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BNET > SEC Filings for BNET > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for BION ENVIRONMENTAL TECHNOLOGIES INC

Form 10-Q for BION ENVIRONMENTAL TECHNOLOGIES INC


7-Nov-2012

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and Notes to Consolidated Financial Statements filed herein and with the Company's Form 10-K for the year ended June 30, 2012.

BUSINESS OVERVIEW

For several years, the Company focused on completion of the development of the next generation of its technology which provides a comprehensive environmental solution to a significant source of pollution in U.S. agriculture, large scale livestock facilities known as Confined Animal Feeding Operations ("CAFO's"). The re-development process is now substantially complete and the initial commercial system, based on our updated technology, has been constructed and placed in full commercial operation. Currently, Bion is focused on using applications of its patented waste management technology to pursue two main business opportunities:
1) installation of Bion systems to retrofit and environmentally remediate existing CAFOs in selected markets where: a) government policy supports such efforts (such as the Chesapeake Bay watershed and/or states and watersheds facing EPA 'total maximum daily load' ("TMDL') issues, and/or b) where CAFO's need our technology to obtain permits to expand or develop without negative environmental consequences; and 2) development of Integrated Projects which will include large CAFOs, such as large dairies, beef cattle feed lots and hog farms, with Bion waste treatment system modules processing the aggregate CAFO waste stream from the equivalent of 40,000 or more beef and/or dairy cows (or the waste stream equivalent of other species) while recovering cellulosic biomass (to be utilized for renewable energy production) and nutrient rich solids (that can potentially to be marketed as feed and/or fertilizer), integrated with an ethanol plant capable of producing 40 million gallons (or more) of ethanol per year and/or with CAFO end product processors. The Company has been pursuing these opportunities within the United States during the later stages of technology re-development and has recently begun activities to pursue such opportunities internationally.

The Company has commenced actively pursuing the opportunity presented by environmental retrofit and remediation of the waste streams of existing CAFOs. The first commercial activity in this area is an agreement with Kreider Farms ("KF") in Pennsylvania to design, construct and operate a Bion system to treat KF's dairy and poultry waste streams to reduce nutrient releases to the environment while generating marketable nutrient credits and renewable energy. On January 26, 2009 the Board of the Pennsylvania Infrastructure Investment Authority ("Pennvest") approved a $7.75 million loan to Bion PA 1, LLC ("PA-1"), a wholly-owned subsidiary of the Company, for the initial stage of Bion's Kreider Farms project. After substantial unanticipated delays, on August 12, 2010 the Company received a permit for construction of the Phase 1 Kreider system. Construction activities commenced during November 2010. The closing/settlement of the Pennvest Loan took place on November 3, 2010. Bion finished the construction of the Phase 1 Kreider System and entered a period of system 'operational shakedown' during May 2011. The Phase 1 Kreider System reached full, stabilized operation by the end of the 2012 fiscal year. During 2011 the Pennsylvania Department of Environmental Protection ("PADEP") re-certified the nutrient credits for this project. The PADEP issued final permits for the Kreider System (including the credit verification plan) on August 1, 2012 on which date the Company deemed that the Kreider System was 'placed in service'. As a result, Bion can now commence generating and verifying nutrient reduction credits for sale during the 2013 fiscal year while continuing to utilize the system to test improvements and add-ons. Additionally, the Kreider System has met the 'technology guaranty' standards which were incorporated in the Pennvest financing documents and the Pennvest Loan is now solely an obligation of PA-1.

The Company continues its development work related to the second phase of the Kreider project ('Phase 2 Kreider Project') which involves production of renewable energy from the waste of KF's poultry operations and the cellulosic solids recovered by the Phase 1 Kreider System. During May 2011 the PADEP certified the Phase 2 Kreider Project for 559,457 nutrient credits under the old EPA's Chesapeake Bay model. The Company anticipates that this project will be certified for between 1.5-2 million nutrient reduction credits pursuant to the recently amended EPA Chesapeake Bay model. The Company intends to have the Phase 2 Kreider Project operational during the 2013 calendar year, and hopes to enter into agreements related to sales of the credits for future delivery (under long term contracts) during the 2013 fiscal year subject to verification by the PADEP.

The Company has commenced activities related to marketing and potential use of its technology in relation to expansion and/or development of CAFO's in the Midwest (and elsewhere). Bion considers this to be a large potential market for the Company's growth over the next 18-36 months. It is anticipated that such activities will accelerate now that the Company has received final permits for the initial KF System (and as its credits are verified). Now that final permitting and verification plan approval has been completed at the Kreider System, the Company intends to seek to advance commercial sales in additional areas which face deadlines to meet EPA TMDL requirements.

Additionally, we believe that Bion's technology platform will allow the integration of large-scale CAFO's and their end-product users, renewable energy production from the CAFO waste stream, and on site utilization of the renewable energy generated and biofuel/ethanol production in an environmentally and economically sustainable manner while reducing the aggregate capital expense and operating costs and increasing revenue and profitability for the entire integrated complex ("Integrated Projects" or "Projects"). In the context of Integrated Projects, Bion's waste treatment process, in addition to mitigating polluting releases, will generate renewable energy from cellulosic portions of the CAFO waste stream which renewable energy can be utilized by integrated facilities including ethanol plants, CAFO end-product processors (including cheese, ice cream and/or bottling plants in the case of dairy CAFOs, and/or slaughter and/or processing facilities in the context of beef CAFOs) and/or other users as a replacement for fossil fuel usage. In addition an integrated ethanol plant's main by-product, called distillers grain, can be added to the feed of the animals in wet form, thereby lowering the capital expenditures, operating, marketing and shipping costs and energy usage of the ethanol production process. In such cases, the ethanol plant would act as a feed mill for the integrated CAFO, thereby reducing the CAFO's feeding costs as well as generating revenue to the ethanol plant, and would also provide a market for the renewable energy that Bion's System produces from the CAFO waste stream. And, in some cases the nutrient rich liquid effluent from the Bion system modules may be directly utilized for greenhouse and/or hydroponic agriculture. Accordingly, such Bion Integrated Projects can be denominated "closed loop". Bion, as developer of, and participant in, Integrated Projects, anticipates that it will share in the cost savings and the revenues generated from these activities.

Bion is currently working with local, state and federal officials with regard to regulatory and legislative initiatives, and with such parties and potential industry participants to evaluate sites in multiple states. The Company believes that its initial Integrated Project will most likely be located and developed (possibly in stages) in Pennsylvania and anticipates optioning land for such a Project during the current calendar year or soon thereafter. Note that locations in other states are also under review and the initial Integrated Project could be developed elsewhere. It is possible that the Company will develop one or more Integrated Projects as joint ventures specifically targeted to meet the growing animal protein demand outside of the United States (including without limitation Asia, Europe and/or the Middle East). Bion intends to choose sites for additional Projects during the calendar years 2013-2015 to create a pipeline of Projects. Management has a 5-year development target (through calendar year 2019) of approximately 10-24 Integrated Projects.
At the end of that period, Bion projects that 5 or more of these Integrated Projects will be in full operation in 3-5 states (or other locations), and the balance would be in various stages ranging from partial operation to early permitting stage. No Integrated Project has been developed to date.

The Company's audited financial statements for the years ended June 30, 2012 and 2011 have been prepared assuming the Company will continue as a going concern.
The Company has incurred net losses of approximately $6,465,000 and $6,998,000 during the years ended June 30, 2012 and 2011, respectively. At June 30, 2012, the Company had a working capital deficit and a stockholders' deficit of approximately $345,000 and $858,000, respectively. The Report of the Independent Registered Public Accounting Firm on the Company's consolidated financial statements as of and for the year ended June 30, 2012 includes a "going concern" explanatory paragraph which means that the accounting firm has expressed substantial doubt about the Company's ability to continue as a going concern. The Company has incurred net losses of approximately $2,453,000 and $3,839,000 for the three months ended September 30, 2012 and 2011, respectively.
At September 30, 2012 the Company has a working capital deficit and a stockholder's deficit of approximately $820,000 and $1,562,000, respectively.
Management's plans with respect to these matters are described in this section and in our consolidated financial statements (and notes thereto), and this material does not include any adjustments that might result from the outcome of this uncertainty. However, there is no guarantee that we will be able to raise sufficient funds or further capital for the operations planned in the near future.

CRITICAL ACCOUNTING POLICIES

Management has identified the following policies below as critical to our business and results of operations. Our reported results are impacted by the application of the following accounting policies, certain of which require management to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact quarterly or annual results of operations. For all of these policies, management cautions that future events rarely develop exactly as expected, and the best estimates routinely require adjustment. Specific risks associated with these critical accounting policies are described in the paragraphs below.

Revenue Recognition

While the Company has not recognized any operating revenues for the past two fiscal years, the Company anticipates that it will commence generation of revenues during the 2013 fiscal year. Revenues will be generated from the sale of nutrient reduction credits, product sales, technology license fees, annual waste treatment fees and/or direct ownership interests in Integrated Projects.
The Company expects to recognize revenue from the sale of nutrient credits and products when there is persuasive evidence that an arrangement exists, when title has passed, the price is fixed or determinable, and collection is reasonably assured. The Company expects that technology license fees will be generated from the licensing of Bion's systems. The Company anticipates that it will charge its customers a non-refundable up-front technology license fee, which will be recognized over the estimated life of the customer relationship.
In addition, any on-going technology license fees will be recognized as earned based upon the performance requirements of the agreement. Annual waste treatment fees will be recognized upon receipt. Revenues, if any, from the Company's interest in Projects will be recognized when the entity in which the Project has been developed recognizes such revenue.

Stock-based compensation

The Company follows the provisions of Accounting Standards Codification 718, which generally requires that share-based compensation transactions be accounted and recognized in the statement of income based upon their grant date fair values.

Derivative Financial Instruments:

Pursuant to Accounting Standards Codification ("ASC") Topic 815 "Derivatives and Hedging" ("Topic 815"), the Company reviews all financial instruments for the existence of features which may require fair value accounting and a related mark-to-market adjustment at each reporting period end. Once determined, the Company assesses these instruments as derivative liabilities. The fair value of these instruments is adjusted to reflect the fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives.

Warrants:

The Company has issued warrants to purchase common shares of the Company.
Warrants are valued using a fair value based method, whereby the fair value of the warrant is determined at the warrant issue date using a market-based option valuation model based on factors including an evaluation of the Company's value as of the date of the issuance, consideration of the Company's limited liquid resources and business prospects, the market price of the Company's stock in its mostly inactive public market and the historical valuations and purchases of the Company's warrants. When warrants are issued in combination with debt or equity securities, the warrants are valued and accounted for based on the relative fair value of the warrants in relation to the total value assigned to the debt or equity securities and warrants combined.

THREE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2011

General and Administrative

Total general and administrative expenses were $2,349,000 and $3,762,000 for the three months ended September 30, 2012 and 2011, respectively.

General and administrative expenses, excluding stock-based compensation charges of $1,407,000 and $3,001,000, were $942,000 and $761,000 for the three months ended September 30, 2012 and 2011, respectively, representing an $181,000 increase. The primary reason for the increase is due to the increase in depreciation expense from $4,000 for the three months ended September 30, 2011 to $166,000 for the three months ended September 30, 2012. Kreider 1 was placed in service on August 1, 2012 and its components are being depreciated over their estimated useful lives. Salaries and related payroll tax expenses increased to $300,000 for the three months ended September 30, 2012 from $230,000 for the three months ended September 30, 2011, primarily due to the fact that during the three months ended September 30, 2011, certain salaries were being capitalized as part of Kreider 1.

General and administrative stock-based compensation for the three months ended September 30, 2012 and 2011 consists of the following:

                                            Three months ended    Three months ended
                                            September 30, 2012    September 30, 2011
General and administrative:
 Fair value of stock/warrant bonuses
expensed                                         $  1,151,000          $ 1,035,000
 Fair value of stock issued to an employee             25,000               25,000
 Change in fair value from modification of
option terms                                                -               95,000
 Fair value of stock options expensed under
ASC 718                                               231,000            1,846,000
   Total                                           $1,407,000           $3,001,000

Stock-based compensation charges decreased to $1,407,000 from $3,001,000 for the three months ended September 30, 2012 and 2011, respectively. Compensation expense relating to stock options was $231,000 and $1,846,000 during the three months ended September 30, 2012 and 2011, respectively, and the decrease is due to more options being vested upon grant date during the three months ended September 30, 2011. The Company also recognized general and administrative non-cash compensation expenses of $1,151,000 and $1,035,000 during the three months ended September 30, 2012 and 2011, respectively, due to the granting and vesting of stock and warrant bonuses. The non-cash compensation expense related to stock and warrant bonuses for both periods were primarily in connection with the extension of employment agreements of two key officers. Compensation expense relating to the change in fair value from the modification of option terms was nil and $95,000 for the three months ended September 30, 2012 and 2011, respectively. During the three months ended September 30, 2011 the options of a key employee were modified.

Research and Development

Total research and development expenses were $49,000 and $70,000 for the three months ended September 30, 2012 and 2011, respectively.

Research and development expenses, excluding stock-based compensation charges of $9,000 and $41,000 were $40,000 and $29,000 for the three months ended September 30, 2012 and 2011, respectively. The primary reason for the increase is due to some pilot program testing related to the enhancement of the Company's technology.

Research and development stock-based compensation for the three months ended September 30, 2012 and 2011 consists of the following:

                                                    Three months
                                                       ended
                                                     September      Three months ended
                                                      30, 2012      September 30, 2011
Research and development:
 Fair value of stock options expensed under ASC 718  $  9,000             $  41,000
   Total                                             $  9,000             $  41,000

Stock-based compensation expense decreased from $41,000 for the three months ended September 30, 2011 to $9,000 for the three months ended September 30, 2012. The decrease is due to the signing in March 2011 of a new employment agreement with a research and development employee which vested stock options previously granted to the employee during May 2008, with issuance and vesting contingent upon the signing of the new employment agreement. There were no similar charges for the three months ended September 30, 2012.

Loss from Operations

As a result of the factors described above, the loss from operations was $2,398,000 and $3,833,000 for the three months ended September 30, 2012 and 2011, respectively.

Other Expense (Income)

Other expense was $55,000 and $6,000 for the three months ended September 30, 2012 and 2011, respectively. Interest expense increased to $55,000 for the three months ended September 30, 2012 from $7,000 for the three months ended September 30, 2011. Interest expense increased primarily due to $34,000 of Pennvest loan interest no longer being capitalized as of August 1, 2012 due to Kreider 1 being placed in service. Interest also increased due to higher deferred compensation balances owed to Brightcap and Mark Smith as of September 30, 2012.

Net Loss Attributable to the Noncontrolling Interest

The net loss attributable to the noncontrolling interest was $1,000 and $13,000 for the three months ended September 30, 2012 and 2011, respectively.

Net Loss Attributable to Bion's Stockholders

As a result of the factors described above, the net loss attributable to Bion's stockholders was $2,453,000 and $4,524,000 for the three months ended September 30, 2012 and 2011, respectively, representing a $0.20 decrease in the net loss per basic and diluted common share from $0.34 to $0.14. For the three months ended September 30, 2011, the Company recorded $549,000 as an inducement offered to its Series C Preferred stockholders to convert their Series C Preferred shares into the Company's restricted common shares at a conversion rate of $3.00 versus the original conversion rate of $4.00.

LIQUIDITY AND CAPITAL RESOURCES

The Company's financial statements for the three months ended September 30, 2012 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Report of our Independent Registered Public Accounting Firm on the Company's financial statements as of and for the year ended June 30, 2012 includes a "going concern" explanatory paragraph which means that the auditors stated that conditions exist that raise substantial doubt about the Company's ability to continue as a going concern.

Operating Activities

As of September 30, 2012, the Company had cash of approximately $99,000. During the three months ended September 30, 2012, net cash used in operating activities was $532,000, primarily consisting of cash operating expenses related to the KF Project that are no longer being capitalized. As previously noted, the Company is currently not generating revenue and accordingly has not generated cash flows from operations. The Company does not anticipate generating sufficient revenues to offset operating and capital costs for a minimum of two to five years. While there are no assurances that the Company will be successful in its efforts to develop and construct its Projects and market its Systems, it is certain that the Company will require significant funding from external sources. Given the unsettled state of the current credit and capital markets, there is no assurance the Company will be able to raise the funds it needs on reasonable terms.

Investing Activities

During the three months ended September 30, 2012 the Company used $64,000 for the final testing during the certification period of the KF Project, which has been capitalized as property and equipment.

Financing Activities

During the three months ended September 30, 2012, the Company received cash proceeds of $322,000 related to the sale of its restricted units, consisting of a common share and a warrant to purchase one half of a common share. The Company used $25,000 and $3,000 respectively, for the redemption of 250 Series B preferred shares and accrued dividends, respectively.

As of September 30, 2012 the Company has debt obligations consisting of deferred compensation of $1,129,000 and a loan payable of $7,754,000 (owed by PA-1). In addition, the Company entered into an 88-month operating lease for office space in New York City in August 2006, with an average monthly lease expense of $15,820. The Company has entered into sub-lease agreements with three separate parties which fully covers the lease expense. As of September 30, 2012, the Company has 14 months remaining on the lease.

Plan of Operations and Outlook

As of September 30, 2012, the Company had cash of approximately $99,000.

The Company continues to explore sources of additional financing to satisfy its current operating requirements as it is not currently generating any revenues. During fiscal year 2012 and for the three months ended September 30, 2012, the Company experienced greater difficulty in raising equity funding than in the prior year. As a result, the Company faced (and continues to face), significant cash flow management challenges due to severe working capital constraints. While the Company hopes to commence revenue generation during the 2013 fiscal year, it is not currently generating any revenues. To partially mitigate these working capital constraints, the Company's core senior management and several key employees have been deferring cash compensation. As of November 6, 2012 such deferrals totaled approximately $1,188,000 (including accrued interest). During the three months ended September 30, 2012 the Company has raised proceeds of approximately $322,500 through sale of its securities (Note 6 to Financial Statements) and anticipates raising additional funds from such sales. However, there is no guarantee that we will be able to raise sufficient funds or further capital for the operations planned in the near future.

The Company is not currently generating any revenues. The Company will need to obtain additional capital to fund its operations and technology development, to satisfy existing creditors, to develop Projects and to sustain operations at the KF facilities.

In January 2009, the Board of Pennsylvania Infrastructure Investment Authority approved a $7.75 million loan to the Company for the initial stage of the KF Project. The Company received a permit for construction of the KF Project on August 12, 2010. Initial construction commenced during November 2010. The settlement/closing of the Pennvest loan took place on November 3, 2010 and the Company received the initial drawdown/reimbursement from Pennvest on January 6, 2011. From January 1, 2011 through June 30, 2012, the Company has received reimbursements of $7,754,000 pursuant to the Pennvest Loan. The Company recently provided Pennvest with data demonstrating that the Kreider System has met the 'technology guaranty' standards which were incorporated in the Pennvest financing documents and, as a result, the Pennvest Loan is now solely an obligation of PA-1.

The Company anticipates that it will seek to raise from $7,500,000 to $50,000,000 or more (debt and equity) during the next twelve months, some of which may be in the context of joint ventures for the development of one or more Integrated Projects. There is no assurance, especially in the extremely unsettled capital markets that presently exist, that the Company will be able to obtain the funds that it needs to stay in business, finance its Projects and other activities, continue its technology development and/or to successfully develop its business.

There can be no assurance that funds required during the next twelve months or thereafter will be generated from operations or that those funds will be available from external sources such as debt or equity financings or other potential sources. The lack of additional capital resulting from the inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on its business. Further, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significantly dilutive effect on the Company's existing shareholders. All of these factors have been exacerbated by the extremely unsettled credit and capital markets presently existing.

Currently, Bion is focused on using applications of its patented waste management technology to pursue two main business opportunities: 1) development of Integrated Projects which will include large CAFOs, such as large dairies, beef cattle feed lots and hog farms, with Bion waste treatment System modules processing the aggregate CAFO waste stream from the equivalent of 40,000 or more beef and/or dairy cows (or the waste stream equivalent of other species) while producing solids to be utilized for renewable energy production (and potentially to be marketed as feed and/or fertilizer), integrated with an ethanol plant capable of producing 40 million gallons (or more) of ethanol per year, and/or integrated with CAFO end product processors, and 2) installation of Bion systems to retrofit and environmentally remediate existing CAFOs in selected markets where: a) government policy supports such efforts (such as the Chesapeake Bay watershed or, potentially, other areas seeking to meet EPA TMDL requirements) and/or b) where CAFO's need our technology to obtain permits to expand or develop without negative environmental consequences. The Company has been . . .

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