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, 1999 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
May 12, 1999:
Common Stock, No Par Value, 9,163,717
<PAGE>
Bion Environmental Technologies, Inc. Form 10-QSB
March 31, 1999
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets:
June 30, 1998 and
March 31, 1999................. F2
Consolidated Statements of Operations:
For the Nine Month Periods Ended
March 31, 1998 and
March 31, 1999................. F3
Consolidated Statements of Operations:
For the Three Month Periods Ended
March 31, 1998 and
March 31, 1999................. F4
Consolidated Statements of Cash Flows:
For the Nine Month Periods Ended
March 31, 1998 and
March 31, 1999................. F5-F6
Consolidated Statement of Changes in
Stockholders Equity for the Period
June 30, 1998 through March 31, 1999. F7-F9
Notes to Consolidated Financial
Statements.......................... F10-F14
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 3
PART II OTHER INFORMATION
ITEM 1-6 ......................................... 26
<PAGE>
FINANCIAL INFORMATION
PART I
ITEM 1. FINANCIAL STATEMENTS
F1
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------- -------------
(Unaudited) (Audited)
Assets
<S> <C> <C>
Current assets
Cash and cash equivalents ........................... $ 62,734 $ 19,104
Accounts receivable(net of allowance of $2,000)10,606 13,986
Contract receivable(net of allowance of $30,000) .... 902 22,902
Work in progress (net of allowance of $30,000)....... 394,408 389,712
------------ ------------
Total current assets .............................. 468,650 445,704
------------ ------------
Property and equipment
Computers and equipment ............................. 303,927 298,782
Accumulated depreciation ............................ (131,364) (91,727)
172,563 207,055
Other assets
Patents, net ........................................ 40,642 43,066
Deferred long-term contract costs ................... 71,333 71,333
Deposits and other .................................. 12,695 13,044
------------ ------------
Total other assets ............................... 124,670 127,443
------------ ------------
Total assets ......................................... $ 765,883 $ 780,202
============ ============
Liabilities and Stockholders' (deficit)
Current liabilities
Accounts payable .................................... $ 367,160 $ 241,384
Accounts payable - related party .................... 22,990 20,324
Note payable ........................................ 180,000 --
Notes payable - stockholders ........................ 341,171 89,171
Capital lease obligations ........................... 34,583 67,137
Accrued expenses .................................... 17,134 24,368
Accrued interest - notes payable .................... 15,279 --
Accrued payroll ..................................... 482,499 284,250
------------ ------------
Total current liabilities ........................ 1,460,816 726,634
Long-term liabilities
Note payable - stockholder .......................... 240,000 210,000
Accrued interest - note payable ..................... 43,370 --
Capital lease obligations ........................... 62,738 83,127
Deferred contract revenue ........................... 151,000 151,000
------------ ------------
Total liabilities ............................... 1,957,924 1,170,761
Commitments and contingencies
Stockholders' (deficit)
Common stock, no par value, 100,000,000
shares authorized, 9,163,717
(March 31, 1998) and 8,764,827
(June 30, 1998) shares issued and
outstanding ........................................ 12,034,019 10,863,469
Common stock subscribed ............................. 51,500 21,500
Accumulated deficit ................................. (13,277,560) (11,275,528)
------------ ------------
Total stockholders' (deficit) ................... (1,192,041) (390,559)
------------ ------------
Total liabilities and stockholders'
(deficit) ........................................... $ 765,883 $ 780,202
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F2
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Nine Months Ended
March 31
---------------------------
1999 1998
----------- ----------
(Unaudited) (Unaudited)
Sales ............................. $ 116,805 $ 357,916
Cost of Sales ..................... 274,183 409,222
----------- -----------
Gross profit (loss) .......... (157,378) (51,306)
General and administrative expenses 1,602,591 1,258,494
Research and development .......... 183,171 168,244
----------- -----------
Loss from operations .............. (1,943,140) (1,478,044)
Other income (expense)
Interest expense ................. (59,569) (71,483)
Loss on sale of assets ........... (239)
Other income (expense), net ...... 677 2,454
----------- -----------
Net (loss) ........................ $(2,002,032) $(1,547,312)
=========== ===========
Basic (Loss) per weighted average
share of common stock ............ $ (0.22) $ (0.28)
=========== ===========
Weighted common shares outstanding 8,976,796 5,447,590
=========== ===========
See notes to consolidated financial statements.
F3
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended
March 31
---------------------------
1999 1998
----------- ----------
(Unaudited) (Unaudited)
Sales .................................... $ 12,881 $ 217,168
Cost of Sales ............................ 63,435 128,229
----------- -----------
Gross profit (loss) ................ (50,554) 88,939
General and administrative expenses ...... 686,660 483,060
Research and development ................. 60,863 58,389
----------- -----------
Loss from operations ..................... (798,077) (452,510)
Other income (expense)
Interest expense ........................ (24,066) (24,668)
Other income (expense), net ............. 617 333
----------- -----------
Net (loss) ............................... $ (821,526) $ (476,845)
=========== ===========
Basic (Loss) per weighted average share of
common stock ............................ $ (0.09) $ (0.06)
=========== ===========
Weighted common shares outstanding ....... 9,144,820 8,611,744
=========== ===========
See notes to consolidated financial statements.
F4
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net (loss) ..................................... $(2,002,032) $(1,547,312)
Adjustments to reconcile net loss to
net cash used in operating activities -
Depreciation and amortization ................. 42,061 41,464
Issuance of common stock for services,
compensation and interest .................... 189,063 724,950
Issuance of subscribed stock for services ..... 34,500 (616,322)
Change in assets and liabilities -
Contract receivables and work in progress .... 20,684 (105,586)
Deposits and other ........................... 349 0
Accounts payable ............................. 187,091 (11,426)
Accrued liabilities .......................... 191,015 116,250
------------ -----------
Net cash used in operating activities ... (1,337,269) (1,397,982)
Cash flows from investing activities
Investments in equipment ....................... (5,145) (13,696)
Investments in patents ......................... -- (7,707)
----------- -----------
Net cash (used in) provided by investing
activities ............................. (5,145) (21,403)
Cash flows from financing activities
Payments on notes payable ...................... (8,000) (133,000)
Proceeds from notes payable .................... 545,000 55,000
Proceeds from sale of stock/warrant issuances .. 809,424 1,294,115
Proceeds from exercise of options .............. 92,563 --
Payments on capital lease obligations .......... (52,943) (47,966)
Proceeds from the sale of assets, net of
selling expenses .............................. -- 262,000
------------ -----------
Net cash provided by financing activities 1,386,044 1,430,149
Net increase in cash and cash equivalents ....... 43,630 10,764
Cash and cash equivalents at beginning of period 19,104 9,232
----------- -----------
Cash and cash equivalents at end of period ...... $ 62,734 $ 19,996
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F5
Footnote:
Supplemental disclosure of cash flow information Cash paid for interest was
$12,603 (1999) and $9,457 (1998).
<PAGE>
Continued from previous page.
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Supplemental disclosure of non-cash financing activities
For the nine months ended March 31, 1999 - Converted $4,500 of common stock
subscribed into 1,300 shares of common stock. Converted $77,170 of notes
payable and interest into 12,862 shares of common stock.
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 notes to consolidated financial statements.
F6
<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)
</TABLE>
See notes to consolidated financial statements.
F8
<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>
Conversion of common stock
subscriptions to common stock ........ 500 $ 1,500 $ (1,500) -- --
Common stock subscriptions for services -- -- $ 11,500 -- $ 11,500
Issuance of common stock for cash ..... 127,974 $ 377,750 -- -- $ 377,750
Issuance of common stock for services . 3,222 $ 10,725 -- -- $ 10,725
Conversion of note payable and
interest for common stock ............ 12,862 $ 77,170 -- -- $ 77,170
Net (loss) for the period ended
December 31, 1998 ................... -- -- -- ($ 654,273) ($ 654,273)
Balances at December 31, 1998 ......... 9,019,942 $ 11,587,013 $ 41,500 ($12,456,034) ($ 827,521)
</TABLE>
See notes to consolidated financial statements.
F-10
<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>
Conversion of common stock
subscriptions to common stock ..... 500 $ 1,500 $ (1,500) -- --
Common stock subscriptions
for services ...................... -- -- $ 11,500 -- $ 11,500
Issuance of common stock for cash ... 84,488 $ 270,000 -- -- $ 270,000
Issuance of common stock for services 56,287 $ 165,443 -- -- $ 165,443
Exercise of stock options .......... 2,500 $ 10,063 -- -- $ 10,063
Net (loss) for the period ended
March 31, 1999 ..................... -- -- -- ($ 821,526) ($ 821,526)
Balances at March 31, 1999 .......... 9,163,717 $ 12,034,019 $ 51,500 ($13,277,560) ($ 1,192,041)
See notes to consolidated financial statements.
F11
</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. The Company has not yet begun
earning significant revenue from its planned principal operations. Consequently,
as of March 31, 1999, the Company has incurred accumulated losses totaling
$13,277,560, resulting in an accumulated stockholders' deficit of $1,192,041.
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:
March 31, June 30,
1999 1998
---------- -----------
Costs incurred on contracts $2,044,961 $1,927,813
Estimated (losses) (598,902) (548,450)
----------- -----------
1,446,059 1,379,363
Less billings to date (1,131,318) (1,069,318)
----------- -----------
$ 314,741 $ 310,045
=========== ===========
Note 4 - Capital Structure
- --------------------------
Because the Company has a relatively complex capital structure the following
capital structure details are set forth:
Common Stock
- ------------
As of May 12, 1999 the Company had 9,163,717 shares of Common Stock issued and
outstanding and 14,321 shares of subscribed stock.
F13
<PAGE>
Options and Warrants
- --------------------
As of May 12, 1999 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:
Vesting Date Expires
----------- -------
Director ($1.72) 10,000 Vested 8/19/02
($2.27) 10,000 Vested 8/19/02
($3.23) 10,000 Vested 11/17/03
-------
Total Director 30,000
Employee ($1.25) 3,000 Vested 6/26/99
($2.00) 3,250 Vested 7/22/99
($3.00) 25,000 Vested 12/31/02
($3.38) 1,000 Vested 1/28/01
($4.00) 13,288 Vested 12/31/01
($4.00) 1,440 Vested 03/03/00
($4.00) 834 Vested 10/31/99
($4.00) 17,500 Vested 8/1/00
($4.00) 1,560 Vested 03/03/00
($4.00) 20,746 Vested 12/31/02
($4.00) 917 Vested 03/18/00
($4.00) 934 6/1/99+ 12/31/02
($4.00) 934 9/1/99+ 12/31/02
($4.00) 26,124 4/30/00+ 12/31/02
($4.00) 26,124 4/30/01+ 12/31/02
($4.00) 26,124 4/30/02+ 12/31/02
($4.13) 1,000 Vested 8/31/00
($4.50) 1,000 Vested 12/31/00
($6.00) 1,440 Vested 03/03/00
($6.00) 15,817 Vested 12/31/01
($6.00) 1,733 8/4/99+ 12/31/01
($6.00) 1,333 8/11/99+ 12/31/01
($6.00) 14,595 11/19/99+ 12/31/02
($6.00) 1,400 3/4/00+ 12/31/02
($6.00) 934 3/16/00+ 12/31/02
($6.00) 1,317 4/1/00+ 12/31/02
($6.00) 934 6/1/00+ 12/31/02
($6.00) 934 9/1/00+ 12/31/02
($6.25) 1,000 Vested 5/31/00
($8.00) 10,000 Vested 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) 7,076 9/15/99+ 12/31/01
($8.00) 14,595 11/19/00+ 12/31/00
($8.00) 1,400 3/4/01+ 12/31/02
F14
<PAGE>
($8.00) 934 3/16/01+ 12/31/02
($8.00) 1,317 4/1/01+ 12/31/02
($8.00) 934 6/1/01+ 12/31/02
($8.00) 934 9/1/01+ 12/31/02
($8.00) 19,040 4/30/00+ 12/31/02
($8.00) 19,040 4/30/01+ 12/31/02
($8.00) 19,040 4/30/02+ 12/31/02
($10.00) 10,000 Vested 12/31/01
($12.50) 10,000 9/15/99+ 12/31/01
($15.00) 10,000 9/15/99+ 12/31/01
($15.00) 31,001 4/30/00+ 12/31/02
($15.00) 31,001 4/30/01+ 12/31/02
($15.00) 31,001 4/30/02+ 12/31/02
-------
Total Employee 435,730
Total Director
and Employee 465,730
-------
-------
+Non-vested employee options equal 306,938
Warrants outstanding as of May 12, 1999 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
exercisable 3/01/99 through 12/31/02: 25,000
------
Total $3.00 warrants 41,330
$4.00 warrants:
exercisable 6/5/97 through 6/30/99: 35,000
exercisable 11/2/98 through 12/31/02: 16,667
exercisable 12/1/98 through 12/31/02: 16,667
exercisable 11/1/99 through 12/31/02: 16,667+
exercisable 12/1/99 through 12/31/02 16,667+
exercisable 4/30/00 through 12/31/02: 26,124+
exercisable 4/30/01 through 12/31/02: 26,124+
exercisable 4/30/02 through 12/31/02: 26,124+
------
Total $4.00 warrants 180,040
F15
<PAGE>
$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 2/1/97 through 12/31/01: 10,000
exercisable 4/21/97 through 4/20/02: 4,172
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
-------
Total $6.00 warrants 167,922
$7.00 warrants:
exercisable 7/1/98 through 6/30/99: 750,593
-------
Total $7.00 warrants 750,593
$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
exercisable 11/1/00 through 12/31/02: 16,667+
exercisable 12/1/00 through 12/31/02: 16,667+
exercisable 4/30/00 through 12/31/02: 19,040+
exercisable 4/30/01 through 12/31/02: 19,040+
exercisable 4/30/02 through 12/31/02: 19,040+
-------
Total $8.00 warrants 100,454
$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: 3,800,311
exercisable 4/30/00 through 12/31/02: 31,001+
exercisable 4/30/01 through 12/31/02: 31,001+
exercisable 4/30/02 through 12/31/02: 31,001+
---------
Total $15.00 warrants 3,903,314
---------
Total of all warrants currently outstanding 5,386,153
---------
---------
+Non-vested employee warrants equal 295,163
Note 5 - Subsequent Events
- --------------------------
On April 15, 1999 the Company revised the March 15, 1999 note with
LoTayLingKyur, Inc.("LTLK"). The revised note has identical terms except that
the conversion (if any) to common stock of the Company will be at $2.00 per
share, and 1 Z warrant will be issued for each $1.00 of principal of the revised
note. As of May 10, 1999 the principal amount of the March 15, 1999 note and the
revised note was $163,00 and $583,000, respectively. (See 8-K dated March
15,1999.)
On April 21, 1999 the Company entered into a marketing and promotional services
agreement with The Augustine Equity Fund Inc.
On April 30, 1999 the Company issued awards to fifteen employees under the
Company's Fiscal Year 1994 Incentive Plan. The awards are as follows: 58,371
options with an exercise price of $4.00 per share, 47,121 with an exercise price
of $8.00 per share, and 83,004 options with an exercise price of $15.00 per
share. One-third of each class of options will vest twelve, twenty four, and
thirty six months from issuance and will expire on December 31, 2002. The
Company also issued warrants to the above fifteen employees to purchase legended
and restricted stock as follows: 58,371 warrants with an exercise price of $4.00
per share, 47,121 warrants with an exercise price of $8.00 per share, and 83,004
warrants with an exercise price of $15.00 per share. One-third of each class
will vest on April 30, 2000, one-third on April 30, 2001, and one-third on April
30, 2002. All of the warrants will expire on December 31, 2002.
On April 30, 1999 the following options and warrants were issued to the
Company's Chief Financial Officer: 20,001 options with an exercise price of
$4.00 per share, 9,999 options with an exercise price of $8.00 per share, and
9,999 options with an exercise price of $15.00 per share under the Fiscal Year
1994 Incentive Plan. The Company also issued 20,001 warrants with an exercise
price of $4.00 per share, 9,999 warrants with an exercise price of $8.00 per
share, and 9,999 warrants with an exercise price of $15.00 per share for
legended and restricted common stock. The options and warrants will vest
one-third (April 30, 2000), one-third (April 30, 2001), and one-third (April 30,
2002) and will expire on December 31, 2002.
On April 30, 1999 the Company issued 33,334 warrants with an exercise price of
$4.00 per share and 33,334 warrants with an exercise price of $8.00 per share to
two employees as part of their employment agreements. The $4.00 warrants will
vest equally on November 1, 1999 and December 1, 1999 and the $8.00 warrants
will vest on November 1, 2000 and December 1, 2000. All of the warrants expire
on December 31, 2002.
F16
<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 170,000 BionAnimals in design,
permitting, construction and/or operations with an additional 909,000
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 $13,277,560 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.
Liquidity and Capital Resources
- -------------------------------
The Company's current ratio as of March 31, 1999 was 0.32 : 1.0 as compared to
0.61 : 1.0 as of June 30, 1998. Cash as of March 31, 1999 increased to $62,734
as compared to $19,104 as of June 30, 1998.
During the nine months ended March 31, 1999, the Company borrowed $252,000 from
four shareholders at 1% interest per month.
As of March 31, 1999 the Company has drawn $240,000 against the October 26, 1996
line-of-credit with a shareholder. (See 8-K dated December 1, 1996.)
During the nine months ended March 31, 1999 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). None of the options were exercised and all have expired.
3
<PAGE>
During the nine months ended March 31, 1999 the Company issued awards to all
current employees (excluding the Company's officers, directors, and management
personnel) under the Company's Fiscal Year 1994 Incentive Plan totalling 22,591
options with an exercise price of $4.00 per share, 22,591 options with an
exercise price of $6.00 per share, and 22,591 options with an exercise price of
$8.00 per share; all of the options will expire on December 31, 2002. The
options will vest as follows: for employees with less than one year of service,
the first third vested on their one year employment anniversary date, the second
third shall vest on the second anniversary date, and the last third will vest on
their third anniversary date. For employees with more than one year of service,
the first third shall vest on November 19, 1998, and the second and last third
shall vest twelve and twenty-four months thereafter respectively.
During the nine month period ended March 31, 1999, the Company issued 16,667
warrants to an employee with an exercise price of $4.00 per share commencing
November 2, 1998 and expiring December 31, 2002. The Company issued an
additional 16,667 warrants to another employee with an exercise price of $4.00
per share commencing December 1, 1998 and expiring December 31, 2002. The above
warrants were issued to the two employees as compensation per their employment
agreements.
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 then 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 exercisable for the period commencing July 1, 1998
and expiring December 31, 2000. (See 8-K dated May 21, 1998.) As of November 5,
1998 the Company had converted the balance of the note payable ($75,000) and
interest ($2,170) into 12,862 shares of restricted and legended common stock and
37,500 warrants exercisable at $7.50 per share commencing on November 5, 1998
and expiring on December 31, 1999.
On January 13, 1999 the Company borrowed $180,000 from a non-related party. The
short term note will accrue interest at two percentage points above the annual
rate publicly announced or published from time to time by Norwest Bank N.A., in
Denver, Colorado as its prime rate. Principal and interest are due on or before
January 12, 2000.
Effective January 25, 1999 the Company made bonus awards to three employees
under the 1994 Incentive Stock Plan. The Company granted 2,500 options at an
exercise price of $4.00 per share, 2,500 options at an exercise price of $4.125
per share, and 2,500 options at an exercise price of $4.25 per share
(exercisable from 1/25/99 - 12/31/99).
During the nine months ended March 31, 1999, the Company authorized the issuance
of 25,000 options under the 1994 Incentive Stock Plan and 25,000 warrants at an
exercise price of $3.00 per share (exercisable from 3/1/99 - 12/31/02) to M.
Duane Stutzman, the Company's Chief Financial Officer.
4
<PAGE>
Effective March 15, 1999 the Company entered into a note ("the Note") with
LoTayLingKyur, Inc. ("LTLK") whereby LTLK (a shareholder) will from time to time
provide cash to the Company. The Note will accrue interest at 1% per month with
both principal and interest due in full on December 31, 1999. The Note is
convertible, in whole or in part, into shares of common stock at $2.50 per share
at any time prior to payment of the principal and interest. As additional
consideration for making the Note, the Company will issue (1) Z warrant (to
purchase one share of the Company's common stock at a price of $15.00 per share
for a 24 month period commencing January 1, 2000) for each $1.25 of principal
amount of the Note (no Z warrants will be issued for interest accumulated on the
principal amount of this Note. As of March 31, 1999, $130,000 of principal was
outstanding on the Note. (See 8-K dated March 15, 1999.)
For the nine months ended March 31, 1999 the Company issued 310,404 shares of
common stock for cash ($809,424), 12,862 shares of common stock as payment of a
note and interest ($77,170), 61,824 shares of common stock for services
($186,893), and converted 1,300 shares of subscribed stock to 1,300 shares of
common stock valued at $4,500. All of the above is legended and restricted
common stock. The Company also issued 12,500 shares of free trading common stock
for the exercise of options ($92,563). The Company has increased subscribed
stock by $30,000 for legended and restricted common stock awarded but not issued
to certain employees as additional compensation.
Results of Operations
- ---------------------
Comparison of the Nine Months Ended March 31, 1999 with Nine Months Ended March
31, 1998
Revenue in the nine months ended March 31, 1999 was $116,805 compared to
$357,916 for the corresponding nine month period in 1998, a decrease of
$241,111. Contract costs were lower ($135,039) during the same nine month
period. Reduced sales and contract costs were were mainly due to the significant
negative impact that lower hog prices have had on the Company's system sales
effort. The Company believes this impact will be temporary.
General and administrative expenses increased by $344,097 over the same period
in the prior year due to higher consulting expenses ($256,000) and investor
relations expenses ($47,000). In the nine months ended March 31,1998 the Company
cancelled a consulting agreement that resulted in a credit of $231,000. The
effect of that credit results in most of the consulting fee increase between the
two periods.
The Company recorded $59,569 in interest expense on its notes to shareholders
and capital equipment leases and $183,171 in research and development costs. As
a result of the above, the Company recorded a net loss of $2,002,032 in the nine
month period ended March 31, 1999, compared to a net loss of $1,547,312 for the
nine month period ended March 31, 1998.
The Company will need to increase sales significantly to obtain profitability.
Comparison of the Three Months Ended March 31, 1999 with Three Months Ended
March 31, 1998
5
<PAGE>
Revenue in the three months ended March 31, 1999 was $12,881 compared to
$217,168 for the corresponding three month period in 1998, a decrease of
$204,287. Contract costs were lower in the 1999 three month period by $64,794
due to decreased expenses associated with BionSoil processing and the reduced
work related to system design and construction overview. The reduced revenue and
system design and construction overview contact costs are attributable mainly to
the lower hog prices which the Company believes are temporary. The above
resulted in a gross loss for the period ended March 31, 1999 of $50,554 as
compared to a gross profit of $88,939 for the same three month period in 1998.
General and administrative expenses increased by $203,600 due to an increase in
compensation expenses ($218,000).
The Company recorded $24,066 in interest expense on its notes payable and
$60,863 in research and development costs. As a result of the above, the Company
recorded a net loss of $821,526 in the three month period ended March 31, 1999,
compared to a net loss of $476,845 for the three month period ended March 31,
1998.
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.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ---------------------------------------------------------
The discussion below contains forward-looking statements (denoted with 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 endnotes set forth below (denoted in [] and referenced at pages 23
to 29) 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 unaudited financial statements contained in this Form 10-QSB show that over
$12,000,000 equity has been invested in the Company through the close of the
fiscal quarter ended March 31, 1999. As of that date, the Company had a negative
net worth of $1,192,041, cumulative losses of $13,277,560, 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, if ever, Bion NMS sales and sales of BionSoil and
BionSoil products are sufficient to fund operations.
However, management believes that the additional information presented in this
section is necessary to give the reader a better understanding of the Company's
development and its goals for the future.
Business Development
--------------------
The Company provides services, systems, and products that solve the
environmental problems caused by waste and wastewater, and in appropriate
situations, recycle treated wastes into high value horticultural products that
produce superior plant growth performance. The Company's prototype Bion systems
and initial system sales were for both BionSoil and non-BionSoil producing
treatment applications. The Company's primary focus was placed originally on
research and technology development of "first-of-a-kind" wastewater treatment
systems. This focus existed from September 20, 1989 (when Bion Technologies,
Inc. was incorporated) to June 30, 1993. In 1993, the Company shifted this
original emphasis to BionSoil producing systems (Bion NMS).
7
<PAGE>
The Company's focus has been twofold following its redirection. First, primary
focus is on the development and application of the Bion NMS for large animal
raising facilities, specifically large dairy and swine facilities. Bion NMS
activities generally involve sales, design, installation, operation, and
material harvesting. Second, the Company is placing an increasing amount of
attention on BionSoil development, production, and sales as the number of
systems in operation increases. BionSoil development efforts include testing,
processing, blending, packaging, marketing, distribution, and sales. In addition
to this two-fold focus, the Company anticipates emphasizing food processing,
municipal, and industrial wastewater treatment in the future.*
The BionAnimal
--------------
The Company's method for tracking the sale and operation of Bion NMS systems as
well as the production of BionSoil is based on a Company defined standard unit,
the BionAnimal, which relates BionSoil production to confined animal weight. The
Company estimates that each BionAnimal will yield approximately one cubic yard
of processed BionSoil per year.* The product is produced when all manure and
urine produced by one BionAnimal is processed in a Bion NMS, collected as
BionSolids, [1] and subsequently converted into BionSoil.*
The following table identifies BionAnimal equivalents for various types of
animals in full-confinement installations.[2]
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 Company experienced strong growth in fiscal year 1998 signing contracts
covering approximately 650,000 BionAnimals (see the Company's June 30,1998
10-QSB). This growth exceeded the Company's internal goals by more that 100
percent. The Company has added an additional 325,000 BionAnimals during the
first three quarters of fiscal year 1999, approximately 40 percent of the
Company's initial internal goal for the year (see the following section for
design, construction, and operation status of these contracts).
8
<PAGE>
The Hog Market Impact
---------------------
The Company's system sales growth experienced a significant negative impact as a
result of the extended deep depression in hog prices, which impact began toward
the end of the second quarter of fiscal year 1999. The decline in hog prices
started in 1998. Prices reached a low of $9.00 per hundred weight in December,
1998, down from $43.00 per hundred weight in December 1997. These depressed
prices are below the break-even point for hog growers. The price drop and
resulting hog industry losses have caused hog producers to reduce general
expenditures and curtail their expansion plans. This industry change has had a
significant negative impact on the Company's plans to sign additional contracts
within the hog industry and has caused some growers to put many of the Company's
existing system contracts on temporary hold.
Additionally, the Company has experienced an adverse impact in selected regions
due to changes in regulatory positions. Colorado voters passed an amendment in
November 1998 (Amendment 14) that places significant constraints on large hog
farms in the state. The subsequent rule making process (which is the subject of
threatened litigation by some hog growers) completely stopped the Company's
progress on its contract for systems for 350,000 hogs on farms in Eastern
Colorado. It will not be possible for work to resume on this contract, nor for
the Company to acquire additional contracts in Colorado, until this situation is
resolved.* The Company faces a similar slow down of new contract activity in
North Carolina as the result of a moratorium on Construction of new or expanded
hog farms (retrofits of waste handling systems on existing farms are proceeding)
which may be extended. The subsequent impact on the Company's business is not
yet clear.
Hog prices, however, have recovered slowly and have trended upward to
approximately $37.00 by early April. Management believes that over the next
several quarters this strengthening in hog prices will continue and will result
in more contracts being signed and work resuming (or commencing) on existing
contracts that have been slowed or put on hold.*
The delayed sales expansion in connection with the fall in hog prices
contributed to a significantly slower growth pace during the second and third
quarters of fiscal year 1999. Management believes that this will continue to
impact the Company's growth for subsequent quarters until hog prices have
reached more normal levels.*
9
<PAGE>
The Company initiated a program to hire two vice president level executives in
the quarter ended June 30, 1998: (1) a Vice President, System Sales and
Marketing, and (2) a Vice President, BionSoil. Hiring these executives took
longer than anticipated. As a result, the Vice President of System Sales and
Marketing joined the Company in November and the Vice President of BionSoil
joined the Company in December. This delay, combined with the impact of low hog
prices, contributed to the significant slowdown in the Company's growth.
The Company believes that the impact of low hog prices and delayed sales
expansion, however, will be short term.* The Company has increased its focus on
expanding its presence in the dairy farm system markets to counter the reduction
in hog system sales. To support this shift, as well as to gain access to the
large western United States market, the Company has recently added a Western
Regional Sales Director and a North Western District Sales Manager to its
operations. This recent expansion in conjunction with increasing hog prices
should assist the Company in accelerating its system sales pace to meet its
sales projections.* Management, however, has also reevaluated the goals
established in the Company's Form 10-KSB, dated June 30, 1998 and Form 10-QSB
dated December 31, 1998 and made the necessary changes to reflect these events.
(See Management's Goals below.)
Bion NMS
--------
Through March 31, 1999, the Company has the following Bion NMS waste and
wastewater treatment systems in various stages of operations, construction, and
design:
|X| 3 Food Processing wastewater treatment systems;
|X| 1 Storm Water Run-off system;
|X| 13 Dairy Bion NMS; and
|X| 64 Swine Bion NMS [3]
The animal Bion NMS systems are designed to contain approximately 1.1 million
BionAnimals when in full operation.
10
<PAGE>
Bion NMS Markets
----------------
There are over 107 million cattle and calves, 61 million hogs and in excess of
1.6 billion fowl on farms in the United States according to the 1997 U.S.
Department of Agriculture Census (the most recent census numbers available from
the United States Department of Agriculture). These animals if converted based
on the Company defined BionAnimal unit, yield approximately 560 million
BionAnimals. However, economics related to installation and operation of Bion
NMS systems require a minimum farm size for Bion NMS application; therefore, not
all of these animals are candidates for Bion NMS systems. Management believes
that the total number of BionAnimals on larger farms that meet the appropriate
criteria is approximately 210 million.[4] Based on this review, these animals
are believed by the Company to be the potential candidates for system
installation in the United States.
The trend to consolidate livestock operations into larger more efficient farm
units is accelerating. The number of large farms is, therefore, increasing.[5]
Based on the 1997 Agricultural census data, there were 210 million BionAnimals
on larger farms in the U.S compared to 140 million in 1992. The increase is most
evident in dairy and hog farms. The number of cows on dairies with over 1,000
cows increased from 937,000 to 1,600,000 between 1992 and 1997 and the number of
hogs on farms with over 5,000 hogs rose from 9,764,000 to 24,578,000 in the same
period. This trend is anticipated to continue over the next several years as
growers realize the economies of scale in facility and production costs.*
Bion NMS Economics
------------------
The Company expects to receive two distinct revenue streams from the Bion NMS:
1) fees for system design, permitting, start-up and initial operation (and, for
certain systems, periodic management or technology fees); and, 2) revenue from
the sale of BionSoil and BionSoil-based products produced from the systems.*
BionSoil sales will commence approximately nine to fifteen months after the
initial start-up of BionSoil production systems installed on large dairy, swine,
poultry farms or feedlots.* Further, initial system start-up typically occurs
six to twelve months after a system contract is signed. Therefore, BionSoil
revenues will typically commence up to 24 months after a system contract is
signed (see endnote 17, below).* Revenues from the sale of BionSoil have been
minimal to date; however, the first significant commercial sales are projected
for spring of 1999.*
11
<PAGE>
The Company may receive multiple design, permit and construction fees for Bion
NMS installations.* These fees are paid to the Company by 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.
The Company has lost money on system design, permitting support, construction
oversight, and initial system operation to date. 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.
The Company is working to establish pricing for its contracts that management
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
--------
Management anticipates that BionSoil, Inc. will purchase the harvested
BionSolids from Bion Technologies, Inc. as Bion NMS systems are brought on-line
and BionSolids are harvested.[6]* These BionSolids will then be processed into
BionSoil products for sale to customers.* Some farms may be paid fees as royalty
for the BionSolids harvested from their sites.* 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.
Many of these costs may be substantially reduced or eliminated with the
construction and operation of a Bion NMS and the farm may, in some cases, also
receive cash payments from the sale of the BionSolids by the Company.*
12
<PAGE>
BionSoil Markets
----------------
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, as well as initial market sector analysis.*
Battelle calculated that the demand for compost and compost-like products in
selected areas of the U.S. alone is projected to be in excess of one billion
cubic yards per year.[7]* This includes products ranging from manure to
composted organic wastes to manufactured potting soils and soil enhancers in
selected areas of the U.S. alone.* This demand is categorized in nine different
application segments:
|X| landscapers,
|X| delivered topsoil,
|X| bagged retail,
|X| nurseries,
|X| landfill final cover,
|X| surface mine reclamation,
|X| sod production,
|X| silvaculture, and
|X| agriculture.
The Company will target these segments in addition to:
|X| state and municipal park and transportation departments,
|X| public and private golf courses,
|X| athletic fields,
|X| home gardeners,
|X| reforestation projects for timber and mining companies,
|X| the U.S. Park Service, and
|X| others.
The Company is currently in the process of analyzing initial target markets
within these segments, including container and field nursery products, landscape
applications, greenhouse propagation, and others.[8]
13
<PAGE>
During the spring and summer 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 produced dairy BionSoil processed and blended with sphagnum peat
moss at the Company's Hermitage, New York facility. The blended product was
subsequently sold in bulk quantities or bagged in both 20 pound and 40 pound
bags and sold. The bagged blended 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. This pricing resulted 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. Therefore, the average price received by the Company for the BionSoil,
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.* The Company is continuing a market test program for
the spring season of 1999 in western New York.
A significant portion of the material harvested from many systems in the last
year was devoted to both university and private studies intended to determine
physical characteristics, blends, and growth results achievable by using
BionSoil in many different applications.[9] The Company is continuing and
aggressively expanding these test programs during the current fiscal year.*
BionSoil Economics
------------------
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 considerably higher prices
when processed and bagged.* This belief is based on results of the Company's
recent market test, a review of prices for soils and soil-enhancing products in
various markets, and target market segment strategies being developed.* [All
prices quoted within this Form 10-QSB are wholesale only and may not be
representative of actual retail prices.]
14
<PAGE>
Additionally, the Company has estimated costs for the various levels of
processing required to sell BionSoil products 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 potential gross margin[10] from BionSoil sales has been
calculated for a series of potential price points[11] from the contract terms
and estimated costs of production and sales and the implied processing levels
required to achieve the products to be sold at these price points.[12]* Table 2
below presents this information for five selected possible price points.* This
table reflects estimates based on the Company's limited experience to date with
the harvesting and processing of BionSoil and BionSoil products. (See endnotes
11 and 12, below).*
Table 2*
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 2 above is
equivalent to the annual gross margin contribution of each BionAnimal in a
system that is fully on-line and 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 and producing
BionSoil within the 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 2 (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. These calculated gross
margins, which are equivalent to gross margins per BionAnimal, are anticipated
to repeat 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 3 for each potential price
point in Table 2.[13]*
15
<PAGE>
Table 3*
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*
This NPV analysis is useful because it provides an indication of the value
management believes should be applied to the number of BionAnimals contained in
each contract for a Bion NMS system.
Geographic Expansion
--------------------
The activities of the Company to design, permit, oversee the installation of,
and operate its Bion NMS systems in the various geographic areas where the
Company is conducting its business to date have established its credibility with
federal, state, and local regulators, as well as environmental and agricultural
professionals. This credibility will assist the Company in its efforts to gain
significant market penetration into new geographic areas.* The Company's
geographic expansion has been limited by financial and personnel constraints
(which continue to exist). Major geographic expansion is now possible given the
heightened awareness surrounding the major manure treatment and disposal
problems facing the animal raising industry[14] and the current proliferation of
state and national legislation being considered.* Management believes that
geographic expansion is essential to the Company's ability to achieve successful
operations in the future.*
The Company has recently expanded its sales operations into California, Oregon,
Washington, Idaho, and Arizona. California was selected as the appropriate
location for the next expansion office because it has the largest concentration
of dairy cows on large farms in the United States and is having problems with
nutrients leaching into groundwater and storm water runoff, as well as land
application and stockpiling of the manure generated on these farms.* The Company
views the next 12-18 months as a critical time period to become established in
California and has taken the initial steps to implement a sales and marketing
plan in that state.* The Company is currently evaluating expansion opportunities
in many other areas throughout the United States.
16
<PAGE>
The staffing, servicing, and marketing costs associated with expansion into new
geographic regions is believed by the Company to be not less than $500,000 per
region, and may exceed $1,500,000.* These costs include 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).* 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. [15]
The Company has not capitalized any of these expenditures on the balance sheet;
all have been recorded as expense items on the income statement. The Company
believes, however, that the money invested in these efforts has created what
might be called "good will," "marketing," and/or "regulatory" value. This belief
is based on experience to date in the regions where system sales and
installation activity have been focused. Management believes that achieving a
greater rate of geographic expansion will require expenditures greater than
those expensed for previous expansion.* Similar cash resources and amounts
will be expensed and not capitalized as the Company continues its expansion into
new areas in the future.*
Technology Expansion
--------------------
The Company has seven issued patents[16] that 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
technology expansion into the cattle feedlot and poultry raising businesses.*
The technology will need to be adapted to treat waste that has different
characteristics and farming operations that have different waste collection
techniques.*
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.
17
<PAGE>
Just as there are additional expenses associated with geographic expansion,
there are also 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 Goals
------------------
BionAnimal Goals
----------------
In July 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.* To support this goal, the Company set an initial goal of 300,000
BionAnimals under contract by the end of 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).*
The Company significantly exceeded this goal. 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. 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, they are anticipated to produce approximately 750,000 cubic
yards of BionSoil per year (see the Company's Form 10-KSB for the fiscal year
ended June 30, 1998).* Normally the Company anticipates this soil production
will start within two years of contract signing.* However, due to the slowing of
construction expenditures brought on by the depressed hog market, many of these
systems will not be on line within two years and therefore BionSoil production
will be significantly delayed. (See the discussion following table 4 and endnote
3, below).*
18
<PAGE>
In July 1998, based on a review of this performance, and the assumptions
detailed below, management set the following revised performance targets for the
number of BionAnimals under contract in each of the next four fiscal years.* The
targets also include quantities of BionSoil available for sale, following the up
to 24 month lag for system design, permitting, construction and start-up.[17]*
Table 4*
Management July 1998 Goals*
---------------------------
BionAnimal/Contracts and BionSoil*
----------------------------------
(all numbers in thousands)*
Fiscal Years Ended June 30*
---------------------------
1999* 2000* 2001* 2002*
------ ------- ------- -------
Number of BionAnimals
added during fiscal
year* 800* 950* 1,200* 1,400*
Cumulative number of
BionAnimals under
Contract* 1,550* 2,500* 3,700* 5,100*
BionSoil available
for sale (cubic yards)* 30* 300* 1,600* 2,600*
These goals could only be realized by the Company if many factors and
assumptions including but not limited to the following were 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 continues towards market consolidation in the
agricultural community, whereby the total number of farms decreases,
however, the number of animals produced increases;* 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. (See management's
discussion in the Company's Form 10-KSB for the fiscal year ended June 30, 1998
and Forms 10-QSB for the fiscal quarters ended September 30 and December 31,
1998.)
19
<PAGE>
Additionally, as discussed above, prices in the hog market have been in a major
depression over the last twelve months. This depression has not only generally
halted expansion in the hog industry, but has also forced some growers to reduce
or eliminate their herds and others to put all expansion or retrofits of manure
handling systems on hold. This price depression coupled with voter and
legislative actions in Colorado and North Carolina (see "The Hog Market Impact"
section, above) along with the Company's delay in hiring key management
positions has slowed the aggressive growth rate that the Company had forecasted
in its Form 10-KSB dated June 30, 1998 and Form 10-QSB dated September 30, 1998.
The short-term impact of these two issues has caused management to reevaluate
forecasts for the remainder of fiscal year 1999 through fiscal year 2002. (See
the Company's 10-QSB for fiscal quarter ending December 31, 1998).Based on the
Company's experience in the fiscal quarter ended March 31, 1999, the continued
uncertainty over the final outcome of various legislative actions and continued
low hog prices, the Company has further adjusted its short term goals. As a
result, the following revised table of management targets has been developed.
Note that the number of BionAnimals added in fiscal year 1999 and fiscal year
2000 have been reduced. Management believes, however, that the total number of
BionAnimals added by June 30, 2002 will equal or exceed the total predicted
previously.*
Table 4A*
Revised Goals*
-------------
BionAnimal/Contracts and BionSoil*
---------------------------------
(all numbers in thousands)*
Fiscal Years Ended June 30*
---------------------------
1999* 2000* 2001* 2002*
------ ------- ------- -------
Number of BionAnimals
added during fiscal
year* 500* 800* 1,250* 1,800*
Cumulative number of
BionAnimals under
Contract* 1,250* 2,050* 3,300* 5,100*
BionSoil available for
sale (cubic yards)[18]* 11* 130* 1,200* 2,100*
These revised goals will only be realized if all of the factors and assumptions
listed following Table 4, above, are met.* Additionally, meeting the short term
targets will require that the upward trend now in evidence in hog prices
continues until growers are once more able to realize a profit and resume
expansion and facility upgrades.*
The percent of total market penetration which these targets represent is very
modest. The Company's systems sales program has achieved (through March 31,
1999) approximately a 0.52% market penetration.* The revised cumulative number
of BionAnimals under contract targets for fiscal years 1999, 2000, 2001 and 2002
if achieved, would represent approximately a 0.6%, 1.0%, 1.6% and 2.4% market
penetration, respectively.* Management believes that its goals resulting in
these market penetrations are realistic goals if the assumptions set forth above
are accurate.* No assurance can be given however, that these goals will be
achieved.
20
<PAGE>
Financial Goals
---------------
Based on these goals for BionAnimal addition and BionSoil production, management
has established the following revised financial performance targets for the
Company for fiscal years 1999 through 2002 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 endnotes thereto.*
Please carefully review the risks and uncertainties presented above and below
and in the endnotes in conjunction with the Company goals summarized in this
Table 5.[19] (See also endnotes 20, 21, and 22, below).
Table 5*
Performance Goals*
(Based on BionAnimals under contract and BionSoil
available for Sale as described in Table 4A above)*
(all numbers in thousands)*
Fiscal Years (ended June 30)*
1999* 2000* 2001* 2002*
----- ----- ----- -------
Number of BionAnimals
added during fiscal
year* 500* 800* 1,250* 1,800*
Cumulative number of
BionAnimals under
contract* 1,250* 2,050* 3,300* 5,100*
BionSoil available
for sale* 11* 130* 1,200* 2,100*
Gross Revenue[20]* $400* $7,570* $52,423* $98,096*
Gross Margin[21]* $11* $3,210* $22,278* $44,441*
Pre-Tax Earnings[22]*$(3,000)* $300* $17,178* $35,991*
(These revised goals were established and originally presented in the Company's
Form 10-QSB for fiscal quarter ending December 31, 1998.)
The targets presented in Table 5 above reflect the revised information presented
in Table 4A. As a result, revenues, margins and earnings projected are lower
than those shown in Table 5 as presented in the Company's Form 10-KSB dated June
30, 1998 and the revised information shown in the Company's Form 10-QSB for the
quarter ended December 31, 1998. As discussed above and in the endnotes, this
fiscal year 1999 reduction is based on the impact the Company is experiencing
from the continuing low hog prices and the continued uncertainty over the final
outcome of various legislative actions.
The goals presented in Table 5, above, for fiscal year 2002 show 5,100,000
BionAnimals under contract but only 2,100,000 cubic yards of BionSoil being sold
during fiscal year 2002.* This is due to the up to 24 month delay between
contract signing and BionSoil availability.* The Company's goal, however, is
that the backlog of 3,000,000 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 $74,000,000 in those later years, even if there are no additional
Bion NMS system sales thereafter.*
21
<PAGE>
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 the first quarter of fiscal 1999 (contracts for
325,000 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.* In response to the
depressed hog markets, regulatory uncertainty in certain states and delay in the
hiring of key management positions, the Company is reasserting its efforts in
order to meet or exceed its new goals and targets.* The Company is expanding its
efforts into new geographical and technical areas as a result, which will bring
beneficial results in the long term.*
The Company has hired both a Vice President of system sales and marketing and a
Vice President, BionSoil, both key management positions necessary to help the
Company achieve these goals. The Company has also recruited and filled 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.*
The potential return based on the Company's growth goals is apparent if the
Company is successful in achieving its targets 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.*
# # # # # # # # # # #
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.
22
<PAGE>
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.
The Company's ability to successfully confront even the currently identified
challenges which lie ahead in meeting its stated goals is far from certain as it
has never operated at a profit and has a negative net worth at the present time.
The Company may, and likely will, face additional challenges, which have not as
yet even been identified. If 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. If 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. The Company's operations are not
currently profitable; therefore, readers are further cautioned that the
Company's continued existence is uncertain 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.
23
<PAGE>
Notes to Management's Discussion and Analysis or Plan of 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, which is different for each category of animal.
3 Five of these 64 systems are presently in operations. The remaining 56 are in
various stages of design, permitting, and construction. Two major factors have
contributed to the delays in bringing new hog systems on line: (1) the decrease
in hog prices and (2) state regulatory developments with water and air quality
issues surrounding hog farms. Despite these factors and resulting delays, all
parties have indicated to the Company that they intend to build and use these
systems.
4 All numbers of animals are taken from the 1997 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
24
<PAGE>
5 According to the 1997 Census of Agriculture published by the U.S. Department
of Agriculture evidence of consolidation of animals onto large farms has
increased significantly from 1992 to 1997, continuing the trend seen in the 1992
Census of Agriculture. In the hog industry, for example: from 1992 to 1997 the
number of hog farms in the U.S. decreased 42.6% to 109,754 while the number of
hogs increased 6% to 61,206,236. Further, those states with the largest growth
in hog inventories also show substantial declines in the number of farms:
Colorado inventories increased 70% while the number of farms declined 25%, North
Carolina inventories rose 89% with a decline of 31% in farm numbers, and
Oklahoma inventories increased 550% with a 12% decline in number of farms.
6 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
test market referenced below.
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 developmental 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 or dry them before
they are processed and blended.
7 The Company is utilizing information obtained from a Battelle Institute study
conducted for the Solid Waste Composting Council. 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. ---------------------
25
<PAGE>
8 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 120 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.
9 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.*
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. Representatives of NCSU conducted a series of studies in 1998
including germination studies using Impatiens, landscape studies using four
common landscape plants, turf growth studies and a series of vegetable and
ornamental growth studies performed at the Bion research center in Clayton,
North Carolina. 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 1999 summer growing season.
26
<PAGE>
10 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,
and bagging.
11 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 or special products.
12 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 2 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 2.*
13 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
years to 2.0 years the time before BionSoil revenues commence after contract
signing.
14 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.
27
<PAGE>
15 During February 1994 the Company opened an office in Smithfield, North
Carolina (subsequently moved to Clayton, 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 three additional
Bion NMS that have come on line. Management estimates that, to date, in excess
of $1,400,000 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. *
16 Issued U.S. patents include the following titles: "Bioconversion Reactor and
System", "Animal Waste Bioconversion System", "Bioconverted Nutrient Rich Humus
I", "Bioconverted Nutirent Rich Humus II," "Phosphorous Treatment Process", and
"Storm Water Remediatory Bioconversion System". In addition, the Canadian Patent
Office has issued "Aqueous Stream Treatment Process".
17 The time between contract signing and BionSoil revenues can be up to 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 related to environmental regulations associated
with Colorado's approving Amendment 14 in the November 1998 election that may
delay the beginning of these activities.
28
<PAGE>
18 There are approximately 22,000 cubic yards of BionSoil available for sale in
fiscal year 1999. However, the Company plans on utilizing up to 6,000 cubic
yards for various growth tests, university studies, and field crop test
programs. Although the Company's goals project for the Company to have 1.25
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. The Company estimates that 5000 cubic
yards will be carried forward into fiscal year 2000.
19 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.
20 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* 5%* 10%* 12%* 14%*
29
<PAGE>
(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* $104.00* $104.00* $110.00* $110.00*
Bulk* $ 24.50* $ 27.50* $ 30.00* $ 32.50*
Weighted
Average* $ 28.48* $ 35.15* $ 39.60* $ 43.35*
(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.*
21 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* $65.00* $64.00* $62.00* $60.00*
Bulk Product*$17.50* $17.50* $17.00* $16.50*
Weighted
Average* $19.88* $22.15* $22.40* $22.59*
(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.)*
30
<PAGE>
d.) 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.*
e.) based on the assumptions above 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* $8.60* $13.00* $17.20* $20.76*
22 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* $2,390* $2,910* $5,100* $8,450*
31
<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 nine month period ended March 31,
1999 without registering the securities under the Securities Act.:
249,962 shares of restricted and legended Common Stock to ten private
investors and nine existing shareholders in privately negotiated
transactions for an aggregate amount of $817,359.
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.
12,862 shares of restricted and legended Common Stock to an existing
shareholder as payment of a note payable and interest valued at
$77,170.
42,440 shares of restricted and legended Common Stock to three
employees in lieu of cash for services rendered valued at, in
aggregate, $127,916.
10,249 shares of restricted and legended Common Stock to a shareholder
for rent and services valued in aggregate at $32,175.
10,535 shares of restricted and legended Common Stock to three
consultants in lieu of cash for services rendered valued at, in
aggregate, $31,602.
32
<PAGE>
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 +Form of promissory note (the "Note") between
Bion Environmental Technologies, Inc. and
LoTayLingKyur, Inc.
10.2 +Form of second promissory note (the "second
note") between Bion Environmental Technologies, Inc.
and LoTayLingKyur, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K (dated March 15, 1999)
reporting on items 5 & 7.
+Incorporated by reference to 8-K filed March 15, 1999.
33
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
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 12, 1999
34
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