-----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, V8RNtIWkHenUwvDcaNfL688Z033CWOm4B6JMLoRxBw9xqme3uPShS7dkBvxydJ27 +zt54SfAxFTHclPqaqURWQ== 0000949303-99-000014.txt : 19990217 0000949303-99-000014.hdr.sgml : 19990217 ACCESSION NUMBER: 0000949303-99-000014 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BION ENVIRONMENTAL TECHNOLOGIES INC CENTRAL INDEX KEY: 0000875729 STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590] IRS NUMBER: 841176672 STATE OF INCORPORATION: CO FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-19333 FILM NUMBER: 99540438 BUSINESS ADDRESS: STREET 1: 555 17TH ST STREET 2: STE 3310 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3032940750 MAIL ADDRESS: STREET 1: 555 17TH ST STREET 2: SUITE 3310 CITY: DENVER STATE: CO ZIP: 80202 FORMER COMPANY: FORMER CONFORMED NAME: RSTS CORP DATE OF NAME CHANGE: 19930328 10QSB 1 QUARTERLY FILING 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, 1998 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.) 555 17th Street, Suite 3310 Denver, Colorado 80202 (Address of principal (Zip Code) executive offices) (303) 294-0750 (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___ The number of shares outstanding of registrant's classes of common stock, as of February 10, 1999: Common Stock, No Par Value, 9,110,838 Bion Environmental Technologies, Inc. Form 10-QSB December 31, 1998 INDEX PART I FINANCIAL INFORMATION PAGE NO. ITEM 1 FINANCIAL STATEMENTS Consolidated Balance Sheets: June 30, 1998 and December 31, 1998................. F2 Consolidated Statement of Operations: For the Six Month Periods Ended December 31, 1997 and December 31, 1998................. F3 Consolidated Statement of Operation: For the Three Month Periods Ended December 31, 1997 and December 31, 1998................. F4 Consolidated Statement of Cash Flows: For the Six Month Periods Ended December 31, 1997 and December 31, 1998................. F5-F6 Statement of Changes in Stockholders Equity for the Period June 30, 1998 through December 31, 1998............... F7-F8 Notes to Financial Statements............ F9-F12 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................ 3 PART II OTHER INFORMATION ITEM 1-6 ......................................... 26 F[PG NUMBER] FINANCIAL INFORMATION PART I ITEM 1. FINANCIAL STATEMENTS BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES See Notes to Consolidated Financial Statements F[PG NUMBER] Consolidated Balance Sheets
December 31, June 30, 1998 1998 (Unaudited) (Audited) Assets Current assets Cash and cash equivalents ............................... $ 3,446 $ 19,104 Accounts receivable ..................................... 11,907 13,986 Contract receivable(net of allowance of $30,000) ............................................ 1,619 22,902 Work in progress (net of allowance of $30,000) ............................................ 388,408 389,712 ------------ ----------- Total current assets ............................... 405,380 445,704 ------------ ----------- Property and equipment Computers and equipment ................................. 301,751 298,782 Accumulated depreciation ................................ (118,210) (91,727) ------------ ----------- 183,541 207,055 Other assets Patents, net ............................................ 41,450 43,066 Deferred long-term contract costs ....................... 71,333 71,333 Deposits and other ...................................... 12,695 13,044 ------------ ----------- Total other assets ................................. 125,478 127,443 ------------ ----------- Total assets ............................................. $ 714,399 $ 780,202 ============ ============ Liabilities and Stockholder (Equity) Current liabilities Accounts payable ........................................ $ 322,638 $ 241,384 Accounts payable - related party ........................ 32,264 20,324 Notes payable - stockholders ............................ 216,171 89,171 Capital lease obligations ............................... 52,399 67,137 Accrued expenses ........................................ 384 24,368 Accrued payroll ......................................... 463,821 284,250 ------------ ----------- Total current liabilities .......................... 1,087,677 726,634 Long-term liabilities Note payable - stockholder .............................. 240,000 210,000 Capital lease obligations ............................... 63,243 83,127 Deferred contract revenue .............................. 151,000 151,000 ------------ ----------- Total liabilities .................................. 1,541,920 1,170,761 ------------ ----------- Commitments and contingencies Stockholders' (deficit) Common stock, no par value, 100,000,000 shares authorized, 9,019,942 (December 31, 1998) and 8,764,827 (June 30, 1998) shares issued and outstanding ............................................ 11,587,013 10,863,469 Common stock subscribed ................................. 41,500 21,500 Accumulated deficit ..................................... (12,456,034) (11,275,528) ------------ ----------- Total stockholders' (deficit) ..................... (827,521) (390,559) ------------ ----------- Total liabilities and stockholders' (deficit) ............................................... $ 714,399 $ 780,202 ============ ============
Consolidated Statements of Operations Six Months Ended December 31 -------------------------- 1998 1997 ------------ ---------- (Unaudited) (Unaudited) Sales ............................. $ 103,924 $ 140,749 Cost of Sales ..................... 210,748 280,992 ----------- ----------- Gross profit (loss) ......... (106,824) (140,243) General and administrative expenses 910,657 776,102 Research and development .......... 122,307 109,855 ----------- ----------- Loss from operations .............. (1,139,788) (1,026,200) Other income (expense) Interest expense ............ (34,995) (46,814) Other income (expense), net . (5,723) 2,547 ----------- ----------- Net (loss) ........................ $(1,180,506) $(1,070,467) =========== =========== Basic (Loss) per weighted average share of common stock .... $ (0.13) $ (0.28) =========== =========== Weighted common shares outstanding 8,892,784 3,865,514 =========== =========== Consolidated Statements of Operations Three Months Ended December 31 ----------------------------- 1998 1997 ------------ ---------- (Unaudited) (Unaudited) Sales .................................... $ 40,052 $ 115,912 Cost of Sales ............................ 87,907 187,423 ----------- ----------- Gross profit (loss) ................ (47,855) (71,511) General and administrative expenses ...... 518,183 305,005 Research and development ................. 55,308 57,098 ----------- ----------- Loss from operations ..................... (621,346) (433,614) Other income (expense) Interest expense ................... (19,847) (23,910) Other income (expense), net ........ (13,080) 558 ----------- ----------- Net (loss) ............................... $ (654,273) $ (456,966) =========== =========== Basic (Loss) per weighted average share of common stock ............................ $ (0.07) $ (0.12) =========== =========== Weighted common shares outstanding ....... 8,951,608 3,957,371 =========== =========== BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Six Months Ended December 31 ----------------------------- 1998 1997 ------------ ---------- (Unaudited) (Unaudited) Cash flows from operating activities Net (loss) .............................. $(1,180,506) $(1,070,467) Adjustments to reconcile net loss to net cash used in operating activities - Depreciation and amortization ........... 28,099 26,586 Issuance of common stock for services, compensation and interest .............. 23,620 93,410 Issuance of subscribed stock for services 23,000 (27,007) Change in assets and liabilities - Receivables and work in progress ....... 24,666 (39,706) Prepaid expenses and other ............. 349 (10,000) Accounts payable ....................... 93,194 (36,217) Accrued liabilities .................... 155,587 88,441 ----------- ----------- Net cash used in operating activities ...................... (831,991) (974,960) Cash flows from investing activities Purchases of equipment .................. (2,969) (7,762) Investments in patents .................. -- (7,706) ----------- ----------- Net cash used in investing activities ...................... (2,969) (15,468) Cash flows from financing activities Payments on notes payable ............... (3,000) (133,000) Proceeds from notes payable ............. 235,000 25,000 Proceeds from sale of stock/warrant issuances .............................. 539,424 915,713 Proceeds from exercise of options ....... 82,500 -- Payments on capital lease obligations ... (34,622) (31,578) Proceeds from the sale of assets, net of selling expenses ................ -- 262,000 ----------- ----------- Net cash provided by financing activities ..................... 819,302 1,038,135 Net increase (decrease) in cash and cash equivalents .................... (15,658) 47,707 Cash and cash equivalents at beginning of period ..................... 19,104 9,232 ----------- ----------- Cash and cash equivalents at end of period $ 3,446 $ 56,939 =========== =========== Footnote: Supplemental disclosure of cash flow information Cash paid for interest was $10,464 (1998) and $26,869 (1997). Continued from previous page. Supplemental disclosure of non-cash financing activities For the six months ended December 31, 1998 Converted $3,000 of common stock subscribed into 800 shares of common stock. Converted $77,170 of notes payable and interest into 12,862 shares of common stock. For the six months ended December 31, 1997 Declared and accrued dividends of $4,653 for preferred stock Series B. Converted $5,007 of common stock subscribed into 1,321 shares of common stock. Converted 18,834 shares of Series B preferred stock to 18,834 shares of common stock valued at $95,482. Issued $30,961 of common stock (10,324 shares) as payment of accrued Series B preferred dividends. BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Stockholders' Equity
Common Stock Common ------------------------- Stock Accumulated Shares Amount Subscribed Deficit Total --------- ------------ ------------ ------------- ------------- Balances at June 30, 1998 ..... 8,764,827 $ 10,863,469 $ 21,500 ($11,275,528) ($ 390,559) Conversion of common stock subscriptions to common stock ....................... 300 $ 1,500 $ (1,500) -- -- Common stock subscriptions for services ................ -- -- $ 11,500 -- $ 11,500 Issuance of common stock for cash .................... 97,942 $ 161,674 -- -- $ 161,674 Issuance of common stock for services ................ 2,315 $ 10,725 -- -- $ 10,725 Exercise of stock options ..... 10,000 $ 82,500 -- -- $ 82,500 Net (loss) for the period ended September 30, 1998 .......... -- -- -- ($ 526,233) ($ 526,233) --------- ----------- ------------ ------------- Balances at September 30, 1998 .......... 8,875,384 $ 11,119,868 $ 31,500 ($11,801,761) ($ 650,393) ========= ============ ============ ============= ============
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Stockholders' Equity Consolidated Statement of Changes in Stockholders' Equity
Common Stock Common ------------------------- Stock Accumulated Shares Amount Subscribed Deficit Total --------- ------------ ------------ ------------- ------------- Conversion of common stock subscriptions to common stock ....................... 500 $ 1,500 $ (1,500) -- -- Common stock subscriptions for services ................ -- -- $ 11,500 -- $ 11,500 Issuance of common stock for cash .................... 127,974 $ 377,750 -- -- $ 377,750 Issuance of common stock for services ................ 3,222 $ 10,725 -- -- $ 10,725 Conversion of note payable and interest for common stock ... 12,862 $ 77,170 -- -- $ 77,170 Net (loss) for the period ended December 31, 1998 ........... -- -- -- ($ 654,273) ($ 654,273) Balances at December 31, 1998 ........... 9,019,942 $ 11,587,013 $ 41,500 ($12,456,034) ($ 827,521)
BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1 - Summary of Accounting Policies The summary of the significant accounting policies of Bion Environmental Technologies, Inc. ("Company") is incorporated by reference to the Company's annual report on Form 10-KSB at June 30, 1998. The accompanying unaudited financial statements and disclosures reflect all adjustments (all of which are normal recurring accruals) in the ordinary course of business which in the opinion of management are necessary for a fair presentation of the results of operations, financial positions, and cash flow of the Company. The results of operations for the periods indicated are not necessarily indicative of the results for a full year. Note 2 - Continued Operations The accompanying financial statements have been prepared on a going con-cern basis which contemplates the realization of assets and liquidation of liabilities in the ordinary course of business. The Company has not yet begun earning significant revenue from its planned principal operations. Consequently, as of December 31, 1998, the Company has incurred accumulated losses totaling $12,456,034, resulting in an accumulated stockholders' deficit of $827,521. Cash flows from current operations are not sufficient to meet the obligations of the Company. Management plans include continuing efforts to obtain additional capital to fund operations until contract sales along with sales of BionSoil(TM) are sufficient to fund operations. There can be no assurance that the Company will be able to successfully attain profitable operations or raise sufficient capital. Note 3 - Cost and Estimated Earnings on Uncompleted Contracts The Company's costs and estimated earnings on uncompleted treatment system contracts consist of the following: December 31, June 30, 1998 1998 ----------- ---------- Costs incurred on contracts $2,023,699 $1,927,813 Estimated (losses) (583,640) (548,450) ----------- ----------- 1,440,059 1,379,363 Less billings to date (1,131,318) (1,069,318) ----------- ----------- $ 308,741 $ 310,045 =========== =========== Note 4 - Capital Structure Because the Company has a relatively complex capital structure the following capital structure details are set forth: Common Stock As of February 10, 1999 the Company had 9,110,838 shares of Common Stock issued and outstanding and 10,987 shares of subscribed stock. Options and Warrants As of February 10, 1999 the Company has outstanding options and warrants as follows: Options outstanding under the Fiscal Year 1994 Incentive Compensation Plan and the Non Employee Director Compensation Plan: Commences Expires Director ($1.72) 10,000 8/20/97 8/19/02 ($2.27) 10,000 8/20/97 8/19/02 ($3.23) 10,000 11/18/98 11/17/03 ------- Total Director 30,000 Employee ($4.00) 1,247 10/21/97 12/31/01 ($4.00) 1,200 2/3/98 12/31/01 ($4.00) 8,519 9/15/97 12/31/01 ($4.00) 834 6/2/98 12/31/01 ($4.00) 694 12/16/97 12/31/01 ($4.00) 1,734 8/4/98 12/31/01 ($4.00) 17,500 8/1/97 8/1/00 ($4.00) 1,000 3/31/98 3/31/99 ($4.00) 1,334 8/11/98 12/31/01 ($4.00) 16,155 11/19/98 12/31/02 ($4.00) 917 2/2/99 12/31/02 ($4.00) 1,400 3/4/99 12/31/02 ($4.00) 934 3/16/99 12/31/02 ($4.00) 1,317 4/1/99 12/31/02 ($4.00) 934 6/1/99 12/31/02 ($4.00) 934 9/1/99 12/31/02 ($4.13) 1,000 9/1/98 8/31/00 ($4.50) 1,000 12/1/98 12/31/00 ($6.00) 1,000 3/31/98 3/31/99 ($6.00) 8,517 9/15/98 12/31/01 ($6.00) 5,000 9/15/97 12/31/01 ($6.00) 1,847 10/21/98 12/31/01 ($6.00) 1,200 2/3/99 12/31/01 ($6.00) 693 12/16/98 12/31/01 ($6.00) 1,733 8/4/99 12/31/01 ($6.00) 1,333 8/11/99 12/31/01 ($6.00) 16,155 11/19/99 12/31/02 ($6.00) 917 2/2/00 12/31/02 ($6.00) 1,400 3/4/00 12/31/02 ($6.00) 934 3/16/00 12/31/02 ($6.00) 1,317 4/1/00 12/31/02 ($6.00) 934 6/1/00 12/31/02 ($6.00) 934 9/1/00 12/31/02 ($6.25) 1,000 6/1/98 5/31/00 ($6.75) 5,000 10/6/97 3/31/99 ($7.25) 10,000 10/6/97 3/31/99 ($8.00) 10,000 9/15/98 12/31/01 ($8.00) 1,246 10/21/99 12/31/01 ($8.00) 1,200 2/3/00 12/31/01 ($8.00) 693 12/16/99 12/31/01 ($8.00) 1,733 8/4/00 12/31/01 ($8.00) 1,333 8/11/00 12/31/01 ($8.00) 8,516 9/15/99 12/31/01 ($8.00) 16,155 11/19/00 12/31/02 ($8.00) 917 2/2/01 12/31/02 ($8.00) 1,400 3/4/01 12/31/02 ($8.00) 934 3/16/01 12/31/02 ($8.00) 1,317 4/1/01 12/31/02 ($8.00) 934 6/1/01 12/31/02 ($8.00) 934 9/1/01 12/31/02 ($10.00) 10,000 9/15/98 12/31/01 ($12.50) 10,000 9/15/99 12/31/01 ($15.00) 10,000 9/15/99 12/31/01 ------- Total Employee 195,879 Total Director and Employee 225,879 Warrants outstanding as of February 10, 1999 consist of the following: $3.00 warrants: exercisable 1/22/96 through 1/21/01: 1,003 exercisable 8/21/96 through 8/20/01: 14,500 exercisable 9/13/96 through 9/12/01: 827 Total $3.00 warrants 16,330 $3.0625 warrants: exercisable 11/2/98 through 12/31/02: 16,667 Total $3.0625 warrants 16,667 $4.00 warrants: exercisable 12/1/98 through 12/31/02 16,667 exercisable 6/5/97 through 6/30/99: 35,000 Total $4.00 warrants 51,667 $5.00 warrants: exercisable 6/20/96 through 6/20/99: 25,000 exercisable 8/21/96 through 8/20/01 10,000 Total $5.00 warrants 35,000 $6.00 warrants: exercisable 6/5/97 through 6/30/00: 100,000 exercisable 3/1/98 through 10/1/99: 50,000 exercisable 6/9/98 through 12/31/01: 3,750 exercisable 2/1/97 through 12/31/01: 10,000 exercisable 4/21/97 through 4/20/02: 4,172 Total $6.00 warrants 167,922 $7.00 warrants: exercisable 7/1/98 through 6/30/99: 887,081 Total $7.00 warrants 887,081 $7.50 warrants: exercisable 7/1/98 through 12/31/00: 187,500 Total $7.50 warrants 187,500 $8.00 warrants: exercisable 2/1/97 through 12/31/01: 10,000 Total $8.00 warrants 10,000 $10.00 warrants: exercisable 2/1/97 through 12/31/01: 10,000 Total $10.00 warrants 10,000 $12.50 warrants: exercisable 2/1/97 through 12/31/01: 10,000 Total $12.50 warrants 10,000 $15.00 warrants: exercisable 2/1/97 through 12/31/01: 10,000 exercisable 1/1/00 through 12/31/01:3,006,911 Total $15.00 warrants3,016,911 Total of all warrants currently outstanding4,409,078 Note 5 - Subsequent Events Effective January 25, 1999 the Company made bonus awards to three employees under the 1994 Incentive Stock Plan. The Company granted 2,500 options at an exercise price of $4.00 per share, 2,500 options at an exercise price of $4.125 per share, and 2,500 options at an exercise price of $4.25 per share (exercisable from 1/25/98 - 12/31/99). On January 13, 1999 the Company borrowed $180,000 from a non related party. The short term note will accrue interest at two percentage points above the annual rate publicly announced or published from time to time by Norwest Bank Colorado, N.A., in Denver, Colorado as its prime rate. Principal and interest are due on or before January 12, 2000. BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES [PG NUMBER] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company designs, installs and operates advanced waste and wastewater treatment systems. These systems, which incorporate patented biological technologies, are capable of removing solids, nutrients and other contaminants from agricultural, industrial and municipal waste-water. In addition, the agricultural systems installed on animal raising facilities produce a marketable, nutrient-rich soil-like product, BionSoil(TM). The Company currently has systems treating swine, dairy, and fruit and juice processing waste streams in Florida, Illinois, New York, North Carolina, and Washington. The Company has approximately 170,000 BionAnimals in design, permitting, construction and/or operations with an additional 909,000 BionAnimals under contract. The Company is in the process of raising capital for operations and future growth, reviewing strategic partners for various aspects of the business, continuing a research and development effort on both systems applications and byproducts, and strengthening its patent coverage. The Company has incurred losses since inception of $12,456,034 and is currently experiencing liquidity problems. Continued losses without the infusion of additional capital raise doubt about its ability to continue as a going concern. Management plans include continuing efforts to obtain additional capital to fund operations until such time, if ever, as contract sales and the sale of BionSoil are sufficient to fund opera-tions. No assumptions can be made that the Company will be able to successfully attain profitable operations and/or raise sufficient capital to sustain operations. Liquidity and Capital Resources The Company's current ratio as of December 31, 1998 was 0.37 : 1.0 as compared to 0.61 : 1.0 as of June 30, 1998. Cash as of December 31, 1998 decreased to $3,446 as compared to $19,104 as of June 30, 1998. During the six months ended December 31, 1998, the Company borrowed $127,000 from three shareholders at 1% interest per month. As of December 31, 1998 the Company has drawn $240,000 against the October 26, 1996 line-of-credit with a shareholder. (See 8-K dated December 1, 1996.) During the six months ended December 31, 1998 the Company made awards to five employees under the 1994 Incentive Stock Plan. The Company granted 30,000 options at an exercise price of $3.25 per share (exercisable from 11/2/98 - 12/31/98). None of the options were exercised and all have expired. During the six months ended December 31, 1998 the Company issued awards to all current employees (excluding the Company's officers, directors, and management personnel) under the Company's Fiscal Year 1994 Incentive Plan totalling 22,591 options with an exercise price of $4.00 per share, 22,591 options with an exercise price of $6.00 per share, and 22,591 options with an exercise price of $8.00 per share; all of the options will expire on December 31, 2002. The options will vest as follows: for employees with less than one year of service, the first third shall vest on their one year employment anniversary date, the second third shall vest on the second anniversary date, and the last third will vest on their third anniversary date. For employees with more than one year of service, the first third shall vest on November 19, 1998, and the second and last third shall vest twelve and twenty-four months thereafter respectively. During the six month period ending December 31, 1998, the Company issued 16,667 warrants to an employee with an exercise price of $3.0625 per share commencing November 2, 1998 and expiring December 31, 2002. The Company issued an additional 16,667 warrants to another employee with an exercise price of $4.00 per share commencing December 1, 1998 and expiring December 31, 2002. The above warrants were issued to the two employees as compensation per their employment agreements On May 21, 1998 the Company entered into a credit facility with a shareholder for a maximum amount not to exceed $1,500,000. On June 30, 1998 the Company converted all of the then outstanding debt ($300,000 of principal and $677 of interest) into 50,113 shares of common stock at $6.00 per share and 150,000 warrants at $7.50 per share exercisable for the period commencing July 1, 1998 and expiring December 31, 2000. (See 8-K dated May 21, 1998.) As of November 5, 1998 the Company had converted the balance of the note payable ($75,000) and interest ($2,170) into 12,862 shares of restricted and legended common stock and 37,500 warrants exercisable at $7.50 per share commencing on November 5, 1998 and expiring on December 31, 1999. For the six months ended December 31, 1998 the Company issued 225,916 shares of common stock for cash ($539,424), 12,862 shares of common stock as payment of a note and interest ($77,170), 5,537 shares of common stock for services ($21,450), and converted 800 shares of subscribed stock to 800 shares of common stock valued at $3,000. All of the above is legended and restricted common stock. The Company also issued 10,000 shares of free trading common stock for the exercise of options ($82,500). The Company has increased subscribed stock by $10,000 for legended and restricted common stock awarded but not issued to certain employees as additional compensation. Results of Operations Comparison of the Six Months Ended December 31, 1998 with Six Months Ended December 31, 1997 Revenue in the six months ended December 31, 1998 was $103,924 compared to $140,749 for the corresponding six month period in 1997, a decrease of $36,825. Contract costs were lower ($70,244) in the 1998 six month period due to reduced costs associated with the BionSoil processing in New York. General and administrative expenses increased by $134,555 in the six month period ended December 31, 1998 due to higher consulting expenses ($243,000) and investor relations expenses ($59,000). $231,000 of the increase in consulting fees was due to the cancellation of a consulting agreement and the credit issued in the quarter ended December 31, 1997. The increase was partially offset by a decrease in compensation expenses ($190,000). The Company recorded $34,995 in interest expense on its notes to shareholders and capital equipment leases and $122,307 in research and development costs. As a result of the above, the Company recorded a net loss of $1,180,506 in the six month period ended December 31, 1998, compared to a net loss of $1,070,467 for the six month period ended December 31, 1997. The Company will need to increase sales significantly to obtain profitability. Comparison of the Three Months Ended December 31, 1998 with Three Months Ended December 31, 1997 Revenue in the three months ended December 31, 1998 was $40,052 compared to $115,912 for the corresponding three month period in 1997, a decrease of $75,860. Contract costs were lower in the 1998 three month period by $99,516 due to the decreased expenses associated with BionSoil processing. The above resulted in a gross loss for the period ended December 31, 1998 of $47,855 as compared to a gross loss of $71,511 for the same three month period in 1997. General and administrative expenses increased by $213,178 due to an increase in consulting and professional fees ($239,000) and investor relations ($45,000) partially offset by a decrease in compensation expenses ($110,000). $231,000 of the increase in consulting fees was due to the cancellation of a consulting agreement and the credit issued in the quarter ended December 31, 1997. The Company recorded $19,847 in interest expense on its notes payable and $55,308 in research and development costs. As a result of the above, the Company recorded a net loss of $654,273 in the three month period ended December 31, 1998, compared to a net loss of $456,966 for the three month period ended December 31, 1997. The Company will need to increase sales significantly to obtain profitability. Year 2000 Issue The Company is aware of the issues associated with the programming code in existing computer systems as the millennium (year 2000) approaches. The "year 2000" problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two-digit year value to 00. The issue is whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. After a review of the Company's computer systems and associated software, management does not believe "year 2000" will have a material effect on the operations or financial condition of the Company. The Company cannot predict the impact that "Year 2000" will have on its customers and vendors. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The discussion below contains forward-looking statements (denoted with asterisks (*)) made in reliance upon the provisions of Rule 175 promulgated under the Securities Act of 1933 and should be read in conjunction with the Company's consolidated financial statements and the Notes thereto. The footnotes set forth below (at pages 21 to 25) are an integral part of this discussion and should be carefully reviewed to properly understand this section. This discussion is qualified in its entirety by the risk factors discussed herein. (a) Plan of Operation General Discussion of Current and Proposed Operations The unaudited financial statements contained in this Form 10-QSB show that over $11,628,513 of equity has been invested in the Company through the close of the fiscal quarter ended December 31, 1998. These financial statements also show that, as of that date, the Company had a negative net worth of $827,521, cumulative losses of $12,456,034, limited current revenues and substantial current operating losses. Continued losses without additional outside funding raise doubt about the Company's ability to continue as a going concern. Management plans to continue raising additional capital to fund operations until such time, if ever, as Bion NMS sales along with the sales of BionSoil and BionSoil products are sufficient to fund operations. Management believes, however, that additional information is necessary to evaluate the Company and its progress relative to the business it is pursuing, its plans for the future, and the associated value the Company has developed during the last several years. Therefore, the following section of this Form 10-QSB is presented by management to give the reader a better understanding of the development of the business of the Company to date, and its goals for growth in the future. Business Development The Company's mission is to provide services, systems and products which solve environmental problems with wastes and wastewater, and in appropriate situations, recycle wastes into high value horticultural products which produce superior plant growth performance. The main emphasis of the Company's business during the past two years has been on the application of the Bion NMS for large animal raising agricultural facilities. As a result, the Company's focus has been more specifically on: first, the sales, design, installation oversight, operations management, and material harvesting of the Bion NMS for large dairy and swine facilities; and, second, BionSoil: the development efforts associated with testing, processing, blending, packaging, marketing, distribution and sales of BionSoil and BionSoil-based products which are produced from the solids harvested from the Company's Bion NMS systems. Through December 31, 1998 the Company has sold, designed or has under contract a total of 81 Bion NMS waste or wastewater treatment systems. These systems include 4 operating food processing or storm water run off systems, as well as 76 Bion NMS BionSolids (see footnote 1, below) producing systems (13 in operation, 4 in construction and 58 under contract in various stages from preliminary design to permitting) that are designed to contain approximately 1.1 million BionAnimals (see definition below) when completed. Eventually the Company anticipates emphasizing additional business areas including without limitation municipal and industrial wastewater treatment*. Prior to September 20, 1989, (when Bion Technologies, Inc., was incorporated) through at least June 30, 1997, the Company was in the technology development mode with limited sales of primarily first-of-a-kind wastewater and/or Bion NMS. Initial sales and installations were wastewater treatment NMS (no BionSolids production) until 1993 when the emphasis shifted to Bion NMS (BionSolids production) applications. During the past two years the Company has been working to emerge from the research and development stage and transition into the sales and marketing of the Bion NMS systems and the BionSoil products produced by those systems. The Company has focused the majority of its efforts and expenditures in these two areas and is beginning to see positive progress in both, as described below*. The Company's method for tracking both the sale and start-up of Bion NMS systems and the production of BionSoil is based on a Company defined standard unit, the BionAnimal, which relates BionSoil production to confined animal weight. When all the manure and urine produced by one BionAnimal is collected as BionSolids and subsequently converted into BionSoil, the Company estimates that each BionAnimal will yield approximately 1 cubic yard of processed BionSoil per year*. Using this definition of BionAnimal the Company has developed the following table relating the number of animals in full confinement installations to the number of BionAnimal equivalents they represent. (See footnote 2, below): Table 1 Animal Approximate Equivalent BionAnimals One dairy cow 10.00 One steer 4.50 One sow 1.35 One market hog 0.90 (1.1 = 1) One nursery pig 0.225 (4.4 = 1) One layer chicken 0.02 (50 = 1) For fiscal year 1998 (see the Company's Form 10-KSB dated June 30, 1998), the Company experienced strong growth and as a result exceeded its' internal goals by more than 100%, adding approximately 650,000 BionAnimals under contract. During the first two quarters of fiscal year 1999, the Company has added an additional 325,000 BionAnimals, approximately 40% of the Company's initial internal goal for the year (see management's goals and targets below). However, during the second fiscal quarter ended December 31, 1998, and continuing into January and February 1999 the Company has experienced the impact of an extended deep depression in hog prices. During December 1998 prices reached a low of $9.00 per hundred weight, down from $43.00 per hundred weight in December 1997. These depressed prices, lasting through the present time, are below the break-even point for hog growers. As a result of this reduction in prices and the commensurate losses accumulated by the hog industry, commitments for expansion of capacity have slowed, and growers have generally delayed or deferred any expenditures possible pending an increase in price to the break-even point. This has had a significant impact on the Company's plans to sign additional contracts within the hog industry and has caused growers to put many of the Company's existing system contracts on temporary hold. However, hog prices have recovered slowly in January 1999 and have trended upward to approximately $25.00 per hundred weight by the end of January 1999. Additionally, in the last quarter of the fiscal year ended June 30, 1998, the Company initiated a program to hire two vice president level executives (a Vice President, system sales and marketing, and a Vice President, BionSoil). Both positions have been filled, however, the recruiting program took substantially more time than anticipated. As a result, the Vice President of system sales and marketing began with the Company in November, and the Vice President of BionSoil began with the Company in December. This delay, combined with the impact of low hog prices in the market resulted in a significant slow down in the Company's pace of growth. The impact of these two issues is anticipated to be short term. However, management has reevaluated the goals established in the Company's Form 10-KSB dated June 30, 1998 and made necessary changes (see Management's Targets, Bion System Sales and BionAnimals Under Contract below). Market Size Management has devoted significant effort to defining the size of the markets for both the Bion NMS and for BionSoil and BionSoil products. These efforts have included formal and informal studies, creation of models as well as analysis of available statistical data. The Company has reviewed the preliminary 1997 U.S. Department of Agriculture Census statistics (the most recent information available from the U.S. Department of Agriculture) as well as additional state by state information, in some cases current as of December 1997, and developed the following size estimates for the target market segments for system sales. The total United States animal population, based on data contained in the 1997 U.S. Department of Agriculture Census statistics shows that there were over 107 million cattle and calves, 61 million hogs and in excess of 1.6 billion fowl on farms in the United States. These numbers if converted based on the Company defined BionAnimal unit, yield approximately 560 million BionAnimals. However, not all of these BionAnimals are on farms that are potential candidates for a Bion NMS installation. The Company has analyzed the economics of system installation, minimum system size requirements and system operation factors related to the size of farms. Based on this review and further analysis of the census data, the Company estimates that the total number of BionAnimals on larger farms, which meet the appropriate criteria, is approximately 210 million (see footnote 3, below). Based on this review, these animals are believed by the Company to be the potential candidates for system installation in the U.S.* Further, the number of large animal farms is increasing as the move to consolidate livestock operations into larger more efficient farm units is accelerating (see footnote 4, below). The 1992 Department of Agriculture Census statistics (which were the most current information available to the Company prior to this Form 10-QSB), showed that the total number of BionAnimals on larger farms was 140 million. The increase in animals on larger farms seen in the 1997 census numbers is most evident in dairy cows (where the number of cows on dairies with over 1,000 cows increased from 937,000 to 1,600,000 between 1992 and 1997) and hog farms (where the number of hogs on farms with over 5,000 hogs rose from 9,764,000 to 24,578,000). This trend is anticipated to continue over the next several years as growers realize the size related economies in facility and production costs*. Management's review of the potential market for BionSoil and BionSoil products has included research by the Battelle Institute in a study conducted for the Solid Waste Composting Council (see footnote 5, below), as well as initial market sector analysis*. Battelle calculated that the demand for compost and compost-like products (including products ranging from manure to composted organic wastes to manufactured potting soils and soil enhancers) in selected areas of the U.S. alone is projected to be in excess of one billion cubic yards per year*. This demand, categorized in nine application segments: landscapers, delivered topsoil, bagged retail, nurseries, landfill final cover, surface mine reclamation, sod production, silvaculture, and agriculture, far exceeds projected supply*. Targeted markets for BionSoil include these segments in addition to state and municipal park and transportation departments, golf courses, athletic fields, home gardeners, reforestation projects for timber and mining companies, the U.S. Park Service and others*. The Company is currently analyzing specific market sectors that are initial target market areas within this overall demand including container nursery products, golf course construction, the turf industry and others (see footnote 6, below)*. Geographic Expansion The activities of the Company to design, permit, oversee the installation of and operate its systems in the various geographic areas where the Company is conducting its business to date have established credibility with federal, state, and local regulators as well as environmental and agricultural professionals. With the establishment of this credibility and recent contract discussions and negotiations, the Company is positioned to attempt to gain significant market penetration into new geographic areas*. To date, the Company's geographic expansion has been limited due to financial and personnel constraints (which continue to exist). However, as a result of heightened awareness about the major manure treatment and disposal problem facing the animal raising industry (see footnote 7, below), and due to the current proliferation of state and national legislation being considered, management believes that major geographic expansion is now possible and is essential to the Company's ability to achieve successful operations in the future*. The Company estimates that the cost associated with the required staffing, servicing, and marketing effort for expansion into new geographic regions, including initial sales calls, system design, regulatory approvals, system installation and operation through the cash-flow break-even point (the Company has not yet achieved cash-flow break-even in any of its regional operations), is not less than $500,000 per region, and may exceed $1,500,000*. The Company's balance sheet does not show any assets created by these expenditures as they all have been recorded as expense items. However, based on experience to date in the regions where system sales and installation activity have been focused, the Company believes that the money invested in these efforts has created what might be called "good will," "marketing," and/or "regulatory" value. Management believes that achieving a greater rate of geographic expansion will require expenditures greater than those expensed for previous expansion*. (An example of the accumulation of these expenses can be understood by reference to the development and installation of the Company's initial hog farm Bion NMS system in North Carolina which is described in more detail in footnote 8, below). The Company is currently evaluating expansion opportunities in many geographic areas throughout the United States. Based on research, management team visits, discussions with regulatory and dairy industry professionals, requests for information and proposals, and review of available information, over the past few months it has become increasingly evident that the state of California is an appropriate location for the next expansion office*. California has the largest concentration of dairy cows in the United States and is having problems with groundwater leaching and stormwater runoff, as well as land application and stock piling of the manure generated on these farms*. The Company views the next 12-18 months as a critical time period to become established in California and has taken the initial steps to implement a sales and marketing plan in that state*. As the Company continues its expansion into new areas in the future, and this expansion requires similar or greater additional cash resources to be spent, these cash amounts, when expended, will be expensed and not shown as balance sheet assets*. Technology Expansion The Company has six issued patents (see footnote 9, below) which provide broad coverage of the fundamental technology that underlies the Company's systems and processes. The Company is conducting a review of its existing patent position and anticipates that additional patent filings may occur based on this review or as further applications of the technology are developed. The Company currently anticipates the expansion of the technology into the cattle feedlot and poultry raising businesses where the technology will need to be adapted to treat waste with both different characteristics and different collection technologies than for existing dairy or swine waste systems*. Other factors that may motivate the expansion of technology include, but are not limited to, current and/or new local, state, and federal regulations, proximity of potential systems to current online systems or systems under contract and the market size of poultry, cattle feedlot and other similar operations. Just as there are additional expenses associated with geographic expansion, there also are additional expenses associated with the adaptation of existing technology for use in regions where climate, soil, and regulatory conditions are different from those experienced in other already established installations. The majority of such expenses (which are investments in the Company's future) will not show as balance sheet assets despite the fact that long term technological value is being created. The Company estimates that a large portion of the net loss through fiscal year 1995 (then shown on the financial statements as approximately $4.0 million) was actually expended on system development and the enhancement of the technology and construction of prototype systems that are the basis of the Company's planned future expansion. The Company has expensed all of these costs. Management's Targets, Bion NMS System Sales and BionAnimals Under Contract In July 1997, Company management established the primary long range goal to achieve a target level of 2,000,000 BionAnimals under contract by June 30, 2000, the end of the Company's fiscal year 2000*. To support achievement of this long-range goal the Company established the addition of 300,000 BionAnimals under contract as the sales target through its fiscal year ending June 30, 1998 which would result in the Company having contracts for a total of approximately 390,000 BionAnimals by June 30, 1998 (see the Company's Form 10-KSB for the fiscal year ended June 30, 1997 for a discussion of these goals)*. For fiscal year 1998 (which ended June 30, 1998), the Company significantly exceeded its goals. During the year, the Company signed contracts for systems designed to contain approximately 650,000 BionAnimals as compared to its goal of adding contracts for approximately 300,000 BionAnimals. As a result, the Company exceeded its target for the fiscal year ended June 30, 1998 by over 100%. When all the systems under contract, as of June 30, 1998, are complete and in full operation they are anticipated to produce approximately 750,000 cubic yards of BionSoil per year (see the Company's Form 10-KSB for the fiscal year ended June 30, 1998). Normally the Company anticipates this soil production will start within two years of contract signing*. However, due to the slowing of construction expenditures brought on by the depressed hog market, many of these systems will not be on line within two years and therefore BionSoil production will be delayed*. In July 1998, based on a review of this performance, and the assumptions detailed below, management set the following revised performance targets for the number of BionAnimals under contract in each of the next four fiscal years, and, following the up to 24 month lag for system design, permitting, construction and start-up (See footnote 10, below), for quantities of BionSoil that were anticipated to be available to be sold*: Table 2 (see footnote 10, below)* Management July 1998 Targets BionAnimal/Contracts and BionSoil (#'s in thousands) Fiscal Years Ended June 30 --------------------------------------- 1999 2000 2001 2002 Number of BionAnimals added during fiscal year (in thousands)* 800* 950* 1,200* 1,400* Cumulative number of BionAnimals under contract (in thousands)* 1,550* 2,500* 3,700* 5,100* BionSoil available for sale (in thousands of cubic yards)* 30* 300* 1,600* 2,600* As management discussed in the Company's Form 10-KSB for the fiscal year ended June 30, 1998 and Form 10-QSB for the fiscal quarter ended September 30, 1998, these goals could only be realized by the Company if many factors and assumptions including but not limited to the following were met: a) that the Company will be able to secure sufficient additional funding, most of which will be raised through capital investments (of which there can be no guarantee); b) that the Company will be able to hire sufficient management personnel, i.e. sales, engineering and operations, in order to promote the growth of the Company and to properly manage that growth; c) that continuing regulatory pressures on the agricultural industries will lead them to install the Bion NMS or similar technology in order to solve the environmental problems; d) that legislative and regulatory powers will not pass and enforce non-science based laws that would render the Bion NMS obsolete or illegal; e) that the Company will be able to expand the application of its technology and accomplish the geographic expansion into new regions; f) that the pricing and features of the Bion NMS and the services provided by the Company can be accomplished within the constraints of the Company's economic model; g) that the trend continues towards market consolidation in the agricultural community, whereby the total number of farms decreases, however, the number of animals produced increases; and h) that the Company is successful in developing, marketing and selling the BionSoil and BionSoil products produced by the Bion NMS*. None of these factors and assumptions can be guaranteed. However, as discussed above, prices in the hog market have been in a major depression over the last nine months. This depression has not only generally halted expansion in the hog industry, but also has forced some growers to reduce or eliminate their herds. This depression coupled with the Company's delay in hiring key management positions has slowed the aggressive growth rate that the Company had forecasted in its Form 10-KSB dated June 30, 1998 and Form 10-QSB dated September 30, 1998. The short term impact of these two issues has caused management to reevaluate forecasts for the remainder of fiscal year 1999 through fiscal year 2002. As a result, the following revised table of management targets has been developed. Note that the number of BionAnimals added in fiscal year 1999 and fiscal year 2000 have been reduced. Management believes, however, that the total number of BionAnimals added by June 30, 2002 will equal or exceed the total predicted previously*. Table 2A* Revised Targets* BionAnimal/Contracts and BionSoil (#'s in thousands) Fiscal Years Ended June 30 --------------------------------------- 1999 2000 2001 2002 Number of BionAnimals added during fiscal year (in thousands)* 500* 800* 1,250* 1,800* Cumulative number of BionAnimals under contract (in thousands)* 1,250* 2,050* 3,300* 5,100* BionSoil available for sale (in thousands of cubic yards)* (See footnotes 11 &12, below) 16* 130* 1,200* 2,100* These revised targets will only be realized if all of the factors and assumptions listed following Table 2, above, are met*. Additionally, meeting the short term targets will require that the upward trend now in evidence in hog prices continues until growers are once more able to realize a profit*. An examination of the size of the target markets for system sales and installations and BionSoil sales (as shown above) shows that the percent of total market penetration, which these targets represent, is very modest*. On the basis of the assumptions above and the analysis of market size (see page 9), the Company's systems sales program has achieved (through December 31, 1998) approximately a 0.5% market penetration, and the revised cumulative number of BionAnimals under contract targets for fiscal years 1999, 2000, 2001 and 2002 if achieved, would represent approximately a 0.6%, 1.0%, 1.6% and 2.4% market penetration respectively*. Management believes such market penetrations represent realistic targets if the assumptions set forth above are accurate*. No assurance can be given however, that these targets will be achieved. Financial Discussion of Bion NMS and BionSoil Business* The Company expects to receive two distinct revenue streams from the Bion NMS: 1) fees for system design, permitting, start-up and initial operation (and, for certain systems, periodic management or technology fees); and, 2) commencing approximately nine to fifteen months after the initial start-up of BionSoil production systems installed on large dairy, swine, poultry farms or feedlots, revenue from the sale of BionSoil and BionSoil-based products produced from the systems [Note that initial system start-up typically occurs six to twelve months after a system contract is signed*. Therefore, BionSoil revenues will typically commence up to 24 months after a system contract is signed], (see footnote 10, below)*. To date, revenues from the sale of BionSoil have been minimal (first significant commercial sales are projected for spring of 1999*). Bion NMS Economics The Company may receive multiple design, permit and construction, and operation oversight fees*. These fees are paid to the Company by the clients in return for services rendered and the licensing of a particular site to use the Bion NMS technology. Fees may also be paid to the Company on a regular ongoing basis for system oversight as well as regulatory and biological testing*. These fees are above and beyond any revenue the Company may receive from the sale of BionSoil. In some cases one or more of these categories of fees may be waived or excluded in formal negotiated contract terms for a variety of reasons, including without limitation, signing the first system contract in a new geographic region, signing the first system contract for a new application of the technology, or offsetting some or all of the fees against reduced or eliminated BionSolids royalties. To date the Company has lost money on system design, permitting support, construction oversight and initial system operation. However, through installing these systems at a loss, the Company has been able to establish a number of Bion NMS systems to use for test sites, demonstrations and to refine the technology. Based on experience to date, the Company is working to establish pricing for its contracts that the Company believes will, independent of BionSoil revenues, be sufficient to cover direct expenses (such as system design, permitting support, construction oversight and initial system operation) related to these system installations*. However, there is no assurance that this goal will be achieved or that the Company will be successful in selling its systems at a price level sufficient for the Company to generate a profit. BionSoil Economics As Bion NMS systems are brought on-line and BionSolids are harvested (see footnote 13, below), it is anticipated that BionSoil, Inc. will purchase the harvested BionSolids from Bion Technologies, Inc. to process it into BionSoil products for sale to customers*. Some farms may be paid fees as royalty for the BionSolids harvested from their site*. These payments potentially represent an important part of the strategy developed by the Company for the successful marketing of Bion NMS systems*. Most large animal raising facilities have substantial operating costs associated with the disposal of manure and waste products, which are generated in large quantities at these facilities. With the construction and operation of a Bion NMS on a farm site, many of these costs may be substantially reduced or eliminated, and the farm may, in some cases, also receive a revenue stream from the cash payments made by the Company to the farm*. During the spring and summer of 1998, the Company conducted a limited market test of BionSoil products through retail and commercial outlets in western New York (see the Company's Form 8-K dated July 1, 1998). The material for this test was New York produced dairy BionSoil processed and blended with Sphagnum peat moss at the Company's Hermitage, New York facility. Subsequently the blended product was sold in bulk quantities or bagged in both 20 pound and 40 pound bags and sold. The bagged product was sold to a limited number of small retail garden shops and nurseries at wholesale prices, to the Company, of $1.97 and $2.97 for 20 and 40 pound bags respectively (resulting in prices per cubic yard of $80.00 and $108.00 respectively). Bulk product was sold through similar distribution outlets for prices from $15.00 to $27.95 per cubic yard. The test market program was conducted with no advertising budget, only limited point-of-sales materials, and with no participation of any large chain retail outlets. The average price per cubic yard for all blended product sold in this limited test market program, bagged and bulk combined, was $39.37 per cubic yard. Therefore, the average price received by the Company for the BionSolids, before mixing with Sphagnum peat moss, was $57.08 per cubic yard. Management believes that this test market program provides the Company's first confirmation of the market viability of BionSoil products. Management further believes that, when product sales efforts are supported with a strong marketing/advertising program, average sales prices will increase above $40.00 per cubic yard for the blended BionSoil product*. Further, it should be noted that a significant portion of the material harvested from many systems in the last year has been devoted to both university and private studies intended to determine physical characteristics, blends, and growth results achievable using BionSoil in many different applications (see footnotes 14 and 15, below). The Company anticipates continuing and aggressively expanding these test programs during the current fiscal year*. Based on results of the Company's recent market test, a review of prices for soils and soil-enhancing products in various markets, and target market segment strategies being developed, the Company believes that BionSoil will sell at no less than an average of $20 per cubic yard when sold in bulk, and will sell for considerably higher prices when processed and bagged*. [It should be noted that all prices quoted within this Form 10-QSB are wholesale only and may not be representative of actual retail prices.] Additionally, based on actual costs experienced in BionSoil harvesting and processing to date, anticipated improvements in processing technologies and efficiencies, and lower per unit costs as volumes increase, the Company has estimated costs for the various levels of processing required to sell BionSoil products*. Given the contract terms and estimated costs of production and sales, the potential gross margin (see footnote 16, below) returned to the Company from BionSoil products sales alone has been calculated for a series of potential price points (see footnote 17, below) (and the implied processing levels required to achieve the products to be sold at these price points (see footnote 18, below))*. Table 3 below presents this information for five selected possible price points*. This table has been prepared reflecting estimates based on the Company's limited experience to date with the harvesting and processing of BionSoil and BionSoil products*. (See footnotes 17 and 18, below)*. Table 3* Potential BionSoil Estimated Related Calculated Wholesale Price BionSoil Expenses Gross Margin Per Cubic Yard* Per Cubic Yard* Per Cubic Yard* $ 20* $ 13* $ 7* $ 40* $ 22* $ 18* $ 60* $ 32* $ 28* $ 80* $ 41* $ 39* $100* $ 53* $ 47* The calculated gross margin per cubic yard as presented in Table 3 above is equivalent to the annual gross margin contribution of each BionAnimal in a system that is fully on line producing BionSoil (see the definition of BionAnimal above where one BionAnimal produces one cubic yard of BionSoil per year). If the Company is successful in bringing targeted systems on line producing BionSoil within the 24 month start-up time frame (which cannot be assured and is subject to numerous and substantial risks); and, if the Company is successful in realizing the various potential price levels and expense levels in columns 1 and 2 of Table 3 (which also cannot be assured and is subject to numerous and substantial risks as explained above and below) then column three, calculated gross margin per cubic yard, is also the calculated annual gross margin contribution of each BionAnimal producing BionSoil. Given that revenue to the Company from BionSoil sales is anticipated to begin in an average of two years after the signing of an agreement for a Bion NMS system, these calculated gross margins, which are equivalent to gross margins per BionAnimal, would be anticipated to be repeated each year thereafter for as long as the installations remain in operation (current system contracts are set for 15 years with renewal option)*. If the net present value (discounted at 8%) of these gross margins is calculated for the normal 15-year period of a contract, assuming no BionSoil revenues for the first two years, the net present value of the gross margin from each BionAnimal under contract would be as shown in Table 4 for each potential price point in Table 3*. (See footnote 19, below). Table 4* Gross Margin Net Present Value Per BionAnimal Calculated Annual 15 Year Net Present Gross Margin Per Value Per BionAnimal BionAnimal* Annual Gross Margins* ----------------- --------------------- $ 7* $ 47* $ 18* $122* $ 28* $190* $ 39* $264* $ 47* $318* Management believes that this NPV analysis is useful because it provides an indication of the value to the Company of the number of BionAnimals contained in each contract for a Bion NMS system*. Management Financial Targets Subject to the risks and uncertainties included in this General Discussion of Current and Proposed Operations section of the Company's Form 10-QSB and the footnotes thereto, management has established the following revised financial performance targets for the Company for fiscal years 1999 through 2002*. Please carefully review the risks and uncertainties presented above and below and in the footnotes in conjunction with the Company targets summarized in this Table 5 (see especially footnotes 20, 21, 22 and 23 below). Table 5* Performance Targets (Based on BionAnimals under contract and BionSoil available for Sale as described in Table 2A above)* (dollars in thousands) Fiscal Years (ended June 30) 1999 2000 2001 2002 ---- ---- ---- ------ Number of BionAnimals added during fiscal year (in thousands)* 500* 800* 1,250* 1,800* Cumulative number of BionAnimals under contract (in thousands)* 1,250* 2,050* 3,300* 5,100* BionSoil available for sale (in thousands of cubic yards)* 22* 130* 1,200* 2,100* Gross Revenue (see Footnote 21)* $751* $7,570* $52,423* $98,096* Gross Margin (see Footnote 22)* $11* $3,210* $22,278* $44,441* Pre-Tax Earnings (see Footnote 23)* $(2,379)* $300* $17,178* $35,991* The targets presented in Table 5 above reflect the revised information presented in Table 2A. As a result, revenues projected are lower than those shown in Table 5 as presented in the Company's Form 10-QSB for the quarter ended September 30, 1998. Note that the targets presented in Table 5, above, for fiscal year 2002 show 5,100,000 BionAnimals under contract but only 2,100,000 cubic yards of BionSoil being sold during fiscal year 2002 due to the up to 24 month delay between contract signing and BionSoil availability*. The Company's goal, however, is that the backlog of 3,000,000 additional cubic yards of BionSoil will be available in subsequent years for sale and is anticipated to increase the goal for gross revenue to approximately $220,000,000 and pre-tax earnings to approximately $72,000,000 in those later years, even if there are no additional Bion NMS system sales thereafter*. While these targets are very aggressive, they are consistent with the Company's progress in fiscal year 1998 (the addition of approximately 650,000 BionAnimals under contract) and progress in fiscal 1999 to date (contracts for 325,000 BionAnimals signed since July 1, 1998)*. Throughout the fiscal year 1998 and the first quarter of the 1999 fiscal year, the Company has proven to be aggressive in setting and attaining such goals and targets*. In response to the depressed hog markets and delay in the hiring of key management positions, the Company is reasserting its efforts in order to meet or exceed its new goals and targets* The Company is expanding its efforts into new geographical and technical areas as a result, which will bring beneficial results in the long term*. The Company has hired both a Vice President of system sales and marketing and a Vice President, BionSoil, both key management positions necessary to help the Company achieve these goals. The Company is actively recruiting to fill other key management, technical and sales positions. Additionally, the Company is pursuing geographical and technical expansion, strategic alliances in both the agricultural and financial communities, and expansion of its client base*. Even though the Company is extremely small at present, has not yet developed substantial market penetration, needs to raise additional capital, and has (and is continuing to accrue) losses to date, the potential return based on the Company's growth goals is apparent if the Company is successful in achieving its targets.* # # # # # # # # # # # As the discussion above includes forward looking statements made in reliance upon the provisions of Rule 175 promulgated under the Securities Act of 1933, readers are cautioned that, although management believes it currently has a reasonable good faith basis for disclosing the substance of some of its internal projections to the public at this time, there can be no assurance given that the Company will ever be successful in achieving any of its stated goals. The Company intends to periodically report on its progress, or lack thereof, in attaining the goals set forth above. The ultimate realization of most (if not all) of the Company's goals will require significant expenditures of funds which, as of this date, are not currently available to the Company. It is currently anticipated that the selling and installation of additional Bion NMS systems will require the Company to hire additional personnel, make significant capital expenditures and generally increase its overhead. Further, the marketing and sale of BionSoil products will require the implementation of a distribution network of wholesalers and/or retailers and a transportation system for delivery of the product to the intended recipients, and may require permitting in some locations, none of which the Company may be successful in achieving. Additional expenditures for personnel and equipment will be necessary to harvest, process, package, sell and deliver the product. The projections stated by management assume that the Company will be successful in obtaining the requisite funds on commercially reasonable terms and that the other stated obstacles will be successfully overcome in the process of making sales of products in the future. As the Company has never operated at a profit and has a negative net worth at the present time, its ability to successfully confront even the currently identified challenges which lie ahead in meeting its stated goals is far from certain. It is likely that the Company will face additional challenges, which have not as yet even been identified. In the event the Company is not able to obtain sufficient outside funding to accomplish its goals within the time periods indicated, the goals would not be met. In the event the Company is not able to successfully overcome the other stated obstacles in the process of making future sales within the time periods indicated, the goals would not be met. As the Company's operations are not currently profitable, readers are further cautioned that, if the Company is not successful in obtaining outside funding in an amount sufficient for it to meet its operating expenses even at its current level, the Company's continued existence is uncertain. FOOTNOTES to General Discussion of Current and Proposed Operations 1. BionSolids are the solid materials that are produced as a result of the bio-conversion of manure and urine by the Bion Nutrient Management System (NMS). BionSolids contain a high proportion of beneficial living organisms (in contrast to traditional composted manure products), only trace amounts of heavy metals and no human waste. 2. The quantities referred to in Table 1 represent the Company's estimate, based on data from the American Society of Agricultural Engineers (ASAE D384.1 - 1989) regarding animal waste production where all wastes are captured, of the quantity of BionSolids that is produced per animal in one year. These estimates are approximations based on the experience to date of the Company and are subject to change. The ratio of animal species to BionAnimal is based on the amount of BionSolids required (mixed and blended with other organic material) in order to produce a growth medium with comparable characteristics that yields one cubic yard of BionSoil. 3. All numbers of animals are taken from the 1997 Census of Agriculture published by the United States Department of Agriculture. The numbers used are for the animal populations of farms above a specific size as follows: * Dairy cows: farms with 200 or more cows * Beef cattle (steers): farms with 200 or more cattle * Hogs and pigs: farms with 1,000 or more * Poultry (chickens and turkeys) based on layers, broilers and turkeys 4. According to the 1997 Census of Agriculture published by the U.S. Department of Agriculture evidence of consolidation of animals onto large farms has increased significantly from 1992 to 1997, continuing the trend seen in the 1992 Census of Agriculture. In the hog industry, for example: from 1992 to 1997 the number of hog farms in the U.S. decreased 42.6% to 109,754 while the number of hogs increased 6% to 61,206,236. Further, those states with the largest growth in hog inventories also show substantial declines in the number of farms: Colorado inventories increased 70% while the number of farms declined 25%, North Carolina inventories rose 89% with a decline of 31% in farm numbers, and Oklahoma inventories increased 550% with a 12% decline in number of farms. 5. Battelle estimated the total U.S. market for compost to be 1.04 billion cubic yards per year. See "Compost: United States Supply and Demand Potential" in Biomass and Bioenergy Vol.3, Nos 3-4, pp. 281-299, 1992. 6. As an example, study data provided by North Carolina State University for the estimated volume of potting media used in container nurseries in the United States shows current demand (1998) to be in excess of 100 million cubic yards per year. Further, data on U.S. golf course construction and expansion show that, as of May 1998, 13,954 holes (or the equivalent of 775 18-hole golf courses) were under construction, and 11,677 (or the equivalent of 649 18-hole courses) were in planning for construction. 7. For further discussion, see, for example, the December 1997 report compiled by the U.S. Senate Committee on Agriculture, Nutrition, and Forestry for Sen. Tom Harkin (D - IA) as well as "Lakes of animal waste pose environmental risk" published by the USA TODAY, December 30, 1997. 8. During February 1994 the Company opened an office in Smithfield, North Carolina (which office was subsequently moved to Clayton, North Carolina) with one full time sales employee. Numerous contacts were made in both the hog raising and dairy farming industries, and the first agreement (for a hog system) was signed in December 1994. A second full time employee, required to provide design, engineering, construction and system operation expertise, was transferred to North Carolina in February 1995. Adverse weather conditions during the construction period resulted in a longer construction time than anticipated; however, system start-up was achieved in June of 1995, and the system has been in continuous operation since. Based on this investment of time and effort and the successful operation of the system, the Company has expanded its efforts in North Carolina including hiring a horticulturist for BionSoil product development and testing, an additional engineer, and a manager for the region. Currently, the Company has submitted proposals to a number of potential customers, is engaged in discussions with several of these, has signed agreements for six additional system installations, and has two additional Bion NMS that have come on line. Management estimates that, to date, in excess of $1,200,000 has been devoted to the effort to build the Company's business in North Carolina. Current projections are that it will require, at a minimum, an additional nine to twelve months before sufficient cash flow will be generated from system and BionSoil sales in North Carolina to offset ongoing expenses for operations conducted in that state*. 9. Issued U.S. patents include the following titles: "Bioconversion Reactor and System", "Animal Waste Bioconversion System", "Bioconverted Nutrient Rich Humus", "Phosphorous Treatment Process", and "Storm Water Remediatory Bioconversion System". In addition, the Canadian Patent Office has issued "Aqueous Stream Treatment Process". 10. The time between contract signing and BionSoil revenues can be up to 24 months broken down as follows: a.) 3-6 months for the design and permitting of the system; b.) 3-6 months for the construction of the system; c.) 1-2 months for the system to come completely on-line, and, d.) 8-10 months for the BionSolids to be produced and mature within the system. In some cases, including the Company's contracts with Crystal Springs Farms, for example, there are financing or other contingencies which may delay the beginning of these activities. 11. There are approximately 22,000 cubic yards of BionSoil available for sale in fiscal year 1999. However, the Company plans on utilizing up to 6,000 cubic yards for various growth tests, university studies, and field crop test programs. 12. Although the Company's goals project for the Company to have 1.25 million BionAnimals under contract in the fiscal year 1999, only the BionAnimals that are currently in operating systems that have been harvested along with a limited number of the new BionAnimals will produce BionSoil that will be available for sale in fiscal year 1999. 13. BionSolid harvests to date have been from relatively new systems and the Company has been devoting substantial effort to develop appropriate technology and sites for processing the material for sale. As a result, only small quantities of BionSoil have been available for sale during the last twelve months. The results for a portion of these sales have been documented in the above referenced test market. The current methods for the harvest of BionSolids and processing it into BionSoil are being continually refined and updated. Currently the BionSolids harvested from a dairy Bion NMS are mechanically harvested and then left for initial drying at the farm. Once dried to a sufficient level the BionSolids are transported to a BionSoil processing site where additional drying takes place before final processing or blending and then subsequently bagging or bulk storage. Harvesting of the hog Bion NMS is still in the developmental stage with multiple methods being studied in an ongoing program. Currently, the most efficient method of harvesting the BionSolids is to pump the BionSolids from the system and then either blend them directly with an organic substrate or dry them before they are processed and blended. 14. During fiscal year 1998, the Company initiated a BionSoil Giveaway Program during which approximately 3,000 cubic yards were given away to private gardeners, local garden centers and university research centers. This program was formed in order to generate feedback regarding BionSoil and to raise public awareness about the product. It is anticipated that additional (and larger) quantities of BionSoil will be given away in each future year for these and other purposes. 15. Representatives of North Carolina State University ("NCSU"), North Carolina Department of Agriculture ("NCDA") and the North Carolina Cooperative Extension Service conducted an independent on-farm research trial in 1996. The test compared the plant growth of four woody ornamental species grown in three BionSoil product mixes to that of the same species grown in a high-grade commercial nursery potting soil with soluble fertilizer additives. The performance of the plants in the BionSoil mixes exceeded that of the plants in the commercial mix in all trials. Representatives of NCSU, NCDA, and Bion Technologies, Inc conducted a further independent study in 1997. The experiment, located at a research facility on NCSU's Raleigh, North Carolina campus, compared the plant growth of four different species (a flowering shrub, an annual, a woody ornamental and a perennial) grown in three mix rates of BionSoil with pine bark to that of the same species grown in a standard mix fertilized with a national brand of synthetic controlled release fertilizer plus other additives. The evaluation also evaluated the performance of the plants in all mixes under four irrigation regimes. BionSoil supplied a steady release of plant nutrients over a three-month period and proved to be a more efficient source of plant fertility under limited water availability than did the control fertilizer. Representatives of NCSU conducted a series of studies in 1998 including germination studies using Impatiens, landscape studies using four common landscape plants, turf growth studies and a series of vegetable and ornamental growth studies performed at the Bion research center in Clayton, North Carolina. These study results support other studies performed by the Company and anecdotal evidence gathered through plant trials from homeowners and others. The Company has an extensive program of additional university and company tests designed and being implemented for the 1999 summer growing season. 16. The Company's gross margin (prior to deduction of G&A expenses, interest, depreciation, taxes, etc.) per cubic yard of BionSoil is calculated from the projected price per cubic yard obtained from sales of bulk or bagged product after deducting the amount paid to the producer, if appropriate, and the projected costs which the Company expects to incur for harvesting, processing, and bagging. 17. The potential BionSoil prices reflect assumptions about the mix between bulk and bagged product sold. For example, at a wholesale price of $20 per cubic yard the mix would be 100% bulk product with no bagged product sold, while at a wholesale price of $100 or higher per cubic yard, the mix would consist almost entirely of bagged product or special products. 18. Due to the Company's lack of experience and start-up nature in the soil processing area, BionSoil expenses are based on management's estimate and therefore are subject to significant variation. Actual production costs to date are higher than those shown in Table 3 due to significant start-up inefficiencies. Current expenses include but are not limited to harvesting, transportation, processing, blending and bagging of the BionSolids into BionSoil. Management believes, however, that as greater quantities of BionSoil are harvested and the processing techniques become more efficient, the margins may equal or exceed the projected Gross Margins shown in Table 3*. 19. Management has changed the Net Present Value calculation from that presented in its Form 10-KSB dated June 30, 1997 by lowering the discount rate from 10% to 8% to more accurately reflect current conditions, and by increasing from 1.5 years to 2.0 years the time before BionSoil revenues commence after contract signing. 20. The following risk factors should be considered when reviewing the projections in these tables: the Company has not made significant sales or operated at a profit, and the projections herein represent very large advances which management believes are attainable since the Company is now emerging from the development stage; there are many difficulties that may be encountered by the Company (as it is a start-up), especially in view of the intense competition from existing and more established companies in the wastewater, waste management, the environmental control and organic soils and products businesses; the Bion NMS system has had limited development and market acceptance is uncertain; the Company is in direct competition with consulting and engineering firms (which may be better capitalized than the Company) that may be capable of developing competitive technologies and products; the business is susceptible to changing technology and the Company may not have adequate patent and proprietary information protection; the Company may become subject to unfavorable governmental regulations, and may have, in the future, liability (with no insurance coverage) for damage to the environment; and, the costs and expenses used for all calculations are estimates made on the basis of limited information available. 21. The following assumptions (none of which are guaranteed to occur) have been made for the gross revenue calculations: a.) that the BionSoil available for sale is sold in the fiscal year that it is available*; b.) that the percentage of BionSoil sold in each year in bagged form for retail sales (which the Company does not engage in) will be as follows*: Fiscal year ending June 30 ---------------------------------------- 1999 2000 2001 2002 Percent bagged BionSoil sold* 5%* 10%* 12%* 14%* (Management has established this mix although it is probable that the mix will vary considerably over time)*. c.) that the average selling price per cubic yard realized by the Company for each fiscal year is as indicated in the following table*: Fiscal year ending June 30 (dollars per cubic yard) 1999 2000 2001 2002 ---- ---- ---- ---- Selling price Bagged $104.00* $104.00* $110.00* $110.00* Bulk $ 24.50* $ 27.50* $ 30.00* $ 32.50* Weighted Average $ 28.48 $ 35.15* $ 39.60* $ 43.35* (The selling price increases shown above are not related to inflation adjustments, rather they reflect the Company establishing product credibility in its respective markets as well as further product refinements.)* d.) that the average selling price include freight to the customer of $7.00 per cubic yard for bagged product and $4.50 per cubic yard for bulk product*. 22. The following assumptions (none of which are guaranteed to occur) have been made for the product costs for gross margin calculations: a.) that the average product direct cost for each fiscal year is as follows*: Fiscal year ending June 30 ---------------------------------------- 1999 2000 2001 2002 Direct Cost Bagged Product $65.00* $64.00* $62.00* $60.00* Bulk Product $17.50* $17.50* $17.00* $16.50* Weighted Average $19.88* $22.15* $22.40* $22.59* (The reduction in direct product costs over time reflects increased efficiencies of operation that have been included based on anticipated product handling efficiencies and economics of scale as the volume of product processed increases.)* b.) that freight charges for shipments to customers will be $7.00 per cubic yard for bagged product (sold and shipped on pallets with approximately two cubic yards per pallet) and $4.50 per cubic yard for bulk product shipped via common carrier truck*. c.) based on the assumptions above the target gross margin per cubic yard of BionSoil (which is the same as gross margin per BionAnimal) is*: Fiscal year ending June 30 ---------------------------------------- 1999 2000 2001 2002 Gross margin per cubic yard $8.60* $13.00* $17.20* $20.76* 23. The Company has developed projections for selling, general and administrative expenses based on increased staffing levels and facilities required for attainment of the target sales and processing levels as follows*: Fiscal year ending June 30 (dollars in thousands) 1999 2000 2001 2002 ---- ---- ---- ---- Selling, General and Administrative Expenses $2,390* $2,910* $5,100* $8,450* OTHER INFORMATION PART II ITEM 1. Legal Proceedings. The Company knows of no material pending legal proceedings to which the Company (or the Subsidiary) is a party or to which any of its systems is the subject and no such proceedings are known to the Company. ITEM 2. Changes in Securities. (c) The following securities were sold in the six month period ended December 31, 1998 without registering the securities under the Securities Act.: 168,348 shares of restricted and legended Common Stock to ten private investors and seven existing shareholders in privately negotiated transactions for an aggregate amount of $568,875. 8,000 shares of restricted and legended Common Stock to one investor under the terms of a 1992 agreement granting such investor a preemptive right to acquire such shares for an aggregate amount of $24,000. 12,862 shares of restricted and legended Common Stock to an existing shareholder as payment of a note payable and interest valued at $77,170. 800 shares of restricted and legended Common Stock to one employee in lieu of cash for services rendered valued at, in aggregate, $3,000. 5,537 shares of restricted and legended Common Stock to a shareholder for rent and services valued in aggregate at $21,450. The shares of the Company's Common Stock which were issued pursuant to the transactions set forth above were issued in reliance upon the exemptions from registration afforded by Sections 3(b), 4(2), or other provisions of the Securities Act of 1933, as amended. Each of the persons to whom such securities were issued made an informed investment decision based upon negotiation with the Company and was provided with appropriate offering documents and access to material information regarding the Company. The Company believes that such persons had knowledge and experience in financial and business matters such that they were capable of evaluating the merits and risks of the acquisition of the Company's Common Stock in connection with these transactions. All certificates representing such common shares bear an appropriate legend restricting the transfer of such securities, except in accordance with the Securities Act of 1933, as amended, and stop transfer instructions have been provided to the Company's transfer agent in accordance therewith. ITEM 3. Defaults Upon Senior Securities. None ITEM 4. Submission of Matters to a Vote of Security Holders. None ITEM 5. Other Information. None ITEM 6. Exhibits and Reports on Form 8-K. None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. Bion Environmental Technologies, Inc. /s/ M. Duane Stutzman M. Duane Stutzman, Chief Financial Officer Dated: February 15, 1999 EX-27 2 FDS --
5 6-MOS JUN-30-1999 DEC-31-1998 3,446 0 13,526 0 0 405,380 301,751 118,210 714,399 1,087,677 0 0 0 11,587,013 (12,414,534) 714,399 0 103,924 0 210,748 1,032,964 0 34,995 (1,180,506) 0 (1,180,506) 0 0 0 (1,180,506) (.13) (.13)
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