NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2021 AND 2020
1. ORGANIZATION,
NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT’S PLANS:
Organization and nature of business:
Bion Environmental Technologies, Inc.'s ("Bion,"
"Company," "We," "Us," or "Our") was incorporated in 1987 in the State of Colorado. 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 have
traditionally been wasted or underutilized, including renewable energy, nutrients (including ammonia nitrogen) and water. From 2016 to
present, the Company has focused a large portion of its activities on developing, testing and demonstrating the 3rd 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 is now ready to develop
its initial 3G Tech system. The Company’s initial ammonium bicarbonate liquid product completed its Organic Materials Review Institute
(“OMRI”) application and review process with approval during May 2020 (and certain restrictions were removed effective April
28, 2021). The Company filed an additional OMRI application on May 3, 2021 for the initial crystallized ammonium bicarbonate co-products
produced by our 3G Tech.
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 due in large part to our ability---based upon ongoing monitoring and third-party
verification of environmental performance--- to provide meaningful assurances concerning sustainability 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 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.
From 2014 through the current 2021 fiscal year, the
Company has focused its research and development on augmenting the basic ‘separate and 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 an important part of project
revenue streams). Bion has worked on development of its 3G 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) while c) maintaining or improving environmental performance. This research and development effort also involves
ongoing review of potential “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’s
technology and technology platform. We believe such activities will continue at least through the 2022 fiscal year (and likely longer),
subject to availability of adequate financing for the Company’s operations, of which there is no assurance. Such activities will
likely include design and construction of an initial, commercial-scale system utilizing our 3G Tech to assist in optimization efforts
before construction of Midwest beef JV Projects, the full Kreider 2 project (see below), and/or other Projects. Consistent with this intent,
on April 27, 2021 the Company executed a letter of intent (‘LOI’) with Lamb Farms, Inc., Oakfield, New York regarding development
and construction of a 3G Tech Bion System to treat the waste from its approximately 2,000 dairy cows and from up to 250 head of beef cattle
to be housed in barns constructed by the Company. If the transaction set forth in the LOI proceeds to a definitive agreement and is followed
by construction of the intended facilities (commencing during the upcoming fiscal year), this will likely be Bion’s initial 3G Tech
System and will serve to demonstrate at commercial scale the capabilities of our 3G Tech and technology platform and provide proof of
concept with regard to the potential ‘beef opportunity’ created by our technology and business model.
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 initially (and numerous other companies at present) 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 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 third 3G patent
issued, which patent significantly expands the breadth and depth of the Company’s 3G Tech coverage. The Company anticipates filing
additional patent applications related to its technology developments during the next 12 months. 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 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 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 integrate
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.
The 3G Tech platform is the basis for the Company’s
JV business model with four distinct revenue streams: 1) pipeline 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.
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1)
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Renewable energy and related carbon credits:
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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.
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2)
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Organic Fertilizer products:
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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 non-synthetic, concentrated ammonium bicarbonate
crystal products which will contain 14-30 percent nitrogen in a crystalline form that will be easily transported, water soluble and provide
readily-available nitrogen for use as part of certified organic production. Our 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 produce organic crops using existing equipment. Bion believes
that this product will potentially have broad applications in the production of a variety of organic products including grains for livestock
feed, row crops, horticulture, greenhouse and hydroponic production, and potentially retail lawn and garden 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 (and certain restrictions were removed effective April 28, 2021). The Company filed an additional OMRI application on May 3,
2021 for the initial crystallized ammonium bicarbonate co-products produced by our 3G Tech.
The Company believes that organic approvals
for its products: a) will provide access to substantially 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 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.
Bion had believed that passage in Pennsylvania
of legislation in 2019 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. 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.
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”) is projected to generate between 1.5-3M lbs. of Chesapeake Bay (“CB” or “Bay”) verified
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.
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 U.S. and worldwide. 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 sustainability is unclear. Bion believes that as these initiatives move forward, true sustainability on the production
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 industry 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 ‘product the consumer wants’ but also
the company that ‘shares the consumer’s values’.
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 the retrofit segment was represented by our agreement with Kreider
Farms (“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 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”). 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 seven 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, PA1 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 March 31, 2021. 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’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.
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 commenced discussions and negotiations with Pennvest concerning this matter but Pennvest rejected PA1’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 7 years. PA1 provides Pennvest with its financial statements (which include a description of system
status) annually. During the current fiscal year, Pennvest’s auditors requested a ‘corrective action plan’ and PA1 informed
Pennvest that “… there is no viable corrective action plan for the Pennvest Loan (‘Loan’). The facility funded
by the Loan has been shut down for many years (which has been disclosed in the annual financial reports to Pennvest and in public filings
by the parent of Bion PA 1, LLC) and the technology utilized in the facility is now obsolete. The facility has not been commercially operated
for approximately six years and has generated zero income. We recommend that Pennvest take appropriate steps to remove and sell the equipment.”
Pennvest recently responded favorably to the approach of selling the equipment but no actions have yet taken place. The Company expects
to have additional communication with Pennvest on this matter during the current quarter. It is not possible at this date to predict the
final outcome of this matter, but the Company believes it is likely that that the equipment will be sold with the proceeds delivered to
Pennvest during our next fiscal year. However, the manner and means of such equipment sale has not been agreed upon as of this date. It
remains possible that a loan modification agreement (coupled with an agreement regarding a technology update and re-start of full operations
at the Kreider 1 dairy) 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. PA1 will evaluate the appropriate manner
to resolve/wrap-up its business over the balance of this calendar year.
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 six to 12 months.
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 has been (and is now) solely an obligation of PA1
since that date.
Kreider Farms (Poultry) – 3G Tech Project
Bion is completing an envelope of policy change and
technology pilots that will allow it to move forward with a commercial large scale 3G Tech project at Kreider Farms. Having recently received
two 3G Tech patents and a Notice of Allowance for the third 3G Tech patent (filings and approvals of related additional patent applications/continuations
remaining pending), Bion is undertaking two key tasks that will ‘complete the envelope’ and allow Bion to launch active development
of the Kreider 2 poultry project and/or other Projects) during the 2021 fiscal year (and thereafter):
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.
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 facility. Kreider has already made a significant investment in upgrading
its poultry facilities to maximize the treatment and recovery efficiencies that can be achieved with Bion’s technology. We are cautiously
optimistic that once PA SB575 (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 competitive bidding program. If the competitive bidding program is implemented, we intend to seek
to arrange project financing for the Kreider 2 Project during 2021-2022 calendar years.
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 livestock 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 today.
Bion’s current long-term goal is to acquire
or develop, or have in a development pipeline, 2-5 Projects over the next 24 to 48 months.
A significant portion of Bion’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”) (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’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 $4,553,000 and $2,659,000 during the years ended June 30, 2020 and 2019, respectively,
and a net loss of approximately $2,799,000 during the nine months ended March 31, 2021. At March 31, 2021, the Company has a working capital
deficit and a stockholders’ deficit of approximately $9,718,000 and $14,505,000, respectively. These factors raise substantial doubt
about the Company’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’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, 2020 and 2019, the
Company received total proceeds of approximately $1,584,000 and $897,000, respectively, from the sale of its debt and equity securities.
Proceeds during the 2020 and 2019 fiscal years have been lower than in earlier years which reduction has negatively impacted the Company’s
business development efforts.
During the nine months ended March 31, 2021, the Company
received total proceeds of approximately $2,150,000 from the sale of its equity securities and paid approximately $160,000 in commissions.
During fiscal years 2020 and 2019 and the nine months
ended March 31, 2021, the Company has faced progressively less difficulty in raising equity funding (but substantial equity dilution has
gone along with the larger amounts of equity financing during the periods). As a result, the Company has faced, and continues to face,
significant cash flow management challenges due to working capital constraints which have only recently begun to be alleviated. To partially
mitigate these working capital constraints, the Company’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 4 and 6) and members of the Company’s senior management have made loans to the Company from time to time.
During the year ended 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 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’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
is able to continue its recent increased success in its efforts to raise needed funds during the remainder of the current fiscal year
(and subsequent periods), of which there is no assurance, management will not need to consider deeper cuts (including additional personnel
cuts) and curtailment of ongoing activities including research and development activities.
The Company will need to obtain additional capital
to fund its operations and technology development, to satisfy existing creditors, to develop Projects (including JV Projects, Integrated
Projects and the Kreider 2 facility) and CAFO Retrofit waste remediation 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’ 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 many 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’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’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) constraints due to problems experienced
in the global industrial supply chain which have delayed certain research and development testing and may delay construction of the initial
3G Tech installation if equipment remains difficult to acquire in a timely manner, vi) 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 vii) 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 POLICIES
Principles of consolidation:
The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Bion Integrated Projects Group, Inc. (“Projects Group”), Bion Technologies,
Inc., BionSoil, Inc., Bion Services, PA1, and PA2; and its 58.9% owned subsidiary, Centerpoint Corporation (“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”).
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 March 31, 2021, the results of operations of the Company for the three and nine
months ended March 31, 2021 and 2020 and the cash flows of the Company for the nine months ended March 31, 2021 and 2020. Operating results
for the three and nine months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending
June 30, 2021.
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 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”) 718, which generally requires that share-based compensation transactions be accounted and recognized
in the statement of operations based upon their grant date fair values.
Derivative Financial Instruments:
Pursuant to ASC Topic 815 “Derivatives and Hedging”
(“Topic 815”), the Company reviews all financial instruments for the existence of features which may require fair value accounting
and a related mark-to-market adjustment at each reporting period end. Once determined, the Company assesses these instruments as derivative
liabilities. The fair value of these instruments is adjusted to reflect the fair value at each reporting period end, with any increase
or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives.
Warrants:
The Company has issued warrants to purchase common
shares of the Company. Warrants are valued using a fair value based method, whereby the fair value of the warrant is determined at the
warrant issue date using a market-based option valuation model based on factors including an evaluation of the Company’s value as
of the date of the issuance, consideration of the Company’s limited liquid resources and business prospects, the market price of
the Company’s stock in its mostly inactive public market and the historical valuations and purchases of the Company’s warrants.
When warrants are issued in combination with debt or equity securities, the warrants are valued and accounted for based on the relative
fair value of the warrants in relation to the total value assigned to the debt or equity securities and warrants combined.
Concentrations of credit risk:
The Company's financial instruments that are exposed
to concentrations of credit risk consist of cash. The Company's cash is in demand deposit accounts placed with federally insured financial
institutions and selected brokerage accounts. Such deposit accounts at times may exceed federally insured limits. The Company has not
experienced any losses on such accounts.
Noncontrolling interests:
In accordance with ASC 810, “Consolidation”,
the Company separately classifies noncontrolling interests within the equity section of the consolidated balance sheets and separately
reports the amounts attributable to controlling and noncontrolling interests in the consolidated statements of operations. In addition,
the noncontrolling interest continues to be attributed its share of losses even if that attribution results in a deficit noncontrolling
interest balance.
Fair value measurements:
Fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the
principal or most advantageous market. The Company uses a fair value hierarchy that has three levels of inputs, both observable and unobservable,
with use of the lowest possible level of input to determine fair value.
Level 1 – quoted prices (unadjusted) in active
markets for identical assets or liabilities;
Level 2 – observable inputs other than Level
1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in
markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and
Level 3 – assets and liabilities whose significant
value drivers are unobservable.
Observable inputs are based on market data obtained
from independent sources, while unobservable inputs are based on the Company’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 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 currently does not generate revenue and
if and when the Company begins to generate revenue the Company will comply with the provisions of Accounting Standards Codification (“ASC”)
606 “Revenue from Contracts with Customers”.
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 nine months ended March 31, 2021 and 2020, 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:
|
|
March 31,
2021
|
|
March 31,
2020
|
Warrants
|
|
|
24,653,567
|
|
|
|
19,393,013
|
|
Options
|
|
|
10,471,600
|
|
|
|
7,716,600
|
|
Convertible debt
|
|
|
10,368,364
|
|
|
|
10,046,039
|
|
Convertible preferred stock
|
|
|
19,750
|
|
|
|
18,750
|
|
The following is a reconciliation of the denominators
of the basic and diluted loss per share computations for the three and nine months ended March 31, 2021 and 2020:
|
|
Three months
ended
March 31,
2021
|
|
Three months
ended
March 31,
2020
|
|
Nine months
ended
March 31,
2021
|
|
Nine months
ended
March 31,
2020
|
Shares issued – beginning of period
|
|
|
32,270,594
|
|
|
|
30,195,005
|
|
|
|
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
|
|
|
31,566,285
|
|
|
|
29,490,696
|
|
|
|
30,704,696
|
|
|
|
27,364,379
|
|
Weighted average shares issued
during the period
|
|
|
1,353,526
|
|
|
|
150,242
|
|
|
|
919,613
|
|
|
|
1,269,223
|
|
Diluted weighted average shares –
end of period
|
|
|
32,919,811
|
|
|
|
29,640,938
|
|
|
|
31,624,309
|
|
|
|
28,633,602
|
|
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’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’s financial statements properly reflect the change.
In June 2018, the FASB issued ASU No. 2018-07 “Compensation
– Stock Compensation – Improvements to Nonemployee Share-Based Payment Accounting” to simplify the accounting for share
based payments granted to nonemployees and was adopted by the Company effective July 1, 2019. Under this guidance, payments to nonemployees
are aligned with the requirements for share based payments granted to employees. The adoption of this guidance did not have a material
impact on the Company’s financial statements as previously issued share-based payments to nonemployees had already reached a measurement
date.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
|
|
March 31,
2021
|
|
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
|
|
|
(2,794,877
|
)
|
|
|
(2,794,257
|
)
|
|
|
$
|
748
|
|
|
$
|
1,368
|
|
As of March 31, 2021, the net book value of Kreider
1 was zero. Management has reviewed the remaining property and equipment for impairment as of March 31, 2021 and believes that no impairment
exists.
Depreciation expense was $206 and $347 for the three
months ended March 31, 2021 and 2020, respectively and $620 and $1,041 for the nine months ended March 31, 2021 and 2020, respectively.
4. DEFERRED
COMPENSATION:
The Company owes deferred compensation to various
employees, former employees and consultants totaling $1,012,159 and $652,367 as of March 31, 2021 and 2020, respectively. Included in
the deferred compensation balances as of March 31, 2021, are $358,367 and $380 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’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’s common stock for the last 10 trading days of the immediately
preceding month. The deferred compensation owed Bassani and Smith as of March 31, 2020 was $97,946 and $36,180, respectively. The Company
also owes various consultants and an employee, pursuant to various agreements, for deferred compensation of $580,912 and $445,741 as of
March 31, 2021 and 2020, respectively, with similar conversion terms as those described above for Bassani and 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, 2022 (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’s securities
(to be issued pursuant to the 2006 Plan) “at market” and/or on the same terms as the Company is selling or has sold its securities
in its then current (or most recent if there is no current) private placement.
During the nine months ended March 31, 2021, Smith
elected to convert $127,660 of deferred compensation into units of the Company at its $0.50 per unit offering price (Note 7).
The Company recorded interest expense of $19,897
($8,645 with related parties) and $18,498 ($10,301 with related parties) for the nine months ended March 31, 2021 and 2020, respectively.
5. LOANS PAYABLE:
Pennvest
PA1, the Company’s wholly-owned subsidiary,
owes $9,797,842 as of March 31, 2021 under the terms of the Pennvest Loan related to the construction of the Kreider 1 System including
accrued interest and late charges totaling $2,043,842 as of March 31, 2021. 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 $5,067,000 in fiscal years 2013 through 2020, and $819,000 in fiscal
year 2021, $846,000 in fiscal year 2022, $873,000 in fiscal year 2023 and $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 $61,722 for both the three months ended March 31, 2021 and 2020, respectively. The Company
has also incurred interest expense related to the Pennvest Loan of $185,166 for both the nine months ended March 31, 2021 and 2020, 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 March 31, 2021.
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 commenced discussions and negotiations with Pennvest concerning this matter but Pennvest rejected PA1’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 7 years. PA1 provides Pennvest with its financial statements (which include a description of system
status) annually. During the current fiscal year, Pennvest’s auditors requested a ‘corrective action plan’ and PA1 informed
Pennvest that “… there is no viable corrective action plan for the Pennvest Loan (‘Loan’). The facility funded
by the Loan has been shut down for many years (which has been disclosed in the annual financial reports to Pennvest and in public filings
by the parent of Bion PA 1, LLC) and the technology utilized in the facility is now obsolete. The facility has not been commercially operated
for approximately six years and has generated zero income. We recommend that Pennvest take appropriate steps to remove and sell the equipment.”
Pennvest recently responded favorably to the approach of selling the equipment but no actions have yet taken place. The Company expects
to have additional communication with Pennvest on this matter during the current quarter. It is not possible at this date to predict the
final outcome of this matter, but the Company believes it is likely that that the equipment will be sold with the proceeds delivered to
Pennvest during our next fiscal year. However, the manner and means of such equipment sale has not been agreed upon as of this date. It
remains possible that a loan modification agreement (coupled with an agreement regarding a technology update and re-start of full operations
at the Kreider 1 dairy) 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. PA1 will evaluate the appropriate manner
to resolve/wrap-up its business over the balance of this calendar year.
In connection with the Pennvest Loan financing
documents, the Company provided a ‘technology guaranty’ regarding nutrient reduction performance of Kreider 1 which was structured
to expire when Kreider 1’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’ 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 was uncollateralized, had 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 were 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 March 31, 2021, the total PPP loan and accrued interest was fully forgiven by the SBA.
6. CONVERTIBLE NOTES PAYABLE
- AFFILIATES:
2020 Convertible Obligations (formerly January
2015 Convertible Notes and 2019 Convertible Note)
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 effective
January 1, 2020 are due and payable on July 1, 2024. The 2020 Convertible Obligations (including accrued interest, plus all future deferred
compensation added subsequently), are convertible, at the sole election of the holder, into Units consisting of one share of the Company’s
common stock and one half to one warrant to purchase a share of the Company’s common stock, at a price of $0.50 per Unit until July
1, 2024. The warrant contained in the Unit was originally exercisable at $1.00 per unit but was modified to $0.75 during the year ended
June 30, 2020 and is exercisable until a date three years after the date of the conversion. During the nine months ended March 31, 2021,
the Company approved the increase of warrants by one-third to be received by the noteholder if a conversion takes place. 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” 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 and rewards” of the embedded derivative instrument are not “clearly and
closely 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’s limited trading volume that indicates the feature is not readily convertible
to cash in accordance with ASC 815-10, “Derivatives and Hedging”.
As of March 31, 2021, the 2020 Convertible Obligation
balances, including accrued interest, owed Bassani (and his donees), Smith and Edward Schafer (“Schafer”), the Company’s
Vice Chairman, were $2,479,268, $1,175,174 and $476,580, respectively. As of March 31, 2020, the 2020 Convertible Obligation balances,
including accrued interest, owed Bassani, Smith and Schafer were $2,384,820, $1,120,932 and $458,424, respectively.
The Company recorded interest expense of $39,463 and
$30,944 for the three months ended March 31, 2021 and 2020, respectively. The Company recorded interest expense of $135,892 and $102,814
for the nine months ended March 31, 2021 and 2020, 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 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. During the year ended
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’ original principal is $130,000, which is being held by the Company as
collateral for a subscription receivable promissory note from Bassani. During the year ended June 30, 2019, with the Company’s approval,
Bassani sold $300,000 of his second replacement note to a Shareholder with all the terms remaining the same.
The balances of the September 2015 Convertible Notes
as of March 31, 2021, including accrued interest owed Bassani, Schafer and Shareholder, are $169,921, $20,026 and $426,860, respectively.
The balances of the September 2015 Convertible Notes as of March 31, 2020, including accrued interest, were $164,230, $19,371 and $411,743,
respectively.
The Company recorded interest expense of $5,366 for
both the three months ended March 31, 2021 and 2020, respectively. The Company recorded interest expense of $16,097 for both the nine
months ended March 31, 2021 and 2020, respectively.
7. STOCKHOLDERS' EQUITY:
Series B Preferred stock:
Since July 1, 2014, the Company has 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, 2020 and 2019, the
Company declared dividends of $2,000 and $2,000, respectively. At March 31, 2021, accrued dividends payable are $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.
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’s
common stock. These shares of the Company’s common stock held by Centerpoint are for the benefit of its shareholders without any
beneficial interest.
During the nine months ended March 31, 2021, the Company
entered into subscription agreements, under three different offerings, to sell units for $0.50 per unit, with each unit consisting of
one share of the Company’s restricted common stock and one warrant to purchase one share of the Company’s restricted common
stock for $0.75 per share with an expiry date of December 31, 2021, and pursuant thereto, the Company issued 3,700,000 units for total
proceeds of $1,850,000, net proceeds of $1,690,000 after commissions of $160,000. The Company allocated the proceeds from the 3,700,000
shares and the 3,700,000 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, $113,239 was allocated
to the warrants and $1,736,761 was allocated to the shares, and both were recorded as additional paid in capital.
During the nine months ended March 31, 2021, 300,000
share of the Company’s restricted company stock were sold to an investor for $300,000.
During the nine months ended March 31, 2021, Smith
elected to convert deferred compensation and accounts payable of $127,660 and $40,491, respectively, into an aggregate 336,305 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, 2024.
During the nine months ended March 31, 2021, the
Company issued 36,000 units to Smith for salary of $18,000, with each unit consisting of one share of the Company’s restricted common
stock and one warrant to purchase one share of the Company’s restricted common stock for $0.75 per share with an expiry date of
December 31, 2024.
During the nine months ended March 31, 2021, 5,000
warrants were exercised to purchase 5,000 shares of the Company’s common stock at $0.75 per share for total proceeds of $3,750.
Warrants:
As of March 31, 2021, the Company had approximately
24.7 million warrants outstanding, with exercise prices from $0.60 to $1.50 and expiring on various dates through June 30, 2025.
The weighted-average exercise price for the outstanding
warrants is $0.73, and the weighted-average remaining contractual life as of March 31, 2021 is 2.8 years.
During the nine months ended March 31, 2021, the Company
entered into subscription agreements, under three different offerings, to sell units for $0.50 per unit, with each unit consisting of
one share of the Company’s restricted common stock and one warrant to purchase one share of the Company’s restricted common
stock for $0.75 per share with an expiry date of December 31, 2021, and pursuant thereto, the Company issued 3,700,000 units for total
proceeds of $1,850,000, net proceeds of $1,690,000 after commissions of $160,000. The Company allocated the proceeds from the 3,700,000
shares and the 3,700,000 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, $113,239 was allocated
to the warrants and $1,736,761 was allocated to the shares, and both were recorded as additional paid in capital.
During the nine months ended March 31, 2021, the Company
issued 50,000 warrants to a consultant to purchase 50,000 shares of the Company’s restricted common stock at an exercise price of
$0.90 per share and an expiration date of December 31, 2021. The warrants were in exchange for services expensed at $2,500.
During the nine months ended March 31, 2021, Smith
elected to convert deferred compensation and accounts payable of $127,660 and $40,491, respectively, into an aggregate 336,305 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, 2024.
During the nine months ended March 31, 2021, the
Company agreed to extend the expiration dates of 4,497,924 warrants owned by certain individuals which were scheduled to expire at various
dates from December 31, 2020 through December 31, 2021. The Company recorded non-cash compensation of $25,506 and interest expense of
$187,139 related to the modification of the warrants.
During the nine months ended March 31, 2021, warrants
to purchase 164,251 shares of the Company’s common stock at prices ranging from $0.75 to $2.00 expired.
During the nine months ended March 31, 2021, 5,000
warrants were exercised to purchase 5,000 shares of the Company’s common stock at $0.75 per share for total proceeds of $3,750.
During the nine months ended March 31, 2021, the
Company issued warrants to brokers as commissions to purchase 322,000 shares of the Company’s common stock at an exercise price
of $0.75 per share and an expiration of December 31, 2022. As the issuance was both a reduction and addition to additional paid in capital
there was no impact to the financial statements.
During the nine months ended March 31, 2021, the
Company issued 36,000 units to Smith for salary of $18,000, with each unit consisting of one share of the Company’s restricted common
stock and one warrant to purchase one share of the Company’s restricted common stock for $0.75 per share with an expiry date of
December 31, 2024.
Stock options:
The Company’s 2006 Consolidated Incentive Plan,
as amended during the nine months ended March 31, 2021 (the “2006 Plan”), provides for the issuance of options (and/or other
securities) to purchase up to 36,000,000 shares of the Company’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 nine months ended March 31, 2021, the
Company approved the modification of existing stock options held by two former consultants, which extended certain expiration dates. The
modifications resulted in incremental non-cash compensation of $8,775.
The Company recorded compensation expense related
to employee stock options of $1,017,700 and nil for the three months ended March 31, 2021 and 2020, respectively and $1,017,700 and $99,500
for the nine months ended March 31, 2021 and 2020, respectively. The Company granted 960,000 and 390,000 options during the nine months
ended March 31, 2021 and 2020, respectively.
The fair value of the options granted during the nine
months ended March 31, 2021 and 2020 were estimated on the grant date using the Black-Scholes option-pricing model with the following
assumptions:
|
|
Weighted
Average,
March 31,
2021
|
|
Range,
March 31,
2021
|
|
Weighted
Average,
March 31,
2020
|
|
Range,
March 31,
2020
|
Volatility
|
|
|
65
|
%
|
|
|
58%-65%
|
|
|
|
68
|
%
|
|
|
68%-70%
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Risk-free interest rate
|
|
|
0.79
|
%
|
|
|
0.47%-0.82%
|
|
|
|
1.75
|
%
|
|
|
1.74%-1.75%
|
|
Expected term (years)
|
|
|
5.8
|
|
|
|
5.0 to 5.9
|
|
|
|
5.0
|
|
|
|
5.0 to 5.2
|
|
The expected volatility was based on the historical
price volatility of the Company’s common stock. The dividend yield represents the Company’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’s estimates.
A summary of option activity under the 2006 Plan for the nine
months ended March 31, 2021 is as follows:
|
|
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
|
|
|
|
960,000
|
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2021
|
|
|
|
10,471,600
|
|
|
$
|
0.77
|
|
|
|
3.9
|
|
|
$
|
10,252,975
|
|
|
Exercisable at March 31, 2021
|
|
|
|
10,471,600
|
|
|
$
|
0.77
|
|
|
|
3.9
|
|
|
$
|
10,252,975
|
|
The following table presents information relating
to nonvested stock options as of March 31, 2021:
|
|
Options
|
|
Weighted Average
Grant-Date Fair
Value
|
|
Nonvested at July 1, 2020
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
|
|
|
960,000
|
|
|
|
1.06
|
|
|
Vested
|
|
|
|
(960,000
|
)
|
|
|
(1.06
|
)
|
|
Nonvested at March 31, 2021
|
|
|
|
—
|
|
|
$
|
—
|
|
The total fair value of stock options that vested
during the nine months ended March 31, 2021 and 2020 was $1,017,700 and $99,500, respectively. As of March 31, 2021, the Company had no
unrecognized compensation cost related to stock options.
Stock-based employee compensation charges in operating expenses
in the Company’s financial statements for the three and nine months ended March 31, 2021 and 2020 are as follows:
|
|
Three
months
ended
March 31,
2021
|
|
Three
months
ended
March 31,
2020
|
|
Nine months
ended
March 31,
2021
|
|
Nine months
ended
March 31,
2020
|
General and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value from modification of
option terms
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,775
|
|
|
$
|
—
|
|
Change in fair value from modification of
warrant terms
|
|
|
—
|
|
|
|
—
|
|
|
|
25,506
|
|
|
|
—
|
|
Fair value of stock options expensed
|
|
|
816,050
|
|
|
|
—
|
|
|
|
816,050
|
|
|
|
92,000
|
|
Total
|
|
$
|
816,050
|
|
|
$
|
—
|
|
|
$
|
850,331
|
|
|
$
|
92,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of stock options expensed
|
|
$
|
201,650
|
|
|
$
|
—
|
|
|
$
|
201,650
|
|
|
$
|
7,500
|
|
Total
|
|
$
|
201,650
|
|
|
$
|
—
|
|
|
$
|
201,650
|
|
|
$
|
7,500
|
|
8. SUBSCRIPTION
RECEIVABLE - AFFILIATES:
As of March 31, 2021, the Company has three interest
bearing, secured promissory notes with an aggregate principal amount of $428,250 ($479,116, 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 March 31, 2021, the Company has two interest
bearing, secured promissory notes with an aggregate principal amount of $46,400 ($52,695 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.
As of March 31, 2021, the Company has an interest
bearing, secured promissory note for $30,000 ($33,192 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 October 10,
2016, the Company approved a month to month contract extension, with Smith which includes provisions for i) a monthly deferred salary
of $18,000 until the Board of Directors re-instates cash payments to all employees and consultants who are deferring compensation, ii)
the right to convert up to $300,000 of his deferred compensation, at his sole election, at $0.75 per share, until December 31, 2022),
and 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”
or into securities sold in the Company’s current/most recent private offering at the price of such offering to third parties. Smith
agreed effective July 29, 2018 to continue to serve the Company under these terms.
Since March 31, 2005, the Company has had various
agreements with Brightcap and/or Bassani, through which the services of Bassani are 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. 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.) Pursuant to the Extension Agreement,
Bassani continued 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. 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, 2022). During February 2018, the Company agreed 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 negotiated and will be finalized in the future. Bassani’s
salary will remain $372,000 per year, which will continue to be accrued until there is adequate cash available while negotiations proceed
toward the re-instatement of a least a partial cash payment. Additionally, the Company has agreed to pay him $2,000 per month to be applied
to life insurance premiums. On August 1, 2018, in the context of extending his agreement to provide services to the Company on a full-time
basis through December 31, 2022) plus 2 years after that on a part-time basis, the Company received an interest bearing secured promissory
note for $300,000 from Bassani as consideration to purchase warrants to purchase 3,000,000 shares of the Company’s restricted common
stock, which warrants are exercisable at $0.60 and have expiry dates of June 30, 2025. The promissory note is secured by Bassani’s
$300,000 of 2020 Convertible Obligation (Note 6) and as of March 31, 2021, the principal and accrued interest was $332,795.
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’s common stock reaching a closing price equal to 50% of currently
specified price; and b) the right to extend the exercise period of all or part of the applicable options and warrants for up to five years
(one year at a time) by annual payments of $.05 per option or warrant to the Company on or before a date during the three months prior
to expiration of the exercise period at least three business days before the end of the expiration period. Effective January 1, 2016 such
annual payments to extend warrant exercise periods have been reduced to $.01 per option or warrant.
During the nine months ended March 31, 2021, the Company
applied a 75% execution/exercise bonus on 3,000,000 warrants held by a trust owned by Bassani.
As of March 31, 2021, the execution/exercise bonuses
ranging from 50-90% were applicable to 10,326,600 of the Company’s outstanding options and 15,423,465 of the Company’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’ 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 (Note 1 and Note 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 nine months ended March
31, 2021 and 2020, the Company received nil for expense reimbursements from CABS, respectively. During the three months ended March 31,
2021 and 2020, the Company paid CABS nil and $12,720, respectively for consulting expenses. During the nine months ended March 31, 2021
and 2020, the company paid CABS nil and $52,540, respectively for consulting expenses.
11. SUBSEQUENT
EVENTS:
The Company has evaluated events that occurred subsequent
to March 31, 2021 for recognition and disclosure in the financial statements and notes to the financial statements.
From April 1, 2021 through May 10, 2021, the Company
has sold 20,000 Units of its securities at $0.50 per Unit for aggregate consideration of $10,000. Each Unit consists of one share of common
stock and a callable warrant to purchase one share of the Company’s common shares at $0.75 per share until December 31, 2021.
From April 1, 2021 through May 10, 2021, Smith has
received 85,833 Units in exchange for $36,000 of salary and $10,060 of expenses and accrued interest.
From April 1, 2021 through May 10, 2021, a consultant
has converted $244,143 of deferred compensation and accrued interest into 488,287 Units.
From April 1, 2021 through May 10, 2021, 705,981 warrants were exercised
for 705,981 shares of the Company’s common stock for proceeds of approximately $529,486.
On April 27, 2021 the Company executed a letter of intent (‘LOI’)
with Lamb Farms, Inc., Oakfield, New York regarding development and construction of a 3G Tech Bion System to treat the waste from its
approximately 2,000 dairy cows and from up to 250 head of beef cattle to be housed in barns constructed by the Company. If the transaction
proceeds to a definitive agreement and constructs the intended facilities (commencing during the upcoming fiscal year), this will likely
be Bion’s initial 3G Tech System and will serve to demonstrate at commercial scale the capabilities of our 3G Tech and technology
platform and provide proof of concept with regard to the potential ‘beef opportunity’ created by our technology and business
model.
The Company filed an additional OMRI application on
May 3, 2021 for the initial crystallized ammonium co-products produced by our 3G Tech.