U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2017
☐o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission File No.000-19333
Bion Environmental Technologies, Inc.
(Name of registrant in its charter)
| Colorado | 84-1176672 | |
| (State or other jurisdiction of incorporation or formation) | (I.R.S. employer identification number) |
Box 566 / 1774 Summitview Way
Crestone, Colorado 81131
(Address of principal executive offices)
(212) 758-6622
(Registrant'sRegistrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Securities Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock | BNET | OTCQB |
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.
☒x Yes☐o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).☒x Yes☐o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large“large accelerated filer," "accelerated filer"” “accelerated filer,” “smaller reporting company,” and "smaller reporting company"“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | ||||
Non-accelerated filer | Smaller reporting company | ||||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).☐o Yes☒x No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.Not applicable.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of common stock, as of the latest practicable date. On February 1, 2018,January 23, 2020, there were 25,033,098
BION ENVIRONMENTAL TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
| PART I. FINANCIAL INFORMATION | Page | ||
| Item 1. | Financial Statements | 5 | |
| Consolidated financial statements (unaudited): | |||
| Balance sheets | 5 | ||
| Statements of operations | 6 | ||
| Statement of changes in equity (deficit) | 7 | ||
| Statements of cash flows | 8 | ||
| Notes to unaudited consolidated financial statements | 9-23 | ||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 24 | |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 38 | |
| Item 4. | Controls and Procedures | 38 | |
| PART II. OTHER INFORMATION | |||
| Item 1. | Legal Proceedings | 39 | |
| Item 1A. | Risk Factors | 39 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 39 | |
| Item 3. | Defaults Upon Senior Securities | 39 | |
| Item 4. | Mine Safety Disclosures | 39 | |
| Item 5. | Other Information | 39 | |
| Item 6. | Exhibits | 40 | |
| Signatures | 41 | ||
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve substantial risks and uncertainties. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "project," "predict," "plan," "believe" or "continue" or the negative thereof or variations thereon or similar terminology. The expectations reflected in forward-looking statements may prove to be incorrect.
| 3 |
BION ENVIRONMENTAL TECHNOLOGIES,
INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
| December 31, | June 30, | |||||||
| 2017 | 2017 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 28,436 | $ | 72,932 | ||||
| Prepaid expenses | 735 | 6,426 | ||||||
| Deposits and other receivables | 1,000 | 1,980 | ||||||
| Total current assets | 30,171 | 81,338 | ||||||
| Other receivables | 2,577 | - | ||||||
| Property and equipment, net (Note 3) | 2,320 | 3,192 | ||||||
| Total assets | $ | 35,068 | $ | 84,530 | ||||
| LIABILITIES AND EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 933,943 | $ | 865,841 | ||||
| Series B Redeemable Convertible Preferred stock, $0.01 par value, | ||||||||
| 50,000 shares authorized; 200 shares issued and outstanding, | ||||||||
| liquidation preference of $33,000 and $32,000, respectively (Note 8) | 30,400 | 29,400 | ||||||
| Loans payable - affiliates (Note 4) | 30,500 | - | ||||||
| Deferred compensation (Note 5) | 141,284 | 2,107,262 | ||||||
| Convertible notes payable - affiliates (Note 7) | - | 88,927 | ||||||
| Loan payable and accrued interest (Note 6) | 8,912,653 | 8,796,322 | ||||||
| Total current liabilities | 10,048,780 | 11,887,752 | ||||||
| Convertible notes payable - affiliates (Note 7) | 3,467,883 | 3,316,060 | ||||||
| Total liabilities | 13,516,663 | 15,203,812 | ||||||
| Deficit: | ||||||||
| Bion's stockholders' equity (deficit): | ||||||||
| Series A Preferred stock, $0.01 par value, 50,000 shares authorized, | ||||||||
| no shares issued and outstanding | - | - | ||||||
| Series C Convertible Preferred stock, $0.01 par value, | ||||||||
| 60,000 shares authorized; no shares issued and outstanding | - | - | ||||||
| Common stock, no par value, 100,000,000 shares authorized, 25,011,939 | ||||||||
| and 24,748,213 shares issued, respectively; 24,307,630 | ||||||||
| and 24,043,904 shares outstanding, respectively | - | - | ||||||
| Additional paid-in capital | 106,353,276 | 103,540,352 | ||||||
| Subscription receivable - affiliates (Note 8) | (174,650 | ) | (40,000 | ) | ||||
| Accumulated deficit | (119,716,539 | ) | (118,676,966 | ) | ||||
| Total Bion's stockholders' deficit | (13,537,913 | ) | (15,176,614 | ) | ||||
| Noncontrolling interest | 56,318 | 57,332 | ||||||
| Total deficit | (13,481,595 | ) | (15,119,282 | ) | ||||
| Total liabilities and deficit | $ | 35,068 | $ | 84,530 | ||||
| December 31, | June 30, | |||||||
| 2019 | 2019 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 469,164 | $ | 41,335 | ||||
| Prepaid expenses | — | 8,005 | ||||||
| Deposits and other receivables | 1,000 | 1,000 | ||||||
| Total current assets | 470,164 | 50,340 | ||||||
| Property and equipment, net (Note 3) | 1,922 | 2,616 | ||||||
| Total assets | $ | 472,086 | $ | 52,956 | ||||
| LIABILITIES AND EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 701,299 | $ | 715,554 | ||||
| Series B Redeemable Convertible Preferred stock, $0.01 par value, 50,000 shares authorized; 200 shares issued and outstanding, liquidation preference of $37,000 and $36,000, respectively (Note 8) | 34,400 | 33,400 | ||||||
| Deferred compensation (Note 5) | 537,119 | 874,162 | ||||||
| Loan payable and accrued interest (Note 6) | 9,444,576 | 9,303,270 | ||||||
| Total current liabilities | 10,717,394 | 10,926,386 | ||||||
| Convertible notes payable - affiliates (Note 7) | 4,523,210 | 3,801,168 | ||||||
| Total liabilities | 15,240,604 | 14,727,554 | ||||||
| Deficit: | ||||||||
| Bion's stockholders' equity (deficit): | ||||||||
| Series A Preferred stock, $0.01 par value, 50,000 shares authorized, no shares issued and outstanding | — | — | ||||||
| Series C Convertible Preferred stock, $0.01 par value, 60,000 shares authorized; no shares issued and outstanding | — | — | ||||||
| Common stock, no par value, 100,000,000 shares authorized, 30,195,005 and 28,068,688 shares issued, respectively; 29,490,696 and 27,364,379 shares outstanding, respectively | — | — | ||||||
| Additional paid-in capital | 111,239,449 | 110,126,802 | ||||||
| Subscription receivable - affiliates (Note 9) | (504,650 | ) | (504,650 | ) | ||||
| Accumulated deficit | (125,551,452 | ) | (124,346,158 | ) | ||||
| (14,816,653 | ) | (14,724,006 | ) | |||||
| Noncontrolling interest | 48,135 | 49,408 | ||||||
| Total deficit | (14,768,518 | ) | (14,674,598 | ) | ||||
| Total liabilities and deficit | $ | 472,086 | $ | 52,956 | ||||
See notes to consolidated financial statements
| 4 |
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 20172019 AND 2016
(UNAUDITED)
| Three months ended | Six months ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenue | $ | - | $ | - | $ | - | $ | - | ||||||||
| Operating expenses: | ||||||||||||||||
General and administrative (including stock-based compensation (Note 8)) | 808,576 | 526,697 | 1,120,693 | 951,388 | ||||||||||||
| Depreciation | 436 | 503 | 872 | 1,005 | ||||||||||||
Research and development (including stock-based compensation (Note 8)) | 338,755 | 126,082 | 445,501 | 238,325 | ||||||||||||
| Total operating expenses | 1,147,767 | 653,282 | 1,567,066 | 1,190,718 | ||||||||||||
| Loss from operations | (1,147,767 | ) | (653,282 | ) | (1,567,066 | ) | (1,190,718 | ) | ||||||||
| Other (income) expense: | ||||||||||||||||
| Gain on extinguishment of liabilities (Note 5) | (718,580 | ) | - | (718,580 | ) | - | ||||||||||
| Interest expense, net | 93,662 | 94,565 | 192,101 | 187,329 | ||||||||||||
| Total other (income) expense | (624,918 | ) | 94,565 | (526,479 | ) | 187,329 | ||||||||||
| Net loss | (522,849 | ) | (747,847 | ) | (1,040,587 | ) | (1,378,047 | ) | ||||||||
| Net loss attributable to the noncontrolling interest | 507 | 862 | 1,014 | 1,396 | ||||||||||||
| Net loss applicable to Bion's common stockholders | $ | (522,342 | ) | $ | (746,985 | ) | $ | (1,039,573 | ) | $ | (1,376,651 | ) | ||||
| Net loss applicable to Bion's common stockholders | ||||||||||||||||
| Per basic and diluted common share | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.04 | ) | $ | (0.06 | ) | ||||
| Weighted-average number of common shares outstanding: | ||||||||||||||||
| Basic and diluted | 24,233,123 | 23,328,499 | 24,150,108 | 23,436,311 | ||||||||||||
| Three months ended | Three months ended | |||||||||||||||||
| December 31, | December 31, | |||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||||
| Revenue | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Operating expenses: | ||||||||||||||||||
| General and administrative (including stock-based compensation (Note 8)) | 387,526 | 289,599 | 707,754 | 967,489 | ||||||||||||||
| Depreciation | 347 | 259 | 694 | 695 | ||||||||||||||
| Research and development (including stock-based compensation (Note 8)) | 114,454 | 114,192 | 237,779 | 283,913 | ||||||||||||||
| Total operating expenses | 502,327 | 404,050 | 946,227 | 1,252,097 | ||||||||||||||
| Loss from operations | (502,327 | ) | (404,050 | ) | (946,227 | ) | (1,252,097 | ) | ||||||||||
| Other expense: | ||||||||||||||||||
| Interest expense | 142,738 | 97,304 | 260,340 | 189,800 | ||||||||||||||
| Total other expense | 142,738 | 97,304 | 260,340 | 189,800 | ||||||||||||||
| Net loss | (645,065 | ) | (501,354 | ) | (1,206,567 | ) | (1,441,897 | ) | ||||||||||
| Net loss attributable to the noncontrolling interest | 768 | 523 | 1,273 | 3,692 | ||||||||||||||
| Net loss applicable to Bion's common stockholders | $ | (644,297 | ) | $ | (500,831 | ) | $ | (1,205,294 | ) | $ | (1,438,205 | ) | ||||||
| Net loss applicable to Bion's common stockholders per basic and diluted common share | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.06 | ) | ||||||
| Weighted-average number of common shares outstanding: | ||||||||||||||||||
| Basic and diluted | 28,804,007 | 26,382,778 | 28,135,409 | 26,021,254 | ||||||||||||||
See notes to consolidated financial statements
| 5 |
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ' EQUITY (DEFICIT)
SIX MONTHS ENDED DECEMBER 31, 20172019 AND 2018
(UNAUDITED)
| Six months ended December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||
| Bion's Shareholders' | |||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Series C Preferred Stock | Common Stock | Additional | Subscription Rec- | Accumulated | Noncontrolling | Total | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | paid-in capital | -eivables for Shares | deficit | interest | equity/(deficit) | |||||||||||||||||||||||||||||||||
| Balances, July 1, 2018 | — | — | — | — | 25,939,892 | — | 108,117,330 | (174,650 | ) | (121,691,956 | ) | 54,338 | (13,694,938) | ||||||||||||||||||||||||||||||
| Issuance of common stock for services | — | — | — | — | 25,718 | — | 13,904 | — | — | — | 13,904 | ||||||||||||||||||||||||||||||||
| Vesting of options for services | — | — | — | — | — | — | 118,000 | — | — | — | 118,000 | ||||||||||||||||||||||||||||||||
| Modification of options | — | — | — | — | — | — | 222,300 | — | — | — | 222,300 | ||||||||||||||||||||||||||||||||
| Sale of units | — | — | — | — | 954,733 | — | 477,365 | — | — | — | 477,365 | ||||||||||||||||||||||||||||||||
| Commissions on sale of units | — | — | — | — | 1,028 | — | (44,436 | ) | — | — | — | (44,436) | |||||||||||||||||||||||||||||||
| Modification of warrants | — | — | — | — | — | — | 166,776 | — | — | — | 166,776 | ||||||||||||||||||||||||||||||||
| Issuance of warrants | — | — | — | — | — | — | 336,250 | (330,000 | ) | — | — | 6,250 | |||||||||||||||||||||||||||||||
| Conversion of debt and liabilities | — | — | — | — | 200,000 | — | 100,000 | — | — | — | 100,000 | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | (1,438,205 | ) | (3,692 | ) | (1,441,897) | |||||||||||||||||||||||||||||||
| Balances, December 31, 2018 | — | $ | — | — | $ | — | 27,121,371 | $ | — | $ | 109,507,489 | $ | (504,650 | ) | $ | (123,130,161 | ) | $ | 50,646 | $(14,076,676) | |||||||||||||||||||||||
| 6 |
| Bion's Shareholders' | ||||||||||||||||||||||||||||||||||||
| Series C Preferred Stock | Common Stock | Additional | Subscription Receivables for | Accumulated | Noncontrolling | Total equity/ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | paid-in capital | Shares | deficit | interest | (deficit) | ||||||||||||||||||||||||||||
| Balances, July 1, 2017 | - | $ | - | 24,748,213 | $ | - | $ | 103,540,352 | $ | (40,000 | ) | $ | (118,676,966 | ) | $ | 57,332 | $ | (15,119,282 | ) | |||||||||||||||||
| Issuance of common stock for services | - | - | 14,615 | - | 11,679 | - | - | - | 11,679 | |||||||||||||||||||||||||||
| Vesting of options and stock bonuses for services | - | - | - | - | 121,971 | - | - | - | 121,971 | |||||||||||||||||||||||||||
| Modification of options | - | - | - | - | 349,656 | - | - | - | 349,656 | |||||||||||||||||||||||||||
| Sale of units | - | - | 249,111 | - | 186,832 | - | - | - | 186,832 | |||||||||||||||||||||||||||
| Commissions on sale of units | - | - | - | - | (13,508 | ) | - | - | - | (13,508 | ) | |||||||||||||||||||||||||
| Modification of warrants | - | - | - | - | 289,542 | - | - | - | 289,542 | |||||||||||||||||||||||||||
| Issuance of warrants | - | - | - | - | 181,500 | (134,650 | ) | - | - | 46,850 | ||||||||||||||||||||||||||
| Extinguishment of deferred compensation – related parties | - | - | - | - | 1,685,252 | - | - | - | 1,685,252 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (1,039,573 | ) | (1,014 | ) | (1,040,587 | ) | ||||||||||||||||||||||||
| Balances, December 31, 2017 | - | $ | - | 25,011,939 | $ | - | $ | 106,353,276 | $ | (174,650 | ) | $ | (119,716,539 | ) | $ | 56,318 | $ | (13,481,595 | ) | |||||||||||||||||
| Six months ended December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| Bion's Shareholders' | ||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Series C Preferred Stock | Common Stock | Additional | Subscription Rec- | Accumulated | Noncontrolling | Total | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | paid-in capital | -eivables for Shares | deficit | interest | equity/(deficit) | ||||||||||||||||||||||||||||||||||
| Balances, July 1, 2019 | — | $ | — | — | $ | — | 28,068,688 | $ | — | $ | 110,126,802 | $ | (504,650 | ) | $ | (124,346,158 | ) | $ | 49,408 | $ | (14,674,598 | ) | ||||||||||||||||||||||
| Issuance of common stock for services | — | — | — | — | 29,000 | — | 16,350 | — | — | — | 16,350 | |||||||||||||||||||||||||||||||||
| Vesting of options for services | — | — | — | — | — | — | 99,500 | — | — | — | 99,500 | |||||||||||||||||||||||||||||||||
| Sale of units | — | — | — | — | 1,954,001 | — | 977,000 | — | — | — | 977,000 | |||||||||||||||||||||||||||||||||
| Commissions on sale of units | — | — | — | — | — | — | (87,200 | ) | — | — | — | (87,200 | ) | |||||||||||||||||||||||||||||||
| Modification of warrants | — | — | — | — | — | — | 35,339 | — | — | — | 35,339 | |||||||||||||||||||||||||||||||||
| Conversion of debt and liabilities | — | — | — | — | 143,316 | — | 71,658 | — | — | — | 71,658 | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | (1,205,294 | ) | (1,273 | ) | (1,206,567 | ) | ||||||||||||||||||||||||||||||
| Balances, December 31, 2019 | — | $ | — | — | $ | — | 30,195,005 | $ | — | $ | 111,239,449 | $ | (504,650 | ) | $ | (125,551,452 | ) | $ | 48,135 | $ | (14,768,518 | ) | ||||||||||||||||||||||
See notes to consolidated financial statements
| 7 |
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 20172019 AND 2016
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (1,040,587 | ) | $ | (1,378,047 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation expense | 872 | 1,005 | ||||||
| Accrued interest on loan payable, deferred compensation and other | 209,684 | 204,917 | ||||||
| Stock-based compensation | 819,698 | 346,828 | ||||||
| Gain on extinguishment of liabilities | (718,580 | ) | - | |||||
| Decrease in prepaid expenses | 5,691 | 7,039 | ||||||
| Increase in accounts payable and accrued expenses | 68,102 | 98,049 | ||||||
| Increase in deferred compensation | 406,800 | 423,800 | ||||||
| Net cash used in operating activities | (248,320 | ) | (296,409 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Decrease in subscription receivable | - | 7,500 | ||||||
| Proceeds from sale of common stock | - | 22,850 | ||||||
| Proceeds from sale of units | 186,832 | 105,000 | ||||||
| Commissions on sale of units | (13,508 | ) | (1,500 | ) | ||||
| Proceeds from loans payable - affiliates | 30,500 | - | ||||||
| Net cash provided by financing activities | 203,824 | 133,850 | ||||||
| Net decrease in cash | (44,496 | ) | (162,559 | ) | ||||
| Cash at beginning of period | 72,932 | 170,194 | ||||||
| Cash at end of period | $ | 28,436 | $ | 7,635 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | - | $ | - | ||||
| Non-cash investing and financing transactions: | ||||||||
| Issuance of common stock to satisfy deferred compensation and accounts payable | $ | - | $ | 6,008 | ||||
| Purchase of warrants for subscription receivable - affiliates | $ | 134,650 | $ | 40,000 | ||||
| Forgiveness of deferred compensation – related parties | $ | 1,685,252 | $ | - | ||||
(UNAUDITED)
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (1,206,567 | ) | $ | (1,441,897 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation expense | 694 | 695 | ||||||
| Accrued interest on loan payable, deferred compensation and other | 278,268 | 203,632 | ||||||
| Stock-based compensation | 115,850 | 527,230 | ||||||
| Decrease in prepaid expenses | 8,005 | 5,866 | ||||||
| Increase (decrease) in accounts payable and accrued expenses | 38,575 | (62,989 | ) | |||||
| Increase in deferred compensation | 288,204 | 355,800 | ||||||
| Net cash used in operating activities | (476,971 | ) | (411,663 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | — | (958 | ) | |||||
| Net cash used in investing activities | — | (958 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from sale of units | 977,000 | 477,365 | ||||||
| Commissions on sale of units | (87,200 | ) | (44,436 | ) | ||||
| Repayment of loans payable - affiliates | (20,000 | ) | — | |||||
| Proceeds from loans payable - affiliates | 35,000 | — | ||||||
| Net cash provided by financing activities | 904,800 | 432,929 | ||||||
| Net increase in cash | 427,829 | 20,308 | ||||||
| Cash at beginning of period | 41,335 | 22,013 | ||||||
| Cash at end of period | $ | 469,164 | $ | 42,321 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | — | $ | — | ||||
| Non-cash investing and financing transactions: | ||||||||
| Shares issued for warrant exercise commissions | $ | — | $ | 514 | ||||
| Purchase of warrants for subscription receivable - affiliates | $ | — | $ | 330,000 | ||||
| Conversion of debt and liabilities | $ | 71,658 | $ | 100,000 | ||||
| Warrants issued for unit commissions | $ | — | $ | 4,850 | ||||
| Conversion of deferred compensation into notes payable - related party | $ | 636,081 | $ | — | ||||
See notes to consolidated financial statements
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BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 20172019 AND 2016
1.
ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN ANDOrganization and nature of business:
Bion Environmental Technologies, Inc. ("Bion"(“Bion” or "We"“We” or the "Company"“Company”) was incorporated in 1987 in the State of Colorado and has developed and continues to develop patented and proprietary technology and business models that provide comprehensive environmental solutions to a significant source of pollution in United States agriculture, large scale livestock facilities known as Concentrated Animal Feeding Operations ("CAFO's"(“CAFO’s”). Application of our technology and technology platform can simultaneously remediate environmental problems and improve operational/resource efficiencies by recovering value from the CAFOs'CAFOs’ waste stream that has traditionally been wasted or underutilized, including renewable energy, nutrients (nitrogen and phosphorus)--- in organic and conventional form-- and clean water. Bion'sBion’s technologies (and applications related thereto) produce substantial reductions of nutrient releases (primarily nitrogen and phosphorus) to both water and air (including ammonia, which is subsequently re-deposited to the ground) from livestock waste streams based upon our operations and research to date (and third partythird-party peer review thereof). Our technology simultaneously enables the documentation of the remediation efforts thereby providing the basis for product branding which addresses consumer concerns regarding sustainability and food safety. We are continually involved in research and development to upgrade and improve our technology and technology applications, including integration with third party technology. Bion provides
Additionally, Bion’s patented and propriety technology can provide comprehensive and cost-effective treatment of livestock waste onsite (and/or at nearby locations), while it is still concentrated and before it contaminates air, soil, groundwater aquifers and/or downstream waters, and, in certain configurations, can be optimized to maximize recovery of marketable nutrients for potential use as fertilizer (organic and/or inorganic) and/or feed additives plus renewable energy (and related environmental credits).
From 2014 through the current 20182020 fiscal year, the Company has focused its research and development on augmenting the basic 'separate‘separate and aggregate'aggregate’ approach of its technology platform to provide additional flexibility and to increase recovery of marketable nutrient by-products (in organic and non-organic forms) and renewable energy production (either/both biogas and/or renewable electricity), thereby increasing potential related revenue streams and reducing dependence of its future projects on the monetization of nutrient reductions (which still remain a veryan important part of project revenue streams). Bion has worked on development of its third generation technology ("(“3G Tech"Tech”) which is designed to: a) generate significantly greater value from the nutrients and renewable energy recovered from the waste stream, b) treat dry (poultry) waste streams as well as wet waste streams (dairy/beef cattle/swine), and while c) while maintaining or improving environmental performance. This research and development effort also involves ongoing review of potential "add-ons"“add-ons” and applications to our technology platform for use in different regulatory and/or climate environments. These research and development activities have targeted completion of development of the next generation of Bion'sBion’s technology and technology platform. We believe such activities will continue at least through the 20182020 fiscal year (and likely longer), subject to availability of adequate financing for the Company'sCompany’s operations, of which there is no assurance. Such activities may include design and construction of a small,an initial, commercial-scale module utilizing our 3G Tech installation to assist in optimization efforts before construction of the full Kreider 2 project (see below).
The Company’s efforts have also focused on usingdevelopment of business models which can facilitate the implementation of its technologies and technology platform in manners which can increase decrease the ‘environmental footprint’ of enterprises which implement our technology while increasing the sustainability and potential economic returns.
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For the past decade, Bion has been directed toward creating applications of itsour patented and proprietary waste management technologies and technology platform to pursue JVs in three main business opportunities: 1) installation of Bion systems ( some of which may generate verified nutrient credits and revenues from the production of renewable energy and byproducts) to retrofit and environmentally remediate existing CAFOs ("Retrofits") in selected markets where:
| 1) | Installation of Bion systems to retrofit and environmentally remediate existing large CAFOs (“Retrofits” and “Retrofit Projects”) in selected markets where: |
a) government policy supports such efforts (such as the Chesapeake Bay watershed, some Great Lakes Basin states, and/or other states and watersheds facing Environmental Protection Agency ("EPA") 'totalEPA ‘total maximum daily load' ("TMDL"load’ (“TMDL”) issues,issues), and/or
b) where CAFO'sCAFO’s need our technology to obtain permits to expand or develop without negative environmental consequences;consequences.
| 2) | Development of new state-of-the-art large scale waste treatment facilities (now utilizing the Company’s 3G Tech) which may be developed in conjunction with new CAFOs in strategic locations that were previously impracticable due to environmental impacts or to treat the waste streams from one or more existing large livestock facilities (“Projects”). Some of these Projects may be either a) Integrated Projects as described below, b) ‘central processing facilities’ which receive the waste from multiple livestock facilities, c) Retrofit Projects or d) hybrids with elements of each of these types. Each version will be able to realize revenue from multiple revenue streams potentially generated by our 3G Tech. |
| 3) | Licensing and/or joint venturing of Bion’s technology and applications (primarily) outside North America. |
In both categories 1) and 2) developmentabove, the Company intends to directly participate (whether by joint venture agreement or other contractual arrangements) in the revenues of new state-of-the-art large-scale waste treatment facilities in conjunction with large CAFO's in strategic locations ("Projects") ( some of these may be Integrated Projects as described below) with multiple revenue streams,the Retrofits and 3) licensing and/or joint venturing of Bion's technology and applications (primarily) outside North America. Projects.
The opportunities described at 1) and 2) above each require substantial political and regulatory (federal, state and local) efforts on the part of the Company and a substantial part of Bion'sBion’s efforts are focused on such political and regulatory matters. Bion currently intends to pursue the international opportunities primarily through the use of consultants with existing relationships in target locations. The most intensecountries. At this time, our primary focus is currently on category 2) above using our 3G Tech to develop new (or expanded) large-scale Projects with strategic partners (including the requirementsKreider 2 Project) on a joint venture (or other participating contractual form) basis. Bion’s business model opens up the opportunity for JV’s in various forms based upon the clean-uprevenue generated by our 3G Tech platform from nutrient reductions, fertilizer co-products and renewable natural gas (which revenue streams will be secured through long term take-off agreements for each of these co-products) providing initial support for financing of required capital expenditures (whether equity or debt).We anticipate that these revenue streams will be supplemented by revenue realized from long-term premium pricing resulting from the Chesapeake Bay faced bysustainable branding opportunity. We believe that the Commonwealth of Pennsylvania andbranding opportunity may provide the potential use of Bion's technology and technology platform on CAFOs to remediate ammonia release (and re-depositionsingle largest contribution to the ground and water) and as an alternative to what the Company believes is far more expensive nutrient removal downstream in storm water and other projects.economic opportunity over time.
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During 2008 the Company commenced actively pursuing the opportunity presented by environmental retrofit and remediation of the waste streams of existing CAFOs which effort has met with very limited success to date. The first commercial activity in this area is represented by our agreement with Kreider Farms ("KF"(“KF”), pursuant to which the Kreider 1 system to treat KF's dairy waste streams to reduce nutrient releases to the environment while generating marketable nutrient credits and renewable energy was designed, constructed and entered full-scale operation during 2011. On January 26, 2009 the Board of the Pennsylvania Infrastructure Investment Authority ("Pennvest"(“Pennvest”) approved a $7.75 million loan to Bion PA 1, LLC ("PA1"(“PA1”), a wholly-owned subsidiary of the Company, for the initial Kreider Farms project ("(“Kreider 1 System"System”). After substantial unanticipated delays, on August 12, 2010 PA1 received a permit for construction of the Kreider 1 System. Construction activities commenced during November 2010. The closing/settlement of the Pennvest Loan took place on November 3, 2010. PA1 finished the construction of the Kreider 1 System and entered a period of system 'operational shakedown' during May 2011. The Kreider 1 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 1 System (including the credit verification plan) on August 1, 2012 on which date the Company deemed that the Kreider 1 System was 'placed in service'. As a result, PA1 commenced generating nutrient reduction credits for potential sale while continuing to utilize the Kreider 1 System to test improvements and add-ons. However, to date liquidity in the Pennsylvania nutrient credit market has been slow to develop significant breadth and depth, which limited liquidity/depth has negatively impacted Bion's business plans and has resulted in challenges to monetizing the nutrient reductions created by PA1's existing Kreider 1 System and Bion's other proposed projects. These difficulties have prevented PA1 from generating any material revenues from the Kreider 1 System to date and raise significant questions as to when, if ever, PA1 will be able to generate such revenues from the Kreider 1 System. PA1 has had sporadic discussions/negotiations with Pennvest related to forbearance and/or re-structuring its obligations pursuant to the Pennvest Loan for more than fourfive years. In the context of such discussions/negotiations, PA1 elected not to make interest payments to Pennvest on the Pennvest Loan since January 2013. Additionally, the Company has not made any principal payments, which were to begin in fiscal 2013, and, therefore, the Company has classified the Pennvest Loan as a current liability as of December 31, 2017.2019. Due to the failure of the Pennsylvania nutrient reduction credit market to develop, the Company determined (on three separate occasions) that the carrying amount of the property and equipment related to the Kreider 1 System exceeded its estimated future undiscounted cash flows based on certain assumptions regarding timing, level and probability of revenues from sales of nutrient reduction credits. Therefore, PA1 and the Company recorded impairments related to the value of the Kreider 1 assets totaling $3,750,000 through June 30, 2015. During the 2016 fiscal year, PA1 and the Company recorded an additional impairment of $1,684,562 to the value of the Kreider 1 assets which reduced the value on the Company'sCompany’s books to zero. This impairment reflects management'smanagement’s judgment that the salvage value of the Kreider 1 assets roughly equals PA1'sPA1’s contractual obligations related to the Kreider 1 System, including expenses related to decommissioning of the Kreider 1 System,, costs associated with needed capital upgrade expenses, and re-certification/ permitting amendments.
On September 25, 2014, Pennvest exercised its right to declare the Pennvest Loan in default and accelerated the Pennvest Loan and demanded that PA1 pay $8,137,117 (principal, interest plus late charges) on or before October 24, 2014. PA1 did not make the payment and does not have the resources to make the payments demanded by Pennvest. PA1 has commenced discussions and negotiations with Pennvest concerning this matter but Pennvest has rejected PA1'sPA1’s proposal made during the fall of 2014. No formal proposals are presently under consideration and only sporadic communication has taken place regarding the matters involved over the last 24 months.5 years. It is not possible at this date to predict the outcome of such this matter, but the Company believes that a loan modification agreement (coupled with an agreement regarding an update and re-start of full operations of the Kreider 1 System) may be reached in the future if/when a more robust market for nutrient reductions develops in Pennsylvania, of which there is no assurance. PA1 and Bion will continue to evaluate various options with regard to Kreider 1 over the next 30-180180 days.
During August 2012, the Company provided Pennvest (and the PADEP) with data demonstrating that the Kreider 1 System met the 'technology guaranty'‘technology guaranty’ standards which were incorporated in the Pennvest financing documents and, as a result, the Pennvest Loan has been (and is now) solely an obligation of PA1 since that date.
The economics (potential revenues, profitability and continued operation) of the Kreider 1 System are based almost entirely on the long termlong-term sale of nutrient (nitrogen and/or phosphorus) reduction credits to meet the requirements of the Chesapeake Bay environmental clean-up.
On May 5, 2016, Bion PA2 LLC ("PA2"(“PA2”) executed a stand-alone joint venture agreement with Kreider Farms covering all matters related to development and operation of a system to treat the waste streams from Kreider'sKreider’s poultry facilities ("(“Kreider 2"2”).
The Kreider projects are owned and operated by Bion through separate subsidiaries, in which Kreider has the option to acquire a noncontrolling interest. S
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Kreider Farms – 3G Tech Project
Bion is completing an envelope of policy change and technology pilots that will allow it to move forward with a commercial large scale 3G Tech project at Kreider Farms. Having recently received a Notice of Allowance of the initial 3G Tech patent (and subsequent filings and approvals of related additional patent applications/continuations), Bion is focused on two key tasks during the first half of the 2020 calendar year that will ‘complete the envelope’ and allow Bion to launch active development of the Kreider 2 (not yet constructed) (and most futurepoultry project (and/or other Projects) later in 2020:
1. Support for adoption of PA SB 575 (successor to SB 799): This will be developed using variations on Bion'screate a competitively-bid market for nutrient reductions/Credits that we believe will provide support for project financing for Kreider 2 prior to development of markets for the coproducts from Kreider 2 are established.
2. Installation of a small-scale 3G Tech ammonia recovery system to recover substantial marketable nutrients and renewable energyproduce ammonium bicarbonate to supplement its revenue from nutrient reductions. be used to make application to OMRI for organic certification (and possibly for grower trials).
The Company believes that the proceeds from multiple byproduct streams including i) fertilizer (organic and non-organic) and/or feed additives and ii) renewable energy (and related credits) can be reasonably projected to generate, in aggregate, revenue streams that, in certain circumstances, may exceed two-thirds of total revenues from such Project(s) when aggregated with license fees related to a 'sustainable brand' resulting from implementation of Bion's technology. To date the market for long-term nutrient reduction credits in Pennsylvania has been very slow to develop and the Company's activities have been negatively affected by the lack of such development.
Bion has a long-standing relationship with Kreider Farms including a 2016 joint venture agreement related to this facility. Kreider has already made a significant investment in upgrading its poultry facilities to maximize the treatment and recovery efficiencies that can be achieved with Bion’s technology. We are cautiously optimistic that once PA SB575 (the recently introduced successor to SB799) will be passed during the current fiscal year, a market will be put in place for long-term commercial sale of the wastes from Kreider's poultry operations. nutrient reduction credits produced at Kreider 2. Bion anticipates that it may require up to 6 months after SB575 becomes law to develop the rules/regulations related to the competitive bidding program. If the competitive bidding program is implemented, we intend to arrange project financing for the Kreider 2 Project during 2020.
Assuming there are positive developments related to the market for nutrient reductions in Pennsylvania, the Company intends to pursue development, design and construction of the Kreider 2 poultry waste/renewable energy project with a goal of achieving operational status for its initial modules during fiscal year 2019.late 2020 or the first half of 2021. However, as discussed above, this Project faces challenges related to the current limits of the existing nutrient reduction market and funding of technology-based, verifiable agricultural nutrient reductions which are anticipated to constitute the largest share of its revenues.
Bion’s current long-term goal is to acquire or develop, or have in a development pipeline, 6 to 12 Projects over the next 36 to 48 months.
A significant portion of Bion'sBion’s activities concern efforts with private and public stakeholders (at local and state level) in Pennsylvania (and other Chesapeake Bay and Midwest and Great Lakes states) and at the federal level EPA and the Department of Agriculture ("USDA"(“USDA”) (and other executive departments) and Congress) to establish appropriate public policies which will create regulations and funding mechanisms that foster installation of the low cost environmental solutions that Bion (and others) can provide through clean-up of agricultural waste streams. The Company anticipates that such efforts will continue in Pennsylvania and other Chesapeake Bay watershed states throughout the next 12 months and in various additional states thereafter.
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Going concern and management'smanagement’s plans:
The consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has not generated significant revenues and has incurred net losses (including significant non-cash expenses) of approximately $2,463,000$2,659,000 and $4,522,000$3,018,000 during the years ended June 30, 20172019 and 2016,2018, respectively, and a net loss of approximately $1,041,000$1,207,000 during the six months ended December 31, 2017.2019. At December 31, 2017,2019, the Company has a working capital deficit and a stockholders'stockholders’ deficit of approximately $10,019,000$10,247,000 and $13,538,000,$14,817,000, respectively. These factors raise substantial doubt about the Company'sCompany’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. The following paragraphs describe management'smanagement’s plans with regard to these conditions.
The Company continues to explore sources of additional financing (including potential agreements with strategic partners – both financial and ag-industry) to satisfy its current and future operating and capital expenditure requirements as it is not currently generating any significant revenues.
During the years ended June 30, 20172019 and 2016,2018, the Company received total proceeds of approximately $452,000$897,000 and $761,000$418,000 from the sale of its debt and equity securities. Proceeds during the 20172019 and 20162018 fiscal years have been lower than in earlier years which reduction has negatively impacted the Company'sCompany’s business development efforts.
During the six months ended December 31, 2017,2019, the Company received total proceeds of approximately $187,000$977,000 from the sale of its debt and equity securities which is lower than previous years.
During fiscal years 20172019 and 20162018 and through the six months ended December 31, 2017,first half of the fiscal year 2020, the Company experienced greatercontinued to experience difficulty in raising equity funding than in the prior years.funding. As a result, the Company faced, and continues to face, significant cash flow management challenges due to working capital constraints. To partially mitigate these working capital constraints, the Company'sCompany’s core senior management and several key employees and consultants have been deferring (and continue to defer) all or part of their cash compensation and/or are accepting compensation in the form of securities of the Company (Notes 5 and 7) and members of the Company'sCompany’s senior management have made loans to the Company (Note 4). During the six monthsyear ended December 31, 2017,June 30, 2018, senior management and certain core employees and consultants agreed to a one-time extinguishment of liabilities owed by the Company which in aggregate totaled $2,404,000. Additionally, the Company made reductions in its personnel during the years ended June 30, 2014 and 2015.2015 and again during the year ended June 30, 2018. The constraint on available resources has had, and continues to have, negative effects on the pace and scope of the Company'sCompany’s efforts to develop its business. The Company has had to delay payment of trade obligations and has had to economize in many ways that have potentially negative consequences. If the Company does not have greater success in its efforts to raise needed funds during the remainder of the current fiscal year (and subsequent periods), management will need to consider deeper cuts (including additional personnel cuts) and curtailment of operations (including possibly Kreider 1 operations) and/or research and development activities.
The Company will need to obtain additional capital to fund its operations and technology development, to satisfy existing creditors, to develop Projects (including Integrated Projects) (includingProjects and the Kreider 2 facility) and CAFO Retrofit waste remediation systems and to continue to operate the Kreider 1 facility. The Company anticipates that it will seek to raise from $2,500,000 to $50,000,000 or more debt and/or equity through joint ventures, strategic partnerships and/or sale of its equity securities (common, preferred and/or hybrid) and/or debt (including convertible) securities, and/or through use of 'rights'‘rights’ and/or warrants (new and/or existing) during the next twelve months. However, as discussed above, there is no assurance, especially in light of the difficulties the Company has experienced in recent periods and the extremely unsettled capital markets that presently exist (especially for companies like us), that the Company will be able to obtain the funds that it needs to stay in business, complete its technology development or to successfully develop its business and Projects.
There is no realistic likelihood that funds required during the next twelve months (or in the periods immediately thereafter) for the Company'sCompany’s basic operations and/or proposed Projects will be generated from operations. Therefore, the Company will need to raise sufficient funds from external sources such as debt or equity financings or other potential sources. The lack of sufficient additional capital resulting from the inability to generate cash flow from operations and/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'sCompany’s existing shareholders. All of these factors have been exacerbated by the extremely limited and unsettled credit and capital markets presently existing for small companies like Bion.
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2.SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Bion Integrated Projects Group, Inc. ("(“Projects Group"Group”), Bion Technologies, Inc., BionSoil, Inc., Bion Services, PA1, and PA2; and its 58.9% owned subsidiary, Centerpoint Corporation ("Centerpoint"(“Centerpoint”). All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"(“SEC”). The consolidated financial statements reflect all adjustments (consisting of only normal recurring entries) that, in the opinion of management, are necessary to present fairly the financial position at December 31, 2017,2019, and the results of operations and cash flows of the Company for the three and six months ended December 31, 20172019 and 2016.2018. Operating results for the three and six months ended December 31, 20172019 are not necessarily indicative of the results that may be expected for the year ending June 30, 2018.
Cash and cash equivalents:
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash and cash equivalents.
Property and equipment:
Property and equipment are stated at cost and are depreciated, when placed into service, using the straight-line method over the estimated useful lives of the related assets, generally three to twenty years. The Company capitalizes all direct costs and all indirect incrementally identifiable costs related to the design and construction of its Integrated Projects. The Company has elected to expense all costs and filing fees related to obtaining patents (resulting in no related asset being recognized in the Company's balance sheet) because the Company believes such costs and fees are immaterial (in the context of the Company's total costs/expenses) and have no direct relationship to the value of the Company's patents. The Company reviews its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized based on the amount by which the carrying value of the assets or asset group exceeds its estimated fair value, and is recognized as a loss from operations.
Stock-based compensation:
The Company follows the provisions of Accounting Standards Codification ("ASC"(“ASC”) 718, which generally requires that share-based compensation transactions be accounted and recognized in the statement of incomeoperations based upon their grant date fair values.
Derivative Financial Instruments:
Pursuant to ASC Topic 815 "Derivatives“Derivatives and Hedging" ("Hedging” (“Topic 815"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'sCompany’s value as of the date of the issuance, consideration of the Company'sCompany’s limited liquid resources and business prospects, the market price of the Company'sCompany’s stock in its mostly inactive public market and the historical valuations and purchases of the Company'sCompany’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.
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Concentrations of credit risk:
The Company's financial instruments that are exposed to concentrations of credit risk consist of cash. The Company's cash is in demand deposit accounts placed with federally insured financial institutions and selected brokerage accounts. Such deposit accounts at times may exceed federally insured limits. The Company has not experienced any losses on such accounts.
Noncontrolling interests:
In accordance with ASC 810, “Consolidation”, the Company separately classifies noncontrolling interests within the equity section of the consolidated balance sheets and separately reports the amounts attributable to controlling and noncontrolling interests in the consolidated statements of operations. In addition, the noncontrolling interest continues to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance.
Fair value measurements:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. The Company uses a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of input to determine fair value.
Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 – observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and
Level 3 – assets and liabilities whose significant value drivers are unobservable.
Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company'sCompany’s market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment.
The fair value of cash and accounts payable approximates their carrying amounts due to their short-term maturities. The fair value of the loan payable is indeterminable at this time due to the nature of the arrangement with a state agency and the fact that it is in default. The fair value of the redeemable preferred stock approximates its carrying value due to the dividends accrued on the preferred stock which are reflected as part of the redemption value. The fair value of the loandeferred compensation, loans payable –- affiliates deferred compensation and convertible notes payable - affiliates are not practicable to estimate due to the related party nature of the underlying transactions.
Revenue Recognition:
The Company recognizescurrently does not generate revenue from the sale of nutrient credits when there is persuasive evidence that an arrangement exists, when title has passed, the price is fixed or determinable, and collection is reasonably assured.
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Loss per share:
Basic loss per share amounts are calculated using the weighted average number of shares of common stock outstanding during the period. Diluted loss per share assumes the conversion, exercise or issuance of all potential common stock instruments, such as options or warrants, unless the effect is to reduce the loss per share or increase the earnings per share. During the three and six months ended December 31, 20172019 and 2016,2018, the basic and diluted loss per share was the same, as the impact of potential dilutive common shares was anti-dilutive.
The following table represents the warrants, options and convertible securities excluded from the calculation of basic loss per share:
December 31, 2017 | December 31, 2016 | |||||||
| Warrants | 12,195,920 | 8,354,795 | ||||||
| Options | 4,840,037 | 4,520,037 | ||||||
| Convertible debt | 6,855,942 | 8,710,252 | ||||||
| Convertible preferred stock | 16,500 | 15,500 | ||||||
| December 31, 2019 | December 31, 2018 | |||||||
| Warrants | 18,784,324 | 16,305,320 | ||||||
| Options | 7,801,600 | 7,152,225 | ||||||
| Convertible debt | 9,779,000 | 8,136,018 | ||||||
| Convertible preferred stock | 18,500 | 17,500 | ||||||
The following is a reconciliation of the denominators of the basic and diluted loss per share computations for the three and six months ended December 31, 20172019 and 2016:
Three months ended December 31, 2017 | Three months ended December 31, 2016 | Six months ended December 31, 2017 | Six months ended December 31, 2016 | |||||||||||||
| Shares issued – beginning of period | 24,809,841 | 23,761,168 | 24,748,213 | 23,573,057 | ||||||||||||
| Shares held by subsidiaries (Note 7) | (704,309 | ) | (704,309 | ) | (704,309 | ) | (704,309 | ) | ||||||||
| Shares outstanding – beginning of period | 24,105,532 | 23,056,859 | 24,043,904 | 22,868,748 | ||||||||||||
| Weighted average shares for fully vested stock bonuses | - | 260,870 | - | 430,435 | ||||||||||||
| Weighted average shares issued during the period | 127,591 | 10,770 | 106,204 | 137,128 | ||||||||||||
| Basic weighted average shares – end of period | 24,233,123 | 23,328,499 | 24,150,108 | 23,436,311 | ||||||||||||
| Three months ended December 31, 2019 | Three months ended December 31, 2018 | Six months ended December 31, 2019 | Six months ended December 31, 2018 | |||||||||||||
| Shares issued – beginning of period | 28,417,602 | 26,996,148 | 28,068,688 | 25,939,892 | ||||||||||||
| Shares held by subsidiaries (Note 8) | (704,309 | ) | (704,309 | ) | (704,309 | ) | (704,309 | ) | ||||||||
| Shares outstanding – beginning of period | 27,713,293 | 26,291,839 | 27,364,379 | 25,235,583 | ||||||||||||
| Weighted average shares issued during the period | 1,090,714 | 90,939 | 771,030 | 785,681 | ||||||||||||
| Diluted weighted average shares – end of period | 28,804,007 | 26,382,778 | 28,135,409 | 26,021,264 | ||||||||||||
Use of estimates:
In preparing the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements:
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company'sCompany’s financial reporting, the Company undertakes a study to determine the consequences of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company'sCompany’s financial statements properly reflect the change.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 "Revenue from Contracts from Customers," which supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)," and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to the exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and earlier application is permitted only as of annual reporting periods beginning after December 15, 2016. Once the Company begins to generate revenue, the Company does not anticipate any material impact on its operations and financial statements.
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3.PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31, 2017 | June 30, 2017 | |||||||
| Machinery and equipment | $ | 2,222,670 | $ | 2,222,670 | ||||
| Buildings and structures | 401,470 | 401,470 | ||||||
| Computers and office equipment | 171,613 | 171,613 | ||||||
| 2,795,753 | 2,795,753 | |||||||
| Less accumulated depreciation | (2,793,433 | ) | (2,792,561 | ) | ||||
| $ | 2,320 | $ | 3,192 | |||||
| December 31, 2019 | June 30, 2019 | |||||||
| Machinery and equipment | $ | 2,222,670 | $ | 2,222,670 | ||||
| Buildings and structures | 401,470 | 401,470 | ||||||
| Computers and office equipment | 173,245 | 173,245 | ||||||
| 2,797,385 | 2,797,385 | |||||||
| Less accumulated depreciation | (2,795,463 | ) | (2,794,769 | ) | ||||
| $ | 1,922 | $ | 2,616 | |||||
As of June 30, 2016,December 31, 2019, the net book value of Kreider 1 was zero. AsManagement has reviewed the remaining property and equipment for impairment as of December 31, 2017, management2019 and believes that no additional impairment exists.
Depreciation expense was $436$347 and $503$259 for the three months ended December 31, 20172019 and 2016,2018, respectively and $872$694 and $1,005$695 for the six months ended December 31, 20172019 and 2016,2018, respectively.
4.
LOANS PAYABLE - AFFILIATES:During the six months ended December 31, 2017,2019, Dominic Bassani ("Bassani"(“Bassani”), the Company'sCompany’s Chief Executive Officer, and Mark A. Smith ("Smith"(“Smith”), the Company'sCompany’s President, have loaned the Company $12,500$20,000 and $18,000,$15,000, respectively, for working capital needs. The loans arewere non-interest bearing are non-collateralized and will beBassani’s loan was repaid whenin cash, while Smith’s loan was converted into units of the BoardCompany at $0.50 per unit, with each unit consisting of Directors determines there is adequate cash available.
5.
DEFERRED COMPENSATION:The Company owes deferred compensation to various employees, former employees and consultants totaling $141,284$537,119 and $1,879,473$698,766 as of December 31, 20172019 and 2016,2018, respectively. Included in the deferred compensation balances as of December 31, 2017,2019, are $31,000$49,318 and $18,000nil owed Bassani and Smith respectively, pursuant to extension agreements effective January 1, 2015, whereby unpaid compensation earned after January 1, 2015, accrues interest at 4% per annum and can be converted into shares of the Company'sCompany’s common stock at the election of the employee during the first five calendar days of any month. The conversion price shall be the average closing price of the Company'sCompany’s common stock for the last 10 trading days of the immediately preceding month. The deferred compensation owed Bassani Smith and Edward Schafer ("Schafer"), the Company's Vice Chairman,Smith as of December 31, 20162018 was $772,629, $281,590$396,041 and $117,292,$42,541, respectively. The Company also owes various consultants, pursuant to various agreements, for deferred compensation of $18,800$415,301 and $466,478$186,700 as of December 31, 20172019 and 2016,2018, respectively, with similar conversion terms as those described above for Bassani Smith and Schafer,Smith, with the exception that the interest accrues at 3% per annum. Bassani and Smith have each been granted the right to convert up to $300,000 of deferred compensation balances at a price of $0.75 per share until December 31, 20182019 (to be issued pursuant to the 2006 Plan). Smith also has the right to convert all or part of his deferred compensation balance into the Company'sCompany’s securities (to be issued pursuant to the 2006 Plan) "at market"“at market” and/or on the same terms as the Company is selling or has sold its securities in its most recent or then current (or most recent if there is no current) private placement. During the six months ended Smith elected to convert $3,828 of deferred compensation into units of the Company at its $0.50 per unit offering price (Note 8). Bassani and Smith also elected to transfer $436,508 and $199,573, respectively, of their respective deferred compensation into their January 2015 Convertible Notes (Note 7). In connection with the agreements related to Smith’s December 31, 2019 transfer, Smith received the right to transfer future deferred compensation to his January 2015 Convertible Note at his election, The Company also owes a current employee deferred compensation of $984 which is convertible into 1,491 shares of the Company's common stock as of December 31, 2017 and, a former employee $72,500, which is not convertible and is non-interest bearing.
The Company recorded interest expense of $31,055$14,662 ($25,1779,494 with related parties) and $25,083$8,388 ($19,3196,596 with related parties) for the six months ended December 31, 20172019 and 2016,2018, respectively.
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6.LOAN PAYABLE:
PA1, the Company'sCompany’s wholly-owned subsidiary, owes $8,912,653$9,444,576 as of December 31, 20172019 under the terms of the Pennvest Loan related to the construction of the Kreider 1 System including accrued interest and late charges totaling $1,158,653$1,690,576 as of December 31, 2017.2019. The terms of the Pennvest Loan provided for funding of up to $7,754,000 which was to be repaid by interest-only payments for three years, followed by an additional ten-year amortization of principal. The Pennvest Loan accrues interest at 2.547% per annum for years 1 through 5 and 3.184% per annum for years 6 through maturity. The Pennvest Loan required minimum annual principal payments of approximately $2,742,000$4,273,000 in fiscal years 2013 through 2017,2019, and $760,000 in fiscal year 2018, $771,000 in fiscal year 2019, $794,000 in fiscal year 2020, $819,000 in fiscal year 2021, $846,000 in fiscal year 2022, $873,000 in fiscal year 2023 and $1,022,000 thereafter.$149,000 in fiscal year 2024. The Pennvest Loan is collateralized by the Kreider 1 System and by a pledge of all revenues generated from Kreider 1 including, but not limited to, revenues generated from nutrient reduction credit sales and by-product sales. In addition, in consideration for the excess credit risk associated with the project, Pennvest is entitled to participate in the profits from Kreider 1 calculated on a net cash flow basis, as defined. The Company has incurred interest expense related to the Pennvest Loan of $49,373$61,722 and $60,408 for both of the three months ended December 31, 20172019 and 2016,2018, respectively. The Company has incurred interest expense related to the Pennvest Loan of $98,747$123,444 and $113,747 for both of the six months ended December 31, 20172019 and 2016,2018, respectively. Based on the limited development of the depth and breadth of the Pennsylvania nutrient reduction credit market to date, PA1 commenced negotiations with Pennvest related to forbearance and/or re-structuring the obligations under the Pennvest Loan. In the context of such negotiations, PA1 has elected not to make interest payments to Pennvest on the Pennvest Loan since January 2013. Additionally, the Company has not made any principal payments, which were to begin in fiscal 2013, and, therefore, the Company has classified the Pennvest Loan as a current liability as of December 31, 2017.
On September 25, 2014, Pennvest exercised its right to declare the Pennvest Loan in default and has accelerated the Pennvest Loan and demanded that PA1 pay $8,137,117 (principal, interest plus late charges) on or before October 24, 2014. PA1 did not make the payment and does not have the resources to make the payment demanded by Pennvest. PA1 has engaged in on/off discussions and negotiations with Pennvest concerning this matter but no such discussions/negotiations are currently active. As of the date of this report, no formal proposals are presently under consideration and only sporadic communication has taken place regarding the matters involved over the past 48 months.5 years. It is not possible at this date to predict the outcome of this matter, but the Company believes it is possible that an agreement may yet be reached that will result in a viable loan modification. Subject to the results of the negotiations with Pennvest and pending development of a more robust market for nutrient reductions in Pennsylvania, PA1 and Bion will continue to evaluate various options with regard to Kreider 1 over the next 30-180180 days.
In connection with the Pennvest Loan financing documents, the Company provided a 'technology guaranty'‘technology guaranty’ regarding nutrient reduction performance of Kreider 1 which was structured to expire when Kreider 1's1’s nutrient reduction performance had been demonstrated. During August 2012 the Company provided Pennvest (and the PADEP) with data demonstrating that the Kreider 1 System had surpassed the requisite performance criteria and that the Company's 'technology guaranty'Company’s ‘technology guaranty’ was met. As a result, the Pennvest Loan is solely an obligation of PA1.
7.
CONVERTIBLE NOTES PAYABLE - AFFILIATES:January 2015 Convertible Notes
The January 2015 Convertible Notes accrue interest at 4% per annum and wereeffective September 30, 2018 are due and payable on December 31, 2017. Effective June 30, 2017, the maturity dates were extended on the January 2015 Convertible Notes until July 1, 2019.2021. The January 2015 Convertible Notes (including accrued interest, plus all future deferred compensation), are convertible, at the sole election of the noteholder, into Units consisting of one share of the Company'sCompany’s common stock and one quarterhalf warrant to purchase a share of the Company'sCompany’s common stock, at a price of $0.50 per Unit until December 31, 2020. The warrant contained in the Unit shall be exercisable at $1.00 per share until December 31, 2020. The original conversion price of $0.50 per Unit approximated the fair value of the Units at the date of the agreements; therefore, no beneficial conversion feature exists. Management evaluated the terms and conditions of the embedded conversion features based on the guidance of ASC 815-15 "Embedded Derivatives"“Embedded Derivatives” to determine if there was an embedded derivative requiring bifurcation. An embedded derivative instrument (such as a conversion option embedded in the deferred compensation) must be bifurcated from its host instruments and accounted for separately as a derivative instrument only if the "risks“risks and rewards"rewards” of the embedded derivative instrument are not "clearly“clearly and closely related"related” to the risks and rewards of the host instrument in which it is embedded. Management concluded that the embedded conversion feature of the deferred compensation was not required to be bifurcated because the conversion feature is clearly and closely related to the host instrument, and because of the Company'sCompany’s limited trading volume that indicates the feature is not readily convertible to cash in accordance with ASC 815-10, "Derivatives“Derivatives and Hedging"Hedging”.
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As of December 31, 2017,2019, the January 2015 Convertible Note balances, including accrued interest, owed Bassani, Smith and Edward Schafer (“Schafer”), the Company’s Vice Chairman, were $2,207,458, $1,118,138 and $453,886, respectively. As of December 31, 2018, the January 2015 Convertible Note balances, including accrued interest, owed Bassani, Smith and Schafer were $1,640,291, $851,781$1,698,873, $882,202 and $423,685, respectively. As of December 31, 2016, the January 2015 Convertible Note balances, including accrued interest, owed Bassani, Smith and Schafer were $1,581,710, $821,360 and $408,553,$438,816, respectively. The Company recorded interest expense of $31,354 and $26,247 for both of the three months ended December 31, 20172019 and 2016,2018, respectively. The Company recorded interest expense of $71,870 and $52,495 for both of the six months ended December 31, 20172019 and 2016,2018, respectively.
During the six months ended December 31, 2019, Bassani and Smith each elected to transfer $436,508 and $199,573, respectively, from deferred compensation owed them to their January 2015 Convertible Notes. Also during the six months ended December 31, 2019, Smith agreed to extend the maturity date of his January 2015 Convertible Notes until July 1, 2022.
During the year ended June 30, 2019, the Company agreed to sell Bassani and Smith, 3,000,000 and 300,000 warrants, respectively, exercisable at $0.60 per share until June 30, 2025 and June 30, 2023, respectively. The purchase price for the warrants is $0.10 per warrant and is payable with secured promissory notes of $300,000 and $30,000 from Bassani and Smith, respectively, both of which are secured by portions of their January 2015 Convertible Notes (Note 9). The promissory notes accrue interest at 4% per annum and as of December 31, 2019 the accrued interest owed by Bassani and Smith is $16,964 and $1,696, respectively.
September 2015 Convertible Notes
During the year ended June 30, 2016, the Company entered into September 2015 Convertible Notes with Bassani, Schafer and a Shareholder which replaced previously issued promissory notes. The initial principal balances of the September 2015 Convertible Notes were $405,831, $16,382 and $82,921, respectively. The September 2015 Convertible Notes bear interest at 4% per annum, originally had maturity dates of December 31, 2017 but during the year ended June 30, 2019 the maturity dates were extended to July 1, 2021, and may be converted at the sole election of the noteholders into restricted common shares of the Company at a conversion price of $0.60 per share. As the conversion price of $0.60 approximated the fair value of the common shares at the date of the September 2015 Convertible Notes, no beneficial conversion feature exists. The balances of the September 2015 Convertible Notes as of December 31, 2017, including accrued interest, are $443,627, $17,899 and $90,600, respectively. The balances of the September 2015 Convertible Notes as of December 31, 2016, including accrued interest, were $427,179, $17,244 and $87,282, respectively. During the six monthsyear ended December 31, 2017,June 30, 2018, Bassani and the Company agreed to split his original September 2015 Convertible Note into two replacement notes with all the terms remaining the same. One of the replacement notes'notes’ original principal is $130,000, which is being held by the Company as collateral for a subscription receivable promissory note from Bassani (Note 8).
The balances of the September 2015 Convertible Notes due Bassani and Schafer were extended until July 1, 2019 and during the six months endedas of December 31, 2017, the maturity date2019, including accrued interest owed Bassani, Schafer and Shareholder, are $162,808, $19,206 and $407,964, respectively. The balances of the note due a Shareholder was extended until July 1, 2019.
The Company recorded interest expense of $5,308$5,365 and $5,092$5,410 for the three months ended December 31, 20172019 and 2016,2018, respectively. The Company recorded interest expense of $10,401$10,731 and $10,185$10,420 for the six months ended December 31, 20172019 and 2016,2018, respectively.
2019 Convertible Notes
During the year ended June 30, 2019, Bassani converted $150,000 of his deferred compensation into a 2019 Deferred Compensation Convertible Promissory Note. The 2019 Convertible Note accrues interest at 4% per annum and is due and payable on May 31, 2021 and as of December 31, 2019 the 2019 Convertible Note and accrued interest was $153,750. The 2019 Convertible Note (including accrued interest), is convertible, at the sole election of the noteholder, into Units consisting of one share of the Company’s common stock and one-half warrant to purchase a share of the Company’s common stock, at an initial price of $0.50 per Unit. The warrant contained in the Unit shall be exercisable at $0.75 per share until December 31, 2021. The original conversion price of $0.50 per Unit approximated the fair value of the Units at the date of the agreements; therefore, no beneficial conversion feature exists. The Company recorded interest expense of $1,482 and nil for the three months ended December 31, 2019 and 2018, respectively. The Company recorded interest expense of $3,359 and nil for the six months ended December 31, 2019 and 2018, respectively.
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8.STOCKHOLDERS' EQUITY:
Series B Preferred stock:
Since July 1, 2014, the Company hadhas 200 shares of Series B redeemable convertible Preferred stock outstanding with a par value of $0.01 per share, convertible at the option of the holder at $2.00 per share, with dividends accrued and payable at 2.5% per quarter. The Series B Preferred stock is mandatorily redeemable at $100 per share by the Company three years after issuance and accordingly was classified as a liability. The 200 shares have reached their maturity date, but due to the cash constraints of the Company have not been redeemed.
During the years ended June 30, 20172019 and 2016,2018, the Company declared dividends of $2,000 and $2,000 respectively. During the three and six months ended December 31, 2017,2019, the Company declared dividends of $500 and $1,000, respectively.$1,000. At December 31, 2017,2019, accrued dividends payable are $13,000.$17,000. The dividends are classified as a component of operations as the Series B Preferred stock is presented as a liability in these financial statements.
Common stock:
Holders of common stock are entitled to one vote per share on all matters to be voted on by common stockholders. In the event of liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to share in all assets remaining after liabilities have been paid in full or set aside and the rights of any outstanding preferred stock have been satisfied. Common stock has no preemptive, redemption or conversion rights. The rights of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of any outstanding series of preferred stock or any series of preferred stock the Company may designate in the future.
Centerpoint holds 704,309 shares of the Company'sCompany’s common stock. These shares of the Company'sCompany’s common stock held by Centerpoint are for the benefit of its shareholders without any beneficial interest.
During the six months ended December 31, 2017,2019, the Company issued 14,61529,000 shares of the Company'sCompany’s common stock at prices ranging from $0.70$0.48 to $0.91$0.75 per share for services valued at $11,679,$16,350 in the aggregate, to a consultant and an employee.
During the six months ended December 31, 2017,2019, the Company entered into a subscription agreementsagreement to sell units for $0.75$0.50 per unit, with each unit consisting of one share of the Company'sCompany’s restricted common stock and one warrant to purchase one half of a share of the Company'sCompany’s restricted common stock for $1.00$0.75 per share with an expiry datesdate of June 30, 2018December 31, 2020, and pursuant thereto, the Company issued 249,11118,000 units for total proceeds of $186,832,$9,000, net proceeds of $173,324$8,100 after commissions.commissions of $900. The Company allocated the proceeds from the 249,11118,000 shares and the 124,5569,000 warrants based upon their relative fair values, using the share price on the day each of the subscription agreements were entered into and the fair value of the warrants, which was determined to be $0.05 per warrant. As a result, $5,660$333 was allocated to the warrants and $181,172$8,667 was allocated to the shares, and both were recorded as additional paid in capital.
During the six months ended December 31, 2017, warrants to purchase 236,850 shares of common stock of the Company at prices between $1.10 and $2.50 per share expired.
During the six months ended December 31, 2017, the Company received2018, Smith elected to convert deferred compensation, loan payable - affiliates and accounts payable of $3,828, $15,000 and $52,830, respectively, into an interest bearing, secured promissory note for $88,250 from Bassani as consideration to purchase warrants to purchase 1,765,000 sharesaggregate 143,316 units at $0.50 per unit, with each unit consisting of one share of the Company'sCompany’s restricted common stock which warrants are exercisable atand one warrant to purchase one share of the Company’s restricted common stock for $0.75 and have expiry datesper share until December 31, 2020.
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Warrants:
As of December 31, 2020. 2019, the Company had approximately 18.8 million warrants outstanding, with exercise prices from $0.60 to $2.00 and expiring on various dates through June 30, 2025.
The weighted-average exercise price for the outstanding warrants have a 90% exercise bonus (Note 9). The promissory note bears interest at 4% per annum, is secured by Bassani's Replacement Note 1$0.84, and the weighted-average remaining contractual life as of Bassani's 2015 Convertible Note (Note 7) with a balance at November 7, 2017 of $130,000, which will be held by the Company. The secured promissory noteDecember 31, 2019 is payable on July 1, 2020.
During the six months ended December 31, 2017,2019, the Company received two interest bearing, secured promissory notesentered into a subscription agreement to sell units for $0.50 per unit, with an aggregate principal amounteach unit consisting of $46,400 from two former employees as consideration to purchase warrants to purchase 928,000 sharesone share of the Company'sCompany’s restricted common stock which warrants are exercisable atand one warrant to purchase one half of a share of the Company’s restricted common stock for $0.75 and haveper share with an expiry datesdate of December 31, 2020. These2020, and pursuant thereto, the Company issued 18,000 units for total proceeds of $9,000, net proceeds of $8,100 after commissions of $900. The Company allocated the proceeds from the 18,000 shares and the 9,000 warrants havebased upon their relative fair values, using the share price on the day each of the subscription agreements were entered into and the fair value of the warrants, which was determined to be $0.05 per warrant. As a 90% exercise bonus (Note 9). The promissory notes bear interest at 4% per annum, are secured by a perfected security interest inresult, $333 was allocated to the warrants and are payable on July 1, 2020.
During the six months ended December 31, 2017,2019, the Company entered into subscription agreements to sell units for $0.50 per unit, with each unit consisting of one share of the Company’s restricted common stock and one warrant to purchase one share of the Company’s restricted common stock for $0.75 per share with an expiry date of December 31, 2020, and pursuant thereto, the Company issued 670,0001,936,001 units for total proceeds of $968,000, net proceeds of $881,700 after commissions of $86,300. The Company allocated the proceeds from the 1,936,001 shares and the 1,936,001 warrants to Smith and 247,000 warrants to a former employee and a consultant to purchase in aggregate 917,000 sharesbased upon their relative fair values, using the share price on the day each of the Company's restricted common stock,subscription agreements were entered into and the fair value of the warrants, which was determined to be $0.05 per warrant. As a result, $47,098 was allocated to the warrants are exercisable at $0.75 per share and have expiry dates of December 31, 2020. The warrants$920,902 was allocated to the shares, and both were recorded as additional paid in exchange for services expensed at $45,850, in aggregate ($33,500 to Smith). These warrants have a 90% exercise bonus (Note 9). The Company also issued 20,000 warrants to a consultant for services valued at $1,000, exercisable at $0.75 per share which expiry dates of October 1, 2020.
During the six months ended December 31, 2017,2019, the Company agreed to extend the expiration dates of 5,682,335740,551 warrants owned by certain individuals (including 5,329,869 owned by Bassani and 23,934 owned by Schafer) which were scheduled to expire at various dates ranging from December 31, 2017 through December 31, 2021.2019. The Company recorded non-cash compensationinterest expense related to the modification of the warrants of $289,542 ($265,353 and $1,197 for Bassani and Schafer, respectively).
Stock options:
The Company'sCompany’s 2006 Consolidated Incentive Plan, as amended (the "2006 Plan"“2006 Plan”), provides for the issuance of options (and/or other securities) to purchase up to 30,000,000 shares of the Company'sCompany’s common stock. Terms of exercise and expiration of options/securities granted under the 2006 Plan may be established at the discretion of the Board of Directors, but no option may be exercisable for more than ten years.
The Company recorded compensation expense related to employee stock options of $97,350$99,500 and $108,960$22,500 for the three months ended December 31, 20172019 and 2016,2018, respectively, and $99,650$99,500 and $129,816$118,000 for the six months ended December 31, 20172019 and 2016,2018, respectively. The Company granted 295,000390,000 and 294,500325,000 options during the six months ended December 31, 20172019 and 2016,2018, respectively.
The fair value of the options granted during the three and six months ended December 31, 20172019 and 20162018 were estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
| Weighted Average, December 31, 2019 | Range, December 31, 2019 | Weighted Average, December 31, 2018 | Range, December 31, 2018 | ||||||||||||||
| Volatility | 68 | % | 68 -70 | % | 70 | % | 63%-76 | % | |||||||||
| Dividend yield | — | — | — | — | |||||||||||||
| Risk-free interest rate | 1.75 | % | 1.74 – 1.75 | % | 2.73 | % | 2.68%-2.78 | % | |||||||||
| Expected term (years) | 5.0 | 5.0 to 5.2 | 3.9 | 3.4 to 4.3 | |||||||||||||
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Weighted Average, December 31, 2017 | Range, December 31, 2017 | Weighted Average, December 31, 2016 | Range, December 31, 2016 | |||
| Volatility | 73% | 73% | 79% | 78%-86% | ||
| Dividend yield | - | - | - | - | ||
| Risk-free interest rate | 1.75% | 1.75% | 1.14% | 0.82% -1.17% | ||
| Expected term (years) | 3 | 3 | 4 | 3-4 |
The expected volatility was based on the historical price volatility of the Company'sCompany’s common stock. The dividend yield represents the Company'sCompany’s anticipated cash dividend on common stock over the expected term of the stock options. The U.S. Treasury bill rate for the expected term of the stock options was utilized to determine the risk-free interest rate. The expected term of stock options represents the period of time the stock options granted are expected to be outstanding based upon management'smanagement’s estimates.
A summary of option activity under the 2006 Plan for the six months ended December 31, 20172019 is as follows:
| Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at July 1, 2017 | 4,545,037 | $1.42 | 2.9 | $ | 176,575 | |||||||||||
| Granted | 295,000 | 0.84 | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | - | - | ||||||||||||||
| Expired | - | - | ||||||||||||||
| Outstanding at December 31, 2017 | 4,840,037 | $1.39 | 3.6 | $ | 18,025 | |||||||||||
| Exercisable at December 31, 2017 | 4,735,037 | $1.39 | 3.6 | $ | 18,025 | |||||||||||
| Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||||
| Outstanding at July 1, 2019 | 7,411,600 | $ | 1.08 | 3.1 | $ | 20,375 | ||||||||||||
| Granted | 390,000 | 0.60 | ||||||||||||||||
| Exercised | — | — | ||||||||||||||||
| Forfeited | — | — | ||||||||||||||||
| Expired | — | — | ||||||||||||||||
| Outstanding at December 31, 2019 | 7,801,600 | $ | 1.06 | 2.8 | $ | — | ||||||||||||
| Exercisable at December 31, 2019 | 7,801,600 | $ | 1.06 | 2.8 | $ | — | ||||||||||||
The following table presents information relating to nonvested stock options as of December 31, 2017:
Options | Weighted Average Grant-Date Fair Value | |||||||
| Nonvested at July 1, 2017 | 25,000 | $ | 0.46 | |||||
| Granted | 295,000 | 0.32 | ||||||
| Vested | (215,000 | ) | 0.35 | |||||
| Nonvested at December 31, 2017 | 105,000 | $ | 0.29 | |||||
| Options | Weighted Average Grant-Date Fair Value | |||||||||
| Nonvested at July 1, 2019 | — | $ | — | |||||||
| Granted | 390,000 | 0.26 | ||||||||
| Vested | (390,000 | ) | 0.26 | |||||||
| Nonvested at December 31, 2019 | — | $ | — | |||||||
The total fair value of stock options that vested during the six months ended December 31, 20172019 and 20162018 was $76,100$99,500 and $113,770$80,500 respectively. As of December 31, 2017,2019, the Company had no unrecognized compensation cost related to stock options.
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Stock-based employee compensation charges in operating expenses in the Company'sCompany’s financial statements for the three and six months ended December 31, 20172019 and 20162018 are as follows:
| Three months ended December 31, 2019 | Three months ended December 31, 2018 | Six months ended December 31, 2019 | Six months ended December 31, 2018 | |||||||||||||
| General and administrative: | ||||||||||||||||
| Change in fair value from modification of option terms | $ | — | $ | — | $ | — | $ | 211,185 | ||||||||
| Change in fair value from modification of warrant terms | — | — | — | 118,233 | ||||||||||||
| Fair value of stock options expensed | 92,000 | 22,500 | 92,000 | 92,125 | ||||||||||||
| Total | $ | 92,000 | $ | 22,500 | $ | 92,000 | $ | 421,543 | ||||||||
| Research and development: | ||||||||||||||||
| Change in fair value from modification of option terms | $ | — | $ | — | $ | — | 11,115 | |||||||||
| Change in fair value from modification of warrant terms | — | — | — | 44,793 | ||||||||||||
| Fair value of stock options expensed | 7,500 | — | 7,500 | 25,875 | ||||||||||||
| Total | $ | 7,500 | $ | — | $ | 7,500 | $ | 81,783 | ||||||||
9. SUBSCRIPTION RECEIVABLE - AFFILIATES:
As of December 31, 2019, the Company has three interest bearing, secured promissory notes with an aggregate principal amount of $428,250 ($457,762, including interest), from Bassani as consideration to purchase warrants to purchase 5,565,000 shares of the Company’s restricted common stock, which warrants have exercise prices ranging from $0.60 to $1.00 and have expiry dates ranging from December 31, 2020 to December 31, 2025. The promissory notes bear interest at 4% per annum, are secured by portions of Bassani’s January 2015 Convertible Note and Bassani’s September 2015 Convertible Notes. The secured promissory notes are payable July 1, 2020.
As of December 31, 2019, the Company has two interest bearing, secured promissory notes with an aggregate principal amount of $46,400 ($50,382 including interest) from two former employees as consideration to purchase warrants to purchase 928,000 shares of the Company’s restricted common stock, which warrants are exercisable at $0.75 and have expiry dates of December 31, 2020. These warrants have a 90% exercise bonus. The promissory notes bear interest at 4% per annum, are secured by a perfected security interest in the warrants, and are payable on July 1, 2020.
As of December 31, 2019, the Company has an interest bearing, secured promissory note for $30,000 ($31,696 including interest) from Smith as consideration to purchase warrants to purchase 300,000 shares of the Company’s restricted common stock, which warrants are exercisable at $0.60 and have expiry dates of December 31, 2023. The warrants have a 75% exercise bonus. The promissory note bears interest at 4% per annum, is secured by $30,000 of Smith’s January 2015 Convertible Note. The secured promissory note is payable on July 1, 2020.
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Three months ended December 31, 2017 | Three months ended December 31, 2016 | Six months ended December 31, 2017 | Six months ended December 31, 2016 | |||||||||||||
| General and administrative: | ||||||||||||||||
| Fair value of stock bonuses expensed | $ | 3,090 | $ | 6,830 | $ | 7,223 | $ | 6,830 | ||||||||
| Change in fair value from modification of option terms | 243,761 | 166,031 | 243,761 | 166,031 | ||||||||||||
| Change in fair value from modification of warrant terms | 156,865 | - | 156,865 | - | ||||||||||||
| Fair value of stock options expensed | 97,350 | 90,067 | 99,650 | 106,565 | ||||||||||||
| Total | $ | 501,066 | $ | 262,928 | $ | 507,499 | $ | 279,426 | ||||||||
| Research and development: | ||||||||||||||||
| Fair value of stock bonus expensed | $ | 8,071 | $ | 7,954 | $ | 15,098 | $ | 7,954 | ||||||||
| Change in fair value from modification of option terms | 105,895 | 11,440 | 105,895 | 11,440 | ||||||||||||
| Change in fair value from modification of warrant terms | 132,677 | - | 132,677 | - | ||||||||||||
| Fair value of stock options expensed | - | 18,889 | - | 23,251 | ||||||||||||
| Total | $ | 246,643 | $ | 38,283 | $ | 253,670 | $ | 42,645 | ||||||||
10. COMMITMENTS AND CONTINGENCIES:
Employment and consulting agreements:
Smith has held the positions of Director, President and General Counsel of Company and its subsidiaries under various agreements (and extensions) and terms since March 2003. On February 10, 2015, the Company executed an Extension Agreement with Smith pursuant to which Smith extended his employment with the Company to December 31, 2015 (with the Company having an option to extend his employment an additional six months). As part of the Extension Agreement, the balance of Smith's existing convertible note payable as of December 31, 2014, adjusted for conversions subsequent to that date, was replaced with a new convertible note with an initial principal amount of $760,520 with terms that i) materially reduce the interest rate by 50% (from 8% to 4%), ii) increases the conversion price by 11% (from $0.45 to $0.50), iii) sets the conversion price at a fixed price so there can be no further reductions, iv) reduces the number of warrants received on conversion by 75% (from 1 warrant per unit to 1/4 per unit) and v) extends the maturity date to December 31, 2017. Additionally, pursuant to the Extension Agreement, Smith: i) will continue to defer his cash compensation ($18,000 per month) until the Board of Directors re-instates cash payments to all employees and consultants who are deferring their compensation, ii) cancelled 150,000 contingent stock bonuses previously granted to him by the Company, iii) has been granted 150,000 new options which vested immediately and iv) outstanding options and warrants owned by Smith (and his donees) have been extended and had the exercise prices reduced to $1.50 (if the exercise price exceeded $1.50). In October 2015, the Company executed an Extension Agreement ("FY2016 Extension Agreement") with Smith pursuant to which Smith extended his employment with the Company to June 30, 2016 (with Company having an option to extend his employment an additional six months). As part of the FY2016 Extension Agreement, Smith: i) will continue to defer his cash compensation ($19,000 per month) until the Board of Directors re-instates cash payments, ii) has been granted 100,000 new options which vested immediately, and iii) has been granted 75,000 shares of common stock as an extension bonus which are immediately vested and were issued on January 5, 2016. As of July 1, 2016, Smith is working under a month to month contract extension until a longer term agreement is reached. On October 10, 2016, the Company approved a month to month contract extension with Smith which includes provisions for i) issuance of 25,000 bonus shares of the Company's common shares on January 15, 2017 (which were subsequently cancelled), ii) grant of 75,000 options to purchase shares of the Company's common shares at $0.90 per share with expiry date of December 31, 2020, which options are subject to the exercise/extension bonus, iii) a monthly deferred salary of $18,000 effective October 1, 2016 iv)until the Board of Directors re-instates cash payments to all employees and consultants who are deferring compensation, ii) the right to convert up to $125,000 of his deferred compensation, at his sole election, at $0.75 per share, until March 15, 2018 (which was expanded on April 27, 2017 to the right to convert up to $300,000 of his deferred compensation, at his sole election, at $0.75 per share, and subsequently extended until December 31, 2018)2019), and v)iii) the right to convert his deferred compensation in whole or in part, at his sole election, at any time in any amount at "market"“market” or into securities sold in the Company'sCompany’s current/most recent private offering at the price of such offering to third parties.
Since March 31, 2005, the Company has had various agreements with Brightcap and/or Bassani, through which the services of Bassani are provided.provided (any reference to Brightcap or Bassani for all purposes are the same individual). The Board appointed Bassani as the Company's CEO effective May 13, 2011. During the fiscal years 2012 and 2013, Bassani entered into extension agreements whereby he was awarded fully vested stock grants totaling 600,000 shares, 500,000 shares of which were to be issued January 15, 2016 and 100,000 shares were to be issued January 15, 2017. The stock grants were expensed in the years they were awarded as they are fully vested. The stock grants were cancelled in October 2016. On February 10, 2015, the Company executed an Extension Agreement with Bassani pursuant to which Bassani extended the term of his service to the Company to December 31, 2017, (with the Company having an option to extend the term an additional six months.) As part of the agreement, the Company's then existing loan payable, deferred compensation and convertible note payable to Bassani, were restructured into two promissory notes as follows: a) The sum of the cash loaned by Bassani to the Company of $279,000 together with $116,277 of unreimbursed expenses through December 31, 2014, were placed into a new promissory note with initial principal of $395,277 which was due and payable on December 31, 2015 and now has been replaced with a September 2015 Convertible Note (Note 7). In connection with these sums and the new promissory note, Bassani was issued warrants to purchase 592,916 shares of the Company's common stock at a price of $1.00 until December 31, 2020; and b) the remaining balances of the Company's accrued obligations to Bassani ($1,464,545) were replaced with a new convertible promissory note with terms that compared with the largest prior convertible note obligation to Bassani: i) materially reduce the interest rate by 50% (from 8% to 4%), ii) increase the conversion price by 11% (from $0.45 to $0.50), iii) sets the conversion price at a fixed price so there can be no further reductions, iv) reduces the number of warrants received on conversion by 75% (from 1 warrant per unit to 1/4 per unit) and v) extends the maturity date to December 31, 2017 (Note 7). Additionally, pursuantPursuant to the Extension Agreement, Bassani i) will continuecontinued to defer his cash compensation ($31,000 per month) until the Board of Directors re-instates cash payments to all employees and consultants who are deferring their compensation, ii) cancelled 250,000 contingent stock bonuses previously granted to him by the Company, iii) has been granted 450,000 new options which vested immediately and iv) outstanding options and warrants owned by Bassani (and his donees) have been extended and had the exercise prices reduced to $1.50 (if the exercise price exceeded $1.50).Duringcompensation. During October 2016 Bassani was granted the right to convert up to $125,000 of his deferred compensation, at his sole election, at $0.75 per share, until March 15, 2018 (which was expanded on April 27, 2017 to the right to convert up to $300,000 of his deferred compensation, at his sole election, at $0.75 per share, and subsequently extended until December 31, 2018)2019).
Execution/exercise bonuses:
As part of agreements the Company entered into with Bassani and Smith effective May 15, 2013, they were each granted the following: a) a 50% execution/exercise bonus which shall be applied upon the effective date of the notice of intent to exercise (for options and warrants) or issuance event, as applicable, of any currently outstanding and/or subsequently acquired options, warrants and/or contingent stock bonuses owned by each (and/or their donees) as follows: i) in the case of exercise by payment of cash, the bonus shall take the form of reduction of the exercise price; ii) in the case of cashless exercise, the bonus shall be applied to reduce the exercise price prior to the cashless exercise calculations; and iii) with regard to contingent stock bonuses, issuance shall be triggered upon the Company'sCompany’s common stock reaching a closing price equal to 50% of currently specified price; and b) the right to extend the exercise period of all or part of the applicable options and warrants for up to five years (one year at a time) by annual payments of $.05 per option or warrant to the Company on or before a date during the three months prior to expiration of the exercise period at least three business days before the end of the expiration period. Effective January 1, 2016 such annual payments to extend warrant exercise periods have been reduced to $.01 per option or warrant.
During the year ended June 30, 2014, the Company extended 50% execution/exercise bonuses with the same terms as described above to Schafer and to Jon Northrop ("Northrop"(“Northrop”), the Company'sCompany’s other board member.
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During the six monthsyear ended December 31, 2017,June 30, 2018, the Company extended 50% execution/exercise bonuses with the same terms as described above to all options and warrants issued prior to November 7, 2017, to an employee and two former employees who are now consultants.
During the six monthsyear ended December 31, 2017,June 30, 2018, the Company increased the above 50% execution/exercise bonus on all outstanding options and warrants owned or acquired in the future by Bassani, Smith and Schafer to 75% (to the extent such existing exercise bonus is less than 75%).
During the six monthsyear ended December 31, 2017,June 30, 2019, the Company issued 3,460,000approved the right to extend the exercise period of all or part of any options or warrants (1,765,000granted in the past or in the future, for up to five years (one year at a time) by annual payments of $0.01 per option/warrant for one of its employees. The extension payment may be made in i) cash; ii) by reduction of sums owed by the Company, and 670,000 to Bassani and Smith, respectively) and 190,000 options to Schafer that have a 90% execution/iii) by reduction of applicable exercise bonus attached.
As of December 31, 2017,2019, the execution/exercise bonuses ranging from 50-90% were applicable to 4,577,1007,604,600 of the Company'sCompany’s outstanding options and 7,748,52412,175,411 of the Company'sCompany’s outstanding warrants.
Litigation:
On September 25, 2014, Pennvest exercised its right to declare the Pennvest Loan in default and has accelerated the Pennvest Loan and has demanded that PA1 pay $8,137,117 (principal, interest plus late charges) on or before October 24, 2014. PA1 did not make the payment and did not then and does not now have the resources to make the payment demanded by Pennvest. During August 2012, the Company provided Pennvest (and the PADEP) with data demonstrating that the Kreider 1 system met the 'technology guaranty'‘technology guaranty’ standards which were incorporated in the Pennvest financing documents and, as a result, the Pennvest Loan is now solely an obligation of PA1. No litigation has commenced related to this matter but such litigation is likely if negotiations do not produce a resolution (Notes(Note 1 and Note 6).
The Company currently is not involved in any other material litigation.
11. RELATED PARTY TRANSACTIONS:
The Coalition for Affordable Bay Solutions (“CABS”), a not-for-profit organization that engages in political and legislative lobbying and educational activities regarding the competitive bidding procurement and nutrient credit trading program in Pennsylvania (and elsewhere), shares certain key management members with the Company.
During the three months ended December 30, 2019 and 2018, respectively, the Company received nil for expense reimbursements from CABS, respectively, while the Company received nil and $30,000 for expense reimbursements from CABS during the six months ended December 31, 2019 and 2018, respectively. During the three and six months ended December 31, 2019, the Company paid CABS $26,920 and $39,820, respectively for consulting expenses. During the three and six months ended December 31, 2018, the Company paid CABS nil for both periods. The Company also issued 16,000 shares of its restricted common stock valued at $8,000 for third party consulting expenses on behalf of CABS during the six months ended December 31, 2018, while there were no such expenses for the six months ended December 31, 2019.
12. SUBSEQUENT EVENTS:
The Company has evaluated events that occurred subsequent to December 31, 20172019 for recognition and disclosure in the financial statements and notes to the financial statements.
From January 1, 20182020 through February 7, 2018,5, 2020, the Company has issued 2,939 shares of the Company's common shares to an employee for services valued at approximately $2,000.
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PART I – FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Statements made in this Form 10-Q that are not historical or current facts, which represent the Company's expectations or beliefs including, but not limited to, statements concerning the Company's operations, performance, financial condition, business strategies, and other information, involve substantial risks and uncertainties. The Company's actual results of operations, most of which are beyond the Company's control, could differ materially. These statements often can be identified by the use of terms such as "may," "will," "expect," "believe," anticipate," "estimate," or "continue" or the negative thereof. We wish to caution readers not to place undue reliance on any such forward looking statements, which speak only as of the date made. Any forward lookingforward-looking statements represent management's best judgment as to what may occur in the future. However, forward looking statements are subject to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected.
These factors include adverse economic conditions, entry of new and stronger competitors, inadequate capital, unexpected costs, failure (or delay) to gain product or regulatory approvals in the United States (or particular states) or foreign countries and failure to capitalize upon access to new markets. Additional risks and uncertainties that may affect forward looking statements about Bion's business and prospects include the possibility that markets for nutrient reduction credits (discussed below) and/or other ways to monetize nutrient reductions will be slow to develop (or not develop at all), the existing default by PA1 on its loan secured by the Kreider 1 system, the possibility that a competitor will develop a more comprehensive or less expensive environmental solution, delays in market awareness of Bion and our Systems, uncertainties and costs related to research and development efforts to update and improve Bion'sBion’s technologies and applications thereof, and/or delays in Bion's development of Projects and failure of marketing strategies, each of which could have both immediate and long term material adverse effects by placing us behind our competitors and requiring expenditures of our limited resources. Bion disclaims any obligation subsequently to revise any forward lookingforward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements filed herein with the Company'sCompany’s Form 10-K for the year ended June 30, 2017.2019.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Statements made in this Form 10-Q that are not historical or current facts, which represent the Company's expectations or beliefs including, but not limited to, statements concerning the Company's operations, performance, financial condition, business strategies, and other information, involve substantial risks and uncertainties. The Company's actual results of operations, most of which are beyond the Company's control, could differ materially. These statements often can be identified by the use of terms such as "may," "will," "expect," "believe," anticipate," "estimate," or "continue" or the negative thereof. We wish to caution readers not to place undue reliance on any such forward looking statements, which speak only as of the date made. Any forward-looking statements represent management's best judgment as to what may occur in the future. However, forward looking statements are subject to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected.
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These factors include adverse economic conditions, entry of new and stronger competitors, inadequate capital, unexpected costs, failure (or delay) to gain product or regulatory approvals in the United States (or particular states) or foreign countries and failure to capitalize upon access to new markets. Additional risks and uncertainties that may affect forward looking statements about Bion's business and prospects include the possibility that markets for nutrient reduction credits (discussed below) and/or other ways to monetize nutrient reductions will be slow to develop (or not develop at all), the existing default by PA1 on its loan secured by the Kreider 1 system, the possibility that a competitor will develop a more comprehensive or less expensive environmental solution, delays in market awareness of Bion and our Systems, uncertainties and costs related to research and development efforts to update and improve Bion’s technologies and applications thereof, and/or delays in Bion's development of Projects and failure of marketing strategies, each of which could have both immediate and long term material adverse effects by placing us behind our competitors and requiring expenditures of our limited resources. Bion disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements filed herein with the Company’s Form 10-K for the year ended June 30, 2019.
BUSINESS OVERVIEW
From 2014 through the current 2018 fiscal year, the Company has focused its research and development activities toward development of our 3G Tech, augmenting the basic 'separate‘separate and aggregate'aggregate’ approach of its technology platform to provide additional flexibility and to increase recovery of nutrient by-productsco-products (in organic and non-organic forms) and renewable energy production (either/both biogas and/or renewable electricity)electricity and related credits), thereby increasing potential related revenue streams and reducing dependence of its future projects on the monetization of nutrient reductions (which still remain a veryan important part of project revenue streams). This research and development effort also involves ongoing review of potential "add-ons"“add-ons” and applications to our technology platform for use in different regulatory and/or climate environments. These research and development activities continued through the 20172018 and 2019 fiscal yearyears with increased focus on recovery of marketable 'byproducts'‘coproducts’ (including nutrients and renewable natural gas) and completion of development of Bion'sBion’s 3G Tech and technology platform. We believe such activities will continue at least through the 2018 fiscal2020 calendar year (and likely longer), subject to availability of adequate financing for the Company'sCompany’s operations, of which there is no assurance. assurance. Such activities may include the design and construction of a small,an initial, commercial-scale module utilizing our 3G Tech installation to assist in the optimization efforts before construction of the full Kreider 2 project (see below).
Bion’s 3G Tech and technology platform are designed to capture four revenue streams under one umbrella and provide the basis for joint ventures between the Company and larger livestock producers seeking to produce environmental/sustainable product lines. The revenue streams are: a) renewable energy and associated greenhouse gas credits (including US Renewable Fuel Standard (RFS) and/or Low Carbon Fuel Standard (LCFS) credits), b) verified nutrient reductions (primarily nitrogen and phosphorus) that can be used as qualified offsets to the federal Chesapeake Bay mandate and US EPA TMDL (‘total maximum daily limit’) requirements, c) co-products consisting of high value fertilizer that Bion believes will achieve certification for use in organic food production for human consumption during the current fiscal year, and d) an environmentally sustainable USDA certification that will be incorporated into a “brand” that can address the consumer concerns regarding food safety and sustainability (based on incorporation of all of the third party verified data for greenhouse gas reductions, nutrient reductions and fertilizer products into a digital register). The “branding” opportunity will offer large scale livestock producer / processor / distributors of livestock products the opportunity to differentiate and identify their products in the marketplace and, thereby creates the opportunity to achieve “premium pricing” by addressing consumer concerns related to safety and sustainability in a manner similar to the premiums achieved by organic producers.
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Operational results from the initial commercial system (utilizing our 2G Tech) confirmed the ability of Bion'sBion’s technologies to meet its nutrient reduction goals at commercial scale for an extended period of operation. Bion's 2GBion’s 3G Tech platform (and the new variations under development) center on its patented and proprietary processes that separate and aggregate the various assets in the CAFO waste stream so they become benign, stable and/or transportable. Bion systems can: a) remove up to 95% of the nutrients (primarily nitrogen and phosphorus) in the effluent, b) reduce greenhouse gases by 90% (or more) including elimination of virtually all ammonia emissions, c) while materially reducing pathogens, antibiotics and hormones in the livestock waste stream. In addition to capturing a portion of valuable nutrients for reuse (in organic and/or non-organic forms), Bion's 2nd generation technology platform also recovers cellulosic biomass which can be used to generate renewable energy from the waste stream in a process more efficient than other technologies that seek to exploit this CAFO waste stream. Our core technology and its primary CAFO applications are now proven in commercial operations. It has been accepted by the Environmental Protection Agency ("EPA"(“EPA”) and other regulatory agencies and it is protected by Bion'sBion’s portfolio of U.S. and international patents (both issued and applied for).
Currently, our research and development activities are underway to improve, update and move toward completion and commercialization of our 3G Tech systems (which is ready to be implemented) during the current fiscal year to meet the needs of CAFOs in various geographic and climate areas with nutrient release constraints and to increase the recovery and generation of valuable by-products while adding the capability to treat dry (poultry) waste streams in addition to wet manure streams.
Bion is focused on using applications of its patented and proprietary waste management technologies and technology platform to pursue three main business opportunities: 1) development of new state-of-the-art large-scale waste treatment facilities in joint ventures with large CAFO’s (and other agricultural industry parties) in strategic locations (“Projects”) ( some of these may be Integrated Projects) with multiple revenue streams; 2) installation of Bion systems ( some of which may generate verified nutrient reduction credits and revenues from the production of renewable energy and byproducts) coproducts) to retrofit and environmentally remediate existing large scale CAFOs ("Retrofits"(“Retrofits”) in selected markets where: a) government policy supports such efforts (such as the Chesapeake Bay watershed, some Great Lakes Basin states, and/or other states and watersheds facing EPA 'total‘total maximum daily load' ("TMDL"load’ (“TMDL”) issues, and/or b) where CAFO'sCAFO’s need our technology to obtain permits to expand or develop without negative environmental consequences; 2) development of new state-of-the-art large-scale waste treatment facilities in conjunction with large CAFO's in strategic locations ("Projects") ( some of these may be Integrated Projects) with multiple revenue streams, and 3) licensing and/or joint venturing of Bion'sBion’s technology and applications (primarily) outside North America. The opportunities described at 1) and 2) above each require substantial political and regulatory (federal, state and local) efforts on the part of the Company and a substantial part of Bion'sBion’s efforts are focused on such political and regulatory matters. Bion intends to pursue international opportunities primarily through the use of consultants with existing relationships in target locations. The most intense focus is currently on the requirements for the clean-up of the Chesapeake Bay, faced byon CAFO projects in the Commonwealth of Pennsylvaniamid-west involving various species, and the potential use of Bion'sBion’s technology and technology platform on CAFOs to remediate ammonia release (and re-deposition to the ground and water) and as an alternative to what the Company believes is far more expensive nutrient removal downstream in storm water and other projects.
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During 2008 the Company commenced actively pursuing the opportunity presented by environmental retrofit and remediation of the waste streams of existing CAFOs which effort has met with very limited success to date. The first commercial activity in this area is represented by our agreement with Kreider Farms ("KF"(“KF”), pursuant to which the Kreider 1 system to treat KF's dairy waste streams to reduce nutrient releases to the environment while generating marketable nutrient credits and renewable energy was designed, constructed and entered full-scale operation during 2011. On January 26, 2009 the Board of the Pennsylvania Infrastructure Investment Authority ("Pennvest"(“Pennvest”) approved a $7.75 million loan to Bion PA 1, LLC ("PA1"(“PA1”), a wholly-owned subsidiary of the Company, for the initial Kreider Farms project ("(“Kreider 1 System"System”). After substantial unanticipated delays, on August 12, 2010 PA1 received a permit for construction of the Kreider 1 System. Construction activities commenced during November 2010. The closing/settlement of the Pennvest Loan took place on November 3, 2010. PA1 finished the construction of the Kreider 1 System and entered a period of system 'operational shakedown'‘operational shakedown’ during May 2011. The Kreider 1 System reached full, stabilized operation by the end of the 2012 fiscal year. During 2011 the PADEP re-certified the nutrient credits for this project. The PADEP issued final permits for the Kreider 1 System (including the credit verification plan) on August 1, 2012 on which date the Company deemed that the Kreider 1 System was 'placed‘placed in service'service’. As a result, PA1 commenced generating nutrient reduction credits for potential sale while continuing to utilize the Kreider 1 System to test improvements and add-ons.However, to date liquidity in the Pennsylvania nutrient credit market has been slow to develop significant breadth and depth, which limited liquidity/depth has negatively impacted Bion'sBion’s business plans and has resulted in challenges to monetizing the nutrient reductions created by PA1'sPA1’s existing Kreider 1 project and Bion'sBion’s other proposed projects. These difficulties have prevented PA1 from generating any material revenues from the Kreider 1 project to date and raise significant questions as to when, if ever, PA1 will be able to generate such revenues from the Kreider 1 System. PA1 has had sporadic discussions/negotiations with Pennvest related to forbearance and/or re-structuring its obligations pursuant to the Pennvest Loan for more than three years. In the context of such discussions/negotiations, PA1 elected not to make interest payments to Pennvest on the Pennvest Loan since January 2013. Additionally, the Company has not made any principal payments, which were to begin in fiscal 2013, and, therefore, the Company has classified the Pennvest Loan as a current liability as of December 31, 2017.2019. Due to the failure of the PAPennsylvania nutrient reduction credit market to develop, the Company determined that the carrying amount of the property and equipment related to the Kreider 1 project exceeded its estimated future undiscounted cash flows based on certain assumptions regarding timing, level and probability of revenues from sales of nutrient reduction credits and, therefore, PA1 and the Company recorded impairments related to the value of the Kreider 1 assets of $1,750,000 and $2,000,000 at June 30, 2015 and June 30, 2014, respectively. During the 2016 fiscal year, PA1 and the Company recorded an impairment of $1,684,562 to the value of the Kreider 1 assets which reduced the value on the Company'sCompany’s books to zero. This impairment reflects management'smanagement’s judgment that the salvage value of the Kreider 1 assets roughly equals PA1'sPA1’s contractual obligations related to the Kreider 1 System, including expenses related to decommissioning of the Kreider 1 System,costs associated with needed capital upgrade expenses, and re-certification/ permitting amendments. See "Impairment loss on property and equipment" below.
On September 25, 2014, Pennvest exercised its right to declare the Pennvest Loan in default and accelerated the Pennvest Loan and demanded that PA1 pay $8,137,117 (principal, interest plus late charges) on or before October 24, 2014. PA1 did not make the payment and does not have the resources to make the payments demanded by Pennvest. PA1 has commenced discussions and negotiations with Pennvest concerning this matter but Pennvest has rejected PA1'sPA1’s proposal made during the fall of 2014. As of the date of this report, no formal proposals are currently under consideration and only sporadic communication has taken place regarding the matters involved over the last 24 months.5 years. It is not possible at this date to predict the outcome of this matter, but the Company believes that a loan modification agreement (coupled with an agreement regarding an update and re-start of full operations of KF1) may be reached in the future if/when a more robust market for nutrient reductions develops in PA,Pennsylvania, of which there is no assurance. PA1 and Bion will continue to evaluate various options with regard to Kreider 1 over the next 30-180180 days.
The economics (potential revenues, profitability and continued operation) of the Kreider 1 System arewere based almost entirely on the long termlong-term sale of nutrient (nitrogen and/or phosphorus) reduction credits to meet the requirements of the Chesapeake Bay environmental clean-up. See below for further discussion.
During August 2012, the Company provided Pennvest (and the PADEP) with data demonstrating that the Kreider 1 System met the 'technology guaranty'‘technology guaranty’ standards which were incorporated in the Pennvest financing documents and, as a result, the Pennvest Loan has been (and is now) solely an obligation of PA1 since that date.
PA1 is currently operatingmaintaining the Kreider 1 System in a limited manner pending development of a more robust market for its nutrient reductions.reductions and/or its potential inclusion within the Kreider 2 Project discussed below.
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Bion continues its pre-developpre-development work related to a waste treatment/renewable energy production facility to treat the waste from KF'sKF’s approximately 5+6+ million chickens (planned to expand to approximately 9-10 million)(and (and potentially other poultry operations and/or other waste streams)('Kreider ('Kreider Renewable Energy Facility' or '‘ Kreider 2 Project'Project’). On May 5, 2016, the Company executed a stand-alone joint venture agreement with Kreider Farms covering all matters related to development and operation of Kreider 2 system to treat the waste streams from Kreider'sKreider’s poultry facilities in Bion PA2 LLC ("PA2"(“PA2”). During May 2011 the PADEP certified a smaller version of the Kreider 2 Project for 559,457 nutrient credits under the old EPA'sEPA’s Chesapeake Bay model. The Company anticipateshas been in ongoing discussions with the PADEP regarding the appropriate credit calculation methodology for large-scale technology-based nutrient reduction installations such as the KF2 Project. Based on these discussions and the size of the Kreider 2 Project, we anticipate that when designs are finalized, the Kreider 2 Project will be re-certified for a far larger number of credits (management’s current estimates are between 1.5-22-4 million (or more) nutrient reduction credits (forfor treatment of the waste stream from Kreider's poultry)Kreider’s poultry pursuant to the Company'sCompany’s subsequent amended application during the 2019current fiscal year pursuant to the amended EPA Chesapeake Bay model and agreements between the EPA and PA. Note that this Project may be expanded in the future to treat wastes from other local and regional CAFOs (poultry and/or dairy)dairy---including the Kreider Dairy) and/or additional Kreider poultry expansion (some of which may not qualify for nutrient reduction credits).The review process to clarify certain issues related to credit calculation and verification commenced during 2014 based on Bion’s 2G Tech but has been placed on hold while certain matters are resolved between the EPA and PAPennsylvania and pending development of a robust market for nutrient reductions in PA.Pennsylvania. The Company anticipates it will submit an amended or new application based on our 3G Technology once these matters are clear. DesignSite specific design and engineering work for this facility, which will probably be the first full-scale project to utilize Bion'sBion’s 3G Tech, have not commenced, and the Company does not yet have financing in place for the Kreider 2 Project. This opportunity is being pursued through PA2. If there are positive developments related to the market for nutrient reductions in PA,Pennsylvania, of which there is no assurance, the Company intends to pursue development, design and construction of the Kreider 2 Project with a goal of achieving operational status for its initial modules during the 2019 fiscalcoming calendar year, and hopes to enter into agreements related to sales of the nutrient reduction credits for future delivery (under long term contracts) during 2018the current 2020 fiscal year subject to verification by the PADEP based on operating data from the Kreider 2 Project. The economics (potential revenues and profitability) of the Kreider 2 Project, despite its use of Bion'sBion’s 3G Tech for increased recovery of marketable by-products, are based in material part the long termlong-term sale of nutrient (nitrogen and/or phosphorus) reduction credits to meet the requirements of the Chesapeake Bay environmental clean-up. However, liquidity in the PAPennsylvania nutrient credit market has been slow to develop significant breadth and depth, which lack of liquidity has negatively impacted Bion'sBion’s business plans and has resulted in challenges to monetizing the nutrient reduction credits generated by PA1'sPA1’s existing Kreider 1 project and will most likely delay PA2'sPA2’s Kreider 2 Project and other proposed projects in PA.
Note that while Bion believes that the Kreider 1 System, the Kreider 2 Project and/or subsequent Bion Projects will eventually generate revenue from the sale of: a) nutrient reductions (credits or in other form), b) renewable energy (and related credits), c) sales of fertilizer products, and/or d) potentially, in time, credits for the reduction of greenhouse gas emissions, plus d)e) license fees related to a 'sustainable brand'‘sustainable brand’. We believe that the potential market is very large, but it is not possible to predict the exact timing and/or magnitude of these potential markets at this time.
A substantial portion of our activities involve public policy initiatives (by the Company and other stakeholders) to encourage the establishment of appropriate public policies and regulations (at federal, regional, state and local levels) to facilitate cost effective environmental clean-up and, thereby, support our business activities. Bion has been joined by National Milk Producers Federation, Land O'Lakes,O’Lakes, JBS and other national livestock interests to support changes to our nation'snation’s clean water strategy that will allow states to acquire low-cost nutrient reductions through a competitive procurement process, in a similar manner to how government entities now acquire many other goods and services on behalf of the taxpayer. As developing markets for nutrient reductions become fully-established, Bion anticipates a robust business opportunity to retrofit existing CAFOs and develop Projects, based primarily on the sale of nutrient credits that provide cost-effective alternatives to today'stoday’s high-cost and failing clean water strategy.
To date the market for long-term nutrient reduction credits in Pennsylvania ('PA'(‘PA’) has been very slow to develop and the Company'sCompany’s activities have been negatively affected by such lack of development.
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Several independent studies have calculated the average cost to remove nitrogen through various sector practices. Reports prepared for the PA Senate (2008), Chesapeake Bay Commission (2012) and PA legislature (2013; described below), as well as the Maryland Chesapeake Bay Financing Strategy Report (2015), demonstrate that the cost to remove nitrogen (per pound on average) from agriculture is $44 to $54, municipal wastewater: $28 to $43, and storm water: $386 to $633. Pursuant to the PA legislative Report, by replacing sector allocation (for all sectors) with competitive bidding, up to 80 percent savings could be achieved in PA'sPA’s Chesapeake Bay compliance costs ($1.5 billion annually) by 2025. If the legislative study had focused on the cost differentials of competitive bidding compared only with storm water, the relative savings would be substantially greater.
Since these studies were completed, most of the larger (Tier 1) municipal wastewater treatment plants in PA have been upgraded, at a cost of approximately $2.5 billion (vs initial 2004 PA DEP cost estimates of $376 million). US EPA is now focused on PA'sPA’s storm water allocation (3.5 million pounds (per last published data)) and has this sector on 'backstop‘backstop level actions'actions’, the highest level of EPA-oversight and the final step before sanctions. In the same 2004 PA DEP cost estimate that led to the more than a $2 billion underestimate/miscalculation in municipal wastewater plant upgrade costs, the estimate for storm water cost was $5.6 billion. In April 2017, US EPA sent a Letter of Expectation to PA DEP, expressing the agency'sagency’s support for the use of nutrient credit trading and competitive bidding to engage the private-sector to lower costs. The letter specifically encouraged the use of credit trading to offset the state'sstate’s looming storm water obligations.
The Company believes that: i) the April 2015 release of a report from the Pennsylvania Auditor General titled "Special“Special Report on the Importance of Meeting Pennsylvania'sPennsylvania’s Chesapeake Bay Nutrient Reduction Targets"Targets” which highlighted the economic consequences of EPA-imposed sanctions if the state fails to meet the 2017 TMDL targets, as well as the need to support using low-cost solutions and technologies as alternatives to higher-cost public infrastructure projects, where possible, and ii) Senate Bill 799 (successor575 (introduced in April 2019 as successor to prior SB 924 and SB 724)799 (which was passed by PA Senate during January 2018 but was not voted on in the House)) which, if adopted, will establish a program that will allow the Pennsylvania'sPennsylvania’s tax- and rate-payers to meet significant portions of their EPA-mandated Chesapeake Bay pollution reductions at significantly lower cost by purchasing verified reductions (by competitive bidding) from all sources, including those that Bion can produce through livestock waste treatment, represent visible evidence of progress being made on these matters in Pennsylvania. During late January2018, SB 799575 was passed by a 47-2 votethe PA Senate in 2019 and introduced in the PA Senate andHouse which is scheduled to be taken up the bill during its current session which is now underway. Such legislation (which has been forwarded to the PA House. Such legislation,bi-partisan support), if passed and signed into law (of which there is no assurance), will potentially enable Bion (and others) to compete for public funding on an equal basis with subsidized agricultural 'best‘best management practices'practices’ and public works and storm water authorities. Note, however, that there has beenis opposition to SB 575 (as was the case for SB 799 (andand its predecessors) from threatened stakeholders committed to the existing status quo approaches--- a significant portion of which was focused on attacking (in often inaccurate and/or vilifying ways) Bion in/through social media and internet articles, blogs, press releases, twitter posts and re-tweets, rather than engaging the substantive issues. If legislation similar to SB 799575 is passed (on a stand-alone basis or as part of a larger piece of legislation) and implemented (in a form which maintains its core provisions), Bion expects that the policies and strategies being developed in PA will not only benefit the Company'sCompany’s existing and proposed PA projects, but will also subsequently provide the basis for a larger Chesapeake Bay watershed strategy and, thereafter, a national clean water strategy.
The Company believes that Pennsylvania is 'ground zero'‘ground zero’ in the long-standing clean water battle between agriculture and the further regulation of agriculture relative to nutrient impacts. The ability of Bion and other technology providers to achieve verified reductions from agricultural non-point sources can resolve the current stalemate and enable implementation of constructive solutions that benefit all stakeholders, providing a mechanism that ensures that taxpayer funds will be used to achieve the most beneficial result at the lowest cost, regardless of source. All sources, point and non-point, rural and urban, will be able to compete for tax payer-funded nitrogen reductions in a fair and transparent process; and since payment from the tax and rate payers would now be performance-based, these providers will be held financially accountable.
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We believe that the overwhelming environmental, economic, quality of life and public health benefits to all stakeholders in the watershed, both within and outside of Pennsylvania, make the case for adoption of the strategies outlined in the Report less an issue of 'if'‘if’, but of 'when‘when and how'how’. The adoption of a competitive procurement program will have significant positive impact on technology providers that can deliver verified nitrogen reductions such as Bion, by allocating existing tax- and rate-payer clean water funding to low cost solutions based upon a voluntary and transparent procurement process. The Company believes that implementation of a competitively-bid nutrient reduction program to achieve the goals for the Chesapeake Bay watershed can also provide a working policy model and platform for other states to adopt that will enhance their efforts to comply with both current and future requirements for local and federal estuarine watersheds, including the Mississippi River/Gulf of Mexico, the Great Lakes Basin and other nutrient-impaired watersheds.
Bion will also pursue the opportunities related to development of Projects including(including Integrated Projects.Projects) which are likely to involve joint ventures with large livestock producers who can utilize the benefits of the ‘sustainable branding’ that Bion technology can facilitate for products produced utilizing its technology. Integrated Projects will include large CAFOs (such as large dairies,poultry facilities, dairy complexes, beef cattle feed lots and/or hog farms) with Bion waste treatmenttreatment/resource recovery system modules processing the aggregate CAFO waste stream from the equivalent of 20,000 to 80,000 (or more) beef or dairy cows (or the waste stream equivalent of other species), while recovering renewable energy andand/or value-added fertilizer/soil amendment products, integrated to various degrees with CAFO end product users/processing facilities, and/or potentially in some locations, a biofuel/ethanol plant capable of producing 40 million to 100 (or more) million gallons of ethanol per year.plant. Such Integrated Projects will involve multiple CAFO modules of 10,000 or more beef or dairy cows (orlarge CAFOs with Bion waste stream equivalent of other species) with waste treatmenttreatment/resource recovery modules on a single site and/or on sites within an approximately 30-mile radius. Bion believes its 3G technology platform (2G Tech, 3G Tech and/or a hybrid in different situations) will allow integration of large-scale CAFO's with end product processors and/(and/or potentially ethanol production,biofuel production), together with renewable energy production and byproducts recoveredco-product recovery from the waste streams, and on-site energy utilization in a relatively 'closed loop' manner that will reduce the capital expenditures, operating costs and carbon footprint for the entire Integrated Project and each component facility. Some Integrated Projects may be developed from scratch while others may be developed in geographic proximity to (and in coordination with) existing participating CAFOs, feed producers (corn growers and/or biofuel plants) and end product processors and/or ethanol plants.processors. Each Integrated Project is likely to have different degrees of integration, especially in the early development phases.
The Company currently anticipates that the Kreider 2 poultry waste treatment facility in PA will be its initial full-scale 3G Project. Bion anticipates that it will select afinalize site selection for the Kreider 2 Project and/or its initial Integrated Project (and possibly additional Projects) during calendarthe current fiscal year 2018. if SB 575 becomes law in PA.Bion hopes to commence development of its initial Project by optioning land and beginning the site-specific design and permitting process during the current fiscal year, 2019, but further delays are possible. It is not possible at this time to firmly predict where the initial Project will be developed or the order in which Projects will be developed. All potential Projects are in very early discussion and pre-development stages and may never progress to actual development or may be developed after other Projects not yet under active consideration.
Bion also hopes to be able to move forward on additional Projects through 2018-212020-2023 to create a pipeline of Projects. Management has a 5-year development target (through calendar year 2023)2025) of approximately 10 or more Projects.Projects pursuant to joint ventures (or similar agreements). Management hopes to have identified and begun development work related to 3-5 Projects over the next 2 years. At the end of the 5-year period, Bion projects that 3-8 of these Projects will be in full operation in 3-6 states (and possibly one or more foreign countries), and the balance would be in various stages ranging from partial operation to early development stage. It is possible that one or more Projects will be developed in 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).No Projects (including Integrated Projects) have been developed to date.
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The Company'sCompany’s audited financial statements for the years ended June 30, 20172019 and 2016 have been2018 were prepared assuming the Company will continue as a going concern. The Company has incurred net losses of approximately $2,463,000$2,659,000 and $4,522,000$3,018,000 during the years ended June 30, 20172019 and 2016,2018, respectively. The Report of the Independent Registered Public Accounting Firm on the Company'sCompany’s consolidated financial statements as of and for the year ended June 30, 20172019 includes a "going concern"“going concern” explanatory paragraph which means that the accounting firm has expressedthere are factors that raise substantial doubt about the Company'sCompany’s ability to continue as a going concern. The Company has incurred net (losseslosses of approximately $1,041,000$1,207,000 and $1,378,000$1,442,000 for the six months ended December 31, 20172019 and 2016,2018, respectively. At December 31, 2017,2019, the Company had a working capital deficit and a stockholders'stockholders’ deficit of approximately $10,019,000$10,247,000 and $13,538,000,$14,817,000, respectively.Management'sManagement’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
Revenue Recognition
The Company currently does not generate revenue and if and when the Company has not recognized any significant operating revenues for the past three fiscal years,begins to generate revenue the Company has commenced generationwill comply with the provisions of revenues during the year ended June 30, 2013. Revenues have been generatedAccounting Standards Codification (“ASC”) 606 “Revenue from the sale of nutrient reduction credits. The Company recognizes 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 ("ASC")ASC 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 ASC Topic 815 "Derivatives“Derivatives and Hedging" ("Hedging” (“Topic 815"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'sCompany’s value as of the date of the issuance, consideration of the Company'sCompany’s limited liquid resources and business prospects, the market price of the Company'sCompany’s stock in its mostly inactive public market and the historical valuations and purchases of the Company'sCompany’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.
Recent Accounting Pronouncements:
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 "Revenue from Contracts from Customers," which supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)," and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to the exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and earlier application is permitted only as of annual reporting periods beginning after December 15, 2016. Once the Company begins to generate revenue, the Company does not anticipate any material impact on its operations and financial statements.
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THREE MONTHS ENDED DECEMBER 31, 20172019 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2016
Revenue
Total revenues were nil for both the three months ended December 31, 20172019 and 2016,2018, respectively.
General and Administrative
Total general and administrative expenses were $809,000$388,000 and $527,000$290,000 for the three months ended December 31, 20172019 and 2016,2018, respectively.
General and administrative expenses, excluding stock-based compensation charges of $501,000$92,000 and $263,000,$23,000, were $308,000$296,000 and $264,000$267,000 for the three months ended December 31, 20172019 and 2016,2018, respectively, representing a $44,000$29,000 increase. Salaries and related payroll tax expenses were $73,000$65,000 and $74,000$64,000 for the three months ended December 31, 20172019 and 2016,2018, respectively. Consulting costs were $158,000$130,000 and $104,000$119,000 for the three months ended December 31, 20172019 and 2016,2018, respectively, representing a $54,000 increase. Most other general$11,000 increase due payment of $27,000 to the Coalition for an Affordable Bay Solution during the three months ended December 31, 2019. Investor relation expenses were $18,000 and administrative expenses$13,000 for the three months ended December 31, 2017 did not change materially compared to the three months ended December 31, 2016.
General and administrative stock-based employee compensation for the three months ended December 31, 20172019 and 20162018 consists of the following:
Three months ended December 31, 2017 | Three months ended December 31, 2016 | |||||||
| General and administrative: | ||||||||
| Fair value of stock options expensed under ASC 718 | $ | 97,000 | $ | 90,000 | ||||
| Change in fair value from modification of option terms | 244,000 | 166,000 | ||||||
| Change in fair value from modification of warrant terms | 157,000 | - | ||||||
| Fair value of stock bonus expensed | 3,000 | 7,000 | ||||||
| Total | $ | 501,000 | $ | 263,000 | ||||
| Three months ended December 31, 2019 | Three months ended September 30, 2018 | |||||||
| General and administrative: | ||||||||
| Fair value of stock options expensed under ASC 718 | $ | 92,000 | $ | 23,000 | ||||
| Total | $ | 92,000 | $ | 23,000 | ||||
Stock-based compensation charges were $501,000$92,000 and $263,000$23,000 for the three months ended December 31, 20172019 and 2016,2018, respectively. Compensation expense relating toThe fair value of stock options was $97,000 and $90,000 duringexpensed for the three months ended December 31, 20172019 and 2016,2018 was $92,000 and $23,000, respectively. The Company granted a total of 295,000 and 259,500390,000 options during the three months ended December 31, 20172019 which were fully vested at grant date.
Depreciation
Total depreciation expense was $347 and 2016, respectively. Compensation expense relating to stock bonuses expensed$259 for the three months ended December 31, 2017 related to 100,000 shares in stock bonuses granted to an employee2019 and a consultant with vesting periods ranging from January 15, 2018, through January 2020 (a portion of which were allocated torespectively.
Research and Development
Total research and development) was $3,000development expenses were $114,000 for both of the three months ended December 31, 2019 and $7,0002018, respectively.
Research and development expenses, excluding stock-based compensation expenses of $8,000 and nil were $106,000 and $114,000 for the three months ended December 31, 20172019 and 2016,2018, respectively, representing a $8,000 decrease. Salaries and related payroll tax expenses were $20,000 for both the three months ended December 31, 2019 and 2018, respectively. Consulting costs were $50,000 and $66,000 for the three months ended December 31, 2019 and 2018, respectively. The Company also incurred $22,000 and $9,000 for the three months ended December 31, 2019 and 2018, respectively in the development of a new pilot program for its anaerobic digestate process.
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Research and development stock-based employee compensation for the three months ended December 31, 2019 and 2018 consists of the following:
| Three months ended December 31, 2019 | Three months ended December 31, 2018 | |||||||
| Research and development: | ||||||||
| Fair value of stock options expensed under ASC 718 | $ | 8,000 | $ | — | ||||
| Total | $ | 8,000 | $ | — | ||||
Stock-based compensation expenses were $8,000 and nil for the three months ended December 31, 2019 and 2018, respectively. The Company granted 390,000 and nil options during the three months ended December 31, 2019 and 2018, respectively, of which all 390,000 options were fully vested during the three months ended December 31, 2019, and a portion of the stock compensation was allocated to research and development.
Loss from Operations
As a result of the factors described above, the loss from operations was $502,000 and $404,000 for the three months ended December 31, 2019 and 2018, respectively.
Other Expense
Other expense was $143,000 and $97,000 for the three months ended December 31, 2019 and 2018, respectively. Interest expense of $35,000 was recorded during the three months ended December 31, 2019 due to the modification of warrant expiry dates for 740,551 warrants held by investors. Interest on deferred compensation and convertible notes payable was $10,000 higher during the three months ended December 31, 2019 due to higher overall balances.
Net Loss Attributable to the Noncontrolling Interest
The net loss attributable to the noncontrolling interest was $768 and $523 for the three months ended December 31, 2019 and 2018, respectively.
Net Loss Attributable to Bion’s Common Stockholders
As a result of the factors described above, the net loss attributable to Bion’s stockholders was $644,000 and $501,000 for the three months ended December 31, 2019 and 2018, respectively, and the net loss per basic common share was $0.02 for both of the three months ended December 31, 2019 and 2018, respectively.
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SIX MONTHS ENDED DECEMBER 31, 2019 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31, 2018
Revenue
Total revenues were nil for both the six months ended December 31, 2019 and 2018, respectively.
General and Administrative
Total general and administrative expenses were $708,000 and $967,000 for the six months ended December 31, 2019 and 2018, respectively.
General and administrative expenses, excluding stock-based compensation charges of $92,000 and $421,000, were $616,000 and $546,000 for the six months ended December 31, 2019 and 2018, respectively, representing a $70,000 increase. Salaries and related payroll tax expenses were $126,000 and $131,000 for the six months ended December 31, 2019 and 2018, respectively, representing a $5,000 decrease due to lower payroll taxes during the six months ended December 31, 2018. Consulting costs were $246,000 and $203,000 for the six months ended December 31, 2019 and 2018, respectively. The increase in consulting costs is due to political consulting to further the environmental mandates in Pennsylvania. Investor relations expenses were $42,000 and $19,000 for the six months ended December 31, 2019 and 2018, representing a $23,000 increase due to the engagement of an investor relations firm during the six months ended December 31, 2019.
General and administrative stock-based employee compensation for the six months ended December 31, 2019 and 2018 consists of the following:
| Six months ended December 31, 2019 | Six months ended December 31, 2018 | |||||||
| General and administrative: | ||||||||
| Change in fair value from modification of option terms | $ | — | $ | 211,000 | ||||
| Change in fair value from modification of warrant terms | — | 118,000 | ||||||
| Fair value of stock options expensed under ASC 718 | 92,000 | 92,000 | ||||||
| Total | $ | 92,000 | $ | 421,000 | ||||
Stock-based compensation charges were $92,000 and $421,000 for the six months ended December 31, 2019 and 2018, respectively. Compensation expense relating to the change in fair value from the modification of option terms was $244,000nil and $166,000$211,000 for the threesix months ended December 31, 20172019 and 2016,2018, respectively, as the Company granted a reduction in certain exercise prices and an extension of certain option expiration dates for an employee and two consultants during the threesix months ended December 31, 2016, while during2018. During the threesix months ended December 31, 2017, the Company extended expiration dates for seven employees and consultants. During the three months ended December 31, 2017,2018, the Company extended expiration dates of warrants for certain employees and consultants which resulted in the recognition of $157,000$118,000 in non-cash compensation.
Three months ended December 31, 2017 | Three months ended December 31, 2016 | |||||||
| Research and development: | ||||||||
| Fair value of stock bonuses expensed | $ | 8,000 | $ | 8,000 | ||||
| Change in fair value from modification of option terms | 106,000 | 11,000 | ||||||
| Change in fair value from modification of warrant terms | 133,000 | - | ||||||
| Fair value of stock options expensed under ASC 718 | - | 19,000 | ||||||
| Total | $ | 247,000 | $ | 38,000 | ||||
Six months ended December 31, 2017 | Six months ended December 31, 2016 | |||||||
| General and administrative: | ||||||||
| Fair value of stock bonus expensed | $ | 7,000 | $ | 7,000 | ||||
| Change in fair value from modification of option terms | 244,000 | 166,000 | ||||||
| Change in fair value from modification of warrant terms | 157,000 | - | ||||||
| Fair value of stock options expensed under ASC 718 | 99,000 | 106,000 | ||||||
| Total | $ | 507,000 | $ | 279,000 | ||||
Depreciation
Total depreciation expense was $872$694 and $1,005$695 for the six months ended December 31, 20172019 and 2016,2018, respectively.
Research and Development
Total research and development expenses were $446,000$238,000 and $238,000$284,000 for the six months ended December 31, 20172019 and 2016,2018, respectively.
Research and development expenses, excluding stock-based compensation expenses of $254,000$8,000 and $43,000$82,000 were $192,000$230,000 and $195,000$202,000 for the six months ended December 31, 20172019 and 2016,2018, respectively. Salaries and related payroll tax expenses were $36,000 for both the six months ended December 31, 2017$41,000 and 2016, respectively. Consulting costs were $105,000 and $112,000$40,000 for the six months ended December 31, 20172019 and 2016,2018, respectively. Consulting costs were $104,000 and $115,000 for the six months ended December 31, 2019 and 2018, respectively.
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Research and development stock-based employee compensation for the six months ended December 31, 20172019 and 20162018 consists of the following:
Six Months ended December 31, 2017 | Six Months ended December 31, 2016 | |||||||
| Research and development: | ||||||||
| Fair value of stock bonuses expensed | $ | 15,000 | $ | 8,000 | ||||
| Change in fair value from modification of option terms | 106,000 | 11,000 | ||||||
| Change in fair value from modification of warrant terms | 133,000 | |||||||
| Fair value of stock options expensed under ASC 718 | - | 24,000 | ||||||
| Total | $ | 254,000 | $ | 43,000 | ||||
| Six Months ended December 31, 2019 | Six Months ended December 31, 2018 | |||||||
| Research and development: | ||||||||
| Change in fair value from modification of option terms | $ | — | $ | 11,000 | ||||
| Change in fair value from modification of warrant terms | — | 45,000 | ||||||
| Fair value of stock options expensed under ASC 718 | 8,000 | 26,000 | ||||||
| Total | $ | 8,000 | $ | 82,000 | ||||
Stock-based compensation expenses were $254,000$8,000 and $43,000$82,000 and for the six months ended December 31, 20172019 and 2016,2018, respectively. CompensationThe compensation expense relating to stock bonuses expensedof $11,000 for the six months ended December 31, 2017 and 2016 of $15,000 and $8,000, respectively, related to 70,000 shares in stock bonuses granted to an employee, whose time is partially allocated to research and development, with vesting periods ranging from April 2017 through January 2020. The compensation expense of $11,000 attributed to2018 was for the change in fair value from modification of options terms for the six months ended December 31, 2016 is due to a research and development employee'semployee and consultant having certain option exercise prices reduced during the period. For the six months ended December 31, 2017 an employee and a consultant's expiration period of certain options were extended resulting in $106,000 of expense.those periods. During the six months ended December 31, 2017,2018, the Company extended expiration dates of warrants for certain research and development employees and consultants which resulted in the recognition of $133,000$45,000 in non-cash compensation.
Loss from Operations
As a result of the factors described above, the loss from operations was $1,567,000$946,000 and $1,191,000$1,252,000 for the six months ended December 31, 20172019 and 2016,2018, respectively.
Other (Income) Expense
Other (income) expense was $(526,000)$260,000 and $187,000$190,000 for the six months ended December 31, 20172019 and 2016,2018, respectively. During the six months ended December 31, 2017, the Company recognized other income of $719,000 due to the extinguishment of liabilities related to deferred compensation of non-related parties. Interest expense related the Pennvest Loan was $194,000$123,000 and $188,000$114,000 for the six months ended December 31, 20172019 and 2016,2018, respectively, while interest expense related to deferred compensation and convertible notes was $101,000 and $71,000 for the six months ended December 31, 2019 and 2018, respectively. The increaseAdditionally, interest expense of $6,000$35,000 and $4,000 was due to higher balances on interest bearing deferred compensationrecorded during the six months ended December 31, 2017. Interest expense related2019 and 2018, respectively, due to the Pennvest loan was $99,000modification of warrant expiry dates for both periods.
Net Loss Attributable to the Noncontrolling Interest
The net loss attributable to the noncontrolling interest was $1,000 and $4,000 for both the six months ended December 31, 20172019 and 2016,2018, respectively.
Net Loss Attributable to Bion'sBion’s Common Stockholders
As a result of the factors described above, the net loss attributable to Bion'sBion’s stockholders was $1,040,000$1,205,000 and $1,377,000$1,438,000 for the six months ended December 31, 20172019 and 2016,2018, respectively, and the net loss per basic common share was $0.04 and $0.06 for the six months ended December 31, 20172019 and 2016,2018, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated financial statements for the six months ended December 31, 20172019 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 consolidated financial statements as of and for the year ended June 30, 20172019 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 December 31, 2017,2019, the Company had cash of approximately $28,000.$469,000. During the six months ended December 31, 2017,2019, net cash used in operating activities was $248,000,$477,000, primarily consisting of cash operating expenses related to salaries and benefits, and other general and administrative costs such as insurance, legal, accounting and legal and accountinginvestor relations expenses.As previously noted, the Company is currently not generating significant 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 substantial funding from external sources. Given the unsettled state of the current credit and capital markets for companies such as Bion, there is no assurance the Company will be able to raise the funds it needs on reasonable terms.
Financing Activities
During the six months ended December 31, 2017, the Company had no investing activities.
As of December 31, 20172019, the Company has debt obligations consisting of: a) loans payable – affiliates of $31,000, b) deferred compensation of $141,000,$537,000, b) convertible notes payable – affiliates of $3,468,000,$4,523,000, and, c) a loan payable and accrued interest of $8,913,000,$9,445,000 (owed by PA1).
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Plan of Operations and Outlook
As of December 31, 2017,2019, the Company had cash of approximately $28,000.
The Company continues to explore sources of additional financing to satisfy its current operating requirements as it is not currently generating any significant revenues. During fiscalthe past six years (fiscal years 2014 through 2017 and through the six months ended December 31, 2017,2019), the Company experienced greater difficulty in raising equity and debt funding than in the prior years.years (which is not mitigated by the relative increase in equity funding during the year ended June 30, 2019). As a result, the Company faced, and continues to face, significant cash flow management challenges due to material working capital constraints. These difficulties, challenges and constraints have continued during fiscal year 2017years 2018 and through the six months ended December 31, 20172019 and the first six (6) months of fiscal year 2020. The Company anticipates that they may continue for the next twelve (12) months or longer.
The Company is not currently generating any significant revenues. Further, the Company'sCompany’s anticipated revenues, if any, from existing projects and proposed projects will not be sufficient to meet the Company'sCompany’s anticipated operational and capital expenditure needs for many years.
Because the Company is not currently generating significant 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 1 facility.
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The first commercial activity in the Retrofit segment is represented by our agreement with Kreider Farms ("KF"), pursuant to which the Kreider 1 system to treat KF's dairy waste streams to reduce nutrient releases to the environment while generating marketable nutrient credits and renewable energy was designed, constructed and entered full-scale operation during 2011. On January 26, 2009 the Board of the Pennsylvania Infrastructure Investment Authority ("Pennvest") approved a $7.75 million loan to Bion PA 1, LLC ("PA1"), a wholly-owned subsidiary of the Company, for the initial Kreider Farms project ("Kreider 1 System"). After substantial unanticipated delays, on August 12, 2010 PA1 received a permit for construction of the Kreider 1 system. Construction activities commenced during November 2010. The closing/settlement of the Pennvest Loan took place on November 3, 2010. PA1 finished the construction of the Kreider 1 System and entered a period of system 'operational shakedown' during May 2011. The Kreider 1 System reached full, stabilized operation by the end of the 2012 fiscal year. During 2011 the PADEP re-certified the nutrient credits for this project. The PADEP issued final permits for the Kreider 1 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, PA1 commenced generating nutrient reduction credits for potential sale while continuing to utilize the Kreider 1 system to test improvements and add-ons.However, to date liquidity in the Pennsylvania nutrient credit market has been slow to develop significant breadth and depth, which limited liquidity/depth has negatively impacted Bion's business plans and has resulted in challenges to monetizing the nutrient reductions created by PA1's existing Kreider 1 project and Bion's other proposed projects. These difficulties have prevented PA1 from generating any material revenues from the Kreider 1 project to date and raise significant questions as to when, if ever, PA1 will be able to generate such revenues from the Kreider 1 system. PA1 has had sporadic discussions/negotiations with Pennvest related to forbearance and/or re-structuring its obligations pursuant to the Pennvest Loan for more than three years. In the context of such discussions/negotiations, PA1 elected not to make interest payments to Pennvest on the Pennvest Loan since January 2013. Additionally, the Company has not made any principal payments, which were to begin in fiscal 2013, and, therefore, the Company has classified the Pennvest Loan as a current liability as of December 31, 2017.2019. Due to the failure of the PA nutrient reduction credit market to develop, the Company determined that the carrying amount of the property and equipment related to the Kreider 1 project exceeded its estimated future undiscounted cash flows based on certain assumptions regarding timing, level and probability of revenues from sales of nutrient reduction credits and, therefore, PA1 and the Company recorded impairments related to the value of the Kreider 1 assets of $1,750,000 and $2,000,000 at June 30, 2015 and June 30, 2014, respectively. During the 2016 fiscal year, PA1 and the Company recorded an impairment of $1,684,562 to the value of the Kreider 1 assets which reduced the value on the Company's books to zero. This impairment reflects management's judgment that the salvage value of the Kreider 1 assets roughly equals PA1's contractual obligations related to the Kreider 1 system, including expenses related to decommissioning of the Kreider 1 system,costs associated with needed capital upgrade expenses, and re-certification/ permitting amendments. See "Impairment loss on property and equipment" above.
On September 25, 2014, Pennvest exercised its right to declare the Pennvest Loan in default and accelerated the Pennvest Loan and demanded that PA1 pay $8,137,117 (principal, interest plus late charges) on or before October 24, 2014. PA1 did not make the payment and does not have the resources to make the payments demanded by Pennvest. PA1 has commenced discussions and negotiations with Pennvest concerning this matter but Pennvest has rejected PA1's proposal made during the fall of 2014. As of the date of this report, no formal proposals are currently under consideration and only sporadic communication has taken place regarding the matters involved over the last 24 months.5 years. It is not possible at this date to predict the outcome of this matter, but the Company believes that a loan modification agreement (coupled with an agreement regarding an update and restart of full operations of KF1) may be reached in the future if/when a more robust market for nutrient reductions develops in PA, of which there is no assurance. PA1 and Bion will continue to evaluate various options with regard to Kreider 1 over the next 30-180180 days.
The economics (potential revenues, profitability and continued operation) of the Kreider 1 System are based almost entirely on the long termlong-term sale of nutrient (nitrogen and/or phosphorus) reduction credits to meet the requirements of the Chesapeake Bay environmental clean-up. See below for further discussion.
During August 2012, the Company provided Pennvest (and the PADEP) with data demonstrating that the Kreider 1 system 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 PA1.
The Company is currently operating the Kreider 1 System in a limited manner pending development of a more robust market for its nutrient reductions.
As indicated above, the Company anticipates that it will seek to raise from $2,500,000 to $50,000,000 or more (from debt, equity, joint venture, strategic partnering, etc.) during the next twelve months, some of which may be in the context of joint ventures for the development of one or more large scale projects.We reiterate that there is no assurance, especially in the extremely unsettled capital markets that presently exist for companies such as Bion, 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.
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There is extremely limited likelihood that funds required during the next twelve months or in the periods immediately thereafter will be generated from operations and there is no assurance 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 and/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 limited and unsettled credit and capital markets presently existing for companies such as Bion.
Currently, Bion is focused on using applications of its patented and proprietary waste management technologies and technology platform to pursue three main business opportunities: 1) installation of Bion systems ( some of which may generate verified nutrient reduction credits and revenues from the production of renewable energy and byproducts) to retrofit and environmentally remediate existing CAFOs ("Retrofits") in selected markets where: a) government policy supports such efforts (such as the Chesapeake Bay watershed, Great Lakes Basin states, and/or other 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; 2) development of new state-of-the-art large scale waste treatment facilities in joint ventures with large CAFO’s in strategic locations ("Projects") ( some of these may be Integrated Projects as described below) with multiple revenue streams, and 3) licensing and/or joint venturing of Bion's technology and applications (primarily) outside North America.America commencing during the 2020 calendar year. The opportunities described at 1) and 2) above each require substantial political and regulatory (federal, state and local) efforts on the part of the Company and a substantial part of Bion's efforts are focused on such political and regulatory matters. Bion is currently pursuing the international opportunities primarily through the use of consultants with existing relationships in target countries. The most intense focus is currently on the requirements for the clean-up of the Chesapeake Bay faced by the Commonwealth of Pennsylvania and the potential use of Bion'sBion’s technology and technology platform on CAFOs to remediate ammonia release (and re-deposition to the ground and water) and as an alternative to what the Company believes is far more expensive nutrient removal downstream in storm water and other projects.
Additionally, the Kreider agreements provide for Bion to develop a waste treatment/renewable energy production facility to treat the waste from Kreider's approximately 5+6+ million chickens (planned to expand to approximately 99-10 million)(and potentially other poultry operations and/or other waste streams)('Kreider Renewable Energy Facility' or ' Kreider 2 Project'). On May 5, 2016, the Company executed a stand-alone joint venture agreement with Kreider Farms covering all matters related to development and operation of a system to treat the waste streams from Kreider's poultry facilities in Bion PA2 LLC ("PA2"). The Company continues its development work related to the details of the Kreider 2 Project. During May 2011 the PADEP certified Kreider 2 Project for 559,457 nutrient credits under the old EPA's Chesapeake Bay model. The Company anticipates that the Kreider 2 Project will be re-certified for between 1.5-2 million (or more) nutrient reduction credits (for treatment of the waste stream from Kreider's poultry) pursuant to the Company's pending reapplication (or subsequent amended application) during 2018 pursuant to the amended EPA Chesapeake Bay model and agreements between the EPA and PA. Note that this Project may be expanded in the future to treat wastes from other local and regional CAFOs (poultry and/or dairy)dairy – including the Kreider Dairy) and/or Kreider poultry expansion (some of which may not qualify for nutrient reduction credits).The review process to clarify certain issues related to credit calculation and verification commenced during 2014 based on Bion’s 2G Tech but has been largely placed on hold while certain matters are resolved between the EPA and PA and pending development of a robust market for nutrient reductions in PA. The Company anticipates it will submit an amended application based on our 3G Technology once these matters are clear. DesignSite specific design and engineering work for this facility, which will probably be the first full-scale project to utilize Bion's 3G Tech, have not commenced, and the Company does not yet have financing in place for the Kreider 2 Project. This opportunity is being pursued through PA2. If there are positive developments related to the market for nutrient reductions in PA, of which there is no assurance, the Company intends to pursue development, design and construction of the Kreider 2 Project with a goal of achieving operational status of its initial modules during the 2019 fiscal2020 calendar year, and hopes to enter into agreements related to sales of the nutrient reduction credits for future delivery (under long term contracts) during 2018the 2020 fiscal year subject to verification by the PADEP based on operating data from the Kreider 2 Project. The economics (potential revenues and profitability) of the Kreider 2 Project, despite its use of Bion's 3G Tech for increased recovery of marketable by-products, are based in material part the long termlong-term sale of nutrient (nitrogen and/or phosphorus) reduction credits to meet the requirements of the Chesapeake Bay environmental clean-up. However, liquidity in the PA nutrient credit market has been slow to develop significant breadth and depth, which lack of liquidity has negatively impacted Bion's business plans and has resulted in challenges to monetizing the nutrient reduction credits generated by PA1's existing Kreider 1 project and will most likely delay PA2's Kreider 2 Project and other proposed projects in PA.
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Note that while Bion believes that the Kreider 1 System (when re-started), the Kreider 2 Project and/or subsequent Bion Projects will eventually generate revenue from the sale of: a) nutrient reductions (credits or in other form), b) renewable energy (and related credits), c) sales of fertilizer products, and/or d) potentially, in time, credits for the reduction of greenhouse gas emissions. Additionally, revenues from licensingemissions, plus e) license fees related to a sustainable brand are also anticipated for many Projects.‘sustainable brand’. We believe that the potential market is very large, but it is not possible to predict the exact timing and/or magnitude of these potential markets at this time.
The Company anticipates that the Kreider 2 poultry waste treatment facility in PA will be its initial Project. Bion anticipates that it will select a site for the Kreider 2 Project and/or its initial Integrated Project (and possibly additional Projects) during calendarthe current fiscal year 2018. if SB575 becomes law in PA.Bion hopes to commence development of its initial Project by optioning land and beginning the site specific design and permitting process during fiscalthe current year, 2019, but delays are possible. It is not possible at this time to firmly predict where the initial Project will be developed or the order in which Projects will be developed. All potential Projects are in very early pre-development stages and may never progress to actual development or may be developed after other Projects not yet under active consideration.
Bion also hopes to be able to move forward on additional Projects through 2018-202020-23 to create a pipeline of Projects. Management has a 5-year development target (through calendar year 2023)2025) of approximately 10 or more Projects. Management hopes to have identified and begun development work related to 3-5 Projects over the next 2 years. At the end of the 5-year period, Bion projects that 3-8 of these Projects will be in full operation in 3-6 states (and possibly one or more foreign countries), and the balance would be in various stages ranging from partial operation to early development stage. It is possible that one or more Projects will be developed in 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).No Projects (including Integrated Projects) has been developed to date.
CONTRACTUAL OBLIGATIONS
We have the following material contractual obligations (in addition to employment and consulting agreements with management and employees):
During 2008 the Company commenced actively pursuing the opportunity presented by environmental retrofit and remediation of the waste streams of existing CAFOs which effort has met with very limited success to date. The first commercial activity in this area is represented by our agreement with Kreider Farms ("KF"), pursuant to which the Kreider 1 system to treat KF's dairy waste streams to reduce nutrient releases to the environment while generating marketable nutrient credits and renewable energy was designed, constructed and entered full-scale operation during 2011. On January 26, 2009 the Board of the Pennsylvania Infrastructure Investment Authority ("Pennvest") approved a $7.75 million loan to Bion PA 1, LLC ("PA1"), a wholly-owned subsidiary of the Company, for the initial Kreider Farms project ("Kreider 1 System"). After substantial unanticipated delays, on August 12, 2010 PA1 received a permit for construction of the Kreider 1 system. Construction activities commenced during November 2010. The closing/settlement of the Pennvest Loan took place on November 3, 2010. PA1 finished the construction of the Kreider 1 System and entered a period of system 'operational shakedown' during May 2011. The Kreider 1System reached full, stabilized operation by the end of the 2012 fiscal year. During 2011 the PADEP re-certified the nutrient credits for this project. The PADEP issued final permits for the Kreider 1 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, PA1 commenced generating nutrient reduction credits for potential sale while continuing to utilize the Kreider 1 system to test improvements and add-ons.However, to date liquidity in the Pennsylvania nutrient credit market has been slow to develop significant breadth and depth, which limited liquidity/depth has negatively impacted Bion's business plans and has resulted in challenges to monetizing the nutrient reductions created by PA1's existing Kreider 1 project and Bion's other proposed projects. These difficulties have prevented PA1 from generating any material revenues from the Kreider 1 project to date and raise significant questions as to when, if ever, PA1 will be able to generate such revenues from the Kreider 1 system. PA1 has had sporadic discussions/negotiations with Pennvest related to forbearance and/or re-structuring its obligations pursuant to the Pennvest Loan for more than three years. In the context of such discussions/negotiations, PA1 elected not to make interest payments to Pennvest on the Pennvest Loan since January 2013. Additionally, the Company has not made any principal payments, which were to begin in fiscal 2013, and, therefore, the Company has classified the Pennvest Loan as a current liability as of December 31, 2017.2019. Due to the failure of the PA nutrient reduction credit market to develop, the Company determined that the carrying amount of the property and equipment related to the Kreider 1 project exceeded its estimated future undiscounted cash flows based on certain assumptions regarding timing, level and probability of revenues from sales of nutrient reduction credits and, therefore, PA1 and the Company recorded impairments related to the value of the Kreider 1 assets of $1,750,000 and $2,000,000 at June 30, 2015 and June 30, 2014, respectively. During the 2016 fiscal year, PA1 and the Company recorded an impairment of $1,684,562 to the value of the Kreider 1 assets which reduced the value on the Company's books to zero. This impairment reflects management's judgment that the salvage value of the Kreider 1 assets roughly equals PA1's contractual obligations related to the Kreider 1 system, including expenses related to decommissioning of the Kreider 1 system,costs associated with needed capital upgrade expenses, and re-certification/ permitting amendments. See "Impairment loss on property and equipment" above.
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On September 25, 2014, Pennvest exercised its right to declare the Pennvest Loan in default and accelerated the Pennvest Loan and demanded that PA1 pay $8,137,117 (principal, interest plus late charges) on or before October 24, 2014. PA1 did not make the payment and does not have the resources to make the payments demanded by Pennvest. PA1 has commenced discussions and negotiations with Pennvest concerning this matter but Pennvest has rejected PA1's proposal made during the fall of 2014. As of the date of this report, no formal proposals are currently under consideration and only sporadic communication has taken place regarding the matters involved over the last 24 months.5 years. It is not possible at this date to predict the outcome of this matter, but the Company believes that a loan modification agreement (coupled with an agreement regarding an update and restart of full operations of KF1) may be reached in the future if/when a more robust market for nutrient reductions develops in PA, of which there is no assurance. PA1 and Bion will continue to evaluate various options with regard to Kreider 1 over the next 30-180180 days.
The economics (potential revenues, profitability and continued operation) of the Kreider 1 System are based almost entirely on the long termlong-term sale of nutrient (nitrogen and/or phosphorus) reduction credits to meet the requirements of the Chesapeake Bay environmental clean-up.
During August 2012, the Company provided Pennvest (and the PADEP) with data demonstrating that the Kreider 1 system 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 PA1.
The Company is currently operating the Kreider 1 System in a limited manner pending development of a more robust market for its nutrient reductions.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S‑K)S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized, and reported within the required time periods. Our Chief Executive Officer and Principal Financial Officer has evaluated the effectiveness of the design and operations of our disclosure controls and procedures as of the end of the period covered by this quarterly report, and has concluded that, as of that date, our disclosure controls and procedures were not effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act, as a result of the material weakness in internal control over financial reporting discussed in Item 9(A) of our Form 10-K for the year ended June 30, 2017.
(b) Changes in Internal Control over Financial Reporting.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
On September 25, 2014, Pennvest exercised its right to declare the Pennvest Loan in default and has accelerated the Pennvest Loan and has demanded that our wholly-owned subsidiary Bion PA-1 LLC ('PA-1'(‘PA-1’) pay $8,137,117 (principal, interest plus late charges) on or before October 24, 2014. The Company anticipates that it is possible that discussions and negotiations will take place between PA-1 and Pennvest concerning this matter over the next 90-180 days.days if legislation is passed in Pennsylvania. No proposals are currently under consideration to resolve this matter. It is not possible at this date to predict the outcome of such negotiations, but the Company believes that it remains possible that negotiations will lead to a commercially reasonable loan modification agreement be reached between PA-1 and Pennvest. Subject to the results of the negotiations with Pennvest and pending development of a more robust market for nutrient reductions in Pennsylvania, PA-1 and Bion anticipate that it will be necessary for the Company to evaluate various options with regard to Kreider 1 over the coming months. Litigation has not commenced in this matter but has been threatened by Pennvest.
The Company currently is not involved in any other material litigation.
Item 1A. Risk Factors.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the quarter ended December 31, 20172019 the Company sold the following restricted securities: a) 5,404 shares issued pursuant to our 2006 Consolidated Incentive Plan ('Plan'), valued at $4,002 in aggregate, to an employee and consultant for services, and b) 196,6941,634,087 units at $0.75$0.50 per unit were sold and the Company received proceeds of $147,521 (each unit consistedconsisting of one share of the Company'sCompany’s restricted common stock and one warrant to purchase half of aone share of the Company'sCompany’s restricted common stock at $1.00$0.75 until December 31, 2020 and received gross proceeds of $817,044 and net proceeds of $740,340. During the three months ended December 31, 2019, Mark A. Smith, Director and President of the Company, elected to convert a loan payable, accrued expenses and interest of $15,000, $52,830 and $3,828, respectively, into an aggregate 143,316 units at $0.50 per unit, pursuant to the 2006 Consolidated Incentive Plan with each unit consisting of one share of the Company’s common stock and one warrant to purchase one share of the Company’s stock for $0.75 per share until June 30, 2018. Additionally, in transactions effective November 7, 2017, the Company sold 3,610,00 warrants, in aggregate, (including 1,765,000 to Dominic Bassani, the Company's CEO ("Bassani") and 670,000 to Mark A. Smith, the Company's President and a director("Smith")) valued at $.05 per warrant for consideration totaling $180,500 (including an $88,250 promissory note from Bassani and $33,500 in services from Smith), which warrants are exercisable at $0.75 and have expiry dates of December 31, 2020.2022. In all of these transactions the Company relied on the exemptions in Section 4(2) of the Securities Act of 1933, as amended, and/or under Rule 506 of Regulation D under the Securities Act of 1933, as amended. See Notes to Financial Statements (included herein) for additional details.
The proceeds were utilized for general corporate purposes.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
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Item 6. Exhibits.
(a) Exhibits required by Item 601 of Regulation S-K.
| Exhibit | Description | |
| 31.1 | ||
| 101 | XBRL Exhibits |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| BION ENVIRONMENTAL TECHNOLOGIES, INC. | ||
| Date: February | By: | /s/ Mark A. Smith |
| Mark A. Smith, President and Chief Financial Officer (Principal Financial and Accounting Officer) | ||
| Date: February | By: | /s/ Dominic Bassani |
| Dominic Bassani, Chief Executive Officer | ||