SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 10549
FORM 10-QSB
(Mark One)
[x] Quarterly report under Section 13 or 15(D) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
____________________________________________
[ ] Transition report under Section 13 or 15(D) of the
Exchange Act
For the transition period from ___________ to ___________
Commission file number 0-15888
______________________________
IGENE Biotechnology, Inc.
_________________________________________________________________
(Exact name of Small Business Issuer as Specified in its Charter)
Maryland 52-1230461
_______________________________ _______________________
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
9110 Red Branch Road, Columbia, Maryland 21045-2024
___________________________________________________
(Address of Principal Executive Offices)
(410) 997-2599
________________________________________________
(Issuer's Telephone Number, Including Area Code)
None
____________________________________________________
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the Issuer: (1) filed all reports required to be
filed by Section 13 or 15(D) of the Exchange Act during the past
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 No x
______ ______
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
78,357,368 shares as of July 20, 2002.
_____________________________________
Transitional Small Business Disclosure Format (check one):
Yes No x
______ ______
FORM 10-QSB
IGENE Biotechnology, Inc.
INDEX
PART I - FINANCIAL INFORMATION
Page
Consolidated Balance Sheets ....................... 5-6
Consolidated Statements of Operations ............. 7
Consolidated Statements of Stockholders' Deficit... 8-9
Consolidated Statements of Cash Flows ............. 10
Notes to Consolidated Financial Statements......... 11-13
Management's Discussion and Analysis of Financial
Conditions and Results of Operations .............. 14-17
PART II - OTHER INFORMATION ....................... 18-19
SIGNATURES ............................................. 20
IGENE BIOTECHNOLOGY, INC.
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
PART I
FINANCIAL INFORMATION
IGENE Biotechnology, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, December 31,
2002 2001
____________ ____________
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 301,441 $ 394,487
Accounts receivable,
(net of allowances of $24,000;
2002 and 2001) 611,435 832,794
Inventory 1,751,755 959,856
Prepaid expenses
and other current assets 474,043 290,553
Deferred costs, current portion 74,160 74,160
____________ ____________
3,212,834 2,551,850
OTHER ASSETS
Property and equipment, net 631,802 232,923
Deferred costs, net of current portion 246,010 304,267
Equipment deposits 223,856 177,091
Deposits on manufacturing equipment 239,805 211,380
Other assets 80,077 61,495
____________ ____________
TOTAL ASSETS $ 4,634,384 $ 3,539,006
============ ============
The accompanying notes are an integral part of the financial statements.
-5-
IGENE Biotechnology, Inc. and Subsidiaries
Consolidated Balance Sheets
(continued)
June 30, December 31,
2002 2001
____________ ____________
(Unaudited)
LIABILITIES, REDEEMABLE PREFERED STOCK
AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,631,801 $ 1,085,893
Equipment lease payable --- 1,733
Variable rate subordinated debenture 1,500,000 1,500,000
____________ ____________
TOTAL CURRENT LIABILITIES 3,131,801 2,587,626
LONG-TERM DEBT
Notes payable 6,361,292 6,057,959
Convertible debentures 4,514,212 3,514,212
Accrued interest 2,385,144 1,927,256
____________ ____________
TOTAL LIABILITIES 16,392,449 14,087,053
____________ ____________
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK
Carrying amount of redeemable preferred
stock, 8% cumulative, convertible,
voting, series A, $.01 par value per
share. Redemption value $16.64
and $16.48, respectively. Authorized
1,312,500 shares, issued 26,405 shares 443,604 435,154
____________ ____________
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value per share.
Authorized, 750,000,000 shares;
issued and outstanding 77,005,618
and 75,848,600 shares,
respectively. 783,574 758,486
Additional paid-in capital 22,342,507 22,188,836
Accumulated other comprehensive income 106,422 ---
Deficit (35,434,172) (33,930,523)
____________ ____________
TOTAL STOCKHOLDERS' DEFICIT (12,201,669) (10,983,201)
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 4,634,384 $ 3,539,006
============ ============
The accompanying notes are an integral part of the financial statements.
-6-
IGENE Biotechnology, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
__________________________ __________________________
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
____________ ____________ ____________ ____________
Sales - AstaXin(R) $ 660,664 $ 1,096,525 $ 1,168,915 $ 1,541,543
Sales - Nutraceuticals 581,049 --- 1,136,406 ---
Cost of sales - AstaXin(R) 603,981 914,442 1,034,641 1,326,561
Cost of sales - Nutraceuticals 455,753 --- 822,437 ---
____________ ____________ ____________ ____________
Gross profit 181,979 182,083 448,243 214,982
____________ ____________ ____________ ____________
Operating expenses:
Marketing and selling 334,596 320,905 582,874 465,084
Research, development and pilot plant 191,333 118,277 371,724 225,612
General and administrative 155,003 133,179 490,692 255,577
____________ ____________ ____________ ____________
Total operating expenses 680,932 572,361 1,445,290 946,273
____________ ____________ ____________ ____________
Operating (loss) (498,953) (390,278) (997,047) (731,291)
____________ ____________ ____________ ____________
Other income (expense)
Miscellaneous income --- 3,000 --- 6,000
Interest expense, net of
interest income of $192, $5,839,
$829, and $6,708 respectively (288,461) (240,099) (506,602) (427,847)
____________ ____________ ____________ ____________
Net loss $ (787,414) $ (627,377) $(1,503,649) $(1,153,138)
============ ============ ============ ============
Basic and diluted net loss
per common share $ (0.01) $ (0.01) $ (0.02) $ (0.02)
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
-7-
IGENE Biotechnology, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
(Unaudited)
Redeemable Preferred Stock
(shares/amount)
__________________________
Balance at January 1, 2001 26,405 $ 418,255
Cumulative undeclared dividends
on redeemable preferred stock --- 8,450
Issuance of common stock in
lieu of cash in payment of
interest on subordinate debenture --- ---
Exercise of employee stock options --- ---
Exercise of warrants --- ---
Net loss for the six months ended
June 30, 2001 --- ---
___________ ___________
Balance at June 30, 2001 26,405 $ 426,705
=========== ===========
Balance at January 1, 2002 26,405 $ 435,154
Cumulative undeclared dividends
on redeemable preferred stock --- 8,450
Issuance of common stock in
lieu of cash in payment of
interest on subordinate debenture --- ---
Shares issued for manufacturing agreement --- ---
Comprehensive loss: --- ---
Net loss for the six months ended
June 30, 2002 --- ---
Other comprehensive income -
Foreign currency translation --- ---
Total comprehensive loss --- ---
___________ ___________
Balance at June 30, 2002 26,405 $ 443,604
=========== ===========
The accompanying notes are an integral part of the financial statements.
-8-
IGENE Biotechnology, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
(Unaudited - Continued)
Accumulated
Additional Other Total
Common Stock Paid-in Comprehensive Stockholders'
(shares/amount) Capital Deficit Income(Loss) Deficit
______________________ _____________ _____________ _____________ _____________
Balance at January 1, 2001 62,249,005 $ 622,490 $ 21,411,645 $(30,257,564) --- $ (8,223,429)
Cumulative undeclared dividends
on redeemable preferred stock --- --- (8,450) --- --- (8,450)
Issuance of common stock in
lieu of cash in payment of
interest on subordinate debenture 40,000 400 89,600 --- --- 90,000
Exercise of employee stock options 5,000 50 200 --- --- 250
Exercise of warrants 170,910 1,709 15,382 --- --- 17,091
Net loss for the six months ended
June 30, 2001 --- --- --- (1,153,138) --- (1,153,138)
__________ __________ _____________ _____________ _____________ _____________
Balance at June 30, 2001 62,464,915 $ 624,649 $ 21,508,377 $(31,410,702) $ --- $ (9,277,676)
========== ========== ============= ============= ============= =============
Balance at January 1, 2002 75,848,600 $ 758,486 $ 22,188,836 $(33,930,523) --- $(10,983,201)
Cumulative undeclared dividends
on redeemable preferred stock --- --- (8,450) --- --- (8,450)
Issuance of common stock in
lieu of cash in payment of
interest on subordinate debenture 40,000 400 89,600 --- --- 90,000
Shares issued for manufacturing
agreement 2,468,768 24,688 72,521 --- --- 97,209
Comprehensive loss:
Net loss for the six months ended
June 30, 2002 --- --- --- (1,503,649) --- (1,503,649)
Other comprehensive income -
Foreign currency translation --- --- --- --- 106,422 106,422
_____________
Total comprehensive loss --- --- --- --- --- (1,397,227)
__________ __________ _____________ _____________ _____________ _____________
Balance at June 30, 2002 78,357,368 $ 783,574 $ 22,342,507 $(35,434,172) $ 106,422 $(12,201,669)
========== ========== ============= ============= ============= =============
The accompanying notes are an integral part of the financial statements.
-9-
IGENE Biotechnology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended
June 30, June 30,
2002 2001
____________ ____________
Cash flows from operating activities
Net loss $(1,503,649) $(1,153,138)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation 26,455 11,164
Amortization 58,257 58,257
Foreign currency translation adjustment 106,422 ---
Manufacturing cost paid in shares of common stock 97,209 ---
Interest on debenture paid in shares of common stock 90,000 90,000
Decrease (increase) in:
Accounts receivable 221,359 (466,612)
Inventory (791,899) (249,810)
Prepaid expenses and other current assets (183,491) (80,531)
Increase in
Accounts payable and accrued expenses 1,003,797 924,283
____________ ____________
Net cash used in operating activities (875,540) (866,387)
____________ ____________
Cash flows from investing activities
Deposits and other assets (93,722) ---
Capital expenditures (425,334) (52,545)
____________ ____________
Net cash used in investing activities (519,106) (52,545)
____________ ____________
Cash flows from financing activities
Proceeds from borrowing 1,000,000 1,050,000
Proceeds from (repayment of) long-term debt 301,600 (7,896)
____________ ____________
Net cash provided by financing activities 1,301,600 1,042,104
____________ ____________
Net (decrease) increase in cash and cash equivalents (93,046) 123,172
Cash and cash equivalents at beginning of period 394,487 143,572
____________ ____________
Cash and cash equivalents at end of period $ 301,441 $ 266,744
============ ============
Supplementary disclosure and cash flow information
__________________________________________________
Cash paid for interest $ 508 $ 235
Cash paid for income taxes --- ---
See Note (2) for non-cash investing and financing activities.
The accompanying notes are an integral part of the financial statements.
-10-
IGENE Biotechnology, Inc. and Subsidiaries
Notes to Financial Statements
(1) Unaudited consolidated financial statements
The consolidated financial statements of Igene
Biotechnology, Inc. and Subsidiaries ("Igene") presented
herein are unaudited, and in the opinion of management,
include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of financial
position and results of operation and cash flows. Such
financial statements do not include all of the information
and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America. This
quarterly report on Form 10-QSB should be read in
conjunction with Igene's Annual Report on Form 10-KSB for
the year ended December 31, 2001.
(2) Non cash investing and financing activities
During the six months ended June 30, 2002 and 2001, the
Company recorded in each quarter dividends in arrears on 8%
redeemable preferred stock cumulating at $.32 per share
aggregating $8,450, which has been removed from paid-in
capital and included in the carrying value of the redeemable
preferred stock.
During the six months ended June 30, 2002 and 2001 the
company issued 40,000 shares of common stock in each period
in payment of interest on the variable rate subordinated
debenture. If paid in cash, the interest would have been
payable at 12% in the amount of $90,000 in each period.
Shares may be issued in lieu of cash under the terms of the
debenture agreement at the higher of $2.25 per share or
market price per share. The stock was issued and related
interest was paid at $2.25 per share, or $90,000, in each
period.
During the six months ended June 30, 2001, the Company
capitalized leased equipment by recording a lease obligation
payable of $18,500 under a capital lease.
During the six months ended June 30, 2001, the Company
satisfied its obligations under demand notes payable of
1,000,000 and related accrued interest of $14,211 by issuing
new 8% convertible debentures in the aggregate principal
amount of $1,014,211.
(3) Foreign Currency Translation and Transactions
Since the day-to-day operations of Igene's foreign
subsidiary in Chile are dependent on the economic
environment of the parent's currency, the financial position
and results of operations of Igene Chile are determined
using Igene's reporting currency (US dollars) as the
functional currency. All exchange gains and losses from
remeasurement of monetary assets and liabilities that are
not denominated in US dollars are recognized currently in
income. These losses and gains occurred primarily as a
result of the effect of valuation of the Chilean Peso on
Igene's accounts receivables, which are mostly denominated
in Chilean Pesos.
The financial position and results of operations of Igene
Norway, whose functional currency is the Norway Krone,
consolidated herein have been translated into US dollars in
accordance with SFAS No. 52, "Foreign Currency Translation,"
(as amended by SFAS No. 130, "Reporting Comprehensive
Income"). All assets and liabilities of this subsidiary
have been translated at the exchange rate at the balance
sheet date. Income statement amounts have been translated
using average rate of exchange over the period. Any
resultant translation adjustments are included in other
comprehensive income, a separate component of stockholders'
equity. Any gains and losses from foreign currency
transactions of this subsidiary are included in operations.
Because this subsidiary was purchased in December 2001, no
foreign currency translation adjustment arose in the six
month period ended June 30, 2001. For the six months ended
June 30, 2002 a foreign currency gain of $106,422 resulted
because the Norway Krone fluctuated favorably against the US
dollar.
-11-
IGENE Biotechnology, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(4) Inventories
Inventory, stated at lower of cost, on a first-in first-out
basis, or market value, represents AstaXin(R) manufactured
and held for sale, as follows:
June 30, December,
2002 2001
__________ __________
Work-in-process - AstaXin(R) $ --- $ 35,764
Finished goods - AstaXin(R) 1,583,796 776,381
Nutraceuticals 167,959 147,711
__________ __________
Total inventory $1,751,755 $ 959,856
(5) Stockholders' Equity (Deficit)
As of June 30, 2002 and 2001, 52,810 shares of authorized
but unissued common stock were reserved for issue upon
conversion of the Company's outstanding preferred stock.
As of June 30, 2002 and 2001, 74,604,500 and 74,905,166
shares, respectively, of authorized but unissued common
stock were reserved for distribution and exercise pursuant
to the Company's Employee Stock Option Plans.
As of June 30, 2002 and 2001, 40,000 and 120,000 shares,
respectively, of authorized but unissued common stock were
reserved for issuance for payment of interest on the
variable rate subordinated debenture and 375,000 shares of
authorized but unissued common stock were reserved for
issuance upon conversion of the variable rate subordinated
debenture.
As of June 30, 2002 and 2001, 13,174,478 shares of
authorized but unissued common stock were reserved for the
conversion of outstanding convertible promissory notes in
the aggregate amount of $1,082,500 held by directors of the
Company.
As of June 30, 2002, 31,427,651 shares of authorized but
unissued common stock were reserved for the conversion of
outstanding convertible promissory notes in the aggregate
amount of $2,514,212 held by directors of the Company.
As of June 30, 2002 and 2001, 188,016,085 and 168,686,995
shares, respectively, of authorized but unissued common
stock were reserved for the exercise of outstanding
warrants.
As of June 30, 2002 and 2001, 12,488,213 and 20,000,000
shares, respectively, of authorized but unissued common
stock were reserved for issuance to the Company's contract
manufacturer pursuant to the terms of the current
manufacturing contract. For the six months ended June 30,
2002, 2,468,768 shares have been issued pursuant to this
agreement at an average price of $.04 per share or $97,209,
which has been included as cost of manufacturing.
During the six months ended June 30, 2001, the company
issued 5,000 new shares of common stock at $.05 per share or
$250, pursuant to the exercise of employee stock option.
-12-
IGENE Biotechnology, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(6) Basic and diluted net loss per common share
Basic and diluted net loss per common share for the six-
month periods ended June 30, 2002 and 2001 is based on
76,207,730 and 62,376,519, respectively, of weighted average
common shares outstanding. For purposes of computing net
loss per common share, the amount of net loss has been
increased by cumulative undeclared dividends in arrears on
preferred stock. No adjustment has been made for any common
stock equivalents outstanding because their effects would be
antidilutive.
(7) Income Taxes
The Company uses the liability method of accounting for
income taxes as required by SFAS No. 109, "Accounting for
Income Taxes". Under the liability method, deferred-tax
assets and liabilities are determined based on differences
between the financial statement carrying amounts and the tax
bases of existing assets and liabilities (i.e., temporary
differences) and are measured at the enacted rates that will
be in effect when these differences reverse. Deferred
income taxes will be recognized when it is deemed more
likely than not that the benefits of such deferred income
taxes will be realized; accordingly, all net deferred income
taxes have been eliminated by a valuation allowance.
(8) Contingency - Litigation
Archer Daniels Midland, Inc. ("ADM") has sued Igene,
alleging patent infringement and requesting injunctive
relief as well as an unspecified amount of damages (suit
filed July 21, 1997, U.S. District Court, Baltimore, MD).
Igene has filed a $300,450,000 counterclaim concerning the
theft of trade secrets (counter claim filed August 4, 1997).
The court denied ADM's request for preliminary injunctive
relief. Mediation efforts during 1999 did not resolve this
dispute, which has been returned to the court for a judicial
disposition. Presently, a stay on all discovery remains in
effect while a court-appointed expert analyzes the yeast
products of both parties. Igene believes that it is not
probable that this dispute will result in an unfavorable
outcome to Igene. Accordingly, no liability has been
reflected in the June 30, 2002 balance sheet. Nonetheless,
should ADM prevail, Igene could be liable for damages, and
Igene could also lose the right to use a particular strain
of yeast. However, Igene expects that this will not affect
Igene's ability to make and sell its product, AstaXin(R).
The Company had expenses of $-0-, in the six month periods
ended June 30, 2002 and 2001 relating to this on-going
litigation.
(9) Subsequent Events
On July 17th 2002, Igene issued and sold $300,000 in
aggregate principal amount of 8% convertible debentures to
certain Directors of Igene. These debentures are convertible
into shares of Igene's common stock at $.03 per share. In
consideration of the commitment to purchase the 8%
convertible debenture, these directors also received an
aggregate of 10,000,000 warrants to purchase common stock at
$.03 per share. These debentures, if not converted earlier,
become due on July 17th 2012.
As of August 13, 2002, the Board of Directors, in further
attempts to ascertain a manufacturing partner, has
authorized retention of the services of Mr. Martin Gerson.
The expected term of the service will be for two (2) years.
In compensation for this service, Mr. Gerson will be awarded
12,000,000 shares of Igene common stock. It is expected the
12,000,000 shares will be awarded in the third quarter and
they will be expensed at market value as compensation at the
time of the award.
-13-
IGENE Biotechnology, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
CAUTIONARY STATEMENTS FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
EXCEPT FOR HISTORICAL FACTS, ALL MATTERS DISCUSSED IN THIS
REPORT, WHICH ARE FORWARD LOOKING, INVOLVE A HIGH DEGREE OF RISKS
AND UNCERTAINTIES. POTENTIAL RISKS AND UNCERTAINTIES INCLUDE,
BUT ARE NOT LIMITED TO, COMPETITIVE PRESSURES FROM OTHER
COMPANIES AND WITHIN THE BIOTECH INDUSTRY, ECONOMIC CONDITIONS IN
THE COMPANY'S PRIMARY MARKETS AND OTHER UNCERTAINTIES DETAILED
FROM TIME-TO-TIME IN THE COMPANY'S SECURITIES AND EXCHANGE
COMMISSION FILINGS.
CERTAIN STATEMENTS IN THIS REPORT SET FORTH MANAGEMENT'S
INTENTIONS, PLANS, BELIEFS, EXPECTATIONS OR PREDICTIONS OF THE
FUTURE BASED ON CURRENT FACTS AND ANALYSES. ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH STATEMENTS, DUE TO
A VARIETY OF FACTORS INCLUDING REDUCED PRODUCT DEMAND, INCREASED
COMPETITION, CURRENCY FLUCTUATIONS, AVAILABILITY OF PRODUCTION
CAPACITY, GOVERNMENT ACTION, WEATHER CONDITIONS, AND OTHER
FACTORS.
Results of Operations
_____________________
Sales and other revenue
Sales of AstaXin(R) for the quarter ended June 30, 2002 and
2001, were $660,664 and $1,096,525, respectively a decrease of
$435,861 or 40%. Sales for the six-month periods ended June 30,
2002 and 2001, were $1,168,915 and $1,541,543, respectively, a
decrease of $372,628 or 24%. The reduction in sales is due to
lack of satisfactory production coupled with current market
condition pressures. Additionally, inventory has been allowed to
build in order to meet demand for seasonal increases in customer
usage. It is expected that sales for subsequent quarters will
return to the levels of 2001, but will be limited by our ability
to develop a satisfactory level of production. However, there can
be no assurance that these, or any increases in sales will occur,
or that they will be material.
During the quarter ended June 30, 2002 Igene recorded sales
of $581,049 for Nutraceuticals. Sales for the six month period
ended June 30, 2002 Igene recorded sales of $1,136,406 for
Nutraceuticals. This is a new business line for Igene, which it
added along with the 2001 acquisition of ProBio Nutraceuticals.
Sales for subsequent quarters are expected to continue to
increase but no subsequent trend is seen. However, there can be
no assurance that these, or any increases in sales will occur, or
that they will be material.
Cost of sales and gross profit
Gross Profit on sales of AstaXin(R) was $56,683 for the
quarter June 30, 2002. This is a decrease of $125,400 from the
$182,083 for the same quarter in the preceding year. Gross
Profit on sales of AstaXin(R) was $134,274 for the six month
periods ended June 30, 2002 which is a decrease of $80,708 from
the $214,982 for the six months ended June 30, 2001. Gross
profits fell from 16% of sales for the six months ended June 30,
2001, to 11% of sales for the six months ended June 30, 2002.
The company attributes the fall in gross profit to a combination
of pricing pressures in the market and inefficiencies in
production. The Company expects that the gross profit will
return to prior levels and be maintained in the future as a
percentage of sales, with expected increases in production
efficiency offsetting pricing competition, but the company can
provide no assurances in that regard. The Company plans to
continue to increase production of AstaXin(R), as needed, to meet
expected increased sales of AstaXin(R). Demand is expected to
increase both due to seasonal increases in customer usage and
increases in our market share. If demand for AstaXin(R) continues
to increase, as the Company expects that it will, sales and gross
profits may be limited by the quantities of AstaXin(R) the
Company is able to produce with its presently available capacity
with its contract manufacturer, as was the case during the fourth
quarter of 2001. To avoid this limitation, the Company is
presently investigating other additional sources of available
production capacity. However, there can be no assurance that the
Company will be able to find and subsequently be able to utilize
other additional sources of production capacity as quickly as
they are needed, and sales and gross profit growth may be limited
unless augmented by increases in production efficiency resulting
from process research and development. Presently available
capacity with the Company's current contract manufacturer is
expected to allow for an approximate increase of 80% over the
capacity being used as of June 30, 2002.
-14-
IGENE Biotechnology, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Cost of sales and gross profit (continued)
The preceding resulted in cost of sales for the quarter
ended June 30, 2002 and 2001 of $603,981 and $914,442,
respectively, a decrease of $310,461 or 34%. Cost of sales for
the six months ended June 30, 2002 and 2001 were $1,034,461 and
$1,326,561, respectively, a decrease of $292,100 or 22%.
The quarter ended June 30, 2002 Igene recorded gross profit
of $125,296 for Nutraceuticals as a result of $455,753 in cost of
sales. For the six months ended June 30, 2002 Igene recorded
gross profit of $313,969 for Nutraceuticals as a result of
$822,437 in cost of sales. This is a gross profit of 22% and 28%
as a percentage of sales respectively. This is a new business
line for Igene, which it added along with the 2001 acquisition of
ProBio Nutraceuticals. During 2002 the company established in
Norway an encapsulation plant to be used to reduce bottling
costs.
Profit for subsequent quarters are expected to continue to
increase in total, maintaining the same profit percentage, but no
subsequent trend is seen. However, there can be no assurance that
these, or any increases in sales will occur, or that they will be
material.
Marketing and selling expenses
Marketing expenses are expected to continue to increase,
since to achieve continuing and increasing sales, and to enter
other markets for both AstaXin(R) and Nutraceuticals, the Company
will need to make additional marketing efforts for both products.
These additional expenses are expected to be funded by gross
profits from product sales, however, there can be no assurance
that these sales will occur, that they will be material or that
gross profits will result. Marketing and selling expenses for
the quarter ended June 30, 2002 were $334,596, an increase of
$13,691, or 4% over the marketing and selling expenses of
$320,905 for the quarter ended June 30, 2001. Marketing and
selling expenses for the six month period ended June 30, 2002
were $582,874, an increase of $117,790, or 25% over the marketing
and selling expenses of $465,084 for the six month period ended
June 30, 2001.
Research, development and pilot plant expenses
Research, development and pilot plant expenses are expected
to continue to increase in the near term in support of increasing
the efficiency of the manufacturing process through
experimentation in the Company's pilot plant, development of
higher yielding strains of yeast and other improvements in the
Company's AstaXin(R) and Nutraceuticals technology. For the
quarters ended June 30, 2002 and 2001, these expenses were
$191,333 and $118,277, respectively, an increase of $73,056 or
62%. For six-month periods ended June 30, 2002 and 2001, these
expenses were $371,724 and $225,612, respectively, an increase of
$146,112 or 65%. However, there can be no assurance that such
improvements in efficiency and yield will continue to occur, or
that they will be material. These expenses are expected to be
funded through additional funding from stockholders, and by
profitable operations, if profitable operations occur.
Operating expenses
General and administrative expenses for the quarters ended
June 30, 2002 and 2001 were $155,003 and $133,179, respectively,
an increase of $21,824 or 16%. General and administrative
expenses for the six-month periods ended June 30, 2002 and 2001
were $490,692 and $255,577, respectively, an increase of $235,115
or 92%. This increase results from the purchase of ProBio
Nutraceuticals, the additional management received incurring
additional management compensation expense, and the overhead
incurred, as well as increases in cost of insurance coverage,
increased legal fees and administrative travel due to the
expansion of the Company. General and administrative expenses
are expected to continue at the current rate in the near future.
These expenses are expected to be funded by additional funding
from stockholders, and by profitable operations, if profitable
operations occur. However, we can provide no assurances that
such additional funding will become available or that such
funding, if any, will be available upon terms favorable to us.
-15-
IGENE Biotechnology, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Litigation expenses
Management expects to ultimately recover some portion of
litigation expenses previously incurred, which are associated
with the suit filed against the Company by ADM and the Company's
counterclaim, through damage awards and to preserve the
commercial product rights associated with AstaXin(R). However,
there can be no assurance that the Company will receive damage
awards or that it's rights will be preserved. The Company
incurred no litigation expenses for the six-month periods ended
June 30, 2002 and 2001. Expenses associated with this on-going
litigation decreased, as compared to the first two quarters in
the prior year, since a stay on all discovery has remained in
effect while a court appointed expert analyzes the yeast product
of both parties to the suit. Costs of litigation will continue
in the future based on management's continuing assessments of the
potential costs and benefits of various litigation strategies and
alternatives. These expenses are expected to be funded by
additional funding from stockholders. A range of reasonably
possible losses from the litigation cannot be estimated at this
time, and accordingly, no liability has been reflected in the
June 30, 2002 financial statements.
Interest expense (net of interest income)
Interest expense (net of interest income) for the quarters
ended June 30, 2002 and 2001 were $288,461 and $240,099,
respectively, an increase of $48,362 or 20%. Interest expense
(net of interest income) for the six month periods ended June 30,
2002 and 2001 were $506,602 and $427,847, respectively, an
increase of $78,755 or 18%. This interest expense (net of
interest income) was almost entirely composed of interest on the
Company's long term financing from its directors and other
stockholders, and interest on the Company's subordinated
debenture in both periods, and has increased due to increased
financing from directors.
Net loss and basic and diluted net loss per common share
As a result of the foregoing, the Company reported net
losses of $787,414 and $627,377, respectively, for the quarters
ended June 30, 2002 and 2001, an increase in the loss of $160,037
or 26%. This represents a loss of $.01 per basic and diluted
common share in each of the quarters ended June 30, 2002 and
2001. The Company reported net losses of $1,503,649 and
$1,153,138, respectively, for the six-month periods ended June
30, 2002 and 2001, an increase in the loss of $350,511 or 30%.
This represents a loss of $.02 per basic and diluted common share
in each of the six-month periods ended June 30, 2002 and 2001.
The weighted average numbers of shares of common stock
outstanding of 76,207,730 and 62,376,519, for the periods ended
June 30, 2002 and 2001, respectively, have increased by
13,831,211 shares. This resulted from the issuance of 80,000
shares in lieu of interest payment on a subordinated debenture,
the issue of 8,000,000 shares of stock related to the purchase of
ProBio, the issuance of 300,666 shares of common stock pursuant
to the exercise of employee stock options, and the issuance of
7,511,787 shares to its manufacturer as regards the manufacturing
agreement. The weighting of the last issuance of 1,311,750
shares to its manufacturer will have only a minimal effect on the
weighted average number of shares of common stock outstanding as
they were not issued until the end of June, 2002.
Financial Position
__________________
During the six-month periods ended June 30, 2002 and 2001,
the following actions also materially affected the Company's
financial position:
- Igene increased inventory from manufacture during the six
month period ended June 30, 2002 by $791,899.
- The carrying value of redeemable preferred stock was
increased and paid-in capital available to common
shareholders was decreased by $8,450, reflecting cumulative
unpaid dividends on redeemable preferred stock.
- Due to increased activity in preparation for increased
production, prepaid expenses and other current assets
increased by $277,263 for the six-month period ended June
30, 2002.
- Accounts receivable collections during the six-month period
ended June 30, 2002 provided $221,359 in cash to the
Company.
-16-
IGENE Biotechnology, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Financial Position (continued)
_______________________________
- Due to the build-up of inventory, accounts payable and
accrued expenses increased by $1,003,797 during the
six-month period ended June 30, 2002.
In December 1988, as part of an overall effort to contain
costs and conserve working capital, Igene suspended payment of
the quarterly dividend on its preferred stock. Resumption of the
dividend will require significant improvements in cash flow.
Unpaid dividends cumulate for future payment or addition to the
liquidation preference or redemption value of the preferred
stock. As of June 30, 2002, total dividends in arrears on
Igene's preferred stock total $232,364 ($8.80 per share) and are
included in the carrying value of the redeemable preferred stock.
Liquidity and Capital Resources
_______________________________
Historically, Igene has been funded primarily by equity
contributions and loans from stockholders. As of June 30, 2002,
Igene had working capital of $81,033, and cash and cash
equivalents of $301,441.
Cash used by operating activities during the six-month
periods ended June 30, 2002 and 2001 amounted to $875,540 and
$866,387, respectively, an increase in cash used of $9,153.
Cash used by investing activities increased by $466,561,
from $52,545 for the six-month period ended June 30, 2001 to
$519,106 for the six-month period ended June 30, 2002. This was
mostly as a result of increased capital expenditures, mainly the
creation of an encapsulation plant in Norway to be used to reduce
the cost of bottling product as part of the Nutraceuticals
operation.
Cash provided by financing activities increased by $259,496
from $1,042,104 for the six-month period ended June 30, 2001 to
$1,301,600 for the six-month period June, 2002. Financing
activities consisted principally of notes from directors. For
the six-month periods ended June 30, 2002 and 2001, the
contributions were $1,000,000 and $1,050,000, respectively. The
increase in funding over the prior period is due mainly to loans
received to finance the creation of the encapsulation plant to be
used to reduce the cost of bottling product as part of the
Nutraceuticals operation.
Over the next twelve months, Igene believes it will need
additional working capital. Igene hopes to achieve profits from
sales of AstaXin(R) and Nutraceuticals, but additional funding
will also be required to finance increased customer receivables
and inventory levels caused by expansion of sales and
manufacturing. However, there can be no assurance that projected
profits, if any, from sales, or projected additional funding from
directors will be available to Igene to fund its continued
operations.
The Company does not believe that inflation has had a
significant impact on its operations during the six-month periods
ended June 30, 2002 and 2001.
-17-
IGENE Biotechnology, Inc. and Subsidiaries
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Archer Daniels Midland, Inc. ("ADM") has sued Igene,
alleging patent infringement and requesting injunctive
relief as well as an unspecified amount of damages (suit
filed July 21, 1997, U.S. District Court, Baltimore, MD).
Igene has filed a $300,450,000 counterclaim concerning the
theft of trade secrets (counter claim filed August 4, 1997).
The court denied ADM's request for preliminary injunctive
relief. Mediation efforts during 1999 did not resolve this
dispute, which has been returned to the court for a judicial
disposition. Presently, a stay on all discovery remains in
effect while a court-appointed expert analyzes the yeast
products of both parties. Igene believes that it is not
probable that this dispute will result in an unfavorable
outcome to Igene. Accordingly, no liability has been
reflected in the March 31, 2002 balance sheet. Nonetheless,
should ADM prevail, Igene could be liable for damages, and
Igene could also lose the right to use a particular strain
of yeast. However, Igene expects that this will not affect
Igene's ability to make and sell its product, AstaXin(R).
The Company had expenses of $-0-, in the six months ended
June 30, 2002 and 2001 relating to this on-going litigation.
Item 2. Changes in Securities and Use of Proceeds.
Limitation on Payment of Dividends
__________________________________
Dividends on Common Stock are currently prohibited because
of the preferential rights of holders of Preferred Stock.
The Company has paid no cash dividends on its Common Stock
in the past and does not intend to declare or pay any
dividends on its Common stock in the foreseeable future.
Sales of Unregistered Securities
________________________________
On July 17th 2002, Igene issued and sold $300,000 in
aggregate principal amount of it's 8% convertible debentures
to certain directors of Igene. These debentures are
convertible into shares of Igene's common stock at $.03 per
share based on the market price of Igene shares at the time
the debentures were agreed to. In consideration of the
commitment to purchase the 8% convertible debenture, these
directors also received an aggregate of 10,000,000 warrants
to purchase common stock at $.03 per share. These
debentures, if not converted earlier, become due on July
17th 2012. Igene believes that the issuance and sale of the
convertible debentures is exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended,
based on, among other things, the fact that the purchasers
of the securities were directors of the company at the time
of purchase.
During the course of 2000 and 2001, Fermic, Igene's
manufacturing agent, earned 5,043,019 shares of common stock
as part of the manufacturing agreement. They are able to
earn up to 20,000,000 shares throughout the course of the
contract. The 5,043,019 shares were earned at an average
price of $.06 per share over the period and issued at the
end of 2001. During the six months ended June 30, 2002,
Fermic earned an additional 2,468,768, shares, they have
been issued pursuant to this agreement at an average price
of $.04 per share or $97,209, which has been included as
cost of manufacturing. Any future shares earned by Fermic
will be issued on a quarterly basis. Igene relied on Section
4(2) of the Securities Act of 1933, as amended, to issue the
shares to Fermic without registration under that act. Igene
relied on the representations and warranties of Fermic made
in the manufacturing agreement in claiming the
aforementioned exemption.
As of August 13, 2002, the Board of Directors, in further
attempts to ascertain a manufacturing partner, has
authorized retention of the services of Mr. Martin Gerson.
The expected term of the service will be for two (2) years.
In compensation for this service, Mr. Gerson will be awarded
12,000,000 shares of Igene common stock. It is expected the
12,000,000 shares will be awarded in the third quarter
and they will be expensed at market value as compensation at
the time of the award.
-18-
IGENE Biotechnology, Inc. and Subsidiaries
PART II
OTHER INFORMATION
(continued)
Item 3. Defaults Upon Senior Securities.
In December 1988, as part of an overall effort to contain
costs and conserve working capital, the Company suspended
payment of the quarterly dividend on its preferred stock.
Resumption of the dividend will require significant
improvements in cash flow. Unpaid dividends cumulate for
future payment or addition to the liquidation preference or
redemption value of the preferred stock. As of June 30,
2002, total dividends in arrears on the Company's preferred
stock total $232,364 ($8.80 per share) and are included in
the carrying value of the redeemable preferred stock.
Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of stockholders held on July 16, 2002,
the following matters were submitted to stockholders' vote
and were approved by the requisite number of votes: (1) the
election of all eight directors of the Company: Joseph C.
Abeles, John A. Cenerazzo, Stephen F. Hiu, Thomas L.
Kempner, Michael G. Kimelman, Sidney R. Knafel, Patrick F.
Monahan; and Stein G. Ulve; and (2) the ratification of the
appointment of Stegman & Company as the Company's
independent auditors for the fiscal year ending December 31,
2002.
Results of the voting were as follows:
Votes Broker
Votes Against or Votes Non-
For Withheld Abstained Votes
__________ __________ _________ ______
(1) Election of Directors
Joseph C. Abeles 55,417,268 219,650 --- ---
John A. Cenerazzo 55,417,268 219,650 --- ---
Stephen F. Hiu 55,417,268 219,650 --- ---
Thomas L. Kempner 55,417,268 219,650 --- ---
Michael G. Kimelman 55,417,268 219,650 --- ---
Sidney R. Knafel 55,417,268 219,650 --- ---
Patrick F. Monahan 55,417,268 219,650 --- ---
Stein G. Ulve 55,417,268 219,650
(2) Ratification of Auditors 55,394,368 171,200 71,350 ---
Item 5. Other Information
Subsequent to the election of the Board of Directors, Joseph
C. Abeles and John A. Cenerazzo have tendered their
statement of resignation from their positions on the board,
effective immediately.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99 -- Certification of Chief Executive Officer
pursuant to 18 U.S.C. SECTION 1350.
Exhibit 99 -- Certification of Chief Financial Officer
pursuant to 18 U.S.C. SECTION 1350.
(b) Reports on Form 8-K
None
-19-
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
IGENE Biotechnology, Inc.
_________________________________
(Registrant)
Date August 14, 2002 By: /s/STEPHEN F. HIU
_______________ _____________________________
STEPHEN F. HIU
President
Date August 14, 2002 By: /s/EDWARD J. WEISBERGER
_______________ _____________________________
EDWARD J. WEISBERGER
Chief Financial Officer
-20-