Commission File No. 000-19333

BION ENVIRONMENTAL TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in its Charter)

Colorado		84-1176672
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

Box 566/1774 Summitview Way

Crestone, Colorado   81131

(Address of Principal Executive Offices, Including Zip Code)

Registrant’s Telephone Number, including area code:  (212) 758-6622

Securities Registered Pursuant to Section 12(b) of the Act:

(e)  Recent Sales of Unregistered Securities

During the year ended June 30, 2013, the Company sold 724,056 shares of its unregistered common stock (not including issuance of 124,157 shares to consultants and employees pursuant to its 2006 Consolidated Incentive Plan). During the year ended June 30, 2013, the Company sold  its unregistered securities in units as follows: a) 177,556 units at $2.25 per unit, and received proceeds of $399,499 (each unit consisted of one share of the Company’s restricted common stock and one warrant to purchase half of a share of the Company’s restricted common stock at $3.10 per share until December 31, 2014); and b) 330,500 units  at $2.00 per unit and received proceeds of $661,000 (each unit consisted of one share of the Company’s restricted common stock and one warrant to purchase half a share of the Company’s restricted common stock at $2.50 per share until December 31, 2014).  The Company also sold 216,000 shares of restricted common stock at $1.25 per share for total proceeds of $295,000.  In all of these transactions the Company relied on the exemptions in Section 4(2) of the Securities Act of 1933, as amended, and/or under Rule 506 of Regulation D under the Securities Act of 1933, as amended.

During the year ended June 30, 2014, the Company sold 1,279,201 shares of its unregistered common stock (not including issuance of 373,435 shares to consultants and employees pursuant to its 2006 Consolidated Incentive Plan and 250,000 shares issued upon conversion of debt). During the year ended June 30, 2014, the Company sold its unregistered securities as follows: a) 400,000 restricted common stock at $1.25 per share, and received proceeds of $500,000; and b) 592,534 restricted common stock at $0.75 per unit and received gross proceeds of $474,400, net proceeds of $467,575 (including subscriptions receivable of $30,000 for 40,000 shares) at June 30, 2014.  The Company also issued 266,667 shares of restricted common stock resulting from the terms in the subscription agreements related to the sale of the 400,000 shares that required additional shares be issued if the Company sold stock at a price lower than $1.25 per share.  In all of these transactions the Company relied on the exemptions in Section 4(2) of the Securities Act of 1933, as amended, and/or under Rule 506 of Regulation D under the Securities Act of 1933, as amended.

ITEM 6.  SELECTED FINANCIAL DATA.

N/A

 

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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Included in ITEM 8 are the audited Consolidated Financial Statements for the fiscal years ended June 30, 2014 and 2013 ("Financial Statements").

Statements made in this Form 10-K 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 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 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. 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 with this Report.

BUSINESS OVERVIEW

During the 2004-2008 calendar years, the Company focused on completion of the development of the second generation of its technology which provides comprehensive environmental solutions to a significant source of pollution in U.S. agriculture, large scale livestock facilities known as Confined Animal Feeding Operations ("CAFO"). The re-development process was substantially completed several years ago and the initial commercial system, based on our updated technology, has been constructed and placed in full commercial operation. Bion continues to focus on refining, testing and/or developing technologies which can supplement our technologies and or be utilized with our technology platform. Over the last 12 months Bion has increased its research and development activities related to development of variations of and applications of its core technologies and their integration with third party technologies.

Operational results from this initial commercial system have confirmed the ability of Bion’s technologies to meet its nutrient reduction goals at commercial scale for an extended period of operation. Bion’s current generation technology platform centers on its patented biological-based 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

 

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livestock waste stream. In addition to capturing valuable nutrients for reuse, Bion’s technology platform also recovers cellulosic biomass which can be used to generate renewable energy from the waste stream in a process more efficient than other technologies that seek to exploit this CAFO 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). Research and development activities are underway to improve, update and move toward the next generation of Bion systems to meet the needs of CAFOs in various geographic and climate areas with nutrient release constraints.

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 to retrofit and environmentally remediate existing CAFOs in selected markets where: a) government policy supports such efforts (such as the Chesapeake Bay watershed, Wisconsin and other 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 Integrated Projects which will include large CAFOs, such as large dairies, beef cattle feed lots and hog farms, with Bion waste treatment system modules processing the aggregate CAFO waste stream from the equivalent of 40,000 or more beef and/or dairy cows (or the waste stream equivalent of other species) while recovering cellulosic biomass (to be utilized for renewable energy production) and nutrient rich solids (that can potentially to be marketed as feed and/or fertilizer), integrated with an ethanol plant capable of producing 40 million gallons (or more) of ethanol per year and/or with CAFO end product processors, and 3) licensing and/or joint venturing of Bion’s technology and applications outside North America. The opportunities described at 1) and 2) above each require substantial political (federal, state and local) efforts on the part of the Company and a substantial part of Bion’s efforts are focused on such political matters. Bion is currently pursuing the international opportunities primarily through the use of consultants with existing relationships in target countries.

Approximately five years ago the Company commenced actively pursuing the opportunity presented by environmental retrofit and remediation of the waste streams of existing CAFOs. The first commercial activity in this area is represented by our agreements with Kreider Farms ("KF") in Pennsylvania pursuant to which a Bion system to treat KF's dairy and poultry waste streams to reduce nutrient releases to the environment while generating marketable nutrient credits and renewable energy was designed, constructed and has been in full-scale operation since 2011. (No other Bion system has been contracted for and/or constructed to date.) On January 26, 2009 the Board of the Pennsylvania Infrastructure Investment Authority (“Pennvest”) approved a $7.75 million loan to Bion PA 1, LLC (“PA-1”), a wholly-owned subsidiary of the Company, for the initial stage of Bion's Kreider Farms project (“Phase 1 Kreider System”). After substantial unanticipated delays, on August 12, 2010 the PA-1 received a permit for construction of the Phase 1 Kreider system.  Construction activities commenced during November 2010.  The closing/settlement of the Pennvest Loan took place on November 3, 2010.  PA-1 finished the construction of the Phase 1 Kreider System and entered a period of system ‘operational shakedown’ during May 2011.  The Phase 1 Kreider 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 economics (potential revenues and profitability) of the Phase 1 Kreider System are based largely on the long term sale of nutrient (nitrogen and/or phosphorus) reduction credits to meet the requirements of the Chesapeake Bay environmental clean-up, which sales have not yet materialized.  The PADEP issued final permits for the Kreider 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, PA-1 has commenced generating and verifying nutrient reduction credits for potential sale while continuing to utilize the system to test improvements and add-ons. Operating results of the Phase 1 Kreider System have documented the efficacy of Bion’s nutrient reduction technology and vetted potential ‘add-ons’ for future installations. 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 PA-1.  As a result of this extended period of operations, Bion is confident that future systems can be constructed with even higher operational efficiencies at lower capital expense and with lower operational costs. To date liquidity in the Pennsylvania nutrient credit market has been slow to develop significant breadth and depth

 

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which limited liquidity has negatively impacted Bion’s business plans and has prevented Bion from monetizing the nutrient reductions created by PA-1’s existing Kreider 1 project and Bion’s other proposed projects. These challenges and difficulties (which continue to this date) have prevented PA-1 from generating any material revenues from the Kreider 1 project to date (PA-1’s Kreider 1 operating expenses have been funded by loans from Bion) and raise significant questions as to when, if ever, PA-1 will be able to generate such material revenues from the Kreider 1 system.  PA-1 has been engaged in on-and-off negotiations with Pennvest related to forbearance and/or re-structuring its obligations pursuant to the Pennvest Loan for over 18 months. In the context of such negotiations, PA-1 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, 2014.  Due to the slow development of the nutrient reduction credit market, 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, recorded a $2,000,000 impairment of the Kreider 1 assets which reduced the value of the Kreider 1 System to $4,349,482 as of June 30, 2014.  Additional impairments may result if the nutrient credit market does not develop in the near term.  

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 PA-1 pay $8,137,117 (principal, interest plus late charges) on or before October 24, 2014. The Company anticipates that discussions and negotiations will take place between PA-1 and Pennvest concerning this matter over the next 30 days.  It is not possible at this date to predict the outcome of such negotiations, but the Company believes that an interim, short-term agreement will be reached that will allow PA-1 and Pennvest a further period of time for further negotiations and evaluation of possible long-term resolutions. Subject to the results of the negotiations with Pennvest and pending development of a more robust market for nutrient reductions in Pennsylvania, PA-1 and Bion anticipate that it will be necessary for the Company 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 PA-1.  

The Company is currently conducting research and development activities at the Kreider 1 system while continuing commercial operations.

The Company continues its development work related to the second phase of the Kreider project (‘Phase 2 Kreider Project’) which involves production of renewable energy from the waste of KF’s poultry operations and the cellulosic solids recovered by the Kreider 1 system. During May 2011 the PADEP certified the Phase 2 Kreider Project for 559,457 nutrient credits under the old EPA’s Chesapeake Bay model.  The Company anticipates that this project will be certified for between 1.5-2 million nutrient reduction credits pursuant to the amended EPA Chesapeake Bay model which was published subsequent to the original certification. Recent announcements related to negotiations between the EPA and PADEP regarding Pennsylvania’s Chesapeake Bay nutrient reduction non-compliance suggest that a resolution of certain matters is likely during the balance of this calendar year which may allow this project to move forward with re-certification and proceed toward design, permitting , construction and eventual operation during the 2015 calendar year. Assuming there are also positive developments related to the market for nutrient reductions in Pennsylvania, the Company intends to pursue development, design and construction of the Kreider poultry waste/renewable energy project with a goal of achieving operational status during 2015. The economics (potential revenues and profitability) of the Phase 2 Kreider Project are based largely on 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 to date has negatively impacted Bion’s business plans and has resulted in challenges to monetizing the nutrient reduction credits created by PA-1’s existing Kreider 1 project and will delay the Company’s Phase 2 Kreider Project and other proposed projects in Pennsylvania.

 

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The Company has commenced activities related to marketing and potential use of its technology in relation to expansion and/or development of CAFO’s in the Great Lakes watersheds and the Midwest states with current efforts being most advanced in Wisconsin.  Bion considers this to be a large potential market for the Company’s growth over the next 18-36 months (and thereafter). Legislation in Wisconsin which became effective during April 2014 represents a significant step forward towards opening business opportunities in that state (which must now promulgate regulations and take other steps related thereto). Based upon the final permitting and verification plan approval and operational results at the Kreider 1 system, the Company intends to seek to advance commercial sales in these regions and additional areas which face deadlines to meet EPA TMDL requirements.

A significant portion of Bion’s current activities concern efforts with private and public stakeholders (at local and state level) in Pennsylvania, other Chesapeake Bay states and in Wisconsin and at the federal level (EPA 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, technology-based  environmental solutions that Bion (and others) can provide through clean-up of agricultural waste streams. In January 2013, the Pennsylvania Legislative Budget and Finance Committee issued a report stating that targeting upstream livestock would save Pennsylvania’s taxpayers up to 80% of previously estimated costs (potential savings for Pennsylvania in excess of a billion dollars per year over the next 20 years) which would be available for other needs (notably aging drinking water and sewer infrastructure) while creating large local benefits of an upstream treatment strategy including reduced freshwater compliance costs, future cost avoidance of treating drinking water from contaminated local aquifers and increased economic activity for agriculture, tourism and recreation.  The Coalition for an Affordable Bay Solution (“Coalition”) was formed to support the creation of a competitively-bid nitrogen trading program in Pennsylvania that will enable Pennsylvania to capture the economic benefits outlined in the legislative study. The Coalition supports legislation to establish a competitively-bid RFP program for nitrogen reductions, where bids will also be ‘scored’ to reflect the value of the benefits to Pennsylvania’s interior waterways and communities.  Founding members of the Coalition represent both Chesapeake Bay and national industry participants, and include Bion, JBS, SA, Kreider Farms, and Fair Oaks Farms. The head of the Coalition is Ed Schafer, Bion’s Executive Vice Chairman. Legislation was filed in the Pennsylvania Senate during the spring of 2013 that, if passed and signed into law, will potentially enable Bion (and others) to compete for public funding on an equal basis with public works and storm water authorities. Activity related to such legislation has recently re-commenced with increased stakeholder support and Bion believes such legislation is likely to be passed (in some version) by the Pennsylvania Legislature during 2014-2015 but cannot predict the exact final content of such legislation or guarantee such passage. If such a program is passed and implemented, Bion expects that the policies and strategies being developed in Pennsylvania will not only benefit the Company’s existing and proposed Pennsylvania projects, but will also subsequently provide the basis for a larger Chesapeake Bay watershed strategy and, thereafter, a national clean water strategy.  Legislation in Wisconsin, which became effective during April 2014, represents a significant step forward towards opening business opportunities in that state.

The Company believes that Pennsylvania (and the entire Chesapeake Bay watershed) and Wisconsin (and other Great Lakes Basin states) represent ‘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 will 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 watersheds, both within and outside of Pennsylvania and Wisconsin, make the case for adoption of the strategies outlined in the Pennsylvania legislative study 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

 

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procurement process. The Company believes that implementation of a competitively-bid nutrient reduction program to achieve the goals for the Chesapeake Bay watershed  and/or the phosphorus reduction needs of Wisconsin can also provide a working policy models and platforms 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.   

Additionally, we believe that Bion's technology platform (including utilization of various third party technologies to supplement the Company’s proprietary technologies) will allow the integration of large-scale CAFOs and their end-product users, renewable energy production from the CAFO waste stream, and 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 and operating costs and increasing revenue and profitability for the entire integrated complex ("Integrated Projects" or "Projects"). In the context of Integrated Projects, Bion's waste treatment process, in addition to mitigating polluting releases, will generate renewable energy from cellulosic portions of the CAFO waste stream which renewable energy can be utilized by integrated facilities including ethanol plants, CAFO end-product processors (including cheese, ice cream and/or bottling plants in the case of dairy CAFOs, and/or slaughter and/or processing facilities in the context of beef CAFOs) and/or other users as a  replacement for fossil fuel usage. In addition an integrated ethanol plant's main by-product, called distillers grain, can be added to the feed of the animals in wet form, thereby lowering the capital expenditures, operating, marketing and shipping costs and energy usage of the ethanol production process. In such cases, the ethanol plant would act as a feed mill for the integrated CAFO, thereby reducing the CAFO's feeding costs as well as generating revenue to the ethanol plant, and would also provide a market for the renewable energy that Bion's System produces from the CAFO waste stream. And, in some cases the nutrient rich liquid effluent from the Bion system modules may be directly utilized for greenhouse and/or hydroponic agriculture. Accordingly, such Bion Integrated Projects can be denominated "closed loop". Bion anticipates that many projects may initially include only partial integration.  Based on the degree of integration in a Project, greater or lesser amounts of benefits will be realized.  Bion, as developer of, and participant in, Integrated Projects, anticipates that it will share in the cost savings and the revenues generated from these activities.

Bion is currently working with local, state and federal officials with regard to regulatory and legislative initiatives, and with such parties and potential industry participants to evaluate sites in multiple states. The Company believes that its initial Integrated Project will most likely be located and developed (probably in stages) in Pennsylvania.  Note that locations in other states are also under review and the initial Integrated Project could be developed elsewhere. It is possible that the Company will develop one or more Integrated Projects as 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).  Bion intends to choose sites for additional Projects during the calendar years 2015-2017 to create a pipeline of Projects. Management has a 5-year development target (through calendar year 2020) of approximately 10-24 Integrated Projects.  At the end of that period, Bion projects that 5 or more of these Integrated Projects will be in full operation in 3-5 states (or other locations), and the balance would be in various stages ranging from partial operation to early permitting stage. No Integrated Project has been developed to date.

The Company’s audited financial statements for the years ended June 30, 2014 and 2013 have been prepared assuming the Company will continue as a going concern.  The Company has incurred net losses of approximately $5,762,000 and $8,250,000 during the years ended June 30, 2014 and 2013, 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, 2014 includes a "going concern" explanatory paragraph which means that the accounting firm has expressed substantial doubt about the Company's ability to continue as a going concern.  At June 30, 2014, the Company had a working capital deficit and a stockholders’ deficit of approximately $11,784,000 and $7,531,000, 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.  

 

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CRITICAL ACCOUNTING POLICIES

Management has identified the following policies below as critical to our business and results of operations. Our reported results are impacted by the application of the following accounting policies, certain of which require management to make subjective or complex judgments.  These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact quarterly or annual results of operations.  For all of these policies, management cautions that future events rarely develop exactly as expected, and the best estimates routinely require adjustment.  Specific risks associated with these critical accounting policies are described in the paragraphs below.

Revenue Recognition

While the Company has not recognized any significant operating revenues for the past two fiscal years, the Company has commenced generation of revenues during the year ended June 30, 2013.  Revenues are generated from the sale of nutrient reduction credits, product sales, technology license fees, annual waste treatment fees and/or direct ownership interests in Integrated Projects.  The Company recognizes revenue from the sale of nutrient credits and products 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 systems.  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 Projects will be recognized when the entity in which the Project has been developed recognizes such revenue.

Stock-based compensation

The Company follows the provisions of Accounting Standards Codification (“ASC”) 718, which generally requires that share-based compensation transactions be accounted and recognized in the statement of 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.

 

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.

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Recent Accounting Pronouncements:

The Company has evaluated all newly issued accounting pronouncements and believes such pronouncements do not have a material effect on the Company’s financial statements.

 

YEAR ENDED JUNE 30, 2014 COMPARED TO THE YEAR ENDED JUNE 30, 2013

Revenue

Total revenues were approximately $6,000 and $12,000 for the years ended June 30, 2014 and 2013, respectively.  The Company recognized revenue from nutrient credit sales for the years ended June 30, 2014 and 2013.

General and Administrative

Total general and administrative expenses were $2,269,000 and $6,875,000 for the years ended June 30, 2014 and 2013, respectively.

General and administrative expenses, excluding stock-based compensation charges of $315,000 and $4,173,000, were $1,954,000 and $2,702,000 for the years ended June 30, 2014 and 2013, respectively, representing a $748,000 decrease.  Salaries and related payroll tax expenses decreased to $820,000 for the year ended June 30, 2014 from $1,255,000 for the year ended June 30, 2013, primarily due to the fact that during the year ended June 30, 2014 five employees were terminated (some of whom have continued to work with the Company on an as-needed consulting basis receiving compensation in the Company’s securities and/or deferring their compensation) which reduced recurring salary and payroll tax costs but was partially offset by accruals for termination benefits.  Consulting costs were $609,000 and $648,000 for the years ended June 30, 2014 and 2013, respectively, representing a $39,000 decrease primarily due to the decreased utilization of a strategic affair consultant during the fiscal 2014 period partially offset by consulting costs for services of former employees.  Contract labor costs at Kreider 1 were $24,000 and $86,000 for the years ended June 30, 2014 and 2013, respectively, representing a $62,000 decrease due to Bion no longer needing to pay for labor coverage.  Utilities, and repair and maintenance costs at Kreider 1 also decreased $34,000 and $33,000, respectively from the year ended June 30, 2013 compared to the year ended June 30, 2014 to due higher efficiencies at the project during the 2014 fiscal year.  Travel expenses were $39,000 and $96,000 for the years ended June 30, 2014 and 2013, respectively, with the decrease attributable to fewer employees thus lower travel costs.

General and administrative stock-based employee compensation for the years ended June 30, 2014 and 2013 consists of the following:

	Year ended June 30, 2014		Year ended June 30, 2013
General and administrative:
Fair value of stock/warrant bonuses expensed	$           -		$1,159,000
Fair value of stock issued to an employee	95,000		100,000
Change in fair value from modification of option and warrant terms	308,000		2,497,000
Fair value of stock options (credited)/ expensed under ASC 718	(88,000)		417,000
Total	$315,000		$4,173,000

Stock-based compensation charges were $315,000 and $4,173,000 for the years ended June 30, 2014 and 2013, respectively.  The Company recognized general and administrative non-cash compensation expenses of nil and $1,159,000 during the years ended June 30, 2014 and 2013, respectively, due to the granting and vesting of stock and warrant bonuses in connection with the extension of employment agreements of two key officers during the year ended June 30, 2013. Compensation expense relating to the change in fair value from the modification of option and warrant terms was $308,000 and $2,497,000 for the years ended June 30, 2014 and 2013, respectively, as the Company granted an extension of option expiration dates for a terminated employee and also granted exercise bonuses to a key employee and board member during the year ended June 30, 2014, while during the year ended June 30, 2013 two key officers received modification of options and warrants under execution/exercise bonuses. Compensation (credits)/expense relating to stock options was $(88,000) and $417,000 during the years ended June 30, 2014 and 2013, respectively, with the decrease resulting from the forfeiture of previously expensed unvested stock options of two employees terminated during the year ended June 30, 2014.

 

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Depreciation

Total depreciation expense was $979,000 and $906,000 for the years ended June 30, 2014 and 2013, respectively.  Depreciation expense is higher for the year ended June 30, 2014 due to a full year’s depreciation of Kreider 1 which was placed in service on August 1, 2012 and its components are being depreciated over their estimated useful lives, versus eleven months during the year ended June 30, 2013.  

Impairment loss on property and equipment

Impairment loss on property and equipment was $2,000,000 and nil for the years ended June 30, 2014 and 2013, respectively.  Management reviewed property and equipment for impairment as of June 30, 2014 and determined that the carrying amount of property and equipment related to the Kreider 1 project exceeded its estimated future undiscounted cash flows under certain assumptions regarding the timing, probability and levels of revenue from sales of nutrient reduction credits.  Management estimated the fair value of the property and equipment, based on such assumptions and the discounted cash flow method, and determined that $2,000,000 of the property and equipment was impaired.

Research and Development

Total research and development expenses were $135,000 and $192,000 for the years ended June 30, 2014 and 2013, respectively.

Research and development expenses, excluding stock-based compensation (credits)/charges of $(117,000) and $38,000 were $252,000 and $154,000 for the years ended June 30, 2014 and 2013, respectively.  The primary reason for the increase is due to pilot program testing related to the enhancement of the Company’s technology.  

Research and development stock-based employee compensation for the years ended June 30, 2014 and 2013 consists of the following:

	Year ended June 30, 2014		Year ended June 30, 2013
Research and development:
Fair value of stock options (credited)/expensed under ASC 718	$ (117,000)		$ 38,000
Total	$ (117,000)		$ 38,000

Stock-based compensation expense decreased from $38,000 for the year ended June 30, 2013 to $(117,000) for the year ended June 30, 2014 due to the forfeiture of previously expensed unvested stock option of an employee terminated during the year ended June 30, 2014.  

Loss from Operations

As a result of the factors described above, the loss from operations was $5,377,000 and $7,960,000 for the years ended June 30, 2014 and 2013, respectively.

Other Expense (Income)

Other expense was $385,000 and $290,000 for the years ended June 30, 2014 and 2013, respectively. Interest expense increased to $403,000 for the year ended June 30, 2014 from $290,000 for the year ended June 30, 2013.  Interest expense increased due to the Pennvest loan interest no longer being capitalized as of August 1, 2012 due to Kreider 1 being placed in service.  The Pennvest non-capitalized loan interest was $197,000 and $182,000 for the years ended June 30, 2014 and 2013, respectively.  The interest related to deferred compensation balances owed to Brightcap and Mark Smith and another employee also increased from $92,000 for the year ended June 30, 2013 to $172,000 for the year ended June 30, 2014.  Loan payable – affiliate interest expense was $23,000 and $7,000 for the years ended June 30, 2014 and 2013, respectively.  During the year ended June 30, 2014, the Company recognized other income of $20,000 due to the gain on extinguishment of liabilities, for which the Company was legally released from payment.

 

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Net Loss Attributable to the Noncontrolling Interest

The net loss attributable to the noncontrolling interest was $3,000 and $6,000 for the years ended June 30, 2014 and 2013, 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 $5,761,000 and $8,248,000 for the year ended June 30, 2014 and 2013, respectively, and the net loss per basic and diluted common share was $0.31 and $0.48, respectively.  

LIQUIDITY AND CAPITAL RESOURCES

The Company's consolidated financial statements for the year ended June 30, 2014 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, 2014 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 June 30, 2014, the Company had cash of approximately $186,000. During the year ended June 30, 2014, net cash used in operating activities was $992,000, primarily consisting of cash operating expenses related to the Kreider Farms Project (‘KF’) that are no longer being capitalized, salaries and benefits, and other general and administrative costs. 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.

Investing Activities

During the year ended June 30, 2014, $57,000 of restricted cash related to the Company’s secured letter of credit which guaranteed its New York office lease was released.  

Financing Activities

During the year ended June 30, 2014, the Company received cash proceeds of $944,000 related to the sale of the Company’s restricted common shares and $25,000 due to the receipt of a subscription receivable. The Company also received $185,000 from loans from affiliates.  The Company used $71,000 to repay a loan payable to an affiliate and incurred share issuance costs of $7,000.  

As of June 30, 2014 the Company has debt obligations consisting of: a) loans payable – affiliates of $382,000, b) deferred compensation of $717,000, c) convertible notes payable – affiliates of $1,737,000, and, d) a loan payable of $7,754,000 (owed by PA-1)(plus accrued interest of $313,000).  

Plan of Operations and Outlook

As of June 30, 2014, the Company had cash of approximately $186,000.  

 

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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 fiscal years 2013 and 2014 (and during the current period), the Company experienced greater difficulty in raising equity and debt funding than in the prior years. During the year ended June 30, 2014 and during the period thereafter, the Company had the greatest difficulty raising funds to date. As a result, the Company faced, and continues to face, significant cash flow management challenges due to material working capital constraints. 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 totaling approximately $382,000 including interest as of June 30, 2014.  As of June 30, 2014 such deferrals totaled approximately $2,453,000 (including accrued interest and deferred compensation converted into promissory notes). 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 has made reductions in its personnel during the year ended June 30, 2014.  The Company has had to delay payments of trade obligations and economize in many ways that have potentially negative consequences. The Company’s accounts payable have increased materially over this period. 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 Integrated Projects and CAFO 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 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 year ended June 30, 2014 the Company raised proceeds of $944,000 through the sale of its securities (Note 8 to Financial Statements) and anticipates raising additional funds from such sales.  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.

On January 26, 2009 the Board of the Pennsylvania Infrastructure Investment Authority (“Pennvest”) approved a $7.75 million loan to Bion PA 1, LLC (“PA-1”), a wholly-owned subsidiary of the Company, for the initial stage of Bion's Kreider Farms project (“Phase 1 Kreider System”). After substantial unanticipated delays, on August 12, 2010 the PA-1 received a permit for construction of the Phase 1 Kreider system. Construction activities commenced during November 2010.  The closing/settlement of the Pennvest Loan took place on November 3, 2010.  PA-1 finished the construction of the Phase 1 Kreider System and entered a period of system ‘operational shakedown’ during May 2011.  The Phase 1 Kreider 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 economics (potential revenues and profitability) of the Kreider 1 System are based largely on the long term sale of nutrient (nitrogen and/or phosphorus) reduction credits to meet the requirements of the Chesapeake Bay environmental clean-up.  The PADEP issued final permits for the Kreider 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, PA-1 has commenced generating nutrient reduction credits for potential sale while continuing to utilize the system to test improvements and add-ons. Operating results of the Phase 1 Kreider system have documented the efficacy of Bion’s nutrient reduction technology and vetted potential ‘add-ons’ for future installations. 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 PA-1.  As a result of this extended period of

 

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operations, Bion is confident that future systems can be constructed with even higher operational efficiencies at lower capital expense and with lower operational costs. To date liquidity in the Pennsylvania nutrient credit market has been slow to develop significant breadth and depth which limited liquidity has negatively impacted Bion’s business plans and has prevented Bion from monetizing the nutrient reductions created by PA-1’s existing Kreider 1 project and Bion’s other proposed projects. These challenges and difficulties (which continue to this date) have prevented PA-1 from generating any material revenues from the Kreider 1 project to date (PA-1’s Kreider 1 operating expenses have been funded by loans from Bion) and raise significant questions as to when, if ever, PA-1 will be able to generate material revenues from the Kreider 1 system.  Additionally, the Company has not made any interest or 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, 2014.  Due to the slow development of the nutrient reduction credit market, 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, recorded a $2,000,000 impairment of the Kreider 1 assets which reduced the value of the Kreider 1 System to $4,349,482 as of June 30, 2014.  Additional impairments may result if the nutrient credit market does not develop in the near term.  

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 PA-1 pay $8,137,117 (principal, interest plus late charges) on or before October 24, 2014. The Company anticipates that discussions and negotiations will take place between PA-1 and Pennvest concerning this matter over the next 30 days.  It is not possible at this date to predict the outcome of such negotiations, but the Company believes that an interim, short-term agreement will be reached that will allow PA-1 and Pennvest a further period of time for further negotiations and evaluation of possible long-term resolutions. Subject to the results of the negotiations with Pennvest and pending development of a more robust market for nutrient reductions in Pennsylvania, PA-1 and Bion anticipate that it will be necessary for the Company 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 PA-1.  

The Company is currently conducting research and development activities at Kreider 1 while continuing commercial operations.

As indicated 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, some of which may be in the context of joint ventures for the development of one or more Integrated 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 unsettled credit and capital markets presently existing for companies such as Bion.  

 

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Currently, Bion is focused on using applications of its patented waste management technology and its technology platform to pursue three main business opportunities: 1) development of Integrated Projects which will include large CAFOs, such as large dairies, beef cattle feed lots and hog farms, with Bion waste treatment System modules processing the aggregate CAFO waste stream from the equivalent of 40,000 or more beef and/or dairy cows (or the waste stream equivalent of other species) while producing solids to be utilized for renewable energy production (and potentially to be marketed as feed and/or fertilizer), integrated with an ethanol plant capable of producing 40 million gallons (or more) of ethanol per year, and/or integrated with CAFO end product processors,  2) installation of Bion systems to retrofit and environmentally remediate existing CAFOs in selected markets where: a) government policy supports such efforts (such as the Chesapeake Bay watershed and Wisconsin or, potentially, other areas seeking to meet EPA TMDL requirements) 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 its technology for use outside of North America.

The Company has commenced activities related to marketing and potential use of its technology in relation to expansion and/or development of CAFO’s in the Northeast and Midwest (and elsewhere).  Bion considers this to be a large potential market for the Company’s growth over the next 18-36 months (and thereafter). Assuming that the Company can be successful in raising necessary funding and the development of a more robust market for nutrient reductions in Pennsylvania (and elsewhere), neither of which are assured at this date, it is anticipated at such activities will accelerate based on the operating results achieved by the Kreider 1 system.

The Company continues its development work related to the second phase of the Kreider project (‘Phase 2 Kreider Project’) which involves production of renewable energy from the waste of KF’s poultry operations and the cellulosic solids recovered by the Kreider 1 system. During May 2011 the PADEP certified the Phase 2 Kreider Project for 559,457 nutrient credits under the old EPA’s Chesapeake Bay model.  The Company anticipates that this project will be certified for between 1.5-2 million nutrient reduction credits pursuant to the amended EPA Chesapeake Bay model which was published subsequent to the original certification. Recent announcements related to negotiations between the EPA and PADEP regarding Pennsylvania’s Chesapeake Bay nutrient reduction non-compliance suggest that a resolution of certain matters is likely during the balance of this calendar year which may allow this project to move forward with re-certification and proceed toward design, permitting , construction and eventual operation during the 2015 calendar year.  Assuming there are also 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 Phase 2 Kreider Project with a goal of achieving operational status during 2015., The economics (potential revenues and profitability) of the Phase 2 Kreider Project are based largely on 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 to date has negatively impacted Bion’s business plans and has resulted in challenges to monetizing the nutrient reduction credits created by PA-1’s existing Kreider 1 project and will delay the Company’s Phase 2 Kreider Project and other proposed projects in Pennsylvania.

Bion is currently working with local, state and federal officials with regard to regulatory and legislative initiatives, and with such parties and potential industry participants to evaluate sites in multiple states. The Company believes that its initial Integrated Project will most likely be located and developed (possibly in stages) in Pennsylvania.  Note that locations in other states are also under review and the initial Integrated Project could be developed elsewhere. It is possible that the Company will develop one or more Integrated Projects as 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).  Bion intends to choose sites for additional Projects during the calendar years 2015-2017 to create a pipeline of Projects. Management has a 5-year development target (through calendar year 2020) of approximately 10-24 Integrated Projects.  At the end of that period, Bion projects that 5 or more of these Integrated Projects will be in full operation in 3-5 states (or other locations), and the balance would be in various stages ranging from partial operation to early permitting stage. No Integrated Project has been developed to date.

 

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CONTRACTUAL OBLIGATIONS

We have the following material contractual obligations (in addition to employment and consulting agreements with management and employees):

On September 27, 2008, the Company executed an agreement with Kreider Farms (and its affiliated entities) (collectively "Kreider") to design, construct and operate, through its wholly-owned subsidiary PA-1, a Bion system to treat the waste of the dairy cows (milkers, dry cows and heifers) at the Kreider Dairy, located in Mannheim, Pennsylvania. In addition, this agreement (as amended and extended) provides for a second phase which will include treatment of the cellulosic solid wastes from the Kreider 1 together with the waste stream from Kreider's poultry facilities to produce renewable energy for Bion's waste treatment facility and/or for market sales. The Kreider 1 system is owned and operated by PA-1, in which Kreider has the option to purchase a minority interest. Funds were expended over the last year to complete the construction of the Kreider 1 System and substantial capital and operating funds (equity and/or debt) has been and will continue to be expended.  The Company anticipates that PA-1 will receive revenue from the sale of nutrient (and other) environmental credits related to the Kreider 1 system, and through sales of renewable energy generated in connection with the second phase (largely poultry manure) of the Kreider project. The $7.75 million loan from the Pennsylvania Infrastructure Investment Authority to PA-1 (“Pennvest Loan”), together with funds provided by the Company, has provided the funds for construction of the Kreider 1 system. The Pennvest loan is to be repaid by interest only payments for the first three years, followed by an additional ten-year amortization of principal, and matures in November 2023.  The Kreider 1 system reached full, stabilized operation by the end of the 2012 fiscal year and received final permits during August 2012.  The Pennsylvania Department of Environmental Protection re-certified the nutrient credits for this project. As a result, PA-1 can now commence generating and verifying nutrient reduction credits for sale while continuing to utilize the system to test improvements and add-ons. Operating results of the Phase 1 Kreider system have documented the efficacy of Bion’s nutrient reduction technology and vetted potential ‘add-ons’ for future installations. As a result of this extended period of operations, Bion is confident that future systems can be constructed with even higher operational efficiencies at lower capital expense and with lower operational costs. To date liquidity in the Pennsylvania nutrient credit market has been slow to develop significant breadth and depth  which limited liquidity has negatively impacted Bion’s business plans and has prevented Bion from monetizing the nutrient reductions created by PA-1’s existing Kreider 1 project and Bion’s other proposed projects. These challenges and difficulties (which continue to this date) have prevented PA-1 from generating any material revenues from the Kreider 1 project to date (PA-1’s Kreider 1 operating expenses have been funded by loans from Bion) and raise significant questions as to when, if ever, PA-1 will be able to generate material revenues from the Kreider 1 system.  PA-1 has been engaged in on-and-off negotiations with Pennvest related to forbearance and/or re-structuring its obligations pursuant to the Pennvest Loan for over 18 months. In the context of such negotiations, PA-1 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, 2014.  Due to the slow development of the nutrient reduction credit market, 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, recorded a $2,000,000 impairment of the Kreider 1 assets which reduced the value of the Kreider 1 System to $4,349,482 as of June 30, 2014.  Additional impairments may result if the nutrient credit market does not develop in the near term.  

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 PA-1 pay $8,137,117 (principal, interest plus late charges) on or before October 24, 2014. The Company anticipates that discussions and negotiations will take place between PA-1 and Pennvest concerning this matter over the next 30 days.  It is not possible at this date to predict the outcome of such negotiations, but the Company believes that an interim, short-term agreement will be reached that will allow PA-1 and Pennvest a further period of time for further negotiations and evaluation of possible long-term resolutions. Subject to the results of the negotiations with Pennvest and pending development of a more robust market for nutrient reductions in Pennsylvania, PA-1 and Bion anticipate that it will be necessary for the Company to evaluate various options with regard to Kreider 1 over the next 30-180 days.

 

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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 PA-1.  

The Company is currently conducting research and development activities at Kreider 1 while continuing commercial operations.

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.

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

N/A

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The consolidated financial statements are set forth on pages F-1 through F-28 hereto.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.  CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

As of June 30, 2014, under the supervision and with the participation of the Company's President and Principal Financial Officer (the same person), management has evaluated the effectiveness of the design and operations of the Company's disclosure controls and procedures.  Based on that evaluation, the President and Principal Financial Officer concluded that the Company's disclosure controls and procedures were not effective as of June 30, 2014 as a result of the material weakness in internal control over financial reporting discussed below. 

Changes in Internal Control over Financial Reporting

There were no changes in internal control over financial reporting that occurred during the last fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). Our Chief Executive Officer and Principal Financial Officer (the same person) conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO Framework") and the related guidance provided in Internal Control Over Financial Reporting – Guidance for Smaller Public Companies, also issued by the Committee of Sponsoring Organizations.

 

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Based on this evaluation, management has concluded that our internal control over financial reporting was not effective as of June 30, 2014. Our President and Principal Financial Officer concluded we have a material weakness due to lack of segregation of duties. Our size has prevented us from being able to employ sufficient resources to enable us to have an adequate level of supervision and segregation of duties within our internal control system. There is one person involved in the processing of the Company's accounting and banking transactions and a single person with overall supervision and review of the cash disbursements and receipts and the overall accounting process. Therefore, while there are some compensating controls in place, it is difficult to ensure effective segregation of accounting duties. While we strive to segregate duties as much as practicable, there is an insufficient volume of transactions to justify additional full time staff. As a result of this material weakness, we have implemented remediation procedures whereby in May 2006 we engaged an outside accounting and consulting firm with SEC and US GAAP experience to assist us with the preparation of our financial statements, evaluation of complex accounting issues and the implementation of systems to improve controls and review procedures over all financial statement and account balances.  We believe that this outside consultant's review improved our disclosure controls and procedures. If this review is effective throughout a period of time, we believe it will help remediate the segregation of duties material weakness. However, we may not be able to fully remediate the material weakness unless we hire more staff.  We will continue to monitor and assess the costs and benefits of additional staffing.

This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management's report on internal control in this annual report.

ITEM 9B.  OTHER INFORMATION

None.

 

 

 

 

 

 

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PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Our directors, executive officers and significant employees/consultants, along with their respective ages and positions are as follows:

Name		Age		Position
Directors and Officers:
Mark A. Smith		64		Executive Chairman, President, General Counsel, Chief Financial Officer and Director
Edward T. Schafer		68		Executive Vice Chairman and Director
Jon Northrop		71		Secretary and Director
Dominic Bassani		68		Chief Executive Officer

Mark A. Smith (64) currently serves Bion Environmental Technologies, Inc. as Executive Chairman, President, General Counsel, Chief Financial Officer and a director and has continually served in senior positions since late March 2003.  Since that time, he has also served as sole director, President and General Counsel of Bion's wholly-owned subsidiaries including Project Group and Services Group.  Since mid-February 2003, Mr. Smith has served as sole director and President and General Counsel of Bion's majority-owned subsidiary, Centerpoint Corporation. Mr. Smith also serves as Manager of Bion PA1, LLC. Previously, from May 21, 1999 through January 31, 2002, Mr. Smith served as a director of Bion. From July 23, 1999, when he became President of Bion, until mid-2001 when he ceased to be Chairman, Mr. Smith served in senior positions with Bion on a consulting basis.  Additionally, Mr. Smith was the president of RSTS Corporation prior to its acquisition of Bion Technologies, Inc. in 1992.  Mr. Smith received a Juris Doctor Degree from the University of Colorado School of Law, Boulder, Colorado (1980) and a BS from Amherst College, Amherst, Massachusetts (1971). Mr. Smith has engaged in the private practice of law in Colorado since 1980.  In addition, Mr. Smith has been active in running private family companies, Stonehenge Corporation (until 1994) and LoTayLingKyur, Inc. (1994-2002). Until returning to Bion during March 2003, Mr. Smith had been in retirement with focus on charitable work and spiritual retreat.

Edward T. Schafer (68) Edward Schafer has served the Company's senior management team as Executive Vice Chairman and has been a member of the Company's Board of Directors since January 1, 2011. Mr. Schafer served as a consultant to Bion since July 2010. Mr. Schafer has served as a director of Continental Resources (NYSE-CLR) since October 2011. He also chairs the Board of Directors of Dynamic Food Ingredients and the Theodore Roosevelt Medora Foundation. In addition he has served on the Board of Governors of Amity Technology LLP since 2009 and the Board of Directors of AGCO-Amity JV since it was formed in 2011.  Mr. Schafer served as a trustee of the Investors Real Estate Trust (NASDAQGS-IRET) from September 2009 to October 2011. He also served as a trustee of the IRET from September 2006 through December 2007, when he resigned from the IRET's Board to serve as Secretary of the U.S. Department of Agriculture under President George W. Bush.  Mr. Schafer, a private investor, is a former Governor of North Dakota. He served as Chief Executive Officer of Extend America, a telecommunications company, from 2001 to 2006, and he has been a member of the Boards of RDO Equipment Co., a privately-owned agricultural and construction equipment company (August 2001 to July 2003) and the University of North Dakota Foundation (June 2005 to December 2007). Mr. Schafer brings the following experience, qualifications, attributes and skills to the Company: general business management, budgeting and strategic planning experience from his service as Chief Executive Officer of Extend America and extensive government, regulatory, strategic planning, budgeting administrative and public affairs experience from his service as Governor of North Dakota and Secretary of the US Department of Agriculture.

 

 

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Jon Northrop (71) has served as our Secretary and a Director since March of 2003.  Since September 2001 he has been self employed as a consultant with a practice focused on business buyer advocacy.  Mr. Northrop is one of our founders and served as our Chief Executive Officer and a Director from our inception in September 1989 until August 2001.  Before founding Bion Technologies, Inc., he served in a wide variety of managerial and executive positions. He was the Executive Director of Davis, Graham & Stubbs, one of Denver's largest law firms, from 1981 to 1989. Prior to his law firm experience, Mr. Northrop worked at Samsonite Corporation's Luggage Division in Denver, Colorado, for over 12 years.  His experience was in all aspects of manufacturing, systems design and implementation, and planning and finance, ending with three years as the Division's Vice President, Finance. Mr. Northrop has a bachelor's degree in Physics from Amherst College, Amherst, Massachusetts (1965), an MBA in Finance from the University of Chicago, Chicago, Illinois (1969), and spent several years conducting post graduate research in low energy particle physics at Case Institute of Technology, Cleveland.

Dominic Bassani (68) has served as Chief Executive Officer of Bion Environmental Technologies, Inc. since April 2011. Previously he was a full-time consultant to the Company and served as the General Manager of Bion's Projects Group subsidiary from April 2003 through September 2006. From September 15, 2008 he has served as Director-Special Projects and Strategic Planning of the Company and our Projects Group subsidiary.  He has been an investor in and consultant to Bion since December 1999. He is an independent investor and since 1990 has owned and operated Brightcap, a management consulting company that provides management services to early stage technology companies. He was a founding investor in 1993 in Initial Acquisition Corp. that subsequently merged in 1995 with Hollis Eden Corp. (HEPH), a biotech company specializing in immune response drugs. From early 1998 until June 1999 he was a consultant to Internet Commerce Corp. (re-named EasyLink Services International Corporation) (ESIC), a leader in business-to-business transactions using the Internet. He is presently an investor in numerous private and public companies primarily in technology related businesses. From 1980 until 1986, Mr. Bassani focused primarily on providing management reorganization services to manufacturing companies and in particular to generic pharmaceutical manufacturers and their financial sponsors.

Family Relationships

There are currently no family relationships among our Directors and Executive Officers.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires our officers and directors, and stockholders owning more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission.  The Company is not aware of any persons who failed to timely file reports under this section.

Involvement in Legal Proceedings

To the best of our knowledge, during the past five years, none of the following occurred with respect to our directors or executive officers:

(1)

any bankruptcy petition filed by or against any business of which one of them was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

(2)

any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

(3)

being subject to any order, judgment or decree of any court of competent jurisdiction, permanently or temporarily inquiring, barring, suspending or otherwise limiting involvement in any type of business, securities or banking activities; and

(4)

being found by a court of competent jurisdiction, the SEC or the CFTC to have violated Federal or state securities or commodities laws.

 

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Audit Committee

The Company has no audit committee and is not now required to have one, or an audit committee financial expert.

Code of Ethics

To date, the Company has not adopted a code of business conduct and ethics applicable to its officers, directors or accounting officer.

 

ITEM 11.  EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE

The following table sets forth the compensation paid to, or accrued for, each of our current and former executive officers during each of our last two fiscal years and the compensation paid to, or accrued for, each of our significant employees and consultants for the same period.

Summary Compensation

__________________

(1)

Includes compensation paid by Bion Technologies, Inc. and our wholly owned subsidiaries.

(2)

Reflects the dollar amount expensed by the Company during the applicable fiscal year for financial statement reporting purposes pursuant to ASC 718.

(3)

Effective July 15, 2012, Mr. Smith has agreed to provide services to Bion and subsidiaries through a date no later than June 30, 2014, at an annual salary of $252,000 commencing September 1, 2012.  Effective May 15, 2013, Mr. Smith entered into an agreement whereby his compensation would continue to be deferred and was transferred into a convertible promissory note.  In consideration for the agreement Mr. Smith was granted execution/exercise bonuses to be effective upon future exercise of outstanding or subsequently acquired options and warrants and in relation to contingent stock bonuses, and their existing options and warrants as of that date, if due to expire prior to December 31, 2018, were extended. Commencing March 1, 2014, Mr. Smith voluntarily reduced his monthly salary to $14,000 on a temporary basis.

 

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(4)

On September 30, 2009, the Company entered into an extension agreement with Brightcap for services provided to the Company by Dominic Bassani at an annual salary of $312,000 for services provided through September 30, 2012.  Effective May 13, 2011, the Company appointed Mr. Bassani Chief Executive Officer due to the resignation of William O'Neill.  In July 2012, the Company and Brightcap agreed to an extension of Mr. Bassani's services through June 30, 2014 at a salary of $26,000 per month.  Effective May 15, 2013, Mr. Bassani entered into an agreement whereby his compensation would continue to be deferred and was transferred into a convertible promissory note.  In consideration for the agreement Mr. Bassani was granted execution/exercise bonuses to be effective upon future exercise of outstanding or subsequently acquired options and warrants and in relation to contingent stock bonuses, and their existing options and warrants as of that date, if due to expire prior to December 31, 2018, were extended.

(5)

Effective May 15, 2013, Mr. Bassani and Mr. Smith entered into an agreement whereby their compensation would continue to be deferred and were transferred into convertible promissory notes, which agreements were extended during September 2014.  In consideration for these agreements, Mr. Bassani and Mr. Smith were granted execution/exercise bonuses to be effective upon future exercise of outstanding or subsequently acquired options and warrants and in relation to contingent stock bonuses, and their existing options and warrants as of that date, if due to expire prior to December 31, 2018, were extended.  The modification of the options and the warrants under the execution/exercise bonuses resulted in an incremental non-cash compensation expense of $1,480,000 and $967,000 to Mr. Bassani and Mr. Smith, respectively, for the year ended June 30, 2013.

(6)

Effective January 1, 2011, the Company entered into an employment agreement with Edward Schafer pursuant to which for a period of three years, Mr. Schafer will provide senior management services on an approximately 75% full time basis, initially as Executive Vice Chairman and as a director.  Initially Mr. Schafer was paid at an annual rate of $250,000, which consisted of $150,000 in cash and $100,000 in common shares of the Company. Due to the cash constraints of the Company, since December 31, 2013, Mr. Schafer’s employment with the Company has continued without any cash compensation due to his agreement to rely solely on bonuses which may be declared from time-to-time by the Company’s Board of Directors, no such bonuses have been declared to date.

(7)

Mr. Bloom and Mr. Morris' employment contracts were terminated effective November 30, 2013, and each their salaries include accrued severance of $75,000, which sums the Company does not believe it owes at present.

(8)

Mr. Rowland's employment contact was terminated as of July 31, 2013, and he was awarded stock compensation of $30,000 related to his severance.

Employment Agreements:

Mark A. Smith (“Smith”) has held the positions of Director, President and General Counsel of Company and its subsidiaries under various agreements and terms since March 2003 (details regard earlier years and periods between 2003 and 2011 may be found in the Company’s prior Forms 10-K and other SEC filings). During July 2011, the Company entered into an extension agreement pursuant to which Smith continued to hold his current positions in the Company through a date no later than December 31, 2012. Commencing January 1, 2012, Smith’s monthly salary was $20,000, which has been accrued and deferred. In addition, Smith has been/will be issued 90,000 shares of the Company’s common stock in two tranches of 45,000 shares on each of January 15, 2013 and 2014, respectively. As part of the extension agreement, Mr. Smith was also granted 200,000 options, which vested immediately, to purchase common shares of the Company at a price of $3.00 per share and which options expire on December 31, 2019. Effective July 15, 2012, the Company entered into an extension agreement pursuant to which Smith will continue to hold his current positions in the Company through a date no later than June 30, 2014. Effective September 2012, Smith’s monthly salary became $21,000 (which is currently being deferred). In addition, Smith will be issued 150,000 shares of the Company’s common stock in two tranches of 75,000 shares on each of January 15, 2014 and 2015, which shares vested immediately. As part of the extension agreement, Smith was also granted a bonus of $25,000 paid in warrants, which vested immediately, to purchase 250,000 shares of the Company’s common stock at a price of $2.10 per share and which warrants expire on December 31, 2018 and a contingent stock bonus of 100,000 shares payable on the date on which the Company’s stock price first reaches $10.00 per share (regardless of whether Smith is still providing services to the Company on such date). Mr. Smith has voluntarily reduced his monthly deferred salary accrual to $14,000 due to the Company’s financial situation.  During September 2014 Mr. Smith agreed to extend: a) the term of his service with the Company, b) his compensation/salary deferral and c) the maturity date of his convertible note to a date no earlier than January 1, 2014 while a longer written extension/deferral agreement covering these and other matters is being negotiated.  

 

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Dominic Bassani (“Bassani”) has served in senior management positions with the Company (as a full-time consultant) since 2001 (see prior Forms 10-K for earlier years and other filings with the SEC). Since March 31, 2005, the Company has had various agreements with Brightcap, Bassani’s family consulting company, through which the services of Bassani were provided through 2011. On September 30, 2009 the Company entered into an extension agreement with Brightcap pursuant to which Bassani provided services to the Company through September 30, 2012 for $312,000 annually (currently deferred). The Board appointed Bassani as the Company's CEO effective May 13, 2011. On July 15, 2011, Bassani, Brightcap and the Company agreed to an extension/amendment of the existing agreement with Brightcap which provides that Bassani serve as CEO through June 30, 2013 and would continue to provide full-time services to the Company in other capacities through June 30, 2014 at a salary of $26,000 per month. In addition Bassani will be issued 300,000 shares of the Company’s common stock issuable in three tranches of 100,000 shares on each of January 15, 2015, 2016 and 2017, respectively. Bassani was also granted 725,000 options, which vested immediately, to purchase shares of the Company’s common stock at $3.00 per share which options expire on December 31, 2019. Effective July 15, 2012, Bassani, Brightcap and the Company agreed to a further extension/amendment of the existing agreement with Brightcap which provides that Bassani will continue to provide the services of CEO through June 30, 2014. Bassani will continue to provide full-time services to the Company at a cash salary of $26,000 per month (which is currently being deferred) and Bassani will be issued 300,000 shares of the Company’s common stock issuable in two tranches of 150,000 shares on each of January 15, 2015 and 2016, respectively, which will be immediately vested. As part of the extension agreement, Bassani was also granted a bonus of $5,000 paid in warrants, which vested immediately, to purchase 50,000 shares of the Company’s common stock at a price of $2.10 per share and which warrants expire on December 31, 2018. During September 2014 Mr. Bassani agreed to extend: a) the term of his service with the Company, b) his compensation/salary deferral and c) the maturity date of his convertible note to a date no earlier than January 1, 2015 while a longer written extension/deferral agreement covering these and other matters is being negotiated.

On May 5, 2013, the Board of Directors approved agreements with Bassani and Smith, with effective date of May 15, 2013, in which Bassani and Smith have agreed to continue to defer their respective cash compensation through April 30, 2014 (unless the Board of Directors elects to re-commence cash payment on an earlier date) and to extend the due dates of their respective deferred cash compensation until January 15, 2015.  The Company has provided Bassani and Smith with convertible promissory notes which reflect all the terms of these agreements to which future accruals will be added as additional principal.  As part of the agreements, Bassani and Smith have also forgiven any possible obligations that Bion may have owed each of them in relation to unused vacation time for periods (over 10 years) prior to June 30, 2012.  In consideration of these agreements, Bassani and Smith:  a) have been granted 50%  ‘execution/exercise’ bonuses to be effective upon future exercise of outstanding (or subsequently acquired) options and warrants owned by Bassani and Smith (and their respective donees) and in relation to contingent stock bonuses; b) their warrants and options, if due to expire prior to December 31, 2018, have been extended to that date (with possible further extensions); and c) other modifications have been made.

Effective January 1, 2011, the Company entered into an employment agreement with Edward Schafer (“Schafer”) pursuant to which for a period of three years, Schafer will provide senior management services to the Company on an approximately 75% full time basis, initially as Executive Vice Chairman and as a director. Compensation for Schafer’s services will initially be at an annual rate of $250,000, which will consist of $150,000 in cash compensation and $100,000 payable in the Company’s common stock. Commencing the month following the first calendar month-end after the Company has completed an equity financing in excess of $3,000,000 (net of commissions and other offering expenses), Schafer’s compensation shall be at an annual rate of $225,000, all of which shall be payable in cash. Effective July 15, 2012, the Company entered into a deferral/employment/ compensation agreement with Schafer pursuant to which  Schafer provides senior management services to the Company on an approximately 75% full time basis, as Executive Vice Chairman and as a director. Basic compensation for Schafer’s services remains unchanged and Schafer was issued 100,000 options to purchase shares of the Company’s common stock at $2.10 per share until December 31, 2018, which immediately vested and a contingent stock bonus of 25,000 shares payable on January 1 of the first year after the Company’s stock price first reaches $10.00 per share (regardless of whether Schafer is still providing services to the Company on such date). Since May 15, 2012 Schafer has been deferring the cash portion of the compensation due him from the Company, in consideration of which he has been granted a 50%

 

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‘execution/exercise’ bonus to be effective upon future exercise of outstanding (or subsequently acquired) options and warrants owned by Bassani and Smith (and their respective donees) and in relation to contingent stock bonuses. Effective January 1, 2014, Mr. Schafer agreed to continue his services to the Company as Director and Executive Vice-Chairman without periodic compensation in light of the Company’s financial situation. Mr. Schafer agreed not to receive any periodic compensation (cash or deferred) commencing January 1, 2014 and will be compensated with bonuses from time-to-time as determined to be appropriate by the Board of Directors.  No such bonuses have been declared to date.  It is anticipated that a new employment/compensation agreement with Mr. Schafer will be negotiated during the current fiscal year.

Effective February 1, 2011, the Company entered into an employment agreement with James Morris, pursuant to which Mr. Morris agreed to serve as Chief Technology Officer of the Company through January 31, 2015 at an annual salary of $150,000 until July 1, 2011, at which time the annual salary shall be increased to $180,000, which increase has been deferred and accrued by the Company.  Mr. Morris’ employment with the Company was terminated effective November 30, 2013.  The Company is involved in litigation with Mr. Morris related to the termination. See “Item 3. Legal Proceedings” above.

Effective September 27, 2011, the Company entered into an employment agreement with George Bloom pursuant to which Mr. Bloom agreed to serve as Chief Engineering Officer of the Company through January 31, 2015 at an annual salary of $150,000 until July 1, 2011, at which time the annual salary shall be increased to $180,000, which increase has been deferred and accrued by the Company.  Mr. Bloom’s employment with the Company was terminated effective November 30, 2013.

Other Agreements

As of September 1, 2014, the Company had outstanding Contingent Stock Bonuses of 492,500 shares, in aggregate, to its key employees and consultants, pursuant to which 415,000 shares, in aggregate, will be issued  when the Company’s common stock trades at or above $10.00 per share and 77,500 shares, in aggregate, will be issued  when Company’s common stock trades at or above $20 per share (of which 425,000, in aggregate,  are owned by  Bassani,  Smith and  Schafer and are subject  to execution bonuses, per managerial agreements, that will be triggered upon Bion’s common stock reaching a closing price equal to 50% of currently specified prices).

Effective January 1, 2011, the Company made grants of stock bonuses aggregating 185,000 shares, which grants are split among all of the Company's core employees and consultants pursuant to the Company's 2006 Consolidated Incentive Plan, as amended.

On January 1, 2011 the Company granted Smith a Contingent Stock Bonus of 50,000 shares. These stock bonuses do not require that Smith remains employed by the Company.

In January 2012, the Company granted an employee (in consideration for extension of his employment agreement) 25,000 Contingent Stock Bonuses; 12,500 shares to be issued if the Company’s stock price exceeds each of $10.00 and $20.00 per share, respectively. 

On July 15, 2012, the Company granted Smith and Schafer Contingent Stock Bonuses of 100,000 and 25,000 shares, respectively.  The stock bonuses are contingent upon the Company’s stock price exceeding $10.00 per share.  These stock bonuses do not require that Smith or Schafer remain employed by the Company.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table sets forth the number of shares of common stock covered by outstanding stock option awards that are exercisable and unexercisable, and the number of shares of common stock covered by unvested restricted stock awards for each of our named executive officers as of June 30, 2014.

 

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______________

(1)

All options and contingent stock bonuses are subject to a 50% execution/exercise bonus upon notice of intent to exercise or issuance of contingent shares as applicable.

Director Compensation

Members of the Board of Directors do not currently receive any cash compensation for their services as Directors, but are entitled to be reimbursed for their reasonable expenses in attending meetings of the Board.  However, it is the Company's intention to begin to pay cash compensation to Board members at some future date.

DIRECTOR COMPENSATION

The following table sets forth certain information regarding the compensation paid to directors during the fiscal year ended June 30, 2014:

______________

(1)

Reflects the dollar amount expensed by the Company during the applicable fiscal year for financial statement reporting purposes pursuant to ASC 718.

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ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

At September 8, 2014, the Company had issued 19,787,068 shares of its common stock, of which 19,082,759 are outstanding (the balance of 704,309 shares are owned by Centerpoint, the Company's majority owned subsidiary).

The following table sets forth certain information regarding the beneficial ownership of our common stock as of September 8, 2014 by:

●

each person that is known by us to beneficially own more than 5% of our common stock;

●

each of our directors;

●

each of our executive officers and significant employees; and

●

all our executive officers, directors and significant employees as a group.

Under the rules of the Securities and Exchange Commission, beneficial ownership includes voting or investment power with respect to securities and includes the shares issuable under stock options that are exercisable within sixty (60) days of September 8, 2014.  Those shares issuable under stock options are deemed outstanding for computing the percentage of each person holding options but are not deemed outstanding for computing the percentage of any other person.  The percentage of beneficial ownership schedule is based upon 19,082,751 shares outstanding as of September 8, 2014.  The address for those individuals for which an address is not otherwise provided is c/o Bion Environmental Technologies, Box 566/1774 Summitview, Crestone, Colorado 81131.  To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting power and investment power with respect to all shares of common stock listed as owned by them.

 

 

 

 

 

 

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		Shares of Common Stock Beneficially Owned
Name and Address		Number		Percent of Class Outstanding		Entitled To Vote
Centerpoint Corporation(1) Box 566/1774 Summitview Way Crestone, CO  81131		704,309		3.6%		-
Dominic Bassani(2) 64 Village Hills Drive Dix Hills, NY  11746		3,597,899		16.6%		17.1%
Anthony Orphanos(3) c/o Blacksmith Advisors, LLC 40 West 57th Street New York, NY 10012		2,174,450		10.9%		11.3%
Danielle Christine Bassani(4) c/o Dominic Bassani 64 Village Hills Drive Dix Hills, NY  11746		1,879,477		8.9%		9.2%
Mark A. Smith(5)		2,545,702		12.0%		12.4%
Edward T. Schafer(6)		758,254		3.7%		3.7%
Jon Northrop(7)		433,221		2.2%		2.2%
All executive officers, directors and significant employees as a group (4 persons)		7,335,076		30.5%		31.4%

__________________

(1)

Centerpoint Corporation is currently majority owned by the Company.  Under Colorado law, Centerpoint Corporation is not entitled to vote these shares unless otherwise ordered by a court.  These shares of common stock may be distributed to the shareholders of Centerpoint Corporation at a future date pursuant to a dividend declared during July 2004.  The shares distributed to Bion, if any, will be cancelled immediately upon receipt.

(2)

Includes 5,624 shares, 725,000 shares underlying options and 1,150,000 shares underlying warrants held directly by Mr. Bassani; 30,000 shares underlying warrants owned jointly with Mr. Bassani’s wife; 354,342 shares and 25,000 shares underlying warrants held by Mr. Bassani's  wife; and 839,933 shares held in IRA accounts of Mr. Bassani and his wife.  Also includes 468,000 shares owned by Mr. Bassani's daughter, Danielle Bassani.  Mr. Bassani has also been granted 250,000 shares of contingent stock bonuses that are not included in this calculation.  Does not include 600,000 shares, in aggregate, which the Company has committed to issue to Mr. Bassani during 2014-2016.  Does not include units that could be issued on the conversion by Bassani of deferred compensation promissory notes in the amount of $1,285,195.  The maturity date of the promissory notes has been deferred to January 15, 2015, and Bassani has the option to convert this amount into units with each unit consisting of 1 share of common stock and 1 warrant exercisable at $2.50 per share until December 31, 2016.  The conversion price will be $.75 per unit.  Does not include 155,834 shares of common stock that could be issued on the conversion (at the election of Bassani) by Bassani of deferred compensation in the amount of $233,750.  Mr. Bassani disclaims ownership of 1,411,477 shares underlying warrants held by The Danielle Christine Bassani Trust, which is separately itemized herein. Mr. Bassani's adult daughter, who lives with him, is the beneficiary of the Danielle Christine Bassani Trust and Mr. Bassani is not one of the trustees of the trust.  Mr. Bassani further disclaims beneficial ownership of shares and warrants owned by various other family members, none of whom live with him or are his dependents, and such shares are not included in this calculation.

 

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(3)

Includes 493,563 shares held directly by Mr. Orphanos plus 188,250 and 10,000 shares, respectively, underlying warrants and options held directly by Mr. Orphanos; 130,263 shares held jointly with his wife; and 1,352,374 shares held in IRA accounts.  Not included are 100,000 shares and 1,411,477 shares underlying warrants held by the Danielle Christine Bassani Trust, of which Mr. Orphanos is a co-trustee and 3,292,198 common shares owned by certain clients of Blacksmith Advisors, over which Mr. Orphanos exercises discretionary authority (which shares include: a) 839,933 shares held in IRA accounts for Mr. Bassani and his wife; b) 354,342 shares held by Mr. Bassani’s wife; c) 5,624 shares held by Mr. Bassani personally; and d) 68,000 shares owned by Danielle Bassani).  Mr. Orphanos disclaims beneficial ownership of the shares listed in the preceding sentences because he has no pecuniary interest in the shares.

(4)

Represents 1,411,477 shares underlying warrants held by The Danielle Christine Bassani Trust, Anthony Orphanos and Donald Codignotto, trustees and 468,000 shares owned by Danielle Bassani, beneficiary of the trust.

(5)

Includes 911,931 shares held directly by Mark A. Smith; 700,000 shares underlying options held directly by Mr. Smith; 796,500 shares underlying warrants held directly by Mr. Smith; 20,834 shares held jointly with his wife; 53,756 shares held by his wife; and 62,681 shares of common stock held by LoTayLingKyur Foundation which is controlled by Mr. Smith.  Does not include 150,000 shares of contingent stock bonuses and 75,000 shares under the Company’s 2006 Consolidated Investment Plan that the Company has committed to issue to Mr. Smith during 2015.  Does not include units that could be issued on the conversion (at the election of Mr. Smith) by Mr. Smith of deferred compensation promissory note in the amount of $780,170.  The due date of this compensation has been deferred to January 15, 2015, and Mr. Smith has the option to convert this amount into units with each unit consisting of 1 share of common stock and 1 warrant exercisable at $2.50 per share until December 31, 2016.  The conversion price will be $.75 per unit.  Does not include shares and warrants owned by various family members of which Mr. Smith disclaims beneficial ownership.  Mr. Smith is also the President of Centerpoint, although shares owned by Centerpoint are not entitled to a vote while held by Centerpoint.

(6)

Includes 158,254 shares held directly by Mr. Schafer and options to purchase 600,000 shares.  Does not include 25,000 shares of contingent stock bonuses.

(7)

Includes 137,492 shares held directly by Jon Northrop; 16,464 shares owned by Jon Northrop's wife; 9,265 shares owned jointly by Jon Northrop and his wife; and options to purchase 270,000 shares held by Jon Northrop.  Does not include shares owned by the adult children of Jon Northrop.

 

 

 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Other than the employment/consulting agreements, deferred compensation arrangements and conversions of debt described above in Item 1 Business and Item 11 Executive Compensation, there are no related party transactions except that:

 

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The Company executed a non-cancellable operating lease for office space in New York City effective August 1, 2006 and extending to November 30, 2013.  The average monthly rent under the lease is $15,820.  The Company provided the lessor with a letter of credit in the amount of $128,443 in connection with the lease which reduces over the term of the release.  The Company's obligations under the lease are partially guaranteed by Salvatore Zizza, former Chairman of Projects Group. Effective January 1, 2009, Mr. Zizza entered into a Master Sublease with the Company pursuant to which Mr. Zizza became a sublessee and, for a one year initial period, became responsible to make all payments pursuant to the lease and manage the lease premises.  Rental payments from existing sub-tenants are being deposited into a Company bank account and Mr. Zizza has utilized such funds as partial funding of the monthly lease payments. Subsequently, Mr. Zizza exercised his option to continue the Master Sublease for the entire period of the lease.  Mr. Zizza fulfilled his obligations under the Master Sublease during the one year initial period and, therefore, he received the funds from the next release from restricted funds securing the Company's letter of credit approximating $28,000.  If Mr. Zizza exercised the option to continue the Master Sublease for the entire term of the lease, and, therefore, received approximately $57,000 balance of restricted funds securing the letter of credit which was terminated.  The Company no longer has any obligations related to the lease and/or the office space.

No directors of the Company are considered to be independent directors.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES.

Audit Fees

In December 2005, the Company engaged GHP Horwath, P.C. as its independent registered public accounting firm.  The aggregate fees billed for each of the last two fiscal years ended June 30, 2013 and June 30, 2014 by GHP Horwath, P.C. for professional services rendered for the audit of the Company's annual financial statements and reviews of interim financial statements included in the Company's quarterly reports on Form 10-Q (and related matters) were $59,400 and $59,500, respectively.

 

Audit Related Fees

There were no fees billed by GHP Horwath, P.C. for audit-related fees in each of the last two fiscal years ended June 30, 2013 and June 30, 2014.

Tax Fees

The aggregate fees billed for tax services rendered by GHP Horwath, P.C. for tax compliance and related services for the two fiscal years ended June 30, 2013 and June 30, 2014 were nil and $1,090, respectively.

All Other Fees

None.

Audit Committee Pre-Approval Policy

Under provisions of the Sarbanes-Oxley Act of 2002, the Company's principal accountant may not be engaged to provide non-audit services that are prohibited by law or regulation to be provided by it, and the Board of Directors (which serves as the Company's audit committee) must pre-approve the engagement of the Company's principal accountant to provide audit and permissible non-audit services. The Company's Board has not established any policies or procedures other than those required by applicable laws and regulations.

 

 

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PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a)  Exhibits

Exhibit

Number

Description and Location

 3.1

Articles of Incorporation. (1)

 3.2

Bylaws. (1)

10.1

Subscription Agreement dated January 10, 2002 between Bion Environmental Technologies, Inc. and Centerpoint Corporation regarding issuance of stock in exchange for cash and claims regarding Aprilia. (1)

10.2

Agreement dated March 15, 2002 and effective January 15, 2002 between Bion Environmental Technologies, Inc. and Centerpoint Corporation regarding purchase of warrant and management agreement. (1)

10.3

Agreement dated February 12, 2003 between Bion Environmental Technologies, Inc. and Centerpoint Corporation canceling provisions of the Subscription Agreement by and between Bion Environmental Technologies, Inc. and Centerpoint Corporation. (1)

10.4

Promissory Note and Security Agreement between Bion Environmental Technologies, Inc. and Bright Capital, LLC. (1)

10.5

First Amendment to Lease between Bion Environmental Technologies, Inc. and Pan Am Equities Corp. (1)

10.6

Agreement between Bion Environmental Technologies, Inc. and Bergen Cove. (1)

10.7

Agreement between Bion Environmental Technologies, Inc. and David Mitchell dated April 7, 2003. (1)

10.8

Letter Agreement with Bright Capital, Ltd. (1)

10.9

Agreement with OAM, S.p.A. dated May 2003. (1)

10.10

Amended Agreement with Centerpoint Corporation dated April 23, 2003. (1)

10.11

Form of Series A Secured Convertible Notes issued in August 2003. (1)

10.12

Financing Documents for Bion Dairy Corporation. (1)

10.13

Form of Class SV/DB Warrant. (1)

10.14

Form of Class SV/DM Warrant. (1)

10.15

Form of Series A* Secured Convertible Notes issued in April 2004. (1)

10.16

Form of Series B Secured Convertible Notes issued in Spring 2004. (1)

10.17

Form of Series B* Secured Convertible Notes issued in June 2004. (1)

 

10.18

Form of Series C Notes issued in September 2005. (1)

 

 

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10.19

Form of 2006 Series A Convertible Promissory Notes issued in September 2006. (1)

10.20

Form of Non-Disclosure Agreement used by the Company. (1)

10.21

Promissory Note and Conversion Agreement between Bion Environmental Technologies, Inc. and Mark A. Smith related to deferred compensation. (1)

10.22

Promissory Note and Conversion Agreement between Bion Environmental Technologies, Inc. and Bright Capital, Ltd. related to deferred compensation. (1)

10.23

Employment agreement with Mark A. Smith. (1)

10.24

Employment agreement with Salvatore Zizza. (1)

10.25

Employment agreement with Bright Capital, Ltd. (1)

10.26

Employment agreement with Jeff Kapell. (1)

10.27

Employment agreement with Jeremy Rowland. (1)

10.28

Office lease at 641 Lexington Avenue, 17th Floor, New York. (1)

10.29

2006 Consolidated Incentive Plan. (1)

10.30

Memo to Dominic Bassani & Bright Capital, Ltd. dated October 16, 2006 regarding Change in Title/Status of DB/Amendment to Brightcap Agreement. (1)

10.31

Letter Agreement between Bion Dairy Corporation and Fair Oaks Dairy Farms dated June 19, 2006. (2)

10.32

Waiver and Release Agreement with Ardour Capital Investments, LLC. (2)

10.33

Promissory Note and Conversion Agreement for Mark Smith, dated January 1, 2007. (2)

10.34

Promissory Note and Conversion Agreement for Salvatore Zizza, dated January 1, 2007. (2)

10.35

Promissory Note and Conversion Agreement for Bright Capital, Ltd., dated January 1, 2007. (2)

10.36

Extension Agreement dated March 31, 2007 between the Company and Mark A Smith. (3)

10.37

Form of Note dated March 31, 2007 in the amount of $151,645.89 in favor of Mark A. Smith. (3)

10.38

Form of Note dated March 31, 2007 in the amount of $379,389.04 in favor of Salvatore Zizza. (3)

10.39

Form of Note dated March 31, 2007 in the amount of $455.486.30 in favor of Bright Capital, Ltd. (3)  

 

10.40

Stipulation and Agreement of Compromise and Release dated May 21, 2007 between Centerpoint Corporation, Bion Environmental Technologies, Richard Anderson and Joseph Foglia, as Plaintiffs, and Comtech Group, Inc., OAM S.p.A., Invested Ernst & Company and others as Defendants. (4)

 

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10.41

Stipulation and Agreement of Compromise, Settlement and Release dated May 15, 2007 between TCMP3 Partners, LLP as Plaintiff and Bion Environmental Technologies, Inc. and Bion Dairy Corporation, among others, as Defendants. (4)

10.42

Stipulation and Agreement of Compromise, Settlement and Release as to Certain Defendants dated May 15, 2007 between TCMP3 Partners, LLP as Plaintiff and certain defendants other than Bion Environmental Technologies, Inc. and Bion Dairy Corporation. (4)

10.43

Letter of Intent dated August 18, 2007 between Bion Environmental Technologies, Inc. and Evergreen Farm, Inc. (5)

10.44

Memorandum of Understanding with Kreider Farms. (6)

10.45

Subscription Agreement from Bright Capital, Ltd. (7)

10.46

Amendment to 2006 Consolidated Incentive Plan. (7)

10.47

Agreement between the Company and Mark A. Smith dated May 31, 2008. (7)

10.48

2007 Series AB Convertible Promissory Note. (8)

10.49

Promissory Note between Bion Environmental Technologies, Inc. and Salvatore Zizza. (9)

10.50

Promissory Note between Bion Environmental Technologies, Inc. and Dominic Bassani. (9)

10.51

Agreement between Jeff Kapell and Bion dated November 1, 2008. (10)

10.52

Agreement between David Mager and Bion dated November 1, 2008. (10)

10.53

Promissory Note between Anthony Orphanos and Bion dated October 30, 2008, Guaranteed by Dominic Bassani. (10)

10.54

Addendum to Settlement Agreement and Release Stipulation from Bion, Bion Dairy and Mark Smith dated October 31, 2008. (10)

10.55

Kreider Farms Agreement (September 25, 2008): REDACTED. (11)

10.56

Agreement between Salvatore Zizza and Bion effective December 31, 2008. (12)

10.57

Amendment #3 to 2006 Consolidated Incentive Plan. (12)

10.58

Agreement between Bright Capital, Ltd. and Dominic Bassani and Bion effective January 11, 2009. (13)

10.59

Agreement between Mark A. Smith and Bion effective January 12, 2009. (13)

10.60

Orphanos Extension Agreement dated January 13, 2009. (13)

10.61

Articles of Amendment including Statement of Designation and Determination of Preferences of Series B Convertible Preferred Stock. (14)  

 

10.62

Lease Agreement between Ronald Kreider and Kreider Farms and Bion PA 1 LLC dated June 26, 2009. (15)

10.63

Capitalization Agreement between Bion Companies and Bion PA 1 LLC dated June 30, 2009. (15)

 

56

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10.64

Zizza Notice re Master Sublease Option Exercise (November 20, 2009). (16)

10.65

Town of Schroeppel resolution (December 10, 2009). (16)

10.66

Articles of Amendment including Statement of Designation and Determination of Preferences of Series C Convertible Preferred Stock. (17)

10.67

Extension Agreement with Mark A. Smith. (18)

10.68

Agreement with Edward Schafer. (18)

10.69

Accepted Funding Offer (base loan agreement) (without exhibits) with PENNVEST for Kreider Farms Project Loan -- effective November 3, 2010. (19)

10.70

Short Form Agreement. (20)

10.71

Resume of William O’Neill. (20)

10.72

Loan & Security Agreement with Milestone Bank. (21)

10.73

O'Neill Employment Agreement (dated December 22, 2010). (22)

10.74

Schafer Employment Agreement (dated December 21, 2010). (22)

10.75

Biography of Edward T. Schafer. (22)

10.76

James Morris Employment Agreement. (23)

10.77

John R. Grabowski Employment Agreement. (23)

10.78

Kreider Farms Clarification Agreement. (23)

10.79

Resignation of William O’Neill (effective May 13, 2011). (24)

10.80

PADEP Certification of Kreider Poultry Credits. (25)

10.81

Bassani/Bright Capital Extension Agreement (executed August 31, 2011) (26)

10.82

Smith Extension Agreement (executed August 31, 2011) (26)

10.83

Bloom Employment Agreement (executed September 30, 2011) (27)

10.84

Extension/Conversion Agreement with Smith and Bassani (dated March 31, 2012) (28)

10.85

Memorialization of extension of Maturity of Bassani convertible deferred compensation (dated July 31, 2012) (29)  

10.86

Kreider Permit (dated August 1, 2012) (29)

 

10.87

Memorialization of Smith Extension Agreement (dated August 14, 2012) (30)

10.88

Memorialization of Bassani Extension Agreement (dated August 14, 2012) (30)

10.89

Memorialization of Schafer Agreement (dated August 21, 2012) (30)

10.90

Board Ratification dated May 5, 2013 (31)

10.91

Demand Promissory Note dated May 13, 2013 (31)

 

57

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10.92

Pennvest Demand Letter (dated September 25, 2014) – Filed herewith electronically.

21

Subsidiaries of the Registrant. (1)

23.1

Consent of GHP Horwath, P.C., Independent Registered Public Accounting Firm - Filed herewith electronically.

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Filed herewith electronically.

31.2

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Filed herewith electronically.

32.1

Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350 - Filed herewith electronically.

32.2

Certification of Principal Financial Officer Pursuant to Section 18 U.S.C. Section 1350 - Filed herewith electronically.

_______________

(1)

Filed with Form 10SB12G on November 14, 2006.

(2)

Filed with Form 10SB12G/A on February 1, 2007.

(3)

Filed with Form 8-K on April 3, 2007.

(4)

Filed with Form 8-K on August 13, 2007.

(5)

Filed with Form 8-K on August 22, 2007.

(6)

Filed with Form 8-K on February 27, 2008.

(7)

Filed with Form 8-K on June 3, 2008.

(8)

Filed with Form 8-K on June 19, 2008.

(9)

Filed with Form 8-K on September 30, 2008.

(10)

Filed with Form 8-K on November 13, 2008.

(11)

Filed with September 30, 2008 Form 10-Q on November 14, 2008.

(12)

Filed with Form 8-K on January 6, 2009.

(13)

Filed with Form 8-K on January 15, 2009.

(14)

Filed with March 31, 2009 Form 10-Q on May 14, 2009.

(15)

Filed with Form 8-K on July 2, 2009.

(16)

Filed with Form 8-K on December 15, 2009.

(17)

Filed with December 31, 2009 Form 10-Q on February 9, 2010.

(18)

Filed with Form 8-K on August 18, 2010.

(19)

Filed with Form 8-K on November 3, 2010.

(20)

Filed with Form 8-K on November 22, 2010.

(21)

Filed with Form 8-K on December 6, 2010.

(22)

Filed with Form 8-K on December 28, 2010.

(23)

Filed with Form 8-K on March 16, 2011.

(24)

Filed with Form 8-K on May 13, 2011.

(25)

Filed with Form 8-K on June 1, 2011.

(26)

Filed with Form 8-K on September 2, 2011.

(27)

Filed with Form 8-K on October 4, 2011.

(28)

Filed with Form 8-K on April 4, 2012.

(29)

Filed with Form 8-K on August 3, 2012

(30)

Filed with Form 8-K on August 21, 2012.

(31)

Filed with March 31, 2013 Form 10-Q on May 14, 2013.

 

(b)  Financial Statement Schedules

Our consolidated financial statements being filed as part of this Form 10-K are filed on Item 8 of this Form 10-K. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

 

58

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BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2014 AND 2013

CONTENTS

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Bion Environmental Technologies, Inc.

We have audited the accompanying consolidated balance sheets of Bion Environmental Technologies, Inc. and subsidiaries ("the Company") as of June 30, 2014 and 2013, and the related consolidated statements of operations, changes in equity (deficit) and cash flows for each of the two years in the period ended June 30, 2014.  These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bion Environmental Technologies, Inc. and subsidiaries as of June 30, 2014 and 2013, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2014, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company has not generated significant revenue and has suffered recurring losses from operations.  These factors raise substantial doubt about its ability to continue as a going concern.  Management's plans in regard to these matters are also discussed in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/GHP HORWATH, P.C.

Denver, Colorado

September 26, 2014

F-2

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BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

F-3

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BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED JUNE 30, 2014 AND 2013

								2014			2013
Revenue							$	5,931		$	11,862
Operating expenses:
	General and administrative (including stock-based
		compensation  (Note 8))						2,269,045			6,874,573
	Depreciation							978,798			905,871
	Impairment loss on property and equipment (Note 3)							2,000,000			-
	Research and development (including stock-based
		compensation (Note 8))						134,862			191,709
	Total operating expenses							5,382,705			7,972,153
Loss from operations								(5,376,774)			(7,960,291)
Other expense (income):
	Interest expense							403,410			289,604
	Gain on extinguishment of liabilities (Note 9)							(20,113)			-
	Other expense							1,918			-
								385,215			289,604
Net loss								(5,761,989)			(8,249,895)
Net loss attributable to the noncontrolling interest								2,976			6,134
Net loss attributable to Bion								(5,759,013)			(8,243,761)
Dividends on preferred stock								(2,000)			(4,417)
Net loss applicable to Bion's common stockholders							$	(5,761,013)		$	(8,248,178)
Net loss applicable to Bion's common stockholders
	per basic and diluted common share						$	(0.31)		$	(0.48)
Weighted-average number of common shares outstanding:
	Basic and diluted							18,636,364			17,315,436

See notes to consolidated financial statements.

F-4

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BION ENVIRONMENTAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)

YEARS ENDED JUNE 30, 2014 AND 2013