UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


FORM 10-Q


(Mark One)

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

[X]þ

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACTEXCHANGEACT OF 1934

For the quarterly period ended September 30, 2008March 31, 2009

[   ]¨

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT


For the transition period from ______________________ to_______________________


Commission File Number 001-08568


IGI Laboratories, Inc.

(Exact name of registrant as specified in its charter)


For the transition period from ______________________ to_______________________

Commission File Number001-08568

IGI Laboratories, Inc.

(Exact name of registrant as specified in its charter)

Delaware

01-0355758

(State or other Jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification No.)

incorporation or organization)

105 Lincoln Avenue
Buena, New Jersey

Buena, New Jersey

08310

(Address of Principal Executive Offices)

(Zip Code)


(856) 697-1441

(Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesþNo¨


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if nay, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes¨No¨


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.


(856)697-1441Large accelerated filer

(Registrant's telephone number, including area code)¨

Accelerated filer 

¨

 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  [X]      No  [  ]

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

      Large accelerated filer   [  ]

Accelerated filer   [  ]

Non-accelerated filer   [  ]

¨

Smaller reporting company   [X]

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  [  ]      No  [X]

      The number of shares outstanding of the issuer's common stock is 14,907,478 shares, net of treasury stock, as of November 5, 2008.þ


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes¨Noþ


<PAGE>The number of shares outstanding of the issuer's common stock is 14,941,712 shares, net of treasury stock, as of May 12, 2009.



PART I

PART I
FINANCIAL INFORMATION


ITEM 1.  Financial Statements


IGI LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except shareshares and per share information)

(Unaudited)


 

Three months ended March 31,

 

 

2009

 

 

2008

Revenues:

 

 

 

 

 

Product sales, net

$

505 

 

$

1,300 

Licensing and royalty income

 

88 

 

 

135 

Research and development income

 

 

 

65 

Total revenues

 

594 

 

 

1,500 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

Cost of sales

 

600 

 

 

681 

Selling, general and administrative expenses

 

648 

 

 

663 

Product development and research expenses

 

119 

 

 

113 

Operating (loss) income

 

(773)

 

 

43 

Interest (expense), net

 

(159)

 

 

(3)

 

 

 

 

 

 

Net (loss) income

 

(932)

 

 

40 

 

 

 

 

 

 

Dividend accreted for beneficial conversion features

 

(970)

 

 

 

 

 

 

 

 

Net (Loss) Income Attributable to Common Stockholders

$

(1,902)

 

$

40 

 

 

 

 

 

 

Basic (loss) income per share

$

(.13)

 

$

.00

Diluted (loss) income per share

 

(.13)

 

 

.00

 

 

 

 

 

 

Weighted average shares of common stock outstanding:

 

 

 

 

 

Basic

 

14,911,218 

 

 

14,831,880 

Diluted

 

14,911,218 

 

 

15,731,303 



 

Three months ended September 30,

 

Nine months ended September 30,

 


 


 

2008

 

2007

 

2008

 

2007

 


 


 


 


            

Revenues:

           

    Product sales

$

770 

 

$

520 

 

$

2,547 

 

$

1,865 

    Research and development income

 

116 

  

329 

  

244 

  

617 

    Licensing and royalty income

 

87 

  

156 

  

364 

  

444 

 


 


 


 


        Total revenues

 

973 

  

1,005 

  

3,155 

  

2,926 

 


 


 


 


            

Cost and expenses:

           

    Cost of sales

 

732 

  

494 

  

1,976 

  

1,632 

    Selling, general and administrative expenses

 

672 

  

469 

  

2,031 

  

1,651 

    Product development and research expenses

 

136 

  

135 

  

372 

  

360 

 


 


 


 


Operating loss

 

(567)

  

(93)

  

(1,224)

  

(717)

Interest expense (net)

 

(3)

  

(12)

  

(9)

  

(39)

Other income

 

  

  

  

64 

 


 


 


 


Loss from continuing operations

 

(568)

  

(105)

  

(1,226)

  

(692)

Gain from discontinued operations

 

  

  

  

 


 


 


 


Net loss

$

(568)

 

$

(105)

 

$

(1,226)

 

$

(687)

 


 


 


 


            

Basic and Diluted Loss Per Share

           

Continuing operations net loss per share

$

(.04)

 

$

(.01)

 

$

(.08)

 

$

(.05)

Discontinued operations income per share

 

  

  

 

$

 


 


 


 


    Net loss per share

$

(.04)

 

$

(.01)

 

$

(.08)

  

(.05)

 


 


 


 


            

Weighted Average of Common Stock and
 Common Stock Equivalents Outstanding

           

    Basic and diluted

 

14,907,478 

  

14,612,899 

  

14,872,610 

  

14,210,812 

            

The accompanying notes are an integral part of the consolidated financial statements.

<PAGE>  2

IGI LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)

 
 

September 30,
2008

 

December 31,
2007*

 

(unaudited)

  
 


 


      

ASSETS

     

Current assets:

     

    Cash and cash equivalents

 

$      207 

  

$      914 

    Accounts receivable, less allowance for doubtful accounts

     

      of $38 and $48 in 2008 and 2007, respectively

 

570 

  

666 

    Licensing and royalty income receivable

 

96 

  

356 

    Inventories

 

644 

  

376 

    Prepaid expenses and other current assets

 

105 

  

93 

  


  


        Total current assets

 

1,622 

  

2,405 

Property, plant and equipment, net

 

2,332 

  

2,410 

Restricted cash - long term

 

50 

  

50 

Other assets - long term

 

20 

  

License fee, net

 

725 

  

800 

  


  


        Total assets

 

$   4,749 

  

$   5,665 

  


  


      

LIABILITIES AND STOCKHOLDERS' EQUITY

     

Current liabilities:

     

    Note payable - related party

 

$      250 

  

$      500 

    Accounts payable

 

511 

  

282 

    Accrued expenses

 

349 

  

419 

    Deferred income, current

 

194 

  

219 

  


  


        Total current liabilities

 

1,304 

  

1,420 

    Deferred income, long term

 

41 

  

45 

    Other long term liabilities

 

  

60 

  


  


        Total liabilities

 

1,345 

  

1,525 

  


  


      

Stockholders' equity:

     

    Series A Convertible Preferred stock, $.01 par value,

     

      100 shares authorized; 50 shares issued as of

     

      September 30, 2008 and December 31, 2007, respectively;

     

      Liquidation preference- $500,000

 

500 

  

500 

    Common stock, $.01 par value, 50,000,000 shares

     

      authorized; 16,873,218 and 16,795,202 shares issued

     

      as of September 30, 2008 and

     

      December 31, 2007, respectively

 

168 

  

168 

    Additional paid-in capital

 

27,901 

  

27,411 

    Accumulated deficit

 

(23,770)

  

(22,544)

    Less treasury stock, 1,965,740 shares at cost

 

(1,395)

  

(1,395)

  


  


        Total stockholders' equity

 

3,404 

  

4,140 

  


  


        Total liabilities and stockholders' equity

 

$   4,749 

  

$   5,665 

  


  


      

The accompanying notes are an integral part of the consolidated financial statements.

* Derived from the audited December 31, 2007 financial statements

<PAGE>  3

IGI LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

 
 

Nine months ended September 30,

 


 

2008

 

2007

 


 


      

Cash flows from operating activities:

     

    Net loss

$

(1,226)

 

$

(687)

    Reconciliation of net loss to net cash used in operating activities:

     

      Depreciation and amortization

 

185 

  

172 

      Amortization of license fee

 

75 

  

75 

      Bad debt expense

 

34 

  

      Provision for write down of inventory

 

42 

  

      Stock based compensation expense

 

392 

  

231 

      Gain on sale of assets of discontinued operations

 

  

(5)

      Recognition of deferred revenue

 

  

(378)

    Changes in operating assets and liabilities:

     

      Accounts receivable

 

62 

  

(228)

      Licensing and royalty income receivable

 

260 

  

(55)

      Inventories

 

(310)

  

(37)

      Prepaid expenses and other assets

 

(33)

  

(36)

      Accounts payable and accrued expenses

 

100 

  

(132)

      Deferred income

 

(29)

  

156 

 


 


      

        Net cash used in operating activities

 

(448)

  

(924)

 


 


      

Cash flows from investing activities:

     

    Capital expenditures

 

(107)

  

(168)

    Proceeds from deposit on sale of assets of discontinued operations

 

  

260 

 


 


      

        Net cash (used in) provided by investing activities

 

(107)

  

92 

 


 


      

Cash flows from financing activities:

     

    Borrowing from note payable - related party

 

  

500

    Repayment of notes payable - related party

 

(250)

  

(1,145)

    Repayment of note payable

 

  

(306)

    Proceeds from exercise of common stock options and warrant

 

98 

  

    Proceeds from private placement of common stock, net of expenses

 

  

1,298 

 


 


      

        Net cash (used in) provided by financing activities

 

(152)

  

347 

 


 


      

Net decrease in cash and equivalents

 

(707)

  

(485)

Cash and equivalents at beginning of period

 

914 

  

619 

 


 


Cash and equivalents at end of period

$

207 

 

$

134 

 


 


      

Supplemental cash flow information:

     

    Cash payments for interest

$

19 

 

$

51 

    Cash payment for taxes

 

  

      

The accompanying notes are an integral part of the consolidated financial statements.



2




<PAGE>  4

IGI LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share information)


 

 

March 31,
2009
(unaudited)

 

 

December 31,
2008*

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

4,481 

 

$

171 

Accounts receivable, less allowance for doubtful accounts
   of $75 in 2009 and 2008

 

354 

 

 

481 

Licensing and royalty income receivable

 

87 

 

 

74 

Inventories

 

828 

 

 

562 

Prepaid expenses and other current assets

 

130 

 

 

82 

Total current assets

 

5,880 

 

 

1,370 

Property, plant and equipment, net

 

2,282 

 

 

2,280 

Restricted cash – long term

 

50 

 

 

50 

License fee, net

 

675 

 

 

700 

Debt issuance costs, net of amortization of $79 in 2009

 

580 

 

 

Other

 

100 

 

 

20 

Total assets

$

9,567 

 

$

4,420 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Convertible note payable, net of discount of $68 in 2009

$

4,715 

 

$

Accounts payable

 

342 

 

 

559 

Accrued expenses

 

354 

 

 

312 

Deferred income, current

 

216 

 

 

56 

Total current liabilities

 

5,627 

 

 

927 

Convertible note payable – related party, net of discount and beneficial
   conversion feature of $195 and $0 in 2009 and 2008

 


305 

 

 


500 

Deferred income, long term

 

38 

 

 

40 

Total liabilities

 

5,970 

 

 

1,467 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Series A Convertible Preferred stock, $.01 par value, 100 shares
   authorized; 50 shares issued and outstanding as of March 31, 2009 and
   December 31, 2008; liquidation preference - $500,000

 



500 

 

 



500 

Series B-1 Convertible Preferred stock, $.01 par value, 1,030
   shares authorized; 202.9 and 0 shares issued and outstanding as of March 31,
   2009 and December 31, 2008, respectively; liquidation
   preference - $1,217,400

 




1,073 

 

 




- - 

Common stock, $.01 par value, 50,000,000 shares authorized;
   16,891,147 and 16,873,218 shares issued as of March 31, 2009 and
   December 31, 2008, respectively

 



169 

 

 



168 

Additional paid-in capital

 

29,548 

 

 

28,076 

Accumulated deficit

 

(26,298)

 

 

(24,396)

Less treasury stock, 1,965,740 common shares at cost

 

(1,395)

 

 

(1,395)

Total stockholders’ equity

 

3,597 

 

 

2,953 

Total liabilities and stockholders' equity

$

9,567 

 

$

4,420 


The accompanying notes are an integral part of the consolidated financial statements.

* Derived from the audited December 31, 2008 financial statements



3




IGI LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


 

Three months ended March 31,

 

 

2009

 

 

2008

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss) income

$

(932)

 

$

40 

Reconciliation of net (loss) income to net cash used in operating activities:

 

 

 

 

 

Depreciation

 

63 

 

 

61 

Amortization of license fee

 

25 

 

 

25 

Stock-based compensation expense

 

75 

 

 

115 

Directors’ compensation payable in stock

 

11 

 

 

Interest expense on convertible note payable

 

12 

 

 

Amortization of discount on convertible note payable

 

 

 

Amortization of discount on convertible note payable – related party

 

52 

 

 

Amortization of debt issuance costs

 

79 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

127 

 

 

(209)

Licensing and royalty income receivable

 

(13)

 

 

230 

Inventories

 

(266)

 

 

(155)

Prepaid expenses and other current assets

 

(48)

 

 

(55)

Accounts payable and accrued expenses

 

(177)

 

 

103 

Deferred income

 

158 

 

 

(213)

Net cash used in operating activities

 

(825)

 

 

(58)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(65)

 

 

(6)

Deposits for capital expenditures

 

(80)

 

 

Net cash used in investing activities

 

(145)

 

 

(6)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Sale of Series B-1 Convertible preferred stock, net of expenses

 

1,073 

 

 

Proceeds from issuance of convertible note payable, net of expenses

 

4,206 

 

 

Proceeds from exercise of common stock options

 

 

 

Repayment of note payable- related party

 

 

 

(250)

Net cash provided by (used in) financing activities

 

5,280 

 

 

(247)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

4,310 

 

 

(311)

Cash and cash equivalents at beginning of period

 

171 

 

 

914 

Cash and cash equivalents at end of period

$

4,481 

 

$

603 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash payments for interest

$

26 

 

$

10 

Cash payment for taxes

 

 

 

 

 

 

 

 

 

Non cash transactions:

 

 

 

 

 

Dividend accreted for beneficial conversion features

 

970 

 

 

Issuance of stock to directors for compensation that was previously accrued

 

21 

 

 



The accompanying notes are an integral part of the consolidated financial statements.





4


IGI LABORATORIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the three months ended March 31, 2009

(in thousands, except share information)

(Unaudited)



 

 

Series A
Preferred Stock

 

Series B
Preferred Stock

 

Common Stock

 

Additional
Paid-In
Capital

 

Accumulated
Deficit

 

Treasury
Stock

 

Total
Stockholders’
Equity

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2008

 

50

 

$ 500

 

-

 

$       -

 

16,873,218

 

$ 168

 

$ 28,076

 

$ (24,396)

 

(1,395)

 

$ 2,953 

Issuance of preferred stock pursuant to a private
   placement net of associated fees of $144 and
   beneficial conversion features

 

 

 

 

 

203

 

568

 

 

 

 

 



505

 

 

 

 

 



1,073 

Value of common stock warrants issued to broker
   in a private placement

 

 

 

 

 

 

 

 

 

 

 

 

 


82

 

 

 

 

 


82 

Discount on convertible note payable related to
   a private placement

 

 

 

 

 

 

 

 

 

 

 

 

 


77

 

 

 

 

 


77 

Beneficial conversion and discount on
   converted note payable

 

 

 

 

 

 

 

 

 

 

 

 

 


247

 

 

 

 

 


247 

Dividends attributable to beneficial
   conversion features of private placement

 

 

 

 

 

 

 


505

 

 

 

 

 


465

 


(970)

 

 

 


Issuance of stock as Directors’ compensation

 

 

 

 

 

 

 

 

 

15,929

 

1

 

20

 

 

 

 

 

21 

Stock options exercised

 

 

 

 

 

 

 

 

 

2,000

 

-

 

1

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

75

 

 

 

 

 

75 

Net loss

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(932)

 

 

(932)

Balance, March 31, 2009

 

50

 

$ 500

 

203

 

$1,073

 

16,891,147

 

$ 169

 

$ 29,548

 

$ (26,298)

 

$(1,395)

 

$ 3,597 



The accompanying notes are an integral part of the consolidated financial statements.




5


IGI LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article8-Article 8-03of 03of Regulation S-XS- X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company'sCompany’s Annual Report on Form 10-KSB10-K for the year ended December 31, 2007.2008. The condensed consolidated balance sheet as of December 31, 20072008 has been derived from those audited consolidated financial statements. Operating results for the ninethree month period ended September 30, 2008March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.2009.


1.

Liquidity


The Company has sustained a net loss of $1,226,000 for the nine months ended September 30, 2008 and had working capital of $318,000 at September 30, 2008. The Company's principal sources of liquidity for IGI Laboratories, Inc. (“IGI”, “IGI,Inc.” or the “Company”), are cash and cash equivalents of approximately $207,000$4,481,000 at September 30, 2008, futureMarch 31, 2009 and cash from operations. The Company sustained a net loss attributable to common stockholders of $1,902,000 for the three months ended March 31, 2009 and had working capital of $253,000 at March 31, 2009.


The Company’s business operations have been partially funded over the past three years through the exercise of stock options by our directors and a $250,000 unused balance onofficers, through private placements of our $500,000stock, the line of credit from Pinnacle Mountain Partners, LLC. This linedescribed below and issuance of credit will expire on January 31, 2009.

We believe that our operating cash flow along with our existing capital resources will not be sufficient to support our current business plan through November 2009. The Company will require additional funding. This funding will depend, in part, on the timing and structure of potential business arrangements.debt. If necessary, we may continue to seek to raise additional capital through the sale of our equity. We may accomplish this via a strategic alliance with a third party. In addition, thereThere may be additional acquisition and growth opportunities that may require external financing. There can be no assurancesassurance that such financing will be available or available on terms acceptable to the Company.


On January 29, 2009, the secured line of credit agreement (“Credit Agreement”) with Pinnacle Mountain Partners, LLC, (“Pinnacle”), a company owned by Dr. and Mrs. Hager, significant stockholders of the Company, and in the case of Mrs. Hager, a director of the Company, was amended and extended for a term of six months, as more fully described in Footnote 8 below. The Company had an outstanding principal balance with a face value of $500,000 as of March 31, 2009 and interest expense related to this line of credit was $8,825 for the three months ended March 31, 2009.


On March 13, 2009, the Company completed a $6,000,000 private placement, resulting in net proceeds of approximately $5,279,000, with certain investment funds affiliated with Signet Healthcare Partners, G.P. (the “Offering”) as more fully described in Footnote 11 below. As a condition to the consummation of the Offering, on March 13, 2009, the Company and Pinnacle entered into an amendment to the Credit Agreement pursuant to which the parties agreed to change the final payment date of the amounts borrowed under the line of credit from July 31, 2009 to instead provide that 50% of the amount of all loans and advances made by Pinnacle under the Credit Agreement will become due and payable on July 31, 2010 and the remaining outstanding loans and advances, together with interest thereon, will become due and payable on July 31, 2011.


In addition, as a condition to the consummation of the Offering, the Company and Pinnacle entered into a note conversion agreement dated March 13, 2009, pursuant to which Pinnacle agreed to convert the principal amount outstanding under the Credit Agreement into shares of the Company’s common stock at a conversion rate of $0.41 per share upon receipt of stockholder approval by the Company of such conversion (the “Note Conversion”). For additional information relating to the Offering, see Footnote 11 below.


The Company’s common stock is listed on the NYSE Amex exchange and, as a result, the Company is subject to Section 711 and Section 713 of the NYSE Amex Company Guide. Section 711 of the NYSE Amex Company Guide requires stockholder approval for the establishment of an equity compensation arrangement pursuant to which stock may be acquired by a director of an issuer. Section 713 of the NYSE Amex Company Guide, to which the Company is subject, requires stockholder approval for issuances of securities that will (i) involve the issuance of common stock, or securities convertible into common stock, equal to 20% or more of presently outstanding stock of a company for less than the greater of book or market value of the stock and/or (ii) result in a change of control of the issuer. Pursuant to Section 711 and Section 713, both the Offering and the Note Conversion require stockholder approval.




6




In connection with the Offering, certain holders of our capital stock, representing approximately 51.7% of the voting power of the outstanding shares of our capital stock entitled to vote to approve the Offering, entered into a voting agreement, pursuant to which these holders agreed to vote or execute and deliver a written consent in favor of approving the Offering. As a result of its interest in the Note Conversion, pursuant to the rules and regulations of the NYSE Amex, Pinnacle and its affiliates, which includes Dr. and Mrs. Hager, significant stockholders of the Company and signatories to the voting agreement, are not permitted to vote to approve the Offering or the Note Conversion so long as the Note Conversion agreement remains in place. As a result of this NYSE Amex voting restriction, holders of our capital stock representing approximately 44.2% of the voting power of the outstanding shares of capital stock of the Company have signed a voting ag reement and are entitled to vote to approve both the Offering and the Note Conversion so long as the Note Conversion remains in place. At the Company’s 2009 annual meeting of stockholders held on May 15, 2009, the Company’s stockholders approved the Offering and Note Conversion. Immediately upon stockholder approval, the $4,782,600 aggregate principal amount of promissory notes issued in the Offering by the Company to the investment funds affiliated with Signet Healthcare Partners, G.P., together with accrued and unpaid interest, were converted into an aggregate of 803.979 shares of the Company’s Series B-1 Preferred Stock and the warrants to purchase shares of the Company’s Series B-2 Preferred Stock issued to these investment funds were terminated. Additionally, the $500,000 principal amount outstanding under the Pinnacle line of credit was converted into 1,219,512 shares of the Company’s common stock.


2.

Organization


On May 7, 2008, the stockholders of IGI, Inc. approved the name change of the Company from IGI, Inc. to IGI Laboratories, Inc. IGI Laboratories, Inc. ("IGI", "IGI, Inc." or the "Company"),The Company, a Delaware corporation, operating in the State of New Jersey, is primarily engaged in the development, manufacturing, filling and packaging of topical, semi-solid and liquid products for pharmaceutical, cosmeceutical and cosmetic companies primarily using its licensed Novasome® encapsulation technology. TheseThe Company has directed its efforts have been directed towardtowards the development of high quality skin care and treatment products marketed through collaborative arrangements with pharmaceutical and consumer products companies.


The Company alsoprovides product development and analytical services to its customers in customersin addition to its manufacturing and packaging services.

IGI's

IGI’s mission is to be a premier provider of topical liquid and semi-solid products to its customers using Novasome® encapsulation technology.


On May 6, 2008, the Company was notified by the American Stock Exchange ("AMEX")NYSE Amex that it was belowfailing to satisfy certain of AMEXNYSE Amex’s continued listing standards. Specifically, the Company was required to reflect income from continuing operations and/or net income in one of its five most recent fiscal years and a minimum of $6,000,000 in stockholders'stockholders’ equity to remain listed on the exchange. The Company had net income from continuing operations in its 2002 fiscal year, but had net losses and losses from continuing operations in each of its 2003, 2004, 2005, 2006 and 2007last six fiscal years. The Company's stockholders'Company’s stockholders’ equity at September 30,March 31, 2009 was $3.6 million.


On June 8, 2008, was $3.4 million.

the Company submitted a plan advising NYSE Amex of the actions that it would take to bring it into compliance with the continued listing standards. On July 15, 2008, AMEXNYSE Amex notified the Company that it accepted the Company'sCompany’s plan of compliance and granted the Company an extension until May 6, 2009 to regain compliance with the continued listing standards described above. The Company will bewas subject to periodic review by AMEXNYSE Amex staff during the extension period. Failure to make progress consistent with the plan or to regain compliance with the continued listing standards by the end of the extension period could result in the Company being delisted from AMEX.NYSE Amex.


On March 13, 2009, the Company completed the Offering, as more fully described in Footnote 11 below. On May 4, 2009, NYSE Amex notified the Company that it had determined that the Company has made a reasonable demonstration of its ability to regain compliance with Sections 1003(a)(ii) and (iii) of the Company Guide in accordance with Section 1009 and therefore granted the Company an extension from May 6, 2009 until May 31, 2009 to regain compliance with these continued listing standards.




7




Major Customers


<PAGE>  5

Major Customers

Major customers of the Company are defined as having revenue greater than 10% of total gross revenue. For the three months ended September 30,March 31, 2009 and 2008, and 2007, three of our customers accounted for 62% and four of our customers accounted for 71%84% and 86% of our revenue, respectively. ForOne of these customers is the nine months ended September 30, 2008 and 2007, four of our customers accountedsame for 58% and two of our customers accounted for 34% of our revenue, respectively.both periods. Accounts receivable related to the Company's majorCompany’smajor customers comprised 57%66% of all account receivables as of September 30, 2008.March 31, 2009. Theloss of one or more of these customers could have a significant impacton our revenues and harm our business and results of operations.


3.

Summary of Significant Accounting Policies


Use of Estimates


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include allowances for excess and obsolete inventories, allowances for doubtful accounts, provisions for income taxes and related deferred tax asset valuation allowance, stock based compensation, and accruals for environmental cleanup and remediation costs. Actual results could differ from those estimates.


Earnings Per Share


Basic earnings per common share and diluted earnings per common share are presented in accordance with SFAS No. 128,Earnings per Share.Basic earningsnet (loss) income per share of common share have beenstock is computed usingbased on the weighted average number of shares of common stock outstanding during the period. Diluted earningsnet (loss) income per share of common share incorporatestock is computed using the incrementalweighted average number of shares of common stock and potential dilutive common stock equivalents outstanding during the period. Potential dilutive common stock equivalents include shares issuable upon the assumed exercise of stock options and warrants, if dilutive.warrants. Due to the net loss for the ninethree months ended September 30, 2008 and 2007 and for the quarters ended September 30, 2008 and 2007,March 31, 2009, the effect of the Company'sCompany’s potential dilutive common stock equivalents was anti-dilutive for each period;anti-dilutive; as a result, the basic and diluted weighted average number of common shares outstanding and net loss(loss) per common share are the same. Potentially dilutive common stock equivalents which were excl uded from the net (loss) income per share calculations due to their anti-dilutive effect amounted to 3,004,332 shares for the three months ended March 31, 2009 and 1,105,447 for the three months ended March 31, 2008.


Revenue Recognition

Revenue Recognition

The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred or contractual services rendered, the sales price is fixed or determinable, and collection is reasonably assured in conformity with SAB No. 104,Revenue Recognition.


The Company derives its revenues from three basic types of transactions: sales of manufactured product, licensing of technology, and research and product development services performed for third parties. Due to differences in the substance of these transaction types, the transactions require, and the Company utilizes, different revenue recognition policies for each.


Product Sales:Sales: The Company recognizes revenue when title transfers to its customers, which is generally upon shipment of products. These shipments are made in accordance with sales commitments and related sales orders entered into with customers either verbally or in written form. The revenues associated with these transactions, net of appropriate cash discounts, product returns and sales reserves, are recorded upon shipment of the products.


Licensing Revenues:Revenues: Revenues earned under licensing or sublicensing contracts are recognized ratably over the life of the agreements. Advance payments by customers are initially recorded as deferred income on the Consolidated Balance Sheet and then recognized ratably over the life of the agreement or as contract obligations are completed.


Product Development Services:The Company establishes agreed uponenters into product development agreements with its customers to perform product development services. Product development revenues are recognized in accordance with the product development agreement upon the completion of the phaseseach phase of development and when we have no future performance obligations relating to thatsuch phase of development. Revenue recognition requires the Company to assess progress against contracted obligations to assure completion of each stage. Payments under these arrangements are generally non-refundable

<PAGE>  6

and are reported as deferred until they are recognized as revenue. If no such arrangement exists, product development fees are recognized ratably over the entire period during which the services are performed.



8




Recent Accounting Pronouncements


In December 2007, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Statement of Financial Accounting Standards ("SFAS"(“SFAS”) No. 141 (revised 2007),Business Combinations ("(“FAS 141R"), which replaces FASB Statement No. 141. FAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements, which will enable users to evaluate the nature and financial effects of the business combination. FAS 141R is effective as of the beginning of an entity's fiscal year that begins after December 15, 2008. FAS 141R will only have an impact on our financial position or results of operations if we enter into a business combination.


In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51 ("FAS 160"), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. FAS 160 is effective as of the beginning of an entity's fiscal year that begins after December 15, 2008. The Company is currently evaluatingWe have evaluated the potential impact, if any, of the adoption of FAS 160 on itsconsolid ated financial position, results of operationsnew statement and cash flows but believes the adoption of FAS 160 willhave determined that it does not have a material effectsignificant impact on its resultsthe determination or reporting of operations orour financial position.results.


In December 2007, the Emerging Issues Task Force (EITF) issued EITF Issue No. 07-1,Accounting for Collaborative Arrangements. EITF 07-1 provides guidance concerning: determining whether an arrangement constitutes a collaborative arrangement within the scope of the Issue; how costs incurred and revenue generated on sales to third parties should be reported in the income statement; how an entity should characterize payments on the income statement; and what participants should disclose in the notes to the financial statements about a collaborative arrangement. EITF 07-1 is effective for the Company'sCompany’s collaborations existing after January 1, 2009. The Company is currently evaluatingWe have evaluated the impact, if any, of adopting EITF 07-1 on its consolidated financial statements but believes the adoption willnew statement and have determined that it does not have a material effectsignificant impact on its resultsthe determination or reporting of operations orour financial position.results.


In March 2008, the FASB issued Statement of Financial Accounting Standards ("SFAS"(“SFAS”) No. 161,Disclosures about Derivative Instruments and Hedging Activities ("(“SFAS 161"161”). SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity'sentity’s financial position, financial performance, and cash flows. SFAS No. 161 also improves transparency about the location and amounts of derivative instruments in an entity'sentity’s financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after NovemberNove mber 15, 2008, with early application encouraged. The Company is currently e valuatingWe have evaluated the impact of the adoption of SFAS 161 on its consolidated financial statements but believes the adoption willnew statement and have determined that it does not have a material effectsignificant impact on itsresultsthe determination or reporting of operations orour financial position.results.


In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, "Determination“Determination of the Useful Life of Intangible Assets"Assets” (FSP 142-3), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill“Goodwill and Other Intangible Assets." FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The guidance in FSP 142-3 for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, adoption. The Company is currently evaluatingWe have evaluated the impact of the adoption of FSP 142-3 on its consolidated financial statements but believes the adopt ion willnew statement and have determined that it does not have a material effectsignificant impa ct on its resultsthe determination or reporting of operations orour financial position.results.


In May 2008, the FASB issued FASB Staff Position ("FSP"(“FSP”) No. APB 14-1, "Accounting“Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (including Partial Cash Settlement)," or FSP APB 14-1, which requires separate accounting for the debt and equity components of convertible debt issuances. The requirements for separate accounting must be applied retrospectively to previously issued cash-settleable convertible instruments as well as

<PAGE>  7

prospectively to newly issued instruments, negatively affecting both net income and earnings per share for issuers of the instruments. The Staff Position is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently evaluatingWe have evaluated the new statement and have determined that it does not have a significant impact thaton the adoptiondetermination or reporting of FSP APB 14-1 will have on its consolidatedour financial statements.results.



9




In June 2008, the FASB issued FSP EITF No. 03-6-1, "Determining“Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, "Earnings“Earnings per Share." The FSP requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents as a separate class of securities in calculating earnings per share. The FSP is effective for fiscal years beginning after December 15, 2008; earlier application is not permitted. The Company is currently evaluating the impact that the adoption of EITF 03-6-1 will have, if any, on its consolidated financial statements.

In September 2008, the FASB issued FAS 133-1 and FIN 45-4, "Disclosures about Credit Derivatives and Certain Guarantees - An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161." The credit derivatives market has expanded significantly over the past few years. Financial statement users and others have expressed concerns that the current disclosure requirements for derivative instruments and certain guarantees do not adequately address the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of credit derivatives and certain guarantees. This FSP amends FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities",to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. This FSP also amends FASB Interpretation No. 45, "Guaranto r's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ", to require an additional disclosure about the current status of the payment/performance risk of a guarantee. Further, this FSP clarifies the Board's intent about the effective date of FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities". The Company is in the process of evaluating the impact of the adoption of FAS 133-1 and FIN 45-4 on its consolidated financial statements but believes the adoption will not have a material effect on itsresults of operations or financial position.

In October 2008, the FASB issued FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active." This FASB Staff Position (FSP) clarifies the application of FASB Statement No. 157, "Fair Value Measurements", in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP shall be effective upon issuance, including prior periods for which financial statements have not been issued. We have evaluated the new statement and have determined that it willdoes not have a significant impact on the determination or reporting of our financia l results.


In June 2008, the FASB issued EITF 07-5,Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock, or EITF 07-5. EITF 07-5 provides guidance in assessing whether an equity-linked financial instrument (or embedded feature) is indexed to an entity's own stock for purposes of determining whether the appropriate accounting treatment falls under the scope of SFAS 133, "Accounting For Derivative Instruments and Hedging Activities" and/or EITF 00-19, "Accounting For Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock". EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and early application is not permitted. We have evaluated the new statement and have determined that it does not have a significant impact on the determination or reporting of our financial results.


4

4..

Inventories


Inventories are valued at the lower of cost, using the first-in, first-out ("FIFO"(“FIFO”) method, or market. Inventories at September 30, 2008March 31, 2009 and December 31, 20072008 consist of:


 

March 31, 2009

 

December 31, 2008

 

(amounts in thousands)

Raw materials

 

$   775

 

 

 

$   537

 

Work in progress

 

26

 

 

 

1

 

Finished goods

 

27

 

 

 

24

 

Total

 

$   828

 

 

 

$   562

 


5.

Stock-Based Compensation


Under the 1998 Directors Stock Plan, 600,000 shares of the Company’s common stock are authorized under the plan and reserved for issuance to non-employee directors, in lieu of payment of directors’ fees in cash. The Company issued 16,305 shares in April 2009 as consideration for directors’ fees for the first quarter of 2009. Directors’ fees for the first quarter of 2009 were accrued on the Company’s financial statements as of March 31, 2009. The Company issued 15,929 shares in March 2009 as consideration for directors’ fees for 2008. Directors’ fees for 2008 were accrued on the Company’s financial statements as of December 31, 2008.


The 1999 Stock Incentive Plan (“1999 Plan”) replaced all previously authorized stock option plans, and no additional options may be granted under those plans. Under the 1999 Plan, options or stock awards may be granted to all of the Company's employees, officers, directors, consultants and advisors to purchase a maximum of 2,500,000 shares of common stock. In May 2007, the Company’s stockholders approved an increase in the maximum amount of shares to be granted by 700,000, for a total of 3,200,000 shares available for grant. However, pursuant to the terms of the 1999 Plan, no awards may be granted after March 13, 2009. A total of 2,392,500 options, having a maximum term of ten years, have been granted at 100% of the fair market value of the Company's common stock at the time of grant. Options outstanding under the 1999 Plan are generally exercisable in cumulative increments over four years commencing one year from date of grant.


The 1999 Director Stock Option Plan (the “Director Plan”) provides for the grant of stock options to non-employee directors of the Company at an exercise price equal to the fair market value per share on the date of the grant. An aggregate of 1,675,000 shares have been approved and authorized for issuance pursuant to this plan. In May 2007, an additional 300,000 shares were approved for issuance under this plan, bringing the total to 1,975,000 available for issue under this plan. A total of 1,674,798 options, have been granted to non-employee directors through March 31, 2009. The options granted under the Director Plan vest in full one year after their respective grant dates and have a maximum term of ten years.



10




The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing formula that uses assumptions noted in the following table. Expected volatilities and risk-free interest rates are based upon the expected life of the grant. The interest rates used are the U.S. Treasury yield curve in effect at the time of the grant.


For the three months ended
March 31, 2009

Expected volatility

67.44%

Expected term (in years)

5.5 years

Risk-free rate

1.71%

Expected dividends

0%

September 30,
2008

December 31,
2007

  


 


  

(amounts in thousands)

 

Raw materials

$

542

 

$

258

 

Work in progress

 

4

  

8

 

Finished goods

 

98

  

110

 


 


 

Total

$

644

 

$

376

 


 


    

5.

Stock-Based Compensation

  
 

Stock Incentive Plans

  
 

The Company currently has a stock-based compensation plan for its Board of Directors, the 1999 Director Stock Option Plan (the "Director Plan"). In accordance with the Director Plan, each non-employee member of the Board is granted an option once a year as compensation for services rendered to the Company for that year. The options vest over a 12-month period. Each Director receives annuallyan option to purchase 15,000 shares with an additionalannual grant to each committee Chairman.

<PAGE>  8

 

The Company also provides each director with additional sharesof our common stock as compensation for each board meeting they attend throughout the year in accordance with the 1998 Director Stock Plan.

  
 

The Company also has a stock-based incentive plan in place for its eligible employees, officers, consultants, independent advisors and non-employee directors, the 1999 Stock Incentive Plan (the "Plan"). The Plan permits the grant of awards of share options and restricted shares for up to 3,200,000 shares ofthe Company's common stock.There are no restricted shareawardsoutstanding under the Plan and the outstanding options are summarized in the table below. Option awards are granted with an exercise price equal to or greater than the closing sale price per share of the Company's common stock on AMEX on the option grant date. Although the terms of any award vary, option awards generally vest based upon four years of continuous service and have a 10-year contractual life.

  
 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing formula that uses assumptions noted in the following table. Expected volatilities and risk-free interest rates are based upon the expected life of the grant. The interest rates used are the U.S. Treasury yield curve in effect at the time of the grant.

  

For the nine months ended
September 30, 2008

  


   
 

Expected volatility

69.70%

 

Expected term (in years)

5.5 - 5.75 years

 

Risk-free rate

2.82 - 3.33%

 

Expected dividends

0%

   
 

A summary of option activity under the Plan and the Director Plan as of September 30, 2008 and changes during the period are presented below:

  

Number of
Options

Weighted
Average
Exercise Price

  


 


 

Outstanding as of 1/1/2008

 

2,274,548

  

$1.42

 

Issued

 

570,000

  

$1.66

 

Exercised

 

53,016

  

$1.41

 

Forfeited

 

-

  

-

 

Expired

 

11,000

  

$2.00

  


  


 

Outstanding as of 9/30/2008

 

2,780,532

  

$1.47

  


  


 

Exercisable as of 9/30/2008

 

2,030,532

  

$1.47

  


  


       
 

Based upon application of the Black-Scholes option-pricing formula described above, the weighted-average grant-date fair value of options granted during the nine months ended September 30, 2008 was $1.04.

  
 

The following table summarizes information regarding options outstanding and exercisable at September 30, 2008:

  
 

Outstanding:

  

Range of Exercise Prices

Stock Options
Outstanding

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual Life

 


   


 


 


 

$0.50

 

$1.00

 

303,250

 

$0.73

 

5.61

 

$1.01

 

$2.00

 

2,065,282

 

$1.41

 

6.51

 

$2.01

 

$3.00

 

412,000

 

$2.31

 

3.94

     


 


 


 

Total

   

2,780,532

 

$1.47

 

6.03

     


 


 


<PAGE>  9

 

Exercisable:

  

Range of Exercise Prices

Stock
Options
Exercisable

Weighted
Average
Exercise Price

 


   


 


  
 

$0.50

 

$1.00

 

303,250

 

$0.73

  
 

$1.01

 

$2.00

 

1,315,282

 

$1.37

  
 

$2.01

 

$3.00

 

412,000

 

$2.31

  
     


 


  
 

Total

   

2,030,532

 

$1.47

  
     


 


  
          
 

As of September 30, 2008, the intrinsic value of the options outstanding is $400,773 and the intrinsic value of the options exercisable is $328,273. The intrinsic value of the options exercised during the nine months ended September 30, 2008 was $32,000. As of September 30, 2008, there was $414,000 of total unrecognized compensation cost that will be recognized through December 2009 related to non-vested share-based compensation arrangements granted under the Plans.

  
 

As part of the Separation Agreement dated September 16, 2008 with the former Vice President of Finance, the Company extended the time period for exercising options for an additional 90 days. Because of this modification, the Company recorded incremental compensation of $5,300.

  

6.

Income Taxes

  
 

Effective January 1, 2007, the Company adopted Financial Interpretation ("FIN") No. 48,Accounting for Uncertainty in Income Taxes--An Interpretation of FASB Statement No. 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than fifty percent likely of being realized upon ultimate settlement. The interpretation also provid es guidance on derecognition, classification, interest and penalties, and other matters. The adoption did not have an effect on the Company's consolidated financial statements.

  
 

As a result of the Company's history of continuing tax losses, the Company has not paid income taxes and has recorded a full valuation allowance against its net deferred tax asset. The Company has not recorded a liability for unrecognized tax benefits prior to adoption of FIN 48 and there was no adjustment from the implementation. There continues to be no liability related to unrecognized tax benefits at September 30, 2008 and no significant changes are expected in the next twelve months. The tax years 2003-2007 remain open to examination by the major taxing jurisdictions to which the Company is subject.

  
 

There was no accrued interest related to unrecognized tax benefits at September 30, 2008.

  

7.

License Fee

  
 

On December 12, 2005, the Company extended its license agreement for an additional ten years with Novavax, Inc. for $1,000,000. This extension entitles the Company to exclusive use of the Novasome® lipid vesicle encapsulation and certain other technologies ("Microencapsulation Technologies" or collectively the "Technologies") in the fields of (i) animal pharmaceuticals, biologicals and other animal health products; (ii) foods, food applications, nutrients and flavorings; (iii) cosmetics, consumer products and dermatological over-the-counter and prescription products (excluding certain topically delivered hormones); (iv) fragrances; and (v) chemicals, including herbicides, insecticides, pesticides, paints and coatings, photographic chemicals and other specialty chemicals, and the processes for making the same (collectively, the "IGI Field")

<PAGE>  10


thruA summary of option activity under the 1999 Plan and the Director Plan as of March 31, 2009 and changes during the period are presented below:


 

 

 

Number of
Options

 

Weighted
Average
Exercise Price

 

 

Outstanding as of 1/1/2009

2,705,532 

 

$1.43

 

 

Issued

 

 

85,000 

 

$0.59

 

 

Exercised

 

 

2,000 

 

$0.50

 

 

Forfeited

 

 

 

-

 

 

Expired

 

 

(100,250)

 

$2.00

 

 

Outstanding as of 3/31/2009

2,688,282 

 

$1.38

 

 

 

 

 

 

 

 

 

 

Exercisable as of 3/31/2009

2,303,282 

  

$1.37

 

 


Based upon application of the Black-Scholes option-pricing formula described above, the weighted-average grant-date fair value of options granted during the three months ended March 31, 2009 was $0.33.


The following table summarizes information regarding options outstanding and exercisable at March 31, 2009:


Outstanding:

 

 

 

 

 

Range of Exercise Prices

 

Stock Options
Outstanding

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual Life

$0.50

$1.00

 

386,250

 

$0.70

 

6.16

$1.01

$2.00

 

1,995,032

 

$1.37

 

6.47

$2.01

$3.00

 

307,000

 

$2.26

 

4.73

Total

2,688,282

 

$1.38

 

6.23


Exercisable:

 

 

 

 

 

Range of Exercise Prices

 

Stock
Options
Exercisable

 

Weighted
Average
Exercise Price

 

 

 

 

 

 

 

 

$0.50

$1.00

 

 301,250

 

$0.74

 

$1.01

$2.00

 

 1,695,032

 

$1.32

 

$2.01

$3.00

 

 307,000

 

$2.26

 

Total

 

 

2,303,282

 

$1.37

 




11




As of March 31, 2009, the intrinsic value of the options outstanding is $14,710 and the intrinsic value of the options exercisable is $4,910. The intrinsic value of the options exercised during the three months ended March 31, 2009 was $380. As of March 31, 2009, there was approximately $231,000 of total unrecognized compensation cost that will be recognized through December 2009 related to non-vested share-based compensation arrangements granted under the Plans.


6.

Income Taxes


As a result of the Company’s history of continuing tax losses, the Company has not paid income taxes and has recorded a full valuation allowance against its net deferred tax asset. The Company has not recorded a liability for unrecognized tax benefits at March 31, 2009 and no significant changes are expected in the next twelve months. The tax years 2005-2008 remain open to examination by the major taxing jurisdictions to which th e Company is subject.


There was no accrued interest related to unrecognized tax benefits at March 31, 2009.


7.

License Fee


On December 12, 2005, the Company extended its license agreement for an additional ten years with Novavax, Inc. for $1,000,000. This extension entitles the Company to exclusive use of the Novasome® lipid vesicle encapsulation and certain other technologies (each a “Microencapsulation Technology”, and collectively, the “Technologies”) in the fields of (i) animal pharmaceuticals, biologicals and other animal health products; (ii) foods, food applications, nutrients and flavorings; (iii) cosmetics, consumer products and dermatological over-the-counter and prescription products (excluding certain topically delivered hormones); (iv) fragrances; and (v) chemicals, including herbicides, insecticides, pesticides, paints and coatings, photographic chemicals and other specialty chemicals, and the processes for making the same (collectively, the “IGI Field”) through 2015. This payment is being amortized ratably over the ten-year period. The Company recorded amortization expense of $75,000 $25,000 related to this agreement for each of the nine-monththree month periods ended September 30, 2008March 31, 2009 and 2007.2008.


8.

Note Payable


On January 31, 2007, the CompanyenteredCompanyentered into a revolving $1,000,000 secured line of credit agreement ("(“Credit Agreement"Agreement”) with Pinnacle Mountain Partners, LLC, ("Pinnacle"(“Pinnacle”), a company owned by Dr. and Mrs. Hager, significant shareholdersstockholders of the Company, and in the case of Mrs. Hager, a director of the Company ,for a term of eighteen months. Loans under the Credit Agreement bearbore interest at prime (5.00%(5.25% at September 30, 2008 and7.75% at September 30, 2007)March 31, 2008), plus 1.5% and arewere collateralized by assets of the Company (other than real property). All accrued and unpaid interest iswas payable monthly in arrears on the first of each month. The Company borrowed $500,000 against this line of credit and has repaid $250,000 of that balance as of September 30,at March 31, 2008. The interest expense related to the borrowing under this note payableCredit Agreement was $19,000 and $51,000$9,000 for the ninethree months ended September 30, 2008 and 2007, respectively.March 31, 2008.


On July 29, 2008, the Company signed an extension agreement related to the secured line of credit with Pinnacle.Pinnacle (the “Extension Agreement”). The extension provides for a revolvingExtension Agreement reduced the maximum loan amount under the Credit Agreement from $1,000,000 to $500,000 secured line of credit for a term of six months.and extended the maturity date from July 31, 2008 to January 31, 2009. As in the original agreement,Credit Agreement, loans under the extension agreement bearExtension Agreement bore interest at prime plus 1.5% and were collateralized by the assets of the Company (other than real property).


On January 26, 2009, the Company signed the Amended and Restated Credit Agreement, which amended and restated the Credit Agreement (as amended by the Extension Agreement). This amendment and restatement extended the maturity date of the $500,000 maximum loan amount from January 31, 2009 to July 31, 2009, with interest at 8.5% (rather than prime plus 1.5%). As in the original Credit Agreement, loans under this amendment are collateralized by the assets of the Company (other than real property). The Company has borrowed $500,000 under this Amended and Restated Credit Agreement as of March 31, 2009 and incurred associated interest expense of $8,825 for the three months ended March 31, 2009.


On March 13, 2009, the Company completed a $6,000,000 private placement, resulting in net proceeds of approximately $5,279,000, with certain investment funds affiliated with Signet Healthcare Partners, G.P. (the “Offering”) as more fully described in Footnote 11 below. As a condition to the consummation of the Offering, on March 13, 2009, the Company and Pinnacle entered into an amendment to the Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) pursuant to which the parties agreed to change the final payment date of the amounts borrowed under the agreement from July 31, 2009 to instead provide that 50% of the amount of all loans and advances made by Pinnacle under the agreement will become due and payable on July 31, 2010 and the remaining outstanding loans and advances , together with interest thereon, will become due and payable on July 31, 2011.



12




In addition, as a condition to the consummation of the Offering, the Company and Pinnacle entered into a note conversion agreement dated March 13, 2009, pursuant to which Pinnacle agreed to convert the principal amount outstanding under the Second Amended and Restated Credit Agreement into shares of the Company’s common stock at a conversion rate of $0.41 per share of common stock (the “conversion shares”) upon receipt of stockholder approval by the Company of such conversion. Upon receipt of the conversion shares, the obligations and liabilities of the Company to repay the principal amount of the note will be deemed satisfied and paid in full. At the Company’s 2009 annual meeting of stockholders held on May 15, 2009, the Company’s Stockholders approved the Note Conversion. Immediately upon stockholder approval, the $500,000 principal amount outstanding under the Pinnacle Note Payable was converted into 1,219,512 shares of the Company’s c ommon stock. For additional information relating to the Offering, see Footnote 11 below.


9.

Related Party Transactions


The Company signed an agreement with Pharmachem on August 22, 2007 with Pharmachem, a significant shareholder,stockholder, to develop Novasome® based products for Pharmachem to market to third party customers. The agreement was completed on August 21, 2008, and all the development work for Pharmachem has ended.


For the ninethree month period ended September 30,March 31, 2008, the Company recognized $133,000$63,000 of research and development revenues from Pharmachem and had a $4,600$56,000 accounts receivable balance at September 30,March 31, 2008 that will bewas received in the normal course of business. For the nine month period ended September 30, 2007, the Company recognized $97,000 of research and development revenues from Pharmachem and had a $51,500 account receivable balance at September 30, 2007.


For a description of the Company'sCompany’s Credit Agreement with Pinnacle, a related party, see footnoteFootnote 8 above. ..


10.

Stock Warrants


In connection with the Private Placementprivate placement transaction with Pharmachem dated February 5, 2007, the Company issued a warrant to purchase 150,000 common shares at $1.00 per share to Landmark Financial which expiresexpired on March 7, 2009 as a commission on this transaction. During the quarter ended June 30, 2008, Landmark Financial Corporation exercised a portion of the warrant to acquire 25,000 shares of common stock.

<PAGE>  11


See Footnote 11 below for a discussion of additional warrants issued by the Company.


11.

Convertible Preferred Stock and Convertible Promissory Notes


On March 13, 2009, the Company completed a $6,000,000 private placement with certain investment funds affiliated with Signet Healthcare Partners, G.P. (the “Offering”). As part of the Offering, the Company issued 202.9 shares of Series B-1 Convertible Preferred Stock (“Series B Preferred Stock”), $4,782,600 in Secured Convertible Promissory Notes (“Promissory Notes”), a Preferred Stock Purchase Warrant to purchase 797.1 shares of non-voting Series B-2 Preferred Stock (“Preferred Stock Warrant”), a Common Stock Purchase Warrant to purchase 350,000 shares of common stock (“Common Stock Warrant”) and amended their line of credit with Pinnacle. In connection with the Offering, the Company incurred placement and legal fees of approximately $721,000, resulting in net proceeds of $5,279,000. These fees were recorded as debt issuance costs in the amount of $577,000 and paid-in capital in the amount of $144,000.


The Series B Preferred Stock has a par value of $0.01 per share and the holders are entitled to quarterly dividends at an annual rate of 5%, when and if declared by the Board of Directors. Furthermore, each share of the Series B Preferred Stock is convertible into 14,634 shares of common stock for an implied common stock conversion price of $0.41 per share, subject to certain adjustments and any accrued and unpaid dividends. At the time of issuance, the market price of the common stock into which the Series B Preferred Stock is convertible was greater than the conversion price. The embedded beneficial conversion feature is being accounted for in accordance with Emerging Issue Task Force (“EITF”) Issue No. 98-5Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios(“EITF 98-5”) and EITF Issue No. 00-27Application of Issue No. 98-5 to Certain Convertible Instrum ents. Accordingly, the beneficial conversion feature on the Series B-1 Preferred Stock is approximately $505,000, which represents the amount by which the estimated fair value of the common stock issuable upon conversion exceed the proceeds from such issuance and was treated as a deemed dividend on the date of the Offering.



13




The Promissory Note bears interest at an annual rate of 5% and matures on July 31, 2009. On the date of issuance, the Promissory Note had a fair value of approximately $4,706,000, resulting in a debt discount of $77,000. Furthermore, the Company has entered into Guaranty and Security Agreements to guarantee repayment of the Promissory Note upon maturity. The note is collateralized by the assets of the Company. However, upon approval by the Company’s stockholders of the Offering or an earlier liquidation event of the Company, the Promissory Note, unamortized discount, and any accrued interest will automatically convert into Series B-1 Preferred Stock for $6,000 per share and the Series B-2 Preferred Stock Warrant will become null and void. The beneficial conversion feature of the Promissory Note is approximately $1,983,000 which is recorded as a deemed dividend from March 14 through May 15, 2009. The dividend recorded through March 31, 2009 is approx imately $465,000, and the remaining dividend of $1,518,000 will be recorded in the second quarter of 2009. The value of the Preferred Stock Warrant was nominal. Under applicable NYSE Amex rules, the Offering required stockholder approval, as more fully described in Footnote 1 above. At the Company’s 2009 annual meeting of stockholders held on May 15, 2009, the Company’s stockholders approved the Offering. Immediately upon stockholder approval, the $4,782,600 aggregate principal amount of Promissory Notes issued in the Offering by the Company to the investment funds affiliated with Signet Healthcare Partners, G.P., together with accrued and unpaid interest, were converted into an aggregate of 803.979 shares of the Company’s Series B-1 Preferred Stock and the Warrants issued to these investment funds were terminated.


The Company granted its placement agent for the Offering a Common Stock Warrant to purchase 350,000 shares of common stock for $0.41 per share. Until stockholder approval of the Offering, this Common Stock Warrant was only exercisable for no more than 88,550 shares. At the Company’s 2009 annual meeting of stockholders held on May 15, 2009, the Company’s stockholders approved the Offering. This warrant expires on March 13, 2012. The fair value of the warrant of approximately $102,000 was determined using the Black Scholes model. The factors used in the calculation are as follows: expected volatility of 66.8%, expected term of 3 years and risk-free interest rate of 1.36%. Expected volatility and risk-free interest rates are based upon the expected life of the warrant. The interest rates used are the yield of a 3-year U.S. Treasury Note as of March 13, 2009. Of this amount, $82,000 was deemed to be attributable to the issuance of debt and was capi talized as debt issuance costs.


The Company and Pinnacle entered into an amendment to the Amended and Restated Credit Agreement. Pinnacle agreed to change the terms of repayment such that 50% of the amount borrowed under the amended Credit Agreement (the “Note Payable”), $500,000 as of December 31, 2008 (see Footnote 8 above) will be payable on July 31, 2010 and the remaining balance will be payable on July 31, 2011. Furthermore, the Company and Pinnacle entered into a Note Conversion Agreement for which Pinnacle agreed to automatically convert the principal amount due under the Note Payable into shares of the Company’s Common Stock at a conversion rate of $0.41 per share upon stockholder approval of the Conversion Agreement. The beneficial conversion feature of the Note Payable of approximately $207,000 was recorded as a debt discount. The fair value of the Note Payable, as modified, was approximately $460,000, resulting in a debt discount of $40,000. At the Company 6;s 2009 annual meeting of stockholders held on May 15, 2009, the Company’s stockholders approved the Note Conversion. Immediately upon stockholder approval, the $500,000 principal amount outstanding under the Note Payable was converted into 1,219,512 shares of the Company’s common stock.


Debt discounts and debt issuance costs are amortized using the effective interest method.


As part of the Offering, the Company entered into an intercreditor agreement with Pinnacle and the Promissory Noteholders. As part of the intercreditor agreement, the Promissory Noteholders agreed to certain terms setting forth debt repayment, security positions and rights. At the Company’s 2009 annual meeting of stockholders held on May 15, 2009, the Company’s stockholders approved the Offering. Immediately upon stockholder approval, the Promissory Notes were converted into shares of the Company’s Series B-1 Preferred Stock. The intercreditor agreement was terminated upon the conversion of the Promissory Notes.




14




ITEM 2.   Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations


This " Management ' s Discussion and Analysis of Financial Condition and Results of Operations

This "Management's Discussion and Analysis of Financial Condition and Results of Operations" " section and other sections of this Quarterly Report on Form 10Q10 Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, that are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates and on management's beliefs and assumptions. In addition, other written or oral statements, which constitute forward-looking statements, may be made by or on behalf of the Company. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on current expectations of management and are not gua ranteesguarantees of future performance, and involve certain risks, uncertainties and assumptions, which are difficult to predict. These risks and uncertainties include, without limitation, competitive factors, outsourcing trends in the pharmaceutical industry, the general economic conditions in the markets in which the Company operates, levels of industry research and development spending, the Company'sCompany’s ability to continue to attract and retain qualified personnel, the fixed price nature of product development agreements or the loss of customers and other factors described in the Company'sCompany’ s filings with the Securities and Exchange Commission, including the "Risk Factors"“Risk Factors” section as set forth below in this Quarterly Report on Form 10-Q. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwis e.otherwise ..


Company Overview


On May 7, 2008, the stockholders of IGI, Inc. approved the name change of the Company from IGI, Inc. to IGI Laboratories, Inc. IGI is engaged in the development, manufacturing, filling and packaging of topical, semi solid and liquid products for pharmaceutical, cosmeceutical and cosmetic companies primarily using its licensed Novasome® encapsulation technology. The Company believes that the Novasome based products developed and manufactured by it are unique in the industry and give its customers a competitive advantage in the market place.


IGI's mission is to be a premier provider of topical liquid and semi-solid products using anits encapsulation technology. Over the last two fiscal years the Company has made four major changes to better pursue its mission:


·

the Company divested the metal plating business to focus on its core business of topical skin care/treatment products;

·

the Company acquired filling and packaging equipment that broaden and enhance product and service offerings;

·

the Company instituted a policy of charging a fee for its Product Development Services; and

·

the Company initiated the development of several prescription skin treatment products with possible commercialization in 2011.


The Company'sCompany’s business plan includes the continued upgrading of its manufacturing capabilities and expanding its production services. Theservices.T he Company will also continue to market its other capabilities to customers, such as product development services and analytical services, all togethereither as a comprehensive package or separately.on an individual basis. In addition to this, the Company intends to explore ways to expand its intellectual property portfolio and increase its R&D product pipeline.


On May 6, 2008, the Company was notified by AMEXNYSE Amex that it was belowfailing to satisfy certain of the AMEXNYSE Amex’s continued listing standards. Specifically, the Company was required to reflect income from continuing operations and/or net income in one of its five most recent fiscal years and a minimum of $6 million in stockholders'stockholders’ equity to remain listed on the exchange. The Company had net income from continuing operations in its 2002 fiscal year, but had net losses and losses from continuing operations in each of its 2003, 2004, 2005, 2006 and 2007last six fiscal years. The Company's stockholders'Company’s stockholders’ equity at September 30,March 31, 2009 was $3.6 million.


On June 8, 2008, was $3.4 million.

the Company submitted a plan advising NYSE Amex of the actions that it would take to bring the Company into compliance with the continued listing standards. On July 15, 2008, AMEXNYSE Amex notified the Company that it accepted the Company'sCompany’s plan of compliance and granted the Company an extension until May 6, 2009 to regain compliance with the continued listing standards described above. The Company will be subject to periodic review by AMEXNYSE Amex staff during the extension period. Failure to make progress consistent with the plan or to regain compliance with the continued listing standards by the end of the extension period could result in the Company being delisted from AMEX.NYSE Amex.

<PAGE>  12



15




On March 13, 2009, the Company completed a $6,000,000 private placement, resulting in net proceeds of approximately $5,279,000, with certain investment funds affiliated with Signet Healthcare Partners, G.P. (the “Offering”) as more fully described in Footnote 11 to the Company’s Consolidated Financial Statements. On May 4, 2009, NYSE Amex notified the Company that it had determined that the Company has made a reasonable demonstration of its ability to regain compliance with Sections 1003(a)(ii) and (iii) of the Company Guide in accordance with Section 1009 and therefore granted the Company an extension from May 6, 2009 until May 31, 2009 to regain compliance with these continued listing standards.


Results of Operations


Three months ended March 31, 2009 compared to March 31, 2008


Results of Operations

 

Three months ended September 30, 2008 compared to September 30, 2007

 

The Company had a net loss attributable to common stockholders of $568,000, or $0.04 per share, for the three months ended September 30, 2008, compared to a net loss of $105,000, or $0.01 per share, in the comparable period for 2007, which resulted from the following:

 

Revenues (in thousands):

 
 

Components of Revenue:

 

2008

 

2007

 

$ Change

 

% Change

   


 


 


 


 

Product sales

 

$770

 

$   520

 

$ 250 

 

48 %

 

Research and development income

 

116

 

329

 

(213)

 

(65)%

 

Licensing and royalty income

 

87

 

156

 

(69)

 

(44)%

   


 


 


 


 

      Total Revenues

 

$973

 

$1,005

 

$  (32)

 

(3)%

   


 


 


 


The increase in product salesCompany had a net loss attributable to common stockholders of $1,902,000, or $0.13 per share, for the three months ended September 30,March 31, 2009, compared to net income of $40,000, or $0.00 per share, in the comparable period for 2008, which resulted from the following:


Revenues (in thousands):


Components of Revenue:

2009

2008

$ Change

% Change

Product sales

$    505

$    1,300

$    (795)

(61)%

Research and development income

1

65

(64)

(98)%

Licensing and royalty income

88

135

(47)

(35)%

    Total Revenues

$    594

$    1,500

$    (906)

(60)%


The decrease in product sales is due to sales to newpoor economic conditions resulting in a decrease in orders from our existing customers for the three months ended March 31, 2009. A portion of the decrease in revenue was offset by reduced salesrevenue from some of the existingnew customers. Research and development income will not be consistent and will vary, from quarter to quarter, depending on the required timeline of each development project.project; the decrease in research and development income during the period ended March 31, 2009 as compared to the same period in 2008 is attributable to this variance. Licensing and royalty income decreased as a result of a decrease in sales of royaltyroyalty- bearing products.


Costs and expenses (in thousands):

   

2008

 

2007

 

$ Change

 

% Change

   


 


 


 


 

Cost of sales

 

$     732

 

$     494

 

$    238

 

48%

 

Selling, general and administrative

 

672

 

469

 

203

 

43%

 

Product development and research

 

136

 

135

 

1

 

1%

   


 


 


 


 

      Totals costs and expenditures

 

$  1,540

 

$  1,098

 

$    442

 

40%

   


 


 


 


          


 

2009

2008

$ Change

% Change

Cost of sales

$     600

$     681

$    (81)

(12)%

Selling, general and administrative

648

663

(15)

(2)%

Product development and research

119

113

5%

    Totals costs and expenditures

$  1,367

$  1,457

$    (90)

(6)%


Cost of sales increaseddecreased for the three months ended September 30, 2008March 31, 2009 as a result of the increasedecrease in product sales. Cost of sales as a percent of product sales and research and development income was 83% for the three month period ended September 30, 2008 compared to 58% for the comparable period in 2007. The increase in cost of sales percentage is due to a lower gross margin related to sales to a new customer in the three months ended September 30, 2008.

Selling, general and administrative expenses for the period ended September 30, 2008 increased as a result of higher stock based compensation expense of $70,000 from the issuance of stock options to our President and Chief Executive Officer, severance of $51,000 for our former Vice President of Finance as per her separation agreement, consulting fees of $21,000 and higher employer match contribution in our 401k plan of $6,000 due to a plan change.

Interest (Expense) Income (in thousands):

   

2008

 

2007

 

$ Change

 

% Change

   


 


 


 


 

Interest Expense

 

$     (4)

 

$   (13)

 

$    9

 

69%

 

Interest Income

 

$      1 

 

$      1 

 

$    -

 

-%

          

Interest expense decreased for the three months ended September 30, 2008 as a result of a decrease in the Company's short-term notes payable principal balance and a reduction in the Company's average interest ratecan vary depending on its short-term notes payable in 2008.

Net loss (in thousands, except per share numbers):

   

2008

 

2007

 

$ Change

 

% Change

   


 


 


 


 

Net loss

 

$  (568)

 

$  (105)

 

$  (463)

 

(441)%

 

Net loss per share

 

(.04)

 

(.01)

 

(.03)

 

(300)%

          

<PAGE>  13

Nine months ended September 30, 2008 compared to September 30, 2007

 

Revenues (in thousands):

 
 

Components of Revenue:

 

2008

 

2007

 

$ Change

 

% Change

   


 


 


 


 

Product sales

 

2,547

 

1,865

 

682 

 

37 %

 

Research and development income

 

244

 

617

 

(373)

 

(60)%

 

Licensing and royalty income

 

364

 

444

 

(80)

 

(18)%

   


 


 


 


 

      Total Revenues

 

3,155

 

2,926

 

229 

 

8 %

   


 


 


 


The increase in product sales relates to the Company's ability to package and fill the products we manufacture for our customer and sales of new products developed by the Company. The higher research and development income for the nine months ended September 30, 2007, related to fees paid to the Company to develop a new product line for a customer which was launched in the first quarter of 2008. The decrease in royalty revenue was related to a decline in royalties from Johnson & Johnson and Estee Lauder in 2008.

Costs and expenses (in thousands):

   

2008

 

2007

 

$ Change

 

% Change

   


 


 


 


 

Cost of sales

 

1,976

 

1,632

 

344

 

21%

 

Selling, general and administrative

 

2,031

 

1,651

 

380

 

23%

 

Product development and research

 

372

 

360

 

12

 

3%

   


 


 


 


 

      Totals costs and expenses

 

4,379

 

3,643

 

736

 

20%

   


 


 


 


          

mix. Cost of sales increased for the nine months ended September 30, 2008 as a result of the increase in product sales. As a percentage of product sales and research and development income, cost of sales was 71% for the nine months ended September 30, 2008 and 66% for the nine months ended September 30, 2007. The higher cost of sales as a percentage of product sales and research and development incomewas 119% for 2008 relatesthe three month period ended March 31, 2009 as compared to 52% for the comparable period in 2008. The increase in costs associated with hiring of additional staff for the product development and analytical services. For the utilization of the surplus manufacturing capacity, the Company also engaged in the manufacturing of lower margin products developed by its new customer, resulting in increased cost of sales as a percentage of product sales.was primarily due to our underutilized manufacturing capacity which lead to unabsorbed overhead expenses.


Selling, general and administrative expenses for the three month period ended September 30, 2008 increasedMarch 31, 2009 decreased as a result of higherlower stock based compensation expense of $155,000$39,000 from the issuance of stock options to our Presidentoffset by an increase in professional fees and Chief Executive Officer, severance agreement of $51,000 for our former Vice President of Finance as per her separation agreement, bad debt expense of $34,000, consultingother fees of $26,000, higher employer match contribution in our 401k plan of $19,000 as a result of changing our 401k plan and higher marketing expense of $16,000. As a percentage of total revenues, selling, general and administrative expenses were 64% and 56% of revenues for the nine months ended September 30, 2008 and 2007, respectively.$32,000.



16




Interest (Expense) Income (in thousands):

   

2008

 

2007

 

$ Change

 

% Change

   


 


 


 


 

Interest Expense

 

(19)

 

(51)

 

32 

 

63 %

 

Interest Income

 

10 

 

12 

 

(2)

 

(17)%

          


 

2009

2008

$ Change

% Change

Interest Expense

$    (160)

$    (10)

$    (150)

(1500)%

Interest Income

$         1 

$       7 

$        (6)

(86)%


Interest expense increased for the three months ended March 31, 2009 as compared to the same period in 2008 due to approximately $151,000 of accrued interest and amortization of debt discount and debt issuance costs related to the convertible notes payable issued in connection with the Offering (see Footnote 11 to the Company’s Consolidated Financial Statements) that were included in interest expense in 2009. Interest income decreased for the ninethree months ended September 30, 2008March 31, 2009 as a result of a decrease in the Company's short-term notes payable principal balance and a reduction in the Company's average interest rate on its short-term notes payable in 2008. Interest income is lower forcompared to the same period as a result ofin 2008 due to lower average cash balances.balances and interest rates in 2009.


OtherNet (loss) income attributable to common stockholders (in thousands, except per share numbers):

   

2008

 

2007

 

$ Change

 

% Change

   


 


 


 


 

Other income

 

7

 

64

 

(57)

 

(89)%

          

<PAGE>  14


 

2009

2008

$ Change

 

Net (loss) income attributable to common stockholders

$    (1,902)

$    40

$    (1,942)

 

Net (loss) income per share

(.13)

.00

(.13)

 

Included

Liquidity and Capital Resources


The Company's operating activities used $825,000 of cash during the three months ended March 31, 2009 compared to $58,000 used in other incomethe comparable period of 2008.The use of cash for the ninethree months ended September 30, 2007March 31, 2008 is $58,000 of insurance settlement funds received by the Company assubstantially a result of the employee theft claim submitted earliernet loss for the period.


The Company’s investing activities used $145,000 of cash in 2007.the three months ended March 31, 2009 compared to $6,000 of cash used in investing activities in the first three months of 2008. The funds receivedused for the period ending March 31, 2009 were netfor additional equipment and improvements for the packaging and filling lines.


The Company's financing activities provided $5,280,000 of cash in the three months ended March 31, 2009 compared to $247,000 used in the three months ended March 31, 2008. The cash provided for the three month period ended March 31, 2009 is mainly from the proceeds of the Convertible Preferred Stock and the Note Payable as more fully described in Footnote 11 to the Company’s Consolidated Financial Statements. The cash used for the period ended March 31, 2008 represents a $25,000 deductiblepay down of the note payable balance offset by proceeds from the exercise of common stock options.


The Company’s principal sources of liquidity are cash and cash equivalents of approximately $4,481,000 at March 31, 2009 and future cash from operations. The Company had working capital of $253,000 at March 31, 2009.


At the Company’s 2009 annual meeting of stockholders held on May 15, 2009, the Company’s stockholders approved the Offering and Note Conversion. Immediately upon stockholder approval, the $4,782,600 aggregate principal amount of promissory notes issued in the Offering by the Company hasto the investment funds affiliated with Signet Healthcare Partners, G.P., together with accrued and unpaid interest, were converted into an aggregate of 803.979 shares of the Company’s Series B-1 Preferred Stock and the warrants to purchase shares of the Company’s Series B-2 Preferred Stock issued to these investment funds were terminated. Additionally, the $500,000 principal amount outstanding under the Pinnacle line of credit was converted into 1,219,512 shares of the Company’s common stock.


We believe that our operating cash flow along with our existing capital resources will be sufficient to support our current business plan through May 2010. The Company may require additional funding. This funding will depend, in part, on its insurance policy.the timing and structure of potential business arrangements. If necessary, we may continue to seek to raise additional capital through the sale of our equity. We may accomplish this via a strategic alliance with a third party. In addition, there may be additional acquisition and growth opportunities that may require external financing. However, the trading price of our stock, a downturn in the U.S. equity and debt markets and the negative economic trends in general could make it more difficult to obtain financing through the issuance of equity securities or otherwise. There can be no assurance that such financing will be available on terms acceptable to the Company, or at all.

Net loss (in thousands, except per share numbers):

   

2008

 

2007

 

$ Change

 

% Change

   


 


 


 


 

Net loss

 

(1,226)

 

(687)

 

(539)

 

(78)%

 

Net loss per share

 

(.08)

 

(.05)

 

(.03)

 

(60)%

          

Liquidity and Capital Resources

 

The Company's operating activities used $448,000 of cash during the nine months ended September 30, 2008 compared to $924,000 used in the comparable period of 2007. The use of cash for the nine months ended September 30, 2008 is substantially a result of the net loss and increase in inventory offset by the collection of royalties from Manhattan Pharmaceuticals. The use of cash in the comparable period of 2007 was for the payments of accounts payable, increase in accounts receivable due to higher sales, and the net loss.

 

The Company's investing activities used $107,000 of cash in the nine months ended September 30, 2008 compared to $92,000 of cash provided by investing activities in the first nine months of 2007. The funds used for the period ending September 30, 2008 were for additional equipment and improvements for the packaging and filling lines. The money provided for the period ending September 30, 2007 represents a deposit of $260,000 on the metal plating equipment sold to UCT less $168,000 in capital expenditures for equipment for the packaging and filling operations in 2007.

 

The Company's financing activities used $152,000 of cash in the nine months ended September 30, 2008 compared to $347,000 provided by financing activities in the nine months ended September 30, 2007. The cash used for the period ended September 30, 2008 represents a pay down of the note payable balance offset by proceeds from the exercise of common stock options and warrants. For the same period in 2007 cash provided represents borrowings from the note payable and proceeds from the issuance of shares pursuant to a private placement of common stock, net of repayments of notes payable.

 

The Company's principal sources of liquidity are cash and cash equivalents of approximately $207,000 at September 30, 2008, future cash from operations, and a $250,000 unused balance on our line of credit from Pinnacle Mountain Partners, LLC; this line of credit will expire on January 31, 2009. The Company had working capital of $318,000 at September 30, 2008.

 

We believe that our operating cash flow along with our existing capital resources will not be sufficient to support our current business plan through November 2009. The Company will require additional funding. This funding will depend, in part, on the timing and structure of potential business arrangements. If necessary, we may continue to seek to raise additional capital through the sale of our equity. We may accomplish this via a strategic alliance with a third party. In addition, there may be additional acquisition and growth opportunities that may require external financing. However, the trading price of our stock, a downturn in the U.S. equity and debt markets and the negative economic trends in general could make it more difficult to obtain financing through the issuance of equity securities or otherwise. There can be no assurance that such financing will be available or available on terms acceptable to the Company.

 

Off Balance Sheet Arrangements

 

The Company does not have any off balance sheet arrangements as of the date of this report.

 

Critical Accounting Policies and Estimates

 

IGI's consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), which require management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates. The following discussion highlights what we believe to be the critical accounting policies and judgments made in the preparation of these consolidated financial statements.

<PAGE>  15

17




Off Balance Sheet Arrangements


The Company does not have any off balance sheet arrangements as of the date of this report.


Critical Accounting Policies and Estimates


IGI’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which require management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates.


Please refer to the Company's 2007 10-KSBCompany’s 2008 10-K for a complete list of all Critical Accounting Policies and Estimates. See also Note 2 ofFootnote 3 to the Company's unaudited financial statements for the three and nine months periods ended September 30, 2008.Company’s Consolidated Financial Statements.

ITEM

3.    Quantitative and Qualitative Disclosures about Market Risk

Current economic conditions may cause a decline in business and consumer spending which could adversely affect our business and financial performance. Our operating results are impacted by the health of the North American economies. Our business and financial performance, including collection of our accounts receivable, realization of inventory and recoverability of assets, may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial market volatility, recession.

If the U.S. economy rapidly contracts or expands, we may have difficulty quickly scaling our operations in response, which may negatively impact our business and financial position.

ITEM 4(T).  Controls and Procedures


(a)

Management's Conclusion Regarding the EffectivenessEvaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed or submitted pursuant toProcedures.Our management, with the Securities Exchange Actparticipation of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that information required to be disclosed by the Company is accumulated and communicated to management, including the Company's President andour Chief Executive Officer and Acting Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2009. Based on that evaluation, our Chief Executive Officer and Acting Principal Financial Officer concluded that, as of March 31, 2009, our disclosure controls and procedures were ineffective, due to allow timely decisions regarding required disclosure.the material weaknesses detailed below in our internal control over financial reporting that have not been fully remediated as of March 31, 2009.


Internal Control over Financial Reporting


Management's Report on Internal Control over Financial Reporting.


Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended. Under the supervision and with the participation of itsour management, including the Company'sour principal executive officer and acting principal financial officer, the Company carried outwe conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of September 30, 2008. Based upon that evaluation, the Company's principal executive officer and acting principal financial officer concluded that, because of the material weaknesses in the Company'sour internal control over financial reporting as described below,based on the Company's disclosure controls and procedures were not effective as ofSeptember 30, 2008. To compensate forframework in Internal Control—Integrated Framework issued by the material weaknesses inCommittee of Sponsoring Organizations of the Company'sTreadway Commission. Our internal control over financial reporting described below,is a process designed to provide reasonable assurance regarding the Company performed additional manual proceduresreliability of financial reporting and analysis and other post-closing procedures in order to prepare the consolidated financial st atements included in this report. As a resultpreparation of these expanded procedures, the Company believes that the consolidated financial statements containedfor external purposes in this report fairly present, in all material respects, the Company's financial condition, results of operations and cash flows for the period covered hereby in conformityaccordance with accounting principles generally accepted accounting principles.

As a resultin the United States of its evaluation, the Company has identified the following material weakness in itsAmerica. Because of their inherent limitations, internal controlcontrols over financial reporting for the period ended September 30, 2008

The Company lacked sufficient personnel who had basic accounting and finance understanding. A lackmay not prevent or detect misstatements. Also, projections of sufficient personnel may prevent the Company from segregating duties within its systemany evaluation of internal control. The inadequate segregation of duties may increaseeffectiveness to future periods are subject to the risk that the Company would not timely detect and resolve an irregularity and report on the resultant impact to the Company's consolidated financial statements and related disclosures.

(b)

Changes to Internal Control Over Financial Reporting

In September 2008, the Company announced that its then Vice President of Finance would no longer be employed by the Company as of October 3, 2008. However, in October 2008, the Company hired an additional qualified accountant to assist with various accounting and finance functions within the organization. The Company believes this new personnel reduces the risk associated with a lack of segregation of duties and thus enhances the Company's system of internal control over financial reporting.

Management believes that the actions described above, when fully implemented will be effective in remediating the specific material weaknesses discussed above.

<PAGE>  16

(c)

Limitations of Effectiveness of Controls

The Company notes that, like other companies, any system of internal controls, however well designed and operated, can provide only reasonable assurance, and not absolute assurance, that the objectives of the internal control system will be met. The design of any control system is based, in part, upon the benefits of the control system relative to its costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of control. In addition, over time, controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. In addition,


Based on our evaluation under the framework inInternal Control—Integrated Framework, management concluded that our internal control over financial reporting was ineffective as of March 31, 2009 due to the following material weaknesses that have not been fully remediated as of March 31, 2009:


Our management has determined that we have a material weakness in our internal control over financial reporting related to an insufficient number of personnel with the appropriate level of experience and technical expertise to appropriately resolve non-routine and complex accounting matters or to evaluate the impact of new and existing accounting pronouncements on our consolidated financial statements while completing the financial statement close process.

We did not maintain appropriate segregation of duties associated with the design controls and use of anypersonnel within the organization. Currently, we do not have sufficient staffing to perform these responsibilities associated with proper segregation of duties.


Until these deficiencies in our internal control systemover financial reporting are remediated, there is based in part upon certain assumptions about the likelihood of future events. Because of the limitations inherenta reasonable possibility that a material misstatement to our annual or interim consolidated financial statements could occur and not be prevented or detected by our internal controls in a cost-effectivetimely manner.



18




In 2008 our efforts to remediate these material weaknesses were hampered by our limited financial resources. We are committed to appropriately addressing these matters in 2009, as follows:


We will reassess our accounting and finance staffing levels to determine and seek the appropriate accounting resources to be added to the team to handle the existing workload, provide extra technical accounting depth and further promote segregation of duties;


We will adopt formal policy and procedure guidelines related to Information Technology practices, covering systems development and change management, security authentication and related measures and operational activities;


We will expand the training and education of our accounting and finance staff members, including Sarbanes-Oxley compliance training, in an effort to improve their effectiveness.


Changes in Internal Control over Financial Reporting


There was no change in our internal control system, misstatements dueover financial reporting during our first quarter that has materially affected, or is reasonably likely to error or fraud may occur and may not be detected.materially affect, our internal control over financial reporting.



19




<PAGE>  17

PART II

OTHER INFORMATION


ITEM 1.  Legal Proceedings


We are involved from time to time in claims which arise in the ordinary course of business. In the opinion of management, we have made adequate provision for potential liabilities, if any, arising from any such matters. However, litigation is inherently unpredictable, and the costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings (whether civil or criminal), settlements, judgementsjudgments and investigations, claims and changes in any such matters, and developments or assertions by or against us relating to intellectual property rights and intellectual property licenses, could have a material adverse effect on our business, financial condition and operating results.


ITEM 1A.  Risk Factors.Factors ..

Our current business and future results may be affected by

Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2008 includes a numberdetailed discussion of risks and uncertainties including thosewhich could adversely affect our future results. Except as set forth below, the risks described below. The risks and uncertainties described below arein our Annual Report on Form 10-K for the year ended December 31, 2008 have not the only risks and uncertainties we face. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could suffer. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements.materially changed.

We face intense competition in the consumer products business.

Our business competes with large, well-financed cosmetic, pharmaceutical and consumer products companies with development and marketing groups that are experienced in the industry and possess far greater resources than those available to us. There is no assurance that our products can compete successfully against our competitors' products or that we can develop and market new products that will be favorably received in the marketplace. In addition, certain of our customers that use our Novasome® lipid vesicles in their products may decide to reduce their purchases from us or shift their business to other technologies.

Rapidly changing technologies and developments by our competitors may make our technologies and products obsolete.

We expect to sublicense our technologies to third parties, which would manufacture and market products incorporating these technologies. However, if our competitors develop new and improved technologies that are superior to our technologies, our technologies could be less acceptable in the marketplace and our business could be harmed.

We will need to raise additional capital that will be required to operate and grow our business, and we may not be able to raise capital on terms acceptable to us or at all.

Operating our business and maintaining our growth efforts will require additional cash outlays and capital expenditures. If cash on hand and cash generated from operations are not sufficient to meet our cash requirements, we will need to seek additional capital, potentially through debt or equity financings, to fund our growth. We cannot assure you that we will be able to raise needed cash on terms acceptable to us or at all. Financings may be on terms that are dilutive or potentially dilutive to our stockholders, and the prices at which new investors would be willing to purchase our securities may be lower than the current price per share of our common stock. The holders of new securities may also have rights, preferences or privileges which are senior to those of existing holders of common stock. If new sources of financing are required, but are insufficient or unavailable, we will be required to modify our growth and operating plans based on available funding, if any, which would harm our ability to grow our business or even stay in business.

We rely on a limited number of customers for a large portion of our revenues.


We depend on a limited number of customers for a large portion of our revenue. For the three months ended September 30,March 31, 2009 and 2008, and 2007, three of our customers accounted for 62% and four of our customers accounted for 71% of our revenue, respectively. For the nine months ended September 30, 200884% and 2007, four of our customers accounted for 58% and two of our customers accounted for 34%86% of our revenue, respectively. The loss of one or more of these customers could have a significant impact on our revenues and harm our business and results of operations.


<PAGE>  18

We face increased financial risk from the inaccurate pricing of our agreements.

Since our product development agreements are often structured as fixed price agreements, we bear the financial risk if we initially under price our agreements or otherwise overrun our cost estimates. Such under pricing or significant cost overruns could have a material adverse effect on our business, results of operations, financial condition, and cash flows.

We are subject to stringent regulatory requirements. Failure to adhere to such requirements could harm our business and results of operations.

In the United States, pharmaceuticals are subject to rigorous Food and Drug Administration (FDA) regulations. Any non-compliance with the regulatory guidelines may necessitate corrective action that may result in additional expenses and use of more of our resources.

We are also subject to regulation under the Occupational Safety and Health Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. Failure to adhere to such regulations could harm our business and results of operations. In addition, our analytical department uses certain hazardous materials and chemicals in limited and controlled quantities. We have implemented safety procedures for handling and disposing of such materials, however, such procedures may not comply with the standards prescribed by federal, state and local regulations. Even if we follow such safety procedures for handling and disposing of hazardous materials and chemicals and such procedures comply with applicable law, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages and any such liability could exceed our resources.

The failure to obtain, maintain or protect patents and other intellectual property could impact our ability to compete effectively.

To compete effectively, we need to develop and maintain a proprietary position with regard to our own technology, products and business. We have obtained or have the use of over 50 patents, either through development by us or entry into license agreements with third parties, and are seeking to develop additional patents. The risks and uncertainties that we face with respect to our patents and other proprietary rights include the following:

the pending patent applications we have filed or may file, or to which we have exclusive rights, may not result in issued patents, or may take longer than we expect to result in issued patents;

changes in U.S. patent laws may adversely affect our ability to obtain or maintain our patent protection;

we may be subject to interference proceedings;

the claims of any patents that are issued may not provide meaningful protection;

we may not be able to develop additional proprietary technologies that are patentable;

the patents licensed or issued to us or our collaborators may not provide a competitive advantage;

other companies may challenge patents licensed or issued to us or our collaborators;

other companies may independently develop similar or alternative technologies, or duplicate our technology;

other companies may design around technologies we have licensed or developed; and

enforcement of patents is complex, uncertain and expensive.

We cannot be certain that patents will be issued as a result of any future pending applications, and we cannot be certain that any of our issued patents or the proprietary rights of third parties whose patents we license, will give us adequate protection from competing products. For example, issued patents may be circumvented or challenged, declared invalid or unenforceable, or narrowed in scope. In addition, since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first to make our inventions or to file patent applications covering those inventions. In the event that another party has also filed a patent application relating to an invention claimed by us, we may be required to participate in an interference proceeding declared by the U.S. Patent and Trademark Office to determine priority of invention, which could result in substantial uncertainties and costs for us, even if the eventual outcome were favorable to us. It is also possible that others may obtain issued patents that could prevent us from commercializing our products or require us to obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business. As to those patents that we have licensed, our rights depend on maintaining our obligations to the licensor under the applicable license agreement, and we may be unable to do so.

The cost to us of any patent litigation or other proceeding relating to our patents or applications, even if resolved in our favor, could be substantial. Our ability to enforce our patent protection could be limited by our financial resources, and may be subject to lengthy delays. If we are unable to effectively enforce our proprietary rights, or if we are found to infringe the rights of others, we may be in breach of our license agreements with our partners.

<PAGE>  19

In addition to patents and patent applications, we depend upon trade secrets and proprietary know-how to protect our proprietary technology. We require our employees, consultants, advisors, and collaborators to enter into confidentiality agreements that prohibit the disclosure of confidential information to any other parties. We require our employees and consultants to disclose and assign to us their ideas, developments, discoveries, and inventions. These agreements may not, however, provide adequate protection for our trade secrets, know-how, or other proprietary information in the event of any unauthorized use or disclosure.

Economic conditions could severely impact us.

Current economic conditions may cause a decline in business and consumer spending which could adversely affect our business and financial performance. Our operating results are impacted by the health of the North American economies. Our business and financial performance, including collection of our accounts receivable, realization of inventory and recoverability of assets including investments, may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial market volatility, recession.

Adverse conditions in the economy and disruption of financial markets could negatively impact our customers and therefore our results of operations.

An economic downturn in the businesses or geographic areas in which we sell our products could reduce demand for these products and result in a decrease in sales volume that could have a negative impact on our results of operations. Volatility and disruption of financial markets could limit our customers' ability to obtain adequate financing or credit to purchase and pay for our products in a timely manner, or to maintain operations, and result in a decrease in sales volume that could have a negative impact on our results of operations. Additionally, economic conditions and market turbulence may also impact our suppliers causing them to be unable to supply in a timely manner sufficient quantities of product components, thereby impairing our ability to manufacture on schedule and at commercially reasonable costs.

If the U.S. economy rapidly contracts or expands, we may have difficulty quickly scaling our operations in response, which may negatively impact our business and financial position.

If we are unable to hire additional qualified personnel, our ability to grow our business may be harmed.

We will need to hire additional qualified personnel with expertise in nonclinical testing, clinical research and testing, government regulation, formulation and manufacturing, sales and marketing and finance. We compete for qualified individuals with numerous pharmaceutical and consumer products companies, universities and other research institutions. Competition for such individuals is intense, and we cannot be certain that our search for such personnel will be successful. Attracting and retaining qualified personnel will be critical to our success.

We have a history of losses and cannot assure you that we will become profitable, and as a result, we may have to cease operations and liquidate our business.


Our expenses have exceeded our revenue in each of the last fivesix years, and no net income has been available to common shareholdersstockholders during each of these years. As of September 30, 2008,March 31, 2009, our shareholders'stockholders’ equity was $3.4$3.6 million and we had an accumulated deficit of $23.7$26.3 million. Our future profitability depends on revenue exceeding expenses, but we cannot assure you that this will occur. If we do not become profitable, we could be forced to curtail operations and sell or liquidate our business, and you could lose some or all of your investment.

If we fail to comply with the reporting obligations of the Securities Exchange Act of 1934 and Section 404 of the Sarbanes-Oxley Act of 2002, or if we fail to achieve and maintain adequate disclosure controls and procedures and internal control over financial reporting, our business results of operations and financial condition, and investors' confidence in us, could be materially adversely affected.

As a public company, we are required to comply with the periodic reporting obligations of the Exchange Act including preparing annual reports, quarterly reports and current reports. Our failure to prepare and disclose this information in a timely manner could subject us to penalties under federal securities laws, expose us to lawsuits and restrict our ability to access financing. In addition, we are required under applicable law and regulations to integrate our systems of disclosure controls and procedures and internal control over financial reporting. Our management assessed our existing disclosure controls and procedures as of September 30, 2008, and our management concluded that our disclosure controls and procedures were not effective as of September 30, 2008 due to the material weakness described above in Item 4(T) - "Controls and Procedures" in this Quarterly Report on Form 10-Q.

<PAGE>  20

We expect to dedicate significant management, financial and other resources in 2008 in connection with complying with Section 404 of the Sarbanes-Oxley Act of 2002. We expect these efforts to include a review of our existing disclosure controls and procedures and internal control structure. As a result of this review, we may either hire or outsource additional personnel to expand and strengthen our finance function. If we fail to achieve and maintain the adequacy of our disclosure controls and procedures and internal control, we may not be able to ensure that we can conclude that we have effective disclosure controls and procedures and internal control over financial reporting in accordance with the Sarbanes-Oxley Act of 2002. Moreover, effective disclosure controls and procedures and internal control is necessary for us to produce reliable financial reports and is important to help prevent fraud. As a result, our failure to satisfy the requirements of Section 404 of the Sarba nes-Oxley Act of 2002 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our common stock.

Risks Related to Our Securities

Our principal stockholders, directors and executive officers own a significant percentage of our stock and will be able to exercise significant influence over our affairs.

Our current principal stockholders, directors and executive officers beneficially own more than 50% of our common stock. As a result, these stockholders, if acting together, would be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

Our stock price is, and we expect it to remain, volatile, which could limit investors' ability to sell stock at a profit. During the last two fiscal years, our stock price has traded at a low of $.81 in the first quarter of 2006 to a high of $2.71 in the second quarter of 2008. The volatile price of our stock makes it difficult for investors to predict the value of their investment, to sell shares at a profit at any given time, or to plan purchases and sales in advance. A variety of factors may affect the market price of our common stock. These include, but are not limited to:

publicity regarding actual or potential clinical results relating to products under development by our competitors or us;

delay or failure in initiating, completing or analyzing nonclinical or clinical trials or the unsatisfactory design or results of these trials;

achievement or rejection of regulatory approvals by our competitors or us;

announcements of technological innovations or new commercial products by our competitors or us;

developments concerning proprietary rights, including patents;

developments concerning our collaborations;

regulatory developments in the United States and foreign countries;

economic or other crises, especially given the recent financial deterioration in the markets in which we compete, and other external factors;

stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the cosmetic, pharmaceutical and consumer products industry;

actual or anticipated sales of our common stock, including sales by our directors, officers or significant stockholders;

period-to-period fluctuations in our revenues and other results of operations;

speculation about our business in the press or the investment community;

changes in financial estimates by us or by any securities analysts who might cover our stock; and

sales of our common stock.

In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation, even if it does not result in liability for us, could result in substantial costs to us and divert management's attention and resources.

Shares of our common stock are relatively illiquid which may affect the trading price of our common stock.


For the quarterly periodthree months ended September 30, 2008,March 31, 2009, the average daily trading volume of our common stock on the American Stock ExchangeNYSE Amex was approximately 10,6003,300 shares. As a result of our relatively small public float, our common stock may be less liquid than the stock of companies with broader public ownership. Among other things, trading of a relatively small volume of our common stock may have a greater impact on the trading price for our shares than would be the case if our public float were larger.

<PAGE>  21


If we fail to meet the continued listing standards of the American Stock ExchangeNYSE Amex our common stock could be delisted and our stock price could suffer.


On May 6, 2008, we were notified by AMEXNYSE Amex that we were below certain of the AMEXNYSE Amex continued listing standards. Specifically, we are required to reflect income from continuing operations and/or net income in one of our five most recent fiscal years and a minimum of $6 million in stockholders'stockholders’ equity to remain listed on the exchange. We had net income from continuing operations in our 2002 fiscal year, but had net losses and losses from continuing operations in each of its 2003, 2004, 2005, 2006 and 2007our last six fiscal years. Our stockholders'stockholders’ equity at September 30,March 31, 2009 was $3.6 million.


On June 8, 2008, was $3.4 million.

the Company submitted a plan advising NYSE Amex of the actions that it would take to bring it into compliance with the continued listing standards. On July 15, 2008, AMEXNYSE Amex notified us that it accepted our plan of compliance and granted us an extension until May 6, 2009 to regain compliance with the continued listing standards described above. We will be subject to periodic review by AMEXNYSE Amex Staff during the extension period. Failure to make progress consistent with the plan or to regain compliance with the continued listing standards by the end of the extension period could result in our being delisted from AMEX.NYSE Amex.



20




On March 13, 2009, the Company completed a $6,000,000 private placement, resulting in net proceeds of approximately $5,279,000, with certain investment funds affiliated with Signet Healthcare Partners, G.P. On May 4, 2009, NYSE Amex notified the Company that it had determined that the Company has made a reasonable demonstration of its ability to regain compliance with Sections 1003(a)(ii) and (iii) of the Company Guide in accordance with Section 1009 and therefore granted the Company an extension from May 6, 2009 until May 31, 2009 to regain compliance with these continued listing standards.


ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

On March 13, 2009, the Company completed a $6,000,000 private placement with certain investment funds affiliated with Signet Healthcare Partners, G.P. (the “Offering”). As part of the Offering, the Company issued 202.9 shares of Series B-1 Convertible Preferred Stock, with a par value of $0.01 per share (“Series B Preferred Stock”), $4,782,600 in Secured Convertible Promissory Notes (“Promissory Notes”), a Preferred Stock Purchase Warrant to purchase 797.1 shares of non-voting Series B-2 Preferred Stock (“Preferred Stock Warrant”), a Common Stock Purchase Warrant to purchase 350,000 shares of common stock (“Common Stock Warrant”) and amended their Credit Agreement with Pinnacle, under which the Company had an outstanding principal balance of $500,000 as of March 31, 2009 and interest expense related to this line of credit was $8,825 for the three months ended March 31, 2009.


Each share of the Series B-1 Preferred Stock is convertible into 14,634 shares of common stock for an implied common stock conversion price of $0.41 per share, subject to certain adjustments and any accrued and unpaid dividends. Upon approval by the Company’s stockholders of the Offering or an earlier liquidation event of the Company, the Promissory Note, unamortized discount, and any accrued interest will automatically convert into Series B-1 Preferred Stock for $6,000 per share and the Preferred Stock Warrant will become null and void. Approval of the Offering was voted upon by our stockholders at our annual meeting on May 15, 2009. If stockholder approval of the Offering was not obtained, the Promissory Note would have remained outstanding and the Preferred Stock Warrant would have become exercisable for an aggregate of 797.1 shares of non-voting Series B-2 Preferred Stock for a term of 4 years commencing on July 31, 2009 at a price of $6,000 per share. The value o f the Preferred Stock Warrant was nominal.


In addition, as a condition to the consummation of the Offering, the Company and Pinnacle entered into a note conversion agreement dated March 13, 2009, pursuant to which Pinnacle agreed to convert (“Conversion”) the Note Payable into shares of the Company’s common stock at a conversion rate of $0.41 per share upon receipt of stockholder approval by the Company of such conversion.


The Offering was made pursuant to the exemption from registration described in Rule 506 under the Securities Act of 1933, as amended.


At the Company’s 2009 annual meeting of stockholders held on May 15, 2009, the Company’s stockholders approved the Offering and Note Conversion. Immediately upon stockholder approval, the $4,782,600 aggregate principal amount of promissory notes issued in the Offering by the Company to the investment funds affiliated with Signet Healthcare Partners, G.P., together with accrued and unpaid interest, were converted into an aggregate of 803.979 shares of the Company’s Series B-1 Preferred Stock and the warrants to purchase shares of the Company’s Series B-2 Preferred Stock issued to these investment funds were terminated. Additionally, the $500,000 principal amount outstanding under the Pinnacle line of credit was converted into 1,219,512 shares of the Company’s common stock.


ITEM 3.  Defaults Upon Senior Securities


None.


ITEM 4.  Submission of Matters to a Vote of Security Holders

None.

None


ITEM 5.  Other Information

None.

None



21




ITEM 6.  Exhibits

Exhibit
Number

Description

10.1

First Amendment to Loan and Security Agreement, dated July 29, 2008, between IGI, Laboratories, Inc. and Pinnacle Mountain Partners LLC (incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K filed August 1, 2008)

Exhibit
Number

Description

3.1

Certificate of Designation of the Relative Rights and Preferences of the Series B-1 Convertible Preferred Stock and Series B-2 Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Report on Form 8-K filed March 19, 2009).

3.2

Certificate of Correction to Correct a Certain Error in the Certificate of Designation of the Relative Rights and Preferences of the Series B-1 Convertible Preferred Stock and Series B-2 Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Report on Form 8-K filed March 19, 2009).

4.1

Form of Secured Convertible Promissory Note (incorporated by reference to Exhibit 4.1 to the Company’s Report on Form 8-K filed March 19, 2009).

4.2

Form of Preferred Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the Company’s Report on Form 8-K filed March 19, 2009).

4.3

IGI Laboratories, Inc. Common Stock Purchase Warrant in favor of Rockport Venture Securities, LLC, dated March 13, 2009 (incorporated by reference to Exhibit 4.2 to the Company’s Report on Form 8-K filed March 19, 2009).

4.4

Third Amended and Restated Revolving Note in favor of Pinnacle Mountain Partners, LLC, dated March 13, 2009 (incorporated by reference to Exhibit 4.4 to the Company’s Report on Form 8-K filed March 19, 2009).

10.1

Second Amendment to Loan and Security Agreement, dated January 26, 2009, between IGI Laboratories, Inc. and Pinnacle Mountain Partners LLC (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed January 29, 2009).

10.2

Second Amended and Restated Revolving Note, dated January 26, 2009, of IGI Laboratories, Inc., made in favor of Pinnacle Mountain Partners LLC (incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 8-K filed January 29, 2009).

10.3

Securities Purchase Agreement, by and among IGI Laboratories, Inc. and the purchasers set forth on Schedule A thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed March 19, 2009).

10.4

Voting Agreement by and among IGI Laboratories, Inc., Signet Healthcare Partners, G.P. and the stockholders of the Company set forth on Schedule A thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 8-K filed March 19, 2009).

10.5

Registration Rights Agreement by and among IGI Laboratories, Inc., the purchasers set forth on Schedule A thereto and the placement agent set forth on Schedule B thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 8-K filed March 19, 2009).

10.6

Guaranty Agreement by Immunogenetics, Inc. in favor of the parties listed on Schedule A thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.4 to the Company’s Report on Form 8-K filed March 19, 2009).

10.7

Security Agreement by and among IGI Laboratories, Inc., Immunogenetics, Inc. and the secured parties listed on the signature page thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.5 to the Company’s Report on Form 8-K filed March 19, 2009).



22





10.2

Amended and Restated Revolving Note, dated July 29, 2008, of IGI Laboratories, Inc., made in favor of Pinnacle Mountain Partners LLC (incorporated by reference to Exhibit 10.2 to the Company's Report on Form 8-K filed August 1, 2008).

10.3

Separation Agreement and Release dated September 16, 2008 between IGI Laboratories, Inc. and Carlene Lloyd (incorporated by reference to Exhibit 10.3 to the Company's Report on Form 8-K filed September 22, 2008).

10.4

Form of Stock Option Award Agreement under the 1999 Stock Incentive Plan.

<PAGE>  22

31.1

Certification of the President and Chief Executive Officer pursuant to Rule 13a-14(a) under the SecuritiesExchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of the Acting Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of the Acting Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

<PAGE>  23

SIGNATURES

10.8

Intellectual Property Security Agreement by and among IGI Laboratories, Inc., Immunogenetics, Inc. and the secured parties listed on the signature page thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.6 to the Company’s Report on Form 8-K filed March 19, 2009).

10.9

Intercreditor Agreement by and among Life Sciences Opportunities Fund II, L.P., Life Sciences Opportunities Fund (Institutional) II, L.P., Pinnacle Mountain Partners LLC and IGI Laboratories, Inc., dated March 13, 2009 (incorporated by reference to Exhibit 10.7 to the Company’s Report on Form 8-K filed March 19, 2009).

10.10

Third Amendment to Loan and Security Agreement by and between IGI Laboratories, Inc. and Pinnacle Mountain Partners, LLC, dated March 13, 2009 (incorporated by reference to Exhibit 10.8 to the Company’s Report on Form 8-K filed March 19, 2009).

10.11

Note Conversion Agreement by and between IGI Laboratories, Inc. and Pinnacle Mountain Partners, LLC, dated March 13, 2009 (incorporated by reference to Exhibit 10.9 to the Company’s Report on Form 8-K filed March 19, 2009).

10.12

Indemnification Agreement by and between IGI Laboratories, Inc. and Joyce Erony, dated March 13, 1999 (incorporated by reference to Exhibit 10.10 to the Company’s Report on Form 8-K filed March 19, 2009).

10.13

Form of Indemnification Agreement for Certain Directors (incorporated by reference to Exhibit 10.11 to the Company’s Report on Form 8-K filed March 19, 2009).

31.1

Certification of the President and Chief Executive Officer pursuant to Rule 13a-14(a) under the SecuritiesExchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of the Acting Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of the Acting Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




23




SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

IGI Laboratories, Inc.

Date: November 14, 2008

By:

/s/ Rajiv Mathur


Rajiv Mathur

President and Chief Executive Officer

Date: November 14, 2008

By:

/s/ Justine Kostka


Justine Kostka

IGI Laboratories, Inc.

Date: May 20, 2009

By:

/s/ Rajiv Mathur

Rajiv Mathur
President and Chief Executive Officer

Date: May 20, 2009

By:

/s/ Justine Kostka

Justine Kostka
Acting Principal Financial Officer




<PAGE>  24




Exhibit Index


Exhibit
Number

Description

3.1

Certificate of Designation of the Relative Rights and Preferences of the Series B-1 Convertible Preferred Stock and Series B-2 Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Report on Form 8-K filed March 19, 2009).

3.2

Certificate of Correction to Correct a Certain Error in the Certificate of Designation of the Relative Rights and Preferences of the Series B-1 Convertible Preferred Stock and Series B-2 Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Report on Form 8-K filed March 19, 2009).

4.1

Form of Secured Convertible Promissory Note (incorporated by reference to Exhibit 4.1 to the Company’s Report on Form 8-K filed March 19, 2009).

4.2

Form of Preferred Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the Company’s Report on Form 8-K filed March 19, 2009).

4.3

IGI Laboratories, Inc. Common Stock Purchase Warrant in favor of Rockport Venture Securities, LLC, dated March 13, 2009 (incorporated by reference to Exhibit 4.2 to the Company’s Report on Form 8-K filed March 19, 2009).

4.4

Third Amended and Restated Revolving Note in favor of Pinnacle Mountain Partners, LLC, dated March 13, 2009 (incorporated by reference to Exhibit 4.4 to the Company’s Report on Form 8-K filed March 19, 2009).

10.1

Second Amendment to Loan and Security Agreement, dated January 26, 2009, between IGI Laboratories, Inc. and Pinnacle Mountain Partners LLC (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed January 29, 2009).

10.2

Second Amended and Restated Revolving Note, dated January 26, 2009, of IGI Laboratories, Inc., made in favor of Pinnacle Mountain Partners LLC (incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 8-K filed January 29, 2009).

10.3

Securities Purchase Agreement, by and among IGI Laboratories, Inc. and the purchasers set forth on Schedule A thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed March 19, 2009).

10.4

Voting Agreement by and among IGI Laboratories, Inc., Signet Healthcare Partners, G.P. and the stockholders of the Company set forth on Schedule A thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 8-K filed March 19, 2009).

10.5

Registration Rights Agreement by and among IGI Laboratories, Inc., the purchasers set forth on Schedule A thereto and the placement agent set forth on Schedule B thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 8-K filed March 19, 2009).

10.6

Guaranty Agreement by Immunogenetics, Inc. in favor of the parties listed on Schedule A thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.4 to the Company’s Report on Form 8-K filed March 19, 2009).

10.7

Security Agreement by and among IGI Laboratories, Inc., Immunogenetics, Inc. and the secured parties listed on the signature page thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.5 to the Company’s Report on Form 8-K filed March 19, 2009).

10.8

Intellectual Property Security Agreement by and among IGI Laboratories, Inc., Immunogenetics, Inc. and the secured parties listed on the signature page thereto, dated March 13, 2009 (incorporated by reference to Exhibit 10.6 to the Company’s Report on Form 8-K filed March 19, 2009).

Exhibit
Number

Description25

10.4

Form of Stock Option Award Agreement under the 1999 Stock Incentive Plan.

31.1

Certification of the President and Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of the Acting Principal Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

10.9

Intercreditor Agreement by and among Life Sciences Opportunities Fund II, L.P., Life Sciences Opportunities Fund (Institutional) II, L.P., Pinnacle Mountain Partners LLC and IGI Laboratories, Inc., dated March 13, 2009 (incorporated by reference to Exhibit 10.7 to the Company’s Report on Form 8-K filed March 19, 2009).

10.10

Third Amendment to Loan and Security Agreement by and between IGI Laboratories, Inc. and Pinnacle Mountain Partners, LLC, dated March 13, 2009 (incorporated by reference to Exhibit 10.8 to the Company’s Report on Form 8-K filed March 19, 2009).

10.11

Note Conversion Agreement by and between IGI Laboratories, Inc. and Pinnacle Mountain Partners, LLC, dated March 13, 2009 (incorporated by reference to Exhibit 10.9 to the Company’s Report on Form 8-K filed March 19, 2009).

10.12

Indemnification Agreement by and between IGI Laboratories, Inc. and Joyce Erony, dated March 13, 1999 (incorporated by reference to Exhibit 10.10 to the Company’s Report on Form 8-K filed March 19, 2009).

10.13

Form of Indemnification Agreement for Certain Directors (incorporated by reference to Exhibit 10.11 to the Company’s Report on Form 8-K filed March 19, 2009).

31.1

Certification of the President and Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of the Acting Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of the Acting Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of the Acting Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

<PAGE>  25

26