NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 2020 AND 2019
1. ORGANIZATION,
NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT’S PLANS:
Organization and nature of business:
Bion Environmental Technologies, Inc.'s ("Bion,"
"Company," "We," "Us," or "Our") was incorporated in 1987 in the State of Colorado. Our
patented and proprietary technology provides comprehensive environmental solutions to one of the greatest water air and water quality
problems in the U.S. today: pollution from large-scale livestock production facilities (also known as “Concentrated Animal
Feeding Operations” or “CAFOs"). Application of our technology and technology platform can simultaneously
remediate environmental problems and improve operational/resource efficiencies by recovering value high-value co-products from
the CAFOs’ waste stream that have traditionally been wasted or underutilized, including renewable energy, nutrients (including
ammonia nitrogen and phosphorus) and water. From 2016 to present, the Company has focused a large portion of its activities on
developing, testing and demonstrating the 3rd generation of its technology and technology platform (“3G Tech”) with
emphasis on increasing the efficiency of production of valuable co-products of its waste treatment including ammonia nitrogen in
the form of organic ammonium bicarbonate products. The Company’s initial ammonium bicarbonate liquid product completed its
Organic Materials Review Institute (“OMRI”) application and review process with approval during May 2020. The Company
anticipates making additional OMRI applications during the current calendar quarter.
The Company believes that, in addition to providing
superior environmental remediation, its 3G Tech will create the opportunity for large scale production of sustainable and/or organic
branded livestock products that will command premium pricing (in part due to ongoing monitoring and third-party verification of
environmental performance to provide meaningful assurances to both consumers and regulators). As co-products, our 3G Tech will
produce valuable organic fertilizer products which can be: a) utilized in the production of organic grains for use as feed in support
of joint venture Projects (“JVs”) raising organic livestock, and/or b) marketed to the growing organic fertilizer market.
Our 3G Tech patented technology was developed to be part of a comprehensive technology platform that could generate multiple present
and projected future revenue streams to offset the costs of technology adoption. Bion’s technology platform includes onsite
monitoring and data collection as well as independent 3rd party verified lab data confirming the environmental reduction
impacts. The third party verified data regarding the environmental impact reductions will also be used to qualify the final consumer
products (livestock protein—including meat, eggs and dairy products) for a US Department of Agriculture (“USDA”)
“Environmentally Sustainable” brand.
From 2014 through the current 2021 fiscal year,
the Company has focused its research and development on augmenting the basic ‘separate and aggregate’ approach of its
technology platform to provide additional flexibility and to increase recovery of marketable nutrient by-products (in organic and
non-organic forms) and renewable energy production (either/both biogas and/or renewable electricity), thereby increasing potential
related revenue streams and reducing dependence of its future projects on the monetization of nutrient reductions (which still
remain an important part of project revenue streams). Bion has worked on development of its 3G Tech which is designed to:
a) generate significantly greater value from the nutrients and renewable energy recovered from the waste stream, b) treat dry (poultry)
waste streams as well as wet waste streams (dairy/beef cattle/swine) while c) maintaining or improving environmental performance.
This research and development effort also involves ongoing review of potential “add-ons” and applications to our technology
platform for use in different regulatory and/or climate environments. These research and development activities have targeted completion
of development of the next generation of Bion’s technology and technology platform. We believe such activities will continue
at least through the 2021 fiscal year (and likely longer), subject to availability of adequate financing for the Company’s
operations, of which there is no assurance. Such activities may include design and construction of an initial, commercial-scale
module utilizing our 3G Tech to assist in optimization efforts before construction of the full Kreider 2 project (see below), Midwest
beef JV Projects and/or other Projects.
The $200 billion U.S. livestock industry is
under intense scrutiny for its environmental and public health impacts – its ‘environmental sustainability’--
at the same time it is struggling with declining revenues and margins (derived in part from clinging to its historic practices
and resulting impacts). Its failure to respond to consumer concerns ranging from food safety to its ‘socialized’ environmental
impacts have provided impetus for plant-based alternatives such as Beyond Meat and Impossible Burger providing “sustainable”
alternatives to this growing consumer segment of the market. The plant-based threat to the livestock industry market (primarily
beef and pork) has succeeded in focusing the large-scale livestock production facilities (also known as “Concentrated Animal
Feeding Operations” or “CAFOs") on how to meet the plant-based market challenge by addressing the consumer sustainability
issues. The adoption of livestock waste treatment technology by industry segments is largely dependent upon adoption generating
sufficient revenues to offset the capital and operating costs associated with technology adoption.
We believe that Bion’s 3G Tech platform,
coupled with common-sense policy changes to U.S. clean water strategy that are already underway, will combine to provide a pathway
to true economic and environmental sustainability with ‘win-win’ benefits for at least a premium sector of the livestock
industry, the environment, and the consumer.
Bion’s business model and technology
can open up the opportunity for JVs (in various contractual forms) between the Company and large livestock/food/fertilizer industry
participants, based upon the supplemental cash flow generated by implementation our 3G Tech business model (described and discussed
below) which will support the costs of technology implementation (including related debt). We anticipate this will result in long
term value for Bion. Long term, Bion anticipates that the sustainable branding opportunity may expand to represent the single largest
contributor to the economic opportunity provided by Bion.
During 2018 the Company had its first patent
issued on its 3G Tech and has continued its work to expand its patent coverage for our 3G Tech. During October 2020 the Company
third 3G patent issued, which patent significantly expands the breadth and depth of the Company’s 3G Tech coverage. The 3G
Tech platform has been designed to maximize the value of co-products produced during the waste treatment/recovery processes, including
pipeline-quality renewable natural gas and organic commercial fertilizer products. All processes will be verifiable by third-parties
(including regulatory authorities, certifying boards and consumers) to comply with environmental regulations and reduction purchase/trading
programs and meet the requirements for: a) renewable energy credits, b) organic certification of the fertilizer coproducts and
c) the USDA PVP ‘Environmentally Sustainable’ branding program. Bion anticipates moving forward with the development
process of its initial commercial installations of its 3G technology during the 2021 (current) and 2022 calendar years.
In parallel, Bion has worked (which work continues)
to advance public policy initiatives that will potentially create markets (in Pennsylvania and other states) that will utilize
taxpayer funding for the purchase of verified pollution reductions from agriculture (“credits”) by the state (or others)
through a competitively-bid procurement programs. Such credits can then be used as a ‘qualified offset’ by an individual
state (or municipality) to meet its federal clean water mandates at significantly lower cost to the taxpayer. Competitive procurement
of verified credits is now supported by US EPA, the Chesapeake Bay Commission, national livestock interests, and other key stakeholders.
Legislation in Pennsylvania to establish the first such state competitive procurement program passed the Pennsylvania Senate by
a bi-partisan majority during March 2019. However, the Covid-19 pandemic and related financial/budgetary crises have subsequently
slowed progress for this and other policy initiatives and, as a result, it is not currently possible to project the timeline for
this and other similar initiatives.
The livestock industry is under tremendous
pressure (from regulatory agencies, a wide range of advocacy groups, institutional investors and the industry’s own consumers)
to adopt sustainable practices. Environmental cleanup is inevitable - policies are already changing. Bion’s 3G technology
was developed for implementation on large scale livestock production facilities, where scale drives lower treatment costs and efficient
production of co-products. We believe that scale, coupled with Bion’s verifiable treatment technology platform, will create
a transformational opportunity to integrate clean production practices at (or close to) the point of production—the source
from which most of the industry’s environmental impacts are initiated. Bion intends to assist the forward-looking segment
of the livestock industry in actually bringing animal protein production in line with Twenty-first Century consumer demands for
sustainability.
The 3G Tech platform is the basis for the
Company’s JV business model with four distinct revenue streams: 1) pipeline quality renewable natural gas and related
carbon credits, 2) premium organic fertilizer products, 3) nutrient credits, and 4) premium pricing from USDA-certified ‘Environmentally
Sustainable’ branding at the retail level. Carbon and nutrient credit revenues will be generated by third-party verification
of the waste treatment processes that produce renewable energy and fertilizer products - with relatively limited incremental cost
to Bion. The same verified data will provide the backbone for the USDA-certified sustainable brand, again with limited incremental
cost.
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1)
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Renewable energy and related carbon credits:
|
Bion’s 3G Tech platform
utilizes customized anaerobic digestion (“AD”) to recover methane from the waste stream. At sufficient scale, methane
produced from AD can be cost-effectively conditioned, compressed and injected into a pipeline. The US Renewable Fuel Standard (“RFS”)
program and state programs in California and elsewhere provide ongoing renewable energy credits for the production and use of renewable
transportation fuels.
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2)
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Organic Fertilizer products:
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The 3G Tech platform has been designed
to produce multiple fertilizer products including: i) ammonia bicarbonate liquid, ii) ammonium bicarbonate in solid crystal form
and iii) a soil amendment products that will contain the remaining nitrogen, phosphorus and other micronutrients captured from
the livestock waste stream. Bion believes each product will qualify for organic certification and intends to file multiple applications
for varying concentrations of crystal product going forward.
Ammonium bicarbonate manufactured
using chemical processes has a long history of use as a fertilizer. Bion’s intends to develop ammonium bicarbonate crystal
products which will contain 14-16 percent nitrogen in a crystalline form that will be easily transported, water soluble and provide
readily-available nitrogen. The products will contain virtually none of the other salt, iron and mineral constituents of the livestock
waste stream that often accompany other organic fertilizers. This product is being developed to fertilizer industry standards so
that it that can be precision-applied to crops using existing equipment. Bion believes that this product will potentially have
broad applications in the production of organic grains for livestock feed, row crops, horticulture, greenhouse and hydroponic production,
and potentially retail lawn and garden products.
The Company’s initial low concentration
ammonium bicarbonate liquid product completed its OMRI application and review process with approval during May 2020.
The Company believes that organic
approvals for its products: a) will provide access to substantially higher value markets compared to synthetic nitrogen products,
and/or b) allow its products to be utilized in growing of organic feed grains to be consumed by livestock raised in JVs which will
thereafter receive organic approvals. Based on preliminary market surveys to date: a) we believe that existing competing organic
fertilizer products in both liquid and granular form are being sold presently at price points significantly greater than Bion’s
projected cost and projected pricing, and b) that livestock products (beef and pork) raised with feed grains grown using Bion organic
ammonium carbonate fertilizer products (during the ‘finishing’ stage) will qualify for organic approvals. It is anticipated
that the Company will seek approvals for such products during the balance of the 2021 fiscal year and will commence JVs that undertake
initial production and marketing of such products during the 2021 calendar year.
Bion had believed that passage in
Pennsylvania of legislation earlier this year that would establish a competitively-bid market for nutrient reduction Credits in
Pennsylvania but the Covid-19 pandemic intervened. The bill will most likely need to be re-introduced in the Senate 2021—2022
session commencing in January 2021. Bion anticipates that passage of SB575 (or re-introduced bill) in Pennsylvania will establish
a competitively-bid market for nutrient reduction credits in Pennsylvania within twelve months after passage and being signed into
law by the Governor.
Note, however, that the current
Covid-19 pandemic and resultant economic crises and budgetary constraints have delayed policy initiatives related to these matters
at both the state and federal levels. As a result, it is not currently possible to reasonably project a timetable for adoption
of the policy changes discussed herein.
Bion’s Kreider Farms poultry
project (“Kreider 2”) is projected to generate between 1.5-3M lbs. of Chesapeake Bay (“CB” or “Bay”)
verified nitrogen reduction Credits (the range depends on the specific calculation methodology agreed to between the EPA and the
Pennsylvania DEP). Bion anticipates the market value for these verified credits will be in the range of $8 to $12 per pound annually.
The focus of the latest PA regulatory watershed improvement plan (“WIP”) has shifted the reduction mandates to individual
counties. Lancaster County, PA is being asked to reduce 21% of the mandate (approximately 11M lbs. of nitrogen) to the Bay. As
a result, the Kreider 2 project in Lancaster County may expand to include a regional processing opportunity in addition to the
Kreider 2 base project. Bion believes that initial funding of such competitive bidding program will allow Bion and others to demonstrate
the technological effectiveness and cost savings of manure control technologies, which should result in the re-allocation of a
portion of the existing approximately $110B in taxpayer clean water funding to be re-directed to nutrient procurement programs
nationwide.
Consumers have demonstrated a willingness
to pay a premium for their safe and sustainable food choices. Beginning
in 2015, Bion has worked with the USDA’s Process Verified Program (“PVP”) – the gold standard in food verification
and branding – to establish a USDA-certified sustainable brand. Bion received conditional approval from the PVP related
to its Kreider 1 project (utilizing 2G Tech). It is our intention to amend and resubmit its application for the 3G Tech platform
when the initial 3G Tech Project is operational and seek an approval for certification based on third-party-verified reductions
in nutrient impacts, greenhouse gases and pathogens in the waste stream based on our 3G Tech. PVP certification incorporated as
part of a recognizable brand will provide consumers with products and brands that can be trusted. Bion projects that such a brand
and livestock product line will command a pricing premium for Bion livestock JVs and their customers.
Food safety and sustainability
are issues of growing importance in the U.S. and worldwide. Bion’s branding initiative reflects trends already underway in
the livestock industry. Over the last few years, most large meat and dairy product retailers have announced ‘sustainability’
initiatives, although the definition of sustainability is unclear. Bion believes that as these initiatives move forward, true sustainability
on the production side will look a lot like what Bion can provide today with its 3G Tech. We believe our 3G Tech platform
can deliver verifiable metrics that demonstrate meaningful improvements in sustainability for livestock production including: a)
reduced carbon and nutrient footprint; b) lower negative impacts to water, soil and air; c) increased pathogen destruction and
other environmental and public health impacts that are unmatched in the industry today.
The Covid-19 pandemic has further heightened consumer awareness
and concerns related to: a) environmental sustainability, b) food safety, c) sourcing and traceability and d) humane treatment
of both animals and workers. The more the livestock industry’s supply chain practices are transparent and known by consumers,
the more consumers are seeking alternatives.
Bion’s ‘Environmental/Sustainable’ branding
program is designed to address a wide array of consumer concerns ranging from: a) ‘where does your food come from?’,
b) animal heritage information; c) anti-biotic use standards; d) humane animal treatment; d) its labor/human conditions (including
hours, wages and working condition standards). It will include block chain traceability thereby enabling any quality issues to
be quickly identified by lot and location thereby minimizing risk to its consumers.
In essence, Bion’s comprehensive technology platform
will enable its livestock producer adopters to not only be the provider of the ‘product the consumer wants’ but also
the company that ‘shares the consumer’s values’.
Kreider Dairy Project
During 2008 the Company commenced actively
pursuing the opportunity presented by environmental retrofit and remediation of the waste streams of existing CAFOs which effort
has met with very limited success to date. The Company’s first commercial activity in the retrofit segment was represented
by our agreement with Kreider Farms (“KF”), pursuant to which the Kreider 1 system (based on an early version of our
2nd generation technology (“2G Tech”)) to treat KF's dairy waste streams to reduce nutrient releases to
the environment while generating marketable nutrient credits was designed, constructed and entered full-scale operation during
2011. On January 26, 2009 the Board of the Pennsylvania Infrastructure Investment Authority (“Pennvest”) approved a
$7.75 million loan to Bion PA 1, LLC (“PA1”), a wholly-owned subsidiary of the Company, for the initial Kreider Farms
project (“Kreider 1 System”). PA1 has had sporadic discussions/negotiations with Pennvest related to forbearance and/or
re-structuring its obligations pursuant to the Pennvest Loan for more than five years. In the context of such discussions/negotiations,
PA1 elected not to make interest payments to Pennvest on the Pennvest Loan since January 2013. Additionally, PA1 has not made any
principal payments, which were to begin in fiscal 2013, and, therefore, the Company has classified the Pennvest Loan as a current
liability as of December 31, 2020. Due to the failure of the Pennsylvania nutrient reduction credit market to develop, the Company
determined (on three separate occasions) that the carrying amount of the property and equipment related to the Kreider 1 System
exceeded its estimated future undiscounted cash flows based on certain assumptions regarding timing, level and probability of revenues
from sales of nutrient reduction credits. Therefore, PA1 and the Company recorded impairments related to the value of the Kreider
1 assets totaling $3,750,000 through June 30, 2015. During the 2016 fiscal year, PA1 and the Company recorded an additional impairment
of $1,684,562 to the value of the Kreider 1 assets which reduced the value on the Company’s books to zero. This impairment
reflects management’s judgment that the salvage value of the Kreider 1 assets roughly equals PA1’s contractual obligations
related to the Kreider 1 System, including expenses related to decommissioning of the Kreider 1 System, costs associated with needed
capital upgrade expenses, and re-certification/ permitting amendments.
On September 25, 2014, Pennvest exercised its
right to declare the Pennvest Loan in default and accelerated the Pennvest Loan and demanded that PA1 pay $8,137,117 (principal,
interest plus late charges) on or before October 24, 2014. PA1 did not make the payment and does not have the resources to make
the payments demanded by Pennvest. PA1 commenced discussions and negotiations with Pennvest concerning this matter but Pennvest
rejected PA1’s proposal made during the fall of 2014. No formal proposals are presently under consideration and only sporadic
communication has taken place regarding the matters involved over the last 6 years. It is not possible at this date to predict
the outcome of such this matter, but the Company believes that a loan modification agreement (coupled with an agreement regarding
an update and re-start of full operations of the Kreider 1 System) may be reached in the future in the context of the development
of the Kreider 2 poultry Project if/when a more robust market for nutrient reductions develops in Pennsylvania, of which there
is no assurance.
The Kreider 1 System has been inactive for
several years with some equipment maintenance work being undertaken. PA1 and Bion will continue to evaluate various options with
regard to Kreider 1 over the next six to 12 months.
During August 2012, the Company provided Pennvest
(and the PADEP) with data demonstrating that the Kreider 1 System met the ‘technology guaranty’ standards which
were incorporated in the Pennvest financing documents and, as a result, the Pennvest Loan has been (and is now) solely an obligation
of PA1 since that date.
Kreider Farms (Poultry) – 3G Tech Project
Bion is completing an envelope of policy change
and technology pilots that will allow it to move forward with a commercial large scale 3G Tech project at Kreider Farms. Having
recently received two 3G Tech patents and a Notice of Allowance for the third 3G Tech patent (filings and approvals of related
additional patent applications/continuations remaining pending), Bion is undertaking two key tasks that will ‘complete the
envelope’ and allow Bion to launch active development of the Kreider 2 poultry project and/or other Projects) during the
2021 fiscal year (and thereafter):
1. Support for adoption of PA SB 575 (or a successor
bill): This will create a competitively-bid market for nutrient reductions/Credits that we believe will provide support for project
financing for Kreider 2 prior to development of markets for the co-products from Kreider 2 are established.
2. Installation of a 3G Tech ammonia recovery system
to produce ammonium bicarbonate to be used to make application to OMRI for organic certification (and possibly for grower trials).
The 3G Tech Kreider 2 Project is planned for
two (or more) locations. It is intended to treat the waste from Kreider’s 1,800 dairy cows and approximately six million
egg layer chickens (with capacity for an additional three million layers). The Kreider 2 Project will be designed with modules
with and initial capacity of 450 tons (or more) per day of waste and will remove nitrogen and phosphorus from the waste stream
that will be converted into high-value coproducts instead of polluting local and downstream waters. The Kreider 2 Project is planned
to be built in three phases and may be expanded to include a ‘central processing facility’ with modules that will accept
transported waste from the region on fee basis.
Bion has a long-standing relationship with
Kreider Farms including a 2016 joint venture agreement related to this facility. Kreider has already made a significant investment
in upgrading its poultry facilities to maximize the treatment and recovery efficiencies that can be achieved with Bion’s
technology. We are cautiously optimistic that once PA SB575 (or a successor bill)) is passed, a market will be put in place for
long-term commercial sale of the nutrient reduction credits produced at Kreider 2. Bion anticipates that it may require up to 6-12
months after such a bill becomes law to develop the rules/regulations related to the competitive bidding program. If the competitive
bidding program is implemented, we intend to arrange project financing for the Kreider 2 Project during 2021.
Sustainable/ Organic Grain-Finished Beef JV Opportunity
Bion believes there is a potentially large opportunity
for JVs to produce sustainable/organic grain-finished beef and is actively involved in early pre-development work and discussions
regarding pursuit of this opportunity.
Beef production is the most challenged
sector of the livestock industry, due to its size and inability, as currently structured, to respond to growing consumer concerns
related to sustainability and food safety. The industry is structured to produce multiple levels of a commodity products (without
any significant pricing premiums) graded based upon taste and tenderness. Today, however, consumer demand is shifting to products
that are more sustainable, regarding carbon footprint, impacts to air and water and other metrics. The Company doesn’t think
the consumer wants to ‘blow up’ the beef industry which is responsible for the best and safest beef available in the
world today (as well as the livelihoods of almost 800,000 farming, ranching and other families supported by the beef industry in
the U.S). Rather, consumers want it to be more sustainable---and still taste good. Bion believes that strong demand exists for
a verified sustainable beef product, with the taste and texture of traditional corn-fed beef which addresses the consumers’
concerns. Bion’s technology platform is designed to enable livestock producers to produce an environmentally sustainable
beef product.
We are moving forward with preliminary
pre-development work on a JV to build a state-of-the-art beef cattle operation in the Midwest U.S. The project would produce corn-fed
USDA-certified organic- and/or sustainable-branded beef. Organic beef would be finished on organic corn (vs grass fed), produced
using the ammonium bicarbonate fertilizer captured from the cattle’s waste. We believe Bion’s unique ability to produce
fertilizer for growing of a supply of low-cost organic corn, and the resulting opportunity to produce organic beef, will dramatically
differentiate us from potential competitors. This organic opportunity is dependent on successfully establishing Bion’s fertilizer
products as acceptable for use in organic grain production.
In addition, as described above,
we intend to develop JVs which use Bion’s organic ammonium bicarbonate fertilizers to support organic grain production. This
grain can be fed (in the finishing stage) to livestock and raise organic beef (and beef products) that will meet consumer demand
with respect to sustainability and safety and provide the tenderness and taste American consumers have come to expect from premium
American beef. Such a product is largely unavailable in the market today.
Bion’s current long-term goal is to acquire
or develop, or have in a development pipeline, 2-5 Projects over the next 24 to 48 months.
A significant portion of Bion’s activities
concern efforts with private and public stakeholders (at local and state level) in Pennsylvania (and other Chesapeake Bay and Midwest
and Great Lakes states) and at the federal level EPA and the Department of Agriculture (“USDA”) (and other executive
departments) and Congress) to establish appropriate public policies which will create regulations and funding mechanisms that foster
installation of the low cost environmental solutions that Bion (and others) can provide through clean-up of agricultural waste
streams. The Company anticipates that such efforts will continue in Pennsylvania and other Chesapeake Bay watershed states throughout
the next 12 months and in various additional states thereafter.
Going concern and management’s plans:
The consolidated financial statements have
been prepared assuming the Company will continue as a going concern. The Company has not generated significant revenues and has
incurred net losses (including significant non-cash expenses) of approximately $4,553,000 and $2,659,000 during the years ended
June 30, 2020 and 2019, respectively, and a net loss of approximately $1,249,000 during the six months ended December 31, 2020.
At December 31, 2020, the Company has a working capital deficit and a stockholders’ deficit of approximately $11,028,000
and $15,778,000, respectively. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The accompanying consolidated financial statements do not include any adjustments relating to the recoverability or classification
of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going
concern. The following paragraphs describe management’s plans with regard to these conditions.
The Company continues to explore sources of
additional financing (including potential agreements with strategic partners – both financial and ag-industry) to satisfy
its current and future operating and capital expenditure requirements as it is not currently generating any significant revenues.
During the years ended June 30, 2020 and 2019,
the Company received total proceeds of approximately $1,584,000 and $897,000, respectively, from the sale of its debt and equity
securities. Proceeds during the 2020 and 2019 fiscal years have been lower than in earlier years which reduction has negatively
impacted the Company’s business development efforts.
During the six months ended December 31, 2020,
the Company received total proceeds of approximately $360,000 from the sale of its equity securities and paid approximately $31,000
in commissions.
During fiscal years 2020 and 2019 and the six
months ended December 31, 2020, the Company continued to experience difficulty in raising equity funding. As a result, the Company
faced, and continues to face, significant cash flow management challenges due to working capital constraints. To partially mitigate
these working capital constraints, the Company’s core senior management and several key employees and consultants have been
deferring (and continue to defer) all or part of their cash compensation and/or are accepting compensation in the form of securities
of the Company (Notes 4 and 6) and members of the Company’s senior management have made loans to the Company from time to
time. During the year ended June 30, 2018, senior management and certain core employees and consultants agreed to a one-time extinguishment
of liabilities owed by the Company which in aggregate totaled $2,404,000. Additionally, the Company made reductions in its personnel
during the years ended June 30, 2014 and 2015 and again during the year ended June 30, 2018. The constraint on available resources
has had, and continues to have, negative effects on the pace and scope of the Company’s efforts to develop its business.
The Company has had to delay payment of trade obligations and has had to economize in many ways that have potentially negative
consequences. If the Company does not have greater success in its efforts to raise needed funds during the remainder of the current
fiscal year (and subsequent periods), management will need to consider deeper cuts (including additional personnel cuts) and curtailment
of ongoing activities including research and development activities.
The Company will need to obtain additional
capital to fund its operations and technology development, to satisfy existing creditors, to develop Projects (including Integrated
Projects and the Kreider 2 facility) and CAFO Retrofit waste remediation systems. The Company anticipates that it will seek to
raise from $2,500,000 to $50,000,000 or more debt and/or equity through joint ventures, strategic partnerships and/or sale of its
equity securities (common, preferred and/or hybrid) and/or debt (including convertible) securities, and/or through use of ‘rights’
and/or warrants (new and/or existing) during the next twelve months. However, as discussed above, there is no assurance, especially
in light of the difficulties the Company has experienced in recent periods and the extremely unsettled capital markets that presently
exist (especially for companies like us), that the Company will be able to obtain the funds that it needs to stay in business,
complete its technology development or to successfully develop its business and Projects.
There is no realistic likelihood that funds
required during the next twelve months (or in the periods immediately thereafter) for the Company’s basic operations and/or
proposed Projects will be generated from operations. Therefore, the Company will need to raise sufficient funds from external sources
such as debt or equity financings or other potential sources. The lack of sufficient additional capital resulting from the inability
to generate cash flow from operations and/or to raise capital from external sources would force the Company to substantially curtail
or cease operations and would, therefore, have a material adverse effect on its business. Further, there can be no assurance that
any such required funds, if available, will be available on attractive terms or that they will not have a significantly dilutive
effect on the Company’s existing shareholders. All of these factors have been exacerbated by the extremely limited and unsettled
credit and capital markets presently existing for small companies like Bion.
Covid-19 pandemic related matters:
The Company faces risks and uncertainties
and factors beyond our control that are magnified during the current Covid-19 pandemic and the unique economic, financial, governmental
and health-related conditions in which the Company, the country and the entire world now reside. To date the Company has experienced
direct impacts in various areas including but without limitation: i) government ordered shutdowns which have slowed the Company’s
research and development projects and other initiatives, ii) shifted focus of state and federal governments which is likely to
negatively impact the Company’s legislative initiatives in Pennsylvania and Washington D. C., iii) strains and uncertainties
in both the equity and debt markets which have made discussion and planning of funding of the Company and its initiatives and
projects with investment bankers, banks and potential strategic partners more tenuous, iv) strains and uncertainties in the agricultural
sector and markets have made discussion and planning more difficult as future industry conditions are now more difficult to assess
and predict, v) due to the age and health of our core management team, all of whom are age 70 or older and have had one or more
existing health issues, the Covid-19 pandemic places the Company at greater risk than was previously the case (to a higher degree
than would be the case if the Company had a larger, deeper and/or younger core management team), and vi) there almost certainly
will be other unanticipated consequences for the Company as a result of the current pandemic emergency and its aftermath.
2. SIGNIFICANT
ACCOUNTING POLICIES
Principles of consolidation:
The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, Bion Integrated Projects Group, Inc. (“Projects Group”),
Bion Technologies, Inc., BionSoil, Inc., Bion Services, PA1, and PA2; and its 58.9% owned subsidiary, Centerpoint Corporation (“Centerpoint”).
All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements
have been prepared without an audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
The consolidated financial statements reflect all adjustments (consisting of only normal recurring entries) that, in the opinion
of management, are necessary to present fairly the financial position at December 31, 2020, the results of operations of the Company
for the three and six months ended December 31, 2020 and 2019 and the cash flows of the Company for the six months ended December
31, 2020 and 2019. Operating results for the three and six months ended December 31, 2020 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2021.
Cash and cash equivalents:
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash and cash equivalents.
Property and equipment:
Property and equipment are stated at cost and
are depreciated, when placed into service, using the straight-line method over the estimated useful lives of the related assets,
generally three to twenty years. The Company capitalizes all direct costs and all indirect incrementally identifiable costs related
to the design and construction of its Integrated Projects. The Company reviews its property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would
be recognized based on the amount by which the carrying value of the assets or asset group exceeds its estimated fair value, and
is recognized as a loss from operations.
Stock-based compensation:
The Company follows the provisions of Accounting
Standards Codification (“ASC”) 718, which generally requires that share-based compensation transactions be accounted
and recognized in the statement of operations based upon their grant date fair values.
Derivative Financial Instruments:
Pursuant to ASC Topic 815 “Derivatives
and Hedging” (“Topic 815”), the Company reviews all financial instruments for the existence of features which
may require fair value accounting and a related mark-to-market adjustment at each reporting period end. Once determined, the Company
assesses these instruments as derivative liabilities. The fair value of these instruments is adjusted to reflect the fair value
at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment
to fair value of derivatives.
Warrants:
The Company has issued warrants to purchase
common shares of the Company. Warrants are valued using a fair value based method, whereby the fair value of the warrant is determined
at the warrant issue date using a market-based option valuation model based on factors including an evaluation of the Company’s
value as of the date of the issuance, consideration of the Company’s limited liquid resources and business prospects, the
market price of the Company’s stock in its mostly inactive public market and the historical valuations and purchases of the
Company’s warrants. When warrants are issued in combination with debt or equity securities, the warrants are valued and accounted
for based on the relative fair value of the warrants in relation to the total value assigned to the debt or equity securities and
warrants combined.
Concentrations of credit risk:
The Company's financial instruments that are
exposed to concentrations of credit risk consist of cash. The Company's cash is in demand deposit accounts placed with federally
insured financial institutions and selected brokerage accounts. Such deposit accounts at times may exceed federally insured limits.
The Company has not experienced any losses on such accounts.
Noncontrolling interests:
In accordance with ASC 810, “Consolidation”,
the Company separately classifies noncontrolling interests within the equity section of the consolidated balance sheets and separately
reports the amounts attributable to controlling and noncontrolling interests in the consolidated statements of operations. In addition,
the noncontrolling interest continues to be attributed its share of losses even if that attribution results in a deficit noncontrolling
interest balance.
Fair value measurements:
Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date in the principal or most advantageous market. The Company uses a fair value hierarchy that has three levels of inputs, both
observable and unobservable, with use of the lowest possible level of input to determine fair value.
Level 1 – quoted prices (unadjusted)
in active markets for identical assets or liabilities;
Level 2 – observable inputs other than
Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities
in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable;
and
Level 3 – assets and liabilities whose
significant value drivers are unobservable.
Observable inputs are based on market data
obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable
inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may
fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified
using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management
judgment.
The fair value of cash and accounts payable
approximates their carrying amounts due to their short-term maturities. The fair value of the loan payable is indeterminable at
this time due to the nature of the arrangement with a state agency and the fact that it is in default. The fair value of the redeemable
preferred stock approximates its carrying value due to the dividends accrued on the preferred stock which are reflected as part
of the redemption value. The fair value of the deferred compensation and convertible notes payable - affiliates are not practicable
to estimate due to the related party nature of the underlying transactions.
Revenue Recognition:
The Company currently does not generate revenue
and if and when the Company begins to generate revenue the Company will comply with the provisions of Accounting Standards Codification
(“ASC”) 606 “Revenue from Contracts with Customers”.
Loss per share:
Basic loss per share amounts are calculated
using the weighted average number of shares of common stock outstanding during the period. Diluted loss per share assumes the conversion,
exercise or issuance of all potential common stock instruments, such as options or warrants, unless the effect is to reduce the
loss per share or increase the earnings per share. During the three and six months ended December 31, 2020 and 2019, the basic
and diluted loss per share was the same, as the impact of potential dilutive common shares was anti-dilutive.
The following table represents the warrants,
options and convertible securities excluded from the calculation of basic loss per share:
|
|
December 31,
2020
|
|
December 31,
2019
|
Warrants
|
|
|
21,270,102
|
|
|
|
18,784,324
|
|
Options
|
|
|
9,511,600
|
|
|
|
7,801,600
|
|
Convertible debt
|
|
|
11,215,175
|
|
|
|
9,779,000
|
|
Convertible preferred stock
|
|
|
19,500
|
|
|
|
18,500
|
|
The following is a reconciliation of the denominators
of the basic and diluted loss per share computations for the three and six months ended December 31, 2020 and 2019:
|
|
Three months
ended
December 31,
2020
|
|
Three months
ended
December 31,
2019
|
|
Six months
ended
December 31,
2020
|
|
Six months
ended
December 31,
2019
|
Shares issued – beginning of period
|
|
|
31,575,656
|
|
|
|
28,417,602
|
|
|
|
31,409,005
|
|
|
|
28,068,688
|
|
Shares held by subsidiaries (Note 7)
|
|
|
(704,309
|
)
|
|
|
(704,309
|
)
|
|
|
(704,309
|
)
|
|
|
(704,309
|
)
|
Shares outstanding – beginning of period
|
|
|
30,871,347
|
|
|
|
27,713,293
|
|
|
|
30,704,696
|
|
|
|
27,364,379
|
|
Weighted average shares issued
during the period
|
|
|
316,298
|
|
|
|
1,090,714
|
|
|
|
285,943
|
|
|
|
771,030
|
|
Diluted weighted average shares –
end of period
|
|
|
31,187,645
|
|
|
|
28,804,007
|
|
|
|
30,990,639
|
|
|
|
28,135,409
|
|
Use of estimates:
In preparing the Company’s consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Recent Accounting Pronouncements:
The Company continually assesses any new accounting
pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s
financial reporting, the Company undertakes a study to determine the consequences of the change to its financial statements and
assures that there are proper controls in place to ascertain that the Company’s financial statements properly reflect the
change.
In June 2018, the FASB issued ASU No. 2018-07
“Compensation – Stock Compensation – Improvements to Nonemployee Share-Based Payment Accounting” to simplify
the accounting for share based payments granted to nonemployees and was adopted by the Company effective July 1, 2019. Under this
guidance, payments to nonemployees is aligned with the requirements for share based payments granted to employees. The adoption
of this guidance did not have a material impact on the Company’s financial statements as previously issued share-based payments
to nonemployees had already reached a measurement date.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
|
|
December 31,
2020
|
|
June 30,
2020
|
Machinery and equipment
|
|
$
|
2,222,670
|
|
|
$
|
2,222,670
|
|
Buildings and structures
|
|
|
401,470
|
|
|
|
401,470
|
|
Computers and office equipment
|
|
|
171,485
|
|
|
|
171,485
|
|
|
|
|
2,795,625
|
|
|
|
2,795,625
|
|
Less accumulated depreciation
|
|
|
(2,794,671
|
)
|
|
|
(2,794,257
|
)
|
|
|
$
|
954
|
|
|
$
|
1,368
|
|
As of December 31, 2020, the net book value
of Kreider 1 was zero. Management has reviewed the remaining property and equipment for impairment as of December 31, 2020 and
believes that no impairment exists.
Depreciation expense was $207 and $347 for
the three months ended December 31, 2020 and 2019, respectively and $414 and $694 for the six months ended December 31, 2020 and
2019, respectively.
4. DEFERRED
COMPENSATION:
The Company owes deferred compensation
to various employees, former employees and consultants totaling $998,474 and $537,119 as of December 31, 2020 and 2019, respectively.
Included in the deferred compensation balances as of December 31, 2020, are $307,260 and $71,699 owed Dominic Bassani (“Bassani”),
the Company’s Chief Executive Officer, and Mark A. Smith (“Smith”), the Company’s President, respectively,
pursuant to extension agreements effective January 1, 2015, whereby unpaid compensation earned after January 1, 2015, accrues interest
at 4% per annum and can be converted into shares of the Company’s common stock at the election of the employee during the
first five calendar days of any month. The conversion price shall be the average closing price of the Company’s common stock
for the last 10 trading days of the immediately preceding month. The deferred compensation owed Bassani and Smith as of December
31, 2019 was $49,318 and nil, respectively. The Company also owes various consultants and an employee, pursuant to various agreements,
for deferred compensation of $547,015 and $415,301 as of December 31, 2020 and 2019, respectively, with similar conversion terms
as those described above for Bassani and Smith, with the exception that the interest accrues at 3% per annum. The Company also
owes a former employee $72,500, which is not convertible and is non-interest bearing.
Bassani and Smith have each been granted
the right to convert up to $300,000 of deferred compensation balances at a price of $0.75 per share until December 31, 2022 (to
be issued pursuant to the 2006 Plan). Smith also has the right to convert all or part of his deferred compensation balance into
the Company’s securities (to be issued pursuant to the 2006 Plan) “at market” and/or on the same terms as the
Company is selling or has sold its securities in its then current (or most recent if there is no current) private placement.
During the six months ended December 31,
2020, Smith elected to convert $37,961 of deferred compensation into units of the Company at its $0.50 per unit offering price
(Note 7).
The Company recorded interest expense
of $12,476 ($5,159 with related parties) and $14,662 ($9,494 with related parties) for the six months ended December 31, 2020 and
2019, respectively.
5. LOANS PAYABLE:
Pennvest
PA1, the Company’s wholly-owned
subsidiary, owes $9,727,189 as of December 31, 2020 under the terms of the Pennvest Loan related to the construction of the Kreider
1 System including accrued interest and late charges totaling $1,973,189 as of December 31, 2020. The terms of the Pennvest Loan
provided for funding of up to $7,754,000 which was to be repaid by interest-only payments for three years, followed by an additional
ten-year amortization of principal. The Pennvest Loan accrues interest at 2.547% per annum for years 1 through 5 and 3.184% per
annum for years 6 through maturity. The Pennvest Loan required minimum annual principal payments of approximately $5,067,000 in
fiscal years 2013 through 2020, and $819,000 in fiscal year 2021, $846,000 in fiscal year 2022, $873,000 in fiscal year 2023 and
$149,000 in fiscal year 2024. The Pennvest Loan is collateralized by the Kreider 1 System and by a pledge of all revenues generated
from Kreider 1 including, but not limited to, revenues generated from nutrient reduction credit sales and by-product sales. In
addition, in consideration for the excess credit risk associated with the project, Pennvest is entitled to participate in the profits
from Kreider 1 calculated on a net cash flow basis, as defined. The Company has incurred interest expense related to the Pennvest
Loan of $61,722 for both the three months ended December 31, 2020 and 2019, respectively. The Company has also incurred interest
expense related to the Pennvest Loan of $123,444 for both the six months ended December 31, 2020 and 2019, respectively. Based
on the limited development of the depth and breadth of the Pennsylvania nutrient reduction credit market to date, PA1 commenced
negotiations with Pennvest related to forbearance and/or re-structuring the obligations under the Pennvest Loan. In the context
of such negotiations, PA1 has elected not to make interest payments to Pennvest on the Pennvest Loan since January 2013. Additionally,
the Company has not made any principal payments, which were to begin in fiscal 2013, and, therefore, the Company has classified
the Pennvest Loan as a current liability as of December 31, 2020.
On September 25, 2014, Pennvest exercised
its right to declare the Pennvest Loan in default and has accelerated the Pennvest Loan and demanded that PA1 pay $8,137,117 (principal,
interest plus late charges) on or before October 24, 2014. PA1 did not make the payment and does not have the resources to make
the payment demanded by Pennvest. PA1 has engaged in on/off discussions and negotiations with Pennvest concerning this matter
but no such discussions/negotiations are currently active. As of the date of this report, no proposals (formal or informal) are
under consideration and only sporadic communication has taken place regarding the matters involved in over 5 years. It is not
possible at this date to predict the outcome of this matter given the extended period which has passed without resolution and
the fact that the technology employed in the Kreider 1 system is now outdated. However, the Company believes that a loan modification
agreement (coupled with an agreement regarding an update and restart of the full operation of Kreider 1 may in the future be possible
in conjunction with the Kreider 2 project, subject to the results of the negotiations with Pennvest and pending development of
a more robust market for nutrient reductions in Pennsylvania. The Covid-19 pandemic has further increased uncertainties. PA1 and
Bion will continue to evaluate various options with regard to Kreider 1 over the next six to twelve months.
In connection with the Pennvest Loan financing
documents, the Company provided a ‘technology guaranty’ regarding nutrient reduction performance of Kreider 1 which
was structured to expire when Kreider 1’s nutrient reduction performance had been demonstrated. During August 2012 the Company
provided Pennvest (and the PADEP) with data demonstrating that the Kreider 1 System had surpassed the requisite performance criteria
and that the Company’s ‘technology guaranty’ was met. As a result, the Pennvest Loan is solely an obligation
of PA1.
Paycheck Protection Program
During the year ended June 30, 2020, the
Company received proceeds from a loan in the amount of $34,800 from Covenant Bank as the lender, pursuant to the Small Business
Administration (“SBA”) Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic
Security (“CARES”) Act. The loan is uncollateralized, has a fixed interest rate of one percent, a term of two years
and the first payment is deferred for six months. Under the CARES Act, borrowers are eligible for forgiveness of principal and
interest on PPP loans to the extent that the proceeds were used to cover eligible payroll costs, rent and utility costs over either
an 8- or 24-week period after the loan was made. As of December 31, 2020, the total PPP loan and accrued interest was $35,026.
Management believes that the Company has met the conditions for full forgiveness of the PPP loan and will be applying for forgiveness
once Covenant Bank and the SBA are ready to accept applications.
6. CONVERTIBLE NOTES
PAYABLE - AFFILIATES:
2020 Convertible Obligations (formerly January
2015 Convertible Notes and 2019 Convertible Note)
The 2020 Convertible Obligations (formerly
named January 2015 Convertible Notes and 2019 Convertible Notes) which accrue interest at either 4% per annum or 4% compounded
quarterly and effective January 1, 2020 are due and payable on July 1, 2024. The 2020 Convertible Obligations (including accrued
interest, plus all future deferred compensation added subsequently), are convertible, at the sole election of the holder, into
Units consisting of one share of the Company’s common stock and one half to three quarters warrant to purchase a share of
the Company’s common stock, at a price of $0.50 per Unit until July 1, 2024. The warrant contained in the Unit was originally
exercisable at $1.00 per unit but was modified to $0.75 during the year ended June 30, 2020 and is exercisable until a date three
years after the date of the conversion. The original conversion price of $0.50 per Unit approximated the fair value of the Units
at the date of the agreements; therefore, no beneficial conversion feature exists. Management evaluated the terms and conditions
of the embedded conversion features based on the guidance of ASC 815-15 “Embedded Derivatives” to determine if there
was an embedded derivative requiring bifurcation. An embedded derivative instrument (such as a conversion option embedded in the
deferred compensation) must be bifurcated from its host instruments and accounted for separately as a derivative instrument only
if the “risks and rewards” of the embedded derivative instrument are not “clearly and closely related”
to the risks and rewards of the host instrument in which it is embedded. Management concluded that the embedded conversion feature
of the deferred compensation was not required to be bifurcated because the conversion feature is clearly and closely related to
the host instrument, and because of the Company’s limited trading volume that indicates the feature is not readily convertible
to cash in accordance with ASC 815-10, “Derivatives and Hedging”.
As of December 31, 2020, the 2020 Convertible
Obligation balances, including accrued interest, owed Bassani (and his donees), Smith and Edward Schafer (“Schafer”),
the Company’s Vice Chairman, were $2,455,656, $1,163,862 and $472,041, respectively. As of December 31, 2019, the 2020 Convertible
Obligation balances, including accrued interest, owed Bassani, Smith and Schafer were $2,361,208, $1,118,138 and $453,886, respectively.
The Company recorded interest expense of $65,468
and $32,836 for the three months ended December 31, 2020 and 2019, respectively. The Company recorded interest expense of $96,428
and $75,229 for the six months ended December 31, 2020 and 2019, respectively.
September 2015 Convertible Notes
During the year ended June 30, 2016, the Company
entered into September 2015 Convertible Notes with Bassani, Schafer and a Shareholder which replaced previously issued promissory
notes. The September 2015 Convertible Notes bear interest at 4% per annum, originally had maturity dates of December 31, 2017 but
during the year ended June 30, 2019 the maturity dates were extended to July 1, 2021, and may be converted at the sole election
of the noteholders into restricted common shares of the Company at a conversion price of $0.60 per share. During the year ended
June 30, 2020, the maturity dates of the September 2015 Convertible Notes were further extended until July 1, 2024. As the conversion
price of $0.60 approximated the fair value of the common shares at the date of the September 2015 Convertible Notes, no beneficial
conversion feature exists. During the year ended June 30, 2018, Bassani and the Company agreed to split his original September
2015 Convertible Note into two replacement notes with all the terms remaining the same. One of the replacement notes’ original
principal is $130,000, which is being held by the Company as collateral for a subscription receivable promissory note from Bassani.
During the year ended June 30, 2019, with the Company’s approval, Bassani sold $300,000 of his second replacement note to
a Shareholder with all the terms remaining the same.
The balances of the September 2015 Convertible
Notes as of December 31, 2020, including accrued interest owed Bassani, Schafer and Shareholder, are $168,498, $19,862 and $423,081,
respectively. The balances of the September 2015 Convertible Notes as of December 31, 2019, including accrued interest, were $162,808,
$19,206 and $407,964, respectively.
The Company recorded interest expense of $5,365
for both the three months ended December 31, 2020 and 2019, respectively. The Company recorded interest expense of $10,731 for
both the six months ended December 31, 2020 and 2019, respectively.
7. STOCKHOLDERS' EQUITY:
Series B Preferred stock:
Since July 1, 2014, the Company has 200 shares
of Series B redeemable convertible Preferred stock outstanding with a par value of $0.01 per share, convertible at the option of
the holder at $2.00 per share, with dividends accrued and payable at 2.5% per quarter. The Series B Preferred stock is mandatorily
redeemable at $100 per share by the Company three years after issuance and accordingly was classified as a liability. The 200 shares
have reached their maturity date, but due to the cash constraints of the Company have not been redeemed.
During the years ended June 30, 2020 and 2019,
the Company declared dividends of $2,000 and $2,000, respectively. At December 31, 2020, accrued dividends payable are $19,500.
The dividends are classified as a component of operations as the Series B Preferred stock is presented as a liability in these
financial statements.
Common stock:
Holders of common stock are entitled to one
vote per share on all matters to be voted on by common stockholders. In the event of liquidation, dissolution or winding up of
the Company, the holders of common stock are entitled to share in all assets remaining after liabilities have been paid in full
or set aside and the rights of any outstanding preferred stock have been satisfied. Common stock has no preemptive, redemption
or conversion rights. The rights of holders of common stock are subject to, and may be adversely affected by, the rights of the
holders of any outstanding series of preferred stock or any series of preferred stock the Company may designate in the future.
Centerpoint holds 704,309 shares of the Company’s
common stock. These shares of the Company’s common stock held by Centerpoint are for the benefit of its shareholders without
any beneficial interest.
During the six months ended December 31, 2020,
the Company entered into subscription agreements to sell units for $0.50 per unit, with each unit consisting of one share of the
Company’s restricted common stock and one warrant to purchase one share of the Company’s restricted common stock for
$0.75 per share with an expiry date of December 31, 2021, and pursuant thereto, the Company issued 720,000 units for total proceeds
of $360,000, net proceeds of $329,000 after commissions of $31,000. The Company allocated the proceeds from the 720,000 shares
and the 720,000 warrants based upon their relative fair values, using the share price on the day each of the subscription agreements
were entered into and the fair value of the warrants, which was determined to be $0.05 per warrant. As a result, $16,856 was allocated
to the warrants and $343,144 was allocated to the shares, and both were recorded as additional paid in capital.
During the six months ended December 31,
2020, Smith elected to convert deferred compensation and accounts payable of $37,961 and $32,833, respectively, into an aggregate
141,589 units at $0.50 per unit, with each unit consisting of one share of the Company’s restricted common stock and one
warrant to purchase one share of the Company’s restricted common stock for $0.75 per share until December 31, 2021.
Warrants:
As of December 31, 2020, the Company had approximately
21.3 million warrants outstanding, with exercise prices from $0.60 to $2.00 and expiring on various dates through June 30, 2025.
The weighted-average exercise price for the
outstanding warrants is $0.74, and the weighted-average remaining contractual life as of December 31, 2020 is 3.2 years.
During the six months ended December 31, 2020,
the Company entered into subscription agreements to sell units for $0.50 per unit, with each unit consisting of one share of the
Company’s restricted common stock and one warrant to purchase one share of the Company’s restricted common stock for
$0.75 per share with an expiry date of December 31, 2021, and pursuant thereto, the Company issued 720,000 units for total proceeds
of $360,000, net proceeds of $329,000 after commissions of $31,000. The Company allocated the proceeds from the 720,000 shares
and the 720,000 warrants based upon their relative fair values, using the share price on the day each of the subscription agreements
were entered into and the fair value of the warrants, which was determined to be $0.05 per warrant. As a result, $16,856 was allocated
to the warrants and $343,144 was allocated to the shares, and both were recorded as additional paid in capital.
During the six months ended December 31, 2020,
the Company issued 50,000 warrants to a consultant to purchase 50,000 shares of the Company’s restricted common stock at
an exercise price of $0.90 per share and an expiration date of December 31, 2021. The warrants were in exchange for services expensed
at $2,500.
During the six months ended December 31,
2020, Smith elected to convert deferred compensation and accounts payable of $37,961 and $32,833, respectively, into an aggregate
141,589 units at $0.50 per unit, with each unit consisting of one share of the Company’s restricted common stock and one
warrant to purchase one share of the Company’s restricted common stock for $0.75 per share until December 31, 2021.
During the six months ended December 31,
2020, the Company modified the expiration dates of 96,996 warrants issued to a broker as commissions to purchase 96,996 shares
of the Company’s common stock at an exercise price of $0.75 per share and an expiration of December 31, 2020. As the modification
was both a reduction and addition to additional paid in capital there was no impact to the financial statements.
During the six months ended December 31,
2020, the Company agreed to extend the expiration dates of 3,547,735 warrants owned by certain individuals which were scheduled
to expire at December 31, 2020. The Company recorded non-cash compensation of $25,506 and interest expense of $163,384 related
to the modification of the warrants.
Stock options:
The Company’s 2006 Consolidated Incentive
Plan, as amended during the six months ended December 31, 2020 (the “2006 Plan”), provides for the issuance of options
(and/or other securities) to purchase up to 36,000,000 shares of the Company’s common stock. Terms of exercise and expiration
of options/securities granted under the 2006 Plan may be established at the discretion of the Board of Directors, but no option
may be exercisable for more than ten years.
During the six months ended December 31,
2020, the Company approved the modification of existing stock options held by two former consultants, which extended certain expiration
dates. The modifications resulted in incremental non-cash compensation of $8,775.
The Company recorded compensation expense related
to employee stock options of nil and $99,500 for both the three and six months ended December 31, 2020 and 2019, respectively.
The Company granted nil and 390,000 options during both the three and six months ended December 31, 2020 and 2019, respectively.
The fair value of the options granted during
the three and six months ended December 31, 2020 and 2019 were estimated on the grant date using the Black-Scholes option-pricing
model with the following assumptions:
|
|
Weighted
Average,
December 31,
2020
|
|
Range,
December 31,
2020
|
|
Weighted
Average,
December 31,
2019
|
|
Range,
December 31,
2019
|
Volatility
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
68
|
%
|
|
|
68%-70
|
%
|
Dividend yield
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Risk-free interest rate
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
1.75
|
%
|
|
|
1.74%-1.75
|
%
|
Expected term (years)
|
|
|
—
|
|
|
|
—
|
|
|
|
5.0
|
|
|
|
5.0 to 5.2
|
|
The expected volatility was based on the historical
price volatility of the Company’s common stock. The dividend yield represents the Company’s anticipated cash dividend
on common stock over the expected term of the stock options. The U.S. Treasury bill rate for the expected term of the stock options
was utilized to determine the risk-free interest rate. The expected term of stock options represents the period of time the stock
options granted are expected to be outstanding based upon management’s estimates.
A summary of option activity under the 2006 Plan for
the six months ended December 31, 2020 is as follows:
|
|
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
Outstanding at July 1, 2020
|
|
|
|
9,511,600
|
|
|
$
|
0.74
|
|
|
|
4.5
|
|
|
$
|
—
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
|
9,511,600
|
|
|
$
|
0.74
|
|
|
|
4.0
|
|
|
$
|
—
|
|
Exercisable at December 31, 2020
|
|
|
|
9,511,600
|
|
|
$
|
0.74
|
|
|
|
4.0
|
|
|
$
|
—
|
|
The following table presents information relating
to nonvested stock options as of December 31, 2020:
|
|
|
|
|
Options
|
|
|
|
Weighted Average Grant-Date Fair Value
|
|
|
Nonvested at July 1, 2020
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
Vested
|
|
|
|
—
|
|
|
|
—
|
|
|
Nonvested at December 31, 2020
|
|
|
|
—
|
|
|
$
|
—
|
|
The total fair value of stock options that
vested during the six months ended December 31, 2020 and 2019 was nil and $99,500, respectively. As of December 31, 2020, the Company
had no unrecognized compensation cost related to stock options.
Stock-based employee compensation charges in operating
expenses in the Company’s financial statements for the three and six months ended December 31, 2020 and 2019 are as follows:
|
|
Three
months
ended
December 31,
2020
|
|
Three
months
ended
December 31,
2019
|
|
Six months
ended
December 31,
2020
|
|
Six months
ended
December 31,
2019
|
General and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value from modification of option terms
|
|
$
|
8,775
|
|
|
$
|
—
|
|
|
$
|
8,775
|
|
|
$
|
—
|
|
Change in fair value from modification of warrant terms
|
|
|
25,506
|
|
|
|
—
|
|
|
|
25,506
|
|
|
|
—
|
|
Fair value of stock options expensed
|
|
|
—
|
|
|
|
92,000
|
|
|
|
—
|
|
|
|
92,000
|
|
Total
|
|
$
|
34,281
|
|
|
$
|
92,000
|
|
|
$
|
34,281
|
|
|
$
|
92,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of stock options expensed
|
|
$
|
—
|
|
|
$
|
7,500
|
|
|
$
|
—
|
|
|
$
|
7,500
|
|
Total
|
|
$
|
—
|
|
|
$
|
7,500
|
|
|
$
|
—
|
|
|
$
|
7,500
|
|
8. SUBSCRIPTION
RECEIVABLE - AFFILIATES:
As of December 31, 2020, the Company has three
interest bearing, secured promissory notes with an aggregate principal amount of $428,250 ($474,892, including interest), from
Bassani as consideration to purchase warrants to purchase 5,565,000 shares of the Company’s restricted common stock, which
warrants have exercise prices ranging from $0.60 to $1.00 and have expiry dates ranging from December 31, 2020 to December 31,
2025. The promissory notes bear interest at 4% per annum, and are secured by portions of Bassani’s 2020 Convertible Obligation
and Bassani’s September 2015 Convertible Notes. The secured promissory notes were payable July 1, 2020 but were extended
to July 1, 2024 during the year ended June 30, 2020. Also, during the year ended June 30, 2020, warrants with exercise prices greater
than $0.75 were reduced to $0.75 and warrants with expiry dates prior to December 31, 2024 were extended to December 31, 2024.
As of December 31, 2020, the Company has
two interest bearing, secured promissory notes with an aggregate principal amount of $46,400 ($52,238 including interest) from
two former employees as consideration to purchase warrants to purchase 928,000 shares of the Company’s restricted common
stock, which warrants are exercisable at $0.75 and have expiry dates of December 31, 2020. During the year ended June 30, 2020,
the expiry dates of the warrants were extended to December 31, 2024. These warrants have a 90% exercise bonus. The promissory notes
bear interest at 4% per annum, are secured by a perfected security interest in the warrants, and were payable on July 1, 2020 but
were extended to July 1, 2024 during the year ended June 30, 2020.
As of December 31, 2020, the Company has an
interest bearing, secured promissory note for $30,000 ($32,896 including interest) from Smith as consideration to purchase warrants
to purchase 300,000 shares of the Company’s restricted common stock, which warrants are exercisable at $0.60 and have expiry
dates of December 31, 2023. During the year ended June 30, 2020, the expiry dates of the warrants were extended to December 31,
2024. The warrants have a 75% exercise bonus and the promissory note bears interest at 4% per annum, and is secured by $30,000
of Smith’s 2020 Convertible Obligations. The secured promissory note was payable on July 1, 2020 but was extended to July
1, 2024 during the year ended June 30, 2020.
9. COMMITMENTS
AND CONTINGENCIES:
Employment and consulting agreements:
Smith has held the positions of Director, President
and General Counsel of Company and its subsidiaries under various agreements (and extensions) and terms since March 2003. On October
10, 2016, the Company approved a month to month contract extension, with Smith which includes provisions for i) a monthly deferred
salary of $18,000 until the Board of Directors re-instates cash payments to all employees and consultants who are deferring compensation,
ii) the right to convert up to $300,000 of his deferred compensation, at his sole election, at $0.75 per share, until December
31, 2022), and iii) the right to convert his deferred compensation in whole or in part, at his sole election, at any time in any
amount at “market” or into securities sold in the Company’s current/most recent private offering at the price
of such offering to third parties. Smith agreed effective July 29, 2018 to continue to serve the Company under these terms.
Since March 31, 2005, the Company has had various
agreements with Brightcap and/or Bassani, through which the services of Bassani are provided (any reference to Brightcap or Bassani
for all purposes are the same individual). The Board appointed Bassani as the Company's CEO effective May 13, 2011. On February
10, 2015, the Company executed an Extension Agreement with Bassani pursuant to which Bassani extended the term of his service to
the Company to December 31, 2017, (with the Company having an option to extend the term an additional six months.) Pursuant to
the Extension Agreement, Bassani continued to defer his cash compensation ($31,000 per month) until the Board of Directors re-instates
cash payments to all employees and consultants who are deferring their compensation. During October 2016 Bassani was granted the
right to convert up to $125,000 of his deferred compensation, at his sole election, at $0.75 per share, until March 15, 2018 (which
was expanded on April 27, 2017 to the right to convert up to $300,000 of his deferred compensation, at his sole election, at $0.75
per share, and subsequently extended until December 31, 2022). During February 2018, the Company agreed to the material terms for
a binding two-year extension agreement for Bassani’s services as CEO, while a detailed, fully executed agreement is still
being negotiated and will be finalized in the future. Bassani’s salary will remain $372,000 per year, which will continue
to be accrued until there is adequate cash available while negotiations proceed toward the re-instatement of a least a partial
cash payment. Additionally, the Company has agreed to pay him $2,000 per month to be applied to life insurance premiums. On August
1, 2018, in the context of extending his agreement to provide services to the Company on a full time basis through December 31,
2022) plus 2 years after that on a part-time basis, the Company received an interest bearing secured promissory note for $300,000
from Bassani as consideration to purchase warrants to purchase 3,000,000 shares of the Company’s restricted common stock,
which warrants are exercisable at $0.60 and have expiry dates of June 30, 2025. The promissory note is secured by Bassani’s
$300,000 of 2020 Convertible Obligation (Note 6) and as of December 31, 2020, the principal and accrued interest was $329,626.
Execution/exercise bonuses:
As part of agreements the Company entered into
with Bassani and Smith effective May 15, 2013, they were each granted the following: a) a 50% execution/exercise bonus which shall
be applied upon the effective date of the notice of intent to exercise (for options and warrants) or issuance event, as applicable,
of any currently outstanding and/or subsequently acquired options, warrants and/or contingent stock bonuses owned by each (and/or
their donees) as follows: i) in the case of exercise by payment of cash, the bonus shall take the form of reduction of the exercise
price; ii) in the case of cashless exercise, the bonus shall be applied to reduce the exercise price prior to the cashless exercise
calculations; and iii) with regard to contingent stock bonuses, issuance shall be triggered upon the Company’s common stock
reaching a closing price equal to 50% of currently specified price; and b) the right to extend the exercise period of all or part
of the applicable options and warrants for up to five years (one year at a time) by annual payments of $.05 per option or warrant
to the Company on or before a date during the three months prior to expiration of the exercise period at least three business days
before the end of the expiration period. Effective January 1, 2016 such annual payments to extend warrant exercise periods have
been reduced to $.01 per option or warrant.
During the year ended June 30, 2014, the Company
extended 50% execution/exercise bonuses with the same terms as described to a board member.
During the year ended June 30, 2018, the Company
extended 50% execution/exercise bonuses with the same terms as described above to all options and warrants issued prior to November
7, 2017, to an employee and two former employees who are now consultants.
During the year ended June 30, 2018, the Company
increased the above 50% execution/exercise bonus on all outstanding options and warrants owned or acquired in the future by Bassani,
Smith and Schafer to 75% (to the extent such existing exercise bonus is less than 75%).
During the year ended June 30, 2019, the Company
approved the right to extend the exercise period of all or part of any options or warrants granted in the past or in the future,
for up to five years (one year at a time) by annual payments of $0.01 per option/warrant for one of its employees. The extension
payment may be made in i) cash; ii) by reduction of sums owed by the Company, and iii) by reduction of applicable exercise bonuses.
During the six months ended December 31, 2020,
the Company applied a 75% execution/exercise bonus on 3,000,000 warrants held by a trust owned by Bassani.
As of December 31, 2020, the execution/exercise
bonuses ranging from 50-90% were applicable to 9,354,600 of the Company’s outstanding options and 15,317,000 of the Company’s
outstanding warrants.
Litigation:
On September 25, 2014, Pennvest exercised its
right to declare the Pennvest Loan in default and has accelerated the Pennvest Loan and has demanded that PA1 pay $8,137,117 (principal,
interest plus late charges) on or before October 24, 2014. PA1 did not make the payment and did not then and does not now have
the resources to make the payment demanded by Pennvest. During August 2012, the Company provided Pennvest (and the PADEP) with
data demonstrating that the Kreider 1 system met the ‘technology guaranty’ standards which were incorporated in the
Pennvest financing documents and, as a result, the Pennvest Loan is now solely an obligation of PA1. No litigation has commenced
related to this matter but such litigation is likely if negotiations do not produce a resolution (Note 1 and Note 5).
The Company currently is not involved in any other material litigation.
10. RELATED
PARTY TRANSACTIONS:
The Coalition for Affordable Bay Solutions
(“CABS”), a not-for-profit organization that engages in political and legislative lobbying and educational activities
regarding the competitive bidding procurement and nutrient credit trading program in Pennsylvania (and elsewhere), shares certain
key management members with the Company.
During the both the three and six months ended
December 31, 2020 and 2019, the Company received nil and nil for expense reimbursements from CABS, respectively. During the three
months ended December 31, 2020 and 2019, the Company paid CABS nil and $26,920, respectively for consulting expenses. During the
six months ended December 31, 2020 and 2019, the company paid CABS nil and $39,820, respectively for consulting expenses.
11. SUBSEQUENT
EVENTS:
The Company has evaluated events that occurred
subsequent to December 31, 2020 for recognition and disclosure in the financial statements and notes to the financial statements.
From January 1, 2021 through February 5, 2021,
the Company has sold 200,000 Units of its securities at $0.50 per Unit for aggregate consideration of $100,000. Each Unit consists
of one share of common stock and a callable warrant to purchase one share of the Company’s common shares at $0.75 per share
until December 31, 2021.
From January 1, 2021 through February 5, 2021,
the Company has granted 85,000 options to employees and consultants, which options are exercisable at $0.60 per share until December
31, 2025.
From January 1, 2021 through February 5, 2021,
the Company applied for and received confirmation from its lender that its PPP loan of $34,800 and accrued interest was forgiven
by the SBA.