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) |
9 East Park Court
Old Bethpage, New York 11804
(Address of principal executive offices)
516-586-5643
(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, 2018,2021, there were 25,033,098
BION ENVIRONMENTAL TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION | Page | ||
Item 1. | Financial Statements | ||
Consolidated financial statements (unaudited): | |||
Balance sheets | |||
Statements of operations | |||
Statement of changes in equity (deficit) | |||
Statements of cash flows | |||
Notes to unaudited consolidated financial statements | |||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | ||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | ||
Item 4. | Controls and Procedures | ||
PART II. OTHER INFORMATION | |||
Item 1. | Legal Proceedings | ||
Item 1A. | Risk Factors | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||
Item 3. | Defaults Upon Senior Securities | ||
Item 4. | Mine Safety Disclosures | ||
Item 5. | Other Information | ||
Item 6. | Exhibits | ||
Signatures | |||
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.
2 |
BION ENVIRONMENTALENFIRONMENTAL TECHNOLOGIES,
CONSOLIDATED 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, | |||||||
2020 | 2020 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 361,184 | $ | 560,828 | ||||
Prepaid expenses | 4,350 | 7,965 | ||||||
Deposits | 1,000 | 1,000 | ||||||
Total current assets | 366,534 | 569,793 | ||||||
Property and equipment, net (Note 3) | 954 | 1,368 | ||||||
Total assets | $ | 367,488 | $ | 571,161 | ||||
LIABILITIES AND EQUITY (DEFICIT) | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 604,255 | $ | 628,926 | ||||
Series B Redeemable Convertible Preferred stock, $0.01 par value, 50,000 shares authorized; 200 shares issued and outstanding, liquidation preference of $39,000 and $38,000, respectively (Note 7) | 36,400 | 35,400 | ||||||
Paycheck Protection Program loan (Note 5) | 27,733 | 14,933 | ||||||
Deferred compensation (Note 4) | 998,474 | 778,217 | ||||||
Loan payable and accrued interest (Note 5) | 9,727,189 | 9,585,883 | ||||||
Total current liabilities | 11,394,051 | 11,043,359 | ||||||
Paycheck Protection Program loan (Note 5) | 7,293 | 19,919 | ||||||
Convertible notes payable - affiliates (Note 6) | 4,703,000 | 4,595,841 | ||||||
Total liabilities | 16,104,344 | 15,659,119 | ||||||
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, 32,270,594 | ||||||||
and 31,409,005 shares issued, respectively; 31,566,285 | ||||||||
and 30,704,696 shares outstanding, respectively | — | — | ||||||
Additional paid-in capital | 114,866,642 | 114,266,683 | ||||||
Subscription receivable - affiliates (Note 8) | (504,650 | ) | (504,650 | ) | ||||
Accumulated deficit | (130,139,711 | ) | (128,891,893 | ) | ||||
Total Bion’s stockholders’ deficit | (15,777,719 | ) | (15,129,860 | ) | ||||
Noncontrolling interest | 40,863 | 41,902 | ||||||
Total deficit | (15,736,856 | ) | (15,087,958 | ) | ||||
Total liabilities and deficit | $ | 367,488 | $ | 571,161 |
See notes to consolidated financial statements
3 |
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 20172020 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 December 31, | Six months ended December 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenue | $ | — | $ | — | $ | — | $ | — | ||||||||
Operating expenses: | ||||||||||||||||
General and administrative (including stock-based compensation (Note 7)) | 291,682 | 387,526 | 594,559 | 707,754 | ||||||||||||
Depreciation | 207 | 347 | 414 | 694 | ||||||||||||
Research and development (including stock-based compensation (Note 7)) | 155,385 | 114,454 | 246,373 | 237,779 | ||||||||||||
Total operating expenses | 447,274 | 502,327 | 841,346 | 946,227 | ||||||||||||
Loss from operations | (447,274 | ) | (502,327 | ) | (841,346 | ) | (946,227 | ) | ||||||||
Other expense: | ||||||||||||||||
Interest expense | 303,171 | 142,738 | 407,511 | 260,340 | ||||||||||||
Total other expense | 303,171 | 142,738 | 407,511 | 260,340 | ||||||||||||
Net loss | (750,445 | ) | (645,065 | ) | (1,248,857 | ) | (1,206,567 | ) | ||||||||
Net loss attributable to the noncontrolling interest | 524 | 768 | 1,039 | 1,273 | ||||||||||||
Net loss applicable to Bion's common stockholders | $ | (749,921 | ) | $ | (644,297 | ) | $ | (1,247,818 | ) | $ | (1,205,294 | ) | ||||
Net loss applicable to Bion's common stockholders per basic and diluted common share | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.04 | ) | ||||
Weighted-average number of common shares outstanding: | ||||||||||||||||
Basic and diluted | 31,187,645 | 28,804,007 | 30,990,639 | 28,135,409 |
See notes to consolidated financial statements
4 |
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
SIX MONTHS ENDED DECEMBER 31, 2017
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- eivables | Accumulated | Noncontrolling | Total | |||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | paid-in capital | 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 | ) |
Six months ended December 31, 2020 | Bion's Shareholders' | |||||||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock | Series C Preferred Stock | Common Stock | Additional | Subscription Rec- eivables | Accumulated | Noncontrolling | Total | |||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | paid-in capital | for Shares | deficit | interest | equity/(deficit) | ||||||||||||||||||||||||||||||||||
Balances, July 1, 2020 | — | $ | — | — | $ | — | 31,409,005 | $ | — | $ | 114,266,683 | $ | (504,650 | ) | $ | (128,891,893 | ) | $ | 41,902 | $ | (15,087,958 | ) | ||||||||||||||||||||||
Sale of units | — | — | — | — | 720,000 | — | 360,000 | — | — | — | 360,000 | |||||||||||||||||||||||||||||||||
Commissions on sale of units | — | — | — | — | — | — | (31,000 | ) | — | — | — | (31,000 | ) | |||||||||||||||||||||||||||||||
Modification of options | — | — | — | — | — | — | 8,775 | — | — | — | 8,775 | |||||||||||||||||||||||||||||||||
Modification of warrants | — | — | — | — | — | — | 188,890 | — | — | — | 188,890 | |||||||||||||||||||||||||||||||||
Issuance of warrants | — | — | — | — | — | — | 2,500 | — | — | — | 2,500 | |||||||||||||||||||||||||||||||||
Conversion of debt and liabilities | — | — | — | — | 141,589 | — | 70,794 | — | — | — | 70,794 | |||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | (1,247,818 | ) | (1,039 | ) | (1,248,857 | ) | ||||||||||||||||||||||||||||||
Balances, December 31, 2020 | — | $ | — | — | $ | — | 32,270,594 | $ | — | $ | 114,866,642 | $ | (504,650 | ) | $ | (130,139,711 | ) | $ | 40,863 | $ | (15,736,856 | ) |
See notes to consolidated financial statements
5 |
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 20172020 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 | $ | - |
2020 | 2019 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (1,248,857 | ) | $ | (1,206,567 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation expense | 414 | 694 | ||||||
Accrued interest on loans payable, deferred compensation and other | 425,499 | 278,268 | ||||||
Stock-based compensation | 36,781 | 115,850 | ||||||
Decrease in prepaid expenses | 3,615 | 8,005 | ||||||
Increase in accounts payable and accrued expenses | 8,162 | 38,575 | ||||||
Increase in deferred compensation | 245,742 | 288,204 | ||||||
Net cash used in operating activities | (528,644 | ) | (476,971 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from sale of units | 360,000 | 977,000 | ||||||
Commissions on sale of units | (31,000 | ) | (87,200 | ) | ||||
Proceeds from loans payable - affiliates | — | 35,000 | ||||||
Repayment of loans payable - affiliates | — | (20,000 | ) | |||||
Net cash provided by financing activities | 329,000 | 904,800 | ||||||
Net (decrease) increase in cash | (199,644 | ) | 427,829 | |||||
Cash at beginning of period | 560,828 | 41,335 | ||||||
Cash at end of period | $ | 361,184 | $ | 469,164 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 28 | $ | — | ||||
Non-cash investing and financing transactions: | ||||||||
Conversion of debt and liabilities into common units | $ | 70,794 | $ | 71,658 | ||||
Conversion of deferred compensation into notes payable - related party | $ | — | 636,081 |
See notes to consolidated financial statements
6 |
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 20172020 AND 2016
1.
ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN ANDOrganization and nature of business:
Bion Environmental Technologies, Inc.'s ("Bion"Bion," "Company," "We," "Us," or "We" or the "Company""Our") was incorporated in 1987 in the State of Colorado and has developed and continues to developColorado. Our patented and proprietary technology and business models that provideprovides comprehensive environmental solutions to a significant sourceone of the greatest water air and water quality problems in the U.S. today: pollution in United States agriculture, large scalefrom large-scale livestock production facilities (also known as Concentrated“Concentrated Animal Feeding Operations ("CAFO's"Operations” or “CAFOs"). Application of our technology and technology platform can simultaneously remediate environmental problems and improve operational/resource efficiencies by recovering value high-value co-products from the CAFOs'CAFOs’ waste stream that hashave traditionally been wasted or underutilized, including renewable energy, nutrients (nitrogen(including ammonia nitrogen and phosphorus) and clean water. Bion's technologies (and applications related thereto) produce substantial reductionsFrom 2016 to present, the Company has focused a large portion of nutrient releases (primarily nitrogenits activities on developing, testing and phosphorus) to both water and air (including ammonia, which is subsequently re-deposited todemonstrating the ground) from livestock waste streams based upon our operations and research to date (and third party peer review thereof). We are continually involved in research and development to upgrade and improve our3rd generation of its technology and technology platform (“3G Tech”) with emphasis on increasing the efficiency of production of valuable co-products of its waste treatment including ammonia nitrogen in the form of organic ammonium bicarbonate products. The Company’s initial ammonium bicarbonate liquid product completed its Organic Materials Review Institute (“OMRI”) application and review process with approval during May 2020. The Company anticipates making additional OMRI applications including integration withduring the current calendar quarter.
The Company believes that, in addition to providing superior environmental remediation, its 3G Tech will create the opportunity for large scale production of sustainable and/or organic branded livestock products that will command premium pricing (in part due to ongoing monitoring and third-party verification of environmental performance to provide meaningful assurances to both consumers and regulators). As co-products, our 3G Tech will produce valuable organic fertilizer products which can be: a) utilized in the production of organic grains for use as feed in support of joint venture Projects (“JVs”) raising organic livestock, and/or b) marketed to the growing organic fertilizer market. Our 3G Tech patented technology was developed to be part of a comprehensive technology platform that could generate multiple present and projected future revenue streams to offset the costs of technology adoption. Bion’s technology platform includes onsite monitoring and data collection as well as independent 3rd party verified lab data confirming the environmental reduction impacts. The third party technology. Bion provides comprehensiveverified data regarding the environmental impact reductions will also be used to qualify the final consumer products (livestock protein—including meat, eggs and cost-effective treatmentdairy products) for a US Department 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 20182021 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 20182021 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)., Midwest beef JV Projects and/or other Projects.
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The $200 billion U.S. livestock industry is under intense scrutiny for its environmental and public health impacts – its ‘environmental sustainability’-- at the same time it is struggling with declining revenues and margins (derived in part from clinging to its historic practices and resulting impacts). Its failure to respond to consumer concerns ranging from food safety to its ‘socialized’ environmental impacts have provided impetus for plant-based alternatives such as Beyond Meat and Impossible Burger providing “sustainable” alternatives to this growing consumer segment of the market. The plant-based threat to the livestock industry market (primarily beef and pork) has succeeded in focusing the large-scale livestock production facilities (also known as “Concentrated Animal Feeding Operations” or “CAFOs") on how to meet the plant-based market challenge by addressing the consumer sustainability issues. The adoption of livestock waste treatment technology by industry segments is largely dependent upon adoption generating sufficient revenues to offset the capital and operating costs associated with technology adoption.
We believe that Bion’s 3G Tech platform, coupled with common-sense policy changes to U.S. clean water strategy that are already underway, will combine to provide a pathway to true economic and environmental sustainability with ‘win-win’ benefits for at least a premium sector of the livestock industry, the environment, and the consumer.
Bion’s business model and technology can open up the opportunity for JVs (in various contractual forms) between the Company and large livestock/food/fertilizer industry participants, based upon the supplemental cash flow generated by implementation our 3G Tech business model (described and discussed below) which will support the costs of technology implementation (including related debt). We anticipate this will result in long term value for Bion. Long term, Bion is focusedanticipates that the sustainable branding opportunity may expand to represent the single largest contributor to the economic opportunity provided by Bion.
During 2018 the Company had its first patent issued on using applicationsits 3G Tech and has continued its work to expand its patent coverage for our 3G Tech. During October 2020 the Company third 3G patent issued, which patent significantly expands the breadth and depth of the Company’s 3G Tech coverage. The 3G Tech platform has been designed to maximize the value of co-products produced during the waste treatment/recovery processes, including pipeline-quality renewable natural gas and organic commercial fertilizer products. All processes will be verifiable by third-parties (including regulatory authorities, certifying boards and consumers) to comply with environmental regulations and reduction purchase/trading programs and meet the requirements for: a) renewable energy credits, b) organic certification of the fertilizer coproducts and c) the USDA PVP ‘Environmentally Sustainable’ branding program. Bion anticipates moving forward with the development process of its patentedinitial commercial installations of its 3G technology during the 2021 (current) and proprietary waste management technologies2022 calendar years.
In parallel, Bion has worked (which work continues) to advance public policy initiatives that will potentially create markets (in Pennsylvania and other states) that will utilize taxpayer funding for the purchase of verified pollution reductions from agriculture (“credits”) by the state (or others) through a competitively-bid procurement programs. Such credits can then be used as a ‘qualified offset’ by an individual state (or municipality) to meet its federal clean water mandates at significantly lower cost to the taxpayer. Competitive procurement of verified credits is now supported by US EPA, the Chesapeake Bay Commission, national livestock interests, and other key stakeholders. Legislation in Pennsylvania to establish the first such state competitive procurement program passed the Pennsylvania Senate by a bi-partisan majority during March 2019. However, the Covid-19 pandemic and related financial/budgetary crises have subsequently slowed progress for this and other policy initiatives and, as a result, it is not currently possible to project the timeline for this and other similar initiatives.
The livestock industry is under tremendous pressure (from regulatory agencies, a wide range of advocacy groups, institutional investors and the industry’s own consumers) to adopt sustainable practices. Environmental cleanup is inevitable - policies are already changing. Bion’s 3G technology was developed for implementation on large scale livestock production facilities, where scale drives lower treatment costs and efficient production of co-products. We believe that scale, coupled with Bion’s verifiable treatment technology platform, will create a transformational opportunity to pursue three mainintegrate clean production practices at (or close to) the point of production—the source from which most of the industry’s environmental impacts are initiated. Bion intends to assist the forward-looking segment of the livestock industry in actually bringing animal protein production in line with Twenty-first Century consumer demands for sustainability.
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The 3G Tech platform is the basis for the Company’s JV business opportunities:model with four distinct revenue streams: 1) installation of Bion systems ( some of which may generate verifiedpipeline quality renewable natural gas and related carbon credits, 2) premium organic fertilizer products, 3) nutrient credits, and 4) premium pricing from USDA-certified ‘Environmentally Sustainable’ branding at the retail level. Carbon and nutrient credit revenues will be generated by third-party verification of the waste treatment processes that produce renewable energy and fertilizer products - with relatively limited incremental cost to Bion. The same verified data will provide the backbone for the USDA-certified sustainable brand, again with limited incremental cost.
1) | Renewable energy and related carbon credits: |
Bion’s 3G Tech platform utilizes customized anaerobic digestion (“AD”) to recover methane from the waste stream. At sufficient scale, methane produced from AD can be cost-effectively conditioned, compressed and injected into a pipeline. The US Renewable Fuel Standard (“RFS”) program and state programs in California and elsewhere provide ongoing renewable energy credits for the production and use of renewable transportation fuels.
2) | Organic Fertilizer products: |
The 3G Tech platform has been designed to produce multiple fertilizer products including: i) ammonia bicarbonate liquid, ii) ammonium bicarbonate in solid crystal form and iii) a soil amendment products that will contain the remaining nitrogen, phosphorus and other micronutrients captured from the livestock waste stream. Bion believes each product will qualify for organic certification and intends to file multiple applications for varying concentrations of crystal product going forward.
Ammonium bicarbonate manufactured using chemical processes has a long history of use as a fertilizer. Bion’s intends to develop ammonium bicarbonate crystal products which will contain 14-16 percent nitrogen in a crystalline form that will be easily transported, water soluble and provide readily-available nitrogen. The products will contain virtually none of the other salt, iron and mineral constituents of the livestock waste stream that often accompany other organic fertilizers. This product is being developed to fertilizer industry standards so that it that can be precision-applied to crops using existing equipment. Bion believes that this product will potentially have broad applications in the production of renewable energyorganic grains for livestock feed, row crops, horticulture, greenhouse and byproducts) hydroponic production, and potentially retail lawn and garden products.
The Company’s initial low concentration ammonium bicarbonate liquid product completed its OMRI application and review process with approval during May 2020.
The Company believes that organic approvals for its products: a) will provide access to retrofitsubstantially higher value markets compared to synthetic nitrogen products, and/or b) allow its products to be utilized in growing of organic feed grains to be consumed by livestock raised in JVs which will thereafter receive organic approvals. Based on preliminary market surveys to date: a) we believe that existing competing organic fertilizer products in both liquid and environmentally remediate existing CAFOs ("Retrofits"granular form are being sold presently at price points significantly greater than Bion’s projected cost and projected pricing, and b) that livestock products (beef and pork) raised with feed grains grown using Bion organic ammonium carbonate fertilizer products (during the ‘finishing’ stage) will qualify for organic approvals. It is anticipated that the Company will seek approvals for such products during the balance of the 2021 fiscal year and will commence JVs that undertake initial production and marketing of such products during the 2021 calendar year.
3) | Nutrient credits: |
Bion had believed that passage in Pennsylvania of legislation earlier this year that would establish a competitively-bid market for nutrient reduction Credits in Pennsylvania but the Covid-19 pandemic intervened. The bill will most likely need to be re-introduced in the Senate 2021—2022 session commencing in January 2021. Bion anticipates that passage of SB575 (or re-introduced bill) in Pennsylvania will establish a competitively-bid market for nutrient reduction credits in Pennsylvania within twelve months after passage and being signed into law by the Governor.
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Note, however, that the current Covid-19 pandemic and resultant economic crises and budgetary constraints have delayed policy initiatives related to these matters at both the state and federal levels. As a result, it is not currently possible to reasonably project a timetable for adoption of the policy changes discussed herein.
Bion’s Kreider Farms poultry project (“Kreider 2”) in selected markets where: a) government policy supports such efforts (such as theis projected to generate between 1.5-3M lbs. of Chesapeake Bay watershed, some Great Lakes Basin states, and/(“CB” or other states and watersheds facing Environmental Protection Agency ("EPA"“Bay”) '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 conjunction 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. The opportunities described at 1) and 2) above each require substantial political and regulatory (federal, state and local) effortsverified nitrogen reduction Credits (the range depends on the specific calculation methodology agreed to between the EPA and the Pennsylvania DEP). Bion anticipates the market value for these verified credits will be in the range of $8 to $12 per pound annually. The focus of the latest PA regulatory watershed improvement plan (“WIP”) has shifted the reduction mandates to individual counties. Lancaster County, PA is being asked to reduce 21% of the mandate (approximately 11M lbs. of nitrogen) to the Bay. As a result, the Kreider 2 project in Lancaster County may expand to include a regional processing opportunity in addition to the Kreider 2 base project. Bion believes that initial funding of such competitive bidding program will allow Bion and others to demonstrate the technological effectiveness and cost savings of manure control technologies, which should result in the re-allocation of a portion of the existing approximately $110B in taxpayer clean water funding to be re-directed to nutrient procurement programs nationwide.
4) | Sustainable Branding: |
Consumers have demonstrated a willingness to pay a premium for their safe and sustainable food choices. Beginning in 2015, Bion has worked with the USDA’s Process Verified Program (“PVP”) – the gold standard in food verification and branding – to establish a USDA-certified sustainable brand. Bion received conditional approval from the PVP related to its Kreider 1 project (utilizing 2G Tech). It is our intention to amend and resubmit its application for the 3G Tech platform when the initial 3G Tech Project is operational and seek an approval for certification based on third-party-verified reductions in nutrient impacts, greenhouse gases and pathogens in the waste stream based on our 3G Tech. PVP certification incorporated as part of a recognizable brand will provide consumers with products and brands that can be trusted. Bion projects that such a brand and livestock product line will command a pricing premium for Bion livestock JVs and their customers.
Food safety and sustainability are issues of growing importance in the CompanyU.S. and a substantial partworldwide. Bion’s branding initiative reflects trends already underway in the livestock industry. Over the last few years, most large meat and dairy product retailers have announced ‘sustainability’ initiatives, although the definition of Bion's efforts are focused on such political and regulatory matters.sustainability is unclear. Bion intends to pursue international opportunities primarily through the use of consultants with existing relationships in target locations. The most intense focus is currentlybelieves that as these initiatives move forward, true sustainability on the requirementsproduction side will look a lot like what Bion can provide today with its 3G Tech. We believe our 3G Tech platform can deliver verifiable metrics that demonstrate meaningful improvements in sustainability for livestock production including: a) reduced carbon and nutrient footprint; b) lower negative impacts to water, soil and air; c) increased pathogen destruction and other environmental and public health impacts that are unmatched in the clean-upindustry today.
The Covid-19 pandemic has further heightened consumer awareness and concerns related to: a) environmental sustainability, b) food safety, c) sourcing and traceability and d) humane treatment of both animals and workers. The more the livestock industry’s supply chain practices are transparent and known by consumers, the more consumers are seeking alternatives.
Bion’s ‘Environmental/Sustainable’ branding program is designed to address a wide array of consumer concerns ranging from: a) ‘where does your food come from?’, b) animal heritage information; c) anti-biotic use standards; d) humane animal treatment; d) its labor/human conditions (including hours, wages and working condition standards). It will include block chain traceability thereby enabling any quality issues to be quickly identified by lot and location thereby minimizing risk to its consumers.
In essence, Bion’s comprehensive technology platform will enable its livestock producer adopters to not only be the provider of the Chesapeake Bay faced by‘product the Commonwealth of Pennsylvania andconsumer wants’ but also the potential use of Bion's technology and technology platform on CAFOs to remediate ammonia release (and re-deposition tocompany that ‘shares 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.consumer’s values’.
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Kreider Dairy Project
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 Company’s first commercial activity in this area isthe retrofit segment was represented by our agreement with Kreider Farms ("KF"(“KF”), pursuant to which the Kreider 1 system (based on an early version of our 2nd generation technology (“2G Tech”)) 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 CompanyPA1 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, 2017.2020. 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.6 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 in the context of the development of the Kreider 2 poultry Project if/when a more robust market for nutrient reductions develops in Pennsylvania, of which there is no assurance.
The Kreider 1 System has been inactive for several years with some equipment maintenance work being undertaken. PA1 and Bion will continue to evaluate various options with regard to Kreider 1 over the next 30-180 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.
Kreider Farms covering all matters related(Poultry) – 3G Tech Project
Bion is completing an envelope of policy change and technology pilots that will allow it to development and operation ofmove forward with a system to treat the waste streams from Kreider's poultry facilities ("Kreider 2").
1. Support for adoption of PA SB 575 (or a successor bill): This will create 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 co-products from Kreider 2 are established.
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2. Installation of a 3G Tech ammonia recovery system to produce ammonium bicarbonate to be used to make application to OMRI for organic certification (and possibly for grower trials).
The 3G Tech Kreider 2 Project is planned for two (or more) locations. It is intended to treat the waste from Kreider’s 1,800 dairy cows and approximately six million egg layer chickens (with capacity for an additional three million layers). The Kreider 2 Project will be designed with modules with and initial capacity of 450 tons (or more) per day of waste and will remove nitrogen and phosphorus from the waste stream that will be converted into high-value coproducts instead of polluting local and downstream waters. The Kreider 2 Project is planned to be built in three phases and may be expanded to include a ‘central processing facility’ with modules that will accept transported waste from the region on fee basis.
Bion has a long-standing relationship with Kreider Farms including a 2016 joint venture agreement related to this Project faces challengesfacility. 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 (or a successor bill)) is passed, a market will be put in place for long-term commercial sale of the nutrient reduction credits produced at Kreider 2. Bion anticipates that it may require up to 6-12 months after such a bill becomes law to develop the rules/regulations related to the current limitscompetitive bidding program. If the competitive bidding program is implemented, we intend to arrange project financing for the Kreider 2 Project during 2021.
Sustainable/ Organic Grain-Finished Beef JV Opportunity
Bion believes there is a potentially large opportunity for JVs to produce sustainable/organic grain-finished beef and is actively involved in early pre-development work and discussions regarding pursuit of this opportunity.
Beef production is the most challenged sector of the existing nutrient reductionlivestock industry, due to its size and inability, as currently structured, to respond to growing consumer concerns related to sustainability and food safety. The industry is structured to produce multiple levels of a commodity products (without any significant pricing premiums) graded based upon taste and tenderness. Today, however, consumer demand is shifting to products that are more sustainable, regarding carbon footprint, impacts to air and water and other metrics. The Company doesn’t think the consumer wants to ‘blow up’ the beef industry which is responsible for the best and safest beef available in the world today (as well as the livelihoods of almost 800,000 farming, ranching and other families supported by the beef industry in the U.S). Rather, consumers want it to be more sustainable---and still taste good. Bion believes that strong demand exists for a verified sustainable beef product, with the taste and texture of traditional corn-fed beef which addresses the consumers’ concerns. Bion’s technology platform is designed to enable livestock producers to produce an environmentally sustainable beef product.
We are moving forward with preliminary pre-development work on a JV to build a state-of-the-art beef cattle operation in the Midwest U.S. The project would produce corn-fed USDA-certified organic- and/or sustainable-branded beef. Organic beef would be finished on organic corn (vs grass fed), produced using the ammonium bicarbonate fertilizer captured from the cattle’s waste. We believe Bion’s unique ability to produce fertilizer for growing of a supply of low-cost organic corn, and the resulting opportunity to produce organic beef, will dramatically differentiate us from potential competitors. This organic opportunity is dependent on successfully establishing Bion’s fertilizer products as acceptable for use in organic grain production.
In addition, as described above, we intend to develop JVs which use Bion’s organic ammonium bicarbonate fertilizers to support organic grain production. This grain can be fed (in the finishing stage) to livestock and raise organic beef (and beef products) that will meet consumer demand with respect to sustainability and safety and provide the tenderness and taste American consumers have come to expect from premium American beef. Such a product is largely unavailable in the market and funding of technology-based, verifiable agricultural nutrient reductions which are anticipatedtoday.
Bion’s current long-term goal is to constituteacquire or develop, or have in a development pipeline, 2-5 Projects over the largest share of its revenues.next 24 to 48 months.
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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.
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$4,553,000 and $4,522,000$2,659,000 during the years ended June 30, 20172020 and 2016,2019, respectively, and a net loss of approximately $1,041,000$1,249,000 during the six months ended December 31, 2017.2020. At December 31, 2017,2020, the Company has a working capital deficit and a stockholders'stockholders’ deficit of approximately $10,019,000$11,028,000 and $13,538,000,$15,778,000, 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, 20172020 and 2016,2019, the Company received total proceeds of approximately $452,000$1,584,000 and $761,000$897,000, respectively, from the sale of its debt and equity securities. Proceeds during the 20172020 and 20162019 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, 2017,2020, the Company received total proceeds of approximately $187,000$360,000 from the sale of its debt and equity securities which is lower than previous years.
During fiscal years 20172020 and 20162019 and through the six months ended December 31, 2017,2020, 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 54 and 7)6) and members of the Company'sCompany’s senior management have made loans to the Company (Note 4).from time to time. 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/orongoing activities including research and development activities.
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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.systems. 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.
Covid-19 pandemic related matters:
The Company faces risks and uncertainties and factors beyond our control that are magnified during the current Covid-19 pandemic and the unique economic, financial, governmental and health-related conditions in which the Company, the country and the entire world now reside. To date the Company has experienced direct impacts in various areas including but without limitation: i) government ordered shutdowns which have slowed the Company’s research and development projects and other initiatives, ii) shifted focus of state and federal governments which is likely to negatively impact the Company’s legislative initiatives in Pennsylvania and Washington D. C., iii) strains and uncertainties in both the equity and debt markets which have made discussion and planning of funding of the Company and its initiatives and projects with investment bankers, banks and potential strategic partners more tenuous, iv) strains and uncertainties in the agricultural sector and markets have made discussion and planning more difficult as future industry conditions are now more difficult to assess and predict, v) due to the age and health of our core management team, all of whom are age 70 or older and have had one or more existing health issues, the Covid-19 pandemic places the Company at greater risk than was previously the case (to a higher degree than would be the case if the Company had a larger, deeper and/or younger core management team), and vi) there almost certainly will be other unanticipated consequences for the Company as a result of the current pandemic emergency and its aftermath.
2.
SIGNIFICANT ACCOUNTING POLICIESPrinciples 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 an 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, and2020, the results of operations and cash flows of the Company for the three and six months ended December 31, 20172020 and 2016.2019 and the cash flows of the Company for the six months ended December 31, 2020 and 2019. Operating results for the three and six months ended December 31, 20172020 are not necessarily indicative of the results that may be expected for the year ending June 30, 2018.2021.
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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.
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.
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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 loan 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.
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, 20172020 and 2016,2019, 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, 2020 | December 31, 2019 | |||||||
Warrants | 21,270,102 | 18,784,324 | ||||||
Options | 9,511,600 | 7,801,600 | ||||||
Convertible debt | 11,215,175 | 9,779,000 | ||||||
Convertible preferred stock | 19,500 | 18,500 |
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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 |
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, 20172020 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, 2020 | Three months ended December 31, 2019 | Six months ended December 31, 2020 | Six months ended December 31, 2019 | |||||||||||||
Shares issued – beginning of period | 31,575,656 | 28,417,602 | 31,409,005 | 28,068,688 | ||||||||||||
Shares held by subsidiaries (Note 7) | (704,309 | ) | (704,309 | ) | (704,309 | ) | (704,309 | ) | ||||||||
Shares outstanding – beginning of period | 30,871,347 | 27,713,293 | 30,704,696 | 27,364,379 | ||||||||||||
Weighted average shares issued during the period | 316,298 | 1,090,714 | 285,943 | 771,030 | ||||||||||||
Diluted weighted average shares – end of period | 31,187,645 | 28,804,007 | 30,990,639 | 28,135,409 |
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.
3.
PROPERTY AND EQUIPMENT:Property and equipment consistsconsist 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, 2020 | June 30, 2020 | |||||||
Machinery and equipment | $ | 2,222,670 | $ | 2,222,670 | ||||
Buildings and structures | 401,470 | 401,470 | ||||||
Computers and office equipment | 171,485 | 171,485 | ||||||
2,795,625 | 2,795,625 | |||||||
Less accumulated depreciation | (2,794,671 | ) | (2,794,257 | ) | ||||
$ | 954 | $ | 1,368 |
As of June 30, 2016,December 31, 2020, the net book value of Kreider 1 was zero. AsManagement has reviewed the remaining property and equipment for impairment as of December 31, 2017, management2020 and believes that no additional impairment exists.
Depreciation expense was $436$207 and $503$347 for the three months ended December 31, 20172020 and 2016,2019, respectively and $872$414 and $1,005$694 for the six months ended December 31, 20172020 and 2016,2019, respectively.
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4.LOANS PAYABLE - AFFILIATES:
The Company owes deferred compensation to various employees, former employees and consultants totaling $141,284$998,474 and $1,879,473$537,119 as of December 31, 20172020 and 2016,2019, respectively. Included in the deferred compensation balances as of December 31, 2017,2020, are $31,000$307,260 and $18,000$71,699 owed Dominic Bassani (“Bassani”), the Company’s Chief Executive Officer, and Mark A. Smith (“Smith”), the Company’s President, 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, 20162019 was $772,629, $281,590$49,318 and $117,292,nil, respectively. The Company also owes various consultants and an employee, pursuant to various agreements, for deferred compensation of $18,800$547,015 and $466,478$415,301 as of December 31, 20172020 and 2016,2019, 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. The Company also owes a former employee $72,500, which is not convertible and is non-interest bearing.
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, 20182022 (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. 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.
During the six months ended December 31, 2017, Bassani,2020, Smith and Schafer agreedelected to cancelconvert $37,961 of deferred compensation owed them asinto units of November 30, 2017 of $1,147,210, $416,656 and $121,386, respectively ($1,685,252 in aggregate). Various consultants also agreed to cancel deferred compensation as of November 30, 2017 totaling $718,580. The total deferred compensation that was cancelled during the six months ended December 31, 2017 was $2,403,832, of which, the $1,685,252 owed related parties was recorded as an increase in additional paid in capital, while $718,580 was recorded as a gain from the extinguishment of liabilities. All deferred compensation agreements remain in effect and the Company accrued deferred compensation anew beginning December 1, 2017.
The Company recorded interest expense of $31,055$12,476 ($25,1775,159 with related parties) and $25,083$14,662 ($19,3199,494 with related parties) for the six months ended December 31, 20172020 and 2016,2019, respectively.
5. LOANS PAYABLE:
Pennvest
PA1, the Company'sCompany’s wholly-owned subsidiary, owes $8,912,653$9,727,189 as of December 31, 20172020 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$1,973,189 as of December 31, 2017.2020. 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$5,067,000 in fiscal years 2013 through 2017,2020, 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 for both of the three months ended December 31, 20172020 and 2016,2019, respectively. The Company has also incurred interest expense related to the Pennvest Loan of $98,747 and$123,444 for both of the six months ended December 31, 20172020 and 2016,2019, 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, 2017.2020.
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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 (formal or informal) are presently under consideration and only sporadic communication has taken place regarding the matters involved in over the past 48 months.5 years. It is not possible at this date to predict the outcome of this matter butgiven the extended period which has passed without resolution and the fact that the technology employed in the Kreider 1 system is now outdated. However, the Company believes it is possible that a loan modification agreement (coupled with an agreement regarding an update and restart of the full operation of Kreider 1 may yetin the future be reached that will resultpossible in a viable loan modification. Subjectconjunction with the Kreider 2 project, subject to the results of the negotiations with Pennvest and pending development of a more robust market for nutrient reductions in Pennsylvania,Pennsylvania. The Covid-19 pandemic has further increased uncertainties. PA1 and Bion will continue to evaluate various options with regard to Kreider 1 over the next 30-180 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.
Paycheck Protection Program
During the year ended June 30, 2020, the Company received proceeds from a loan in the amount of $34,800 from Covenant Bank as the lender, pursuant to the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The loan is uncollateralized, has a fixed interest rate of one percent, a term of two years and the first payment is deferred for six months. Under the CARES Act, borrowers are eligible for forgiveness of principal and interest on PPP loans to the extent that the proceeds were used to cover eligible payroll costs, rent and utility costs over either an 8- or 24-week period after the loan was made. As of December 31, 2020, the total PPP loan and accrued interest was $35,026. Management believes that the Company has met the conditions for full forgiveness of the PPP loan and will be applying for forgiveness once Covenant Bank and the SBA are ready to accept applications.
6. CONVERTIBLE NOTES PAYABLE - AFFILIATES:
2020 Convertible Notes
The 2020 Convertible Obligations (formerly named January 2015 Convertible Notes and 2019 Convertible Notes) which accrue interest at either 4% per annum or 4% compounded quarterly and wereeffective January 1, 2020 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, 2019.2024. The January 20152020 Convertible NotesObligations (including accrued interest, plus all future deferred compensation)compensation added subsequently), are convertible, at the sole election of the noteholder,holder, into Units consisting of one share of the Company'sCompany’s common stock and one quarterhalf to three quarters warrant to purchase a share of the Company'sCompany’s common stock, at a price of $0.50 per Unit until December 31, 2020.July 1, 2024. The warrant contained in the Unit shall bewas originally exercisable at $1.00 per shareunit but was modified to $0.75 during the year ended June 30, 2020 and is exercisable until December 31, 2020.a date three years after the date of the conversion. 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, 2017,2020, the January 20152020 Convertible NoteObligation balances, including accrued interest, owed Bassani (and his donees), Smith and Edward Schafer (“Schafer”), the Company’s Vice Chairman, were $2,455,656, $1,163,862 and $472,041, respectively. As of December 31, 2019, the 2020 Convertible Obligation balances, including accrued interest, owed Bassani, Smith and Schafer were $1,640,291, $851,781$2,361,208, $1,118,138 and $423,685,$453,886, respectively. As
The Company recorded interest expense of $65,468 and $32,836 for the three months ended December 31, 2016, the January 2015 Convertible Note balances, including accrued interest, owed Bassani, Smith2020 and Schafer were $1,581,710, $821,360 and $408,553,2019, respectively. The Company recorded interest expense of $26,247$96,428 and $75,229 for both of the three months ended December 31, 2017 and 2016, respectively. The Company recorded $52,495 for both of the six months ended December 31, 20172020 and 2016,2019, 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. During the year ended June 30, 2020, the maturity dates of the September 2015 Convertible Notes were further extended until July 1, 2024. 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 date2020, including accrued interest owed Bassani, Schafer and Shareholder, are $168,498, $19,862 and $423,081, respectively. The balances of the note due a Shareholder was extended until July 1, 2019.
The Company recorded interest expense of $5,308 and $5,092$5,365 for both the three months ended December 31, 20172020 and 2016,2019, respectively. The Company recorded interest expense of $10,401 and $10,185$10,731 for both the six months ended December 31, 20172020 and 2016,2019, respectively.
7. 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, 20172020 and 2016,2019, the Company declared dividends of $2,000 and $2,000, respectively. During the three and six months ended December 31, 2017, the Company declared dividends of $500 and $1,000, respectively. At December 31, 2017,2020, accrued dividends payable are $13,000.$19,500. The dividends are classified as a component of operations as the Series B Preferred stock is presented as a liability in these financial statements.
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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, the Company issued 14,615 shares of the Company's common stock at prices ranging from $0.70 to $0.91 per share for services valued at $11,679, in the aggregate, to a consultant and an employee.
During the six months ended December 31, 2017, warrants2020, Smith elected to purchase 236,850 sharesconvert deferred compensation and accounts payable of common stock of the Company$37,961 and $32,833, respectively, into an aggregate 141,589 units at prices between $1.10 and $2.50 per share expired.
Warrants:
As of December 31, 2020, the Company had approximately 21.3 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 is $0.74, and the weighted-average remaining contractual life as of December 31, 2020 is 3.2 years.
During the six months ended December 31, 2020, 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 datesdate of June 30, 2018December 31, 2021, and pursuant thereto, the Company issued 249,111720,000 units for total proceeds of $186,832,$360,000, net proceeds of $173,324$329,000 after commissions.commissions of $31,000. The Company allocated the proceeds from the 249,111720,000 shares and the 124,556720,000 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$16,856 was allocated to the warrants and $181,172$343,144 was allocated to the shares, and both were recorded as additional paid in capital. The Company also issued 89,485 warrants to purchase 89,485 shares of the Company's restricted common shares with an exercise price of $1.00 per share exercisable until June 30, 2019 as commissions related to the above sale of Units.
During the six months ended December 31, 2017, the Company received an interest bearing, secured promissory note for $88,250 from Bassani as consideration to purchase warrants to purchase 1,765,000 shares of the Company's restricted common stock, which warrants are exercisable at $0.75 and have expiry dates of December 31, 2020. The 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 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 note is payable on July 1, 2020.
During the six months ended December 31, 2017,2020, Smith elected to convert deferred compensation and accounts payable of $37,961 and $32,833, respectively, into an aggregate 141,589 units at $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 until December 31, 2021.
During the six months ended December 31, 2020, the Company modified the expiration dates of 96,996 warrants issued to a broker as commissions to purchase 96,996 shares of the Company’s common stock at an exercise price of $0.75 per share and an expiration of December 31, 2020. As the modification was both a reduction and addition to additional paid in capital there was no impact to the financial statements.
During the six months ended December 31, 2020, the Company agreed to extend the expiration dates of 5,682,3353,547,735 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, 2021.2020. The Company recorded non-cash compensation of $25,506 and interest expense of $163,384 related to the modification of the warrants of $289,542 ($265,353 and $1,197 for Bassani and Schafer, respectively).warrants.
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Stock options:
The Company'sCompany’s 2006 Consolidated Incentive Plan, as amended during the six months ended December 31, 2020 (the "2006 Plan"“2006 Plan”), provides for the issuance of options (and/or other securities) to purchase up to 30,000,00036,000,000 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.
During the six months ended December 31, 2017,2020, the Company approved the modification of existing stock options held by certain employees andtwo former consultants, which extended certain expiration dates. The modifications resulted in incremental non-cash compensation of $349,656 (including $119,350 and $68,000 for Bassani and Schafer, respectively).
The Company recorded compensation expense related to employee stock options of $97,350nil and $108,960$99,500 for both the three months ended December 31, 2017 and 2016, respectively, and $99,650 and $129,816 for the six months ended December 31, 20172020 and 2016,2019, respectively. The Company granted 295,000nil and 294,500390,000 options during both the three and six months ended December 31, 20172020 and 2016,2019, respectively.
The fair value of the options granted during the three and six months ended December 31, 20172020 and 20162019 were estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
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 |
Weighted Average, December 31, 2020 | Range, December 31, 2020 | Weighted Average, December 31, 2019 | Range, December 31, 2019 | |||||||||||||
Volatility | — | % | — | % | 68 | % | 68%-70 | % | ||||||||
Dividend yield | — | — | — | |||||||||||||
Risk-free interest rate | — | % | — | % | 1.75 | % | 1.74%-1.75 | % | ||||||||
Expected term (years) | — | — | 5.0 | 5.0 to 5.2 |
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, 20172020 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, 2020 | 9,511,600 | $ | 0.74 | 4.5 | $ | — | |||||||||||
Granted | — | — | |||||||||||||||
Exercised | — | — | |||||||||||||||
Forfeited | — | — | |||||||||||||||
Expired | — | — | |||||||||||||||
Outstanding at December 31, 2020 | 9,511,600 | $ | 0.74 | 4.0 | $ | — | |||||||||||
Exercisable at December 31, 2020 | 9,511,600 | $ | 0.74 | 4.0 | $ | — |
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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, 2020 | — | $ | — | |||||||
Granted | — | — | ||||||||
Vested | — | — | ||||||||
Nonvested at December 31, 2020 | — | $ | — |
The total fair value of stock options that vested during the six months ended December 31, 20172020 and 20162019 was $76,100nil and $113,770$99,500, respectively. As of December 31, 2017,2020, the Company had no unrecognized compensation cost related to stock options.
Stock-based employee compensation charges in operating expenses in the Company'sCompany’s financial statements for the three and six months ended December 31, 20172020 and 20162019 are as follows:
Three months ended December 31, 2020 | Three months ended December 31, 2019 | Six months ended December 31, 2020 | Six months ended December 31, 2019 | |||||||||||||
General and administrative: | ||||||||||||||||
Change in fair value from modification of option terms | $ | 8,775 | $ | — | $ | 8,775 | $ | — | ||||||||
Change in fair value from modification of warrant terms | 25,506 | — | 25,506 | — | ||||||||||||
Fair value of stock options expensed | — | 92,000 | — | 92,000 | ||||||||||||
Total | $ | 34,281 | $ | 92,000 | $ | 34,281 | $ | 92,000 | ||||||||
Research and development: | ||||||||||||||||
Fair value of stock options expensed | $ | — | $ | 7,500 | $ | — | $ | 7,500 | ||||||||
Total | $ | — | $ | 7,500 | $ | — | $ | 7,500 |
8. SUBSCRIPTION RECEIVABLE - AFFILIATES:
As of December 31, 2020, the Company has three interest bearing, secured promissory notes with an aggregate principal amount of $428,250 ($474,892, 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, and are secured by portions of Bassani’s 2020 Convertible Obligation and Bassani’s September 2015 Convertible Notes. The secured promissory notes were payable July 1, 2020 but were extended to July 1, 2024 during the year ended June 30, 2020. Also, during the year ended June 30, 2020, warrants with exercise prices greater than $0.75 were reduced to $0.75 and warrants with expiry dates prior to December 31, 2024 were extended to December 31, 2024.
As of December 31, 2020, the Company has two interest bearing, secured promissory notes with an aggregate principal amount of $46,400 ($52,238 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. During the year ended June 30, 2020, the expiry dates of the warrants were extended to December 31, 2024. 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 were payable on July 1, 2020 but were extended to July 1, 2024 during the year ended June 30, 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 |
As of December 31, 2020, the Company has an interest bearing, secured promissory note for $30,000 ($32,896 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. During the year ended June 30, 2020, the expiry dates of the warrants were extended to December 31, 2024. The warrants have a 75% exercise bonus and the promissory note bears interest at 4% per annum, and is secured by $30,000 of Smith’s 2020 Convertible Obligations. The secured promissory note was payable on July 1, 2020 but was extended to July 1, 2024 during the year ended June 30, 2020.
9.
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 rightBoard of Directors re-instates cash payments to convert up to $125,000 of his deferredall employees and consultants who are deferring compensation, at his sole election, at $0.75 per share, until March 15, 2018 (which was expanded on April 27, 2017 toii) the right to convert up to $300,000 of his deferred compensation, at his sole election, at $0.75 per share, until December 31, 2018)2022), 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)2022).
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.
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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"), the Company's othera board member.
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 year ended June 30, 2019, the Company approved the right to extend the exercise period of all or part of any options or warrants granted 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 iii) by reduction of applicable exercise bonuses.
During the six months ended December 31, 2017,2020, the Company issued 3,460,000 warrants (1,765,000 and 670,000 to Bassani and Smith, respectively) and 190,000 options to Schafer that haveapplied a 90%75% execution/exercise bonus attached.
As of December 31, 2017,2020, the execution/exercise bonuses ranging from 50-90% were applicable to 4,577,1009,354,600 of the Company'sCompany’s outstanding options and 7,748,52415,317,000 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)5).
The Company currently is not involved in any other material litigation.
10. 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 both the three and six months ended December 31, 2020 and 2019, the Company received nil and nil for expense reimbursements from CABS, respectively. During the three months ended December 31, 2020 and 2019, the Company paid CABS nil and $26,920, respectively for consulting expenses. During the six months ended December 31, 2020 and 2019, the company paid CABS nil and $39,820, respectively for consulting expenses.
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11. SUBSEQUENT EVENTS:
The Company has evaluated events that occurred subsequent to December 31, 20172020 for recognition and disclosure in the financial statements and notes to the financial statements.
From January 1, 20182021 through February 7, 2018,5, 2021, the Company has issued 2,939 shares of the Company's common shares to an employee for services valued at approximately $2,000.
From January 1, 20182021 through February 7, 2018,5, 2021, the Company has agreedgranted 85,000 options to the material terms for a binding two-year extension agreement for Bassani's services as CEO, while a detailed, fully executed agreement is still being negotiatedemployees and will be finalized in the future. Bassani's salary will remain $372,000consultants, which options are exercisable at $0.60 per year which will continue to be accruedshare until there is adequate cash available while negotiations proceed toward the re-instatement of at least a partial cash payment. Additionally,December 31, 2025.
From January 1, 2021 through February 5, 2021, the Company has agreed to pay him $2,000 per month to be applied to life insurance premiums. Further, Bassani has been awarded 2,000,000 fully vested options to purchase common stockfor and received confirmation from its lender that its PPP loan of $34,800 and accrued interest was forgiven by the Company at $0.75 per share with an expiry date of December 31, 2022. Such options will contain a 90% execution bonus and the options may be extended for an additional 5 years at $0.01 per share per extension year.SBA.
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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, loss (permanently or for any extended period of time) of the services of members of the Company’s small core management team (all of whom are age 70 or older) 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.
THESE RISKS, UNCERTAINTIES AND FACTORS BEYOND OUR CONTROL ARE MAGNIFIED DURING THE CURRENT UNCERTAIN PERIOD RELATED TO THE COVID-19 PANDEMIC AND THE UNIQUE ECONOMIC, FINANCIAL, GOVERNMENTAL AND HEALTH-RELATED CONDITIONS IN WHICH THE COMPANY, THE ENTIRE COUNTRY AND THE ENTIRE WORLD NOW RESIDE. TO DATE THE COMPANY HAS EXPERIENCED DIRECT IMPACTS IN VARIOUS AREAS INCLUDING WITHOUT LIMITATION: I) GOVERNMENT-ORDERED SHUTDOWNS WHICH HAVE SLOWED THE COMPANY’S RESEARCH AND DEVELOPMENT PROJECTS AND OTHER INITIATIVES, II) SHIFTED FOCUS OF STATE AND FEDERAL GOVERNMENT WHICH IS LIKELY TO NEGATIVELY IMPACT THE COMPANY’S LEGISLATIVE INITIATIVES IN PENNSYLVANIA AND WASHINGTON DC, III) STRAINS AND UNCERTAINTIES IN BOTH THE EQUITY AND DEBT MARKETS HAVE MADE DISCUSSION AND PLANNING OF FUNDING OF THE COMPANY AND ITS INITIATIVES AND PROJECTS WITH INVESTMENT BANKERS, BANKS AND POTENTIAL STRATEGIC PARTNERS MORE TENUOUS, IV) STRAINS AND UNCERTAINTIES IN THE AGRICULTURAL SECTOR AND MARKETS HAVE MADE DISCUSSION AND PLANNING OF FUNDING OF THE COMPANY AND ITS INITIATIVES AND PROJECTS MORE DIFFICULT AS FUTURE INDUSTRY CONDITIONS ARE NOW MORE DIFFICULT TO ASSESS/PREDICT, V) DUE TO THE AGE AND HEALTH OF OUR CORE MANAGEMENT TEAM, ALL OF WHOM ARE AGE 70 OR OLDER AND HAVE HAD ONE OR MORE EXISTING HEALTH ISSUES, THE COVID-19 PANDEMIC PLACES THE COMPANY AT GREATER RISK THAN WAS PREVIOUSLY THE CASE (TO A HIGHER DEGREE THAN WOULD BE THE CASE IF THE COMPANY HAD A LARGER, DEEPER AND/OR YOUNGER CORE MANAGEMENT TEAM), AND VI) THERE ALMOST CERTAINLY WILL BE OTHER UNANTICIPATED CONSEQUENCES FOR THE COMPANY AS A RESULT OF THE CURRENT PANDEMIC EMERGENCY AND ITS AFTERMATH.
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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's Form 10-K for the year ended June 30, 2017.
BUSINESS OVERVIEW
Bion Environmental Technologies, Inc.'s (“Bion,” “Company,” “We,”" “Us,” or ‘Our”) patented and proprietary technology provides comprehensive environmental solutions to one of the greatest water air and water quality problems in the U.S. today: pollution from large-scale livestock production facilities (also known as “Concentrated Animal Feeding Operations” or “CAFOs"). Application of our technology and technology platform can simultaneously remediate environmental problems and improve operational/resource efficiencies by recovering value high-value co-products from the CAFOs’ waste stream that has traditionally been wasted or underutilized, including renewable energy, nutrients (including ammonia nitrogen and phosphorus) and water. From 2014 through the current 2018 fiscal year,2016 to present, the Company has focused a large portion of its researchactivities on developing, testing and development activities toward developmentdemonstrating the 3rd generation of its technology and technology platform (“3G Tech”) with emphasis on increasing the efficiency of production of valuable by-products of its waste treatment including ammonia nitrogen in the form of organic ammonium bicarbonate products. The Company’s initial ammonium bicarbonate liquid product completed its Organic Materials Review Institute (“OMRI”) application and review process with approval during May 2020. (See discussion at “Organic Fertilizer products” in Item 1 above). The Company anticipates making additional OMRI applications during the current calendar quarter.
The Company believes that, in addition to providing superior environmental remediation, its 3G Tech will create the opportunity for large scale production of sustainable and/or organic branded livestock products that will command premium pricing (in part due to ongoing monitoring and third-party verification of environmental performance to provide meaningful assurances to both consumers and regulators). As co-products, our 3G Tech augmentingwill produce valuable organic fertilizer products which can be: a) utilized in the basic 'separateproduction of organic grains for use as feed in support of joint venture Projects (“JVs”) raising organic livestock, and/or b) marketed to the growing organic fertilizer market. Our 3G Tech patented technology was developed to be part of a comprehensive technology platform that could generate multiple present and aggregate' approachprojected future revenue streams to offset the costs of technology adoption. Bion’s technology platform includes onsite monitoring and data collection as well as independent 3rd party verified lab data confirming the environmental reduction impacts. The third party verified data regarding the environmental impact reductions will also be used to qualify the final consumer products (livestock protein—including meat, eggs and dairy products) for a US Department of Agriculture (“USDA”) “Environmentally Sustainable” brand. We anticipate that a material portion of our focus over the next 12-36 months will involvement development and participation in such JVs involved with the production and marketing of Environmentally Sustainable conventional and/or organic beef, swine and poultry.
The $200 billion U.S. livestock industry is under intense scrutiny for its environmental and public health impacts – its ‘environmental sustainability’-- at the same time it is struggling with declining revenues and margins (derived in part from clinging to its historic practices and resulting impacts). Its failure to respond to consumer concerns ranging from food safety to its ‘socialized’ environmental impacts have provided impetus for plant-based alternatives such as Beyond Meat and Impossible Burger providing “sustainable” alternatives to this growing consumer segment of the market. The plant-based threat to the livestock industry market (primarily beef and pork) has succeeded in focusing the large scale livestock production facilities (also known as “Concentrated Animal Feeding Operations” or “CAFOs") on how to meet the plant-based market challenge by addressing the consumer sustainability issues. The adoption of livestock waste treatment technology by industry segments is largely dependent upon adoption generating sufficient revenues to offset the capital and operating costs associated with technology adoption.
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We believe that Bion’s 3G Tech platform, coupled with common-sense policy changes to U.S. clean water strategy that are already underway, will combine to provide a pathway to true economic and environmental sustainability with ‘win-win’ benefits for at least a premium sector of the livestock industry, the environment, and the consumer.
Bion’s business model and technology can open up the opportunity for JVs (in various contractual forms) between the Company and large livestock/food/fertilizer industry participants, based upon the supplemental cash flow generated by implementation our 3G Tech business model (described and discussed below) which will support the costs of technology implementation (including related debt). We anticipate this will result in long term value for Bion. Long term, Bion anticipates that the sustainable branding opportunity may expand to represent the single largest contributor to the economic opportunity provided by Bion.
During 2018 the Company had its first patent issued on its 3G Tech and has continued its work to expand its patent coverage for our 3G Tech. During October 2020, the Company the Company’s third 3G patent, which patent significantly expands the breadth and depth of the Company’s 3G Tech coverage. (See “Patents” below). The 3G Tech platform has been designed to maximize the value of co-products produced during the waste treatment/recovery processes, including pipeline-quality renewable natural gas and organic commercial fertilizer products. All processes will be verifiable by third-parties (including regulatory authorities, certifying boards and consumers) to comply with environmental regulations and trading programs and meet the requirements for: a) renewable energy credits, b) organic certification of the fertilizer coproducts and c) the USDA PVP ‘Environmentally Sustainable’ branding program (See discussion at Item 1 above and below herein.) Bion anticipates moving forward with the development process of its initial commercial installations of its 3G technology during the 2021 (current) and 2022 calendar years.
In parallel, Bion has worked (which work continues) to advance public policy initiatives that will potentially create markets (in Pennsylvania and other states) that will utilize taxpayer funding for the purchase of verified pollution reductions from agriculture (“credits”) by the state (or others) through a competitively-bid procurement programs. Such credits can then be used as a ‘qualified offset’ by an individual state (or municipality) to meet its federal clean water mandates at significantly lower cost to the taxpayer. Competitive procurement of verified credits is now supported by US EPA, the Chesapeake Bay Commission, national livestock interests, and other key stakeholders. Legislation in Pennsylvania to establish the first such state competitive procurement program passed the Pennsylvania Senate by a bi-partisan majority during March 2019. However, the Covid-19 pandemic and related financial/budgetary crises have subsequently slowed progress for this and other policy initiatives and, as a result, it is not currently possible to project the timeline for this and other similar initiatives (see discuss at Item 1 above and below herein).
The livestock industry is under tremendous pressure (from regulatory agencies, a wide range of advocacy groups, institutional investors and the industry’s own consumers) to adopt sustainable practices. Environmental cleanup is inevitable - policies are already changing. Bion’s 3G technology was developed for implementation on large scale livestock production facilities, where scale drives lower treatment costs and efficient production of co-products. We believe that scale, coupled with Bion’s verifiable treatment technology platform, will create a transformational opportunity to provide additional flexibility andintegrate clean production practices at (or close to) the point of production—the source from which most of the industry’s environmental impacts are initiated. Bion intends to increase recoveryassist the forward-looking segment of nutrient by-products (in organic and non-organic forms) and renewable energythe livestock industry in actually bringing animal protein 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 very important part of project revenue streams). This research and development effort also involves ongoing review of potential "add-ons" and applications to our technology platformin line with Twenty-first Century consumer demands for use in different regulatory and/or climate environments. These research and development activities continued through the 2017 fiscal year with increased focus on recovery of marketable 'byproducts' (including nutrients and renewable natural gas) and completion of development of Bion'ssustainability.
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Bion’s 3G Tech and technology platform. We believe such activities will continue at least throughplatform are designed to capture four revenue streams under one umbrella and provide the 2018 fiscal year, subjectbasis 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)(the value and availability of adequate financing forwhich will vary based on livestock type, geographical locations, and state regulatory programs), b) verified nutrient reductions (primarily nitrogen and phosphorus) that can be used as qualified offsets to the Company's operations,federal Chesapeake Bay mandate and US EPA TMDL (‘total maximum daily limit’) requirements (the value of which there is no assurancewill vary based on livestock type, geographical locations, and state regulatory programs), c) co-products consisting of high value fertilizer for use in organic food production for human consumption and/or to grow feed for use by livestock in Projects, 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). Such activities may includeThe Company believes that the design“branding” opportunity will offer large scale livestock producer / processor / distributors of livestock products the opportunity to differentiate and construction of a small, commercial-scale 3G Tech installation to assistidentify their products in the optimization efforts before construction ofmarketplace and, thereby creates the Kreider 2 project (see below).
Operational results from the initial commercial system (utilizing(Kreider 1 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 arewere now proven in the Kreider 1 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 CAFOsJVs in various geographic and climate areas with nutrient release constraints and to increase the recovery and generation of valuable by-productsco-products while adding the capability to treat dry (poultry) waste streams in addition to wet manure streams.
Bion business activity is focused on using applications of its patented3G Tech for utilization in JVs 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, some 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 conjunction with large CAFO's in strategic locations ("Projects") ( some of these may beProjects (including Integrated Projects) with multiple revenue streams,in which the Company will participate as developer, technology provider and 3) licensing and/or joint venturing of Bion's technologydirect participant. Currently our efforts and applications (primarily) outside North America. The opportunities described atfunds are being expended on pre-development activities related to: 1) the Kreider 2 poultry JV and 2) Midwest sustainable/organic grain-finished beef JV (see discussion at Item 1 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 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 by the Commonwealth of Pennsylvania and the potential use of Bion'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.below herein).
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KREIDER 1 (HISTORY AND STATUS)
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.System based our 2G Tech (which the Company is no longer implementing). 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 slowfailed to develop significant breadth and depth, which limited liquidity/depth has negatively impacted Bion'sBion’s business plans and has resulted in insurmountable 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.System which has now been inactive for several years. 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 threefive 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, 2017.2020. 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 context of development of the Kreider 2 Project (see discussion at Item 1 above and below herein) 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 30-180 days.6-12 months.
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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 some equipment at the Kreider 1 System in a limited manner pending development of a more robust market for its nutrient reductions.
3G TECH KREIDER 2 POULTRY PROJECT
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 (utilizing our 3G Tech) 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 utilizing our 3G Tech platform. 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). TheA 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 once these matters are clear. Designbased on our 3G Technology. Site specific design and engineering work for this facility, which will probably be one of the first full-scale commercial projects 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 2018 subject to verification byin the PADEP based on operating data from the Kreider 2 Project.future. 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 developnot yet developed 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's existing Kreider 1 project and will most likely delay PA2'sPA2’s Kreider 2 Project and other proposed projects in PA.Pennsylvania.
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Note that while Bion believes that the Kreider 1 System, the Kreider 2 Project and/or subsequent Bion Projects in PA and the Chesapeake Bay Watershed 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’, the Covid-19 pandemic has delayed legislative efforts needed to commence its development. 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.
MIDWEST SUSTAINABLE/ORGANIC GRAIN-FINISHED BEEF JV OPPORTUNITY
Bion believes there is a potentially large opportunity to develop JVs to produce sustainable/organic grain-finished beef in the Midwest and is actively involved in early pre-development work and discussions regarding pursuit of this opportunity.
We are moving forward with preliminary pre-development work on a JV to build a state of the art beef cattle operation in the Midwest U.S. The project would produce corn-fed USDA-certified organic- and/or sustainable-branded beef. Organic beef would be finished on organic corn (versus grass fed), produced using the ammonium bicarbonate fertilizer captured from the cattle’s waste. We believe Bion’s unique ability to produce fertilizer for growing of a supply of low-cost organic corn, and the resulting opportunity to produce organic beef, will dramatically differentiate us from potential competitors. This organic opportunity is dependent on successfully establishing Bion’s fertilizer products as acceptable for use in organic grain production. We intend to develop JVs with organic farmers which use Bion’s organic ammonium bicarbonate fertilizers to support organic grain production. This grain can be fed (in the finishing stage) to livestock to raise organic beef (and beef products) that will meet consumer demand with respect to sustainability and safety and provide the tenderness and taste American consumers have come to expect from premium American beef. Such a product is largely unavailable in the market today (See discussion at Item 1 above).
PUBLIC POLICY INITIATIVES
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. Further note that the current COVID-19 crisis has shifted government, legislative and budget focuses in PA in manners which may delay our efforts. 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.
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THE COVID-19 PANDEMIC HAS FURTHER INCREASED UNCERTAINTIES RE SB 575 AND ALL POLICY INITIATIVES. SEE FURTHER DISCUSSION IN ITEM 1 ABOVE.
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.
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.
The Company currently anticipates that either a Midwest Sustainable/Organic Grain-Fed Beef JV or the Kreider 2 poultry waste treatment facilityJV in PA will be its initial full-scale 3G 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 calendar year 2018. Bion hopes to commence development of its initial Projectproject by optioning land and beginning the site-specific design and permitting processprocesses 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 multiple JVs/Projects through 2018-212021-2024 to create a pipeline of Projects. Management has a 5-year development target (through calendar year 2023)2026) of approximately 103-8 or more Projects.JVs/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 3-83-5 or more of these JVs/Projects will be in full operation in 3-63 or more 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 JVs/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, 20172020 and 2016 have been2019 were prepared assuming the Company will continue as a going concern. The Company has incurred net losses of approximately $2,463,000$4,553,000 and $4,522,000$2,659,000 during the years ended June 30, 20172020 and 2016,2019, 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, 20172020 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$1,249,000 and $1,378,000$1,207,000 for the six months ended December 31, 20172020 and 2016, respectively.2019. At December 31, 2017,2020, the Company had a working capital deficit and a stockholders'stockholders’ deficit of approximately $10,019,000$11,028,000 and $13,538,000,$15,778,000, 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.
COVID-19 PANDEMIC RELATED MATTERS:
The Company faces risks and uncertainties and factors beyond our control that are magnified during the current Covid-19 pandemic and the unique economic, financial, governmental and health-related conditions in which the Company, the country and the entire world now reside. To date the Company has not recognized any significant operating revenuesexperienced direct impacts in various areas including but without limitation: i) government ordered shutdowns which have slowed the Company’s research and development projects and other initiatives, ii) shifted focus of state and federal governments which is likely to negatively impact the Company’s legislative initiatives in Pennsylvania and Washington D. C., iii) strains and uncertainties in both the equity and debt markets which have made discussion and planning of funding of the Company and its initiatives and projects with investment bankers, banks and potential strategic partners more tenuous, iv) strains and uncertainties in the agricultural sector and markets have made discussion and planning more difficult as future industry conditions are now more difficult to assess and predict, v) due to the age and health of our core management team, all of whom are age 70 or older and have had one or more existing health issues, the Covid-19 pandemic places the Company at greater risk than was previously the case (to a higher degree than would be the case if the Company had a larger, deeper and/or younger core management team), and vi) there almost certainly will be other unanticipated consequences for the past three fiscal years,Company as a result of the current pandemic emergency and its aftermath.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
The Company currently does not generate revenue and if and when the Company has commenced generationbegins to generate revenue the Company will 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.
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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.
THREE MONTHS ENDED DECEMBER 31, 20172020 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2016
Revenue
Total revenues were nil for both the three months ended December 31, 20172020 and 2016,2019, respectively.
General and Administrative
Total general and administrative expenses were $809,000$292,000 and $527,000$388,000 for the three months ended December 31, 20172020 and 2016,2019, respectively.
General and administrative expenses, excluding stock-based compensation charges of $501,000$34,000 and $263,000,$92,000, were $308,000$258,000 and $264,000$296,000 for the three months ended December 31, 20172020 and 2016,2019, respectively, representing a $44,000 increase.$38,000 decrease. Salaries and related payroll tax expenses were $73,000$75,000 and $74,000$65,000 for the three months ended December 31, 20172020 and 2016, respectively.2019, respectively and the increase is due to paying a consultant partially as an employee during the three months ended December 31, 2020. Consulting costs were $158,000$95,000 and $104,000$130,000 for the three months ended December 31, 20172020 and 2016,2019, respectively, representing a $54,000 increase. Most other general$35,000 decrease due to payment of $27,000 to the Coalition for an Affordable Bay Solution during the three months ended December 31, 2019 that was not present during the three months ended December 31, 2020. Investor relation expenses were $9,000 and administrative expenses$18,000 for the three months ended December 31, 2017 did not change materially compared2020 and 2019, respectively, the decrease related to lack of investor conferences due to the pandemic. Travel expenses also decreased by $8,000 when comparing the three months ended December 31, 2016.2020 to the same period in 2019 due to the pandemic.
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General and administrative stock-based employee compensation for the three months ended December 31, 20172020 and 20162019 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, 2020 | Three months ended December 31, 2019 | |||||||
General and administrative: | ||||||||
Change in fair value from modification of option terms | $ | 9,000 | $ | — | ||||
Change in fair value from modification of warrant terms | 25,000 | — | ||||||
Fair value of stock options expensed under ASC 718 | — | 92,000 | ||||||
Total | $ | 34,000 | $ | 92,000 |
Stock-based compensation charges were $501,000$34,000 and $263,000$92,000 for the three months ended December 31, 20172020 and 2016,2019, respectively. Compensation expense relating toThe fair value of stock options was $97,000 and $90,000 duringexpensed for the three months ended December 31, 20172020 and 2016,2019 was nil and $92,000, respectively. The Company granted a total of 295,000 and 259,500390,000 options during the three months ended December 31, 2017 and 2016, respectively. Compensation expense relating to stock bonuses expensed for2019 which were fully vested at grant date, while no options were granted during the three months ended December 31, 2017 related to 100,000 shares in stock bonuses granted to an employee and a consultant with vesting periods ranging from January 15, 2018 through January 2020 (a portion of which were allocated to research and development) was $3,000 and $7,000 for the three months ended December 31, 2017 and 2016, respectively.2020. Compensation expense relating to the change in fair value from the modification of option terms was $244,000$9,000 and $166,000nil for the three months ended December 31, 20172020 and 2016,2019, 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 three months ended December 31, 2016, while during the three months ended December 31, 2017, the Company extended expiration dates for seven employees and consultants.2020. During the three months ended December 31, 2017,2020, the Company extended expiration dates of warrants for certain employees and consultants which resulted in the recognition of $157,000$25,000 in non-cash compensation.
Depreciation
Total depreciation expense was $436$207 and $503$347 for the three months ended December 31, 20172020 and 2016,2019, respectively.
Research and Development
Total research and development expenses were $339,000$155,000 and $126,000$114,000 for the three months ended December 31, 20172020 and 2016,2019, respectively.
Research and development expenses, excluding stock-based compensation expenses of $247,000nil and $38,000,$8,000 were $92,000$155,000 and $88,000$106,000 for the three months ended December 31, 20172020 and 2016, respectively.2019, respectively, representing a $49,000 increase. Salaries and related payroll tax expenses were $18,000$22,000 and $17,000$20,000 for the three months ended December 31, 20172020 and 2016,2019, respectively. Consulting costs remained relatively constant and were $2,000$54,000 and $10,000$50,000 for the three months ended December 31, 20172020 and 2016,2019, respectively. The decrease in consulting costs was offset by $14,000 of expensesCompany also incurred $67,000 and $22,000 for a new pilot testing program during the three months ended December 31, 2017.2020 and 2019, respectively in the development of new components of the 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, 20172020 and 20162019 consists of the following:
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 |
Three months ended December 31, 2020 | Three months ended December 31, 2019 | |||||||
Research and development: | ||||||||
Fair value of stock options expensed under ASC 718 | $ | — | $ | 8,000 | ||||
Total | $ | — | $ | 8,000 |
Stock-based compensation expenses were $247,000nil and $38,000$8,000 for the three months ended December 31, 20172020 and 2016,2019, respectively. Compensation expense relating to stock bonuses expensed for the three months ended December 31, 2017 and 2016, related to 70,000 shares in stock bonusesThe Company granted to an employee, whose time is partially allocated to research and development, with vesting periods ranging from January 2018 through January 2020. The fair value of stock options expensed was nil and $19,000 for the three months ended December 31, 2017 and 2016, respectively. The compensation expense of $106,000 and $11,000 attributed to the change in fair value from modification of390,000 options terms for the three months ended December 31, 2017 and 2016, respectively, is due to a research and development employee's having certain option exercise prices reduced during the three months ended December 31, 20162020 and the same employee having his option expiration dates extended for2019, respectively, of which all 390,000 options were fully vested during the three months ended December 31, 2017. During2019, and a portion of the three months ended December 31, 2017, the Company extended expiration dates of warrants for certain employeesstock compensation was allocated to research and consultants which resulted in the recognition of $133,000 in non-cash compensation.
Loss from Operations
As a result of the factors described above, the loss from operations was $1,148,000$447,000 and $653,000$502,000 for the three months ended December 31, 20172020 and 2016,2019, respectively.
Other (Income) Expense
Other (income) expense was $(625,000)$303,000 and $95,000$143,000 for the three months ended December 31, 20172020 and 2016,2019, respectively. DuringInterest expense of $163,000 and $35,000 was recorded during the three months ended December 31, 2017, the Company recognized other income of $716,0002020 and 2019, respectively, due to the extinguishmentmodification of liabilities related towarrant expiry dates for 3,244,110 and 740,551 warrants held by investors. Interest on deferred compensation of non-related parties. Interest expense, net remained relatively unchanged at $94,000 forand convertible notes payable was $32,000 higher during the three months ended December 31, 2017 compared2020 due to $95,000 for the three months ended December 31, 2016.
Net Loss Attributable to the Noncontrolling Interest
The net loss attributable to the noncontrolling interest was $507$524 and $862$768 for the three months ended December 31, 20172020 and 2016,2019, 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 $522,000$750,000 and $747,000$644,000 for the three months ended December 31, 20172020 and 2016,2019, respectively, and the net loss per basic and diluted common share was $0.02 for both of the three months ended December 31, 2020 and $0.03.
SIX MONTHS ENDED DECEMBER 31, 20172020 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31, 2016
Revenue
Total revenues were nil for both the six months ended December 31, 20172020 and 2016,2019, respectively.
General and Administrative
Total general and administrative expenses were $1,121,000$595,000 and $951,000$708,000 for the six months ended December 31, 20172020 and 2016,2019, respectively.
General and administrative expenses, excluding stock-based compensation charges of $507,000$34,000 and $279,000,$92,000, were $614,000$561,000 and $672,000$616,000 for the six months ended December 31, 20172020 and 2016,2019, respectively, representing a $58,000$55,000 decrease. Salaries and related payroll tax expenses remained fairly constant at $146,000were $144,000 and $126,000 for the six months ended December 31, 2017 compared2020 and 2019, respectively, representing a $18,000 increase due to $150,000a consultant being partially paid as an employee during the six months ended December 31, 2020. Consulting costs were $191,000 and $246,000 for the six months ended December 31, 2016. Consulting2020 and 2019, respectively. The decrease in consulting costs is partially due a consultant being paid as an employee and the absence of political consulting to further the environmental mandates in Pennsylvania during the six months ended December 31, 2020. Investor relations expenses were $261,000$35,000 and $263,000$42,000 for the six months ended December 31, 20172020 and 2016, respectively. Investor relation2019, and travel costs decreased from $43,000were $7,000 and $21,000 for the six months ended December 31, 2016 to $25,000 for the six months ended December 31, 20172020 and 2019, respectively, with decreases due to decreased spending on investor relations development firms during the six months ended December 31, 2017. Insurance related expenses were $29,000 and $39,000 for the six months ended December 31, 2017 and 2016, respectively, as the Company economized by changing some of its insurance coverage during the six months ended December 31, 2017.pandemic.
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General and administrative stock-based employee compensation for the six months ended December 31, 20172020 and 20162019 consists of the following:
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 |
Six months ended December 31, 2020 | Six months ended December 31, 2019 | |||||||
General and administrative: | ||||||||
Change in fair value from modification of option terms | $ | 9,000 | $ | — | ||||
Change in fair value from modification of warrant terms | 25,000 | — | ||||||
Fair value of stock options expensed under ASC 718 | — | 92,000 | ||||||
Total | $ | 34,000 | $ | 92,000 |
Stock-based compensation charges were $507,000$34,000 and $279,000$92,000 for the six months ended December 31, 20172020 and 2016,2019, respectively. Compensation expense relating toThe fair value of stock bonusesoptions expensed for the six months ended December 31, 20172020 and 2016 of $7,000, related to 100,000 shares in stock bonuses2019 was nil and $92,000, respectively. The Company granted to an employee and a consultant with vesting periods ranging from April 2017 through January 2020 (a portion of390,000 options during the six months ended December 31, 2019 which were allocated to research and development).fully vested at grant date, while no options were granted during the six months ended December 31, 2020. Compensation expense relating to the change in fair value from the modification of option terms was $244,000$9,000 and $166,000nil for the six months ended December 31, 20172020 and 2016,2019, 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 six months ended December 31, 2016 and the Company extended certain option expiration dates for seven employees and consultants during the six months ended December 31, 2017.2020. During the six months ended December 31, 2017,2020, the Company extended expiration dates of warrants for certain employees and consultants which resulted in the recognition of $157,000$25,000 in non-cash compensation. The fair value of stock options expensedcompensation, while no such warrant modifications took place during the six months ended December 31, 2019.
Depreciation
Total depreciation expense was $414 and $694 for the six months ended December 31, 20172020 and 2016 was $99,000 and $106,0002019, respectively.
Research and Development
Total research and development expenses were $446,000$246,000 and $238,000 for the six months ended December 31, 20172020 and 2016,2019, respectively.
Research and development expenses, excluding stock-based compensation expenses of $254,000nil and $43,000$8,000 were $192,000$246,000 and $195,000$230,000 for the six months ended December 31, 20172020 and 2016,2019, respectively. Salaries and related payroll tax expenses were $36,000$44,000 and $41,000 for the six months ended December 31, 2020 and 2019, respectively. Consulting costs were $104,000 for both the six months ended December 31, 20172020 and 2016,2019, respectively. Consulting costs were $105,000The Company also incurred $73,000 and $112,000$53,000 for the six months ended December 31, 20172020 and 2016, respectively.
Research and development stock-based employee compensation for the six months ended December 31, 20172020 and 20162019 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, 2020 | Six Months ended December 31, 2019 | |||||||
Research and development: | ||||||||
Fair value of stock options expensed under ASC 718 | — | $ | 8,000 | |||||
Total | $ | — | $ | 8,000 |
Stock-based compensation expenses were $254,000nil and $43,000 and$8,000 for the six months ended December 31, 20172020 and 2016,2019, respectively. Compensation expense relating toThe Company expensed nil and $8,000 for the fair value of stock bonuses expensed foroptions that vested during the six months ended December 31, 20172020 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 to 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's 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. During the six months ended December 31, 2017, the Company extended expiration dates of warrants for certain research and development employees and consultants which resulted in the recognition of $133,000 in non-cash compensation.2019.
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Loss from Operations
As a result of the factors described above, the loss from operations was $1,567,000$841,000 and $1,191,000$946,000 for the six months ended December 31, 20172020 and 2016,2019, respectively.
Other (Income) Expense
Other (income) expense was $(526,000)$408,000 and $187,000$260,000 for the six months ended December 31, 20172020 and 2016,2019, respectively. DuringInterest expense of $163,000 and $35,000 was recorded during the six months ended December 31, 2017, the Company recognized other income of $719,0002020 and 2019, respectively, due to the extinguishmentmodification of liabilitieswarrant expiry dates for warrants held by investors. Interest expense related to deferred compensation of non-related parties. Interest expenseconvertible notes was $194,000$107,000 and $188,000$86,000 for the six months ended December 31, 20172020 and 2016, respectively. The2019, respectively and the increase of $6,000 was dueis attributable to higher balances on interest bearing deferred compensation during the six months ended December 31, 2017. Interest expense related to the Pennvest loan was $99,000 for both periods.
Net Loss Attributable to the Noncontrolling Interest
The net loss attributable to the noncontrolling interest was $1,000 for both the six months ended December 31, 20172020 and 2016,2019, 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$1,248,000 and $1,377,000$1,205,000 for the six months ended December 31, 20172020 and 2016,2019, respectively, and the net loss per basic common share was $0.04 and $0.06 for both the six months ended December 31, 20172020 and 2016,2019, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated financial statements for the six months ended December 31, 20172020 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, 20172020 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.
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Operating Activities
As of December 31, 2017,2020, the Company had cash of approximately $28,000.$361,000. During the six months ended December 31, 2017,2020, net cash used in operating activities was $248,000,$529,000, primarily consisting of cash operating expenses related to salaries and benefits, and other general and administrative costs such as insurance, legal, accounting, consulting 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, 20172020, the Company has debt obligations consisting of: a) loans payable – affiliates of $31,000, b) deferred compensation of $141,000,$998,000, b) convertible notes payable – affiliates of $3,468,000, and,$4,703,000, c) a loan payable and accrued interest of $8,913,000,$9,727,000 (owed solely by PA1).
Plan of Operations and Outlook
As of December 31, 2017,2020, 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 seven years (fiscal years 2014 through 2017 and through the six months ended December 31, 2017,2020), the Company experienced greater difficulty in raising equity and debt funding than in the prior years.years (which was not mitigated by the relative increase in equity funding during the year ended June 30, 2020). 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 2019 and through the six months ended December 31, 2017 and the2020. The Company anticipates that they may continue for the next twelve (12) months or longer.
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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.
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, 2017.2020. 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 30-180 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.
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.
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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 (and potentially other poultry operations and/or other waste streams)('Kreider ('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 2018-202021-24 to create a pipeline of Projects. Management has a 5-year development target (through calendar year 2023)2026) 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.
Covid-19 pandemic related matters:
The Company faces risks and uncertainties and factors beyond our control that are magnified during the current Covid-19 pandemic and the unique economic, financial, governmental and health-related conditions in which the Company, the country and the entire world now reside. To date the Company has experienced direct impacts in various areas including but without limitation: i) government ordered shutdowns which have slowed the Company’s research and development projects and other initiatives, ii) shifted focus of state and federal governments which is likely to negatively impact the Company’s legislative initiatives in Pennsylvania and Washington D. C., iii) strains and uncertainties in both the equity and debt markets which have made discussion and planning of funding of the Company and its initiatives and projects with investment bankers, banks and potential strategic partners more tenuous, iv) strains and uncertainties in the agricultural sector and markets have made discussion and planning more difficult as future industry conditions are now more difficult to assess and predict, v) due to the age and health of our core management team, all of whom are age 70 or older and have had one or more existing health issues, the Covid-19 pandemic places the Company at greater risk than was previously the case (to a higher degree than would be the case if the Company had a larger, deeper and/or younger core management team), and vi) there almost certainly will be other unanticipated consequences for the Company as a result of the current pandemic emergency and its aftermath.
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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, 2017.2020. 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 30-180 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, 20172020 the Company sold the following restricted securities: a) 5,404670,000 units at $0.50 per 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 at $0.75 until December 31, 2021 and received gross proceeds of $335,000 and net proceeds of $306,500 and b) 24,938 shares issued pursuant to our 2006 Consolidated Incentive Plan ('Plan'(“Plan”), valued at $4,002 in aggregate, to an employee and consultant for services, and b) 196,694 units at $0.75 per unit were sold and upon the Company received proceedsconversion of $147,521 (each unit consisted of one share of the Company's restricted common stock and one warrant to purchase half of a share of the Company's restricted common stock at $1.00 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.debt. 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.
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 | ||
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