BION ENVIRONMENTAL TECHNOLOGIES, INC.
PO Box 323, Old Bethpage, NY 11804
Tel: 516-249-5682
Fax: 425-984-9702
July 2, 2009
Linda Cvrkel
Branch Chief
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE, Mail Stop 3561
Washington, D.C. 20549
Re: Bion Environmental Technologies, Inc.
Form 10-KSB for the year ended June 30, 2008
Filed September 26, 2008
File No. 0-19333
Dear Ms. Cvrkel:
This letter will serve as a response and/or explanation with respect to the
comments in your letter dated June 8, 2009 (the "Comment Letter") regarding
Bion Environmental Technologies, Inc. ("Bion" or the "Company"). The entire
text of the comments contained in your comment letter has been reproduced in
this letter for ease of reference. A response to each comment is set forth
immediately below the text of the comment.
1. We note from your response to our prior comments number 1 and 2 that you
do not believe the provisions of SFAS No. 84 applied to the Series A Note
conversion, as you believed it was a modification under EITF 06-6, as the
conversions of the convertible debt were not exercisable for only a limited
period of time per EITF 02-15, paragraph 6(a). Since the modifications to
the conversion terms were made at or shortly before the maturity date of the
Series A Notes in May 2008, we are unclear as to why you believe the
conversion terms were "not exercisable for only a limited period of time" as
you indicated in your response. Please explain in further detail your basis
or rationale for this conclusion since it appears the notes were required to
be repaid at the time the loans were modified or shortly thereafter. As a
result, it appears the conversion of the debt had to occur within a very
short or limited period of time after the notes were modified.
Response: We will respond to both comments 1 and 2 in a combined response
after comment 2.
2. Furthermore, after reviewing your response to our comment numbers 1 and 2
and considering the factors noted above, we continue to believe that the
conversion of the Series A Notes into your common shares at a price of $2 per
share (versus the original conversion price of $6 per share) should be
accounted for as an induced conversion pursuant to the guidance in SFAS No.
84 and EITF 02-15. Additionally it appears that the impact of this error of
approximately $500,000 would be material to your results of operations for
2008. Accordingly, please revise your financial statements for fiscal 2008
to account for the conversion of the Series A notes as an induced conversion
pursuant to the guidance in SFAS No. 84.
Response to comments 1 and 2: The Company will accept the Staff's position
that the conversion of the Series A Notes into common shares at a price of $2
per shares should be accounted for as an induced conversion pursuant to the
guidance in SFAS No. 84 and EITF 02-15. However the Company does not believe
that the impact of the error is material to the results of operations for
2008 and has prepared a memo addressing the materiality of the error under
Staff Accounting Bulletin No. 99. The memo is included as an attachment to
our response.
3. In preparing your revised financial statements, please ensure that your
financial statements include all of the disclosures outlined in paragraph 26
of SFAS No. 154.
Response: Based upon our response to comment number 2 and our materiality
assessment under SAB No. 99, we believe we do not need to restate our
financial statements and therefore the disclosures outlined in paragraph 26
of SFAS No. 154 do not apply.
4. We note your response to our prior comment number 6 in which you indicate
that the disclosures outlined in paragraph 40 of SFAS No. 128 will be
provided in future filings. However, we note that certain disclosures
outlined in paragraph 40 have not been included in the notes to your interim
financial statements included in your Form 10-Q for the quarter ended March
31, 2009. In future filings, please disclose in the notes to your financial
statements the number of securities, including those issuable pursuant to
warrants, options and convertible debt instruments, that could potentially
dilute basic EPS in the future but that were not included in the computation
of diluted EPS because to do so would have been anti-dilutive for the
period(s) presented. Refer to the guidance outlined in paragraph 40(c)of
SFAS No. 128.
Response: We have reviewed the guidance outlined in paragraph 40(c)of SFAS
No. 128 and will expand our disclosure in future filings to incorporate the
required disclosure of the number of securities, including those issuable
pursuant to warrants, options and convertible debt instruments, that could
potentially dilute basic EPS in the future but that were not included in the
computation of diluted EPS because to do so would have been anti-dilutive for
the period(s) presented.
A copy of this letter is being electronically forwarded to Ms. Effie Simpson
at simpsone@sec.gov pursuant to telephonic communication. We are filing this
response letter (and attachment) on EDGAR together with the prior response
letters.
Please note the address on the letterhead which should be used for
correspondence as we have closed our New York City office to which you have
been mailing your comment letters.
If you have any further questions or comments, I can be reached by phone at:
719-256-5329 or 303-517-5302 (cell); by fax at: 425-984-9702; and by email at
mas@biontech.com.
Yours,
/s/ Mark A. Smith
Mark A. Smith, President
Bion Environmental Technologies, Inc.
ATTACHMENT 1
Date: June 30, 2009
To: Jon Northrop and Jere Northrop, Board members
Cc: Michael Filkoski, GHP Horwath P.C.
From: Mark A. Smith, Chief Executive Officer and Chief Financial
Officer
Subject: Materiality Assessment of Prior Period Error
Overview
Pursuant to our discussions, I have documented our analysis of the facts and
circumstances related to the accounting of the conversion of the 2006 Series
A Notes ("Notes") into restricted common shares of the Company in May 2008
and the materiality of the required adjustment. It documents management's
conclusion that the necessary adjustment is immaterial when applying the
guidance of Staff Accounting Bulletin No. 99. I have informed the
independent auditors that the Board shares this conclusion and the
independent auditors also agree.
In connection with a review of the Company's June 30, 2008 financial
statements by the Corporate Finance Staff of the Securities and Exchange
Commission (the "Staff"), we have had several discussions via written and
telephonic communication regarding the accounting for the conversion of the
Notes into restricted common shares of the Company. The Staff has informed
us that they disagree with the Company's accounting treatment and feel that
the conversion of the Notes should be accounted for as an induced conversion
pursuant to the guidance in SFAS No. 84 and EITF 02-15. Although I believe
that this matter requires professional judgment on which accountants may
disagree, I recognize that the Staff's position is reasonable and supported
in the accounting literature.
Background
The substance of this transaction is that, on May 31, 2008, the maturity date
of the Notes, the Series A note holders ("note holders") each elected to take
the cash they were due and about to receive from the Company in repayment of
the principal and accrued interest of the Notes, and purchase restricted
shares of the Company's common stock on the same terms of a contemporaneous
private placement. On May 31, 2008 the Company could (and would) have
written checks to the note holders to satisfy the repayment terms of the
Notes. The note holders could (and would) have endorsed the checks back to
the Company to satisfy the requirements of executed subscription agreements
to purchase additional shares of the Company at the fair value of $2 per
share, as it was their desire to acquire restricted shares of the Company's
common stock on substantially identical terms as the contemporaneous private
placement offered to other investors. The Company, in an effort to simplify
the transaction for the note holders, did not write the checks as the note
holders agreed this would not be necessary. The note holders never requested
any additional consideration from the Company, and the Company offered no
inducement to the note holders. Therefore, the Company believes that, from
the standpoint of appropriate accounting treatment, two separate transactions
took place: a) the maturity and settlement of the Notes followed by b) the
purchase by the note holders of shares in the Company's restricted common
stock. The form in which these distinct transactions were accomplished (as a
single net transaction for purposes of ease and simplicity for all the
parties) does not change the substance of the two separate cash transactions.
It had been our view that this netted transaction actually represented two
distinct transactions, the maturity of the Notes and the simultaneous
purchase by the Note holders of restricted common shares of the Company and
therefore no inducement accounting was required. However, we did consider
EITF 06-6 to determine whether a modification or exchange of the conversion
terms applied. The Company accounted for the conversion as a modification
and exchange of a debt instruments that affected the fair value of an
existing embedded conversion option. As such, the Company determined $42,000
to be the estimated impact under EITF 06-6. This amount was calculated as
the difference between the fair value of the embedded conversion option
immediately before and after the exchange of the Notes for common shares of
the Company. This amount was not material for the year ended June 30, 2008.
Our independent auditors concurred with this treatment and did not disagree
that the impact was immaterial to our financial statements. The Staff
advised us that they viewed this conversion as an inducement and that the
difference between the original conversion price of the Notes of $6 per share
and the $2 the Notes were converted into should be recognized as expense at
the time of conversion. Per review of SFAS No. 84 and EITF 02-15, I
believe the Staff's position is reasonable. As a result, the June 30, 2008,
September 30, 2008, December 31, 2008 and March 31, 2009 financial statements
are misstated and an assessment needs to be performed to determine the
materiality of these prior period errors.
Assessment
SEC Staff Accounting Bulletin No. 99 - Materiality ("SAB 99") is the relevant
guidance that needs to be applied to the facts of our situation. SAB 99
states that both quantitative and qualitative factors need to be taken into
consideration when assessing materiality. Per SAB 99 "quantifying...the
magnitude of a misstatement is only the beginning of an analysis of
materiality; it cannot appropriately be used as a substitute for a full
analysis of all relevant considerations. Materiality concerns the
significance of an item to users of a registrant's financial statements. A
matter is 'material' if there is substantial likelihood that a reasonable
person would consider it important."
SAB 99 also refers to Statement of Financial Accounting Concepts No. 2 which
defined materiality as "the omission or misstatement of an item in a
financial report is material if, in the light of surrounding circumstances,
the magnitude of the item is such that it is probable that the judgment of a
reasonable person relying upon the report would have been changed or
influenced by the inclusion or correction of the item."
SAB 99 specifically states, "In the context of a misstatement of a financial
statement item, while the 'total mix' includes the size in numerical or
percentage terms of the misstatement, it also includes the factual context in
which the user of financial statements would view the financial statement
item. The shorthand in the accounting and auditing literature for this
analysis is that financial management and the auditor must consider both
'quantitative' and 'qualitative' factors in assessing an item's materiality."
Quantitative Factors
An analysis of the numeric impact of the misstatement to financial statements
is as follows:
Three Months Six Months Nine Months
Year Ended Ended Ended Ended
6/30/08 9/30/08 12/31/08 3/31/09
------------ ------------ ------------ ------------
Net loss:
As reported $ 1,778,562 $ 930,393 $ 136,200 $ 954,626
As corrected $ 2,297,944 $ 930,393 $ 136,200 $ 954,626
$ Difference $ 519,382 - - -
% of Net loss 29% 0% 0% 0%
Loss per share:
As reported $ 0.21 $ 0.09 $ 0.01 $ 0.09
As corrected $ 0.27 $ 0.09 $ 0.01 $ 0.09
Additional paid in capital:
As reported $ 73,422,195 $ 73,665,312 $ 73,476,577 $ 74,098,100
As corrected $ 73,941,577 $ 74,184,694 $ 73,995,959 $ 74,617,482
$ Difference $ 519,382 $ 519,382 $ 519,382 $ 519,382
% of total < 1% < 1% < 1% < 1%
Accumulated deficit:
As reported $(74,342,288) $(75,272,681) $(74,478,488) $(75,296,914)
As corrected $(74,861,670) $(75,792,063) $(74,997,870) $(75,816,296)
$ Difference $ (519,382) $ (519,382) $ (519,382) $ (519,382)
% of total < 1% < 1% < 1% < 1%
Total shareholder equity:
As reported $ (920,093) $ (1,607,369) $ (1,001,911) $ (1,198,814)
As corrected $ (920,093) $ (1,607,369) $ (1,001,911) $ (1,198,814)
$ Difference - - - -
% of total - - - -
Quantitatively, the error is material to the year ended June 30, 2008;
however, see discussion below of qualitative factors indicating that it is
not material to a reader. Quantitatively, the amount is clearly not material
to the reporting periods subsequent to June 30, 2008. In addition, as the
Company filed under Regulation S-B for the year ended June 30, 2008, it was
not required to disclose quarterly financial information in its 10-KSB for
the fiscal year ended June 30, 2008. As this error relates to the fourth
quarter of fiscal 2008, no amounts previously reported related to quarterly
financial information for the fiscal year ended June 30, 2008 are affected.
The error had no quantitative impact on the previously issued statements of
cash flows or any discussion on liquidity in MD&A as this was a non cash
item.
Qualitative Factors
SAB 99 identifies certain qualitative considerations to take into account in
assessing the materiality of an error which is not intended to be an
exhaustive list:
1. Is the misstatement subject to precise measurement? - YES.
2. Does the misstatement mask a change in earnings or other
trends? - NO.
3. Does the misstatement hide a failure to meet analyst's
expectations? - NO
4. Does the misstatement change a loss into income or vice
versa? - NO.
5. Does the misstatement concern a segment or portion of the
business playing a significant role in operations - N/A (company
operates in only one segment)
6. Does the misstatement affect compliance with regulatory
requirements? - NO
7. Does the misstatement affect compliance with loan covenants or
contractual requirements? - NO.
8. Did the misstatement have the effect of increasing management
compensation? - NO.
9. Did the misstatement involve concealment of an unlawful
transaction? - NO.
10. Was the misstatement intentional? NO.
Conclusion
For September 30, 2008, December 31, 2008 and March 31, 2009, the
quantitative amount of the misstatement was not material to those financial
statements and there were no qualitative factors present to change this
assessment. For June 30, 2008, while the quantitative amount was significant
to net loss, the weight of the above discussed qualitative factors leads me
to conclude that the misstatement should not be considered material to the
2008 statements. I do not believe a reasonable person would have formed a
different conclusion regarding the company if the financial statements had
been correctly stated at the time.
My conclusion is based on the following factors. First, the Company has a
relatively limited number of shareholders and debt holders and management of
the Company believes based upon communications with them, current net losses
to date are not the basis for their investment decisions. The shareholders
have invested based upon the technology the Company has developed and the
business opportunities to be pursued based on the Company's technology
including the expectation of future earnings once the technology is deployed.
Note that the Company has only begun to commercially deploy its technology
during the second half of fiscal year 2009. Second, recording the
additional expense in 2008 would not have turned income into a loss, changed
any operating trend in the business, or changed the reported cash flows from
operations, financing or investing activities. I do not think a reader would
have viewed a $2.3 million loss any differently than a $1.8 million loss,
particularly due to the fact that the difference is based on a non cash
expense and the Company has a history of losses, a significant portion of
which have been the result of non-cash items. Third, the error had no
bearing on contractual requirements, loan covenants, expectations,
compensation nor did it conceal an unlawful transaction. Fourth, the error
was unintentional. Management believed they were properly accounting for the
transaction. I do not believe there would be any significant gain to the
Company's security holders and/or the investing public following the Company
from restating the Company's financial statements for these past periods.
Therefore, I propose that the June 30, 2008 financial statements not be
restated due to the qualitative factors of immateriality described above and
that the subsequent periods not be restated due to both the quantitative and
the qualitative factors of immateriality described above . I propose adding
the following language to the applicable footnote in our 10-K for the year
ended June 30, 2009 (and substantively similar language in the MD&A):
'During the fourth quarter of 2009, we determined that the
conversion of the 2006 Series A Convertible Promissory Notes
during fiscal year 2008 resulted in a non-cash inducement expense
of $519,382 that should have been recognized for the year ended
June 30, 2008. Management evaluated this matter in the context of
Staff Accounting Bulletin No. 99 - "Materiality" and determined
that the error was not material to previously issued financial
statements.'
ATTACHMENT 2
BION ENVIRONMENTAL TECHNOLOGIES, INC.
PO Box 323, Old Bethpage, NY 11804
Tel: 516-249-5682
Fax: 425-984-9702
May 9, 2009
Linda Cvrkel
Branch Chief
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE, Mail Stop 3561
Washington, D.C. 20549
Re: Bion Environmental Technologies, Inc.
Form 10-KSB for the year ended June 30, 2008
Filed September 26, 2008
File No. 0-19333
Dear Ms. Cvrkel:
This letter will serve as a response and/or explanation with respect to the
comments in your letter dated April 16, 2009 (the "Comment Letter") regarding
Bion Environmental Technologies, Inc. ("Bion" or the "Company"). The entire
text of the comments contained in your comment letter has been reproduced in
this letter for ease of reference. A response to each comment is set forth
immediately below the text of the comment.
1. We note from your response to our prior comment number 1 that the Company
did not account for the conversion of the Series A Notes into 389,543 shares
of restricted common stock pursuant to the guidance of SFAS No. 84 as no
additional consideration was offered to the note holders for the purpose of
inducing the conversion of the debt to common shares. We also note from your
response that the note holders wished to increase their positions in the
Company at the time the 2006 Series A Notes matured in May 2008, and
therefore the Company agreed to exchange the 2006 Series A Notes for the
Company's restricted stock at $2 per share, which approximated the fair value
of the shares at such time.
Please note that pursuant to the guidance of EITF 02-15, the provisions of
SFAS No. 84 apply to all conversions of convertible debt that (a) occur
pursuant to changed conversion provisions that are exercisable only for a
limited period of time and (b) include the issuance of all of the equity
securities issuable pursuant to conversion privileges included in the terms
of the debt at issuance for each debt instrument that is converted,
regardless of the party that initiates the offer or whether the offer relates
to all debt holders. As the conversion of your Series A Notes into 389,543
restricted common shares based on a conversion of approximately $2 per share
versus the original conversion price of $6 per share, appears to be due
changed conversion provisions that are exercisable for only a limited period
of time and include the issuance of all of the equity securities pursuant to
the conversion privileges included in the Series A Notes at issuance, we
continue to believe that the conversion of these notes should be accounted
for pursuant to the guidance in SFAS No. 84 and EITF 02-15. Please revise or
advise as appropriate. Please note that similar treatment should be used for
any other obligations converted into the Company's common shares at prices
other than the original conversion terms.
Response: We will respond to both comments 1 and 2 in a combined response
after comment 2.
2. In addition, we are unclear as how the Company determined that the
potential impact of inducement accounting for the Series A Convertible Notes
pursuant to SFAS No. 84 would total only approximately $42,000 as you have
indicated in your response. In this regard, based on the additional number
of shares issued as a result of the revised conversion terms of 259,697, and
the trading price of your shares of approximately $2 per share, it appears
that inducement accounting would result in a charge to your results of
operations of approximately $500,000. Please advise us of how you calculated
the $42,000 estimated impact of inducement accounting discussed in your
response to our comment. We may have further comment upon receipt of your
response.
Response to comments 1 and 2: When the Company was considering the
accounting treatment required for the conversion of the Series A Notes into
389,543 restricted common shares, the Company first considered and reviewed
EITF 06-6 "Debtor's Accounting for a Modification (or Exchange) of
Convertible Debt Instruments" to determine whether the modification or
exchange of the conversion terms applied. The Company believes that EITF 06-6
paragraph 5(b) applies as it was a modification and exchange of a debt
instruments that affected the fair value of an existing embedded conversion
option. As such, the Company determined $42,000 to be the estimated impact
under EITF 06-6. This amount was calculated as the difference between the
fair value of the embedded conversion option immediately before and after the
exchange of the Notes for common shares of the Company. We incorrectly
stated in our initial response that the $42,000 was the impact of the
inducement under SFAS 84. As discussed previously, we believe this amount is
not material for the year ended June 30, 2008.
The Company then reviewed the guidance of SFAS 84 and as indicated earlier
did not believe the provisions applied to the Series A Note conversion even
after considering EITF 02-15, as the Company deemed the Series A Note
conversion as a modification under 06-6, as the conversions of convertible
debt were not exercisable for only a limited period of time as per EITF 02-15
paragraph 6(a).
The substance of this transaction is that, on the maturity date of the Notes,
the note holders each elected to take the cash they were due and about to
receive from the Company in repayment of the principal and accrued interest
of the Notes and purchase restricted shares of the Company's common stock on
the same terms of a contemporaneous private placement. The Company believes
that the substance of the transaction should prevail over the form which the
parties utilized to effect the transaction. On May 31, 2008, the maturity
date of the Notes, the Company could (and would) have written checks to the
Series A note holders to satisfy the repayment terms of the Series A Notes.
The note holders could (and would) have endorsed the checks back to the
Company to satisfy the requirements of executed subscription agreements to
purchase additional shares of the Company at the fair value of $2 per share
as it was their desire to acquire restricted shares of the Company's common
stock on substantially identical terms as the contemporaneous private
placement offered to other investors. The Company, in an effort to simplify
the transaction for the note holders, did not write the checks as the note
holders agreed this would not be necessary. The note holders never requested
any additional consideration from the Company, and the Company offered no
inducement to the note holders. Therefore, the Company believes that, from
the standpoint of appropriate accounting treatment, two separate transactions
took place: a) the maturity and settlement of the Series A Notes followed by
b) the purchase by the note holders of shares in the Company's restricted
common stock. The form in which these distinct transactions were
accomplished as a single net transaction (for purposes of ease and simplicity
for all the parties), does not change the substance of the two separate cash
transactions.
While the Company still stands by its opinion that SFAS No. 84 accounting
does not apply, the Company believes that the charge of approximately
$500,000 to the statement of operations would only have an impact on the net
loss on the June 30, 2008 Form 10-KSB and would have no impact on the Form
10-Qs filed subsequent to the June 30, 2008 Form 10-KSB as the net impact to
shareholders' equity would be zero and the separate line item changes to both
the additional paid in capital and deficit accounts would be immaterial when
compared to the Company's additional paid in capital and accumulated deficit
at June 30, 2008 of $73,422,195 and $(74,342,288), respectively. While
$500,000 of additional expense is quantitatively large in comparison to the
net loss of $1,778,562 for year ended June 30, 2008, we believe that it is
more important to evaluate the qualitative factors. There are no qualitative
factors that would be influenced (negatively or positively) if an additional
$500,000 of loss was reported. The Company has a relatively limited number
of shareholders and debt holders and management of the Company believes that
based upon communications with them, current net losses to date are not the
basis for their investment decisions. The shareholders have invested based
upon the technology the Company is producing and expectation of future
earnings once the technology is deployed, not based upon net income or loss
during the year ended June 30, 2008 and accumulated through that date.
Therefore, we do no believe it is probable an additional $500,000 of loss for
the year ended June 30, 2008, would have changed or influenced an investor
relying upon this financial information for decisions regarding their
investment.
3. We note your response to our prior comment number 4. Please expand your
disclosure in future filings to provide the information cited in your
response. Your revised disclosures should be presented in a level of detail
consistent with your response to our prior comment.
Response: We will expand our disclosure in future filings to incorporate the
information provided in our response to prior comment number 4.
4. We note your response to our prior comment number 5. Please expand your
disclosure in future filings to provide the information cited in your
response. Your revised disclosures should be presented in a level of detail
consistent with your response to our prior comment.
Response: We will expand our disclosure in future filings to incorporate the
information provided in our response to prior comment number 5.
5. Please explain why the weighted average shares used in computing the
Company's basic and diluted earnings per share for the three months ended
December 31, 2008, of 10,418,914 and 10,432,149, respectively is
significantly less than the shares outstanding at the beginning and the end
of the period as indicated in the statement of changes in shareholders equity
on page 5 of 11,070,658 and 11,226,658, respectively. Please advise or
revise as appropriate.
Response: The following table reconciles the issued and outstanding shares
as of September 30, 2008 to the Company's basic and diluted weighted average
shares as of December 31, 2008.
Number of Shares
----------------
Shares issued September 30, 2008 11,070,658
Shares held by subsidiaries (704,309)
----------
Shares outstanding September 30, 2008 10,366,349
Weighted average shares issued during
three months ended December 31, 2008 52,565
----------
Basic weighted average shares
December 31, 2008 10,418,914
Effect of diluted securities 13,235
----------
Diluted weighted average shares
December 31, 2008 10,432,149
==========
Please note the following disclosure made in Note 8 of the Company's June 30,
2008 Form 10-KSB which explains the reduction of the 704,309 shares held by
subsidiaries in the table above, as follows:
"As a result of dividends declared in July 2004, Centerpoint
holds 693,799 shares of the Company's common stock for the
benefit of its shareholders without any beneficial interest.
The Company accounts for these shares similar to treasury stock.
As a result of Company common shares being distributed pursuant
to a settlement in April 2008, Centerpoint holds 10,510 shares
of the Company's common stock for the benefit of its shareholders
without any beneficial interest. The Company accounts for these
shares similar to treasury stock."
The disclosure was inadvertently omitted from the December 31, 2008 Form 10-Q
but the Company will ensure that the disclosure is in the March 31, 2009 and
subsequent Form 10-Qs and Form 10-K filings. The Company will also provide a
table such as the one above in future filings when appropriate.
6. Also, please revise future filings to include disclosures required by
paragraph 40 of SFAS No. 128 for all periods presented in the Company's
financial statements.
Response: The Company will ensure that in future filings it includes the
information required for each period for which an income statement is
presented as required by paragraph 40 of SFAS No. 128.
A copy of this letter is being electronically forwarded to Ms. Effie Simpson
at simpsone@sec.gov pursuant to telephonic communication.
Please note the address on the letterhead which should be used for
correspondence as we have closed our New York City office to which you have
been mailing your comment letters.
If you have any further questions or comments, I can be reached by phone at:
719-256-5329 or 303-517-5302 (cell); by fax at: 425-984-9702; and by email at
mas@biontech.com.
Yours,
/s/ Mark A. Smith
Mark A. Smith, President
Bion Environmental Technologies, Inc.
ATTACHMENT 3
BION ENVIRONMENTAL TECHNOLOGIES, INC.
PO Box 323, Old Bethpage, NY 11804
Tel: 516-249-5682
Fax: 425-984-9702
March 27, 2009
Linda Cvrkel
Branch Chief
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE, Mail Stop 3561
Washington, D.C. 20549
Re: Bion Environmental Technologies, Inc.
Form 10-KSB for the year ended June 30, 2008
Filed September 26, 2008
File No. 0-19333
Dear Ms. Cvrkel:
This letter will serve as a response and/or explanation with respect to
the comments in your letter dated February 3, 2009 (the "Comment Letter")
regarding Bion Environmental Technologies, Inc. ("Bion" or the "Company").
The entire text of the comments contained in your comment letter has been
reproduced in this letter for ease of reference. A response to each comment
is set forth immediately below the text of the comment.
1. We note from the disclosures in Note 5 that on May 31, 2008, the maturity
date for the 2006 Series A Convertible notes, the principal and accrued
interest of the 2006 Notes totaling $779,074 were exchanged via subscription
agreements for 389,543 shares of restricted common stock of the Company at $2
per share which approximated the market price of the stock at the time of the
conversion. We also note from the disclosure included in your prior year's
Annual Report on Form 10-K that the 2006 Notes when issued originally
provided for a conversion price of $6 per share. As the 2006 Notes were
converted into the Company's common shares at a conversion price
significantly lower than the original conversion price of the Series A Notes,
please explain why you did not account for the conversion pursuant to the
guidance in SFAS No. 84.
Response: The conversion of the 2006 Series A Notes was not accounted for
pursuant to the guidance of SFAS No. 84 as there was no additional
consideration offered to the note holders for the purpose of inducing the
conversion of the debt to common shares. As of May 31, 2008, the maturity
date, the 2006 Series A Notes totaled $779,074 and the Company would have
paid the note holders in cash for the principal and accrued interest had the
note holders so elected. The note holders, however, who were all accredited
investors and existing shareholders, wished to increase their positions in
the Company. At the same time, the Company was in the process of a private
placement offering of common shares at $2 per share. Therefore, the Company
and the note holders agreed to exchange the 2006 Series A Notes for the
Company's restricted stock at $2 per share, which approximated the fair
market value on the dates the subscription agreements were executed. As
such, no additional value was given to the note holders as they received the
same value of common shares in the Company as the value of the 2006 Series A
notes at maturity. In consideration of the Staff's comment, we have reviewed
the guidance of SFAS No. 84 and computed the potential expense as if there
was an inducement offer. Although, as discussed above, we do not believe
SFAS No. 84 accounting is appropriate, the potential inducement would have
been approximately $42,000. We believe this amount is not material for the
year ended June 30, 2008 as it is less than 2.5% of our reported net loss,
was not a cash item, had no impact to our reported loss per share and did not
impact any of our contractual agreements.
2. In a related matter, we also note that the 2007 Series A Convertible
Promissory Notes were originally convertible into the Company's common shares
at a price of $4 per share at the note holders option and that the Company
had the right to require the 2007 Notes to be converted into its common
shares at the lesser of a $4 per share or the price of an offering in which
the Company raises $3,000,000 or more. We also note that on May 31, 2008,
all of the non-affiliated 2007 note holders and certain affiliated note
holders converted their notes into the Company's common shares at $2 per
share, the price at which the Company sold common stock during the period.
We further note that the shares sold by the Company during the year ended
June 30, 2008, resulted in gross proceeds aggregating only $630,000 by the
Company. As the 2007 Notes were also converted into the Company's common
shares at a conversion price significantly lower than the original conversion
price of $4 per share, please similarly explain why you did not account for
the conversion of the 2007 Notes into the Company's common shares as an
induced conversion pursuant to the guidance of SFAS No. 84.
Response: The conversion of the 2007 Series A Notes was not accounted for
pursuant to the guidance of SFAS No. 84 due to the fact that these note
holders elected to convert (solely their decision) and the fact there was no
additional consideration offered to the note holders for the purpose of
inducing the conversion of the debt to common shares. Pursuant to the terms
of the 2007 Series A Note set forth at Section 2(b), each note holder had the
option to elect to exchange the note, at its initial principal amount plus
accrued interest, into securities that were substantially identical to
securities that the Company sold in any offering in which the Company raised
less than $3,000,000. In May 2008 these note holders elected to convert.
The note holders had the right as outlined in their original note to convert
their notes in May and June of 2008 as the Company was in the midst of a
private placement offering (which raised less than $3,000,000) of its common
shares at $2 per share, which approximated the fair market value at the time
of the note holders' elections to convert. As such there was no inducement
and no additional consideration offered to the note holders and, therefore,
no accounting treatment pursuant to SFAS No. 84 was required.
3. We note from the disclosure in the first paragraph of Note 7 that during
fiscal year 2007, the Company entered into agreements converting deferred
compensation amounts aggregating $975,000 into promissory notes with
conversion agreements. Please tell us and revise Note 7 to disclose the
significant terms of the conversion agreements into which the deferred
compensation amounts aggregating $975,000 were converted during 2007. Also
please explain how the conversion terms for these promissory notes were
calculated or determined and indicate whether the terms of the promissory
notes provided for a beneficial conversion feature at the time the notes were
issued in exchange for the deferred compensation. Also please reconcile the
disclosure in Note 7 which indicates that the deferred compensation
aggregating $975,000 was converted into promissory notes during 2007 with
that included on your cash flow statement in the supplemental disclosure of
non-cash investing and financing activities of $787,500.
Response: As disclosed in Note 8 of the Company's June 30, 2007 Form 10-KSB,
effective January 1, 2007, the Company entered into agreements with three of
its officers converting deferred compensation amounts owed as of December 31,
2006 into promissory notes with conversion agreements. The notes accrued
interest at 6% per annum, with principal and interest due and payable on
January 1, 2009, if not previously paid. The conversion agreements allowed
for the conversion of the notes into shares of the Company's common stock as
follows: a) by the holder at any time after July 1, 2007; b) by the Company
any time after there has been an effective registration including the shares
underlying the conversion of the underlying notes for six months; c) by the
holder and the Company by mutual agreement at any time prior to the payment
by the Company of the outstanding principal and interest. Due to the fact
that all of promissory notes with conversion agreements were converted during
the year ended June 30, 2008, we do not believe that restating Note 7 to add
this information would be useful or necessary to current investors.
On March 31, 2007 the total principal and accrued interest owed under the
promissory notes with conversion agreements of $787,500 and $11,521,
respectively, together with deferred compensation owed for the three months
ended March 31, 2007 of $187,500, were converted, by mutual agreement, into
the 2007 Series A Promissory Notes. The total of these two amounts is
$975,000. As the conversion price of the 2007 Series A Notes of $4 per share
was above the approximate fair market value of the Company's common shares at
the date of the conversion of the promissory notes and deferred compensation,
no beneficial conversion feature resulted from the transaction. The total
deferred compensation converted into 2007 Series A Notes during the year
ended June 30, 2007 was $975,000, of which $787,500 was converted from debt
(promissory notes) and $187,500 was converted from a current liability
(deferred compensation). Therefore, the supplemental disclosure of non-cash
investing and financing activities on the statement of cash flows only
disclosed the $787,500 related to the debt portion of the conversion.
4. We note from the disclosure in Note 7 and your consolidated statements of
changes in stockholders' deficit that $530,085 of deferred compensation owed
to Brightcap and Mr. Smith was converted into common shares at a price of $2
per share during fiscal 2008. Please tell us and revise Note 7 to explain
how these conversion terms were calculated or determined. If $2 was
determined to be the fair market value of the Company's common shares please
explain how this fair value was determined.
Response: The Company was in the process of a private placement offering of
common shares at $2 per share around the time that Brightcap and Mr. Smith
converted their deferred compensation into common shares of the Company at $2
per share. In addition to the fact that third parties were buying common
shares of the Company for cash at $2 per share, the quoted market price of
the shares at the time was approximately $2 per share. Therefore, $2 was
deemed to be the fair value. Due to the fact that the deferred compensation
amounts owed Brightcap and Mr. Smith were converted during the year ended
June 30, 2008, we do not believe that restating Note 7 to add this
information would be useful or necessary to current investors.
5. We note the disclosure indicating that on March 31, 2007, the Company
issued 151,908 shares of its common stock to satisfy its deferred
compensation obligation owed under various management agreements with the D2
LLC Deferred Compensation Trust of $607,629. Please tell us how you
determined the number of shares issued in satisfaction of this obligation.
If this was based on the fair value of the shares issued, please explain how
fair value was determined.
Response: As disclosed in Note 7 of the Company's June 30, 2007 Form 10-KSB,
in March 2003, the D2 LLC Deferred Compensation Trust agreed to accept
payment on March 31, 2007 by conversion of the deferred compensation into
common stock of the Company at the higher of the average price of the
Company's common stock during the ten trading days ending March 27, 2007, or
$4 per share. The average price of the Company's common stock during the ten
trading days prior to March 27, 2007 was below $4 per share, therefore the
Company converted the debt owed at a conversion rate of $4 per share as per
the terms of the March 2003 agreement. As a result, the conversion was not
based on the fair value of the shares issued at the time of issuance but
pursuant to contractual terms negotiated four years earlier.
6. We note from the disclosure in your Form 8-K that effective May 31, 2008,
certain outstanding options were modified to extend the exercise periods for
the options or to reduce the exercise prices of the options. Please tell us
and explain in the notes to your financial statements in future filings how
you accounted for the modifications of these options in your financial
statements and indicate the amount of any incremental compensation expense
recognized in connection with the modifications pursuant to the guidance in
paragraph 51 of SFAS No. 123R. If no additional expense was recognized in
connection with the modifications, please explain why.
Response: The Company did follow the guidance of paragraph 51 of SFAS No.
123R and recorded incremental compensation expense related to these
modifications of stock options totaling approximately $188,000 for the year
ended June 30, 2008. We will disclose how we accounted for the modifications
and indicate the amount of incremental compensation expense recognized in
connection with the modifications in future filings.
7. We note the disclosure in your Form 8-K dated January 12, 2009 indicating
that the Company granted bonuses to Dominic Bassani and Mark Smith in the
form of warrants to purchase common stock at $.75 per share and the extension
of the expiration dates of warrants previously issued to December 31, 2018.
We also note that each of the parties received the option or right to convert
accrued deferred compensation and other obligations into the Company's common
shares at $.75 per share. Please tell us and explain in future filings how
the Company determined the values assigned to the new and modified warrants
issued as part of these arrangements. Also please explain how you determined
the conversion price of $.75 per common share for the accrued deferred
compensation and other obligations that are convertible or were converted
into the Company's common shares at $.75 per share. As part of your
response, please indicate whether the $.75 conversion price represents a
beneficial conversion feature which should be accounted for pursuant to the
guidance in EITF 98-5 or EITF 00-27, as applicable. We may have further
comment upon receipt of your response.
Response: These items date from the current quarter ending March 31, 2009
and we will make the requested disclosure in the Company's Form 10-Q for the
quarter ending March 31, 2009 and future filings as required. The $.75
warrant exercise price (and conversion prices) in the various
agreements/documents was the price at which the Company was selling
restricted common stock to third parties during the relevant period. From
December 18, 2008 to December 30, 2008, the period during which the various
transactions were negotiated, the Company's common stock, which normally only
trades sporadically, did not trade at all in the public market. On all such
dates the bid price in the public market was between $.55 and $.57 per share.
Therefore, there were no beneficial conversion features. The bonus grants to
Dominic Bassani and Mark Smith, and the other portions of the related
agreements, were the subject of extended discussion and negotiations during
late December 2008. The value placed upon the warrants to purchase common
stock at $.75 per share that were issued as bonuses to Dominic Bassani and
Mark Smith was determined to be $.10 per newly issued warrant, which
represented the Board's business judgment based on factors including the
Board's evaluation of the Company's current value, limited liquid resources
and business prospects, the market price of the Company's stock in its mostly
inactive public market, the concurrent sales of restricted common stock at
$.75 per share, and the valuation and purchases of the Company's newly issued
warrants during earlier periods. The Board discussed the possible use of
formulas for valuation of the warrants (and extensions) and concluded, as it
has historically concluded, that application of Black-Scholes (or similar)
calculation to determine the value of the Company's warrants resulted in
amounts that greatly exceed any price a third party would pay for such
securities and greatly overstate the value. The allocation of the bonuses
between newly issued warrants and the extension of existing warrants was
determined by the Board's business judgment as to the approximate relative
value of the extensions of the outstanding warrants compared to the newly
issued warrants. Note that the Company's publicly traded stock did not trade
in the public market between December 18, 2008 and December 30, 2008, the
period during which the bonuses were determined and the related agreements
were negotiated. Note further that during this period the publicly reported
bid price for the Company's common stock was between $.55 and $.57 per share.
The conversion price of the deferred compensation and other obligations of
the Company of $.75 per share was determined based upon the fact that the
Company had been selling restricted shares of the Company's common stock for
cash around the same period at $.75 per share. Therefore no beneficial
conversion features exist.
8. Also, we noted that Mr. Orphanos agreed to extend the maturity date of a
$65,000 promissory note issued during the fall of 2008 to June 30, 2009 in
exchange for the Company making such note convertible into shares of common
stock at a price of $.75 per share and issuing warrants to purchase 15,000
shares of common stock at a price of $.75 per share. Please explain how the
Company valued and accounted for the warrants issued in this transaction and
explain how the Company accounted for the revision in the terms of the debt
modification. As part of your response, you should also explain whether the
revised promissory note provided for a beneficial conversion feature and how
any beneficial conversion feature was accounted for in the Company's
financial statements pursuant to guidance in EITF 98-5 and EITF 00-27, as
applicable.
Response: At the time Mr. Orphanos agreed to extend the terms of his
promissory note to June 30, 2009 in exchange for the Company making such note
convertible into common stock of the Company at a price of $.75 per share,
the Company had been involved in selling restricted shares of the Company for
cash at a price of $.75 per share. In addition, the quoted market price of
the shares at that time was substantially lower than $.75 per share,
therefore, no beneficial conversion feature existed at the time of the debt
modification. The Company evaluated the debt modification pursuant to EITF
96-19 and determined that the extension of the maturity date and the issuance
of 15,000 warrants to purchase shares of the Company at $.75 at the time of
the modification did not represent a substantial difference in the terms of
the original debt. The Company valued the warrants at $.10 per warrant,
which was the same value deemed appropriate for the issuance of warrants to
Mr. Bassani and Mr. Smith as discussed in comment 8.
9. We urge all persons who are responsible for the accuracy and adequacy of
the disclosure in the filing to be certain that the filing includes all
information required under the Securities Exchange Act of 1934 and that they
have provided all information investors require for an informed investment
decision. Since the company and its management are in possession of all
facts relating to a company's disclosure, they are responsible for the
accuracy and adequacy of the disclosure they have made.
Response: The management of the Company acknowledges the following:
a) the Company is responsible for the adequacy and the accuracy of the
disclosure in the filing;
b) staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action with respect
to the filing; and
c) the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under federal securities
laws of the United States.
A copy of this letter is being electronically forwarded to Ms. Effie Simpson
at simpsone@sec.gov pursuant to telephonic communication.
If you have any further questions or comments, I can be reached by phone at:
719-256-5329 or 303-517-5302 (cell); by fax at: 425-984-9702; and by email at
mas@biontech.com.
Yours,
/s/ Mark A. Smith
Mark A. Smith, President
Bion Environmental Technologies, Inc.