Form of Note And Warrant Purchase Agreement

NOTE AND WARRANT PURCHASE AGREEMENT


NOTE AND WARRANT PURCHASE AGREEMENT (this "Agreement") dated as of ____________________, by and between BION ENVIRONMENTAL TECHNOLOGIES, INC., a Colorado corporation (the "Company"), D2 CO., LLC, a Delaware limited liability company ("D2") and the other parties executing signature pages hereto (collectively with D2, the "Purchasers").


WHEREAS, in a series of transactions and upon and subject to the terms and conditions hereinafter set forth, the Company desires to issue and sell to the Purchasers, and the Purchasers desire to purchase from the Company, (i) an minimum of $1,000,000 and a maximum of $5,000,000 aggregate face amount of convertible Bridge Notes (the "Bridge Notes") in the form attached hereto as Exhibit A and (ii) a minimum of an aggregate of 300,000 and a maximum of an aggregate of 1,500,000 Bridge Warrants (the "Bridge Warrants") in the form attached as Exhibit B, each of which shall entitle the holder thereof to purchase one share of the Common Stock of the Company.


NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, he Purchasers and the Company hereby agree as follows:


1. Purchase of Company Securities.


1.1. Purchase and Sale of the Bridge Notes and the Bridge Warrants. Subject to the terms and conditions set forth herein, the Company hereby agrees to issue and sell to the Purchasers, and each Purchaser, hereby agrees to purchase from the Company, such number of Units (as defined below) at the Closing (as such term is defined in Section 2.1 hereof) as is listed on its signature page. Each "Unit" shall consist of $25,000 face amount of Bridge Notes and 7,500 Bridge Warrants. The aggregate purchase price for the Units sold pursuant to this Agreement shall be equal to the sum of $1.00 for each $1.00 principal amount of Bridge Notes and $.05 for each Bridge Warrant.


2. Closing.


2.1. Closing. The initial closing and each additional closing of the purchase and sale of the Units will take place at the offices of Bion. Such closings (each, a "Closing" and collectively, the "Closings") will take place at 10:00 A.M., local time, on such dates as may be mutually agreed upon by the Company and the Purchasers. The date of each Closing is referred to herein as a "Closing Date." The date of the first Closing shall hereafter be referred to as the "Initial Closing Date" and the date of the final Closing shall hereafter be referred to as the "Final Closing Date." At each Closing, the Company will deliver to the Purchasers the Bridge Notes and the Bridge Warrants purchased as set forth in Section 1 hereof, against payment of the Purchase Price, by wire transfer payable to the Company. The Bridge Notes and the Bridge Warrants shall be registered in each Purchaser's name or the name of its nominee(s) in such denominations as the Purchaser shall request pursuant to instructions delivered to the Company not less than two days prior to such Closing Date.


3. Conditions to the Obligations of Purchasers at the Closing. The obligation of each Purchaser to purchase and pay for the Units to be purchased by it at a Closing is subject to the satisfaction on or prior to the Closing Date of the following conditions, which may only be waived by written consent of Purchasers:


3.1. Opinion of Counsel to the Company. Purchaser shall have received from counsel for the Company, its opinion dated the Closing Date in the form of Exhibit A hereto.


3.2. Representations and Warranties. All of the representations and warranties of the Company contained in this Agreement shall be true and correct at and as of such Closing Date, except for changes caused by the transactions contemplated hereby.


3.3. Performance of Covenants. All of the covenants and agreements of the Company contained in this Agreement and required to be performed on or prior to the Closing Date shall have been performed in a manner satisfactory in all respects to Purchasers.


3.4. Legal Action. No injunction, order, investigation, claim, action or proceeding before any court or governmental body shall be pending or threatened wherein an unfavorable judgment, decree or order would restrain, impair or prevent the carrying out of this Agreement or any of the transactions contemplated hereby, declare unlawful the transactions contemplated by this Agreement or cause any such transaction to be rescinded.


3.5. Consents. The Company shall have obtained in writing or made all consents, waivers, approvals, orders, permits, licenses and authorizations of, and registrations, declarations, notices to and filings and applications with, any governmental authority or any other person or entity (including, without limitation, securityholders and creditors of the Company) required to be obtained or made in order to enable the Company to observe and comply with all its obligations under this Agreement and to consummate the transactions contemplated hereby.


3.6. Closing Documents. The Company shall have delivered to the Purchasers the following:


(a) a certificate executed by the President or Chief Executive Officer of the Company, dated the Closing Date, stating that the conditions set forth in Sections 3.2 through 3.5 have been satisfied;


(b) an incumbency certificate, dated the Closing Date, for the officers of the Company executing this Agreement, the Bridge Notes and the Bridge Warrants and any other documents or instruments delivered in connection with this Agreement at the Closing;


(c) a certificate of the Secretary or Assistant Secretary of the Company, dated the Closing Date, as to the continued and valid existence of the Company, certifying the attached copy of the By-laws of the Company, the authorization of the execution, delivery and performance of this Agreement, and the resolutions adopted by the Board of Directors of the Company authorizing the actions to be taken by the Company under this Agreement;


(d) a certificate of the Secretary of State of the State of Colorado, dated a recent date, to the effect that the Company is in good standing in the State of Colorado and that all annual reports, if any, have been filed as required and that all taxes and fees have been paid in connection therewith;


(e) a certified copy of the Articles of Incorporation of the Company as filed with the Secretary of State of the State of Colorado and any amendments thereto;


(f) such certificates, other documents and instruments as Purchasers and their counsel may reasonably request in connection with, and to effect, the transactions contemplated by this Agreement.


4. Conditions to the Obligations of the Company at the Closing. The obligation of the Company to issue and sell the Bridge Notes and the Bridge Warrants to the Purchasers at a Closing is subject to the satisfaction on or prior to the Closing Date of the following conditions, any of which may be waived by the Company:


4.1. Representations and Warranties. The representations and warranties of the Purchasers contained in this Agreement shall be true and correct at and as of the Closing Date.


4.2. Legal Action. No injunction, order, investigation, claim, action or proceeding before any court or governmental body shall be pending or threatened wherein an unfavorable judgment, decree or order would restrain, impair or prevent the carrying out of this Agreement or any of the transactions contemplated hereby, declare unlawful the transactions contemplated by this Agreement or cause any such transaction to be rescinded.


5. Representations and Warranties of the Company. The Company hereby represents and warrants to the Purchasers that except as set forth on the schedule (the "Disclosure Schedule") attached hereto:


5.1.Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Colorado. The Company has all requisite corporate power and authority, and holds all licenses, permits and other required authorizations from governmental authorities, necessary to conduct its business as it is now being conducted or proposed to be conducted and to own or lease the properties and assets it now owns or holds under lease. Except where such failure to qualify could not reasonably be deemed to have a material adverse effect on the Company, the Company is duly qualified or licensed and in good standing as a foreign corporation in each jurisdiction wherein the character of its properties or the nature of the activities conducted by it makes such qualification or licensing necessary.


5.2. Capitalization. The Company's authorized capitalization is set forth in the SEC Documents (as defined below). All outstanding securities of the Company are validly issued, fully paid and nonassessable. Except as set forth on the Disclosure Schedule, no shareholder of the Company is entitled to any preemptive rights with respect to the purchase of or sale of any securities by the Company. Except as has been set forth in the Disclosure Schedule, there are no outstanding options, warrants or other rights, commitments or arrangements, written or oral, to purchase or otherwise acquire any authorized but unissued shares of capital stock of the Company or any security directly or indirectly convertible into or exchangeable for any capital stock of the Company or under which any such option, warrant or convertible security may be issued in the future, and there are no voting trusts or agreements, shareholders' agreements, pledge agreements, buy-sell, rights of first offer, negotiation or refusal or proxies or similar arrangements relating to any securities of the Company to which the Company is a party, and to the best knowledge of the Company after due investigation there are no such trusts, agreement, rights, proxies or similar arrangements as to which the Company is not a party. Except as set forth on the Disclosure Schedule and as contemplated herein, none of the shares of capital stock of the Company is reserved for any purpose, and the Company is neither subject to any obligation (contingent or otherwise), nor has any option to repurchase or otherwise acquire or retire any shares of its capital stock. The SEC Documents sets forth (i) the number of shares of Common Stock authorized for issuance under the Company's Fiscal Year 1994 Incentive Plan and the Company's 1996 Non-employee Director Stock Plan; (ii) the number of shares of Common Stock as to which options under such plan have been (a) reserved for issuance and (b) exercised; and (iii) the exercise prices for all outstanding options under such plan. Except as set forth on the Disclosure Schedule, no antidilution adjustments with respect to the outstanding securities of the Company will be triggered by the issuance of the securities contemplated hereby.


5.3. Due Authorization, Valid Issuance, Etc.. The Bridge Notes have been duly authorized and, when issued in accordance with this Agreement upon the Closing Date, will be free and clear of all liens imposed by or through the Company. The Bridge Warrants have been duly authorized and, when issued in accordance with this Agreement upon the Closing Date, will be validly issued and free and clear of all liens imposed by or through the Company. The shares of capital stock, issuable upon conversion of the Bridge Notes, have been duly authorized and shares of Common Stock have been reserved, and upon the conversion of the Bridge Notes will be validly issued, fully paid and nonassessable and will be free and clear of all liens imposed by or through the Company. The shares of Common Stock issuable upon the exercise of the Bridge Warrants have been duly authorized and reserved, and upon the exercise of the Bridge Warrants in accordance with the terms and conditions thereof and this Agreement, will be validly issued, fully paid and nonassessable shares of Common Stock and will be free and clear of all liens imposed by or through the Company. Except as set forth on the Disclosure Schedule, the issuance, sale and clear delivery of the Bridge Notes, the Bridge Warrants and the Common Stock or other capital stock of the Company issuable upon the exercise of the Bridge Warrants and conversion of the Bridge Notes will not be subject to any preemptive right of shareholders of the Company or to any right of first refusal or other right in favor of any person.


5.4. Authorization; No Breach. The Company has the full corporate power and authority to execute, deliver and enter into this Agreement and to perform its obligations hereunder, and the execution, delivery and performance of this Agreement, the Bridge Notes, the Bridge Warrants, and any related financing statement and all other transactions contemplated hereby have been duly authorized by the Company, and this Agreement constitutes a legal, valid and binding obligation of the Company, enforceable in accordance with its terms except as the enforceability hereof may be limited by (a) bankruptcy, insolvency, moratorium and similar laws affecting creditors' rights generally and (b) the availability of remedies under general equitable principles and (c) to the extent the indemnification provisions contained in Section 8.5 hereof may be limited by applicable federal or state securities laws. To the Company's knowledge, the execution and delivery by the Company of this Agreement, the offering, sale and issuance of the Bridge Notes and the Bridge Warrants pursuant to this Agreement, and the performance and fulfillment of the Company of its obligations under this Agreement, the Bridge Notes and the Bridge Warrants, do not and will not (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under, or event which, with notice or lapse of time or both, would constitute a breach of or default under, (iii) result in the creation of any lien, security interest, adverse claim, charge or encumbrance upon the capital stock or assets of the Company pursuant to, (iv) give any third party the right to accelerate any obligation under or terminate, (v) result in a violation of, (vi) result in the loss of any license, certificate, legal privilege or legal right enjoyed or possessed by the Company under, or (vii) except for filings required to be made with the Securities and Exchange Commission, require any authorization, consent, approval, exemption or other action by or notice to any court or administrative or governmental body pursuant to or require the consent of any other person under, the Articles of Incorporation or By-Laws of the Company or any law, statute, rule or regulation to which the Company is subject or by which any of its properties are bound, or any agreement, instrument, order, judgment or decree to which the Company is subject or by which its properties are bound.


5.5. Financial Statements and SEC Documents. (a) Incorporated by reference herein are (i) the audited financial statements of the Company for the fiscal year ended June 30, 1999, including the balance sheet as at the end of such fiscal year and the related statements of operations, shareholders' equity (deficit) and cash flows for such fiscal year, certified by Ehrhardt Keefe Steiner & Hoffman PC and (ii) the September 30 Financial Statements (the financial statements referred to in clauses (i) and (ii) are referred to herein collectively as the "Financial Statements"). For purposes of this Agreement, September 30, 1999, shall be hereinafter referred to as the "Balance Sheet Date." The Financial Statements have been prepared in accordance with the books and records of the Company and generally accepted accounting principles, applied consistently with the past practices of the Company (except as otherwise noted in such Financial Statements), reflect all liabilities and obligations of the Company, as of their respective dates, and present fairly the financial position of the Company and the results of its operations as of the time and for the periods indicated therein.


(b) Incorporated by referenced herein are each report, schedule, registration statement and definitive proxy statement filed by the Company with the Securities and Exchange Commission since May 15, 1996 (as such documents have since the time of their filing been amended, the "SEC Documents") which are all the documents (other than preliminary material) that the Company was required to file with the Securities and Exchange Commission since such date. As of their respective dates, the SEC Documents complied in all respects with the requirements of the Securities Act (as defined in Section 9.7) and/or the Securities Exchange Act (as defined in Section 9.8) as the case may be, and the rules and regulations of the Securities and Exchange Commission thereunder applicable to such SEC Documents and none of the SEC Documents contained any untrue statement of a material fact or omitted to statement of material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the Securities and Exchange Commission with respect thereto, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10_QSB of the Securities and Exchange Commission) and fairly present (subject, in the case of the unaudited statements, to normal, recurring audit adjustments) the financial position of the Company as at the dates thereof and the consolidated results of their operations and cash flows for the periods then ended.


5.6. No Material Adverse Changes. Except as set forth on the Disclosure Schedule, since the Balance Sheet Date there has not at any time been (a) any material adverse change in the financial condition, operating results, business prospects, employee relations or customer relations of the Company, or (b) other adverse changes, which in the aggregate have been materially adverse to the Company.


5.7. Litigation. Except as set forth on the Disclosure Schedule, there are no actions, suits, proceedings, orders, claim, or, to the Company's knowledge, investigations pending or, to the Company's knowledge, threatened against or affecting the Company, at law or in equity or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality; there are no arbitration proceedings pending under collective bargaining agreements or otherwise; and, to the knowledge of the Company, there is no basis for any of the foregoing.


5.8. Compliance with Law. To the Company's knowledge, the Company has complied in all material respects with all applicable statutes and regulations of the United States and of all states, municipalities and applicable agencies and foreign jurisdictions or bodies in respect of the conduct of its business and operations, and the failure, if any, by the Company to have fully complied with any such statute or regulation does not and will not materially adversely affect the business or operations of the Company.


5.9. Undisclosed Liabilities. To the Company's knowledge, the Company has no obligation or liability (whether accrued, absolute, contingent, unliquidated, or otherwise, whether due or to become due) arising out of transactions entered into at or prior to the Closing of this Agreement, or any action or inaction at or prior to the Closing of this Agreement, or any state of facts existing at or prior to the Closing of this Agreement, except (a) liabilities reflected on the Company Balance Sheet; (b) liabilities incurred in the ordinary course of business since the Balance Sheet Date (none of which is a liability for breach of ...