
nine application segments: landscapers, delivered topsoil, bagged retail,
nurseries, landfill final cover, surface mine reclamation, sod production,
silvaculture, and agriculture, far exceeds projected supply.* 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, the U.S. Park Service and others.* The Company is currently
analyzing specific market sectors that are initial target market areas
within this overall demand including container nursery products, golf
course construction, the turf industry and others (see footnote 7, below).*
Geographic Expansion
--------------------
The activities of the Company to design, permit, oversee the installation
of and operate its systems in the various geographic areas where the
Company is conducting its business to date 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 into new geographic areas.* To date, the
Company's geographic expansion has been limited due to financial and
personnel constraints (which continue to exist). However, as a result of
heightened awareness about the major manure treatment and disposal problem
facing the animal raising industry (see footnote 8, below), and due to the
current proliferation of state and national legislation being considered,
management believes that major geographic expansion is now possible and is
essential to the Company's ability to achieve successful operations in the
future.*
The Company estimates that the cost associated with the required staffing,
servicing, and marketing for expansion into new geographic regions,
including initial sales calls, system design, regulatory approvals, system
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. The Company's balance sheet does not show any assets created by
these expenditures as they all have been recorded as expense items.
However, based on experience to date in the regions where system sales and
installation activity have been focused, the Company believes that the
money invested in these efforts 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 expenditures
greater than those expensed for previous expansion.* (An example of the
accumulation of these expenses 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 9,
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 10, below) which provide
broad coverage of the fundamental technology that underlies the Company's
systems and processes. The Company is conducting a review of its existing
patent position and anticipates that additional patent filings may occur
based on this review or as further applications of the technology are
developed. The Company currently anticipates the expansion of the
technology into the cattle feedlot and poultry raising businesses where the
technology will need to be adapted to treat waste with both different
characteristics and different collection technologies than for existing
dairy or swine waste systems.*
Other factors that may motivate the expansion of technology include, but
are not limited to, current and/or new local, state, and federal
regulations, proximity of potential systems to current online systems or
systems under contract and the market size of poultry, cattle feedlot and
other similar 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.
Management's Targets/Goals, Bion NMS System Sales and BionAnimals Under
Contract
---------------------------------------------------------------------------
Based on the results of the limited current BionSoil test market (see
BionSoil Economics below), analysis of the Company's potential markets for
both BionSoil products and Bion NMS systems, the large number of proposals
and preliminary agreements currently being prepared at the specific request
of potential clients, the recent signing of additional major Bion NMS
system installation contracts (see footnote 11, below) and the steadily
increasing interest in Bion NMS systems as a cost effective and efficient
solution to environmental issues related to waste and wastewater handling
in the large animal agriculture area, management has reviewed the goals for
system sales and installations that were previously established by the
Company.
<PAGE>
In June of 1996 the Company set internal sales goals for each of the last
two fiscal years, 1997 and 1998. Note, however, that as of June 30, 1997,
the Company had not met its internal sales goal for systems and BionAnimals
established for that fiscal year due to a number of factors, including but
not limited to capital availability, the decision to close the Company's
Washington state office, 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 did not make economic sense due to geographic
isolation or other factors 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). (See
the Company's Form 10-KSB for the fiscal year ended June 30, 1997).
In July 1997, following careful review of its failure to attain the goals
that had been established for fiscal year 1997 (which ended June 30, 1997),
Company management established the primary long range goal to achieve a
target level of 2,000,000 BionAnimals under contract 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 300,000 BionAnimals
under contract as the sales target through its fiscal year ending June 30,
1998 which would result in the Company having contracts for a total of
approximately 390,000 BionAnimals by June 30, 1998. (See the Company's Form
10-KSB for the fiscal year ended June 30, 1997 for a discussion of these
goals).
For fiscal year 1998 (which ended June 30, 1998), the Company significantly
exceeded its goals. During the year, the Company signed contracts for
systems designed to contain approximately 650,000 BionAnimals as compared
to its goal of adding contracts for approximately 300,000 BionAnimals
through the end of the fiscal year. As a result, the Company exceeded its
target for the fiscal year ended June 30, 1998 by over 100%. When all the
systems under contract, as of June 30, 1998, are complete and in full
operation (which is expected to take up to two years from signing) they are
anticipated to produce approximately 750,000 cubic yards of BionSoil per
year.
Based on these factors and the assumptions detailed below, management has
set the following revised performance goals for the number of BionAnimals
under contract in each of the next four fiscal years, and, following the 15
to 24 month lag for system design, permitting, construction and start-up,
for quantities of BionSoil that are anticipated to be available to be
sold:*
Table 2* (see footnote 12, below)
Management Targets/Goals
BionAnimal/Contracts and BionSoil (#'s in thousands)
- --------------------------------------------------------------------------------
Fiscal Years Ended June 30,
-------------------------------------------
1999 2000 2001 2002
-------- -------- -------- ---------
Number of BionAnimals
added during fiscal
year (in thousands)* . 800* 950* 1,200* 1,400*
Cumulative number of
BionAnimals under
contract (in
thousands)* .......... 1,550* 2,500* 3,700* 5,100*
BionSoil available
for sale (in thousands
of cubic yards)* ..... 30* 300* 1,600* 2,600*
[Note that through the first quarter of fiscal 1999 the Company has already
achieved approximately 40% of its goals for the fiscal year. Through September
30, 1998 the Company had signed a contract for systems to handle the waste from
approximately 315,000 BionAnimals. However, this contract is for system
installations in the State of Colorado which may be impacted by the regulations
to be developed by the Colorado Department of Health and Environment required by
the passage of Initiative 14 in the November 1998 election]
The above goals will only be realized by the Company if many factors and
assumptions including but not limited to the following are met: a) that the
Company will be able to secure sufficient additional funding, most of which will
be raised through capital investments (of which there can be no guarantee); b)
that the Company will be able to hire sufficient management personnel, i.e.
sales, engineering and operations, in order to promote the growth of the Company
and to properly manage that growth; c) that continuing regulatory pressures on
the agricultural industries will lead them to install the Bion NMS or similar
technology in order to solve the environmental problems; d) that legislative and
regulatory powers will not pass and enforce non-science based laws that would
render the Bion NMS obsolete or illegal; e) that the Company will be able to
expand the application of its technology and accomplish the geographic expansion
into new regions; f) that the pricing and features of the Bion NMS and the
services provided by the Company can be accomplished within the constraints of
the Company's economic model; g) that the trend towards market consolidation in
the agricultural community, whereby the total number of farms decreases,
however, the number of animals produced increases, continues; and h) that the
Company is successful in developing, marketing and selling the BionSoil and
BionSoil products produced by the Bion NMS.* None of these factors and
assumptions can be guaranteed.
<PAGE>
These goals for system and BionSoil sales represent aggressive growth for the
Company.* The Company currently believes however, that its goals are reasonable
in light of recent developments. In fiscal year 1998 the Company added contracts
for Bion NMS systems containing 650,000 BionAnimals. Further, in the first
quarter of fiscal year 1999 the Company has added contracts for additional Bion
NMS systems designed to contain approximately 315,000 BionAnimals. An
examination of the size of the target markets for system sales and installations
and BionSoil sales (as shown above) shows that the percent of total market
penetration, which these goals represent, is very modest. On the basis of the
assumptions above and the analysis of market size (see page 8), the Company's
systems sales program has achieved (through June 30, 1998) approximately a 0.5%
market penetration, and the existing system sales goals for fiscal years 1999,
2000, 2001 and 2002 if achieved, would represent approximately a 1.1%, 1.8%,
2.6% and 3.6% market penetration respectively.* Management believes such market
penetrations represent realistic goals if the assumptions set forth above are
accurate. No assurance can be given however, that these goals will be achieved.
To increase the Company's ability to achieve these system sales goals, effective
November 1, 1998, the Company hired a Vice President of system sales and
marketing.
Financial Discussion of Bion NMS and BionSoil Business
- ------------------------------------------------------
The Company expects to receive two distinct revenue streams from Bion NMS
systems: 1) fees for system design, permitting, start-up and initial operation
(and, for certain systems, periodic management or technology fees); and, 2)
commencing approximately nine to fifteen months after the initial start-up of
BionSoil production systems installed on large dairy, swine, poultry farms or
feedlots, revenue from the sale of BionSoil and BionSoil-based products produced
from the systems [Note that initial system start-up typically occurs six to
twelve months after a system contract is signed. Therefore, BionSoil revenues
will typically commence between 15 and 24 months after a system contract is
signed], (see footnote 13, below).* To date, revenues from the sale of BionSoil
have been minimal (first significant commercial sales are projected for spring
of 1999).*
Bion NMS Economics
- ------------------
The Company may receive multiple design, permit and construction, and operation
oversight fees. These fees are paid to the Company by the clients in return for
services rendered and the licensing of a particular site to use the Bion NMS
technology. Fees may also be paid to the Company on a regular ongoing basis for
system oversight as well as regulatory and biological testing. These fees are
above and beyond any revenue the Company may receive from the sale of BionSoil.
In some cases one or more of these categories of fees may be waived or excluded
in formal negotiated contract terms for a variety of reasons, including without
limitation, signing the first system contract in a new geographic region,
signing the first system contract for a new application of the technology, or
offsetting some or all of the fees against reduced or eliminated BionSolids
royalties.
To date 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 working to establish 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.* However, there is no assurance that this goal will be achieved
or that the Company will be successful in selling its systems at a price level
sufficient for the Company to generate a profit.
BionSoil Economics
- ------------------
As Bion NMS systems are brought on-line and BionSolids are harvested (see
footnote 14, below), it is anticipated that BionSoil, Inc. will purchase the
harvested BionSolids from Bion Technologies, Inc. to process it into BionSoil
products for sale to customers.* Some farms may be paid fees as royalty for the
BionSolids harvested from their site.* 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
substantial operating costs associated with the disposal of manure and waste
products, which are generated 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, in some cases, also
receive a revenue stream from the cash payments made by the Company to the
farm.*
During the spring of 1998, the Company conducted a limited market test of
BionSoil products through retail and commercial outlets in western New York (see
the Company's Form 8-K dated July 1, 1998). The material for this test was New
York dairy BionSoil processed and blended with Sphagnum peat moss at the
Company's Hermitage, New York facility. Subsequently the blended product was
sold in bulk quantities or bagged in both 20 pound and 40 pound bags and sold.
The bagged product was sold to a limited number of small retail garden shops and
nurseries at wholesale prices, to the Company, of $1.97 and $2.97 for 20 and 40
pound bags respectively (resulting in prices per cubic yard of $80.00 and
$108.00 respectively). Bulk product was sold through similar distribution
outlets for prices from $15.00 to $27.95 per cubic yard. The test market program
was conducted with no advertising budget, only limited point-of-sales materials,
and with no participation of any large chain retail outlets. The average price
per cubic yard for all blended product sold in this limited test market program,
bagged and bulk combined, was $39.37 per cubic yard. The average price received
by the Company for the BionSolids, before mixing with Sphagnum peat moss, was
$57.08 per cubic yard. Management believes that this test market program
provides the Company's first confirmation of the market viability of BionSoil
products. Management further believes that, when product sales efforts are
supported with a strong marketing/advertising program, average sales prices will
increase above $40.00 per cubic yard for the blended BionSoil product.*
Further, it should be noted that a significant portion of the material harvested
from many systems in the last year has been devoted to both university and
private studies intended to determine physical characteristics, blends, and
growth results achievable using BionSoil in many different applications (see
footnotes 15 and 16, below).
<PAGE>
Based on results of the Company's current market test, a review of prices for
soils and soil-enhancing products in various markets, and target market segment
strategies being developed, the Company believes that BionSoil will sell at no
less than an average of $20 per cubic yard when sold in bulk, and will sell for
higher prices when processed and bagged, which prices may rise to $100 per cubic
yard or higher.* [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 lower per unit costs as volumes increase, the Company has
estimated costs for the various levels of processing required to sell BionSoil
products.* Given the contract terms and estimated costs of production and sales,
the potential gross margin (see footnote 17, below) returned to the Company from
BionSoil products sales alone has been calculated for a series of potential
price points (see footnote 18, below) (and the implied processing levels
required to achieve the products to be sold at these price points (see footnote
19, below)).* Table 3 below presents this information for five selected possible
price points.* This table has been prepared reflecting estimates based on the
Company's limited experience to date with the harvesting and processing of
BionSoil and BionSoil products. (See footnotes 18 and 19, below).*
Table 3*
Potential BionSoil Estimated Related Calculated
Wholesale Price BionSoil Expenses Gross Margin
Per Cubic Yard * Per Cubic Yard * Per Cubic Yard *
- ------------------ ----------------- ----------------
$ 20* 13* 7*
40* 22* 18*
60* 32* 28*
80* 41* 39*
100* 53* 47*
The calculated gross margin per cubic yard as presented in Table 3 above is
equivalent to the annual gross margin contribution of each BionAnimal in a
system that is fully on line producing BionSoil (see the definition of
BionAnimal above where one BionAnimal produces one cubic yard of BionSoil per
year).
If the Company is successful in bringing targeted systems on line producing
BionSoil within the 18 to 24 month start-up time frame (which cannot be assured
and is subject to numerous and substantial risks); and, if the Company is
successful in realizing the various potential price levels and expense levels in
columns 1 and 2 of Table 3 (which also cannot be assured and is subject to
numerous and substantial risks as explained above and below) then column three,
calculated gross margin per cubic yard is also the calculated annual gross
margin contribution of each BionAnimal producing BionSoil. Given that 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 calculated gross margins, which are equivalent to gross margins per
BionAnimal, would be anticipated to be repeated each year thereafter for as long
as the installations remain in operation (current system contracts are set for
15 years with renewal option).* If the net present value (discounted at 8%) of
these gross margins is calculated for the normal 15-year period of a contract,
assuming no BionSoil revenues for the first two years, the net present value of
the gross margin from each BionAnimal under contract would be as shown in Table
4 for each potential price point in Table 3.* (See footnote 20, below).
<PAGE>
Table 4*
Gross Margin Net Present Value Per BionAnimal
---------------------------------------------
Calculated Annual 15 Year Net Present
Gross Margin Per Value Per BionAnimal
BionAnimal* Annual Gross Margins*
----------------- ---------------------
$ 7* $ 47*
18* 122*
28* 190*
39* 264*
47* 318*
Management believes that this NPV analysis is useful because it provides an
indication of the value to the Company of the number of BionAnimals contained in
each contract for Bion NMS systems.
Management Financial Targets/Goals
- ----------------------------------
Subject to the risks and uncertainties included in this General Discussion of
Current and Proposed Operations section of the Company's Form 10-QSB and the
footnotes thereto, management has established the following financial
performance goals for the Company for fiscal years 1999 through 2002. Please
------
carefully review the risks and uncertainties presented above and below and in
- --------------------------------------------------------------------------------
the footnotes in conjunction with the Company goals summarized in this Table 5
- --------------------------------------------------------------------------------
(see especially footnotes 21, 22, 23 and 24 below).
- ---------------------------------------------------
Table 5*
Performance Goals
-----------------
<TABLE>
<CAPTION>
(Based on BionAnimals under contract and
BionSoil available for Sale as
described in Table 2 above)
(dollars in thousands)
Fiscal Years (ended June 30)
---------------------------------------------------
1999 2000 2001 2002
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Number of BionAnimals
added during fiscal
year (in thousands)* ..... 800* 950* 1,200* 1,400*
Cumulative number of
BionAnimals under contract
(in thousands)* .......... 1,550* 2,500* 3,700* 5,100*
BionSoil available
for sale (in thousands
of cubic yards)* ......... 30* 300* 1,600* 2,600*
Gross Revenue
(see Footnote 22)* ....... $ 1,250* $ 14,100* $ 67,100* $114,750*
Gross Margin
(see Footnote 23)* ....... $ 350* $ 4,600* $ 27,100* $ 52,000*
Pre-Tax Earnings
(see Footnote 24)* $ (2,650)* $ 600* $ 19,100* $ 37,500*
</TABLE>
<PAGE>
The above table includes gross revenue, gross margin and pre-tax earnings that
include fees and revenues to the Company from both the sale of the Bion NMS and
BionSoil revenue. The Table 5 which appeared in the June 30, 1998 Form 10 KSB
only reflected BionSoil revenue, gross margin and pre-tax earnings.
Note that the goals presented in Table 5, above, for fiscal year 2002 show
5,100,000 BionAnimals under contract but only 2,600,000 cubic yards of BionSoil
being sold during fiscal year 2002 due to the 15 to 24 month delay between
contract signing and BionSoil availability.* The Company's goal, however, is
that backlog of 2,500,000 additional cubic yards of BionSoil will be available
in subsequent years for sale and is anticipated to increase the goal for gross
revenue to approximately $220,000,000 and pre-tax earnings to approximately
$72,000,000 in those later years, even if there are no additional Bion NMS
system sales thereafter.*
While these goals are very aggressive, they are consistent with the Company's
progress in fiscal year 1998 (the addition of approximately 650,000 BionAnimals
under contract) and progress in fiscal 1999 to date (contracts for 315,000
BionAnimals signed since July 1, 1998).* Throughout the fiscal year 1998 and the
first quarter of the 1999 fiscal year, the Company has proven to be aggressive
in setting and attaining such goals and targets.*
The Company has hired a Vice President of system sales and marketing, a key
management position necessary to help the Company achieve these goals, and is
actively recruiting to fill other key management, technical and sales positions.
Additionally, the Company is pursuing geographical and technical expansion,
strategic alliances in both the agricultural and financial communities, and
expansion of its client base.*
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 Bion
NMS 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 would 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 would 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. BionSolids are the solid materials that are produced as a result of the
bio-conversion of manure and urine by the Bion Nutrient Management System
(NMS). BionSolids contain a high proportion of beneficial living organisms
(in contrast to traditional composted manure products), only trace amounts
of heavy metals and no human waste.
2. The quantities referred to in Table 1 represent the Company's estimate,
based on data from the American Society of Agricultural Engineers (ASAE
D384.1 - 1989) regarding animal waste production where all wastes are
captured, of the quantity of BionSolids that is produced per animal in one
year. These estimates are approximations based on the experience to date of
the Company and are subject to change. The ratio of animal species to
BionAnimal is based on the amount of BionSolids required (mixed and blended
with other organic material) in order to produce a growth medium with
comparable characteristics that yields one cubic yard of BionSoil.
3. The 1992 U.S. Department of Agriculture Census numbers are somewhat out of
date. However, the 1997 U.S. Department of Agriculture Census national
summary statistics will not be available until the spring of 1999. Some
more current statistics used by management are available on a
state-by-state basis.
4. 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 * Hogs and pigs: farms with 1,000 or more * Poultry
(chickens and turkeys) based on layers, broilers and turkeys
5. According to a July 1996 report published by the U.S. Bureau of the Census
the number of large farms has increased from 51,995 in 1969 to 333,865 in
1992, while at the same time the overall number of farms decreased from 2.7
million in 1969 to 1.9 million in 1992. Further evidence of consolidation
in the hog industry is found in the greater than 100% increase in the
number of hogs in the state of North Carolina from 1987 to 1992 while at
the same time there was a 38% decrease in the number of hog farms in the
state. These numbers are calculated from data in the 1992 U.S. Department
of Agriculture Census.
6. 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.
7. As an example, study data provided by North Carolina State University for
the estimated volume of potting media used in container nurseries in the
United States shows current demand (1998) to be in excess of 100 million
cubic yards per year. Further, data on U.S. golf course construction and
expansion show that, as of May 1998, 13,954 holes (or the equivalent of 775
18-hole golf courses) were under construction, and 11,677 (or the
equivalent of 649 18-hole courses) were in planning for construction.
8. For further discussion, see, for example, the December 1997 report compiled
by the U.S. Senate Committee on Agriculture, Nutrition, and Forestry for
Sen. Tom Harkin (D - IA) as well as "Lakes of animal waste pose
environmental risk" published by the USA TODAY, December 30, 1997.
<PAGE>
9. 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 six additional system installations, and has two additional
Bion NMS that have come on line. Management estimates that, to date, in
excess of $1,100,000 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.*
10. 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".
11. 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, oversee installation and operate multiple Bion
NMS swine waste treatment systems in six additional states. Also, as
reported in the Company's July 1, 1998, Form 8-K, the Company entered into
an agreement with Crystal Springs Farms, LLC. of Wray, Colorado, to design,
install and operate Bion NMS swine waste treatment systems Yuma County,
Colorado which will contain approximately 315,000 BionAnimals.
12. Although the Company's goals project for the Company to have 1.5 million
BionAnimals under contract in the fiscal year 1999, only the BionAnimals
that are currently in operating systems that have been harvested along with
a limited number of the new BionAnimals will produce BionSoil that will be
available for sale in fiscal year 1999.
13. The time between contract signing and BionSoil revenues is between 15 and
24 months broken down as follows: a.) 3-6 months for the design and
permitting of the system; b.) 3-6 months for the construction of the
system; c.) 1-2 months for the system to come completely on-line, and, d.)
8-10 months for the BionSolids to be produced and mature within the system.
In some cases, including the Company's contracts with Crystal Springs
Farms, for example, there are financing or other contingencies which may
delay the beginning of these activities.
14. BionSolid 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. As a result,
only small quantities of BionSoil have been available for sale during the
last twelve months. The results for a portion of these sales have been
documented in the above referenced test market.
<PAGE>
The current methods for the harvest of BionSolids and processing it into
BionSoil are being continually refined and updated. Currently the
BionSolids harvested from a dairy Bion NMS are mechanically harvested and
then left for initial drying at the farm. Once dried to a sufficient level
the BionSolids are transported to a BionSoil processing site where
additional drying takes place before final processing or blending and then
subsequently bagging or bulk storage. Harvesting of the hog Bion NMS is
still in the experimental stage with multiple methods being studied in an
ongoing program. Currently, the most efficient method of harvesting the
BionSolids is to pump the BionSolids from the system and then either blend
them directly with an organic substrate (aged shredded pine bark for
example) or dry them before they are processed and blended.
15. During fiscal year 1998, the Company initiated a BionSoil Giveaway Program
during which approximately 3,000 cubic yards were given away to private
gardeners, local garden centers and university research centers. This
program was formed in order to generate feedback regarding BionSoil and to
raise public awareness about the product. It is anticipated that additional
(and larger) quantities of BionSoil will be given away in each future year
for these and other purposes.
16. 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 supports 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.
17. 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 cubic 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.
18. The potential BionSoil prices reflect assumptions about the mix between
bulk and bagged product sold. For example, at a wholesale price of $20 per
cubic yard the mix would be 100% bulk product with no bagged product sold,
while at a wholesale price of $100 or higher per cubic yard, the mix would
consist almost entirely of bagged product.
<PAGE>
19. Due to the Company's lack of experience and start-up nature in the soil
processing area, BionSoil expenses 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 3 due to significant start-up
inefficiencies. Current expenses include but are not limited to harvesting,
transportation, processing, blending and bagging of the BionSolids into
BionSoil. Management believes, however, that as greater quantities of
BionSoil are harvested and the processing techniques become more efficient,
the margins may equal or exceed the projected Gross Margins shown in Table
3.*
20. Management has changed the Net Present Value calculation from that
presented in its Form 10-KSB dated June 30, 1997 by lowering the discount
rate from 10% to 8% to more accurately reflect current conditions, and by
increasing from 1.5 year to 2.0 years the time before BionSoil revenues
commence after contract signing.
21. The following risk factors should be considered when reviewing the
projections in these tables: the Company has not made significant sales or
operated at a profit, 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.
22. The following assumptions (none of which are guaranteed to occur) have been
made for the gross revenue calculations:
a.) that the BionSoil available for sale is sold in the fiscal year that
it is available;*
b.) that the percentage of BionSoil sold in each year in bagged form for
retail sales (which the Company does not engage in) will be as
follows:*
Fiscal year ending June 30,
1999 2000 2001 2002
----------- --------- --------- ---------
Percent bagged BionSoil sold 10%* 11%* 12%* 14%*
(Management has established this mix although it is probable that the mix will
vary considerably over time).*
c.) that the average selling price per cubic yard realized by the Company
for each fiscal year is as indicated in the following table:*
Fiscal year ending June 30,
(dollars per cubic yard)
1999 2000 2001 2002
--------- ----------- ---------- ----------
Selling price
- -------------
Bagged $90.00* . $ 95.00* $ 100.00* $ 100.00*
Bulk ........... 25.00* 27.50* 30.00* 32.50*
Weighted Average 31.50* 34.92* 38.40* 41.95*
<PAGE>
(The selling price increases shown above are not related to inflation
adjustments, rather they reflect the Company establishing product credibility in
its respective markets as well as further product refinements.)*
d.) that the average selling price include freight to the customer of
$7.00 per cubic yard for bagged product and $4.50 per cubic yard for
bulk product.*
23. The following assumptions (none of which are guaranteed to occur) have been
made for the product costs for gross margin calculations:
a.) that the average product direct cost for each fiscal year is as
follows:*
Fiscal year ending June 30,
1999 2000 2001 2002
--------- ----------- ---------- ----------
Direct Cost
Bagged Product $ 58.00* $ 57.00* $ 55.00* $ 53.00*
Bulk Product ... 13.00* 13.00* 12.50* 12.00*
Weighted Average 17.50* 17.84* 17.60* 17.74*
(The reduction in direct product costs over time reflects increased efficiencies
of operation that have been included based on anticipated product handling
efficiencies and economics of scale as the volume of product processed
increases.)*
b.) that freight charges for shipments to customers will be $7.00 per
cubic yard for bagged product (sold and shipped on pallets with
approximately two cubic yards per pallet) and $4.50 per cubic yard for
bulk product shipped via common carrier truck.*
c.) based on the assumptions above and in footnote 21, the target gross
margin per cubic yard of BionSoil (which is the same as gross margin
per BionAnimal) is:*
Fiscal year ending June 30,
1999 2000 2001 2002
------ ------ ------ ------
Gross margin per cubic yard $9.25* $12.33* $16.05* $19.46*
24. The Company has developed projections for selling, general and
administrative expenses based on increased staffing levels and facilities
required for attainment of the target sales and processing levels as
follows:*
Fiscal year ending June 30,
(dollars in thousands)
1999 2000 2001 2002
------ ------ ------ ------
Selling, General and Administrative
Expenses $3,000* $4,000* $8,000* $14,500*
<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 quarter ended September 30, 1998
without registering the securities under the Securities Act.:
47,500 shares of restricted and legended Common Stock to seven private
investors and two existing shareholders in privately negotiated
transactions for an aggregate amount of $191,125.
8,000 shares of restricted and legended Common Stock to one investor under
the terms of a 1992 agreement granting such investor a preemptive right to
acquire such shares for an aggregate amount of $24,000.
300 shares of restricted and legended Common Stock to one employee in lieu
of cash for services rendered valued at, in aggregate, $1,500.
2,315 shares of restricted and legended Common Stock to a shareholder for
rent and services valued in aggregate at $10,725.
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 Crystal Springs
Farms, LLC dated July 1, 1998.*
10.2 Agreement between Bion Environmental Techno-logies, Inc. and John
Finamore dated July 1, 1998.* 27 Financial data schedule.
(b) Reports on Form 8-K: Form 8-K (dated July 1, 1998) reporting on
items 5 & 7.
* Previously filed and incorporated by reference.
<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: November 16, 1998
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