NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016 AND 2015
1.
ORGANIZATION, NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT
S PLANS:
Organization and nature of business:
Bion Environmental Technologies, Inc. (
Bion
or
We
or the
Company
) was incorporated in 1987 in the State of Colorado and has developed and continues to develop patented and proprietary technology and business models that provide comprehensive environmental solutions to a significant source of pollution in United States agriculture, large scale livestock facilities known as Confined Animal Feeding Operations (
CAFO
s
). Bion
s technologies (and applications related thereto) produce substantial reductions of nutrient releases (primarily nitrogen and phosphorus) to both water and air (including ammonia, which is subsequently re-deposited to the ground) from livestock waste streams based upon our operations and research to date (and third party peer review thereof). We are continually involved in research and development to upgrade and improve our technology and technology applications, including integration with third party technology. Bion provides comprehensive and cost-effective treatment of livestock waste onsite (and/or at nearby locations), while it is still concentrated and before it contaminates air, soil, groundwater aquifers and/or downstream waters, and, in certain configurations, can be optimized to maximize recovery of marketable nutrients for potential use as fertilizer (organic and/or inorganic) and/or feed additives plus renewable energy (and related environmental credits).
During the 2014, 2015 and 2016 fiscal years, the Company increased its research and development focus 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 a very 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 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 2017 fiscal year, subject to availability of adequate financing for the Company
s operations, of which there is no assurance.
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 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 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. 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 locations. 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 as an alternative to what the Company believes is far more expensive nutrient removal downstream in storm water projects.
F-7
Management believes that Bion
s technology platform (including utilization of various third party technologies to supplement the Company
s proprietary technologies), through the combination of remediation of the waste streams of large scale existing CAFOs with recovery of valuable marketable nutrients and renewable energy, can enable the integration of large-scale CAFO
s and their end-product users, renewable energy production from the CAFO waste stream, on site utilization of the renewable energy generated and biofuel/ethanol production in an environmentally and economically sustainable manner while reducing the aggregate capital expense, operating costs and environmental footprint for the entire integrated complex (
Integrated Projects
). In the context of Integrated Projects, Bion
s waste treatment process, in addition to mitigating polluting releases, enables generation of renewable energy from the CAFO waste stream, which renewable energy can be sold into renewable energy markets (with material economic incentives) and/or utilized by integrated facilities including ethanol plants, CAFO end-product processors (including cheese, ice cream and/or bottling plants in the case of dairy CAFO
s and/or slaughter and/or processing facilities in the context of beef and/or swine CAFO
s) and/or other users as a fossil fuel replacement. The nutrients (primarily nitrogen and phosphorus) can be harvested from the solids and liquid streams recovered from the livestock waste stream and can be utilized as either high value fertilizer (organic and/or inorganic) and/or the basis for high protein animal feed and the nutrient rich effluent can potentially be utilized in integrated hydroponic agriculture and/or field applied as fertilizer. Bion believes that its large scale Projects (including Integrated Projects) will produce high quality, traceable animal protein which can address consumer food safety/security concerns at a lower cost than current industry practices while also maintaining a far lower net environmental footprint per unit of protein produced due to water recycling (possible due to the removal of nutrients, etc. from the water by Bion
s technology applications), production of renewable energy from the waste stream (reducing the use of fossil fuels), and multiple levels of economies of scale, co-location and integration savings in transportation and other logistics. Projects may involve various degrees of integration which will limit the benefits described herein.
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 Pennsylvania Department of Environmental Protection (
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 June 30, 2016. 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, effective June 30, 2016, 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 $0. 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.
F-8
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 has commenced discussions and negotiations with Pennvest concerning this matter but Pennvest has rejected PA1
s proposal made during the fall of 2014. Neither party has any formal proposal on the table as of the date of this report, and only sporadic communication continues regarding the matters involved. It is not possible at this date to predict the outcome of such negotiations/discussions, but the Company believes that a loan modification agreement may be reached in the future 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 30-180 days.
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 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.
On May 5, 2016, Bion PA2 LLC (
PA2
) 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 (
Kreider 2
). The Kreider projects are owned and operated by Bion through separate subsidiaries, in which Kreider has the option to acquire a noncontrolling interest. Substantial capital (equity and/or debt) has been and will continue to be expended on these projects. Additional funds will be required for continuing operations and additional capital expenditures at Kreider 1 until sufficient revenues can be generated, of which there is no assurance. The Company anticipates that the Kreider 1 project will generate revenue primarily from the sale of nutrient reduction (and/or other) environmental credits. A portion of Bion
s research and development activities has taken place at the Kreider 1 facility.
Kreider 2 (not yet constructed) (and most future projects) will be developed using Bion
s 3G Tech to recover substantial marketable nutrients and renewable energy to supplement its revenue from nutrient reductions. The Company believes that the proceeds from multiple byproduct streams including i) feed additives and/or fertilizer (organic and non-organic) and ii) renewable energy (and related credits) can be reasonably projected to generate, in aggregate, revenue streams that, in certain circumstances, may approach (or exceed) 50% of total revenues from such project(s). To date the market for long-term nutrient reduction credits in Pennsylvania has been very slow to develop and the Company
s activities have been negatively affected by the lack of such development.
Kreider 2 development work and technology evaluation, including execution of a stand-alone joint venture agreement, amended credit certification and discussions with potential joint venture partners, continues, which project primarily relates to treatment of the wastes from Kreider
s poultry operations. Assuming there are positive developments related to the market for nutrient reductions in Pennsylvania, the Company intends to pursue development, design and construction of the Kreider 2 poultry waste/renewable energy project with a goal of achieving operational status during calendar year 2017. However, as discussed above, this project faces challenges related to the current limits of the existing nutrient reduction market and funding of technology-based, verifiable agricultural nutrient reductions which are anticipated to constitute the largest share of its revenues.
F-9
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 (the Environmental Protection Agency (
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, 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 $4,522,000 and $5,642,000 during the years ended June 30, 2016 and 2015, respectively. At June 30, 2016, the Company has a working capital deficit and a stockholders
deficit of approximately $10,602,000 and $13,938,000, 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, 2016 and 2015, the Company received total proceeds of $760,604 and $1,000,940, respectively, from the sale of its debt and equity securities. Proceeds during the 2016 and 2015 fiscal years have been lower than in earlier years which reduction has negatively impacted the Company
s business development efforts.
During fiscal years 2016 and 2015, the Company experienced greater difficulty in raising equity funding than in the prior years. 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 6 and 8) and members of the Company
s senior management have made loans to the Company. Additionally, the Company made reductions in its personnel during the year ended June 30, 2014. 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 2017 fiscal year (and subsequent periods), management will need to consider deeper cuts (including additional personnel cuts) and curtailment of operations (including possibly Kreider 1 operations) and/or 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) (including the Kreider 2 facility) and CAFO Retrofit waste remediation systems and to continue to operate the Kreider 1 facility. 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 small companies), 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.
F-10
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.
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.
Cash:
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash.
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.
Derivative Financial Instruments:
Pursuant to Accounting Standards Codification (
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 assets or 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.
F-11
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, subscription receivable and accounts payable approximates their carrying amounts due to their short-term maturities. The fair value of the loan payable approximates its carrying amount as it bears interest at rates commensurate with market rates. 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 deferred compensation and convertible notes payable - affiliates are not practicable to estimate due to the related party nature of the underlying transactions.
Revenue Recognition:
Revenues are generated from the sale of nutrient reduction credits. The Company recognizes revenue from the sale of nutrient credits when there is persuasive evidence that an arrangement exists, when title has passed, the price is fixed or determinable, and collection is reasonably assured.
The Company expects that technology license fees will be generated from the licensing of Bion
s integrated system. The Company anticipates that it will charge its customers a non-refundable up-front technology license fee, which will be recognized over the estimated life of the customer relationship. In addition, any on-going technology license fees will be recognized as earned based upon the performance requirements of the agreement. Annual waste treatment fees will be recognized upon receipt. Revenues, if any, from the Company
s interest in Integrated Projects will be recognized when the entity in which the Integrated Project has been developed recognizes such revenue.
F-12
Stock-based compensation:
The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements and the cost is measured based on the grant date fair value of the award. The stock option compensation expense is recognized over the period during which an employee is required to provide service in exchange for the award (the requisite service period). The Company utilizes the Black-Scholes option-pricing model to determine fair value. Key assumptions of the Black-Scholes option-pricing model include applicable volatility rates, risk-free interest rates and the instrument
s expected remaining life. These assumptions require significant management judgment.
Income taxes:
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases, as well as net operating losses.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets or liabilities of a change in tax rates is recognized in the period in which the tax change occurs. A valuation allowance is provided to reduce the deferred tax assets by 100%, since the Company believes that at this time it is more likely than not that the deferred tax asset will not be realized.
The Company is no longer subject to U.S. federal and state tax examinations for fiscal years before 2009. Management does not believe there will be any material changes in the Company
s unrecognized tax positions over the next 12 months.
The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of June 30, 2016, there were no penalties or accrued interest amounts associated with any unrecognized tax benefits, nor was any interest expense recognized during the years ended June 30, 2016 and 2015.
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. During years ended June 30, 2016 and 2015, 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 diluted loss per share:
|
|
|
|
|
June 30,
2016
|
|
June 30,
2015
|
Warrants
|
8,112,114
|
|
9,532,189
|
Options
|
4,225,537
|
|
4,413,870
|
Convertible debt
|
7,988,445
|
|
6,056,270
|
Convertible preferred stock
|
15,000
|
|
14,000
|
The following is a reconciliation of the denominators of the basic loss per share computations for the years ended June 30, 2016 and 2015:
F-13
|
|
|
|
Year
ended
June 30,
2016
|
Year
ended
June 30,
2015
|
Shares issued
beginning of period
|
22,089,650
|
19,576,619
|
Shares held by subsidiaries (Note 9)
|
(704,309)
|
(704,309)
|
Shares outstanding
beginning of period
|
21,385,341
|
18,872,310
|
Weighted average shares for fully
vested stock bonuses
|
600,000
|
675,000
|
Weighted average shares issued
during the period
|
759,940
|
998,146
|
Basic weighted average shares
end of period
|
22,745,281
|
20,545,456
|
Reclassifications:
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation including the reclassification of accrued interest related to the Pennvest Loan from accounts payable and accrued expenses into loan payable and accrued interest.
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 May 2014, the Financial Accounting Standards Board (
FASB
) issued Accounting Standards Update (
ASU
) No. 2014-09
Revenue from Contracts from Customers,
which supersedes the revenue recognition requirements in
Revenue Recognition (Topic 605),
and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to the exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and earlier application is permitted only as of annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the new standard and assessing the potential impact on its operations and financial statements.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements
Going Concern: Disclosures of Uncertainties about an Entity
s Ability to Continue as a Going Concern.
The new standard requires management to perform interim and annual assessments of an entity
s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity
s ability to continue as a going concern. The guidance is effective for annual periods ending after December 15, 2016, and interim periods thereafter, early application is permitted. The the adoption of ASU No. 2014-15 did not have a material impact on the Company
s financial statements.
F-14
3.
PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
|
|
|
|
|
|
|
June 30,
2016
|
|
June 30,
2015
|
Machinery and equipment
|
|
$ 2,222,670
|
|
$ 2,923,577
|
Buildings and structures
|
|
401,470
|
|
1,385,125
|
Computers and office equipment
|
|
173,313
|
|
175,248
|
|
|
2,797,453
|
|
4,483,950
|
Less accumulated depreciation
|
|
(2,793,194)
|
|
(2,506,731)
|
|
|
$ 4,259
|
|
$ 1,977,219
|
Management reviewed property and equipment for impairment as of June 30, 2016 and determined that the carrying amount of 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 potentially needed capital expenditures and it was also determined that the salvage value of the system components will be offset by contractual decommissioning obligations. Kreider 1 was measured at estimated fair value on a non-recurring basis using level 3 inputs, which resulted in an impairment of $1,684,562 of the property and equipment for the year ended June 30, 2016. As of June 30, 2016, the net book value of Kreider 1 was zero. The Company also recorded an impairment of $1,750,000 for the year ended June 30, 2015.
Depreciation expense was $293,577 and $623,934 for the years ended June 30, 2016 and 2015, respectively.
4.
PROMISSORY NOTE RECEIVABLE:
During the year ended June 30, 2016, the Company received an interest bearing, secured promissory note for $105,000. The promissory note accrued interest at 4% per annum, was collateralized, and was payable on January 31, 2016. The promissory note receivable was issued as consideration for an unaffiliated investor
s subscription agreement to exercise warrants into 100,000 restricted common shares of the Company
s common stock at $1.05 per share. During January 2016, the Company received a $35,000 principal payment and entered into a new agreement with the borrowers which extended the maturity date of the remaining principal and interest until June 15, 2016. All the other terms of the original agreement remained unchanged. During June 2016, the Company received an additional $10,000 principal payment and entered into a new agreement with the borrowers which extended the maturity date of the remaining principal and interest until September 1, 2016. All the other terms of the original agreement remained unchanged. On June 30, 2016, the Company and the borrowers agreed to cancel the existing promissory note with a remaining principal balance of $60,000 and interest of $2,727 resulting in a net cancellation of 57,142 previously issued but not outstanding restricted common shares.
5.
NOTES PAYABLE - AFFILIATES:
During the year ended June 30, 2015, the Company entered into promissory notes (
FY2015 Promissory Notes
), with effective dates of January 1, 2015, for initial principal amounts of $395,277, $15,956 and $80,764, with Dominic Bassani (
Bassani
), the Company
s Chief Executive Officer (
CEO
), Edward Schafer (
Schafer
), the Company
s Vice Chairman, and a major shareholder, (
Shareholder
), respectively. The FY2015 Promissory Notes accrued interest at 4% per annum and were payable on December 31, 2015. Effective September 8, 2015, the Company entered into new convertible promissory notes (
September 2015 Convertible Notes
) with Bassani, Schafer and Shareholder which replaced the FY2015 Promissory Notes. The initial principal balances of the September 2015 Convertible Notes were $405,831, $16,382 and $82,921, respectively. The new convertible promissory notes bear interest at 4% per annum, have maturity dates of December 31, 2017 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 (Note 8). Interest expense related to the September 2015 Convertible Notes was $16,385 for the year ended June 30, 2016.
F-15
6.
DEFERRED COMPENSATION:
The Company owes deferred compensation to various employees, former employees and consultants totaling $1,436,595 as of June 30, 2016. Included in the deferred compensation balances as of June 30, 2016, are $573,818, $168,302 and $115,073 owed Bassani, Mark A. Smith (
Smith
), the Company
s President, and Schafer, 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. During the year ended June 30, 2016, Smith converted $82,861 of deferred compensation into 99,159 shares of the Company
s common stock at conversion prices between $0.76 and $0.96 per share. Smith also utilized deferred compensation of $2,355 to exercise warrants which resulted in the issuance of 6,280 shares of the Company
s common stock. The Company also owes various consultants, pursuant to various agreements, for deferred compensation of $337,918 as of June 30, 2016 with similar conversion terms as those described above for Bassani, Smith and Schafer, with the exception that the interest accrues at 3% per annum. The Company also owes a former employee and a current employee deferred compensation of $168,000 and $984, respectively, which is convertible into 226,168 and 1,132 shares, respectively, of the Company
s common stock as of June 30, 2016 and, a former employee $72,500, which is not convertible and is non-interest bearing.
7.
LOAN PAYABLE:
As of June 30, 2016, PA1, the Company
s wholly-owned subsidiary, owes $8,563,662 under the terms of the Pennvest Loan related to the construction of the Kreider 1 System including accrued interest and late charges totaling $809,662. The terms of the Pennvest Loan provide for funding of up to $7,754,000 which is 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 $2,001,000 in fiscal years 2013 through 2016, and $741,000 in fiscal year 2017, $760,000 in fiscal year 2018, $771,000 in fiscal year 2019, $794,000 in fiscal year 2020, $819,000 in fiscal year 2021 and $1,867,000 thereafter. 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 $197,494 for both of the years ended June 30, 2016 and 2015, respectively. Based on the limited development of the depth and breadth of the Pennsylvania nutrient reduction credit market to date, PA1 has 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 June 30, 2016.
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. Neither party has any formal proposal on the table as of the date of this report. It is not possible at this date to predict the outcome of such negotiations, but the Company believes it is possible that an agreement may yet be reached that will result in a viable loan modification. Subject to the results of the negotiations with Pennvest and pending development of a more robust market for nutrient reductions in Pennsylvania, PA1 and Bion will continue to evaluate various options with regard to Kreider 1 over the next 30-180 days.
F-16
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.
8.
CONVERTIBLE NOTES PAYABLE - AFFILIATES:
January 2015 Convertible Notes
The January 2015 Convertible Notes accrue interest at 4% per annum and are due and payable on December 31, 2017. The January 2015 Convertible Notes (including accrued interest, plus all future deferred compensation), are convertible, at the sole election of the noteholder, into Units consisting of one share of the Company
s common stock and one quarter warrant to purchase a share of the Company
s common stock, at a price of $0.50 per Unit until December 31, 2020. The warrant contained in the Unit shall be exercisable at $1.00 per share until December 31, 2020. 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 June 30, 2016, the January 2015 Convertible Note balances, including accrued interest, owed Bassani, Smith and Schafer were $1,552,178, $806,025 and $400,925, respectively. During the years ended June 30, 2016 and 2015, the Company recorded interest expense of $104,419 and $51,354, respectively, related to the January 2015 Convertible Notes.
September 2015 Convertible Notes
During the year ended June 30, 2016, the Company entered into September 2015 Convertible Notes with Bassani, Schafer and Shareholder which replaced the previously issued FY2015 Promissory Notes. The initial principal balances of the September 2015 Convertible Notes were $405,831, $16,382 and $82,921, respectively. The September 2015 Convertible Notes bear interest at 4% per annum, have maturity dates of December 31, 2017 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. 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. The balances of the September 2015 Convertible Notes as of June 30, 2016, including accrued interest, are $418,995, $16,913 and $85,611, respectively. The Company recorded interest expense related to the 2015 Convertible Notes of $16,385 and nil for the years ended June 30, 2016 and 2015, respectively.
9.
STOCKHOLDERS' EQUITY:
Series B Preferred stock:
At July 1, 2014, the Company had 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 $2.00 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.
F-17
During the years ended June 30, 2016 and 2015, the Company declared dividends of $2,000 and $2,000 respectively. At June 30, 2016, accrued dividends payable are $10,000. The dividends are classified as a component of operations as the Series B Preferred stock is presented as a liability in these financial statements. For the fiscal year ended June 30, 2015 these amounts were presented differently but the June 30, 2015 financial statements were revised even though such revision previously was and continues to be immaterial to the prior year 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. The Company accounts for these shares similar to treasury stock.
During the year ended June 30, 2015, the Company issued 45,647 shares of the Company
s common stock at prices ranging from $0.43 to $1.22 per share for services valued at $41,028, in the aggregate, to consultants, a former employee and two employees. The Company also issued 75,000 shares of fully vested bonus shares granted to Smith in fiscal year 2013 which were expensed at grant date.
During the year ended June 30, 2015, the Company issued 130,953 shares of the Company
s common stock upon Bassani
s fiscal year 2014 election to convert $110,000, of his convertible notes payable
affiliate into units at a conversion price of $0.84 per unit.
During the year ended June 30, 2015, the Company sold 35,000 shares of the Company
s restricted common stock at $0.75 per share for total proceeds of $26,250. The Company also issued 40,000 shares of the Company
s restricted common stock upon receipt of its subscription receivable of $30,000 during the year ended June 30, 2015.
During the year ended June 30, 2015, the Company entered into subscription agreements to sell units for $0.50 each, with each unit consisting of one share of the Company
s restricted common stock and one warrant to purchase one half of a share of the Company
s restricted common stock for $0.75 per share until December 31, 2016 and pursuant thereto, the Company issued 1,800,000 units for total proceeds of $900,000, which included Smith
s purchase of 12,561 units by converting $6,280 of convertible notes. During the year ended June 30, 2015 cash commissions of $61,522 were paid to brokers related to the unit offering in addition to the issuance of 123,044 broker
s warrants to purchase the Company
s common stock at $0.75 per share until June 30, 2016. The broker
s warrants were valued at $0.05 per warrant and $6,152 was recorded to interest expense during the year ended June 30, 2015. The Company allocated the proceeds from the shares and the 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, $34,826 was allocated to the warrants and $865,174 was allocated to the shares, and both were recorded as additional paid in capital.
During the year ended June 30, 2015, the Company entered into subscription agreements to exercise certain warrants with expiry dates on or before December 31, 2015, into restricted shares of the Company
s common stock at a reduced exercise price of $1.05, for the period from May 13, 2015 through June 30, 2015. The Company extended the offering for an additional 15 days to July 15, 2015 and therefore any warrants which would have expired on June 30, 2015 were automatically extended to July 15, 2015. As the $1.05 exercise price was a reduction from the original exercise prices of the warrants, and due to the limited time in which the warrant holders had to subscribe, the reduction in the offering price was accounted for as an inducement and a conversion inducement of $9,593 was recorded. Pursuant to the offering, 71,133 warrants were exercised and 71,133 shares of the Company
s restricted common stock were issued resulting in cash proceeds of $74,690 for the year ended June 30, 2015. The Company had entered into a subscription agreement to exercise 12,500 warrants at $1.05 for which a subscription receivable of $13,125 was recorded at June 30, 2015.
F-18
During the year ended June 30, 2015, Smith elected to convert $106,099 of his convertible notes at $0.45 per unit into 235,775 units of the Company, consisting of one share of the Company
s common stock and one warrant to purchase the Company
s common stock at a price of $1.50 until December 31, 2020.
During the year ended June 30, 2015, Smith and various consultants elected to convert $80,780 of deferred compensation into 99,523 shares of the Company
s common stock at conversion rates ranging from $0.72 to $1.24 per share.
During the year ended June 30, 2016, the Company issued 242,034 shares of the Company
s common stock at prices ranging from $0.76 to $1.15 per share for services valued at $228,558, in the aggregate, to consultants and employees, including $69,000 expensed for 75,000 fully vested bonus shares to Smith that were issued in January 2016.
During the year ended June 30, 2016, the Company issued 12,500 shares of the Company
s restricted common stock upon receipt of its subscription receivable of $13,125 for the exercise of 12,500 warrants.
During the year ended June 30, 2016, the Company entered into subscription agreements to exercise certain warrants with expiry dates on or before December 31, 2015, into restricted shares of the Company
s common stock at a reduced exercise price of $1.05, for the period from June 30, 2015 through July 15, 2015. Pursuant to the offering, 265,894 warrants were exercised and 265,894 shares of the Company
s restricted common stock were issued resulting in cash proceeds of $174,189 and receipt of a $105,000 interest bearing, collateralized promissory note. During January 2016, the Company received a $35,000 principal payment and entered into a new agreement with the borrowers which extended the maturity date of the remaining principal and interest until June 15, 2016. All the other terms of the original agreement remain unchanged. During June 2016, the Company received a $10,000 principal payment and entered into a new agreement with the borrowers which extended the maturity date of the remaining principal and interest until September 1, 2016. All the other terms of the original agreement remain unchanged. On June 30, 2016, the Company and the borrowers agreed to cancel the existing promissory note with a remaining principal balance of $60,000 and interest of $2,727 resulting in a net cancellation of 57,142 previously issued but not outstanding restricted common shares.
During the year ended June 30, 2016, the Company entered into subscription agreements to sell units for $0.80 per unit, with each unit consisting of one share of the Company
s restricted common stock and one warrant to purchase one half of a share of the Company
s restricted common stock for $1.10 per share until June 30, 2017 and pursuant thereto, the Company issued 393,698 units for total proceeds of $314,957. During the year ended June 30, 2016, cash commissions of $24,496 were paid to brokers related to the unit offering. The Company allocated the proceeds from the shares and the 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, $8,041 was allocated to the warrants and $306,916 was allocated to the shares, and both were recorded as additional paid in capital.
During the year ended June 30, 2016, the Company entered into subscription agreements with various warrant holders, whereby the warrant holders elected to exercise 284,445 warrants at an exercise price of $0.75 and 284,445 shares of the Company
s common stock were issued resulting in cash proceeds of $213,333.
During the year ended June 30, 2016, Smith exercised 6,280 warrants at an exercise price of $0.75. The warrants were entitled to an exercise bonus of 50% of the exercise price which resulted in a reduced exercise price of $0.375 per warrant. Smith elected to convert $2,355 of deferred compensation in exchange for the issuance of 6,280 shares of the Company
s common stock.
During the year ended June 30, 2016, Smith and various consultants elected to convert $82,861 and $200,877 of deferred compensation, respectively, into 99,159 and 236,539 shares, respectively, of the Company
s common stock at conversion rates ranging from $0.76 to $1.15 per share.
F-19
Warrants:
As of June 30, 2016, the Company had approximately 8.1 million warrants outstanding, with exercise prices from $0.75 to $3.00 and expiring on various dates through December 31, 2020.
The weighted-average exercise price for the outstanding warrants is $1.24, and the weighted-average remaining contractual life as of June 30, 2016 is 3.9 years.
During the year ended June 30, 2015, warrants to purchase 67,500 shares of the Company
s common stock at $0.85 per share were issued pursuant the promissory notes entered into by Bassani and Shareholder. The warrants were determined to have a fair value of $0.10 per warrant and expire on December 31, 2018. The Company recorded interest expense of $6,750 related to the warrant issuances.
During the year ended June 30, 2015, the Company issued warrants to purchase 900,000 shares of the Company
s restricted common stock for $0.75 per share until December 31, 2016 in connection with the sale of 1,800,000 units. The Company also issued 123,044 warrants to purchase shares of the Company
s restricted common stock for $0.75 per share until June 30, 2016 to brokers as commission related to the sale of the units. The warrants were deemed to have a fair value of $0.05 per warrant and the Company recorded interest expense of $6,152 related to the warrant issuances.
In conjunction with the execution of Bassani and Smith
s extension agreements (Note 12), 3,906,953 and 1,883,324 warrants issued to Bassani and Smith (and their donees), respectively, were extended until December 31, 2020 and certain warrants with an exercise price in excess of $1.50 were reduced to $1.50. The Company recorded non-cash compensation expense related to the modification of the warrants of $223,589 for the year ended June 30, 2015.
During the year ended June 30, 2015, the Company agreed to extend the expiration date of 985,833 warrants owned by various individuals which were scheduled to expire on December 31, 2014 to March 31, 2015. The Company recorded expense related to the modification of the warrants of $986 for the year ended June 30, 2015.
During the year ended June 30, 2015, the Company agreed to extend the expiration date of 1,260,833 warrants owned by various individuals which were scheduled to expire between March 31, 2015 and April 30, 2015 to June 30, 2015. The Company recorded interest expense of $6,061 related to the modification of the warrants for the year ended June 30, 2015.
During the year ended June 30, 2015, the Company entered into subscription agreements to exercise certain warrants with expiry dates on or before December 31, 2015, into restricted shares of the Company
s common stock at a reduced exercise price of $1.05, for the period from May 13, 2015 through June 30, 2015. The Company extended the offering for an additional 15 days to July 15, 2015 and therefore any warrants which would have expired on June 30, 2015 were automatically extended to July 15, 2015. As a result of the offering, 71,133 warrants were exercised and 71,133 shares of the Company
s restricted common stock were issued resulting in cash proceeds of $74,690 for the year ended June 30, 2015.
During the year ended June 30, 2016, warrants to purchase 1,047,806 shares of common stock of the Company at prices between $2.25 and $3.10 per share expired.
During the year ended June 30, 2016, the Company entered into subscription agreements to exercise certain warrants with expiry dates on or before December 31, 2015, into restricted shares of the Company
s common stock at a reduced exercise price of $1.05, for the period from July 1, 2015 through July 15, 2015. As a result of the offering, 265,894 warrants were exercised and 265,894 shares of the Company
s restricted common stock were issued resulting in cash proceeds of $174,189 and receipt of a collateralized promissory note receivable for $105,000. During the year ended June 30, 2016, the Company received a total of $45,000 in principal payments. On June 30, 2016, the Company and the borrowers agreed to cancel the existing promissory note with a remaining principal balance of $60,000 and interest of $2,727 resulting in a net cancellation of 57,142 previously issued but not outstanding restricted common shares.
F-20
During the year ended June 30, 2016, the Company entered into subscription agreements with various warrant holders, whereby the warrant holders elected to exercise 284,445 warrants at an exercise price of $0.75 and 284,445 shares of the Company
s common stock were issued resulting in cash proceeds of $213,333. At June 30, 2016 the Company had a subscription agreement for the exercise of 10,000 warrants at an exercise price of $0.75, resulting in a subscription receivable of $7,500.
During the year ended June 30, 2016, Smith exercised 6,280 warrants at an exercise price of $0.75. The warrants were entitled to an exercise bonus of 50% of the exercise price which resulted in a reduced exercise price of $0.375 per warrant. Smith elected to convert $2,355 of deferred compensation in exchange for the issuance of 6,280 shares of the Company
s common stock.
Stock options:
The Company
s 2006 Consolidated Incentive Plan, as amended (the
2006 Plan
), provides for the issuance of options (and/or other securities) to purchase up to 22,000,000 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.
In November 2014, the Company entered into an agreement with a board member which entitled the board member to modifications of existing stock options resulting in the extension of certain expiration dates and resulting in incremental non-cash compensation expense of $11,783 for the year ended June 30, 2015.
In February 2015, the Company entered into extension agreements with Bassani, Smith and Schafer (Note 12) which entitled them to modifications of existing stock options resulting in the extension of certain expiration dates and the reduction of certain exercise prices. The option modifications resulted in incremental non-cash compensation expense of $357,500 for the year ended June 30, 2015.
During the year ended June 30, 2016, the Company approved the modification of existing stock options held by a board member which extended certain expiration dates and resulted in incremental non-cash compensation expense of $42,550.
The Company recorded compensation expense related to employee stock options of $99,553 and $501,609 for the years ended June 30, 2016 and 2015, respectively. The Company granted 100,000 and 957,500 options during the years ended June 30, 2016 and 2015, respectively. During the years ended June 30, 2016 and 2015, 288,333 and 802,500 options expired, respectively.
The fair value of the options granted during the years ended June 30, 2016 and 2015 were estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
Weighted
Average,
June 30,
2016
|
Range,
June 30,
2016
|
|
Weighted
Average,
June 30,
2015
|
Range,
June 30,
2015
|
Volatility
|
|
74%
|
74%
|
|
76%
|
74%-80%
|
Dividend yield
|
|
-
|
-
|
|
-
|
-
|
Risk-free interest rate
|
|
1.75%
|
1.75%
|
|
1.55%
|
0.51%-1.79%
|
Expected term (years)
|
|
5
|
5
|
|
6.1
|
2-10
|
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.
F-21
A summary of option activity under the 2006 Plan for the two years ended June 30, 2016 is as follows:
|
|
|
|
|
|
|
Options
|
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
Outstanding at July 1, 2014
|
4,258,870
|
|
$2.81
|
3.2
|
|
-
|
Granted
|
957,500
|
|
0.74
|
|
|
|
Exercised
|
-
|
|
-
|
|
|
|
Forfeited
|
-
|
|
-
|
|
|
|
Expired
|
(802,500)
|
|
2.78
|
|
|
|
Outstanding at June 30, 2015
|
4,413,870
|
|
$1.88
|
4.1
|
|
$398,250
|
Granted
|
100,000
|
|
0.92
|
|
|
|
Exercised
|
-
|
|
-
|
|
|
|
Forfeited
|
-
|
|
-
|
|
|
|
Expired
|
(288,333)
|
|
2.90
|
|
|
|
Outstanding at June 30, 2016
|
4,225,537
|
|
$1.79
|
3.7
|
|
$158,675
|
Exercisable at June 30, 2016
|
4,175,537
|
|
$1.80
|
3.6
|
|
$144,175
|
|
The following table presents information relating to nonvested stock options as of June 30, 2016:
|
|
|
|
|
Options
|
|
Weighted Average
Grant-Date Fair
Value
|
Nonvested at July 1, 2015
|
100,000
|
|
$ 0.76
|
Granted
|
100,000
|
|
0.59
|
Vested
|
(150,000)
|
|
(0.65)
|
Nonvested at June 30, 2016
|
50,000
|
|
$ 0.76
|
The total fair value of stock options that vested during the years ended June 30, 2016 and 2015 was $97,000 and $476,075, respectively. As of June 30, 2016, the Company had $9,913 of unrecognized compensation cost related to stock options.
Stock-based employee compensation charges in operating expenses in the Company
s financial statements for the years ended June 30, 2016 and 2015 are as follows:
|
|
|
|
Year
ended
June 30,
2016
|
Year
ended
June 30,
2015
|
General and administrative:
|
|
|
Fair value of stock bonus expensed
|
$ 69,000
|
$ -
|
Change in fair value from modification of
option terms
|
42,550
|
369,283
|
Change in fair value from modification of
warrant terms
|
-
|
223,917
|
Fair value of stock options expensed
|
66,092
|
378,937
|
Total
|
$ 177,642
|
$ 972,137
|
|
|
|
Research and development:
|
|
|
Fair value of stock options expensed
|
$ 33,461
|
$ 122,672
|
Total
|
$ 33,461
|
$ 122,672
|
F-22
10.
INCOME TAXES:
The reconciliation between the expected federal income tax benefit computed by applying the Federal statutory rate to loss before income taxes and the actual benefit for taxes on loss for the years ended June 30, 2016 and 2015 is as follows:
|
|
|
|
|
|
|
2016
|
|
2015
|
Expected income tax benefit at statutory rate
|
|
$ (1,537,000)
|
|
$(1,918,000)
|
State taxes, net of federal benefit
|
|
(138,000)
|
|
(173,000)
|
Permanent differences and other
|
|
(13,000)
|
|
(19,000)
|
Change in valuation allowance
|
|
1,688,000
|
|
2,110,000
|
Income tax benefit
|
|
$ -
|
|
$ -
|
The Company has net operating loss carry-forwards (
NOLs
) for tax purposes of approximately $51,824,000 as of June 30, 2016. These NOLs expire on various dates through 2036.
The utilization of the NOLs may be limited under Section 382 of the Internal Revenue Code.
The Company
s deferred tax assets for the years ended June 30, 2016 and 2015 are estimated as follows:
|
|
|
|
|
|
|
2016
|
|
2015
|
NOLs
noncurrent
|
|
$ 19,705,000
|
|
$ 19,083,000
|
Stock-based compensation - current
|
|
5,392,000
|
|
5,255,000
|
Property and equipment
noncurrent
|
|
2,014,000
|
|
1,390,000
|
Deferred compensation - noncurrent
|
|
1,688,000
|
|
1,383,000
|
Gross deferred tax assets
|
|
28,799,000
|
|
27,111,000
|
Valuation allowance
|
|
(28,799,000)
|
|
(27,111,000)
|
Net deferred tax assets
|
|
$ -
|
|
$ -
|
The Company has provided a valuation allowance of 100% of its net deferred tax asset due to the uncertainty of generating future profits that would allow for the realization of such deferred tax assets.
11.
401(k) PLAN:
The Company has adopted the Bion Technologies, Inc. 401(k) Profit Sharing Plan and Trust (the
401(k) Plan
), a defined contribution retirement plan for the benefit of its employees. The 401(k) Plan is currently a salary deferral only plan and at this time the Company does not match employee contributions. The 401(k) is open to all employees over 21 years of age and no service requirement is necessary.
12.
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 terms since March 2003. During September 2014, Smith agreed to continue his employment agreement through April 15, 2015 and also agreed to continue to defer his temporarily reduced salary of $14,000 per month until such date. On February 10, 2015, the Company executed an Extension Agreement with Smith pursuant to which Smith extended his employment with the Company to December 31, 2015 (with the Company having an option to extend his employment an additional six months). As part of the Extension Agreement, the balance of Smith
s existing convertible note payable as of December 31, 2014, adjusted for conversions subsequent to that date, was replaced with a new convertible note with an initial principal amount of $760,520 with terms that i) materially reduce the interest rate by 50% (from 8% to 4%), ii) increases the conversion price by 11% (from $0.45 to $0.50), iii) sets the conversion price at a fixed price so there can be no further reductions, iv) reduces the number of warrants received on conversion by 75% (from 1 warrant per unit to 1/4 per unit) and v) extends the maturity date to December 31, 2017.
F-23
Additionally, pursuant to the Extension Agreement, Smith: i) will continue to defer his cash compensation ($18,000 per month) until the Board of Directors re-instates cash payments to all employees and consultants who are deferring their compensation, ii) cancelled 150,000 contingent stock bonuses previously granted to him by the Company, iii) has been granted 150,000 new options which vested immediately and iv) outstanding options and warrants owned by Smith (and his donees) have been extended and had the exercise prices reduced to $1.50 (if the exercise price exceeded $1.50). In October 2015, the Company executed an Extension Agreement (
FY2016 Extension Agreement
) with Smith pursuant to which Smith extended his employment with the Company to June 30, 2016 (with Company having an option to extend his employment an additional six months). As part of the FY2016 Extension Agreement, Smith: i) will continue to defer his cash compensation ($19,000 per month) until the Board of Directors re-instates cash payments, ii) has been granted 100,000 new options which vested immediately, and iii) has been granted 75,000 shares of common stock as an extension bonus which are immediately vested and were issued on January 5, 2016. As of July 1, 2016, Smith is working under a month to month contract extension until a longer term agreement is reached.
Since March 31, 2005, the Company has had various agreements with Brightcap and/or Bassani, through which the services of Bassani are provided. The Board appointed Bassani as the Company's CEO effective May 13, 2011. During the fiscal years 2012 and 2013, Bassani entered into extension agreements whereby he was awarded fully vested stock grants totaling 600,000 shares, 500,000 shares of which are to be issued January 15, 2016 and 100,000 shares are to be issued January 15, 2017. The stock grants were expensed in the years they were awarded as they are fully vested. 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.) As part of the agreement, the Company
s then existing loan payable, deferred compensation and convertible note payable to Bassani, were restructured into two promissory notes as follows: a) The sum of the cash loaned by Bassani to the Company of $279,000 together with $116,277 of unreimbursed expenses through December 31, 2014, were placed into a new promissory note with initial principal of $395,277 which was due and payable on December 31, 2015 and now has been replaced with a September 2015 Convertible Note (Note 8). In connection with these sums and the new promissory note, Bassani was issued warrants to purchase 592,916 shares of the Company
s common stock at a price of $1.00 until December 31, 2020; and b) the remaining balances of the Company
s accrued obligations to Bassani ($1,464,545) were replaced with a new convertible promissory note with terms that compared with the largest prior convertible note obligation to Bassani: i) materially reduce the interest rate by 50% (from 8% to 4%), ii) increase the conversion price by 11% (from $0.45 to $0.50), iii) sets the conversion price at a fixed price so there can be no further reductions, iv) reduces the number of warrants received on conversion by 75% (from 1 warrant per unit to 1/4 per unit) and v) extends the maturity date to December 31, 2017 (Note 8). Additionally, pursuant to the Extension Agreement, Bassani i) will continue 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, ii) cancelled 250,000 contingent stock bonuses previously granted to him by the Company, iii) has been granted 450,000 new options which vested immediately and iv) outstanding options and warrants owned by Bassani (and his donees) have been extended and had the exercise prices reduced to $1.50 (if the exercise price exceeded $1.50).
On February 10, 2015, the Company entered into an agreement with Schafer pursuant to which Schafer will continue to provide services to the Company through December 31, 2015. Additionally, pursuant to the agreement, i) the exercise period of outstanding options and warrants owned by Schafer have been extended, and ii) 25,000 contingent stock bonuses previously granted to Schafer have been cancelled by the Company. In January 2016, Schafer agreed to extend his agreement with the Company through December 31, 2016. During June 2016, Schafer and the Company determined that due to other obligations Schafer
s involvement with the Company during the 2016 fiscal year was less than anticipated and reduced his fiscal year 2016 compensation (all of which had been deferred) by $160,000 and future compensation will be determined periodically based on evaluation by the board of directors.
F-24
Contingent stock bonuses:
The Company has declared contingent deferred stock bonuses to its key employees and consultants at various times throughout the years. The stock bonuses are contingent upon the Company
s stock price exceeding a certain target price per share, and the grantees still being employed by or providing services to the Company at the time the target prices are reached.
The Company
s outstanding contingent stock bonuses as of June 30, 2016 are as follows:
|
|
|
|
|
|
Target Price per share
|
|
$5.00
|
$10.00
|
|
$20.00
|
Number of shares
|
|
50,000
|
40,000
|
|
27,500
|
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 execution/exercise bonuses with the same terms as described above to Schafer and to Jon Northrop, the Company
s other board member.
As of June 30, 2016, the execution/exercise bonus was applicable to 3,045,000 of the Company
s outstanding options and 6,753,219 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 does not 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 (Notes 1 and Note 7).
The Company currently is not involved in any other material litigation.
F-25
13.
SUBSEQUENT EVENTS:
The Company has evaluated events that occurred subsequent to June 30, 2016 for recognition and disclosure in the financial statements and notes to the financial statements.
From July 1, 2016 through September 16, 2016, the Company has issued 17,479 shares of the Company
s common shares to an employee and consultants valued at approximately $14,000.
From July 1, 2016 through September 16, 2016, a consultant has elected to convert approximately $6,000 of deferred compensation into 7,152 shares of the Company
s common shares.
From July 1, 2016 through September 16, 2016, the Company has granted 35,000 options to purchase shares of the Company
s common shares at an exercise price of $1.00 per share. The options vested immediately upon grant date and expire on July 31, 2020.
From July 1, 2016 through September 16, 2016, the Company has sold 30,467 shares of the Company
s restricted common stock for $0.75 per share.
From July 1, 2016 through September 16, 2016, the Company has sold 120,000 units for $0.75 per unit, with each consisting of one share of the Company
s restricted stock and one warrant to purchase one half of a share of the Company
s restricted common stock for $1.00 per share until December 31, 2017. The proceeds from the sale of the units totaled $90,000.
From July 1, 2016 through September
16, 2016, 722,319 warrants to purchase the Company
s common stock expired unexercised.
F-26