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, 2020 and 2019 ("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, loss (permanently or for any extended period of time) of the
services of members of the Company’s small core management team (all of whom are age 70 or older) and failure to capitalize
upon access to new markets. Additional risks and uncertainties that may affect forward looking statements about Bion's business
and prospects include the possibility that markets for nutrient reduction credits (discussed below) and/or other ways to monetize
nutrient reductions will be slow to develop (or not develop at all), the existing default by PA1 on its loan secured by the Kreider
1 system, the possibility that a competitor will develop a more comprehensive or less expensive environmental solution, delays
in market awareness of Bion and our Systems, uncertainties and costs related to research and development efforts to update and
improve Bion’s technologies and applications thereof, and/or delays in Bion's development of Projects and failure of marketing
strategies, each of which could have both immediate and long term material adverse effects by placing us behind our competitors
and requiring expenditures of our limited resources.
THESE RISKS, UNCERTAINTIES AND FACTORS BEYOND
OUR CONTROL ARE MAGNIFIED DURING THE CURRENT UNCERTAIN PERIOD RELATED TO THE COVID-19 PANDEMIC AND THE UNIQUE ECONOMIC, FINANCIAL,
GOVERNMENTAL AND HEALTH-RELATED CONDITIONS IN WHICH THE COMPANY, THE ENTIRE COUNTRY AND THE ENTIRE WORLD NOW RESIDE. TO DATE
THE COMPANY HAS EXPERIENCED DIRECT IMPACTS IN VARIOUS AREAS INCLUDING WITHOUT LIMITATION: I) GOVERNMENT-ORDERED SHUTDOWNS
WHICH HAVE SLOWED THE COMPANY’S RESEARCH AND DEVELOPMENT PROJECTS AND OTHER INITIATIVES, II) SHIFTED FOCUS OF STATE AND FEDERAL
GOVERNMENT WHICH IS LIKELY TO NEGATIVELY IMPACT THE COMPANY’S LEGISLATIVE INITIATIVES IN PENNSYLVANIA AND WASHINGTON DC,
III) STRAINS AND UNCERTAINTIES IN BOTH THE EQUITY AND DEBT MARKETS HAVE MADE DISCUSSION AND PLANNING OF FUNDING OF THE COMPANY
AND ITS INITIATIVES AND PROJECTS WITH INVESTMENT BANKERS, BANKS AND POTENTIAL STRATEGIC PARTNERS MORE TENUOUS, IV) STRAINS AND
UNCERTAINTIES IN THE AGRICULTURAL SECTOR AND MARKETS HAVE MADE DISCUSSION AND PLANNING OF FUNDING OF THE COMPANY AND ITS INITIATIVES
AND PROJECTS MORE DIFFICULT AS FUTURE INDUSTRY CONDITIONS ARE NOW MORE DIFFICULT TO ASSESS/PREDICT, V) DUE TO THE AGE AND HEALTH
OF OUR CORE MANAGEMENT TEAM, ALL OF WHOM ARE AGE 70 OR OLDER AND HAVE HAD ONE OR MORE EXISTING HEALTH ISSUES, THE COVID-19 PANDEMIC
PLACES THE COMPANY AT GREATER RISK THAN WAS PREVIOUSLY THE CASE (TO A HIGHER DEGREE THAN WOULD BE THE CASE IF THE COMPANY HAD A
LARGER, DEEPER AND/OR YOUNGER CORE MANAGEMENT TEAM), AND VI) THERE ALMOST CERTAINLY WILL BE OTHER UNANTICIPATED CONSEQUENCES FOR
THE COMPANY AS A RESULT OF THE CURRENT PANDEMIC EMERGENCY AND ITS AFTERMATH.
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
Bion Environmental Technologies, Inc.'s ("Bion,"
"Company," "We," "Us," or "Our") patented and proprietary technology provides comprehensive
environmental solutions to one of the greatest water air and water quality problems in the U.S. today: pollution from large-scale
livestock production facilities (also known as “Concentrated Animal Feeding Operations” or ”CAFOs").
Application of our technology and technology platform can simultaneously remediate environmental problems and improve operational/resource
efficiencies by recovering value high-value co-products from the CAFOs’ waste stream that has traditionally been wasted or
underutilized, including renewable energy, nutrients (including ammonia nitrogen and phosphorus) and water. From 2016 to present,
the Company has focused a large portion of its activities on developing, testing and demonstrating the 3rd generation of its technology
and technology platform (“3G Tech”) with emphasis on increasing the efficiency of production of valuable by-products
of its waste treatment including ammonia nitrogen in the form of organic ammonium bicarbonate products. The Company’s initial
ammonium bicarbonate liquid product completed its Organic Materials Review Institute (“OMRI”) application and review
process with approval during May 2020. (See discussion at “Organic Fertilizer products” in Item 1 above.)
The Company believes that, in addition to providing
superior environmental remediation, its 3G Tech will create the opportunity for large scale production of sustainable and/or organic
branded livestock products that will command premium pricing (in part due to ongoing monitoring and third party verification of
environmental performance to provide meaningful assurances to both consumers and regulators). As co-products, our 3G Tech will
produce valuable organic fertilizer products which can be: a) utilized in the production of organic grains for use as feed in support
of joint venture Projects (“JVs”) raising organic livestock, and/or b) marketed to the growing organic fertilizer market.
Our 3G Tech patented technology was developed to be part of a comprehensive technology platform that could generate multiple present
and projected future revenue streams to offset the costs of technology adoption. Bion’s technology platform includes onsite
monitoring and data collection as well as independent 3rd party verified lab data confirming the environmental reduction
impacts. The third party verified data regarding the environmental impact reductions will also be used to qualify the final consumer
products (livestock protein—including meat, eggs and dairy products) for a US Department of Agriculture (“USDA”)
“Environmentally Sustainable” brand.
The $200 billion U.S. livestock industry is
under intense scrutiny for its environmental and public health impacts – its ‘environmental sustainability’--
at the same time it is struggling with declining revenues and margins (derived in part from clinging to its historic practices
and resulting impacts). Its failure to respond to consumer concerns ranging from food safety to its ‘socialized’ environmental
impacts have provided impetus for plant-based alternatives such as Beyond Meat and Impossible Burger providing “sustainable”
alternatives to this growing consumer segment of the market. The plant-based threat to the livestock industry market (primarily
beef and pork) has succeeded in focusing the large scale livestock production facilities (also known as “Concentrated Animal
Feeding Operations” or “CAFOs") on how to meet the plant-based market challenge by addressing the consumer sustainability
issues. The adoption of livestock waste treatment technology by industry segments is largely dependent upon adoption generating
sufficient revenues to offset the capital and operating costs associated with technology adoption.
We believe that Bion’s 3G Tech platform,
coupled with common-sense policy changes to U.S. clean water strategy that are already underway, will combine to provide a pathway
to true economic and environmental sustainability with ‘win-win’ benefits for at least a premium sector of the livestock
industry, the environment, and the consumer.
Bion’s business model and technology
can open up the opportunity for JVs (in various contractual forms) between the Company and large livestock/food/fertilizer industry
participants, based upon the supplemental cash flow generated by implementation our 3G Tech business model (described and discussed
below) which will support the costs of technology implementation (including related debt). We anticipate this will result in long
term value for Bion. Long term, Bion anticipates that the sustainable branding opportunity may expand to represent the single largest
contributor to the economic opportunity provided by Bion.
During 2018, the Company had its first patent
issued on its 3G Tech and has continued its work to expand its patent coverage for our 3G Tech. In August 2020, the Company received
a Notice of Allowance on its third patent which significantly expands the breadth and depth of the Company’s 3G Tech coverage.
(See “Patents” below). The 3G Tech platform has been designed to maximize the value of co-products produced during
the waste treatment/recovery processes, including pipeline-quality renewable natural gas and organic commercial fertilizer products.
All processes will be verifiable by third-parties (including regulatory authorities, certifying boards and consumers) to comply
with environmental regulations and trading programs and meet the requirements for: a) renewable energy credits, b) organic certification
of the fertilizer coproducts and c) the USDA PVP ‘Environmentally Sustainable’ branding program (See discussion at
Item 1 above and below herein.) Bion anticipates moving forward with the development process of its initial commercial installations
of its 3G technology during the 2021 (current) and 2022 fiscal years.
In parallel, Bion has worked (which work continues)
to advance public policy initiatives that will potentially create markets (in Pennsylvania and other states) that will utilize
taxpayer funding for the purchase of verified pollution reductions from agriculture (“credits”) by the state (or others)
through a competitively-bid procurement programs. Such credits can then be used as a ‘qualified offset’ by an individual
state (or municipality) to meet its federal clean water mandates at significantly lower cost to the taxpayer. Competitive procurement
of verified credits is now supported by US EPA, the Chesapeake Bay Commission, national livestock interests, and other key stakeholders.
Legislation in Pennsylvania to establish the first such state competitive procurement program passed the Pennsylvania Senate by
a bi-partisan majority during March 2019. However, the Covid-19 pandemic and related financial/budgetary crises have subsequently
slowed progress for this and other policy initiatives and, as a result, it is not currently possible to project the timeline for
this and other similar initiatives (see discuss at Item 1 above and below herein).
The livestock industry is under tremendous
pressure ( from regulatory agencies, a wide range of advocacy groups, institutional investors and the industry’s own consumers)
to adopt sustainable practices. Environmental cleanup is inevitable - policies are already changing. Bion’s 3G technology
was developed for implementation on large scale livestock production facilities, where scale drives lower treatment costs and efficient
production of co-products. We believe that scale, coupled with Bion’s verifiable treatment technology platform, will create
a transformational opportunity to integrate clean production practices at (or close to) the point of production—the source
from which most of the industry’s environmental impacts are initiated. Bion intends to assist the forward-looking segment
of the livestock industry in actually bringing animal protein production in line with Twenty-first Century consumer demands for
sustainability.
Bion’s 3G Tech and technology platform
are designed to capture four revenue streams under one umbrella and provide the basis for joint ventures between the Company and
larger livestock producers seeking to produce environmental/sustainable product lines. The revenue streams are: a) renewable energy
and associated greenhouse gas credits (including US Renewable Fuel Standard (RFS) and/or Low Carbon Fuel Standard (LCFS) credits)(the
value and availability of which will vary based on livestock type, geographical locations, and state regulatory programs), b) verified
nutrient reductions (primarily nitrogen and phosphorus) that can be used as qualified offsets to the federal Chesapeake Bay mandate
and US EPA TMDL (‘total maximum daily limit’) requirements (the value of which will vary based on livestock type, geographical
locations, and state regulatory programs), c) co-products consisting of high value fertilizer for use in organic food production
for human consumption and/or to grow feed for use by livestock in Projects, and d) an environmentally sustainable USDA certification
that will be incorporated into a “brand” that can address the consumer concerns regarding food safety and sustainability
(based on incorporation of all of the third party verified data for greenhouse gas reductions, nutrient reductions and fertilizer
products into a digital register). The Company believes that the “branding” opportunity will offer large scale livestock
producer / processor / distributors of livestock products the opportunity to differentiate and identify their products in the marketplace
and, thereby creates the opportunity to achieve “premium pricing” by addressing consumer concerns related to safety
and sustainability in a manner similar to the premiums achieved by organic producers.
Operational results from the initial commercial
system (Kreider 1 utilizing our 2G Tech) confirmed the ability of Bion’s technologies to meet nutrient reduction goals at
commercial scale for an extended period of operation. Bion’s 3G Tech platform (and the new variations under development)
center on its patented and proprietary processes that separate and aggregate the various assets in the CAFO waste stream so they
become benign, stable and/or transportable. Bion systems can: a) remove up to 95% of the nutrients (primarily nitrogen and phosphorus)
in the effluent, b) reduce greenhouse gases by 90% (or more) including elimination of virtually all ammonia emissions, c) while
materially reducing pathogens, antibiotics and hormones in the livestock waste stream. Our core technology and its primary CAFO
applications were now proven in the Kreider 1 commercial operations. It has been accepted by the Environmental Protection Agency
(“EPA”) and other regulatory agencies and it is protected by Bion’s portfolio of U.S. and international patents
(both issued and applied for).
Currently, our research and development
activities are underway to improve, update and commercialization of our 3G Tech systems (which is ready to be implemented) during
the current fiscal year to meet the needs of JVs in various geographic and climate areas with nutrient release constraints and
to increase the recovery and generation of valuable co-products while adding the capability to treat dry (poultry) waste streams
in addition to wet manure streams at lower capital costs and operating costs
Bion business activity is focused on using
applications of its 3G Tech for utilization in JVs and Projects (including Integrated Projects) in which the Company will participate
as developer, technology provider and direct participant. Currently our efforts and funds are being expended on pre-development
activities related to: 1) the Kreider 2 poultry JV and 2) Midwest sustainable/organic grain-finished beef JV (see discussion at
Item 1 above and below herein).
KREIDER 1 (HISTORY AND STATUS)
During 2008 the Company commenced actively
pursuing the opportunity presented by environmental retrofit and remediation of the waste streams of existing CAFOs which effort
has met with very limited success to date. The first commercial activity in this area is represented by our agreement with Kreider
Farms (“KF”), pursuant to which the Kreider 1 system to treat KF's dairy waste streams to reduce nutrient releases
to the environment while generating marketable nutrient credits and renewable energy was designed, constructed and entered full-scale
operation during 2011. On January 26, 2009 the Board of the Pennsylvania Infrastructure Investment Authority (“Pennvest”)
approved a $7.75 million loan to Bion PA 1, LLC (“PA1”), a wholly-owned subsidiary of the Company, for the initial
Kreider Farms project (“Kreider 1 System”). After substantial unanticipated delays, on August 12, 2010 PA1 received
a permit for construction of the Kreider 1 System based our 2G Tech (which the Company is no longer implementing). Construction
activities commenced during November 2010. The closing/settlement of the Pennvest Loan took place on November 3, 2010. PA1 finished
the construction of the Kreider 1 System and entered a period of system ‘operational shakedown’ during May 2011. The
Kreider 1 System reached full, stabilized operation by the end of the 2012 fiscal year. During 2011 the PADEP re-certified the
nutrient credits for this project. The PADEP issued final permits for the Kreider 1 System (including the credit verification plan)
on August 1, 2012 on which date the Company deemed that the Kreider 1 System was ‘placed in service’. As a result,
PA1 commenced generating nutrient reduction credits for potential sale while continuing to utilize the Kreider 1 System to test
improvements and add-ons. However, to date liquidity in the Pennsylvania nutrient credit market has failed to develop significant
breadth and depth, which limited liquidity/depth has negatively impacted Bion’s business plans and has resulted in insurmountable
challenges to monetizing the nutrient reductions created by PA1’s existing Kreider 1 project and Bion’s other proposed
projects. These difficulties have prevented PA1 from generating any material revenues from the Kreider 1 project to date and raise
significant questions as to when, if ever, PA1 will be able to generate such revenues from the Kreider 1 System which has now been
inactive for several years. PA1 had sporadic discussions/negotiations with Pennvest related to forbearance and/or re-structuring
its obligations pursuant to the Pennvest Loan for more than five years. In the context of such discussions/negotiations, PA1 elected
not to make interest payments to Pennvest on the Pennvest Loan since January 2013. Additionally, 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, 2020. Due to the failure of the Pennsylvania nutrient reduction credit market to develop, the Company determined
that the carrying amount of the property and equipment related to the Kreider 1 project exceeded its estimated future undiscounted
cash flows based on certain assumptions regarding timing, level and probability of revenues from sales of nutrient reduction credits
and, therefore, PA1 and the Company recorded impairments related to the value of the Kreider 1 assets of $1,750,000 and $2,000,000
at June 30, 2015 and June 30, 2014, respectively. During the 2016 fiscal year, PA1 and the Company recorded an impairment of $1,684,562
to the value of the Kreider 1 assets which reduced the value on the Company’s books to zero ($0). This impairment reflects
management’s judgment that the salvage value of the Kreider 1 assets roughly equals PA1’s contractual obligations related
to the Kreider 1 System, including expenses related to decommissioning of the Kreider 1 System.
On September 25, 2014, Pennvest exercised
its right to declare the Pennvest Loan in default and accelerated the Pennvest Loan and demanded that PA1 pay $8,137,117 (principal,
interest plus late charges) on or before October 24, 2014. PA1 did not make the payment and does not have the resources to make
the payments demanded by Pennvest. PA1 commenced discussions and negotiations with Pennvest concerning this matter but Pennvest
rejected PA1’s proposal made during the fall of 2014. As of the date of this report, no formal proposals are currently under
consideration and only sporadic communication has taken place regarding the matters involved over the last 5 years. It is not possible
at this date to predict the outcome of this matter, but the Company believes that a loan modification agreement (coupled with an
agreement regarding an update and re-start of full operations of KF1) may be reached in the context of development of the Kreider
2 Project (see discussion at Item 1 above and below herein) in the future if/when a robust market for nutrient reductions develops
in Pennsylvania, of which there is no assurance. PA1 and Bion will continue to evaluate various options with regard to Kreider
1 over the next 6-12 months.
The economics (potential revenues, profitability
and continued operation) of the Kreider 1 System were based almost entirely on the long-term sale of nutrient (nitrogen and/or
phosphorus) reduction credits to meet the requirements of the Chesapeake Bay environmental clean-up. See below for further discussion.
During August
2012, the Company provided Pennvest (and the PADEP) with data demonstrating that the Kreider 1 System met the ‘technology
guaranty’ standards which were incorporated in the Pennvest financing documents and, as a result, the Pennvest Loan has been
(and is now) solely an obligation of PA1 since that date. However, the Company’s consolidated balance sheet as of
June 30, 2020 reflects the Pennvest Loan as a liability of $9,585,883 despite the fact that the obligation (if any) solely an obligation
of PA 1.
PA1 is currently maintaining some equipment
at the Kreider 1 System pending its potential inclusion within the Kreider 2 Project discussed below.
3G TECH KREIDER 2 POULTRY PROJECT
Bion continues
its pre-development work related to a waste treatment/renewable energy production facility to treat the waste from KF’s
approximately 6+ million chickens (planned to expand to approximately 9-10 million) (and potentially other poultry operations
and/or other waste streams) ('Kreider Renewable Energy Facility' or ‘ Kreider 2 Project’). On May 5, 2016, the Company
executed a stand-alone joint venture agreement with Kreider Farms covering all matters related to development and operation of
Kreider 2 system to treat the waste streams from Kreider’s poultry facilities in Bion PA2 LLC (“PA2”). During
May 2011 the PADEP certified a smaller version of the Kreider 2 Project (utilizing our 3G Tech) for 559,457 nutrient credits under
the old EPA’s Chesapeake Bay model. The Company has been in ongoing discussions with the PADEP regarding the appropriate
credit calculation methodology for large-scale technology-based nutrient reduction installations such as the KF2 Project utilizing
our 3G Tech platform. Based on these discussions and the size of the Kreider 2 Project, we anticipate that when designs are finalized,
the Kreider 2 Project will be re-certified for a far larger number of credits (management’s current estimates are between
2-4 million (or more) nutrient reduction credits for treatment of the waste stream from Kreider’s poultry pursuant to the
Company’s subsequent amended application during the current fiscal year pursuant to the amended EPA Chesapeake Bay model
and agreements between the EPA and PA. Note that this Project may be expanded in the future to treat wastes from other local and
regional CAFOs (poultry and/or dairy---including the Kreider Dairy) and/or additional Kreider poultry expansion (some of which
may not qualify for nutrient reduction credits). A review process to clarify certain issues related to credit calculation and
verification commenced during 2014 based on Bion’s 2G Tech but has been placed on hold while certain matters are resolved
between the EPA and Pennsylvania and pending development of a robust market for nutrient reductions in Pennsylvania. The Company
anticipates it will submit an amended or new application based on our 3G Technology. Site specific design and engineering work
for this facility, which will probably be one of the first full-scale commercial projects to utilize Bion’s 3G Tech, have
not commenced, and the Company does not yet have financing in place for the Kreider 2 Project. This opportunity is being pursued
through PA2. If there are positive developments related to the market for nutrient reductions in Pennsylvania, of which there
is no assurance, the Company intends to pursue development, design and construction of the Kreider 2 Project with a goal of achieving
operational status for its initial modules during the coming calendar year, and hopes to enter into agreements related to sales
of the nutrient reduction credits for future delivery (under long term contracts) in the future. The economics (potential revenues
and profitability) of the Kreider 2 Project, despite its use of Bion’s 3G Tech for increased recovery of marketable by-products,
are based in material part the long-term sale of nutrient (nitrogen and/or phosphorus) reduction credits to meet the requirements
of the Chesapeake Bay environmental clean-up. However, liquidity in the Pennsylvania nutrient credit market has not yet developed
significant breadth and depth, which lack of liquidity has negatively impacted Bion’s business plans and will most likely
delay PA2’s Kreider 2 Project and other proposed projects in Pennsylvania.
Note that while Bion believes that the Kreider
2 Project and/or subsequent Bion Projects in PA and the Chesapeake Bay Watershed will eventually generate revenue from the sale
of: a) nutrient reductions (credits or in other form), b) renewable energy (and related credits), c) sales of fertilizer products,
and/or d) potentially, in time, credits for the reduction of greenhouse gas emissions, plus e) license fees related to a ‘sustainable
brand’, the Covid-19 pandemic has delayed legislative efforts needed to commence its development. We believe that the potential
market is very large, but it is not possible to predict the exact timing and/or magnitude of these potential markets at this time.
MIDWEST SUSTAINABLE/ORGANIC GRAIN-FINISHED
BEEF JV OPPORTUNITY
Bion believes there is a potentially large opportunity
to develop JVs to produce sustainable/organic grain-finished beef in the Midwest and is actively involved in early pre-development
work and discussions regarding pursuit of this opportunity.
We are moving forward with preliminary
pre-development work on a JV to build a state of the art beef cattle operation in the Midwest U.S. The project would produce corn-fed
USDA-certified organic- and/or sustainable-branded beef. Organic beef would be finished on organic corn (vs grass fed), produced
using the ammonium bicarbonate fertilizer captured from the cattle’s waste. We believe Bion’s unique ability to produce
fertilizer for growing of a supply of low-cost organic corn, and the resulting opportunity to produce organic beef, will dramatically
differentiate us from potential competitors. This organic opportunity is dependent on successfully establishing Bion’s fertilizer
products as acceptable for use in organic grain production. We intend to develop JVs with organic farmers which use Bion’s
organic ammonium bicarbonate fertilizers to support organic grain production. This grain can be fed (in the finishing stage) to
livestock to raise organic beef (and beef products) that will meet consumer demand with respect to sustainability and safety and
provide the tenderness and taste American consumers have come to expect from premium American beef. Such a product is largely
unavailable in the market today (See discussion at Item 1 above).
PUBLIC POLICY INITIATIVES
A substantial portion of our activities involve
public policy initiatives (by the Company and other stakeholders) to encourage the establishment of appropriate public policies
and regulations (at federal, regional, state and local levels) to facilitate cost effective environmental clean-up and, thereby,
support our business activities. Bion has been joined by National Milk Producers Federation, Land O’Lakes, JBS and other
national livestock interests to support changes to our nation’s clean water strategy that will allow states to acquire low-cost
nutrient reductions through a competitive procurement process, in a similar manner to how government entities now acquire
many other goods and services on behalf of the taxpayer. As developing markets for nutrient reductions become fully-established,
Bion anticipates a robust business opportunity to retrofit existing CAFOs and develop Projects, based primarily on the sale of
nutrient credits that provide cost-effective alternatives to today’s high-cost and failing clean water strategy.
To date the market for long-term nutrient
reduction credits in Pennsylvania (‘PA’) has been very slow to develop and the Company’s activities have been
negatively affected by such lack of development. However, Bion is confident that once these markets are established, the credits
it produces will be competitive in the credit trading markets, based on its cost to remove nitrogen from the livestock waste stream,
compared to the cost to remove nitrogen through various other treatment activities.
Several independent studies have calculated
the average cost to remove nitrogen through various sector practices. Reports prepared for the PA Senate (2008), Chesapeake Bay
Commission (2012) and PA legislature (2013; described below), as well as the Maryland Chesapeake Bay Financing Strategy Report
(2015), demonstrate that the cost to remove nitrogen (per pound on average) from agriculture is $44 to $54, municipal wastewater:
$28 to $43, and storm water: $386 to $633. Pursuant to the PA legislative Report, by replacing sector allocation (for all sectors)
with competitive bidding, up to 80 percent savings could be achieved in PA’s Chesapeake Bay compliance costs ($1.5 billion
annually) by 2025. If the legislative study had focused on the cost differentials of competitive bidding compared only with storm
water, the relative savings would be substantially greater.
Since these studies were completed, most of
the larger (Tier 1) municipal wastewater treatment plants in PA have been upgraded, at a cost of approximately $2.5 billion (vs
initial 2004 PA DEP cost estimates of $376 million). US EPA is now focused on PA’s storm water allocation (3.5 million pounds
(per last published data)) and has this sector on ‘backstop level actions’, the highest level of EPA-oversight and
the final step before sanctions. In the same 2004 PA DEP cost estimate that led to the more than a $2 billion underestimate/miscalculation
in municipal wastewater plant upgrade costs, the estimate for storm water cost was $5.6 billion. In April 2017, US EPA sent a Letter
of Expectation to PA DEP, expressing the agency’s support for the use of nutrient credit trading and competitive bidding
to engage the private-sector to lower costs. The letter specifically encouraged the use of credit trading to offset the state’s
looming storm water obligations.
The Company believes that: i) the April 2015
release of a report from the Pennsylvania Auditor General titled “Special Report on the Importance of Meeting Pennsylvania’s
Chesapeake Bay Nutrient Reduction Targets” which highlighted the economic consequences of EPA-imposed sanctions if the state
fails to meet the 2017 TMDL targets, as well as the need to support using low-cost solutions and technologies as alternatives to
higher-cost public infrastructure projects, where possible, and ii) Senate Bill 575 (introduced in April 2019 as successor to prior
SB 799 (which was passed by PA Senate during January 2018 but was not voted on in the House)) which, if adopted, will establish
a program that will allow the Pennsylvania’s tax- and rate-payers to meet significant portions of their EPA-mandated Chesapeake
Bay pollution reductions at significantly lower cost by purchasing verified reductions (by competitive bidding) from all sources,
including those that Bion can produce through livestock waste treatment, represent visible evidence of progress being made on these
matters in Pennsylvania. SB 575 was passed by the PA Senate in 2019 and introduced in the PA House which is scheduled to be taken
up the bill during its current session which is now underway. Such legislation (which has bi-partisan support), if passed and signed
into law (of which there is no assurance), will potentially enable Bion (and others) to compete for public funding on an equal
basis with subsidized agricultural ‘best management practices’ and public works and storm water authorities. Note,
however, that there is opposition to SB 575 (as was the case for SB 799 and its predecessors) from threatened stakeholders committed
to the existing status quo approaches--- a significant portion of which was focused on attacking (in often inaccurate and/or vilifying
ways) Bion in/through social media and internet articles, blogs, press releases, twitter posts and re-tweets, rather than engaging
the substantive issues. Further note that the current COVID-19 crisis has shifted government, legislative and budget focuses in
PA in manners which may delay our efforts. If legislation similar to SB 575 is passed (on a stand-alone basis or as part of a larger
piece of legislation) and implemented (in a form which maintains its core provisions), Bion expects that the policies and strategies
being developed in PA will not only benefit the Company’s existing and proposed PA projects, but will also subsequently provide
the basis for a larger Chesapeake Bay watershed strategy and, thereafter, a national clean water strategy.
THE COVID-19 PANDEMIC HAS FURTHER INCREASED
UNCERTAINTIES RE SB 575 AND ALL POLICY INITIATIVES. SEE FURTHER DISCUSSION IN ITEM 1 ABOVE.
The Company believes that Pennsylvania is ‘ground
zero’ in the long-standing clean water battle between agriculture and the further regulation of agriculture relative to nutrient
impacts. The ability of Bion and other technology providers to achieve verified reductions from agricultural non-point sources
can resolve the current stalemate and enable implementation of constructive solutions that benefit all stakeholders, providing
a mechanism that ensures that taxpayer funds will be used to achieve the most beneficial result at the lowest cost, regardless
of source. All sources, point and non-point, rural and urban, will be able to compete for tax payer-funded nitrogen reductions
in a fair and transparent process; and since payment from the tax and rate payers would now be performance-based, these providers
will be held financially accountable.
We believe that the overwhelming environmental,
economic, quality of life and public health benefits to all stakeholders in the watershed, both within and outside of Pennsylvania,
make the case for adoption of the strategies outlined in the Report less an issue of ‘if’, but of ‘when and
how’. The adoption of a competitive procurement program will have significant positive impact on technology providers that
can deliver verified nitrogen reductions such as Bion, by allocating existing tax- and rate-payer clean water funding to low cost
solutions based upon a voluntary and transparent procurement process. The Company believes that implementation of a competitively-bid
nutrient reduction program to achieve the goals for the Chesapeake Bay watershed can also provide a working policy model and platform
for other states to adopt that will enhance their efforts to comply with both current and future requirements for local and federal
estuarine watersheds, including the Mississippi River/Gulf of Mexico, the Great Lakes Basin and other nutrient-impaired watersheds.
(Note, however, that current COVID-19 crisis has shifted government, legislative and budget focuses in manners which may delay
the fruition of our efforts.)
The Company currently anticipates that either
a Midwest Sustainable/Organic Grain-Fed Beef JV or the Kreider 2 poultry JV in PA will be its initial full-scale 3G Project. Bion
hopes to commence development of its initial s by optioning land and beginning the site-specific design and permitting processes
during the current fiscal year, but further delays are possible. It is not possible at this time to firmly predict where the initial
Project will be developed or the order in which Projects will be developed. All potential Projects are in very early discussion
and pre-development stages and may never progress to actual development or may be developed after other Projects not yet under
active consideration.
Bion also hopes to be able to move forward
on multiple JVs/Projects through 2021-2024 to create a pipeline of Projects. Management has a 5-year development target (through
calendar year 2026) of approximately 3-8 or more JVs/Projects pursuant to joint ventures (or similar agreements). Management hopes
to have identified and begun development work related to 3-5 Projects over the next 2 years. At the end of the 5-year period, Bion
projects that 3-5 or more of these JVs/Projects will be in full operation in 3 or more states (and possibly one or more foreign
countries), and the balance would be in various stages ranging from partial operation to early development stage. It is possible
that one or more Projects will be developed in joint ventures specifically targeted to meet the growing animal protein demand outside
of the United States (including without limitation Asia, Europe and/or the Middle East). No JVs/Projects (including Integrated
Projects) have been developed to date.
The Company’s audited financial statements
for the years ended June 30, 2020 and 2019 were prepared assuming the Company will continue as a going concern. The Company has
incurred net losses of approximately $4,553,000 and $2,659,000 during the years ended June 30, 2020 and 2019, 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, 2020 includes a “going concern” explanatory paragraph which means that there are factors
that raise substantial doubt about the Company’s ability to continue as a going concern. At June 30, 2020, the Company had
a working capital deficit and a stockholders’ deficit of approximately $10,474,000 and $15,130,000, 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.
COVID-19 PANDEMIC RELATED MATTERS:
The Company faces risks and uncertainties
and factors beyond our control that are magnified during the current Covid-19 pandemic and the unique economic, financial, governmental
and health-related conditions in which the Company, the country and the entire world now reside. To date the Company has experienced
direct impacts in various areas including but without limitation: i) government ordered shutdowns which have slowed the Company’s
research and development projects and other initiatives, ii) shifted focus of state and federal governments which is likely to
negatively impact the Company’s legislative initiatives in Pennsylvania and Washington D. C., iii) strains and uncertainties
in both the equity and debt markets which have made discussion and planning of funding of the Company and its initiatives and projects
with investment bankers, banks and potential strategic partners more tenuous, iv) strains and uncertainties in the agricultural
sector and markets have made discussion and planning more difficult as future industry conditions are now more difficult to assess
and predict, v) due to the age and health of our core management team, all of whom are age 70 or older and have had one or more
existing health issues, the Covid-19 pandemic places the Company at greater risk than was previously the case (to a higher degree
than would be the case if the Company had a larger, deeper and/or younger core management team), and vi) there almost certainly
will be other unanticipated consequences for the Company as a result of the current pandemic emergency and its aftermath.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
The Company currently does not generate
revenue and if and when the Company begins to generate revenue the Company will comply with the provisions of Accounting Standards
Codification (“ASC”) 606 “Revenue from Contracts with Customers”.
Stock-based compensation
The Company follows the provisions of ASC
718, which generally requires that share-based compensation transactions be accounted and recognized in the statement of income
based upon their grant date fair values.
Derivative Financial Instruments:
Pursuant to ASC Topic 815 “Derivatives
and Hedging” (“Topic 815”), the Company reviews all financial instruments for the existence of features which
may require fair value accounting and a related mark-to-market adjustment at each reporting period end. Once determined, the Company
assesses these instruments as derivative liabilities. The fair value of these instruments is adjusted to reflect the fair value
at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment
to fair value of derivatives.
Warrants:
The Company has issued warrants to purchase
common shares of the Company. Warrants are valued using a fair value based method, whereby the fair value of the warrant is determined
at the warrant issue date using a market-based option valuation model based on factors including an evaluation of the Company’s
value as of the date of the issuance, consideration of the Company’s limited liquid resources and business prospects, the
market price of the Company’s stock in its mostly inactive public market and the historical valuations and purchases of the
Company’s warrants. When warrants are issued in combination with debt or equity securities, the warrants are valued and accounted
for based on the relative fair value of the warrants in relation to the total value assigned to the debt or equity securities and
warrants combined.
Recent Accounting Pronouncements:
In June 2018, the FASB issued ASU No. 2018-07
“Compensation – Stock Compensation – Improvements to Nonemployee Share-Based Payment Accounting” to simplify
the accounting for share based payments granted to nonemployees and was adopted by the Company effective July 1, 2019. Under this
guidance, payments to nonemployees is aligned with the requirements for share-based payments granted to employees. The adoption
of this guidance did not have a material impact on the Company’s financial statements as previously issued share-based payments
to nonemployees had already reached a measurement date.
YEAR ENDED JUNE 30, 2020 COMPARED
TO THE YEAR ENDED JUNE 30, 2019
Revenue
Total revenues were nil for both the
years ended June 30, 2020 and 2019, respectively.
General and Administrative
Total general and administrative expenses
were $3,090,000 and $1,725,000 for the years ended June 30, 2020 and 2019, respectively.
General and administrative expenses, excluding
stock-based compensation charges of $1,931,000 and $536,000, were $1,159,000 and $1,189,000 for the years ended June 30, 2020 and
2019, respectively, representing a $30,000 decrease. Salaries and related payroll tax expenses were $266,000 and $254,000 for the
year ended June 30, 2020 and 2019, respectively. Consulting costs were $458,000 and $446,000 for the years ended June 30, 2020
and 2019, respectively, as there were no significant changes in the Company’s use of consultants. Insurance related expenses
were $93,000 and $86,000 for the years ended June 30, 2020 and 2019, representing a $7,000 increase due to renewal of insurance
coverage and higher premium costs. Investor relations related expenses were $72,000 and $145,000 for the years ended June 30, 2020
and 2019, respectively, a $73,000 decrease due to the fact the pandemic curtailed investor conferences and related travel during
the latter part of the year ended June 30, 2020. Accounting and tax related costs were $105,000 and $87,000 for the years ended
June 30, 2020 and 2019, respectively, with the increase being attributed to tax preparation fees.
General and administrative stock-based
employee compensation for the years ended June 30, 2020 and 2019 consists of the following:
General and administrative:
Change in fair value from modification of option terms $ 511,000 $ 211,000
Change in fair value from modification of warrant terms 1,065,000 118,000
Stock-based compensation charges were $1,931,000
and $536,000 for the years ended June 30, 2020 and 2019, respectively. Compensation expense relating to the change in fair value
from the modification of option terms was $511,000 and $211,000 for the years ended June 30, 2020 and 2019, respectively, as the
Company granted a reduction in certain exercise prices and an extension of certain option expiration dates for 7,121,600 and 1,025,000
options during the years ended June 30, 2020 and 2019, respectively. During the years ended June 30, 2020 and 2019, the Company
extended expiration dates of warrants for certain employees and consultants which resulted in the recognition of $1,065,000 and
$118,000, respectively, in non-cash compensation. The fair value of stock options expensed for the years ended June 30, 2020 and
2019 was $355,000 and $207,000, respectively. The Company granted 2,210,000 and 655,000 fully vested options during the years ended
June 30, 2020 and 2019, respectively.
Depreciation
Total depreciation expense was $1,248 and
$1,314 for the years ended June 30, 2020 and 2019, respectively.
Research and Development
Total research and development expenses
were $1,124,000 and $520,000 for the years ended June 30, 2020 and 2019, respectively.
Research and development expenses, excluding
stock-based compensation expenses of $646,000 and $85,000 were $478,000 and $435,000 for the years ended June 30, 2020 and 2019,
respectively. Salaries and related payroll tax expenses were $80,000 for both the years ended June 30, 2020 and 2019, respectively.
Consulting costs were $218,000 and $230,000 for the years ended June 30, 2020 and 2019, respectively, while expenses related to
the development of a new pilot program for its anaerobic digestate process were $112,000 and $51,000, respectively for the years
ended June 30, 2020 and 2019, respectively.
Research and development stock-based employee
compensation for the years ended June 30, 2020 and 2019 consists of the following:
Research and development:
Change in fair value from modification of option terms $ 115,000 $ 11,000
Change in fair value from modification of warrant terms 457,000 45,000
Stock-based compensation expenses were
$646,000 and $85,000 and for the years ended June 30, 2020 and 2019, respectively. The compensation expense of $115,000 and $11,000
for the years ended June 30, 2020 and 2019, respectively was for the change in fair value from modification of options terms is
due to a research and development employee and consultant having certain option exercise prices reduced during those periods. During
the years ended June 30, 2020 and 2019, the Company extended expiration dates of warrants for certain research and development
employees and consultants which resulted in the recognition of $457,000 and $45,000, respectively, in non-cash compensation. The
Company expensed $74,000 and $29,000 for the fair value of stock options that vested during the years ended June 30, 2020 and 2019.
The Company granted 2,210,000 and 655,000 options during the years ended June 30, 2020 and 2019, respectively, that were fully
vested within that time period and a portion of the stock compensation was allocated to research and development.
Loss from Operations
As a result of the factors described above,
the loss from operations was $4,215,000 and $2,246,000 for the years ended June 30, 2020 and 2019, respectively.
Other (Income) Expense
Other (income) expense was $338,000 and
$413,000 for the years ended June 30, 2020 and 2019, respectively. Interest expense related the Pennvest Loan was $247,000 and
$239,000 for the years ended June 30, 2020 and 2019, respectively, while interest expense related to deferred compensation and
convertible notes was $182,000 and $147,000 for the years ended June 30, 2020 and 2019, respectively, with the increase being attributable
to overall higher deferred compensation and note balances. Additionally, interest expense of $36,000 and $25,000 was recorded during
the years ended June 30, 2020 and 2019, respectively, due to the modification of warrant expiry dates for warrants held by investors.
During the year ended June 30, 2020, the Company recognized other income of $122,000 due to the extinguishment of liabilities due
to the legal release of certain accounts payable and $6,000 due to the grant of an Economic Impact Disaster Loan.
Net Loss Attributable to the Noncontrolling
Interest
The net loss attributable to the noncontrolling
interest was $8,000 and $5,000 for the years ended June 30, 2020 and 2019, respectively.
Net Loss Attributable to Bion’s
Common Stockholders
As a result of the factors described above,
the net loss attributable to Bion’s stockholders was $4,546,000 and $2,654,000 for the years ended June 30, 2020 and 2019,
respectively, and the net loss per basic common share was $0.16 and $0.10 for the years ended June 30, 2020 and 2019, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated financial statements
for the year ended June 30, 2020 have been prepared on a going concern basis, which contemplates the realization of assets and
the settlement of liabilities and commitments in the normal course of business. The Report of our Independent Registered Public
Accounting Firm on the Company's consolidated financial statements as of and for the year ended June 30, 2020 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, 2020, the Company had cash
of approximately $561,000. During the year ended June 30, 2020, net cash used in operating activities was $966,000, primarily consisting
of cash operating expenses related to salaries and benefits, and other general and administrative costs such as insurance, legal,
accounting, consulting and investor relations expenses. As previously noted, the Company is currently not generating significant
revenue and accordingly has not generated cash flows from operations. The Company does not anticipate generating sufficient revenues
to offset operating and capital costs for a minimum of two to five years. While there are no assurances that the Company will be
successful in its efforts to develop and construct its Projects and market its Systems, it is certain that the Company will require
substantial funding from external sources. Given the unsettled state of the current credit and capital markets for companies such
as Bion, there is no assurance the Company will be able to raise the funds it needs on reasonable terms.
Financing Activities
During the years ended June 30, 2020, the Company
received gross cash proceeds of $1,584,000 from the sale of 3,168,001 units which consists of one share of the Company’s
restricted common stock and one warrant to purchase one share of the Company’s restricted common stock for $0.75 per share
through December 2020 and December 2021. The Company paid cash commissions related to the sale of units of $148,000. The Company
received proceeds from loans from affiliates of $35,000 during the year ended June 30, 2020 and used $20,000 to repay such loans
during the same period. The Company also received a Paycheck Protection Program loan in the amount of $35,000 during the year ended
June 30, 2020.
As of June 30, 2020, the Company has debt obligations
consisting of: a) deferred compensation of $778,000, b) convertible notes payable – affiliates of $4,596,000, c) a loan payable
and accrued interest of $9,586,000 (owed by PA1), and d) a Paycheck Protection Program loan of $35,000.
Plan of Operations and Outlook
As of June 30, 2020, the Company had cash of
approximately $561,000.
The Company continues to explore sources
of additional financing to satisfy its current operating requirements as it is not currently generating any significant revenues.
During the past six years (fiscal years 2014 through 2019), the Company experienced greater difficulty in raising equity and debt
funding than in the prior years (which is not mitigated by the relative increase in equity funding during the year ended June 30,
2020). As a result, the Company faced, and continues to face, significant cash flow management challenges due to material working
capital constraints. These difficulties, challenges and constraints have continued during fiscal years 2019 and 2020. The Company
anticipates that they may continue for the next twelve (12) months or longer. To partially mitigate these working capital constraints,
the Company's core senior management and some key employees and consultants have been deferring all or part of their cash compensation
and/or are accepting compensation in the form of securities of the Company (Notes 5 and 7 to Financial Statements) and members
of the Company's senior management have made loans to the Company which have been converted into convertible promissory notes as
of June 30, 2020. During the year ended June 30, 2018 senior management and certain core employees and consultants agreed to a
one-time extinguishment of liabilities owed by the Company which in aggregate totaled $2,404,000. As of June 30, 2020, such deferrals
totaled approximately $5,374,000 (including accrued interest and deferred compensation converted into promissory notes but excluding
conversions of deferred compensation into the Company's common stock by officers, employees and consultants that have already been
completed). The extended constraints on available resources have had, and continue to have, negative effects on the pace and
scope of the Company's effort to develop its business. The Company made reductions in its personnel during the years ended
June 30, 2014 and 2015 and again in 2018. The Company has had to delay payments of trade obligations and economize in many ways
that have potentially negative consequences. If the Company does not have greater success in its efforts to raise needed funds
during the current year (and subsequent periods), we will need to consider deeper cuts (including additional personnel cuts) and
curtailments of operations (including possibly Kreider 1 operations). The Company will need to obtain additional capital to fund
its operations and technology development, to satisfy existing creditors, to develop Projects (including Integrated Projects) and
CAFO Retrofit waste remediation systems (including the Kreider 2 facility) and to continue to operate the Kreider 1 facility (subject
to agreements being reached with Pennvest as discussed above). The Company anticipates that it will seek to raise from $2,500,000
to $50,000,000 or more (debt and equity) during the next twelve months. However, as discussed above, there is no guarantee that
we will be able to raise sufficient funds or further capital for the operations planned in the near future.
The Company is not currently generating
any significant revenues. Further, the Company’s anticipated revenues, if any, from existing projects and proposed projects
will not be sufficient to meet the Company’s anticipated operational and capital expenditure needs for many years. During
the year ended June 30, 2020 the Company raised gross proceeds of approximately $1,584,000 through the sale of its securities and
paid commissions of approximately $148,000, and anticipates raising additional funds from such sales and transactions. However,
there is no guarantee that we will be able to raise sufficient funds or further capital for the operations planned in the near
future.
Because the Company is not currently generating
significant revenues, the Company will need to obtain additional capital to fund its operations and technology development, to
satisfy existing creditors, to develop Projects and to sustain operations at the KF 1 facility.
The first commercial activity in the Retrofit
segment is represented by our agreement with Kreider Farms ("KF"), pursuant to which the Kreider 1 system to treat KF's
dairy waste streams to reduce nutrient releases to the environment while generating marketable nutrient credits and renewable energy
was designed, constructed and entered full-scale operation during 2011. On January 26, 2009 the Board of the Pennsylvania Infrastructure
Investment Authority ("Pennvest") approved a $7.75 million loan to Bion PA 1, LLC ("PA1"), a wholly-owned subsidiary
of the Company, for the initial Kreider Farms project ("Kreider 1 System"). After substantial unanticipated delays, on
August 12, 2010 PA1 received a permit for construction of the Kreider 1 system. Construction activities commenced during November
2010. The closing/settlement of the Pennvest Loan took place on November 3, 2010. PA1 finished the construction of the Kreider
1 System and entered a period of system 'operational shakedown' during May 2011. The Kreider 1 System reached full, stabilized
operation by the end of the 2012 fiscal year. During 2011 the PADEP re-certified the nutrient credits for this project. The PADEP
issued final permits for the Kreider 1 System (including the credit verification plan) on August 1, 2012 on which date the Company
deemed that the Kreider System was 'placed in service'. As a result, PA1 commenced generating nutrient reduction credits for potential
sale while continuing to utilize the Kreider 1 system to test improvements and add-ons. However, to date liquidity in the Pennsylvania
nutrient credit market has been slow to develop significant breadth and depth, which limited liquidity/depth has negatively impacted
Bion's business plans and has resulted in challenges to monetizing the nutrient reductions created by PA1's existing Kreider 1
project and Bion's other proposed projects. These difficulties have prevented PA1 from generating any material revenues from the
Kreider 1 project to date and raise significant questions as to when, if ever, PA1 will be able to generate such revenues from
the Kreider 1 system. PA1 has had sporadic discussions/negotiations with Pennvest related to forbearance and/or re-structuring
its obligations pursuant to the Pennvest Loan for more than three years. In the context of such discussions/negotiations, PA1 elected
not to make interest payments to Pennvest on the Pennvest Loan since January 2013. Additionally, the Company has not made any principal
payments, which were to begin in fiscal 2013, and, therefore, the Company has classified the Pennvest Loan as a current liability
as of June 30, 2020. Due to the failure of the PA nutrient reduction credit market to develop, the Company determined that the
carrying amount of the property and equipment related to the Kreider 1 project exceeded its estimated future undiscounted cash
flows based on certain assumptions regarding timing, level and probability of revenues from sales of nutrient reduction credits
and, therefore, PA1 and the Company recorded impairments related to the value of the Kreider 1 assets of $1,750,000 and $2,000,000
at June 30, 2015 and June 30, 2014, respectively. During the 2016 fiscal year, PA1 and the Company recorded an impairment of $1,684,562
to the value of the Kreider 1 assets which reduced the value on the Company's books to zero. This impairment reflects management's
judgment that the salvage value of the Kreider 1 assets roughly equals PA1's contractual obligations related to the Kreider 1 system,
including expenses related to decommissioning of the Kreider 1 system, costs associated with needed capital upgrade expenses,
and re-certification/ permitting amendments.
On September 25, 2014, Pennvest exercised
its right to declare the Pennvest Loan in default and accelerated the Pennvest Loan and demanded that PA1 pay $8,137,117 (principal,
interest plus late charges) on or before October 24, 2014. PA1 did not make the payment and does not have the resources to make
the payments demanded by Pennvest. PA1 commenced discussions and negotiations with Pennvest concerning this matter but Pennvest
rejected PA1's proposal made during the fall of 2014. As of the date of this report, no formal proposals are currently under consideration
and only sporadic communication has taken place regarding the matters involved over the last 5 years. It is not possible at this
date to predict the outcome of this matter, but the Company believes that a loan modification agreement (coupled with an agreement
regarding an update and restart of full operations of KF1) may be reached in the future if/when a more robust market for nutrient
reductions develops in PA, of which there is no assurance. PA1 and Bion will continue to evaluate various options with regard to
Kreider 1 over the next 180 days.
The economics (potential revenues,
profitability and continued operation) of the Kreider 1 System are based almost entirely on the long-term sale of nutrient (nitrogen
and/or phosphorus) reduction credits to meet the requirements of the Chesapeake Bay environmental clean-up. See below for further
discussion.
During August 2012, the Company provided
Pennvest (and the PADEP) with data demonstrating that the Kreider 1 system met the 'technology guaranty' standards which were incorporated