SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
December 31, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 OR THE TRANSITION PERIOD FROM
__________ TO __________
Commission file number 0-19333
Bion Environmental Technologies, Inc.
(Exact name of registrant as specified in its charter)
Colorado 84-1176672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 17th Street, Suite 3310
Denver, Colorado 80202
(Address of principal (Zip Code)
executive offices)
(303) 294-0750
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
The number of shares outstanding of registrant's classes of common stock, as of
February 10, 1999:
Common Stock, No Par Value, 9,110,838
<PAGE>
Bion Environmental Technologies, Inc. Form 10-QSB
December 31, 1998
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets:
June 30, 1998 and
December 31, 1998................. F2
Consolidated Statement of Operations:
For the Six Month Periods Ended
December 31, 1997 and
December 31, 1998................. F3
Consolidated Statement of Operation:
For the Three Month Periods Ended
December 31, 1997 and
December 31, 1998................. F4
Consolidated Statement of Cash Flows:
For the Six Month Periods Ended
December 31, 1997 and
December 31, 1998................. F5-F6
Statement of Changes in Stockholders
Equity for the Period June 30, 1998
through December 31, 1998............... F7-F8
Notes to Financial Statements............ F9-F12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................ 3
PART II OTHER INFORMATION
ITEM 1-6 ......................................... 26
<PAGE>
F[PG NUMBER]
FINANCIAL INFORMATION
PART I
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
See Notes to Consolidated Financial Statements
F[PG NUMBER]
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
(Unaudited) (Audited)
Assets
<S> <C> <C>
Current assets
Cash and cash equivalents ............................... $ 3,446 $ 19,104
Accounts receivable ..................................... 11,907 13,986
Contract receivable(net of allowance
of $30,000) ............................................ 1,619 22,902
Work in progress (net of allowance
of $30,000) ............................................ 388,408 389,712
------------ -----------
Total current assets ............................... 405,380 445,704
------------ -----------
Property and equipment
Computers and equipment ................................. 301,751 298,782
Accumulated depreciation ................................ (118,210) (91,727)
------------ -----------
183,541 207,055
Other assets
Patents, net ............................................ 41,450 43,066
Deferred long-term contract costs ....................... 71,333 71,333
Deposits and other ...................................... 12,695 13,044
------------ -----------
Total other assets ................................. 125,478 127,443
------------ -----------
Total assets ............................................. $ 714,399 $ 780,202
============ ============
Liabilities and Stockholder (Equity)
Current liabilities
Accounts payable ........................................ $ 322,638 $ 241,384
Accounts payable - related party ........................ 32,264 20,324
Notes payable - stockholders ............................ 216,171 89,171
Capital lease obligations ............................... 52,399 67,137
Accrued expenses ........................................ 384 24,368
Accrued payroll ......................................... 463,821 284,250
------------ -----------
Total current liabilities .......................... 1,087,677 726,634
Long-term liabilities
Note payable - stockholder .............................. 240,000 210,000
Capital lease obligations ............................... 63,243 83,127
Deferred contract revenue .............................. 151,000 151,000
------------ -----------
Total liabilities .................................. 1,541,920 1,170,761
------------ -----------
Commitments and contingencies
Stockholders' (deficit)
Common stock, no par value, 100,000,000
shares authorized, 9,019,942
(December 31, 1998) and 8,764,827
(June 30, 1998) shares issued and
outstanding ............................................ 11,587,013 10,863,469
Common stock subscribed ................................. 41,500 21,500
Accumulated deficit ..................................... (12,456,034) (11,275,528)
------------ -----------
Total stockholders' (deficit) ..................... (827,521) (390,559)
------------ -----------
Total liabilities and stockholders'
(deficit) ............................................... $ 714,399 $ 780,202
============ ============
</TABLE>
<PAGE>
Consolidated Statements of Operations
Six Months Ended
December 31
--------------------------
1998 1997
------------ ----------
(Unaudited) (Unaudited)
Sales ............................. $ 103,924 $ 140,749
Cost of Sales ..................... 210,748 280,992
----------- -----------
Gross profit (loss) ......... (106,824) (140,243)
General and administrative expenses 910,657 776,102
Research and development .......... 122,307 109,855
----------- -----------
Loss from operations .............. (1,139,788) (1,026,200)
Other income (expense)
Interest expense ............ (34,995) (46,814)
Other income (expense), net . (5,723) 2,547
----------- -----------
Net (loss) ........................ $(1,180,506) $(1,070,467)
=========== ===========
Basic (Loss) per weighted
average share of common stock .... $ (0.13) $ (0.28)
=========== ===========
Weighted common shares outstanding 8,892,784 3,865,514
=========== ===========
<PAGE>
Consolidated Statements of Operations
Three Months Ended
December 31
-----------------------------
1998 1997
------------ ----------
(Unaudited) (Unaudited)
Sales .................................... $ 40,052 $ 115,912
Cost of Sales ............................ 87,907 187,423
----------- -----------
Gross profit (loss) ................ (47,855) (71,511)
General and administrative expenses ...... 518,183 305,005
Research and development ................. 55,308 57,098
----------- -----------
Loss from operations ..................... (621,346) (433,614)
Other income (expense)
Interest expense ................... (19,847) (23,910)
Other income (expense), net ........ (13,080) 558
----------- -----------
Net (loss) ............................... $ (654,273) $ (456,966)
=========== ===========
Basic (Loss) per weighted average share of
common stock ............................ $ (0.07) $ (0.12)
=========== ===========
Weighted common shares outstanding ....... 8,951,608 3,957,371
=========== ===========
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended
December 31
-----------------------------
1998 1997
------------ ----------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net (loss) .............................. $(1,180,506) $(1,070,467)
Adjustments to reconcile net loss to
net cash used in operating activities -
Depreciation and amortization ........... 28,099 26,586
Issuance of common stock for services,
compensation and interest .............. 23,620 93,410
Issuance of subscribed stock for services 23,000 (27,007)
Change in assets and liabilities -
Receivables and work in progress ....... 24,666 (39,706)
Prepaid expenses and other ............. 349 (10,000)
Accounts payable ....................... 93,194 (36,217)
Accrued liabilities .................... 155,587 88,441
----------- -----------
Net cash used in operating
activities ...................... (831,991) (974,960)
Cash flows from investing activities
Purchases of equipment .................. (2,969) (7,762)
Investments in patents .................. -- (7,706)
----------- -----------
Net cash used in investing
activities ...................... (2,969) (15,468)
Cash flows from financing activities
Payments on notes payable ............... (3,000) (133,000)
Proceeds from notes payable ............. 235,000 25,000
Proceeds from sale of stock/warrant
issuances .............................. 539,424 915,713
Proceeds from exercise of options ....... 82,500 --
Payments on capital lease obligations ... (34,622) (31,578)
Proceeds from the sale of assets,
net of selling expenses ................ -- 262,000
----------- -----------
Net cash provided by financing
activities ..................... 819,302 1,038,135
Net increase (decrease) in cash
and cash equivalents .................... (15,658) 47,707
Cash and cash equivalents at
beginning of period ..................... 19,104 9,232
----------- -----------
Cash and cash equivalents at end of period $ 3,446 $ 56,939
=========== ===========
Footnote:
Supplemental disclosure of cash flow information Cash paid for interest was
$10,464 (1998) and $26,869 (1997).
<PAGE>
Continued from previous page.
Supplemental disclosure of non-cash financing activities
For the six months ended December 31, 1998
Converted $3,000 of common stock subscribed into 800 shares of common
stock.
Converted $77,170 of notes payable and interest into 12,862 shares of
common stock.
For the six months ended December 31, 1997
Declared and accrued dividends of $4,653 for preferred stock Series B.
Converted $5,007 of common stock subscribed into 1,321 shares of
common stock.
Converted 18,834 shares of Series B preferred stock to 18,834 shares
of common stock valued at $95,482.
Issued $30,961 of common stock (10,324 shares) as payment of accrued
Series B preferred dividends.
<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>
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
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>
<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 December 31, 1998, the Company has incurred accumulated losses totaling
$12,456,034, resulting in an accumulated stockholders' deficit of $827,521. 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:
December 31, June 30,
1998 1998
----------- ----------
Costs incurred on contracts $2,023,699 $1,927,813
Estimated (losses) (583,640) (548,450)
----------- -----------
1,440,059 1,379,363
Less billings to date (1,131,318) (1,069,318)
----------- -----------
$ 308,741 $ 310,045
=========== ===========
Note 4 - Capital Structure
Because the Company has a relatively complex capital structure the following
capital structure details are set forth:
<PAGE>
Common Stock
As of February 10, 1999 the Company had 9,110,838 shares of Common Stock issued
and outstanding and 10,987 shares of subscribed stock.
Options and Warrants
As of February 10, 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:
Commences Expires
Director ($1.72) 10,000 8/20/97 8/19/02
($2.27) 10,000 8/20/97 8/19/02
($3.23) 10,000 11/18/98 11/17/03
-------
Total Director 30,000
Employee ($4.00) 1,247 10/21/97 12/31/01
($4.00) 1,200 2/3/98 12/31/01
($4.00) 8,519 9/15/97 12/31/01
($4.00) 834 6/2/98 12/31/01
($4.00) 694 12/16/97 12/31/01
($4.00) 1,734 8/4/98 12/31/01
($4.00) 17,500 8/1/97 8/1/00
($4.00) 1,000 3/31/98 3/31/99
($4.00) 1,334 8/11/98 12/31/01
($4.00) 16,155 11/19/98 12/31/02
($4.00) 917 2/2/99 12/31/02
($4.00) 1,400 3/4/99 12/31/02
($4.00) 934 3/16/99 12/31/02
($4.00) 1,317 4/1/99 12/31/02
($4.00) 934 6/1/99 12/31/02
($4.00) 934 9/1/99 12/31/02
($4.13) 1,000 9/1/98 8/31/00
($4.50) 1,000 12/1/98 12/31/00
($6.00) 1,000 3/31/98 3/31/99
($6.00) 8,517 9/15/98 12/31/01
($6.00) 5,000 9/15/97 12/31/01
($6.00) 1,847 10/21/98 12/31/01
($6.00) 1,200 2/3/99 12/31/01
($6.00) 693 12/16/98 12/31/01
($6.00) 1,733 8/4/99 12/31/01
($6.00) 1,333 8/11/99 12/31/01
($6.00) 16,155 11/19/99 12/31/02
($6.00) 917 2/2/00 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 6/1/98 5/31/00
<PAGE>
($6.75) 5,000 10/6/97 3/31/99
($7.25) 10,000 10/6/97 3/31/99
($8.00) 10,000 9/15/98 12/31/01
($8.00) 1,246 10/21/99 12/31/01
($8.00) 1,200 2/3/00 12/31/01
($8.00) 693 12/16/99 12/31/01
($8.00) 1,733 8/4/00 12/31/01
($8.00) 1,333 8/11/00 12/31/01
($8.00) 8,516 9/15/99 12/31/01
($8.00) 16,155 11/19/00 12/31/02
($8.00) 917 2/2/01 12/31/02
($8.00) 1,400 3/4/01 12/31/02
($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
($10.00) 10,000 9/15/98 12/31/01
($12.50) 10,000 9/15/99 12/31/01
($15.00) 10,000 9/15/99 12/31/01
-------
Total Employee 195,879
Total Director
and Employee 225,879
Warrants outstanding as of February 10, 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
Total $3.00 warrants 16,330
$3.0625 warrants:
exercisable 11/2/98 through 12/31/02: 16,667
Total $3.0625 warrants 16,667
$4.00 warrants:
exercisable 12/1/98 through 12/31/02 16,667
exercisable 6/5/97 through 6/30/99: 35,000
Total $4.00 warrants 51,667
$5.00 warrants:
exercisable 6/20/96 through 6/20/99: 25,000
exercisable 8/21/96 through 8/20/01 10,000
Total $5.00 warrants 35,000
$6.00 warrants:
exercisable 6/5/97 through 6/30/00: 100,000
exercisable 3/1/98 through 10/1/99: 50,000
exercisable 6/9/98 through 12/31/01: 3,750
exercisable 2/1/97 through 12/31/01: 10,000
exercisable 4/21/97 through 4/20/02: 4,172
Total $6.00 warrants 167,922
<PAGE>
$7.00 warrants:
exercisable 7/1/98 through 6/30/99: 887,081
Total $7.00 warrants 887,081
$7.50 warrants:
exercisable 7/1/98 through 12/31/00: 187,500
Total $7.50 warrants 187,500
$8.00 warrants:
exercisable 2/1/97 through 12/31/01: 10,000
Total $8.00 warrants 10,000
$10.00 warrants:
exercisable 2/1/97 through 12/31/01: 10,000
Total $10.00 warrants 10,000
$12.50 warrants:
exercisable 2/1/97 through 12/31/01: 10,000
Total $12.50 warrants 10,000
$15.00 warrants:
exercisable 2/1/97 through 12/31/01: 10,000
exercisable 1/1/00 through 12/31/01:3,006,911
Total $15.00 warrants3,016,911
Total of all warrants currently outstanding4,409,078
Note 5 - Subsequent Events
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 1/25/98 - 12/31/99).
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 Colorado,
N.A., in Denver, Colorado as its prime rate. Principal and interest are due on
or before January 12, 2000.
<PAGE>
BION ENVIRONMENTAL TECHNOLOGIES, INC.
AND SUBSIDIARIES
[PG NUMBER]
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 $12,456,034 and is currently
experiencing liquidity problems. Continued losses without the infusion of
additional capital raise doubt about its ability to continue as a going concern.
Management plans include continuing efforts to obtain additional capital to fund
operations until such time, if ever, as contract sales and the sale of BionSoil
are sufficient to fund opera-tions. No assumptions can be made that the Company
will be able to successfully attain profitable operations and/or raise
sufficient capital to sustain operations.
Liquidity and Capital Resources
The Company's current ratio as of December 31, 1998 was 0.37 : 1.0 as compared
to 0.61 : 1.0 as of June 30, 1998. Cash as of December 31, 1998 decreased to
$3,446 as compared to $19,104 as of June 30, 1998.
During the six months ended December 31, 1998, the Company borrowed $127,000
from three shareholders at 1% interest per month.
As of December 31, 1998 the Company has drawn $240,000 against the October 26,
1996 line-of-credit with a shareholder. (See 8-K dated December 1, 1996.)
During the six months ended December 31, 1998 the Company made awards to five
employees under the 1994 Incentive Stock Plan. The Company granted 30,000
options at an exercise price of $3.25 per share (exercisable from 11/2/98 -
12/31/98). None of the options were exercised and all have expired.
<PAGE>
During the six months ended December 31, 1998 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 shall vest 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 six month period ending December 31, 1998, the Company issued 16,667
warrants to an employee with an exercise price of $3.0625 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.
For the six months ended December 31, 1998 the Company issued 225,916 shares of
common stock for cash ($539,424), 12,862 shares of common stock as payment of a
note and interest ($77,170), 5,537 shares of common stock for services
($21,450), and converted 800 shares of subscribed stock to 800 shares of common
stock valued at $3,000. All of the above is legended and restricted common
stock. The Company also issued 10,000 shares of free trading common stock for
the exercise of options ($82,500). The Company has increased subscribed stock by
$10,000 for legended and restricted common stock awarded but not issued to
certain employees as additional compensation.
Results of Operations
Comparison of the Six Months Ended December 31, 1998 with Six Months Ended
December 31, 1997
Revenue in the six months ended December 31, 1998 was $103,924 compared to
$140,749 for the corresponding six month period in 1997, a decrease of $36,825.
Contract costs were lower ($70,244) in the 1998 six month period due to reduced
costs associated with the BionSoil processing in New York.
<PAGE>
General and administrative expenses increased by $134,555 in the six month
period ended December 31, 1998 due to higher consulting expenses ($243,000) and
investor relations expenses ($59,000). $231,000 of the increase in consulting
fees was due to the cancellation of a consulting agreement and the credit issued
in the quarter ended December 31, 1997. The increase was partially offset by a
decrease in compensation expenses ($190,000).
The Company recorded $34,995 in interest expense on its notes to shareholders
and capital equipment leases and $122,307 in research and development costs. As
a result of the above, the Company recorded a net loss of $1,180,506 in the six
month period ended December 31, 1998, compared to a net loss of $1,070,467 for
the six month period ended December 31, 1997.
The Company will need to increase sales significantly to obtain profitability.
Comparison of the Three Months Ended December 31, 1998 with Three Months Ended
December 31, 1997
Revenue in the three months ended December 31, 1998 was $40,052 compared to
$115,912 for the corresponding three month period in 1997, a decrease of
$75,860. Contract costs were lower in the 1998 three month period by $99,516 due
to the decreased expenses associated with BionSoil processing. The above
resulted in a gross loss for the period ended December 31, 1998 of $47,855 as
compared to a gross loss of $71,511 for the same three month period in 1997.
General and administrative expenses increased by $213,178 due to an increase in
consulting and professional fees ($239,000) and investor relations ($45,000)
partially offset by a decrease in compensation expenses ($110,000). $231,000 of
the increase in consulting fees was due to the cancellation of a consulting
agreement and the credit issued in the quarter ended December 31, 1997.
The Company recorded $19,847 in interest expense on its notes payable and
$55,308 in research and development costs. As a result of the above, the Company
recorded a net loss of $654,273 in the three month period ended December 31,
1998, compared to a net loss of $456,966 for the three month period ended
December 31, 1997.
The Company will need to increase sales significantly to obtain profitability.
Year 2000 Issue
<PAGE>
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two-digit year value to 00.
The issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. After a review of the Company's computer systems and associated software,
management does not believe "year 2000" will have a material effect on the
operations or financial condition of the Company. The Company cannot predict the
impact that "Year 2000" will have on its customers and vendors.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The discussion below contains forward-looking statements (denoted with asterisks
(*)) made in reliance upon the provisions of Rule 175 promulgated under the
Securities Act of 1933 and should be read in conjunction with the Company's
consolidated financial statements and the Notes thereto. The footnotes set forth
below (at pages 21 to 25) 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 $11,628,513 of equity has been invested in the Company through the
close of the fiscal quarter ended December 31, 1998. These financial
statements also show that, as of that date, the Company had a negative net
worth of $827,521, cumulative losses of $12,456,034, limited current
revenues and substantial current operating losses. Continued losses without
additional outside funding raise doubt about the Company's ability to
continue as a going concern. Management plans to continue raising
additional capital to fund operations until such time, if ever, as Bion NMS
sales along with the sales of BionSoil and BionSoil products are sufficient
to fund operations.
Management believes, however, that additional information is necessary to
evaluate the Company and its progress relative to the business it is
pursuing, its plans for the future, and the associated value the Company
has developed during the last several years. Therefore, the following
section of this Form 10-QSB is presented by management to give the reader a
better understanding of the development of the business of the Company to
date, and its goals for growth in the future.
Business Development
The Company's mission is to provide services, systems and products which
solve environmental problems with wastes and wastewater, and in appropriate
situations, recycle wastes into high value horticultural products which
produce superior plant growth performance. The main emphasis of the
Company's business during the past two years has been on the application of
the Bion NMS for large animal raising agricultural facilities. As a result,
the Company's focus has been more specifically on: first, the sales,
design, installation oversight, operations management, and material
harvesting of the Bion NMS for large dairy and swine facilities; and,
second, BionSoil: the development efforts associated with testing,
processing, blending, packaging, marketing, distribution and sales of
BionSoil and BionSoil-based products which are produced from the solids
harvested from the Company's Bion NMS systems. Through December 31, 1998
the Company has sold, designed or has under contract a total of 81 Bion NMS
waste or wastewater treatment systems. These systems include 4 operating
food processing or storm water run off systems, as well as 76 Bion NMS
BionSolids (see footnote 1, below) producing systems (13 in operation, 4 in
construction and 58 under contract in various stages from preliminary
design to permitting) that are designed to contain approximately 1.1
million BionAnimals (see definition below) when completed. Eventually the
Company anticipates emphasizing additional business areas including without
limitation municipal and industrial wastewater treatment*.
Prior to September 20, 1989, (when Bion Technologies, Inc., was
incorporated) through at least June 30, 1997, the Company was in the
technology development mode with limited sales of primarily first-of-a-kind
wastewater and/or Bion NMS. Initial sales and installations were wastewater
treatment NMS (no BionSolids production) until 1993 when the emphasis
shifted to Bion NMS (BionSolids production) applications.
During the past two years the Company has been working to emerge from the
research and development stage and transition into the sales and marketing
of the Bion NMS systems and the BionSoil products produced by those
systems. The Company has focused the majority of its efforts and
expenditures in these two areas and is beginning to see positive progress
in both, as described below*. The Company's method for tracking both the
sale and start-up of Bion NMS systems and the production of BionSoil is
based on a Company defined standard unit, the BionAnimal, which relates
BionSoil production to confined animal weight. When all the manure and
urine produced by one BionAnimal is collected as BionSolids and
subsequently converted into BionSoil, the Company estimates that each
BionAnimal will yield approximately 1 cubic yard of processed BionSoil per
year*.
Using this definition of BionAnimal the Company has developed the following
table relating the number of animals in full confinement installations to
the number of BionAnimal equivalents they represent. (See footnote 2,
below):
Table 1
Animal Approximate Equivalent BionAnimals
One dairy cow 10.00
One steer 4.50
One sow 1.35
One market hog 0.90 (1.1 = 1)
One nursery pig 0.225 (4.4 = 1)
One layer chicken 0.02 (50 = 1)
<PAGE>
For fiscal year 1998 (see the Company's Form 10-KSB dated June 30, 1998),
the Company experienced strong growth and as a result exceeded its'
internal goals by more than 100%, adding approximately 650,000 BionAnimals
under contract. During the first two quarters of fiscal year 1999, the
Company has added an additional 325,000 BionAnimals, approximately 40% of
the Company's initial internal goal for the year (see management's goals
and targets below). However, during the second fiscal quarter ended
December 31, 1998, and continuing into January and February 1999 the
Company has experienced the impact of an extended deep depression in hog
prices. During December 1998 prices reached a low of $9.00 per hundred
weight, down from $43.00 per hundred weight in December 1997. These
depressed prices, lasting through the present time, are below the
break-even point for hog growers. As a result of this reduction in prices
and the commensurate losses accumulated by the hog industry, commitments
for expansion of capacity have slowed, and growers have generally delayed
or deferred any expenditures possible pending an increase in price to the
break-even point. This has had a significant impact on the Company's plans
to sign additional contracts within the hog industry and has caused growers
to put many of the Company's existing system contracts on temporary hold.
However, hog prices have recovered slowly in January 1999 and have trended
upward to approximately $25.00 per hundred weight by the end of January
1999.
Additionally, in the last quarter of the fiscal year ended June 30, 1998,
the Company initiated a program to hire two vice president level executives
(a Vice President, system sales and marketing, and a Vice President,
BionSoil). Both positions have been filled, however, the recruiting program
took substantially more time than anticipated. As a result, the Vice
President of system sales and marketing began with the Company in November,
and the Vice President of BionSoil began with the Company in December. This
delay, combined with the impact of low hog prices in the market resulted in
a significant slow down in the Company's pace of growth. The impact of
these two issues is anticipated to be short term. However, management has
reevaluated the goals established in the Company's Form 10-KSB dated June
30, 1998 and made necessary changes (see Management's Targets, Bion System
Sales and BionAnimals Under Contract below).
Market Size
Management has devoted significant effort to defining the size of the
markets for both the Bion NMS and for BionSoil and BionSoil products. These
efforts have included formal and informal studies, creation of models as
well as analysis of available statistical data.
The Company has reviewed the preliminary 1997 U.S. Department of
Agriculture Census statistics (the most recent information available from
the U.S. Department of Agriculture) as well as additional state by state
information, in some cases current as of December 1997, and developed the
following size estimates for the target market segments for system sales.
The total United States animal population, based on data contained in the
1997 U.S. Department of Agriculture Census statistics shows that there were
over 107 million cattle and calves, 61 million hogs and in excess of 1.6
billion fowl on farms in the United States. These numbers if converted
based on the Company defined BionAnimal unit, yield approximately 560
million BionAnimals.
<PAGE>
However, not all of these BionAnimals are on farms that are potential
candidates for a Bion NMS installation. The Company has analyzed the
economics of system installation, minimum system size requirements and
system operation factors related to the size of farms. Based on this review
and further analysis of the census data, the Company estimates that the
total number of BionAnimals on larger farms, which meet the appropriate
criteria, is approximately 210 million (see footnote 3, below). Based on
this review, these animals are believed by the Company to be the potential
candidates for system installation in the U.S.* Further, the number of
large animal farms is increasing as the move to consolidate livestock
operations into larger more efficient farm units is accelerating (see
footnote 4, below). The 1992 Department of Agriculture Census statistics
(which were the most current information available to the Company prior to
this Form 10-QSB), showed that the total number of BionAnimals on larger
farms was 140 million. The increase in animals on larger farms seen in the
1997 census numbers is most evident in dairy cows (where the number of cows
on dairies with over 1,000 cows increased from 937,000 to 1,600,000 between
1992 and 1997) and hog farms (where the number of hogs on farms with over
5,000 hogs rose from 9,764,000 to 24,578,000). This trend is anticipated to
continue over the next several years as growers realize the size related
economies in facility and production costs*.
Management's review of the potential market for BionSoil and BionSoil
products has included research by the Battelle Institute in a study
conducted for the Solid Waste Composting Council (see footnote 5, below),
as well as initial market sector analysis*. Battelle calculated that the
demand for compost and compost-like products (including products ranging
from manure to composted organic wastes to manufactured potting soils and
soil enhancers) in selected areas of the U.S. alone is projected to be in
excess of one billion cubic yards per year*. This demand, categorized in
nine application segments: landscapers, delivered topsoil, bagged retail,
nurseries, landfill final cover, surface mine reclamation, sod production,
silvaculture, and agriculture, far exceeds projected supply*. Targeted
markets for BionSoil include these segments in addition to state and
municipal park and transportation departments, golf courses, athletic
fields, home gardeners, reforestation projects for timber and mining
companies, the U.S. Park Service and others*. The Company is currently
analyzing specific market sectors that are initial target market areas
within this overall demand including container nursery products, golf
course construction, the turf industry and others (see footnote 6, below)*.
Geographic Expansion
The activities of the Company to design, permit, oversee the installation
of and operate its systems in the various geographic areas where the
Company is conducting its business to date have established credibility
with federal, state, and local regulators as well as environmental and
agricultural professionals. With the establishment of this credibility and
recent contract discussions and negotiations, the Company is positioned to
attempt to gain significant market penetration into new geographic areas*.
To date, the Company's geographic expansion has been limited due to
financial and personnel constraints (which continue to exist). However, as
a result of heightened awareness about the major manure treatment and
disposal problem facing the animal raising industry (see footnote 7,
below), and due to the current proliferation of state and national
legislation being considered, management believes that major geographic
expansion is now possible and is essential to the Company's ability to
achieve successful operations in the future*.
<PAGE>
The Company estimates that the cost associated with the required staffing,
servicing, and marketing effort for expansion into new geographic regions,
including initial sales calls, system design, regulatory approvals, system
installation and operation through the cash-flow break-even point (the
Company has not yet achieved cash-flow break-even in any of its regional
operations), is not less than $500,000 per region, and may exceed
$1,500,000*. The Company's balance sheet does not show any assets created
by these expenditures as they all have been recorded as expense items.
However, based on experience to date in the regions where system sales and
installation activity have been focused, the Company believes that the
money invested in these efforts has created what might be called "good
will," "marketing," and/or "regulatory" value. Management believes that
achieving a greater rate of geographic expansion will require expenditures
greater than those expensed for previous expansion*. (An example of the
accumulation of these expenses can be understood by reference to the
development and installation of the Company's initial hog farm Bion NMS
system in North Carolina which is described in more detail in footnote 8,
below).
The Company is currently evaluating expansion opportunities in many
geographic areas throughout the United States. Based on research,
management team visits, discussions with regulatory and dairy industry
professionals, requests for information and proposals, and review of
available information, over the past few months it has become increasingly
evident that the state of California is an appropriate location for the
next expansion office*. California has the largest concentration of dairy
cows in the United States and is having problems with groundwater leaching
and stormwater runoff, as well as land application and stock piling 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*.
As the Company continues its expansion into new areas in the future, and
this expansion requires similar or greater additional cash resources to be
spent, these cash amounts, when expended, will be expensed and not shown as
balance sheet assets*.
Technology Expansion
The Company has six issued patents (see footnote 9, below) which provide
broad coverage of the fundamental technology that underlies the Company's
systems and processes. The Company is conducting a review of its existing
patent position and anticipates that additional patent filings may occur
based on this review or as further applications of the technology are
developed. The Company currently anticipates the expansion of the
technology into the cattle feedlot and poultry raising businesses where the
technology will need to be adapted to treat waste with both different
characteristics and different collection technologies than for existing
dairy or swine waste systems*.
<PAGE>
Other factors that may motivate the expansion of technology include, but
are not limited to, current and/or new local, state, and federal
regulations, proximity of potential systems to current online systems or
systems under contract and the market size of poultry, cattle feedlot and
other similar operations.
Just as there are additional expenses associated with geographic expansion,
there also are additional expenses associated with the adaptation of
existing technology for use in regions where climate, soil, and regulatory
conditions are different from those experienced in other already
established installations. The majority of such expenses (which are
investments in the Company's future) will not show as balance sheet assets
despite the fact that long term technological value is being created.
The Company estimates that a large portion of the net loss through fiscal
year 1995 (then shown on the financial statements as approximately $4.0
million) was actually expended on system development and the enhancement of
the technology and construction of prototype systems that are the basis of
the Company's planned future expansion. The Company has expensed all of
these costs.
Management's Targets, Bion NMS System Sales and BionAnimals Under Contract
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, the end of the Company's fiscal year 2000*. To support achievement of
this long-range goal the Company established the addition of 300,000
BionAnimals under contract as the sales target through its fiscal year
ending June 30, 1998 which would result in the Company having contracts for
a total of approximately 390,000 BionAnimals by June 30, 1998 (see the
Company's Form 10-KSB for the fiscal year ended June 30, 1997 for a
discussion of these goals)*.
For fiscal year 1998 (which ended June 30, 1998), the Company significantly
exceeded its goals. During the year, the Company signed contracts for
systems designed to contain approximately 650,000 BionAnimals as compared
to its goal of adding contracts for approximately 300,000 BionAnimals. 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 delayed*.
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, and, following the up to 24 month lag for system design,
permitting, construction and start-up (See footnote 10, below), for
quantities of BionSoil that were anticipated to be available to be sold*:
<PAGE>
Table 2 (see footnote 10, below)*
Management July 1998 Targets
BionAnimal/Contracts and BionSoil (#'s in thousands)
Fiscal Years Ended June 30
---------------------------------------
1999 2000 2001 2002
Number of BionAnimals
added during fiscal
year (in thousands)* 800* 950* 1,200* 1,400*
Cumulative number of
BionAnimals under
contract (in
thousands)* 1,550* 2,500* 3,700* 5,100*
BionSoil available
for sale (in thousands
of cubic yards)* 30* 300* 1,600* 2,600*
As management discussed in the Company's Form 10-KSB for the fiscal year
ended June 30, 1998 and Form 10-QSB for the fiscal quarter ended September
30, 1998, 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.
<PAGE>
However, as discussed above, prices in the hog market have been in a major
depression over the last nine months. This depression has not only
generally halted expansion in the hog industry, but also has forced some
growers to reduce or eliminate their herds. This depression coupled 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.
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 2A*
Revised Targets*
BionAnimal/Contracts and BionSoil (#'s in thousands)
Fiscal Years Ended June 30
---------------------------------------
1999 2000 2001 2002
Number of BionAnimals
added during fiscal
year (in thousands)* 500* 800* 1,250* 1,800*
Cumulative number of
BionAnimals under
contract (in
thousands)* 1,250* 2,050* 3,300* 5,100*
BionSoil available
for sale (in thousands
of cubic yards)*
(See footnotes 11 &12,
below) 16* 130* 1,200* 2,100*
These revised targets will only be realized if all of the factors and
assumptions listed following Table 2, 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*.
An examination of the size of the target markets for system sales and
installations and BionSoil sales (as shown above) shows that the percent of
total market penetration, which these targets represent, is very modest*.
On the basis of the assumptions above and the analysis of market size (see
page 9), the Company's systems sales program has achieved (through December
31, 1998) approximately a 0.5% market penetration, and 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 such market penetrations represent realistic targets if the
assumptions set forth above are accurate*. No assurance can be given
however, that these targets will be achieved.
Financial Discussion of Bion NMS and BionSoil Business*
<PAGE>
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)
commencing approximately nine to fifteen months after the initial start-up
of BionSoil production systems installed on large dairy, swine, poultry
farms or feedlots, revenue from the sale of BionSoil and BionSoil-based
products produced from the systems [Note that initial system start-up
typically occurs six to twelve months after a system contract is signed*.
Therefore, BionSoil revenues will typically commence up to 24 months after
a system contract is signed], (see footnote 10, below)*. To date, revenues
from the sale of BionSoil have been minimal (first significant commercial
sales are projected for spring of 1999*).
Bion NMS Economics
The Company may receive multiple design, permit and construction, and
operation oversight fees*. These fees are paid to the Company by the
clients in return for services rendered and the licensing of a particular
site to use the Bion NMS technology. Fees may also be paid to the Company
on a regular ongoing basis for system oversight as well as regulatory and
biological testing*. These fees are above and beyond any revenue the
Company may receive from the sale of BionSoil. In some cases one or more of
these categories of fees may be waived or excluded in formal negotiated
contract terms for a variety of reasons, including without limitation,
signing the first system contract in a new geographic region, signing the
first system contract for a new application of the technology, or
offsetting some or all of the fees against reduced or eliminated BionSolids
royalties.
To date the Company has lost money on system design, permitting support,
construction oversight and initial system operation. However, through
installing these systems at a loss, the Company has been able to establish
a number of Bion NMS systems to use for test sites, demonstrations and to
refine the technology. Based on experience to date, the Company is working
to establish pricing for its contracts that the Company believes will,
independent of BionSoil revenues, be sufficient to cover direct expenses
(such as system design, permitting support, construction oversight and
initial system operation) related to these system installations*. However,
there is no assurance that this goal will be achieved or that the Company
will be successful in selling its systems at a price level sufficient for
the Company to generate a profit.
BionSoil Economics
As Bion NMS systems are brought on-line and BionSolids are harvested (see
footnote 13, below), it is anticipated that BionSoil, Inc. will purchase
the harvested BionSolids from Bion Technologies, Inc. to process it into
BionSoil products for sale to customers*. Some farms may be paid fees as
royalty for the BionSolids harvested from their site*. These payments
potentially represent an important part of the strategy developed by the
Company for the successful marketing of Bion NMS systems*. Most large
animal raising facilities have substantial operating costs associated with
the disposal of manure and waste products, which are generated in large
quantities at these facilities. With the construction and operation of a
Bion NMS on a farm site, many of these costs may be substantially reduced
or eliminated, and the farm may, in some cases, also receive a revenue
stream from the cash payments made by the Company to the farm*.
<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. Subsequently the blended product was sold in bulk quantities or
bagged in both 20 pound and 40 pound bags and sold. The bagged product was
sold to a limited number of small retail garden shops and nurseries at
wholesale prices, to the Company, of $1.97 and $2.97 for 20 and 40 pound
bags respectively (resulting in prices per cubic yard of $80.00 and $108.00
respectively). Bulk product was sold through similar distribution outlets
for prices from $15.00 to $27.95 per cubic yard. The test market program
was conducted with no advertising budget, only limited point-of-sales
materials, and with no participation of any large chain retail outlets. The
average price per cubic yard for all blended product sold in this limited
test market program, bagged and bulk combined, was $39.37 per cubic yard.
Therefore, the average price received by the Company for the BionSolids,
before mixing with Sphagnum peat moss, was $57.08 per cubic yard.
Management believes that this test market program provides the Company's
first confirmation of the market viability of BionSoil products. Management
further believes that, when product sales efforts are supported with a
strong marketing/advertising program, average sales prices will increase
above $40.00 per cubic yard for the blended BionSoil product*.
Further, it should be noted that a significant portion of the material
harvested from many systems in the last year has been devoted to both
university and private studies intended to determine physical
characteristics, blends, and growth results achievable using BionSoil in
many different applications (see footnotes 14 and 15, below). The Company
anticipates continuing and aggressively expanding these test programs
during the current fiscal year*.
<PAGE>
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, 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*.
[It should be noted that all prices quoted within this Form 10-QSB are
wholesale only and may not be representative of actual retail prices.]
Additionally, based on actual costs experienced in BionSoil harvesting and
processing to date, anticipated improvements in processing technologies and
efficiencies, and lower per unit costs as volumes increase, the Company has
estimated costs for the various levels of processing required to sell
BionSoil products*. Given the contract terms and estimated costs of
production and sales, the potential gross margin (see footnote 16, below)
returned to the Company from BionSoil products sales alone has been
calculated for a series of potential price points (see footnote 17, below)
(and the implied processing levels required to achieve the products to be
sold at these price points (see footnote 18, below))*. Table 3 below
presents this information for five selected possible price points*. This
table has been prepared reflecting estimates based on the Company's limited
experience to date with the harvesting and processing of BionSoil and
BionSoil products*. (See footnotes 17 and 18, below)*.
Table 3*
Potential BionSoil Estimated Related Calculated
Wholesale Price BionSoil Expenses Gross Margin
Per Cubic Yard* Per Cubic Yard* Per Cubic Yard*
$ 20* $ 13* $ 7*
$ 40* $ 22* $ 18*
$ 60* $ 32* $ 28*
$ 80* $ 41* $ 39*
$100* $ 53* $ 47*
The calculated gross margin per cubic yard as presented in Table 3 above is
equivalent to the annual gross margin contribution of each BionAnimal in a
system that is fully on line producing BionSoil (see the definition of
BionAnimal above where one BionAnimal produces one cubic yard of BionSoil
per year).
If the Company is successful in bringing targeted systems on line producing
BionSoil within the 24 month start-up time frame (which cannot be assured
and is subject to numerous and substantial risks); and, if the Company is
successful in realizing the various potential price levels and expense
levels in columns 1 and 2 of Table 3 (which also cannot be assured and is
subject to numerous and substantial risks as explained above and below)
then column three, calculated gross margin per cubic yard, is also the
calculated annual gross margin contribution of each BionAnimal producing
BionSoil. Given that revenue to the Company from BionSoil sales is
anticipated to begin in an average of two years after the signing of an
agreement for a Bion NMS system, these calculated gross margins, which are
equivalent to gross margins per BionAnimal, would be anticipated to be
repeated each year thereafter for as long as the installations remain in
operation (current system contracts are set for 15 years with renewal
option)*. If the net present value (discounted at 8%) of these gross
margins is calculated for the normal 15-year period of a contract, assuming
no BionSoil revenues for the first two years, the net present value of the
gross margin from each BionAnimal under contract would be as shown in Table
4 for each potential price point in Table 3*. (See footnote 19, below).
Table 4*
Gross Margin Net Present Value Per BionAnimal
Calculated Annual 15 Year Net Present
Gross Margin Per Value Per BionAnimal
BionAnimal* Annual Gross Margins*
----------------- ---------------------
$ 7* $ 47*
$ 18* $122*
$ 28* $190*
$ 39* $264*
$ 47* $318*
Management believes that this NPV analysis is useful because it provides an
indication of the value to the Company of the number of BionAnimals
contained in each contract for a Bion NMS system*.
Management Financial Targets
<PAGE>
Subject to the risks and uncertainties included in this General Discussion
of Current and Proposed Operations section of the Company's Form 10-QSB and
the footnotes thereto, management has established the following revised
financial performance targets for the Company for fiscal years 1999 through
2002*. Please carefully review the risks and uncertainties presented above
and below and in the footnotes in conjunction with the Company targets
summarized in this Table 5 (see especially footnotes 20, 21, 22 and 23
below).
Table 5*
Performance Targets
(Based on BionAnimals under contract and BionSoil
available for Sale as described in Table 2A above)*
(dollars in thousands)
Fiscal Years (ended June 30)
1999 2000 2001 2002
---- ---- ---- ------
Number of BionAnimals
added during fiscal
year (in thousands)* 500* 800* 1,250* 1,800*
Cumulative number of
BionAnimals under contract
(in thousands)* 1,250* 2,050* 3,300* 5,100*
BionSoil available
for sale (in thousands
of cubic yards)* 22* 130* 1,200* 2,100*
Gross Revenue
(see Footnote 21)* $751* $7,570* $52,423* $98,096*
Gross Margin
(see Footnote 22)* $11* $3,210* $22,278* $44,441*
Pre-Tax Earnings
(see Footnote 23)* $(2,379)* $300* $17,178* $35,991*
The targets presented in Table 5 above reflect the revised information
presented in Table 2A. As a result, revenues projected are lower than those
shown in Table 5 as presented in the Company's Form 10-QSB for the quarter
ended September 30, 1998.
<PAGE>
Note that the targets 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 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 $72,000,000 in those later years, even if
there are no additional Bion NMS system sales thereafter*.
While these targets are very aggressive, they are consistent with the
Company's progress in fiscal year 1998 (the addition of approximately
650,000 BionAnimals under contract) and progress in fiscal 1999 to date
(contracts for 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 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 is actively recruiting to
fill other key management, technical and sales positions. Additionally, the
Company is pursuing geographical and technical expansion, strategic
alliances in both the agricultural and financial communities, and expansion
of its client base*.
Even though the Company is extremely small at present, has not yet
developed substantial market penetration, needs to raise additional
capital, and has (and is continuing to accrue) losses to date, the
potential return based on the Company's growth goals is apparent if the
Company is successful in achieving its targets.*
# # # # # # # # # # #
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.
<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.
As the Company has never operated at a profit and has a negative net worth
at the present time, its ability to successfully confront even the
currently identified challenges which lie ahead in meeting its stated goals
is far from certain. It is likely that the Company will face additional
challenges, which have not as yet even been identified. In the event the
Company is not able to obtain sufficient outside funding to accomplish its
goals within the time periods indicated, the goals would not be met. In the
event the Company is not able to successfully overcome the other stated
obstacles in the process of making future sales within the time periods
indicated, the goals would not be met. As the Company's operations are not
currently profitable, readers are further cautioned that, if the Company is
not successful in obtaining outside funding in an amount sufficient for it
to meet its operating expenses even at its current level, the Company's
continued existence is uncertain.
<PAGE>
FOOTNOTES to General Discussion of Current and Proposed Operations
1. BionSolids are the solid materials that are produced as a result of the
bio-conversion of manure and urine by the Bion Nutrient Management System
(NMS). BionSolids contain a high proportion of beneficial living organisms
(in contrast to traditional composted manure products), only trace amounts
of heavy metals and no human waste.
2. The quantities referred to in Table 1 represent the Company's estimate,
based on data from the American Society of Agricultural Engineers (ASAE
D384.1 - 1989) regarding animal waste production where all wastes are
captured, of the quantity of BionSolids that is produced per animal in one
year. These estimates are approximations based on the experience to date of
the Company and are subject to change. The ratio of animal species to
BionAnimal is based on the amount of BionSolids required (mixed and blended
with other organic material) in order to produce a growth medium with
comparable characteristics that yields one cubic yard of BionSoil.
3. 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
4. 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.
5. 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.
6. As an example, study data provided by North Carolina State University for
the estimated volume of potting media used in container nurseries in the
United States shows current demand (1998) to be in excess of 100 million
cubic yards per year. Further, data on U.S. golf course construction and
expansion show that, as of May 1998, 13,954 holes (or the equivalent of 775
18-hole golf courses) were under construction, and 11,677 (or the
equivalent of 649 18-hole courses) were in planning for construction.
7. For further discussion, see, for example, the December 1997 report compiled
by the U.S. Senate Committee on Agriculture, Nutrition, and Forestry for
Sen. Tom Harkin (D - IA) as well as "Lakes of animal waste pose
environmental risk" published by the USA TODAY, December 30, 1997.
<PAGE>
8. During February 1994 the Company opened an office in Smithfield, North
Carolina (which office was 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 two additional Bion NMS that have
come on line. Management estimates that, to date, in excess of $1,200,000
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*.
9. Issued U.S. patents include the following titles: "Bioconversion Reactor
and System", "Animal Waste Bioconversion System", "Bioconverted Nutrient
Rich Humus", "Phosphorous Treatment Process", and "Storm Water Remediatory
Bioconversion System". In addition, the Canadian Patent Office has issued
"Aqueous Stream Treatment Process".
10. 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 which may delay the beginning of
these activities.
11. 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.
12. 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.
13. BionSolid harvests to date have been from relatively new systems and the
Company has been devoting substantial effort to develop appropriate
technology and sites for processing the material for sale. As a result,
only small quantities of BionSoil have been available for sale during the
last twelve months. The results for a portion of these sales have been
documented in the above referenced test market.
<PAGE>
The current methods for the harvest of BionSolids and processing it into
BionSoil are being continually refined and updated. Currently the
BionSolids harvested from a dairy Bion NMS are mechanically harvested and
then left for initial drying at the farm. Once dried to a sufficient level
the BionSolids are transported to a BionSoil processing site where
additional drying takes place before final processing or blending and then
subsequently bagging or bulk storage.
Harvesting of the hog Bion NMS is still in the 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.
14. 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.
15. 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.
16. 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.
<PAGE>
17. 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.
18. Due to the Company's lack of experience and start-up nature in the soil
processing area, BionSoil expenses are based on management's estimate and
therefore are subject to significant variation. Actual production costs to
date are higher than those shown in Table 3 due to significant start-up
inefficiencies. Current expenses include but are not limited to harvesting,
transportation, processing, blending and bagging of the BionSolids into
BionSoil. Management believes, however, that as greater quantities of
BionSoil are harvested and the processing techniques become more efficient,
the margins may equal or exceed the projected Gross Margins shown in Table
3*.
19. 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.
20. 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.
21. 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%*
(Management has established this mix although it is probable that the mix will
vary considerably over time)*.
<PAGE>
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*.
22. 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.)*
b.) that freight charges for shipments to customers will be $7.00 per
cubic yard for bagged product (sold and shipped on pallets with
approximately two cubic yards per pallet) and $4.50 per cubic yard for
bulk product shipped via common carrier truck*.
c.) based on the assumptions above 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*
23. 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*
<PAGE>
OTHER INFORMATION
PART II
ITEM 1. Legal Proceedings.
The Company knows of no material pending legal proceedings to which the Company
(or the Subsidiary) is a party or to which any of its systems is the subject and
no such proceedings are known to the Company.
ITEM 2. Changes in Securities.
(c) The following securities were sold in the six month period ended December
31, 1998 without registering the securities under the Securities Act.:
168,348 shares of restricted and legended Common Stock to ten private
investors and seven existing shareholders in privately negotiated
transactions for an aggregate amount of $568,875.
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.
800 shares of restricted and legended Common Stock to one employee in lieu
of cash for services rendered valued at, in aggregate, $3,000.
5,537 shares of restricted and legended Common Stock to a shareholder for
rent and services valued in aggregate at $21,450.
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.
<PAGE>
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. None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunder duly authorized.
Bion Environmental Technologies, Inc.
/s/ M. Duane Stutzman
M. Duane Stutzman, Chief Financial
Officer
Dated: February 15, 1999
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