-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QCaEw//Afzzhx2hFa3+lj0YGXMzR27sFaweWrNzb/ds2nDZ2qtEtc/y2150YDbIR wkbdczEuN3rDOBbMFG+rQg== 0000948830-03-000062.txt : 20030219 0000948830-03-000062.hdr.sgml : 20030219 20030219164537 ACCESSION NUMBER: 0000948830-03-000062 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030219 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BION ENVIRONMENTAL TECHNOLOGIES INC CENTRAL INDEX KEY: 0000875729 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE CHEMICALS [2870] IRS NUMBER: 841176672 STATE OF INCORPORATION: CO FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-31437 FILM NUMBER: 03573130 BUSINESS ADDRESS: STREET 1: 18 EAST 50TH STREET STREET 2: 10TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 3032940750 MAIL ADDRESS: STREET 1: 18 EAST 50TH ST STREET 2: 10TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: RSTS CORP DATE OF NAME CHANGE: 19930328 10QSB 1 bion10q.txt BION ENVIRONMENTAL 12-31-02 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR THE TRANSITION PERIOD FROM _______ TO _______ Commission file number 0-19333 Bion Environmental Technologies, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Colorado 84-1176672 ---------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 18 East 50th Street 10th Floor N.Y., N.Y. 10022 ----------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 758-6622 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ As of February 13, 2003 the issuer had outstanding 5,304,521 shares of common stock. This includes 1,900,000 shares held by a majority-owned subsidiary of the registrant. Transitional Small Business Disclosure Format (Check one): Yes ___ No X BION ENVIRONMENTAL TECHNOLOGIES, INC. QUARTERLY REPORT ON FORM 10-QSB TABLE OF CONTENTS PART I .................................................................. 3 Item 1. Financial Statements .................................... 3 Unaudited consolidated balance sheet as of December 31, 2002 ..................................... 4 Unaudited consolidated statements of operations for the three and six months ended December 31, 2002 and 2001 ............................ 5 Unaudited consolidated statements of cash flows for the six months ended December 31, 2002 and 2001 ............................ 6 Notes to unaudited consolidated financial statements .... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................... 15 Item 3. Controls and Procedures ................................. 21 PART II ................................................................. 22 Item 1. Legal Proceedings ....................................... 22 Item 2. Changes in Securities ................................... 22 Item 5. Other Information ....................................... 22 Item 6. Exhibits and Reports on Form 8-K ........................ 23 Signatures ....................................................... 24 Certifications ................................................... 25 2 PART I Item 1. Financial Statements 3 BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES Unaudited Consolidated Balance Sheet As of December 31, 2002
ASSETS Current assets: Cash and cash equivalents $ 122,198 Accounts receivable, net of allowance for doubtful accounts of $2,000 20,431 Inventory 211,842 Prepaid expenses and other current assets 111,358 ----------- Total current assets 465,829 Property and equipment, net 223,479 Claims receivable 1,339,154 Other assets 212,638 ----------- Total assets $ 2,241,100 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 681,572 Accrued expenses 177,101 Capital lease obligation 2,115 ----------- Total current liabilities 860,788 Deferred compensation 494,272 ----------- Total liabilities 1,355,060 Minority interest 445,083 Commitments and contingencies Stockholders' Equity: Preferred Stock, $.01 par value, 10,000 shares authorized, -0- shares issued and outstanding Common stock, no par value, 100,000,000 shares authorized, 4,208,791 shares issued and 4,117,352 outstanding (this does not include 1,095,730 shares held by Centerpoint which will be distributed to Bion and subsequently cancelled) Additional paid in capital 59,220,602 Accumulated deficit (57,959,168) Treasury stock, at cost, 91,439 shares of common stock (820,477) ----------- Total stockholders' equity 440,957 ----------- Total liabilities and stockholders' equity $ 2,241,100 ===========
See notes to consolidated financial statements 4 BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations
Three Months Ended Six Months Ended December 31, December 31, -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Revenue: Soil sales $ 62,626 $ 15,610 $ 109,264 $ 28,612 ----------- ----------- ----------- ----------- Cost of soil 191,398 123,586 387,116 242,676 ----------- ----------- ----------- ----------- Gross loss (128,772) (107,976) (277,852) (214,064) ----------- ----------- ----------- ----------- Expenses: General and administrative (excluding non- cash charges for services and compensation of $55,176 and $276,700 for the three months ended December 31, 2002 and 2001, respectively and $(7,923) and $500,629 for the six months ended December 31, 2002 and 2001, respectively) 727,002 590,796 1,364,195 1,212,876 Research and development 185,332 183,698 335,194 397,167 Non-cash charges for services and compensation 55,176 276,700 (7,923) 500,629 ----------- ----------- ----------- ----------- 967,510 1,051,194 1,691,466 2,110,672 ----------- ----------- ----------- ----------- Operating loss (1,096,282) (1,159,170) (1,969,318) (2,324,736) ----------- ----------- ----------- ----------- Other income and expense: Interest expense (including non-cash interest charges of $2,250 and $1,421,048 for the three months ended December 31, 2002 and 2001, respectively and $2,250 and $2,539,766 for the six months ended December 31, 2002 and 2001, respectively) (2,362) (1,421,347) (2,437) (2,540,559) Interest income 2,161 1,494 7,790 10,693 Other (expense) income, net (3,914) 27,252 (20,613) 68,610 ----------- ----------- ----------- ----------- (4,115) (1,392,601) (15,260) (2,461,256) ----------- ----------- ----------- ----------- Net loss before minority interest (1,100,397) (2,551,771) (1,984,578) (4,785,992) ----------- ----------- ----------- ----------- Minority interest (39,041) - (3,989) - ----------- ----------- ----------- ----------- Net loss and comprehensive loss $(1,139,438) $(2,551,771) $(1,988,567) $(4,785,992) =========== =========== =========== =========== Basic and diluted loss per common share: Net loss per common share $ (0.28) $ (1.92) $ (0.48) $ (3.63) =========== =========== =========== =========== Weighted-average number of common shares outstanding, basic and diluted loss 4,117,352 1,329,805 4,117,352 1,318,322 =========== =========== =========== ===========
See notes to consolidated financial statements 5 BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES Unaudited Consolidated Statements of Cash Flows
Six Months Ended December 31, -------------------------- 2002 2001 ----------- ----------- Cash flows from operating activities: Net loss $(1,988,567) $(4,785,992) Adjustments to reconcile net loss to net cash used in operating activities: Minority interest in net loss of subsidiary 3,989 - Depreciation and amortization 41,274 37,569 Beneficial conversion feature amortized to interest expense - 297,000 Loss on disposal of asset 7,443 - Amortization of debt discount - 1,554,425 Accretion of notes payable for interest expense 2,250 688,341 Reduction of note receivable for consulting services - 41,100 Compensation charge from variable options - (3,469) Non-cash charges for equity instruments issued for compensation and services (7,923) 462,998 Changes in: Accounts receivable (3,137) 10,350 Note receivable (1,987) (121,441) Inventory (144,202) - Prepaid expenses and other current assets 36,641 114 Deposits and other 548 - Accounts payable 357,635 96,051 Accrued expenses 121,949 16,406 ----------- ----------- Net cash used in operating activities (1,574,087) (1,706,548) ----------- ----------- Cash flows from investing activities: Purchases of property and equipment (116,152) (12,575) ----------- ----------- Net cash used in investing activities (116,152) (12,575) ----------- ----------- Cash flows from financing activities: Payments of capital lease obligations (1,134) (9,011) Proceeds from the exercise of stock options - 120,000 Issuance of notes payable, related parties - 355,000 ----------- ----------- Net cash (used in) provided by financing activities (1,134) 465,989 ----------- ----------- Net decrease in cash and cash equivalents (1,691,373) (1,253,134) Cash and cash equivalents, beginning of period 1,813,571 1,300,398 ----------- ----------- Cash and cash equivalents, end of period $ 122,198 $ 47,264 =========== =========== Supplemental disclosure of cash flow information: Cash paid for interest during the period $ 299 $ 793 =========== =========== Supplemental disclosure of non-cash financing activities: Issuance of stock for convertible bridge note $ - $ 112,740
See notes to consolidated financial statements 6 BION ENVIRONMENTAL TECHNOLOGIES, INC., AND SUBSIDIARIES Notes to unaudited consolidated financial statements 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Bion Environmental Technologies, Inc. (the "Company", "Bion", "we", "us" or "our") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. In the opinion of management, such statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the Company's financial position, results of operations and cash flows at the dates and for the periods indicated. Pursuant to the requirements of the Securities and Exchange Commission applicable to Quarterly Reports on Form 10-QSB, the accompanying financial statements do not include all the disclosures required by GAAP for annual financial statements. While the Company believes that the disclosures presented are adequate to make the information not misleading, these interim consolidated financial statements should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-KSB/A for the year ended June 30, 2002. Operating results for the periods indicated are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2003. Certain fiscal year 2002 items have been reclassified to conform to their fiscal year 2003 presentation. 2. ORGANIZATION AND NATURE OF BUSINESS Bion Environmental Technologies, Inc. ("Bion" or the "Company") was incorporated in 1987 in the State of Colorado. Bion is an environmental service company focused on the needs of confined animal feeding operations (CAFOs). Bion is engaged in two main areas of activity: waste stream remediation and organic soil and fertilizer production. Bion's waste remediation service business provides CAFOs (primarily in the swine and dairy industries) with treatment for the animal waste outputs. In this regard, Bion treats their entire waste stream in a manner which cleans and reduces the waste stream thereby mitigating pollution of the air, water (both ground and surface) and soil, while creating value-added organic soil and fertilizer products. Bion's soil and fertilizer products are being used for a variety of applications including school athletic fields, golf courses and home and garden applications. The Company's Nutrient Management System (NMS) is a patented biological and engineering process that treats water, nutrient and air pollution associated with animal waste. The system also provides a use for the waste materials and solids by biologically converting them into environmentally friendly, time-release organic-based solids that are the basis of Bion's organic soil and fertilizer business segment. Bion's BionSoil(R) and Bion Fertilizer product lines contain a unique mix of organic nutrients, bacteria and other microbes that extensive testing has shown produces superior plant growth with reduced leaching of nutrients when compared to traditional chemical fertilizers. 7 BION ENVIRONMENTAL TECHNOLOGIES, INC., AND SUBSIDIARIES Notes to unaudited consolidated financial statements 2. ORGANIZATION AND NATURE OF BUSINESS (CONTINUED) The unaudited consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company incurred losses totaling $1,988,567 during the six months ended December 31, 2002 and has a history of losses which has resulted in an accumulated deficit of $57,959,168 at December 31, 2002. During the year ended June 30, 2002, through the Company's transactions with Centerpoint Corporation and OAM S.p.A., the Company obtained $4,800,000 in cash. The Company is currently engaged in seeking additional financing to satisfy its current operating requirements. There can be no assurance that sufficient funds required during the next twelve months or thereafter will be generated from operations or that funds will be available from external sources such as debt or equity financings or other potential sources. The lack of additional capital resulting from the inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on its business. Further, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significantly dilutive effect on the Company's existing shareholders. We have a stockholders' equity of $440,957, an accumulated deficit of $57,959,168, limited current revenues, substantial current operating losses and negative working capital. Our operations are not currently profitable; therefore, readers are further cautioned that our continued existence is uncertain if we are not successful in obtaining outside funding in an amount sufficient for us to meet our operating expenses at our current level. Management is currently engaged in seeking additional capital to fund operations until Bion system and BionSoil(R) sales are sufficient to fund operations. There is 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 asset carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. In connection with their report on our Consolidated Financial Statements as of and for the year ended June 30, 2002, BDO Seidman, LLP, our independent certified public accountants, expressed substantial doubt about our ability to continue as a going concern because of recurring net losses and negative cash flow from operations. 3. SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly- and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 8 BION ENVIRONMENTAL TECHNOLOGIES, INC., AND SUBSIDIARIES Notes to unaudited consolidated financial statements 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Loss per share of common stock: Basic earnings per share includes no dilution and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share. In loss periods, dilutive common equivalent shares are excluded, as the effect would be anti-dilutive. Therefore, basic and diluted earnings per share are the same for all periods presented[lrd1]. For the periods ended December 31, 2002, 199,027 stock options and 1,393,303 warrants having a weighted-average exercise price of $12.64 and $7.66, respectively, were excluded in the net loss per share calculation since the effect of inclusion would be anti-dilutive and for the periods ended December 31, 2001, 172,391 stock options and 933,147 warrants having a weighted-average exercise price of $20.10 and $15.00, respectively, were excluded in the net loss per share calculation since the effect of inclusion would be anti-dilutive. Patents: Patents are recorded at costs of $54,946 less accumulated amortization of $26,425 for a net amount of $28,521, which is included in other assets. Amortization is calculated on a straight-line basis over a period of the estimated economic life or legal life of 17 years. Amortization expense for the six and three month periods ended December 31, 2002 and 2001 was $1,616 and $808, respectively. Recently issued accounting pronouncements: In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Interpretation No. 45 requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The recognition requirement is effective for guarantees issued or modified after December 31, 2002 and is not expected to have a material impact on the Company. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends certain provisions of SFAS No. 123 and is effective for financial statements for fiscal years ending after December 15, 2002. The Company is currently assessing the impact of adoption of SFAS No. 148. 4. DEFERRED COMPENSATION On June 30, 2001, Bion and D2CO, LLC ("D2") agreed that the payments owed to D2 under an existing management agreement be paid to a Rabbi Trust for the benefit of D2. On July 31, 2001, Bion and Sam Spitz (the "Trustee") entered into the Trust Under Deferred Compensation Plan for D2Co, LLC (the "Trust"). 9 BION ENVIRONMENTAL TECHNOLOGIES, INC., AND SUBSIDIARIES Notes to unaudited consolidated financial statements 4. DEFERRED COMPENSATION (CONTINUED) Under the Trust agreement, the Company shall contribute assets to the Trust. Such assets are subject to claims of the Company's creditors in the event of the Company's insolvency, at such times as specified in the management agreement with D2. D2 shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the management agreement with D2 and the Trust shall be unsecured contractual rights of D2 against the Company. Payments of all amounts in the Trust are to be made to D2 on January 2, 2011, as stated in the Trust agreement. The Company accounts for the Trust under the provisions of Emerging Issues Task Force ("EITF") 97-14 "Accounting for Deferred Compensation Arrangement Where Amounts are Earned and Held in a Rabbi Trust and Invested" which requires the Company to consolidate into its financial statements the net assets of the Trust. The value of the Company's common stock held by the Trust is classified in shareholders' equity and is accounted for in a manner similar to treasury stock. The deferred compensation obligation has been classified as a liability and is adjusted, with the corresponding charge or credit to compensation expense, to reflect changes in fair value of the common stock held by the Trust. 5. STOCKHOLDERS' EQUITY Reverse stock split: Effective July 8, 2002, the Company completed a one-for-ten reverse stock split of its outstanding shares of common stock. The accompanying unaudited consolidated financial statements have been retroactively adjusted to reflect the reverse stock split. 6. COMMITMENTS AND CONTINGENCIES Claims contingency: On July 22, 2002, Thomas Keith Barefoot ("Barefoot"), doing business as Quin Deca Farm ("Quin Deca"), an unaffiliated party, filed a complaint against the Company in the Superior Court of the County of Harnett in the State of North Carolina regarding the Company's first generation Bion NMS System on Quin Deca Farm and the harvesting of BionSoil(R). The complaint includes breach of contract claims asserting that the Company abandoned the NMS system on Quin Deca Farm and the failure of the Company to harvest BionSoil(R). The second claim is for fraud regarding misrepresentation of the state of the technology of the first generation NMS. The third claim is for unfair and deceptive trade practices for misrepresentation of the state of the technology of the NMS System. The fourth claim is for negligent misrepresentation made by Bion in connection with the work it performed and its suitability for the intended purpose. The fifth claim is for equity/specific performance in that Bion left Quin Deca with an economically and technically deficient waste management system that cannot continue to be used without adequate and alternative methods of waste removal. Quin Deca is seeking $830,000 in damages plus punitive damages and to have its damages trebled, reasonable attorney fees and principles of equity requiring Bion to install its second generation Bion NMS system. The Company does not believe that the claim has merit and that the ultimate resolution of this litigation will have a material adverse effect on the Company, its operations or its financial condition. 10 BION ENVIRONMENTAL TECHNOLOGIES, INC., AND SUBSIDIARIES Notes to unaudited consolidated financial statements 7. RELATED PARTY TRANSACTIONS The Company issued to D2 15,322 and 23,421 shares of common stock for management fees during the three and six months ended December 31, 2001, respectively. The management fees were valued at $125,000 and $250,000 during the three and six months ended December 31, 2001, respectively. The Company and D2 orally agreed during January 2002, that in the event the average price per common share is below $7.50 for any quarter in which consulting fees are to be paid to the Trust, Bion will issue a convertible note in lieu of the stock payment. The agreement is to remain in place during the "Adjustment Period" noted in the Centerpoint and OAM Agreements. The convertible note is recorded as deferred compensation upon consolidation of the Trust. On July 1, 2002, D2 returned to the Company 2,874 shares of the Company's common stock that was issued as part of the consulting fee to D2 paid to the Trust Under Deferred Compensation Plan for D2Co, LLC (the "Trust") for the Benefit of D2. The shares were subsequently cancelled. On September 30, 2002, the Company issued a convertible note for the D2 management fee to be paid to the Trust for the three months ended September 30, 2002. The convertible note was issued for the amount of the management fee of $150,000 and pays interest at 6% per annum, payable in cash or in shares of the Company's common stock. The convertible note is convertible into shares of common stock in whole or in part at the time of the Company's next equity financing, at the price of the next equity financing. The convertible note is recorded as deferred compensation upon consolidation of the Trust. On December 31, 2002, the Company issued a convertible note for the D2 management fee to be paid to the Trust for the three months ended December 31, 2002. The convertible note was issued for the amount of the management fee of $150,000 and pays interest at 6% per annum, payable in cash or in shares of the Company's common stock. The convertible note is convertible into shares of common stock in whole or in part at the time of the Company's next equity financing, at the price of the next equity financing. The convertible note is recorded as deferred compensation upon consolidation of the Trust. 8. BUSINESS SEGMENT INFORMATION The Company operates in three business segments as follows: Systems: The Company designs, markets, installs and manages waste, wastewater and storm water systems, primarily in the agricultural and food processing industries. Soil: The Company produces and markets BionSoil(R) products such as organic fertilizers, potting soils and soil amendments which are produced from the nutrient rich Bion Solids harvested from agricultural systems installed on large dairy and hog farms. 11 BION ENVIRONMENTAL TECHNOLOGIES, INC., AND SUBSIDIARIES Notes to unaudited consolidated financial statements 8. BUSINESS SEGMENT INFORMATION (CONTINUED) Other: Contains the operating results of Centerpoint of which the Company's owns 57.6%. Centerpoint currently does not have any business operations other than general and administrative. The Company's reportable operating segments have been determined in accordance with the Company's internal management structure, which is organized based on operating activities. The accounting policies of the operating segments are the same as those described in the summary of accounting policies. The Company evaluates performance based upon several factors, of which the primary financial measure is segment operating income. The following table summarizes information about operations and long-lived assets as of and for the six months ended December 31, 2002 and 2001:
Systems Soil Other Total ------- ---- ----- ----- Six Months Ended - December 31, 2002 Revenues $ - $ 109,264 $ - $ 109,264 =========== =========== ========= =========== Operating loss $(1,064,227) $ (787,112) $(117,979) $(1,969,318) Other income/(expense), net $ (68) $ (8,504) $ (6,688) $ (15,260) Minority interest $ - $ - $ (3,989) $ (3,989) ----------- ----------- --------- ----------- Net Loss $(1,064,295) $ (795,616) $(128,656) $(1,988,567) =========== =========== ========= =========== Supplemental segment information: Amortization and depreciation $ 18,474 $ 22,800 $ - $ 41,274 As of December 31, 2002 Property and Equipment, net $ 52,789 $ 170,690 $ - $ 223,479 Total Assets $ 900,513 $ 1,254,809 $ 85,778 $ 2,241,100 Six Months Ended - December 31, 2001 Revenues $ - $ 28,612 $ - $ 28,612 =========== =========== ========= =========== Operating loss $(1,415,723) $ (909,013) $ - $(2,324,736) Other income/(expense), net $(1,223,053) $(1,238,203) $ - $(2,461,256) ----------- ----------- --------- ----------- Net Loss $(2,638,776) $(2,147,216) $ - $(4,785,992) =========== =========== ========= =========== Supplemental segment information: Amortization and depreciation $ 15,767 $ 21,802 $ - $ 37,569 As of December 31, 2001 Property and Equipment, net $ 83,833 $ 75,639 $ - $ 159,472 Total Assets $ 249,408 $ 225,002 $ - $ 474,410
12 BION ENVIRONMENTAL TECHNOLOGIES, INC., AND SUBSIDIARIES Notes to unaudited consolidated financial statements 8. BUSINESS SEGMENT INFORMATION (CONTINUED) The following table summarizes information about operations and long-lived assets as of and for the three months ended December 31, 2002 and 2001:
Systems Soil Other Total ------- ---- ----- ----- Three Months Ended - December 31, 2002 Revenues $ - $ 62,626 $ - $ 62,626 =========== =========== ========= =========== Operating loss $ (579,118) $ (413,315) $(103,849) $(1,096,282) Other income/(expense), net $ 104 $ 216 $ (4,435) $ (4,115) Minority interest $ - $ - $ (39,041) $ (39,041) ----------- ----------- --------- ----------- Net Loss $ (579,014) $ (413,099) $(147,325) $(1,139,438) =========== =========== ========= =========== Supplemental segment information: Amortization and depreciation $ 9,331 $ 11,400 $ - $ 20,731 As of December 31, 2002 Property and Equipment, net $ 52,789 $ 170,690 $ - $ 223,479 Total Assets $ 900,513 $ 1,254,809 $ 85,778 $ 2,241,100 Three Months Ended - December 31, 2001 Revenues $ - $ 15,610 $ - $ 15,610 =========== =========== ========= =========== Operating loss $ (695,876) $ (463,294) $ - $(1,159,170) Other income/(expense), net $ (691,800) $ (700,801) $ - $(1,392,601) Minority interest $ - $ - $ - $ - ----------- ----------- --------- ----------- Net Loss $(1,387,676) $(1,164,095) $ - $(2,551,771) =========== =========== ========= =========== Supplemental segment information: Amortization and depreciation $ 8,137 $ 9,792 $ - $ 17,929 As of December 31, 2001 Property and Equipment, net $ 83,833 $ 75,639 $ - $ 159,472 Total Assets $ 249,408 $ 225,002 $ - $ 474,410
13 BION ENVIRONMENTAL TECHNOLOGIES, INC., AND SUBSIDIARIES Notes to unaudited consolidated financial statements 9. SUBSEQUENT EVENTS During the period January 10, 2003 through February 13, 2003, D2 advanced the Company $245,000. In February 2003, the Company reduced personnel resulting in future reductions of approximately $50,000 a month in salaries and benefits, not including other residual expense reductions. The Company intends to substantially reduce costs in the upcoming quarter. Effective February 12, 2003, in order to eliminate an impediment to a possible future financing, the Company entered into an agreement with Centerpoint to immediately cancel Section 2.4 "Post-Closing Adjustment" and Section 1.2(b) "Failure to Register or Lapse of Effectiveness" from the Subscription Agreement by and between Bion Environmental Technologies, Inc. and Centerpoint Corporation dated January 2002. Management believes that it is in the best interests of the Company's shareholders that these obstacles to a possible future financing be removed. As consideration to Centerpoint for canceling the sections noted above, the Company forgave all amounts due from Centerpoint, totaling approximately $500,000. In addition, the Company returned to Centerpoint for cancellation, warrants to purchase one million shares of Centerpoint. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Statements made in this Form 10-QSB that are not historical or current facts are "forward-looking statements" within the meaning of section 27A of the Securities Act of 1933, as amended (the "Securities Act") and section 21E of the Securities Exchange Act of 1934, as amended. These statements often can be identified by the use of terms such as "may," "will," "expect," "believe," "anticipate," "estimate," or "continue" or the negative thereof. Bion intends that such forward-looking statements be subject to the safe harbors for such statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management's best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. These factors include adverse economic conditions, entry of new and stronger competitors, inadequate capital, unexpected costs, failure to gain product approval in the United States or foreign countries and failure to capitalize upon access to new markets. Additional risks and uncertainties that may affect forward-looking statements about Bion's business and prospects include the possibility that a competitor will develop a more comprehensive or less expensive environmental solution, delays in market awareness of Bion and our systems and soil, or possible delays in Bion's marketing strategies, each of which could have an immediate and material adverse effect by placing us behind our competitors. Bion disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes. Lack of Review by Independent Certified Public Accountants This Form 10-QSB has not been reviewed by BDO Seidman, LLP, our independent certified public accountants, as required by Item 310(b) of Regulation S-B. BDO Seidman, LLP has not performed the review because they have not yet reviewed the impact on the Company's accounts and operations of the various items disclosed in our Report on Form 8-K dated February 7, 2003. We are not aware of any dispute with BDO Seidman, LLP as to any accounting matters. Overview Bion Environmental Technologies, Inc. provides waste management solutions to the agricultural industry, focusing on livestock waste from confined animal feeding operations ("CAFOs"), such as large dairy and hog farms. We are currently engaged in two main areas of activity: * waste stream remediation and reduction of atmospheric emissions and * organic soil and fertilizer production. 15 Our waste remediation and reduction of atmospheric emissions service business provides CAFOs (primarily in the swine and dairy industries) with treatment for the animal waste outputs. In this regard, we microbiologically treat their entire waste stream, reducing air emissions and nutrient discharges, while creating value-added organic soil and fertilizer products. Bion's soil and fertilizer products are being used for a variety of topdressing applications including school athletic fields, golf courses and home and garden applications. Our Nutrient Management System (NMS) is a patented biological and engineering process that treats water, nutrient and air pollution associated with animal waste. The system also provides a use for the waste materials and solids by biologically converting them into environmentally friendly, time-release organic-based solids that are the basis of our organic soil and fertilizer business segment. Our BionSoil(R) and Bion Fertilizer product lines contain a unique mix of organic nutrients, bacteria and other microbes that extensive testing has shown produces superior plant growth with reduced leaching of nutrients when compared to traditional chemical fertilizers. We have been conducting business since 1989. Our original systems were wastewater treatment systems for dairy farms and food processing plants. The basic design was modified in late 1994 to create a NMS that produces organic soil products as a by-product of remediation of the waste stream when installed on large dairies or swine farms. Through June 2000, we sold and subsequently installed, in the aggregate, 32 of these first generation systems in 7 states, of which 19 are still in operation through December 2002. Of theses 19 systems, 12 are first generation Bion NMS soil production system installations and 7 are waste only systems. Since June 30, 2000 we have not installed any new NMS systems since our concentration has been on research and the development of our second generation system. We also have an ongoing research program related to our BionSoil(R) and Bion Fertilizer product lines. This research and development includes work related to harvest and processing, blending of specialty product mixes for specific market segments and tests of the effectiveness of BionSoil(R) and Bion Fertilizer blends in a number of plants in a variety of growing environments. As the development program described above moved forward during the 2001 and 2002 fiscal years, our focus shifted from sales of first generation systems to pre-marketing the system capabilities and the economics of our second generation NMS. We have recently initiated marketing Bion's second generation system. We anticipate that we will begin leasing our first second generation system in the summer of 2003 and receive approximately $22,000 a month in lease revenue. The nutrient management capabilities of this new generation of systems will help break one of the major barriers facing those portions of the dairy and protein growing businesses in the U.S. which desire to expand. Our second generation system will allow businesses in these markets to meet ever stricter environmental standards for larger farms and raise more animals on less land while meeting or exceeding all requirements to protect the environment. 16 Critical Accounting Policies and Significant Use of Estimates in Financial Statements The Securities and Exchange Commission ("SEC") recently issued disclosure guidance for "critical accounting policies." The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The following list of critical accounting policies is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are more fully described in Note 3 to the consolidated financial statements included in this Quarterly Report on Form 10-QSB and in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-KSB/A. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles with no need for management's judgment in their application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. We have identified the following to be critical accounting policies of the Company: Revenue recognition: BionSoil(R) sales are recognized upon delivery of soil to customer and all risks and rewards of ownership pass to the customer. Stock-based compensation: The Company accounts for its stock-based compensation arrangements with its employees in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and complies with the disclosure provisions of SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 established a fair-value-based method of accounting for stock-based compensation plans. Stock-based awards to non-employees are accounted for at fair value in accordance with the provisions of SFAS 123. Income taxes: Deferred income taxes are determined by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. A valuation allowance is provided based on the weight of available evidence, if it is considered more likely than not that some portion, or all, of the deferred tax assets will not be realized. Claims receivable: Claims receivable are valued through an internal allocation made by Bion management based on its own evaluation of the relevant facts and circumstances and its review of a fairness opinion that was provided by an investment banking firm with regard to the transaction as a whole. The rights to 65% of these claims were ultimately assigned to OAM. The rights to 35% of the claims remained with Centerpoint and are included in the consolidated financial statements of the Company. This analysis requires the Company to make significant estimates, and changes in facts and circumstances could result in material changes in the valuation of the claims receivable. Contingencies: Management is unable to make a reasonable estimate of the liabilities that may result from the final resolution of certain litigation matters disclosed. Further assessments of the potential liability will be made as additional information becomes available. Management currently does not believe that these proceedings will have a material adverse affect on the Company's consolidated financial position. It is possible, however, that results of operations could be materially affected by changes in management's assumptions relating to these proceedings or the actual final resolution of these proceedings. 17 Results of Operations - Comparison of Six Months Ended December 31, 2002 with Six Months Ended December 31, 2001 We recorded $109,000 of soil sales during the six months ended December 31, 2002 (the "2003 Six Months"). This compares to soil sales of $29,000 for the six months ended December 31, 2001 (the "2002 Six Months"). In the 2003 Six Months we began harvesting the solids from three of our first generation nutrient management systems. We did not harvest any solids from these systems in the 2002 Six Months as we were focusing our efforts on the development of our second generation system. The increase in solids allowed us to sell more soil during the 2003 Six Months compared to the 2002 Six Months. Cost of soil was $387,000 for the 2003 Six Months and $243,000 for the 2002 Six Months. The increase in cost of goods sold was principally due to an increase in sales. The decrease in the gross loss as a percentage of sales is principally the result of economies of scale. General and administrative expenses increased to $1,364,000 for the 2003 Six Months from $1,213,000 for the 2002 Six Months. The increase is primarily attributable to an increase in legal fees of $131,000 due to increased legal costs associated with structuring a future private placement and the preparation of agreements with California State University, Fresno, DeVries Dairy and Dairy Properties, LLC, an increase in tax and accounting fees of $97,000 primarily due to expenses incurred to complete outstanding tax returns for Centerpoint and an increase in licensing fees of $50,000 for the BioBalance patent. These increases were offset by a decrease in salaries of $99,000. Research and development costs decreased to $335,000 for the 2003 Six Months from $397,000 for the 2002 Six Months. This decrease is primarily the result of the construction during the 2002 Six Months of the second generation prototype system built at Dreammaker Dairy. We did not incur construction costs on the prototype during the 2003 Six Months. Non-cash expenses for services and compensation decreased to income of $8,000 for the 2003 Six Months from an expense of $501,000 for the 2002 Six Months. During the 2003 Six Months, non-cash charges for services and compensation consisted of $300,000 in convertible notes issued as management fees to the Trust Under Deferred Compensation Plan for D2Co, LLC (the "Trust") and amortization for the value of options issued of $19,000. These expenses were offset by income in the amount of $327,000 from the reduction in the value of the Company's common stock previously issued to the Trust. During the 2002 Six Months, non-cash charges for services and compensation consisted of amortization expense for the value of options previously issued to various individuals of $136,000, management fees to D2 of $250,000, common stock issued to individuals with a value of $77,000 and the reduction of a note receivable for services of $41,000. These amounts were offset by the reversal of a charge previously taken for variable options of $3,500. Interest expense decreased to $2,400 for the 2003 Six Months from $2,541,000 for the 2002 Year. The decrease is primarily the result of the conversion of all outstanding debt to common shares of the Company on January 15, 2002. Results of Operations - Comparison of Three Months Ended December 31, 2002 with Three Months Ended December 31, 2001 We recorded $63,000 of soil sales during the three months ended December 31, 2002 (the "2003 Quarter"). This compares to soil sales of $16,000 for the three months ended December 31, 2001 (the "2002 Quarter"). In the 2003 Quarter we began harvesting the solids from three of our first generation nutrient management systems. We did not harvest any solids from these systems 18 in the 2002 Quarter as we were focusing our efforts on the development of our second generation system. The increase in solids allowed us to sell more soil during the 2003 Quarter compared to the 2002 Quarter. Cost of soil was $191,000 for the 2003 Quarter and $124,000 for the 2002 Quarter. The increase in cost of goods sold was principally due to an increase in sales. The decrease in the gross loss as a percentage of sales is principally the result of economies of scale. General and administrative expenses increased to $727,000 for the 2003 Quarter from $591,000 for the 2002 Quarter. The increase is primarily attributable to an increase in legal fees of $81,000 due to our efforts to register shares of common stock and obtain additional financing, an increase in accounting fees of $91,000 primarily due to expenses incurred to complete outstanding tax returns for Centerpoint and an increase in licensing fees of $25,000. These increases were offset by a decrease in salaries of $14,000, a decrease in rents of $17,000 and a decrease in travel of $29,000. Research and development costs remained approximately the same for the 2003 Quarter and the 2002 Quarter. Non-cash expenses for services and compensation decreased to $55,000 for the 2003 Quarter from $277,000 for the 2002 Quarter. During the 2003 Quarter, non-cash charges for services and compensation consisted of $150,000 in convertible notes issued as management fees to the Trust and $10,000 for amortization of the value of options previously issued. These amounts were offset by income in the amount of $105,000 from the reduction in the value of the Company's common stock previously issued to the Trust. During the 2002 Quarter, non-cash charges for services and compensation consisted of amortization expense for the value of options previously issued to various individuals of $59,000, management fees to D2 of $125,000, common stock issued to individuals with a value of $68,000 and the reduction of a note receivable for services of $25,000. Interest expense decreased to $2,400 for the 2003 Quarter from $1,421,000 for the 2002 Quarter. The decrease is primarily the result of the conversion of all outstanding debt to common shares of the Company on January 15, 2002. Seasonality Bion's installation capability is restricted in cold weather climates to approximately eight months per year. However, when weather conditions limit construction activity in southern market areas, projects in northern markets can proceed, and when northern area weather is inappropriate, southern projects can proceed. BionSoil(R) harvests on the existing installed base is semi-annual and is timed for spring and fall, with harvested soils being available for sale shortly after harvesting. BionSoil(R) and Bion Fertilizer product sales are expected to exhibit a somewhat seasonal sales pattern with emphasis on spring, summer and fall sales. Liquidity and Capital Resources Our principal sources of liquidity, which consist of cash and cash equivalents, are $122,000 as of December 31, 2002. We believe we will not generate sufficient operating cash flow to meet our needs and we are currently seeking external financing. There can be no assurances that any financing will be available or that the terms will be acceptable to us, or that any financing will be consummated. Any failure on our part to do so will have a material adverse impact on us and may cause us to cease operations. 19 We were successful during the year ended June 30, 2001 in raising working capital through the sale of warrants and convertible debt. During the year ended June 30, 2001 we raised $2,527,000 in a private placement in the form of convertible bridge notes. In addition, Southview, Inc., a related party, had advanced the Company funds totaling $518,000 as of June 30, 2001. During the year ended June 30, 2002 we raised net working capital of $4,800,000. All outstanding convertible debt of the Company was converted into shares of the Company's common stock on January 15, 2002 due to the Centerpoint transaction based upon agreed terms. These notes totaling $14,256,779 were converted at $7.50 per share, which was the same price per share of the shares purchased by Centerpoint. The total shares issued for the conversion of these notes were 1,900,911. During the period January 10, 2003 through February 13, 2003, D2 advanced the Company $245,000. At approximately the close of business on February 11, 2003, we were informed by potential investors that they would not proceed with a planned financing because of current market conditions. As a result, we were unable to proceed with a pending bridge financing because the bridge financing was intended to be repaid from funds that were to be provided from the expected financing that was terminated by the potential investors. Due to liquidity issues, we have informed all of our employees that we do not currently have enough cash on hand to pay our employees after February 15, 2003. Although we are currently seeking other sources of capital, as of this date we have not been able to secure financing that is necessary for our current and future operations and there can be no assurance that sufficient funds will be available from external sources. 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 our existing shareholders. Since we do not yet have the ability to generate cash flow from operations, we will be forced to substantially curtail or cease our current business activities if we are not able to immediately raise capital from outside sources. This would have a material adverse effect on our business and our shareholders. The level of funding required to accomplish our objectives is ultimately dependent on the success of our research and development efforts, which at this time is unknown. Currently, we estimate that no less than approximately $650,000 will be required for continued research and development efforts which includes construction of the system at Devries Dairy and the engineering for the system at the California Agricultural Technology Institute at California State University, Fresno. In addition, we would need additional funds for continued general and administrative expenses and funds to satisfy our existing creditors. Going Concern In connection with their report on our Consolidated Financial Statements as of and for the year ended June 30, 2002, BDO Seidman, LLP, our independent certified public accountants, expressed substantial doubt about our ability to continue as a going concern because of recurring net losses and negative cash flow from operations. 20 We have stockholders' equity of $441,000, a cumulative deficit of $57,959,000, limited current revenues and substantial current operating losses. Our operations are not currently profitable; therefore, readers are further cautioned that our continued existence is uncertain if we are not successful in obtaining outside funding in an amount sufficient for us to meet our operating expenses at our current level. Management is currently engaged in seeking additional capital to fund operations until Bion system and BionSoil(R) sales are sufficient to fund operations. Consolidated Working Capital Consolidated working capital is a negative $395,000 at December 31, 2002 compared to a positive $1,665,000 at June 30, 2002. This change is primarily the result of operating cash outflows of $1,574,000 and purchases of property and equipment of $116,000 during the 2003 Six Months. Analysis of Cash Flows Cash used in operating activities decreased to $1,574,000 in the 2003 Six Months from $1,707,000 in the 2002 Six Months. The decrease is primarily the result of an increase in accounts payable and accrued expenses of $480,000 and an increase in inventory of $144,000. Cash used in investing activities increased to $116,000 in the 2003 Six Months compared to $13,000 cash used in investing activities in the 2002 Six Months. The increase is the result of property and equipment purchases relating to soil processing made in the 2003 Six Months. Cash used in financing activities decreased to $1,000 in the 2003 Six Months compared to $466,000 of cash provided by financing activities in the 2002 Six Months. The decrease is primarily the result of the pay down of the principal balance of capital leases. In addition, the 2002 Six Months included proceeds of $120,000 from the exercise of stock options and proceeds of $355,000 from the issuance of notes payable to related parties. We currently have no commitments for material capital expenditures. Item 3. Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this quarterly report, and, based on their evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. 21 PART II Item 1. Legal Proceedings On July 22, 2002, Thomas Keith Barefoot ("Barefoot"), doing business as Quin Deca Farm ("Quin Deca"), an unaffiliated party, filed a complaint against the Company in the Superior Court of the County of Harnett in the State of North Carolina regarding the Company's first generation Bion NMS System on Quin Deca Farm and the harvesting of BionSoil(R). The complaint includes breach of contract claims asserting that the Company abandoned the NMS system on Quin Deca Farm and the failure of the Company to harvest BionSoil(R). The second claim is for fraud regarding misrepresentation of the state of the technology of the first generation NMS. The third claim is for unfair and deceptive trade practices for misrepresentation of the state of the technology of the NMS System. The fourth claim is for negligent misrepresentation made by Bion in connection with the work it performed and its suitability for the intended purpose. The fifth claim is for equity/specific performance in that Bion left Quin Deca with an economically and technically deficient waste management system that cannot continue to be used without adequate and alternative methods of waste removal. Quin Deca is seeking $830,000 in damages plus punitive damages and to have its damages trebled, reasonable attorney fees and principles of equity requiring Bion to install its second generation Bion NMS system. The Company does not believe that the claim has merit and that the ultimate resolution of this litigation will have a material adverse effect on the Company, its operations or its financial condition. Item 2. Changes in Securities On December 31, 2002, the Company issued a convertible note for the D2 management fee to be paid to the Trust Under Deferred Compensation Plan for D2CO, LLC ("Trust") for the three months ended December 31, 2002. The convertible note was issued having an principal amount of $150,000 and pays interest at 6% per annum, payable in shares of the Company's common stock. The convertible note is convertible into shares of common stock in whole or in part at the time of the Company's next equity financing, at the price of the next equity financing. The securities described in this section were issued by Bion in a transaction not involving a public offering. The Trust is a sophisticated investor associated with a Director of the Company and had access to complete information concerning the Company. The Trust made representations that it was an "accredited" investor who was receiving the securities with investment intent and not with the intent to distribute the securities. The issuance of the securities was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. Item 5. Other Information We had the following changes to our management: Effective February 10, 2003, Mr. Salvatore Zizza resigned as our President and Chief Operating Officer citing he was not able to devote the time necessary to perform such duties. On February 7, 2003, as a result of cost-cutting measures, Mr. David Fuller has been terminated as our Principal Accounting Officer. The duties of the Principal Accounting Officer will now be performed by Mr. Lawrence Danziger, our Chief Financial Officer. On February 14, 2002, Howard E. Chase and Andrew Gould resigned as Directors. We are not aware of any disputes with either of these persons. Copies of their resignation letters are attached as Exhibits 99.3 and 99.4. 22 Effective February 12, 2003, in order to eliminate an impediment to a possible future financing, the Company entered into an agreement with Centerpoint to immediately cancel Section 2.4 "Post-Closing Adjustment" and Section 1.2(b) "Failure to Register or Lapse of Effectiveness" from the Subscription Agreement by and between Bion Environmental Technologies, Inc. and Centerpoint Corporation dated January 2002. Management believes that it is in the best interests of the Company's shareholders that these obstacles to a possible future financing be removed. As consideration to Centerpoint for canceling the sections noted above, the Company forgave all amounts due from Centerpoint, totaling approximately $500,000. In addition, the Company returned to Centerpoint for cancellation, warrants to purchase one million shares of Centerpoint. Item 6. Exhibits and Reports on Form 8-K The following documents are filed as exhibits to this Form 10-QSB, including those exhibits incorporated in this Form 10-QSB by reference to a prior filing of Bion under the Securities Act or the Exchange Act as indicated in parenthesis: Exhibit No. Description 10.1 Employment Agreement between Bion Environmental Technologies, Inc. and Lawrence Danziger. 10.2 Letter of Intent between Bion Environmental Technologies, Inc. and DeVries Dairy. 10.3 Agreement between the Agricultural Foundation of California State University, Fresno and Bion Environmental Technologies, Inc. 99.1 Certification by David J. Mitchell pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification by Lawrence R. Danziger pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.3 Resignation Letter from Howard Chase. 99.4 Resignation Letter from Andrew Gould. Reports on Form 8-K None. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 19, 2003 BION ENVIRONMENTAL TECHNOLOGIES, INC. by: /s/ David J. Mitchell ----------------------------------- David J. Mitchell Chief Executive Officer by: /s/ Lawrence R. Danzinger ----------------------------------- Lawrence R. Danziger Chief Financial Officer 24 CERTIFICATIONS PURSUANT TO RULE 13a-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED I, David J. Mitchell, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Bion Environmental Technologies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ David J. Mitchell Date: February 19, 2003 --------------------------------------- Name: David J. Mitchell Title: Principal Executive Officer 25 CERTIFICATIONS PURSUANT TO RULE 13a-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED I, Lawrence R. Danziger, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Bion Environmental Technologies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Lawrence Danzinger Date: February 19, 2003 ---------------------------------------- Name: Lawrence Danziger Title: Principal Financial Officer 26 EX-10.1 3 ex101.txt EXHIBIT 10.1 EXHIBIT 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT FOR "AT WILL" EMPLOYEE (the "Agreement") is made effective the 29th day of July, 2002, by and between Bion Environmental Technologies, Inc., a Colorado corporation (hereinafter called the "Corporation"), and Lawrence Danziger (hereinafter called the "Employee"). W I T N E S S E T H: In consideration of the covenants and agreements herein contained and the moneys to be paid hereunder, the Corporation hereby employs the Employee and the Employee hereby agrees to perform services as an employee of the Corporation, on an "at will" basis, upon the following terms and conditions: 1. Term of Employment. Subject to the provisions for termination set forth below this agreement will begin on July 29, 2002, and remain in effect until terminated in accordance with Paragraph 7 or 8. 2. Compensation. (a) The Company shall pay Employee a base salary of $140,000 per year, for the services of the Employee, payable at regular payroll periods. (b) The Employee shall be eligible to receive a bonus as may be determined and awarded by the Board of Directors from time to time in its sole discretion. (c) The Employee shall be eligible to receive options to purchase common stock of the Company under the Company's stock option plans on such dates and in such amounts as may be determined by the Board of Directors (or appropriate committee thereof) from time to time in its sole discretion. (d) The Employee shall be reviewed for performance not less than once per year. Such review shall be the basis for any increases in base salary. 3. Duties and Position. The Company hires the Employee in the capacity of Chief Financial Officer. The Employee's duties may be reasonably modified at the Company's discretion from time to time. 4. Employee to Devote Full Time to Company. The Employee will devote full time, attention, and energies to the business of the Company, and, during this employment, will not engage in any other business activity, regardless of whether such activity is pursued for profit, gain, or other pecuniary advantage. Employee is not prohibited from making personal investments in any other businesses provided those investments do not require active involvement in the operation of said companies. 5. Confidentiality or Proprietary Information. Employee agrees, during or after the term of this employment, not to reveal confidential information, or trade secrets to any person, firm, corporation, or entity. Should Employee reveal or threaten to reveal this information, the Company shall be entitled to an injunction restraining the Employee from disclosing same, or from rendering any services to any entity to whom said information has been or is threatened to be disclosed. the right to secure an injunction is not exclusive, and the Company may pursue any other remedies it has against the Employee for a breach or threatened breach of this condition, including the recovery of damages from the Employee. 6. Benefits. (a) The Employee may incur reasonable expenses for furthering the Company's business, including expenses for entertainment, travel, and similar items. The Company shall reimburse Employee for all business expenses after the Employee presents an itemized account of expenditures, pursuant to Company policy. (b) The Employee shall be entitled to a yearly vacation of two weeks at full pay. Employee shall be entitled to all paid holidays and personal days the Company makes available to its employees. (c) Employee shall be entitled to participate in any and all medical insurance, group health, disability insurance, pension and other benefit plans which are made generally available by the Company to its senior executives. 7. Termination of Agreement. (a) Without cause, the Company, or its successor, may terminate this agreement at any time upon 90 days written notice to the Employee. If the Company requests, the Employee will continue to perform his/her duties and may be paid his/her regular salary up to the date of termination. In addition, the Company will pay the Employee on the date of the termination a severance allowance of four months continued medical coverage and four months salary less taxes and social security required to be withheld. Without cause, the Employee may terminate employment upon 30 days' written notice to the Company. (b) With cause, upon the occurrence of any of the events listed below, the Company may terminate the Employee without further obligation under this agreement: 1) Employee's conviction of any criminal act directly related to Employee's duties hereunder including, without limitation, misappropriation of funds or property of the Company or any other felony criminal act. 2) Employee's misfeasance or malfeasance in office, which shall mean fraud, dishonesty, willful misconduct or gross neglect of duties. 3) Breach by Employee of any material provision of this Agreement. 8. Death Benefit. Should Employee die during the term of employment, the Company shall pay to Employee's estate any compensation due through the end of the month in which death occurred. 9. Settlement by Arbitration. Any claim or controversy that arises out of or relates to this agreement, or the breach of it, shall be settled by arbitration in accordance with the rules of the American Arbitration Association. Judgment upon the award rendered may be entered in any court with jurisdiction. 10. Limited Effect of Waiver by Company. Should Company waive breach of any provision of this agreement by the Employee, that waiver will not operate or be construed as a waiver of further breach by the Employee. 11. Severability. If, for any reason, any provision of this agreement is held invalid, all other provisions of this agreement shall remain in effect. If this agreement is held invalid or cannot be enforced, then to the full extent permitted by law any prior agreement between the Company (or any predecessor thereof) and the Employee shall be deemed reinstated as if this agreement had not been executed. 12. Assumption of Agreement by Company's Successors and Assignees. The Company's rights and obligations under this agreement will inure to the benefit and be binding upon the Company's successors and assignees. 13. Oral Modifications Not Binding. This instrument is the entire agreement of the Company and the Employee. Oral changes have no effect. It may be altered only by a written agreement signed by the party against whom enforcement of any waiver, change, modification, extension, or discharge is sought. Signed this 10th day of October 2002. BION ENVIRONMENTAL TECHNOLOGIES, INC. /s/ David J. Mitchell David J. Mitchell President and Chief Executive Officer EMPLOYEE /s/ Lawrence Danziger Lawrence Danziger EX-10.2 4 ex102.txt EXHIBIT 10.2 EXHIBIT 10.2 December 16, 2002 Mr. George DeVries George DeVries Dairy 1860 CR 241 Dublin, Texas 76446 Dear George: This letter is intended to serve as a letter of intent outlining the general terms, conditions and responsibilities of the DeVries Dairy and Bion Technologies, Inc. (Bion) in the design, installation, operations and monitoring of a Bion NMS waste treatment system at the DeVries Dairy. Project Purpose and Duration. The existing waste management system serving the DeVries Dairy will be retrofitted under this project to treat waste generated by the existing herd as a Bion NMS waste treatment system. Treatment system performance will be monitored and assessed by Bion and the DeVries Dairy relative to nutrient removal efficiency. Performance data for the Bion NMS waste treatment system will be used to support the permitting process for expanding the herd size at the DeVries Dairy. The Bion NMS waste treatment system will be operated for between six and nine months to collect data to support the permitting process. Once necessary operations data is collected, the Bion NMS facility will be removed from service and the existing lagoon converted back to its original configuration. The DeVries Dairy will apply for permits necessary to expand it's herd size in an expedient manner following project completion and based upon Bion NMS system performance. Details and cost of a Bion NMS waste treatment system to service the expanded dairy operations will be determined in the future based on permit requirements stipulated by the Texas Commission on Environmental Quality. Implementation of a Bion NMS waste treatment system to service the expanded dairy operations is predicated on the successful negotiation and execution of an agreement between the DeVries Dairy and Bion. Project Description. The existing waste facilities will be modified and new equipment and controls installed as necessary to convert the existing system into a Bion NMS waste treatment system. Work to be completed includes the following: 1. Bion will develop and implement a sampling and monitoring program with DeVries Dairy that provides the data required by Texas regulatory officials to permit expansion of the dairy. The DeVries Dairy will work with Bion in obtaining regulatory agency approval of the sampling and monitoring program to be utilized prior to Bion NMS process start up. 2. Modify lagoon #1 by installing baffles, an aeration and mixing system, process monitoring equipment and controls for converting a portion of the lagoon into a bioreactor. 3. Install an effluent pump station for wasting bioreactor effluent from the system for additional treatment and discharge to temporary storage. 4. Install effluent polishing fine screen and screw press for solids dewatering. 5. Install miscellaneous facilities including a shed type structure to house system controls, open covered area to house the fine screen and concrete pads for equipment and solids storage. 6. Design and installation of a wet weather flow management system. 7. Design and installation of solids processing and composting facilities. Project Costs. The cost of items 1 thru 6 included in the Project Description section above will be borne by Bion. For item 7, Bion will assist the DeVries Dairy with the design and installation of solids composting and processing facilities but associated capital costs will be borne by the DeVries Dairy. Implementation of composting facilities at the Dairy will be completed under the sole discretion of the DeVries Dairy. Facility Operations. DeVries Dairy and Bion personnel will jointly operate the Bion NMS waste treatment facility. Bion personnel will initially operate the facility and train DeVries Dairy personnel in the proper operation of the Bion NMS waste treatment facility. Once DeVries Dairy personnel are trained, they will take over the day-to-day facility operations with general oversight and monitoring by Bion personnel. Project Implementation. The DeVries Dairy and Bion agree to work together in a cooperative manner in implementing the project outlined herein. As part of this collaborative effort, the DeVries Dairy will provide Bion personnel and it's contractor(s) unfettered access to the dairy property for project design, construction and operations. Bion agrees to coordinate site access requirements with the DeVries Dairy to minimize impacts on dairy operations. By signing below, the respective parties agree in principle to the general terms, conditions and responsibilities outlined above. Bion Technologies, Inc. The DeVries Dairy /s/ George Bloom /s/ George DeVries George Bloom George DeVries Chief Operating Officer EX-10.3 5 ex103.txt EXHIBIT 10.3 EXHIBIT 10.3 AGREEMENT BETWEEN THE AGRICULTURAL FOUNDATION OF CALIFORNIA STATE UNIVERSITY, FRESNO AND BION ENVIRONMENTAL TECHNOLOGIES, INC. (Regarding the contribution, installation, use and removal of environmental testing equipment/structures) This Agreement (hereinafter referred to as the "Agreement") is entered into this 19th day of November, 2002, by Bion Environmental Technologies, Inc. (hereinafter referred to as "BION"), and the Agricultural Foundation of California State University, Fresno, a California nonprofit public benefit corporation serving as a California State University sponsored projects auxiliary organization (hereinafter referred to as the "Agricultural Foundation"). WHEREAS, the Agricultural Foundation is not a public agency, but rather an Internal Revenue Code Section 170 (c) qualified charitable organization exempt from taxation under Internal Revenue Code Section 501 (c) (3) and California Revenue and Taxation Code Section 23701d; and WHEREAS, the Agricultural Foundation, by virtue of an Operating Agreement and Lease Agreement with the Trustees of the California State University, has the right to possess and operate certain farming and dairy properties/facilities on the campus of California State University, Fresno (hereinafter the "Premises") for research, educational, and related purposes and uses in conformity with Title V of the California Code of Regulations Section 42500, in the furtherance of California State University, Fresno's (hereinafter the "University") educational mission; and WHEREAS, BION is involved in the business of developing innovative livestock nutrient management systems; and WHEREAS, BION wishes to contribute certain equipment/structures to the Agricultural Foundation for mutually-beneficial research purposes (as such purposes are described in Exhibit C hereto), and install the same on the Premises, subject to the terms and conditions contained herein; and WHEREAS, from time to time, the California Agricultural Technology Institute (hereinafter "CATI") may serve as the designee of the Agricultural Foundation for the purposes of conducting agriculturally related research projects utilizing the property/facilities leased by the Agricultural Foundation; and WHEREAS, it is the desire of the Agricultural Foundation, through its designee, CATI, to engage in such agriculturally related research and educational activities on the terms and conditions contained herein. NOW THEREFORE, in consideration of the mutual recitals and promises herein contained and for such other and further consideration as is hereby acknowledged, and upon consultation with their respective counsel/advisors and/or opportunity therefor, the parties agree as follows: 1. Term and Termination. (a) This Agreement shall be effective upon the due execution of the Construction Agreement (as defined below). Once effective, this Agreement shall continue in full force and effect for a period of thirty (30) days following the Completion Date (as defined in section 6(a) below) (hereinafter the "Term"), subject to earlier termination in accordance with the provisions hereof. (b) BION shall have the right to terminate this Agreement, effective immediately upon written notice, if (i) the University Parties (as defined below) fail to substantially perform their duties pursuant hereto or (ii) the University Parties breach the provisions hereof. (c) The Agricultural Foundation shall have the right to terminate this Agreement effective immediately upon written notice if BION fails to substantially perform its duties pursuant hereto or it breaches the provisions hereof. 2. Equipment. BION agrees that it will provide to the Agricultural Foundation, at no cost to the Agricultural Foundation, the University, the Trustees of the California State University, CATI, or the State of California, such equipment and the related structure as specified in Exhibit A attached hereto and incorporated herein by this reference (collectively, the "Equipment"). The Agricultural Foundation shall allow the Equipment to be installed on the Premises by May 1, 2003 or as soon thereafter as reasonably possible. Notwithstanding the foregoing, the parties understand and agree that the Agricultural Foundation shall be responsible for (i) its portion of the taxes set forth in Section 4(a), with BION being responsible for its own portion of said taxes pursuant thereto, (ii) the laboratory research and other costs set forth in Section 6(a), and (iii) all ongoing operational and maintenance costs related to the Transferred Equipment (as defined below) incurred following the Term. 3. Installation of Equipment. BION will cause the Equipment to be installed on that portion of the Premises identified to and approved by the Executive Director of the Agricultural Foundation, by retaining a California general contractor experienced and qualified to perform the installation of the Equipment (hereinafter the "Contractor"). The Contractor will be selected by BION, but will be subject to the reasonable approval of the Agricultural Foundation. BION will be solely responsible for all installation, installation materials and related fees, costs and expenses, and will indemnify, defend and hold harmless the Agricultural Association, the Trustees of the California State University, California State University, Fresno, CATI, the State of California (together, the "University Parties"), and each of said entities' employees, agents, representatives, divisions, directors, officers, and attorneys (hereinafter, an "Agent") from and against such installation, installation materials and related fees, costs and expenses (including, but not limited to, the cost of the Equipment, the Contractor's fees and costs, and all other related costs and expenses), as well as all liability, suits, claims and damages arising from or relating to such installation. In conformity with this paragraph 3, the Agricultural Foundation, the Contractor and BION will enter into a separate written agreement in compliance with the policies and procedures of the Agricultural Foundation, Trustees of the California State University, CATI, and California State University, Fresno, which written agreement shall detail the rights and responsibilities of the parties thereto, as it applies to the Equipment installation goods and services to be provided by the Contractor, in a form to be mutually agreed upon by the party (the "Construction Agreement"). 4. Title to Equipment; License to use Equipment and Technology. (a) Title to such of the Equipment (the "Transferred Equipment") that is listed on Exhibit A but that is not listed on Exhibit B shall pass to the Agricultural Foundation upon delivery of the Equipment to Premises, provided however, that should the Agricultural Foundation substantially fail to perform its duties or obligations hereunder, or otherwise materially breach this Agreement, (i) as a result of conditions that are not beyond the control of the Agricultural Foundation, and (ii) at a time when BION is not in material breach of this Agreement that resulted in the University Parties' above-referenced failure to perform or breach, then title to the Transferred Equipment shall be conveyed back to BION, and the University Parties agree to timely execute any documents and take any actions reasonably requested by BION to accomplish such conveyance. With respect to those items listed on Exhibit B (the "Bion Equipment"), BION shall at all times retain title thereto. BION will be solely responsible for the removal of the Bion Equipment from the Premises following the Completion Date and all costs attendant thereto. Any and all taxes payable in connection with the transfer of title to the Transferred Equipment shall be borne such that BION will pay one-half of such taxes, and the remaining one-half shall be paid by the Agricultural Foundation. (b) BION hereby grants to the Agricultural Foundation and CATI, as designee of the Agricultural Foundation, (i) a royalty-free license, which may not be assigned or sublicensed, to use the Equipment solely to conduct the Research at the Premises, pursuant to the protocol set forth on Exhibit C hereto and the other terms and conditions hereof during the Term, and (ii) a non-exclusive, royalty-free license, which may not be assigned or sublicensed, to use the Know-How (as defined below) solely at the Premises and pursuant to the protocol set forth on Exhibit C hereto and the other terms and conditions hereof, (x) to operate the BION Equipment during the Term, and (y) to operate the Transferred Equipment during the Term and for purposes of the Fresno Research for a period of 20 years commencing upon the end of the Term. "Know-How" shall mean all technical data, information, drawings and designs, know-how, trade secrets, procedures, protocols, software object and source code, algorithms and instructions constituting part of or used in connection with the Bion System (as defined below) that is in the possession of the Licensor, to the extent that same is required for the use of the Bion System at the Premises pursuant to the terms of this Agreement. In the event that the Agricultural Foundation or CATI, as its designee, materially fails to comply with the operating conditions set forth on Exhibit C hereto, and such failure results in damage to the Bion System or interferes with the effective operation of the Bion System, then BION shall have the right to immediately terminate the licenses granted pursuant to this Section 4(b). 5. Damage to Property. (a) At no time during the Term will BION commit any act, or fail to perform any act, that damages the Premises or other property of the University Parties. Following the Completion Date and during the Term, BION will be responsible for the removal of the Bion Equipment from the Premises, and for the return of the Premises to such condition as existed prior to the execution of this Agreement, normal wear and tear excepted. Notwithstanding the foregoing, BION will promptly replace the master research control panel (which it will remove and retain following the Completion Date) with an operational control panel capable of properly controlling and monitoring the Transferred Equipment. In this regard, BION agrees that immediately following its execution of this Agreement, it will place on deposit in a trust account with the California State University, Fresno Foundation ("Foundation"), the sum of Twenty Thousand Dollars ($20,000.00) (hereinafter the "Deposit") to be held by the Foundation during the Term, as a security deposit to guarantee BION's faithful compliance with this Section 5(a). The Agricultural Foundation and BION shall both be required to execute any documents necessary for disbursements to be made from said trust account. Should BION, or anyone hired by and/or acting on behalf of BION, at any time during the Term damage the Premises or other property of the University Parties, the Agricultural Foundation shall notify BION in writing of the type and amount of such claim, including any supporting documents, and indicate that it is the intention of the Agricultural Foundation, on behalf of such damaged entity, to satisfy such claim, in whole or in part, through the appropriation of all or a portion of the Deposit. If the Agricultural Foundation does not receive written notification in accordance with Section 10 hereof of BION's objection to the claim within thirty (30) calendar days following BION's receipt of the claim, BION will be deemed to have consented to settlement of the claim out of the Deposit, and BION will thereafter execute any documents as may be necessary to disburse such funds out of the Deposit to satisfy the claim. If BION does send the Agricultural Foundation notice that it objects to the claim within such thirty-day period, then the dispute shall be settled by arbitration pursuant to Section 9 hereof. BION's obligations referred to in this Section 5(a) shall not be limited to the amount of the Deposit. Any Deposit monies remaining at the end of the Term shall be returned to BION within ten (10) calendar days after the end of the Term. (b) The Agricultural Foundation agrees that to the extent reasonably practicable, it shall ensure that, at no time during the Term will any University Party commit any act, or fail to perform any act, that damages the Equipment, unreasonably interferes with the operation of the Equipment, or otherwise compromises the integrity of the Bion System Research and/or Bion System Results (as such terms are defined below). 6. Research; Results; Ownership. (a) The Agricultural Foundation shall, and/or shall cause CATI, as designee of the Agricultural Foundation, to, utilize the Equipment on the Premises for the purpose of conducting independent, scientifically-based evaluations of the BION Nutrient Management Waste Treatment System (as further defined in Exhibit D hereto, the "Bion System") under the conditions described as "Core Conditions" in Exhibit C hereto, in order to determine the Bion System's efficacy in reducing potential pollutants released into the air, surface waters or groundwater from dairy effluents (the "Phase One Research"). In addition, the Agricultural Foundation and CATI, as designee, shall provide unrestricted access to the Premises to such persons as BION shall designate in order to enable BION to monitor the operations of the Bion System, perform maintenance, conduct evaluations of the Bion System (including under the conditions described as "Stress Conditions" in Exhibit C hereto (the "Phase Two Research" and, together with the Phase One Research, the "Bion System Research")) and for all other purposes contemplated by this Agreement. The Agricultural Foundation and CATI, as its designee, may also conduct research the focus of which is not the Bion Technology (the "Fresno Research" and, together with the Bion System Research, the "Research"). The Phase One Research shall be conducted in accordance with the protocol and within the time periods set forth in Exhibit C hereto. The Agricultural Foundation and CATI, as its designee, shall not commence the Phase One Research until BION advises them in writing that the Bion System has reached equilibrium. Copies of any and all raw data, analyses and lab results resulting from or relating to the Research or any other analyses of the BION System, or collected from the Bion System by any of the University Parties, their contracted researchers, and/or any other Agents thereof (the "Data"), shall be submitted to BION immediately. The parties agree that the Agricultural Foundation or CATI, as its designee, shall complete the Phase One Research and deliver to BION a final written report thereon (the "Phase One Report"), which shall set forth in detail the findings of the Phase One Research, within a period of sixty (60) days from the date on which the Phase One Research is completed in accordance with Exhibit C hereto. The date on which BION has received the Phase One Report shall hereinafter be referred to as the "Completion Date." BION shall have the right to approve or disapprove of the Phase One Report for any reason whatsoever. If BION approves of the Phase One Report, it shall deliver a written notice so indicating to the Agricultural Foundation. Failure of BION to notify the Agricultural Foundation or CATI of BION's approval or disapproval of the Phase One Report within fourteen (14) calendar days following the Completion Date shall be deemed to be an approval of the Phase One Report. Upon the actual or deemed approval of BION in accordance with this Subsection, the Agricultural Foundation and/or CATI shall have the right to publish the Phase One report pursuant to this Section 6. In the event that BION disapproves of the Phase One Report by so notifying the Agricultural Foundation or CATI within the 14-day period described above, BION shall have the right to append comments to the Phase One Report, which shall in all cases be published or disseminated with the Phase One Report. BION shall provide such comments to the Agricultural Foundation or CATI within thirty (30) days following the Completion Date. In the event that the Agricultural Foundation and/or CATI, to their knowledge, substantially fails to adhere to the protocol relative to the Phase One Research set forth on Exhibit C hereto, then the Agricultural Foundation and/or CATI shall (i) promptly disclose such failure to BION and (ii) include in their portion of the Phase One Report a clear statement that, and the manner in which, such protocol materially was not followed. The laboratory costs and all other costs of the Phase One Research and any Fresno Research, and delivery of the Phase One Report and any other Data to BION, shall be borne by the Agricultural Foundation. The laboratory costs and all other costs of the Phase Two Research shall be borne by BION. (b) BION shall own all rights, title and interest in and to the results of the Bion System Research and the Data related thereto, including the Phase One Report, and any interim reports (collectively, the "Bion System Results"). The Agricultural Foundation shall own all rights, title and interest in and to the Fresno Research. However, the University Parties shall have a non-exclusive right to publish and otherwise disseminate the Phase One Report, provided that (i) such Phase One Report is delivered to BION at least fourteen (14) days prior to its dissemination and (ii) if BION disapproves of the report pursuant to Subsection 6(a) above, then BION shall be permitted to append comments and/or require the Agricultural Foundation and/or CATI to include a statement in the Phase One Report in accordance with the provisions of Subsection 6(a) above. The University Parties will, at any time at BION's request and at BION's cost, execute and deliver to BION such assignments, certificates or other instruments as BION may from time to time deem necessary or desirable to evidence, establish, maintain, perfect, protect, enforce or defend BION's right, title and interest in and to the Bion System Results. (c) The Bion Equipment, the Bion System, the Know-How and any and all Improvements (defined below) (collectively, the "Bion Technology") are and shall remain the sole and exclusive property of BION. For purposes hereof, "Improvements" shall mean any version, enhancement, modification or refinement of the Bion System, the Know-How and/or technologies related to biological nutrients, odor, air emission and residuals conversion and/or control processes, anaerobic treatment processes, residuals/waste management and water reuse, whether patented or not, which is capable of improving the technical and/or economic characteristics of the Bion System and the Know-How or such technologies. Intellectual property rights regarding products, procedures, processes, or inventions developed through use of the Transferred Equipment following the Term that do not relate to the Bion Technology shall be solely owned by the Agricultural Foundation and CATI. Intellectual property rights regarding products, procedures, processes, or inventions developed through use of the Equipment during or following the Term that relate to the Bion Technology shall be solely owned by BION. Notwithstanding the foregoing, (i) for a period of twenty (20) years following the Term, the Agricultural Foundation and/or CATI may engage in research using the Transferred Equipment and/or any aspect of the Know-How for the development of a theretofore unique application/use thereof with regard to dairy air and/or water emissions, residual/waste treatment, water reuse, anaerobic treatment, or related dairy purposes/uses, (ii) prior to engaging in such research, the Agricultural Foundation or CATI shall offer BION a right of first refusal to partner in such research and jointly own any intellectual property developed thereby, and (iii) should BION decline to exercise the aforementioned right of first refusal, then all intellectual property developed through such research shall be solely owned by the Agricultural Foundation and/or CATI. 7. Confidential Information. (a) Each party will, and shall cause its Agents to (and, in the case of the Agricultural Foundation, will cause the other University Parties and their Agents to), maintain all information received by it from the other party in trust and confidence and will not disclose any such information ("Confidential Information") to any third party or use any such Confidential Information for any purposes other than those purposes permitted under this Agreement, all under terms and conditions similar to those specified in that certain "Confidentiality/Proprietary Information Agreement," dated April 24, 2002, executed by and between BION and California State University, Fresno and incorporated herein by this reference (the "Confidentiality Agreement"). Each party may use the other party's Confidential Information only to the extent explicitly permitted under this Agreement or required to accomplish the purposes of this Agreement. Except as otherwise explicitly provided herein, all information related to the Bion System Research, Bion System Results and the Bion Technology shall be treated as the Confidential Information of BION for purposes of this provision. Each party shall, and shall cause its Agents to (and, in the case of the Agricultural Foundation, will cause the other University Parties and their Agents to), use at least the same standard of care as it uses to protect its own Confidential Information of a similar nature to ensure that its Agents do not disclose or make any unauthorized use of such Confidential Information, but in any event no less than reasonable care. Each party will promptly notify the other upon discovery of any unauthorized use or disclosure of the other party's Confidential Information. (b) Confidential Information shall not include any information that the receiving party can demonstrate by competent written records: (i) is now, or hereafter becomes, through no act or failure to act on the part of the receiving party in breach hereof, generally known or available; (ii) is known by the receiving party, through a third party source, at the time of receiving such information, as evidenced by its written records; (iii) is hereafter furnished to the receiving party by a third party, as a matter of right and without restriction on disclosure; (iv) is independently developed by the receiving party without use of the Confidential Information of the other party or any breach of this Agreement; or (v) is the subject of a written permission to disclose provided by the disclosing party. (c) Notwithstanding any other provision of this Agreement, each party may disclose Confidential Information if such disclosure: (i) is in response to an apparently valid subpoena, or order of a court or other governmental body of the United States or a foreign country, or any political subdivision thereof; provided, however, that the responding party shall first have given notice to the other party hereto; (ii) is otherwise required by law or regulation; provided, however, that the responding party shall first have given notice to the other Party hereto; or (iii) is otherwise necessary to establish rights or enforce obligations under this Agreement, but only to the extent that any such disclosure is necessary under the circumstances. (d) In the event this Agreement is terminated, each Party shall return to the other party all Confidential Information received by it from the other party, provided, however, that each party may keep one copy of such Confidential Information for legal archival purposes. Access to the copy so retained by each party's legal department shall be restricted to counsel and such Confidential Information shall not be used except in the resolution of any claims or disputes arising out of this Agreement. 8. Indemnification. BION shall indemnify, defend and hold harmless the Trustees of the California State University, the State of California, and all of said entities' Agents from and against any and all claims, damages, suits, costs, expenses and liabilities arising out of BION's breach of any of its obligations contained in this Agreement. BION shall indemnify, defend and hold harmless the Agricultural Foundation and CATI, and all of said entities' Agents from and against any and all claims, damages, suits, costs, expenses and liabilities arising out of BION's breach of any of its obligations contained herein. The Agricultural Foundation shall indemnify, defend and hold harmless BION, and all of its Agents from and against any and all claims, damages, suits, costs, expenses and liabilities arising out of a University Party's breach of any of their obligations contained herein. 9. Dispute Settlement. Any dispute regarding the construction or application of any of the terms, provisions, or conditions of this Agreement shall on the written request of either party served on the other, be resolved by arbitration in accordance with the rules and procedures set forth in California Code of Civil Procedure Sections 1280-1294.2, including the right to conduct the discovery specified in C.C.P. Section 1283.05. All such disputes shall be arbitrated in Fresno, California. The arbitration shall be before one neutral arbitrator to be selected in accordance with the Commercial Rules of the American Arbitration Association, which shall assume responsibility for administering said arbitration. The arbitrator shall be a member of the California State bar actively engaged in the practice of law; or a retired member of the state or federal judiciary. The substantive law of the State of California, including its statue of limitations applicable to the commencement of a lawsuit, shall apply to the arbitration. The arbitrator shall follow the rules of evidence of the State of California relating to the trial of a civil action. The arbitrator is empowered to grant summary rulings in response to motions filed by a party prior to the final decision of the arbitrator and may grant any remedy or relief that a court of the State of California may grant under the circumstances. The cost of the arbitration shall be borne by the losing party or in such proportions, as the arbitrator deems appropriate. Judgment on the arbitration award may be entered in any court having jurisdiction over the subject matter of the controversy. The parties hereto understand that by signing this Agreement, they are waiving any rights they may possess to have such disputes litigated in a court or by jury trial. 10. Notices. All notices and demands which either party is required to or desires to give to the other shall be given in writing by personal delivery, express courier service or by telecopy to the address or telecopy number set forth below for the respective party, provided that if any party gives notice of a change of name, address or telecopy number, notices to that party shall thereafter be given as demanded in that notice. All notices and demands so given shall be effective upon receipt by the party to whom notice or a demand is being given. The Agricultural Foundation: The Agricultural Foundation of California State University, Fresno Attn.: Executive Director 2771 East Shaw Avenue Fresno, CA 93710-8205 (559) 278-0800 (phone) (559) 278-0989 (fax) With courtesy copy to: CATI Attention: Joe Bezerra 2910 E. Barstow Ave. Fresno, CA 93740-8009 (559) 278-2361 BION: Bion Environmental Technologies, Inc. Attn.: David Mitchell, Chief Executive Officer Address: 18 East 50th Street, 10th Floor New York, New York 10022 Phone Number: (212) 758-6622 Fax Number: (212) 758-8844 11. Entire Agreement. This Agreement and any and all documents/materials referenced herein shall constitute the entire agreement between the parties on the subject matter hereof. This Agreement supersedes all prior understandings or agreements, oral, parole, or otherwise, except that the Confidentiality Agreement shall remain in full force and effect to the extent it is not inconsistent with the terms and conditions of Section 7 hereof. No such understanding or agreement not incorporated herein shall be binding upon the parties hereto. This Agreement may be amended only in a writing signed by the parties hereto. 12. Relationship of Parties. This Agreement is not intended to constitute, create, give rise to, or otherwise recognize a joint venture, partnership or formal business entity of any kind. Neither party hereto shall have the authority to enter into any obligation on behalf of the other, or to represent itself as an agent or representative of the other. 13. Attorney Fees. In any action or proceeding brought by a party hereto, seeking to enforce any of its rights or obligations incurred hereunder, the prevailing party in such action shall be entitled to reasonable attorney fees and costs incurred therein in addition to any other relief to which such party may be entitled. 14. Due Investigation. Unless otherwise expressly provided herein, the parties and signatories hereto and each of them expressly acknowledge and agree that it: a) Is separately represented and advised as to the subject matter hereof; b) Has undertaken its own investigation of this transaction and the possible effects/consequences thereof; c) Has been afforded an opportunity to consult with respective counsel, advisors, and/or consultants; and d) Has not relied upon any claim, representation, and/or warranty made by any party hereto, or the agent thereof, except to the extent expressly set forth herein. 15. Construction. The parties and signatories and each of them further acknowledge and agree that this Agreement has been jointly prepared by the parties hereto, that it will be construed fairly as to both parties, and that it shall not be construed against either party solely as a result of the drafting thereof. 16. Amendments. No amendment, modification, or assignment of this Agreement shall be valid unless made in a writing signed by the parties. 17. Due Authorization, Etc. The parties represent and warrant that the execution, delivery, and performance of this Agreement are within their respective powers, have been duly authorized by all necessary action, do not require any consent or other action by or in respect of or filing with, any third party or governmental body or agency, and do not contravene, violate or conflict with, or constitute a default under, any provision of applicable law or regulation or charter or bylaws, or any agreement, judgment, injunction, order, decree or other instrument binding upon the parties or any of them. 18. Survival. Sections 5(a), 6(b), 6(c), 7, 8, and 9 shall survive the termination of this Agreement; and the licenses granted in Section 4(b) shall survive for the periods set forth therein. 19. Counterparts. This Agreement may be executed in separate counterparts, and by the Parties on separate counterparts, each of which when so executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, this Agreement has been entered in counterparts on the date first set forth above and is effective upon its full execution. Signed: BION BION ENVIRONMENTAL TECHNOLOGIES, INC. By: /s/ David Mitchell Name: David Mitchell Title: Chief Executive Officer Date: 12/9, 2002 AGRICULTURAL FOUNDATION THE AGRICULTURAL FOUNDATION OF CALIFORNIA STATE UNIVERSITY, FRESNO By: /s/ D.S. Adishan-Astone Deborah S. Adishian-Astone, Executive Director Date: 12/5, 2002 Approved by: /s/ Carl Pherson Carl Pherson, Agricultural Operations Date: 12/3, 2002 /s/ Joe Bezerra Joe Bezerra, CATI Date: 12/4, 2002 EXHIBITS Exhibit A: Equipment Exhibit B: Bion Equipment Exhibit C: (i) Protocol for influent sampling, testing procedures, and interpretation of data; etc. (ii) Description of "Core Conditions," and "Stress Conditions" (iii) Timing of two phases and related protocol (iv) Research purposes (v) General operating parameters during and following Term of Agreement (e.g., include operating manual) Exhibit D: Definition of Bion System EX-99.1 6 ex991.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTON 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Bion Environmental Technologies, Inc. (the "Company") on Form 10-QSB for the period ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Chief Executive Officer of the Company certifies, that to the best of his knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. - ------------------------------ David J. Mitchell Chief Executive Officer February 19, 2003 EX-99.2 7 ex992.txt EXHIBIT 99.2 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTON 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Bion Environmental Technologies, Inc. (the "Company") on Form 10-QSB for the period ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Chief Financial Officer of the Company certifies, that to the best of his knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. - ------------------------------- Lawrence R. Danziger Chief Financial Officer February 19, 2003 EX-99.3 8 ex993.txt EXHIBIT 99.3 EXHIBIT 99.3 THE HOLLANDBROOK GROUP, LLC February 14, 2003 via fax: 212-758-8844 David Mitchell, Chief Executive Officer Bion Environmental Technologies, Inc. 18 East 50th St., 10th Floor New York, NY 10022 Dear David: As you know, I have resigned from Bion's Board, effective today. I and certain business colleagues are currently engaged in intensive negotiations to acquire a business. This matter is now consuming essentially all of my time. I wish Bion every success in its continuing financing efforts and in exploiting its promising technology. Sincerely, /s/ Howard E. Chase Howard E. Chase 1661 Route 22 West * Bound Brook, NJ 08805 * hechase@hollandbrook.com phone: 732-537-0500 * fax: 732-537-0600 - cell: 908-400-3995 EX-99.4 9 ex994.txt EXHIBIT 99.4 EXHIBIT 99.4 ANDREW G. GOULD 164 Lyons Road Scarsdale, New York 10583 Tel 914-723-2560 * email andrew@gouldco.com By Fax and Certified Mail February 14, 2003 Bion Environmental Technologies, Inc. 18 East 50th St., 10th Floor New York, NY 10022 Fax 212-758-8844 Gentlemen: Based on the conference-call update received by the Bion Board of Directors from the Chief Executive Officer earlier this week, in which we were informed of the company's emerging business challenges and continuing efforts by the company's management to raise capital, it has become clear to me that Bion is going to need a Board whose members can be directly engaged in the company's capital-formation and other affairs. Moreover, it is clear that the frequency and intensity of this engagement is likely to increase beyond the sort of support that can be provided by an outside Board member who has other full- time commitments. In light of this update, I have taken stock of my current business commitments and have concluded that it is impractical for me to continue as an outside member of Bion's Board of Directors. Accordingly, and effective immediately, I resign as a member of the Board of Directors of Bion Environmental Technologies, Inc. I appreciate the opportunity to have served on the Board, and I wish you well with Bion's activities. Sincerely, /s/ Andrew G. Gould Andrew G. Gould -----END PRIVACY-ENHANCED MESSAGE-----