Statements made in this Form 10-Q that are not historical or current facts,
which represent the Company's expectations or beliefs including, but not limited
to, statements concerning the Company's operations, performance, financial
condition, business strategies, and other information, involve substantial risks
and uncertainties. The Company's actual results of operations, most of which are
beyond the Company's control, could differ materially. These statements often
can be identified by the use of terms such as "may," "will," "expect,"
"believe," anticipate," "estimate," or "continue" or the negative thereof. We
wish to caution readers not to place undue reliance on any such forward looking
statements, which speak only as of the date made. Any forward-looking statements
represent management's best judgment as to what may occur in the future.
However, forward looking statements are subject to risks, uncertainties and
important factors beyond our control that could cause actual results and events
to differ materially from historical results of operations and events and those
presently anticipated or projected.
These factors include adverse economic conditions, entry of new and stronger
competitors, inadequate capital, unexpected costs, failure (or delay) to gain
product or regulatory approvals in the United States (or particular states) or
foreign countries, loss (permanently or for any extended period of time) of the
services of members of the Company's small core management team (all of whom are
age 70 or older) and failure to capitalize upon access to new markets.
Additional risks and uncertainties that may affect forward looking statements
about Bion's business and prospects include the possibility that markets for
nutrient reduction credits (discussed below) and/or other ways to monetize
nutrient reductions will be slow to develop (or not develop at all), the
existing default by PA1 on its loan secured by the Kreider 1 system, the
possibility that a competitor will develop a more comprehensive or less
expensive environmental solution, delays in market awareness of Bion and our
Systems, uncertainties and costs related to research and development efforts to
update and improve Bion's technologies and applications thereof, and/or delays
in Bion's development of Projects and failure of marketing strategies, each of
which could have both immediate and long term material adverse effects by
placing us behind our competitors and requiring expenditures of our limited
resources.
THESE RISKS, UNCERTAINTIES AND FACTORS BEYOND OUR CONTROL ARE MAGNIFIED DURING
THE CURRENT UNCERTAIN PERIOD RELATED TO THE COVID-19 PANDEMIC AND THE UNIQUE
ECONOMIC, FINANCIAL, GOVERNMENTAL AND HEALTH-RELATED CONDITIONS IN WHICH THE
COMPANY, THE ENTIRE COUNTRY AND THE ENTIRE WORLD NOW RESIDE. TO DATE THE
COMPANY HAS EXPERIENCED DIRECT IMPACTS IN VARIOUS AREAS INCLUDING 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 GOVERNMENT WHICH IS LIKELY TO NEGATIVELY IMPACT THE COMPANY'S
LEGISLATIVE INITIATIVES IN PENNSYLVANIA AND WASHINGTON DC, III) STRAINS AND
UNCERTAINTIES IN BOTH THE EQUITY AND DEBT MARKETS 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 OF FUNDING OF THE COMPANY AND ITS INITIATIVES AND
PROJECTS MORE DIFFICULT AS FUTURE INDUSTRY CONDITIONS ARE NOW MORE DIFFICULT TO
ASSESS/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.
27
Bion disclaims any obligation subsequently to revise any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
filed herein with the Company's Form 10-K for the year ended June 30, 2019.
BUSINESS OVERVIEW
From 2014 through the current fiscal year, the Company has focused its research
and development activities toward development of our 3G Tech, augmenting the
basic 'separate and aggregate' approach of its technology platform to provide
additional flexibility and to increase recovery of nutrient co-products (in
organic and non-organic forms) and renewable energy production (either/both
biogas and/or renewable electricity and related credits), 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). 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 continued through the 2018 and 2019 fiscal
years with increased focus on recovery of marketable 'coproducts' (including
nutrients and renewable natural gas) and completion of development of Bion's 3G
Tech and technology platform. We believe such activities will continue at least
through the 2020 calendar 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 the 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).
Bion's 3G Tech and technology platform are designed to capture four revenue
streams under one umbrella and provide the basis for joint ventures between the
Company and larger livestock producers seeking to produce
environmental/sustainable product lines. The revenue streams are: a) renewable
energy and associated greenhouse gas credits (including US Renewable Fuel
Standard (RFS) and/or Low Carbon Fuel Standard (LCFS) credits)(the value and
availability of which will vary based on livestock type, geographical locations,
and state regulatory programs), b) verified nutrient reductions (primarily
nitrogen and phosphorus) that can be used as qualified offsets to the federal
Chesapeake Bay mandate and US EPA TMDL ('total maximum daily limit')
requirements (the value of which will vary based on livestock type, geographical
locations, and state regulatory programs), c) co-products consisting of high
value fertilizer that Bion believes will achieve certification for use in
organic food production for human consumption during the current fiscal year
and/or to grow feed for use by livestock in Projects, and d) an environmentally
sustainable USDA certification that will be incorporated into a "brand" that can
address the consumer concerns regarding food safety and sustainability (based on
incorporation of all of the third party verified data for greenhouse gas
reductions, nutrient reductions and fertilizer products into a digital
register). The Company believes that the "branding" opportunity will offer large
scale livestock producer / processor / distributors of livestock products the
opportunity to differentiate and identify their products in the marketplace and,
thereby creates the opportunity to achieve "premium pricing" by addressing
consumer concerns related to safety and sustainability in a manner similar to
the premiums achieved by organic producers.
Operational results from the initial commercial system (utilizing our 2G Tech)
confirmed the ability of Bion's technologies to meet nutrient reduction goals at
commercial scale for an extended period of operation. Bion's 3G Tech platform
(and the new variations under development) center on its patented and
proprietary processes that separate and aggregate the various assets in the CAFO
waste stream so they become benign, stable and/or transportable. Bion systems
can: a) remove up to 95% of the nutrients (primarily nitrogen and phosphorus) in
the effluent, b) reduce greenhouse gases by 90% (or more) including elimination
of virtually all ammonia emissions, c) while materially reducing pathogens,
antibiotics and hormones in the livestock waste stream. Our core technology and
its primary CAFO applications are now proven in commercial operations. It has
been accepted by the Environmental Protection Agency ("EPA") and other
regulatory agencies and it is protected by Bion's portfolio of U.S. and
international patents (both issued and applied for).
Currently, our research and development activities are underway to improve,
update and commercialization of our 3G Tech systems (which is ready to be
implemented) during the current fiscal year to meet the needs of CAFOs in
various geographic and climate areas with nutrient release constraints and to
increase the recovery and generation of valuable by-products while adding the
capability to treat dry (poultry) waste streams in addition to wet manure
streams at lower capital costs and operating costs.
28
Bion is focused on using applications of its patented and proprietary waste
management technologies and technology platform to pursue three main business
opportunities: 1) development of new state-of-the-art large-scale waste
treatment facilities in joint ventures with large CAFO's (and other agricultural
industry parties) in strategic locations ("Projects") ( some of these may be
fully or partially Integrated Projects) with multiple revenue streams; 2)
installation of Bion systems ( some of which may generate verified nutrient
reduction credits and revenues from the production of renewable energy and
coproducts) to retrofit and environmentally remediate existing large scale CAFOs
("Retrofits") in selected markets where: a) government policy supports such
efforts (such as the Chesapeake Bay watershed, some Great Lakes Basin states,
and/or other states and watersheds facing EPA 'total maximum daily load'
("TMDL") issues, and/or b) where CAFO's need our technology to obtain permits to
expand or develop without negative environmental consequences; and 3) licensing
and/or joint venturing of Bion's technology and applications (primarily) outside
North America. The opportunities described at 1) and 2) above each require
substantial political and regulatory (federal, state and local) efforts on the
part of the Company and a substantial part of Bion's efforts are focused on such
political and regulatory matters. Bion intends to pursue international
opportunities primarily through the use of consultants with existing
relationships in target locations. The most intense focus is currently on the
requirements for the clean-up of the Chesapeake Bay, on CAFO projects in the
mid-west involving various species, and the potential use of Bion's technology
and technology platform on CAFOs to remediate ammonia release (and re-deposition
to the ground and water) and as an alternative to what the Company believes is
far more expensive nutrient removal downstream in storm water and other
projects.
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 first commercial
activity in this area is represented by our agreement with Kreider Farms ("KF"),
pursuant to which the Kreider 1 system to treat KF's dairy waste streams to
reduce nutrient releases to the environment while generating marketable nutrient
credits and renewable energy 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"). After substantial
unanticipated delays, on August 12, 2010 PA1 received a permit for construction
of the Kreider 1 System. Construction activities commenced during November 2010.
The closing/settlement of the Pennvest Loan took place on November 3, 2010. PA1
finished the construction of the Kreider 1 System and entered a period of system
'operational shakedown' during May 2011. The Kreider 1 System reached full,
stabilized operation by the end of the 2012 fiscal year. During 2011 the PADEP
re-certified the nutrient credits for this project. The PADEP issued final
permits for the Kreider 1 System (including the credit verification plan) on
August 1, 2012 on which date the Company deemed that the Kreider 1 System was
'placed in service'. As a result, PA1 commenced generating nutrient reduction
credits for potential sale while continuing to utilize the Kreider 1 System to
test improvements and add-ons. However, to date liquidity in the Pennsylvania
nutrient credit market has been slow to develop significant breadth and depth,
which limited liquidity/depth has negatively impacted Bion's business plans and
has resulted in challenges to monetizing the nutrient reductions created by
PA1's existing Kreider 1 project and Bion's other proposed projects. These
difficulties have prevented PA1 from generating any material revenues from the
Kreider 1 project to date and raise significant questions as to when, if ever,
PA1 will be able to generate such revenues from the 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 three 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, the Company has not made any principal payments, which were
to begin in fiscal 2013, and, therefore, the Company has classified the Pennvest
Loan as a current liability as of March 31, 2020. Due to the failure of the
Pennsylvania nutrient reduction credit market to develop, the Company determined
that the carrying amount of the property and equipment related to the Kreider 1
project exceeded its estimated future undiscounted cash flows based on certain
assumptions regarding timing, level and probability of revenues from sales of
nutrient reduction credits and, therefore, PA1 and the Company recorded
impairments related to the value of the Kreider 1 assets of $1,750,000 and
$2,000,000 at June 30, 2015 and June 30, 2014, respectively. During the 2016
fiscal year, PA1 and the Company recorded an 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.
29
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. As of the date of this report, no formal proposals are
currently under consideration and only sporadic communication has taken place
regarding the matters involved over the last 5 years. It is not possible at this
date to predict the outcome of 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 KF1) may be reached in the future if/when a more
robust market for nutrient reductions develops in Pennsylvania, of which there
is no assurance. PA1 and Bion will continue to evaluate various options with
regard to Kreider 1 over the next 180 days.
The economics (potential revenues, profitability and continued operation) of the
Kreider 1 System were based almost entirely on the long-term sale of nutrient
(nitrogen and/or phosphorus) reduction credits to meet the requirements of the
Chesapeake Bay environmental clean-up. See below for further discussion.
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.
PA1 is currently maintaining the Kreider 1 System pending development of a more
robust market for its nutrient reductions and/or its potential inclusion within
the Kreider 2 Project discussed below.
Bion continues its pre-development work related to a waste treatment/renewable
energy production facility to treat the waste from KF's approximately 6+ million
chickens (planned to expand to approximately 9-10 million) (and potentially
other poultry operations and/or other waste streams) ('Kreider Renewable Energy
Facility' or ' Kreider 2 Project'). On May 5, 2016, the Company executed a
stand-alone joint venture agreement with Kreider Farms covering all matters
related to development and operation of Kreider 2 system to treat the waste
streams from Kreider's poultry facilities in Bion PA2 LLC ("PA2"). During May
2011 the PADEP certified a smaller version of the Kreider 2 Project for 559,457
nutrient credits under the old EPA's Chesapeake Bay model. The Company has been
in ongoing discussions with the PADEP regarding the appropriate credit
calculation methodology for large-scale technology-based nutrient reduction
installations such as the KF2 Project. Based on these discussions and the size
of the Kreider 2 Project, we anticipate that when designs are finalized, the
Kreider 2 Project will be re-certified for a far larger number of credits
(management's current estimates are between 2-4 million (or more) nutrient
reduction credits for treatment of the waste stream from Kreider's poultry
pursuant to the Company's subsequent amended application during the current
fiscal year pursuant to the amended EPA Chesapeake Bay model and agreements
between the EPA and PA. Note that this Project may be expanded in the future to
treat wastes from other local and regional CAFOs (poultry and/or
dairy---including the Kreider Dairy) and/or additional Kreider poultry expansion
(some of which may not qualify for nutrient reduction credits). The review
process to clarify certain issues related to credit calculation and verification
commenced during 2014 based on Bion's 2G Tech but has been placed on hold while
certain matters are resolved between the EPA and Pennsylvania and pending
development of a robust market for nutrient reductions in Pennsylvania. The
Company anticipates it will submit an amended or new application based on our 3G
Technology once these matters are clear. Site specific design and engineering
work for this facility, which will probably be the first full-scale project to
utilize Bion's 3G Tech, have not commenced, and the Company does not yet have
financing in place for the Kreider 2 Project. This opportunity is being pursued
through PA2. If there are positive developments related to the market for
nutrient reductions in Pennsylvania, of which there is no assurance, the Company
intends to pursue development, design and construction of the Kreider 2 Project
with a goal of achieving operational status for its initial modules during the
coming calendar year, and hopes to enter into agreements related to sales of the
nutrient reduction credits for future delivery (under long term contracts)
during the 2021 calendar year subject to verification by the PADEP based on
operating data from the Kreider 2 Project. The economics (potential revenues and
profitability) of the Kreider 2 Project, despite its use of Bion's 3G Tech for
increased recovery of marketable by-products, are based in material part the
long-term sale of nutrient (nitrogen and/or phosphorus) reduction credits to
meet the requirements of the Chesapeake Bay environmental clean-up. However,
liquidity in the Pennsylvania nutrient credit market has been slow to develop
significant breadth and depth, which lack of liquidity has negatively impacted
Bion's business plans and has resulted in challenges to monetizing the nutrient
reduction credits generated by PA1's existing Kreider 1 project and will most
likely delay PA2's Kreider 2 Project and other proposed projects in
Pennsylvania.
30
Note that while Bion believes that the Kreider 1 System, the Kreider 2 Project
and/or subsequent Bion Projects will eventually generate revenue from the sale
of: a) nutrient reductions (credits or in other form), b) renewable energy (and
related credits), c) sales of fertilizer products, and/or d) potentially, in
time, credits for the reduction of greenhouse gas emissions, plus e) license
fees related to a 'sustainable brand'. We believe that the potential market is
very large, but it is not possible to predict the exact timing and/or magnitude
of these potential markets at this time.
A substantial portion of our activities involve public policy initiatives (by
the Company and other stakeholders) to encourage the establishment of
appropriate public policies and regulations (at federal, regional, state and
local levels) to facilitate cost effective environmental clean-up and, thereby,
support our business activities. Bion has been joined by National Milk Producers
Federation, Land O'Lakes, JBS and other national livestock interests to support
changes to our nation's clean water strategy that will allow states to acquire
low-cost nutrient reductions through a competitive procurement process, in a
similar manner to how government entities now acquire many other goods and
services on behalf of the taxpayer. As developing markets for nutrient
reductions become fully-established, Bion anticipates a robust business
opportunity to retrofit existing CAFOs and develop Projects, based primarily on
the sale of nutrient credits that provide cost-effective alternatives to today's
high-cost and failing clean water strategy.
To date the market for long-term nutrient reduction credits in Pennsylvania
('PA') has been very slow to develop and the Company's activities have been
negatively affected by such lack of development. However, Bion is confident that
once these markets are established, the credits it produces will be competitive
in the credit trading markets, based on its cost to remove nitrogen from the
livestock waste stream, compared to the cost to remove nitrogen through various
other treatment activities.
Several independent studies have calculated the average cost to remove nitrogen
through various sector practices. Reports prepared for the PA Senate (2008),
Chesapeake Bay Commission (2012) and PA legislature (2013; described below), as
well as the Maryland Chesapeake Bay Financing Strategy Report (2015),
demonstrate that the cost to remove nitrogen (per pound on average) from
agriculture is $44 to $54, municipal wastewater: $28 to $43, and storm water:
$386 to $633. Pursuant to the PA legislative Report, by replacing sector
allocation (for all sectors) with competitive bidding, up to 80 percent savings
could be achieved in PA's Chesapeake Bay compliance costs ($1.5 billion
annually) by 2025. If the legislative study had focused on the cost
differentials of competitive bidding compared only with storm water, the
relative savings would be substantially greater.
Since these studies were completed, most of the larger (Tier 1) municipal
wastewater treatment plants in PA have been upgraded, at a cost of approximately
$2.5 billion (vs initial 2004 PA DEP cost estimates of $376 million). US EPA is
now focused on PA's storm water allocation (3.5 million pounds (per last
published data)) and has this sector on 'backstop level actions', the highest
level of EPA-oversight and the final step before sanctions. In the same 2004 PA
DEP cost estimate that led to the more than a $2 billion
underestimate/miscalculation in municipal wastewater plant upgrade costs, the
estimate for storm water cost was $5.6 billion. In April 2017, US EPA sent a
Letter of Expectation to PA DEP, expressing the agency's support for the use of
nutrient credit trading and competitive bidding to engage the private-sector to
lower costs. The letter specifically encouraged the use of credit trading to
offset the state's looming storm water obligations.
31
The Company believes that: i) the April 2015 release of a report from the
Pennsylvania Auditor General titled "Special Report on the Importance of Meeting
Pennsylvania's Chesapeake Bay Nutrient Reduction Targets" which highlighted the
economic consequences of EPA-imposed sanctions if the state fails to meet the
2017 TMDL targets, as well as the need to support using low-cost solutions and
technologies as alternatives to higher-cost public infrastructure projects,
where possible, and ii) Senate Bill 575 (introduced in April 2019 as successor
to prior SB 799 (which was passed by PA Senate during January 2018 but was not
voted on in the House)) which, if adopted, will establish a program that will
allow the Pennsylvania's tax- and rate-payers to meet significant portions of
their EPA-mandated Chesapeake Bay pollution reductions at significantly lower
cost by purchasing verified reductions (by competitive bidding) from all
sources, including those that Bion can produce through livestock waste
treatment, represent visible evidence of progress being made on these matters in
Pennsylvania. SB 575 was passed by the PA Senate in 2019 and introduced in the
PA House which is scheduled to be taken up the bill during its current session
which is now underway. Such legislation (which has bi-partisan support), if
passed and signed into law (of which there is no assurance), will potentially
enable Bion (and others) to compete for public funding on an equal basis with
subsidized agricultural 'best management practices' and public works and storm
water authorities. Note, however, that there is opposition to SB 575 (as was the
case for SB 799 and its predecessors) from threatened stakeholders committed to
the existing status quo approaches--- a significant portion of which was focused
on attacking (in often inaccurate and/or vilifying ways) Bion in/through social
media and internet articles, blogs, press releases, twitter posts and re-tweets,
rather than engaging the substantive issues. Further note that the current
COVID-19 crisis has shifted government, legislative and budget focuses in PA in
manners which may delay our efforts. If legislation similar to SB 575 is passed
(on a stand-alone basis or as part of a larger piece of legislation) and
implemented (in a form which maintains its core provisions), Bion expects that
the policies and strategies being developed in PA will not only benefit the
Company's existing and proposed PA projects, but will also subsequently provide
the basis for a larger Chesapeake Bay watershed strategy and, thereafter, a
national clean water strategy.
The Company believes that Pennsylvania is 'ground zero' in the long-standing
clean water battle between agriculture and the further regulation of agriculture
relative to nutrient impacts. The ability of Bion and other technology providers
to achieve verified reductions from agricultural non-point sources can resolve
the current stalemate and enable implementation of constructive solutions that
benefit all stakeholders, providing a mechanism that ensures that taxpayer funds
will be used to achieve the most beneficial result at the lowest cost,
regardless of source. All sources, point and non-point, rural and urban, will be
able to compete for tax payer-funded nitrogen reductions in a fair and
transparent process; and since payment from the tax and rate payers would now be
performance-based, these providers will be held financially accountable.
We believe that the overwhelming environmental, economic, quality of life and
public health benefits to all stakeholders in the watershed, both within and
outside of Pennsylvania, make the case for adoption of the strategies outlined
in the Report less an issue of 'if', but of 'when and how'. The adoption of a
competitive procurement program will have significant positive impact on
technology providers that can deliver verified nitrogen reductions such as Bion,
by allocating existing tax- and rate-payer clean water funding to low cost
solutions based upon a voluntary and transparent procurement process. The
Company believes that implementation of a competitively-bid nutrient reduction
program to achieve the goals for the Chesapeake Bay watershed can also provide a
working policy model and platform for other states to adopt that will enhance
their efforts to comply with both current and future requirements for local and
federal estuarine watersheds, including the Mississippi River/Gulf of Mexico,
the Great Lakes Basin and other nutrient-impaired watersheds. (Note, however,
that current COVID-19 crisis has shifted government, legislative and budget
focuses in manners which may delay the fruition of our efforts.)
32
Bion will also pursue the opportunities related to development of Projects
(including Integrated Projects) which are likely to involve joint ventures with
large livestock producers who can utilize the benefits of the 'sustainable
branding' that Bion technology can facilitate for products produced utilizing
its technology and/or utilized the co-products produced by Bion's systems in the
livestock production process. Integrated Projects will include large CAFOs (such
as large poultry facilities, dairy complexes, beef cattle feed lots and/or hog
farms) with Bion waste treatment/resource recovery system modules processing the
aggregate CAFO waste stream from the equivalent of 20,000 to 80,000 (or more)
beef or dairy cows (or the waste stream equivalent of other species), while
recovering and utilizing value-added fertilizer/soil amendment products and/or
renewable energy, integrated to various degrees with CAFO end product
users/processing facilities, and/or potentially in some locations, a
biofuel/ethanol plant. Such Integrated Projects will involve large CAFOs with
Bion waste treatment/resource recovery modules on a single site and/or on sites
within an approximately 30-mile radius. Bion believes its 3G technology platform
will allow integration of large-scale CAFO's with end product processors (and/or
potentially biofuel production), together with renewable energy production and
co-product recovery from the waste streams, and on-site energy utilization in a
relatively 'closed loop' manner that will reduce the capital expenditures,
operating costs and carbon footprint for the entire Integrated Project and each
component facility. Some Integrated Projects may be developed from scratch while
others may be developed in geographic proximity to (and in coordination with)
existing participating CAFOs, feed producers (corn growers and/or biofuel
plants) and end product processors. Each Integrated Project is likely to have
different degrees of integration, especially in the early development phases.
The Company currently anticipates that the Kreider 2 poultry waste treatment
facility in PA will be its initial full-scale 3G Project. Bion anticipates that
it will finalize site selection for the Kreider 2 Project and/or its initial
Integrated Project (and possibly additional Projects) during the current fiscal
year if SB 575 becomes law in PA. Bion hopes to commence development of its
initial Project by optioning land and beginning the site-specific design and
permitting process during the current fiscal year, but further delays are
possible. It is not possible at this time to firmly predict where the initial
Project will be developed or the order in which Projects will be developed. All
potential Projects are in very early discussion and pre-development stages and
may never progress to actual development or may be developed after other
Projects not yet under active consideration.
Bion also hopes to be able to move forward on additional Projects through
2021-2024 to create a pipeline of Projects. Management has a 5-year development
target (through calendar year 2026) of approximately 10 or more Projects
pursuant to joint ventures (or similar agreements). Management hopes to have
identified and begun development work related to 3-5 Projects over the next 2
years. At the end of the 5-year period, Bion projects that 3-8 of these Projects
will be in full operation in 3-6 states (and possibly one or more foreign
countries), and the balance would be in various stages ranging from partial
operation to early development stage. It is possible that one or more Projects
will be developed in joint ventures specifically targeted to meet the growing
animal protein demand outside of the United States (including without limitation
Asia, Europe and/or the Middle East). No Projects (including Integrated
Projects) have been developed to date.
The Company's audited financial statements for the years ended June 30, 2019 and
2018 were prepared assuming the Company will continue as a going concern. The
Company has incurred net losses of approximately $2,659,000 and $3,018,000
during the years ended June 30, 2019 and 2018, respectively. The Report of the
Independent Registered Public Accounting Firm on the Company's consolidated
financial statements as of and for the year ended June 30, 2019 includes a
"going concern" explanatory paragraph which means that there are factors that
raise substantial doubt about the Company's ability to continue as a going
concern. The Company has incurred net losses of approximately $1,714,000 and
$1,951,000 for the nine months ended March 31, 2020 and 2019, respectively. At
March 31, 2020, the Company had a working capital deficit and a stockholders'
deficit of approximately $10,552,000 and $15,157,000, respectively. Management's
plans with respect to these matters are described in this section and in our
consolidated financial statements (and notes thereto), and this material does
not include any adjustments that might result from the outcome of this
uncertainty. However, there is no guarantee that we will be able to raise
sufficient funds or further capital for the operations planned in the near
future.
33
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.
CRITICAL ACCOUNTING POLICIES
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".
Stock-based compensation
The Company follows the provisions of ASC 718, which generally requires that
share-based compensation transactions be accounted and recognized in the
statement of income 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.
Recent Accounting Pronouncements:
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.
34
THREE MONTHS ENDED MARCH 31, 2020 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2019
Revenue
Total revenues were nil for both the three months ended March 31, 2020 and 2019,
respectively.
General and Administrative
Total general and administrative expenses were $269,000 and $305,000 for the
three months ended March 31, 2020 and 2019, respectively.
General and administrative expenses, excluding stock-based compensation charges
of nil and $5,000, were $269,000 and $300,000 for the three months ended March
31, 2020 and 2019, respectively, representing a $31,000 decrease. Salaries and
related payroll tax expenses were $67,000 and $62,000 for the three months ended
March 31, 2020 and 2019, respectively. Consulting costs were $117,000 and
$115,000 for the three months ended March 31, 2020 and 2019, respectively.
Investor relation expenses were $17,000 and $44,000 for the three months ended
March 31, 2020 and 2019, respectively, with the three months ended March 31,
2019 being higher due to a contract with a company providing investor relations
for emerging growth companies during that period.
General and administrative stock-based employee compensation for the three
months ended March 31, 2020 and 2019 consists of the following:
Three months Three months
ended ended
March 31, March 31,
2020 2019
General and administrative:
Fair value of stock options expensed under ASC 718 $ - $ 5,000
Total
$ - $ 5,000Stock-based compensation charges were nil and $5,000 for the three months ended
March 31, 2020 and 2019, respectively. The fair value of stock options expensed
for the three months ended March 31, 2020 and 2019 was nil and $5,000,
respectively. The Company granted nil and 25,000 fully vested options during the
three months ended March 31, 2020 and 2019, respectively.
Depreciation
Total depreciation expense was $347 and $271 for the three months ended March
31, 2020 and 2019, respectively.
Research and Development
Total research and development expenses were $135,000 and $104,000 for the three
months ended March 31, 2020 and 2019, respectively, representing a $31,000
increase.
Salaries and related payroll tax expenses were $19,000 and $20,000 for the three
months ended March 31, 2020 and 2019, respectively. Consulting costs were
$60,000 and $62,000 for the three months ended March 31, 2020 and 2019,
respectively. The Company also incurred $42,000 and nil for the three months
ended March 31, 2020 and 2019, respectively in the development of a new pilot
program for its anaerobic digestate process. Research and development
stock-based employee compensation for the three months ended March 31, 2020 and
2019 were nil for both periods.
Loss from Operations
As a result of the factors described above, the loss from operations was
$404,000 and $409,000 for the three months ended March 31, 2020 and 2019,
respectively.
35
Other Expense
Other expense was $103,000 and $100,000 for the three months ended March 31,
2020 and 2019, respectively. Interest on deferred compensation and convertible
notes payable was $3,000 higher during the three months ended March 31, 2020 due
to higher overall balances.
Net Loss Attributable to the Noncontrolling Interest
The net loss attributable to the noncontrolling interest was $516 and $505 for
the three months ended March 31, 2020 and 2019, respectively.
Net Loss Attributable to Bion's Common Stockholders
As a result of the factors described above, the net loss attributable to Bion's
stockholders was $507,000 and $509,000 for the three months ended March 31, 2020
and 2019, respectively, and the net loss per basic common share was $0.02 and
$0.01 for the three months ended March 31, 2020 and 2019, respectively.
NINE MONTHS ENDED MARCH 31, 2020 COMPARED TO THE NINE MONTHS ENDED MARCH 31,
2019
Revenue
Total revenues were nil for both the nine months ended March 31, 2020 and 2019,
respectively.
General and Administrative
Total general and administrative expenses were $977,000 and $1,273,000 for the
nine months ended March 31, 2020 and 2019, respectively.
General and administrative expenses, excluding stock-based compensation charges
of $92,000 and $426,000, were $885,000 and $847,000 for the nine months ended
March 31, 2020 and 2019, respectively, representing a $38,000 increase. Salaries
and related payroll tax expenses were $193,000 for both the nine months ended
March 31, 2020 and 2019, respectively. Consulting costs were $362,000 and
$318,000 for the nine months ended March 31, 2020 and 2019, respectively. The
increase in consulting costs is due to political consulting to further the
environmental mandates in Pennsylvania. Insurance related expenses were $69,000
and $64,000 for the nine months ended March 31, 2020 and 2019, representing a
$5,000 increase due to renewal of insurance coverage and higher premium costs.
General and administrative stock-based employee compensation for the nine months
ended March 31, 2020 and 2019 consists of the following:
Nine months Nine months
ended ended
March 31, March 31,
2020 2019
General and administrative:
Change in fair value from modification of option
terms $ - $ 211,000 Change in fair value from modification of warrant
terms
- 118,000
Fair value of stock options expensed under ASC
718 92,000 97,000
Total $ 92,000 $ 426,000Stock-based compensation charges were $92,000 and $426,000 for the nine months
ended March 31, 2020 and 2019, respectively. Compensation expense relating to
the change in fair value from the modification of option terms was nil and
$211,000 for the nine months ended March 31, 2020 and 2019, respectively, as the
Company granted a reduction in certain exercise prices and an extension of
certain option expiration dates for an employee during the nine months ended
March 31, 2019. During the nine months ended March 31, 2019, the Company
extended expiration dates of warrants for certain employees and consultants
which resulted in the recognition of $118,000 in non-cash compensation, while no
such warrant modifications took place during the nine months ended March 31,
2020. The fair value of stock options expensed for the nine months ended March
31, 2020 and 2019 was $92,000 and $97,000, respectively both periods. The
Company granted 390,000 and 350,000 fully vested options during the nine months
ended March 31, 2020 and 2019, respectively.
36
Depreciation
Total depreciation expense was $1,041 and $966 for the nine months ended March
31, 2020 and 2019, respectively.
Research and Development
Total research and development expenses were $373,000 and $387,000 for the nine
months ended March 31, 2020 and 2019, respectively.
Research and development expenses, excluding stock-based compensation expenses
of $8,000 and $82,000 were $365,000 and $305,000 for the nine months ended March
31, 2020 and 2019, respectively. Salaries and related payroll tax expenses were
$60,000 for both the nine months ended March 31, 2020 and 2019, respectively.
Consulting costs were $164,000 and $177,000 for the nine months ended March 31,
2020 and 2019, respectively, while expenses related to the development of a new
pilot program for its anaerobic digestate process were $95,000 and $18,000,
respectively for the nine months ended March 31, 2020 and 2019, respectively.
Research and development stock-based employee compensation for the nine months
ended March 31, 2020 and 2019 consists of the following:
Nine months ended Nine months ended
March 31, 2020 March 31, 2019
Research and development:
Change in fair value from modification of option
terms $ - $ 11,000
Change in fair value from modification of warrant
terms
- 45,000
Fair value of stock options expensed under ASC
718 8,000 26,000
Total $ 8,000 $ 82,000
Stock-based compensation expenses were $8,000 and $82,000 and for the nine
months ended March 31, 2020 and 2019, respectively. The compensation expense of
$11,000 for the nine months ended March 31, 2019 was for the change in fair
value from modification of options terms is due to a research and development
employee and consultant having certain option exercise prices reduced during
those periods. During the nine months ended March 31, 2019, the Company extended
expiration dates of warrants for certain research and development employees and
consultants which resulted in the recognition of $45,000 in non-cash
compensation. The Company expensed $8,000 and $26,000 for the fair value of
stock options that vested during the nine months ended March 31, 2020 and 2019.
Loss from Operations
As a result of the factors described above, the loss from operations was
$1,350,000 and $1,661,000 for the nine months ended March 31, 2020 and 2019,
respectively.
Other Expense
Other expense was $363,000 and $290,000 for the nine months ended March 31, 2020
and 2019, respectively. Interest expense related the Pennvest Loan was $185,000
and $173,000 for the nine months ended March 31, 2020 and 2019, respectively,
while interest expense related to deferred compensation and convertible notes
was $141,000 and $108,000 for the nine months ended March 31, 2020 and 2019,
respectively. Additionally, interest expense of $36,000 and $8,000 was recorded
during the nine months ended March 31, 2020 and 2019, respectively, due to the
modification of warrant expiry dates for warrants held by investors.
37
Net Loss Attributable to the Noncontrolling Interest
The net loss attributable to the noncontrolling interest was $2,000 and $4,000
for the nine months ended March 31, 2020 and 2019, respectively.
Net Loss Attributable to Bion's Common Stockholders
As a result of the factors described above, the net loss attributable to Bion's
stockholders was $1,712,000 and $1,947,000 for the nine months ended March 31,
2020 and 2019, respectively, and the net loss per basic common share was $0.06
and $0.07 for the nine months ended March 31, 2020 and 2019, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated financial statements for the nine months ended March
31, 2020 have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments in the
normal course of business. The Report of our Independent Registered Public
Accounting Firm on the Company's consolidated financial statements as of and for
the year ended June 30, 2019 includes a "going concern" explanatory paragraph
which means that the auditors stated that conditions exist that raise
substantial doubt about the Company's ability to continue as a going concern.
Operating Activities
As of March 31, 2020, the Company had cash of approximately $357,000. During the
nine months ended March 31, 2020, net cash used in operating activities was
$753,000, primarily consisting of cash operating expenses related to salaries
and benefits, and other general and administrative costs such as insurance,
legal, accounting and investor relations expenses. As previously noted, the
Company is currently not generating significant revenue and accordingly has not
generated cash flows from operations. The Company does not anticipate generating
sufficient revenues to offset operating and capital costs for a minimum of two
to five years. While there are no assurances that the Company will be successful
in its efforts to develop and construct its Projects and market its Systems, it
is certain that the Company will require substantial funding from external
sources. Given the unsettled state of the current credit and capital markets for
companies such as Bion, there is no assurance the Company will be able to raise
the funds it needs on reasonable terms.
Financing Activities
During the nine months ended March 31, 2020, the Company received gross cash
proceeds of $1,159,000 from the sale of 2,318,001 units which consists 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 through
December 2020 and December 2021. The Company paid cash commissions related to
the sale of units of $105,000. The Company received proceeds from loans from
affiliates of $35,000 during the nine months ended March 31, 2020 and used
$20,000 to repay such loans during the same period.
As of March 31, 2020, the Company has debt obligations consisting of: a)
deferred compensation of $652,000, b) convertible notes payable - affiliates of
$4,560,000, and, c) a loan payable and accrued interest of $9,506,000 (owed by
PA1).
38
Plan of Operations and Outlook
As of March 31, 2020, the Company had cash of approximately $357,000.
The Company continues to explore sources of additional financing to satisfy its
current operating requirements as it is not currently generating any significant
revenues. During the past six years (fiscal years 2014 through 2019), the
Company experienced greater difficulty in raising equity and debt funding than
in the prior years (which is not mitigated by the relative increase in equity
funding during the nine months ended March 31, 2020). As a result, the Company
faced, and continues to face, significant cash flow management challenges due to
material working capital constraints. These difficulties, challenges and
constraints have continued during fiscal years 2018 and 2019 and the first nine
(9) months of fiscal year 2020. The Company anticipates that they may continue
for the next twelve (12) months or longer. To partially mitigate these working
capital constraints, the Company's core senior management and some key employees
and consultants have been deferring all or part of their cash compensation
and/or are accepting compensation in the form of securities of the Company
(Notes 5 and 7 to Financial Statements) and members of the Company's senior
management have made loans to the Company which have been converted into
convertible promissory notes as of March 31, 2020. 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. As of March 31, 2020, such deferrals totaled approximately
$5,212,000 (including accrued interest and deferred compensation converted into
promissory notes but excluding conversions of deferred compensation into the
Company's common stock by officers, employees and consultants that have already
been completed). The extended constraints on available resources have had, and
continue to have, negative effects on the pace and scope of the Company's effort
to develop its business. The Company made reductions in its personnel during the
years ended June 30, 2014 and 2015 and again in 2018. The Company has had to
delay payments of trade obligations and 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 current year (and subsequent
periods), we will need to consider deeper cuts (including additional personnel
cuts) and curtailments of operations (including possibly Kreider 1 operations).
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 CAFO Retrofit waste remediation systems
(including the Kreider 2 facility) and to continue to operate the Kreider 1
facility (subject to agreements being reached with Pennvest as discussed above).
The Company anticipates that it will seek to raise from $2,500,000 to
$50,000,000 or more (debt and equity) during the next twelve months. However, as
discussed above, there is no guarantee that we will be able to raise sufficient
funds or further capital for the operations planned in the near future.
The Company is not currently generating any significant revenues. Further, the
Company's anticipated revenues, if any, from existing projects and proposed
projects will not be sufficient to meet the Company's anticipated operational
and capital expenditure needs for many years. During the nine months ended March
31, 2020 the Company raised gross proceeds of approximately $1,159,000 through
the sale of its securities and paid commissions of approximately $105,000, and
anticipates raising additional funds from such sales and transactions. However,
there is no guarantee that we will be able to raise sufficient funds or further
capital for the operations planned in the near future.
Because the Company is not currently generating significant revenues, the
Company will need to obtain additional capital to fund its operations and
technology development, to satisfy existing creditors, to develop Projects and
to sustain operations at the KF 1 facility.
The first commercial activity in the Retrofit segment is represented by our
agreement with Kreider Farms ("KF"), pursuant to which the Kreider 1 system to
treat KF's dairy waste streams to reduce nutrient releases to the environment
while generating marketable nutrient credits and renewable energy 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"). After substantial unanticipated delays, on August 12, 2010 PA1
received a permit for construction of the Kreider 1 system. Construction
activities commenced during November 2010. The closing/settlement of the
Pennvest Loan took place on November 3, 2010. PA1 finished the construction of
the Kreider 1 System and entered a period of system 'operational shakedown'
during May 2011. The Kreider 1 System reached full, stabilized operation by the
end of the 2012 fiscal year. During 2011 the PADEP re-certified the nutrient
credits for this project. The PADEP issued final permits for the Kreider 1
System (including the credit verification plan) on August 1, 2012 on which date
the Company deemed that the Kreider System was 'placed in service'. As a result,
PA1 commenced generating nutrient reduction credits for potential sale while
continuing to utilize the Kreider 1 system to test improvements and add-ons.
However, to date liquidity in the Pennsylvania nutrient credit market has been
slow to develop significant breadth and depth, which limited liquidity/depth has
negatively impacted Bion's business plans and has resulted in challenges to
monetizing the nutrient reductions created by PA1's existing Kreider 1 project
and Bion's other proposed projects. These difficulties have prevented PA1 from
generating any material revenues from the Kreider 1 project to date and raise
significant questions as to when, if ever, PA1 will be able to generate such
revenues from the 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 three
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, the Company has not made any principal payments, which were to
begin in fiscal 2013, and, therefore, the Company has classified the Pennvest
Loan as a current liability as of March 31, 2020. Due to the failure of the PA
nutrient reduction credit market to develop, the Company determined that the
carrying amount of the property and equipment related to the Kreider 1 project
exceeded its estimated future undiscounted cash flows based on certain
assumptions regarding timing, level and probability of revenues from sales of
nutrient reduction credits and, therefore, PA1 and the Company recorded
impairments related to the value of the Kreider 1 assets of $1,750,000 and
$2,000,000 at June 30, 2015 and June 30, 2014, respectively. During the 2016
fiscal year, PA1 and the Company recorded an 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.
39
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. As of the date of this report, no formal proposals are
currently under consideration and only sporadic communication has taken place
regarding the matters involved over the last 5 years. It is not possible at this
date to predict the outcome of this matter, but the Company believes that a loan
modification agreement (coupled with an agreement regarding an update and
restart of full operations of KF1) may be reached in the future if/when a more
robust market for nutrient reductions develops in PA, of which there is no
assurance. PA1 and Bion will continue to evaluate various options with regard to
Kreider 1 over the next 180 days.
The economics (potential revenues, profitability and continued operation) of the
Kreider 1 System are based almost entirely on the long-term sale of nutrient
(nitrogen and/or phosphorus) reduction credits to meet the requirements of the
Chesapeake Bay environmental clean-up. See below for further discussion.
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.
The Company is currently operating the Kreider 1 System in a limited manner
pending development of a more robust market for its nutrient reductions and/or
its potential inclusion within the Kreider 2 Project discussed above.
As indicated above, the Company anticipates that it will seek to raise from
$2,500,000 to $50,000,000 or more (from debt, equity, joint venture, strategic
partnering, etc.) during the next twelve months, some of which may be in the
context of joint ventures for the development of one or more large scale
projects. We reiterate that there is no assurance, especially in the extremely
unsettled capital markets that presently exist for companies such as Bion, that
the Company will be able to obtain the funds that it needs to stay in business,
finance its Projects and other activities, continue its technology development
and/or to successfully develop its business.
There is extremely limited likelihood that funds required during the next twelve
months or in the periods immediately thereafter will be generated from
operations and there is no assurance that those funds will be available from
external sources such as debt or equity financings or other potential sources.
The lack of additional capital resulting from the inability to generate cash
flow from operations 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 companies such as Bion.
Currently, Bion is focused on using applications of its patented and proprietary
waste management technologies and technology platform to pursue three main
business opportunities: 1) installation of Bion systems ( some of which may
generate verified nutrient reduction credits and revenues from the production of
renewable energy and byproducts) to retrofit and environmentally remediate
existing CAFOs ("Retrofits") in selected markets where: a) government policy
supports such efforts (such as the Chesapeake Bay watershed, Great Lakes Basin
states, and/or other states and watersheds facing EPA 'total maximum daily load'
("TMDL") issues, and/or b) where CAFO's need our technology to obtain permits to
expand or develop without negative environmental consequences; 2) development of
new state-of-the-art large scale waste treatment facilities in joint ventures
with large CAFO's in strategic locations ("Projects") ( some of these may be
Integrated Projects as described below) with multiple revenue streams, and 3)
licensing and/or joint venturing of Bion's technology and applications
(primarily) outside North America commencing during the 2020 calendar year. The
opportunities described at 1) and 2) above each require substantial political
and regulatory (federal, state and local) efforts on the part of the Company and
a substantial part of Bion's efforts are focused on such political and
regulatory matters. Bion is currently pursuing the international opportunities
primarily through the use of consultants with existing relationships in target
countries. The most intense focus is currently on the requirements for the
clean-up of the Chesapeake Bay faced by the Commonwealth of Pennsylvania and the
potential use of Bion's technology and technology platform on CAFOs to remediate
ammonia release (and re-deposition to the ground and water) and as an
alternative to what the Company believes is far more expensive nutrient removal
downstream in storm water and other projects.
40
Additionally, the Kreider agreements provide for Bion to develop a waste
treatment/renewable energy production facility to treat the waste from Kreider's
approximately 6+ million chickens (planned to expand to approximately 9-10
million)(and potentially other poultry operations and/or other waste
streams)('Kreider Renewable Energy Facility' or ' Kreider 2 Project'). On May 5,
2016, the Company executed a stand-alone joint venture agreement with Kreider
Farms covering all matters related to development and operation of a system to
treat the waste streams from Kreider's poultry facilities in Bion PA2 LLC
("PA2"). The Company continues its development work related to the details of
the Kreider 2 Project. During May 2011 the PADEP certified Kreider 2 Project for
559,457 nutrient credits under the old EPA's Chesapeake Bay model. The Company
anticipates that the Kreider 2 Project will be re-certified for between 1.5-2
million (or more) nutrient reduction credits (for treatment of the waste stream
from Kreider's poultry) pursuant to the Company's pending reapplication (or
subsequent amended application) during 2018 pursuant to the amended EPA
Chesapeake Bay model and agreements between the EPA and PA. Note that this
Project may be expanded in the future to treat wastes from other local and
regional CAFOs (poultry and/or dairy - including the Kreider Dairy) and/or
Kreider poultry expansion (some of which may not qualify for nutrient reduction
credits). The review process to clarify certain issues related to credit
calculation and verification commenced during 2014 based on Bion's 2G Tech but
has been largely placed on hold while certain matters are resolved between the
EPA and PA and pending development of a robust market for nutrient reductions in
PA. The Company anticipates it will submit an amended application based on our
3G Technology once these matters are clear. Site specific design and engineering
work for this facility, which will probably be the first full-scale project to
utilize Bion's 3G Tech, have not commenced, and the Company does not yet have
financing in place for the Kreider 2 Project. This opportunity is being pursued
through PA2. If there are positive developments related to the market for
nutrient reductions in PA, of which there is no assurance, the Company intends
to pursue development, design and construction of the Kreider 2 Project with a
goal of achieving operational status of its initial modules during the 2020
calendar year, and hopes to enter into agreements related to sales of the
nutrient reduction credits for future delivery (under long term contracts)
during the 2020 fiscal year subject to verification by the PADEP based on
operating data from the Kreider 2 Project. The economics (potential revenues and
profitability) of the Kreider 2 Project, despite its use of Bion's 3G Tech for
increased recovery of marketable by-products, are based in material part the
long-term sale of nutrient (nitrogen and/or phosphorus) reduction credits to
meet the requirements of the Chesapeake Bay environmental clean-up. However,
liquidity in the PA nutrient credit market has been slow to develop significant
breadth and depth, which lack of liquidity has negatively impacted Bion's
business plans and has resulted in challenges to monetizing the nutrient
reduction credits generated by PA1's existing Kreider 1 project and will most
likely delay PA2's Kreider 2 Project and other proposed projects in PA.
Note that while Bion believes that the Kreider 1 System (when re-started), the
Kreider 2 Project and/or subsequent Bion Projects will eventually generate
revenue from the sale of: a) nutrient reductions (credits or in other form), b)
renewable energy (and related credits), c) sales of fertilizer products, and/or
d) potentially, in time, credits for the reduction of greenhouse gas emissions,
plus e) license fees related to a 'sustainable brand'. We believe that the
potential market is very large, but it is not possible to predict the exact
timing and/or magnitude of these potential markets at this time.
The Company anticipates that the Kreider 2 poultry waste treatment facility in
PA will be its initial Project. Bion anticipates that it will select a site for
the Kreider 2 Project and/or its initial Integrated Project (and possibly
additional Projects) during the current fiscal year if SB575 becomes law in PA.
Bion hopes to commence development of its initial Project by optioning land and
beginning the site specific design and permitting process during the current
year, but delays are possible. It is not possible at this time to firmly predict
where the initial Project will be developed or the order in which Projects will
be developed. All potential Projects are in very early pre-development stages
and may never progress to actual development or may be developed after other
Projects not yet under active consideration.
Bion also hopes to be able to move forward on additional Projects through
2021-24 to create a pipeline of Projects. Management has a 5-year development
target (through calendar year 2026) of approximately 10 or more Projects.
Management hopes to have identified and begun development work related to 3-5
Projects over the next 2 years. At the end of the 5-year period, Bion projects
that 3-8 of these Projects will be in full operation in 3-6 states (and possibly
one or more foreign countries), and the balance would be in various stages
ranging from partial operation to early development stage. It is possible that
one or more Projects will be developed in joint ventures specifically targeted
to meet the growing animal protein demand outside of the United States
(including without limitation Asia, Europe and/or the Middle East). No Projects
(including Integrated Projects) has been developed to date.
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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.
CONTRACTUAL OBLIGATIONS
We have the following material contractual obligations (in addition to
employment and consulting agreements with management and employees):
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 first commercial
activity in this area is represented by our agreement with Kreider Farms ("KF"),
pursuant to which the Kreider 1 system to treat KF's dairy waste streams to
reduce nutrient releases to the environment while generating marketable nutrient
credits and renewable energy 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"). After substantial
unanticipated delays, on August 12, 2010 PA1 received a permit for construction
of the Kreider 1 system. Construction activities commenced during November 2010.
The closing/settlement of the Pennvest Loan took place on November 3, 2010. PA1
finished the construction of the Kreider 1 System and entered a period of system
'operational shakedown' during May 2011. The Kreider 1System reached full,
stabilized operation by the end of the 2012 fiscal year. During 2011 the PADEP
re-certified the nutrient credits for this project. The PADEP issued final
permits for the Kreider 1 System (including the credit verification plan) on
August 1, 2012 on which date the Company deemed that the Kreider System was
'placed in service'. As a result, PA1 commenced generating nutrient reduction
credits for potential sale while continuing to utilize the Kreider 1 system to
test improvements and add-ons. However, to date liquidity in the Pennsylvania
nutrient credit market has been slow to develop significant breadth and depth,
which limited liquidity/depth has negatively impacted Bion's business plans and
has resulted in challenges to monetizing the nutrient reductions created by
PA1's existing Kreider 1 project and Bion's other proposed projects. These
difficulties have prevented PA1 from generating any material revenues from the
Kreider 1 project to date and raise significant questions as to when, if ever,
PA1 will be able to generate such revenues from the 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 three 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, the Company has not made any principal payments, which were
to begin in fiscal 2013, and, therefore, the Company has classified the Pennvest
Loan as a current liability as of March 31, 2020. Due to the failure of the PA
nutrient reduction credit market to develop, the Company determined that the
carrying amount of the property and equipment related to the Kreider 1 project
exceeded its estimated future undiscounted cash flows based on certain
assumptions regarding timing, level and probability of revenues from sales of
nutrient reduction credits and, therefore, PA1 and the Company recorded
impairments related to the value of the Kreider 1 assets of $1,750,000 and
$2,000,000 at June 30, 2015 and June 30, 2014, respectively. During the 2016
fiscal year, PA1 and the Company recorded an 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.
42
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. As of the date of this report, no formal proposals are
currently under consideration and only sporadic communication has taken place
regarding the matters involved over the 5 years. It is not possible at this date
to predict the outcome of this matter, but the Company believes that a loan
modification agreement (coupled with an agreement regarding an update and
restart of full operations of KF1) may be reached in the future if/when a more
robust market for nutrient reductions develops in PA, of which there is no
assurance. PA1 and Bion will continue to evaluate various options with regard to
Kreider 1 over the next 180 days.
The economics (potential revenues, profitability and continued operation) of the
Kreider 1 System are based almost entirely on the long-term sale of nutrient
(nitrogen and/or phosphorus) reduction credits to meet the requirements of the
Chesapeake Bay environmental clean-up.
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.
The Company is currently operating the Kreider 1 System in a limited manner
pending development of a more robust market for its nutrient reductions and/or
its potential inclusion within the Kreider 2 Project discussed below.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements (as that term is defined in
Item 303 of Regulation S-K) that are reasonably likely to have a current or
future material effect on our financial condition, revenue or expenses, results
of operations, liquidity, capital expenditures or capital resources.
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BION ENVIRONMENTAL TECHNOLOGIES, INC. 
