Image Source: Bion Environmental Technologies

Summary

• There is pressure from all sides on the livestock sector to address serious sustainability issues, opening opportunities for disruptive business models like Bion.
• Bion's patented technologies turn environmentally damaging waste into multiple useful products generating multiple income streams and has a leg up on the competition.
• It's very early days though, the company doesn't yet generate revenue, but it just announced a LOI for its first large-scale commercial project.

Bion Environmental Technologies (OTCQB:BNET) is a small environmental technology ( ESG) company that addresses a very big problem in a very elegant way, turning environmentally damaging waste into useful products. 

The market for the company's technology, that is now in its third generation, took a long time to mature. The second generation looked like it was taking off, but the long-term market for nutrient reduction credits on which it mostly relied for generating income is not yet established in Pennsylvania. 

This is the main reason why the company developed the third generation of their technology, which creates additional income streams which we will discuss extensively below. The business model enabled by the third generation technology – Bion’s “beef opportunity” – is no longer dependent on policy change or subsidies, but rather it is driven by consumer demand and superior production economics.

Investors need to know that Bion is a high-risk/high-reward play, on the one hand, the company has a comprehensive solution, a first-mover advantage, and little in the way of competition. On the other hand, the company doesn't generate any revenue yet and there are some hurdles to overcome before the company can move forward.

The problem

The problem they address is the environmental impact from livestock, from the 10-K:

Environmental impacts from livestock production include surface- and groundwater pollution, greenhouse gas emissions, ammonia, and other air pollution, excess water use, and pathogens related to foodborne illnesses and antibiotic resistance... The greatest impacts come from the manure waste. Estimates of total annual U.S. livestock manure waste vary widely, but start around a billion tons, between 100 and 130 times greater than human waste.  

The industry is under attack from all sides:

These problems are serious and in no way restricted to the US. In our native Netherlands, the government has just embarked on what can only be described as a wholesale attempt at decimating the livestock sector in order to reduce nitrogen pollution that is having a huge effect on nature, water and air quality, similar to the US but on even more concentrated land.

The aim is to reduce livestock business by up to 70% close to nature areas and smaller declines elsewhere. Farmers are not taking this lying down and mass protests are already ensuing. 

In the US, according to the USDA, about 5% of U.S. crops are now fertilized with raw, untreated manure. However, that number rises dramatically in regions like the Mississippi River and Great Lakes Basins, with more intensive livestock production. The problem is that approximately 75 percent of the nitrogen in that manure is not utilized by the plants being fertilized but rather ‘escapes’ to contaminate the environment through various pathways.  

Instead of expensive reductions like the ones proposed in the Netherlands, would it not be a better idea if technology could address these actual problems in an economical fashion? Well, look no further than Bion's third-generation technology solution.

Bion's third-generation tech platform

Here is a schematic depiction of their third-generation tech platform

Their plant captures the various pollutants and turns them into products (and environmental credits) that are useful and can be sold, generating multiple revenue streams:

The market is potentially very large as the US is dominated by large-scale facilities which make up more than 80% of US livestock production, where cost-effective treatment can be implemented. Let's have a closer look at the revenue streams their platform generates:

Renewable energy

There are two possible streams here:

• Recovering methane (biogas) that is upgraded to pipeline quality Renewable Natural Gas (RNG)
• Putting solar panels on the roof of the facility
• Recovering methane (biogas)

On the latter (10-K):

Bion’s 3G Tech platform utilizes customized anaerobic digestion (“AD”) to recover biogas (methane) from the waste stream. At sufficient scale, methane produced from AD can be cost-effectively conditioned, compressed and injected into a pipeline.

There are Federal and state-level programs for biogas, like the US (RFS Renewable Fuel Standard) program and state programs that provide alternative energy credits and additional programs are being developed that might produce further benefits. In the climate change bill now in the US Senate, AD projects will become eligible for a 30% federal investment tax credit (ITC).

Organic fertilizer products

From the 10-K:

The 3G Tech platform has been designed to produce multiple fertilizer products, including: i) ammonium bicarbonate liquid, ii) ammonium bicarbonate in solid crystal form – AD Nitrogen – and iii) soil amendment products that will contain the remaining nitrogen, phosphorus and other micronutrients captured from the livestock waste stream. Bion believes each product will qualify for organic certification.

Their fertilizers enjoy a dramatically lower carbon footprint than synthetic fertilizers, here is why (10-K):

The reactive nitrogen captured and upcycled into AD Nitrogen was going to be lost through volatilization and runoff, and that loss would generally need to be offset with a synthetic nitrogen, such as anhydrous ammonia or urea. These synthetic nitrogen products are produced through the Haber-Bosch (and other) synthetic processes, which converts hydrogen and atmospheric nitrogen to ammonia, with methane as the energy source. It is an extremely energy-intensive process with a carbon footprint that , while not yet fully understood, is widely accepted to be very large.

The company has already applied for one of these organic certifications (for its crystal product AD Nitrogen) with others to follow. OMRI is a nonprofit organization providing independent reviews of products, like fertilizers, pest controls, and numerous other inputs intended for use in certified organic production and processing. 

Bion already received one OMRI certification in May 2020 (for its low-concentration liquid ammonia). Bion’s second application to OMRI, for its solid AD Nitrogen product was filed in May 2021. Management believes that the second application can piggyback on the first because (December 2021 update):

As a result of the approval of the liquid product, Bion’s process has been deemed by OMRI to be non-synthetic. The higher strength AD Nitrogen product uses the very same non-synthetic technology. We are confident it will ultimately be approved too, although the timing of that approval is impossible to predict.

While OMRI operates nationally, as does a designation by California, an alternative would be to seek state-level accreditation which runs independently from OMRI (August 2020 update):

OMRI reviews these products against the organic standards established by the NOP to determine if they are suitable for use in organic production. Acceptable products are then OMRI Listed®. OMRI enables a national listing thru one application versus the alternative of using certifiers to secure listings in individual states.

The company has also filed for approval in California, Iowa, and Nebraska concurrently while a final OMRI determination is achieved.

NOP is the National Organic Program, developing and enforcing uniform national standards for organically-produced agricultural end products (note that this is different from OMRI which accredits inputs when suitable to serve in organic production).

NOP operates as a public-private partnership, accrediting private companies and certifying farms and businesses meeting the national organic standards.

The NOP requirement for that is the non-use of synthetic chemicals in the production or handling of the product. OMRI concluded that Bion's ammonia recovery system isn't synthetic. All this is important as (10-K):

a) provide access to substantially higher value markets compared to synthetic nitrogen products, and/or b) allow its products to be utilized in growing of organic feed grains to be consumed by livestock raised in JVs which will be sold as organic.

The OMRI application for their AD Nitrogen product is taking time because it's a solid and OMRI has no protocol for a solid. Also, the process behind AD Nitrogen is rather unique and transformational, so this will take time.

Moreover, management believes its organic fertilizer products (both liquid and granular) are considerably cheaper than existing competing organic fertilizer products, from the Q3/22 10-Q:

Like all plants, corn requires nitrogen to grow. Corn is especially sensitive to a late-season application of readily available nitrogen – the key to maximizing yields. With non-organic field corn, this nitrogen is supplied by an application of a low-cost synthetic fertilizer, such as urea or anhydrous ammonia. However, the cost for suitable nitrogen fertilizer that can be applied late-season in organic corn production is so high that the late-season application becomes uneconomical, resulting in substantially lower yields – a widely recognized phenomena known as the ‘yield gap’ in organic production. The yield gap results in higher costs for organic corn that, in turn, make it uneconomical to feed that corn to livestock.

Bion's organic fertilizers have important environmental advantages:

• Direct capture of waste like nitrogen (the target of an all-out assault on livestock farming in the Netherlands) at its source, where it still concentrated and possible, rather than spraying this over fields, ending up in the air and water streams.
• "Every pound of nitrogen that is captured, upcycled, and returned to the agricultural nitrogen cycle as high-quality fertilizer (vs lost to contaminate downstream waters), is also pound for pound of nitrogen that will not have to be produced as synthetic urea or anhydrous ammonia, with their tremendous carbon cost." (Q3/22 10-Q).

Nutrient credits

The main income stream for their second-generation platform, which is no longer a requirement for their third-generation of technology, nutrient (nitrogen and phosphorus) credits depends on yet-to-be-implemented credit schemes on a state and potentially federal level. Management believes this is coming in multiple states in the next several years. A legislative bill in Pennsylvania was delayed by Covid, but (10-K):

Bion anticipates that after passage of a similar bill in the future, PA will establish a competitively-bid market for nutrient credits within twelve months after legislative passage and being signed into law by the Governor.

Sustainable branding

Management believes this is potentially the largest income stream for their third-generation platform as consumers have shown a willingness to pay premium prices for sustainable products like organic meat and plant-based meat from the likes of Beyond Meat and others. Progress here will be enhanced by USDA PVP certification, from the 10-K:

Bion has worked with the USDA’s Process Verified Program (“PVP”) – the gold standard in food verification and branding – to establish a USDA PVP-certified sustainable brand. Bion received conditional approval from the PVP related to its Kreider 1 project (utilizing 2G Tech). It is our intention to submit an application for the 3G Tech platform when the initial 3G Tech Project is operational later this fiscal year and seek an approval for certification based on third-party-verified reductions in nutrient impacts, greenhouse gases and pathogens in the waste stream (and other attributes), based on our 3G Tech... Bion believes that such a brand and livestock product line will command a pricing premium for Bion’s livestock JVs and their customers.  

There is pressure here from all sides, consumers, large retailers, large institutional investors, large restaurant chains, and the like, which is a good thing as it provides an opening for disruptive newcomers like Beyond Meat, but also for Bion. The big difference is that Bion can clean up the existing supply chain. That takes substantially less capital than building a whole new one and further, allows Bion to supply the consumer a product they are used to and already enjoy.

The company's platform delivers verifiable metrics demonstrating meaningful improvements in sustainability for livestock production which are difficult, if not impossible, to match for others in the industry today. These benefits include:

• A dramatically reduced carbon and nutrient footprint
• Lower negative impacts on water, soil, and air
• Increased pathogen destruction
• Other environmental and public health impacts.

Consumers will be made aware through advertising and can verify at the point of sale through QR codes on packaging, linking to specific product data with Bion supporting blockchain traceability in the verification process. 

Business model

The company is planning to target three main segments:

• Joint ventures for new installations
• Retrofit existing CAFOs (Concentrated Animal Feeding Operations)
• Licensing (mainly for overseas markets).

The company is focused on the first opportunity for new state-of-the-art facilities and especially on those opportunities in the beef industry where the need is the greatest and Bion’s technology can have the most impact. 

Projects

The company already has a number of existing and planned JV projects:

• Fair Oaks Indiana (demo facility)
• Ribbonwire Ranch (full-scale commercial beef project)
• Kreider 2 Poultry/Dairy (retrofit)
• Fair Oaks, Indiana

The Kreider 2 Poultry JV has already had a long gestation process. Due to the lack of a nutrient credit market (yet), financing can’t be put in place so site-specific design and engineering work haven't started (Q3/22 10-Q):

The economics (potential revenues and profitability) of the Kreider 2 Project, despite its proposed 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.

The 3G Fair Oaks project was initiated in September 2021 and equipment fabrication started in the spring of 2022. 

It's designed to be large enough to prove commercial viability at scale but small enough so that it can be built quickly, while also simultaneously proving up their sustainable beef model. From the linked PR:

Successful installation, startup, and steady state operations at the facility will demonstrate scalability and determine biogas and nitrogen recovery efficiencies at scale. The facility is anticipated to produce sufficient ammonium bicarbonate for both commercial testing by potential joint venture partners and university growth trials. The platform will generate operating data to support certification requirements for various private and regulatory agencies, such as USDA’s Process Verified Program (PVP) for a USDA-certified sustainable brand. The facility will also produce sustainable beef products – conventional and organic – for initial test-marketing efforts. These critical steps must be accomplished in order to move forward with joint ventures to develop the large-scale projects that will be needed to supply national distribution.

Bion recently announced it will accelerate the data acquisition phase – that data is needed to start the final design of the first large-scale commercial project – by using the effluent from an AD on existing dairy barns, so that it does not have to first construct barns and an anaerobic digester. In the announcement, Bion was vague about what further operations it will conduct at this location. 

On the basis of the results of the initial project (Fair Oaks), the company will proceed with the development of the first modules of its initial large-scale beef projects in early 2023, and there are further big plans (10-K):

Bion intends to pursue its ‘beef opportunity’ in a series of large-scale JV projects, which will be based on construction of 10 modules housing approximately 15,000 head each, for a total of 150,000 head per project. Bion anticipates that these JVs would be comprised of parties that could include a) Bion, b) capital market/financing providers, and c) strategic industry partners who would be equity participants... The Company currently has a goal to develop and establish production at four to six such beef projects in production (at least in part) over the next five years, with a target capacity goal for this business segment in the range of 600,000 - 900,000 head. 

There is a white paper in support of this.

Alternatives

There are some advantages that Bion enjoys versus alternatives:

• Taste and texture advantages of corn-fed beef versus grass-fed beef.
• Health concerns over plant-based alternatives, which are highly processed and only serve a fraction of the market (ground beef). 
• Price advantage over both plant-based and cellular meat. 

In their December 2021 update to shareholders they had this to say about plant-based alternatives:

More recently, BYND has had to contend with the reality of a much more concerning issue: despite the hype and early promise, the products themselves have not been the hit with consumers that they were expected to be. The fact is that many who tried BYND’s products simply did not like them and have not come back for more. BYND and other plant-based alternatives will fight over the vegan niche in the market; but, in my opinion, they won’t be able to satisfy the much larger number of meat-eating consumers that value sustainability, but not so much as to sacrifice enjoyment. 

But BYND and others have shown there is demand for real disruptive products that address the sustainability issues of the livestock sector. That said, sustainability is not enough, the products also have to satisfy consumer taste, which is where Bion's corn-fed beef comes in. Management has this to say about alternatives (10-K):

The Company is unaware of any other technology and/or business model that can offer the same level of comprehensive treatment of livestock waste, produce high value coproducts, and deliver a sustainable brand that can provide an industry response to counter today’s anti-meat messaging, along with the inroads in the animal protein market being made by alternative protein competitors.

So we are pretty confident about their market opportunity, and they might very well have a point (Q3/22 10-Q):

A grain-finished organic beef product is largely unavailable in the marketplace today due to the higher costs of producing organic corn and grain.

But the company needs some regulatory changes in order to be able to fully take advantage of the opportunities. 

Regulatory and Certification hurdles

We have already discussed some of this above, but hurdles remain that could impact the economics of Bion's projects somewhat. Bion is confident that these will get resolved in time.

• Credit markets for nutrients, in particular, Pennsylvania’s  Policy SB 832
• PVP certification from USDA
• Approval of its current OMRI application and/or parallel state-level applications for AD Nitrogen

One has to realize that sustainable and organic are separate and distinct designations for beef (or pork). Management argues that the market for sustainable beef is much larger but commands a smaller pricing premium, while the market for organic beef will be smaller but benefit from a substantially larger price premium (and also be somewhat costlier to produce). 

With respect to the PVP certification (Q3/22 10-Q):

Bion has successfully navigated the USDA PVP application process previously, having received conditional approval of its 2G Tech platform (pending resubmission and final site audits), and is confident it will be successful in qualifying its 3G Tech platform.

The $1.2B infrastructure bill that passed early this year contains provisions for renewable energy markets and credits under the RFS, the Renewable Fuel Standard. It might also infuse new life into Pennsylvania's efforts (SB 832) by providing funding (December 2021 update): 

The bill provides a minimum of $250 million in funding (from the new infrastructure bill); of that, 10 percent is allocated to the CWPP. Remember that establishing the CWPP, which would fund a nutrient credit trading program, could be the second revenue source needed to begin the development of the large scale Kreider 2 poultry project. An OMRI Listing of AD Nitrogen, as discussed above, could also be the second. Either one gets it done – and we think we’ll get them both.

Well, that would be good news. SB 832 incorporates three different programs; the CWPP (Clean Water Procurement Program); the Agriculture Conservation Assistance Program; and the Municipal Storm Water Assistance Program.

With respect to organic beef (Q3/22 10-Q):

This organic opportunity is dependent on successfully establishing Bion’s fertilizer products as acceptable for use in organic grain production... A grain-finished organic beef product is largely unavailable in the marketplace today due to the higher costs of producing organic corn and grain.

We've already explained above that they have one OMRI approval for their liquid ammonium bicarbonate fertilizer and have applied for approval of for the solid version for national certification with OMRI and California, and at a couple of state levels (Texas, Iowa). For reference, the solid version is just a dewatered version of the already-approved liquid, and it is dewatered without using chemicals or other additives.

Economics

As an example of project economics, here is the economics of the Kreider retrofit JV project:

(Click on image to enlarge)

But note that the nutrient credits are not yet in place and there is only one organic designation for the products (the liquid fertilizer). Management is clearly not discouraged though:
 

 

The economics are not attractive enough without these elements fully in place for the retrofit project market to begin developing, but management thinks they will get both.

Finances

As the company doesn't generate any revenue yet, basically what matters here is the cash burn and the amount of cash they have left:
 

Data by YCharts

The cash outflow is remarkably small, in Q1 it had just $427K in operating expenses and $51K on interest payments, for instance. However, this isn't going to last (Q3/22 10-Q):

The Company anticipates substantial increases in demands for capital and operating expenditures as it moves toward commercial implementation of its 3G Tech and development of JVs..  The Company will need to obtain additional capital to fund its operations and technology development, to satisfy existing creditors, to develop Projects (including the Initial Project, JV Projects, Integrated Projects and the Kreider 2 facility) and CAFO Retrofit waste remediation systems. The Company anticipates that it will seek to raise from $10,000,000 to $50,000,000 or more debt and/or equity through joint ventures, strategic partnerships and/or sale of its equity securities (common, preferred and/or hybrid) and/or debt (including convertible) securities, and/or through use of ‘rights’ and/or warrants (new and/or existing) and or through other means during the next twelve months.  

Given the lack of revenues it's no wonder there has been a fair amount of dilution:
 

Data by YCharts

According to the latest 10-Q (from Q3/22), the company had $3.7M in cash left, and a debt of $6.85M, mostly consisting of notes. There are also 19.1M warrants outstanding with exercise prices between $0.60 and $1.50. There are 10.4M performance pay options outstanding with an exercise price of $0.77.

Conclusion

We see a number of very attractive features:

• The company has unique technology that is applicable in most large-scale livestock businesses, either in retrofit or JV new installations and it can be licensed as well (mostly for overseas markets).
• The technology addresses a large and serious problem, turning environmentally damaging waste into useful products that generate multiple income streams.
• In turning environmentally damaging waste into useful products at source it seems to have a first-mover advantage and there doesn't seem to be anything comparable on the market.
• There is enormous pressure from all sides on the livestock sector to clean up its act. 
• The company has four patents and holds important advantages over alternative organic and/or sustainable products like plant-based meat and grass-fed beef. 
• The third generation of its technology depends much more on the opportunities in beef (organic and/or sustainable beef), which is a huge market opportunity.

But there are substantial risks as well:

• The company doesn't produce any revenues yet and will need considerable amounts of capital to move forward with JV and retrofit projects.
• Not all of the regulatory elements are in place to produce optimum revenue from their 3G technology, like markets for nutrient credits, and organic and sustainability designations. 
• The technology is still to prove its economic viability at scale although the fact that the company sees JVs as its main business model at the minimum suggests that they think it's viable and are willing to put their money where their mouth is.

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