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, 2003
[ ] 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 x No
___ ___
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
87,073,769 shares as of August 10, 2003.
_______________________________________
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 ............. 11-14
Management's Discussion and Analysis of Financial
Conditions and Results of Operations ................... 15-20
PART II - OTHER INFORMATION ............................ 21-22
SIGNATURES .................................................. 23
EXHIBIT INDEX ............................................... 24
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,
2003 2002
____________ ____________
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 366,634 $ 497,711
Accounts receivable (net of allowances of $24,000 in 2002) 576,655 528,065
Inventory --- 374,709
Prepaid expenses and other current assets 178,683 192,993
Assets to be disposed of --- 628,326
Deferred costs, current portion --- 74,160
____________ ____________
1,121,972 2,295,964
OTHER ASSETS
Property and equipment, net 177,562 196,258
Deferred costs, net of current portion --- 187,753
Equipment deposits 90,000 199,685
Investment in unconsolidated joint venture 11,953,000 ---
Loans receivable from manufacturing agent 267,851 324,405
Other assets 4,886 5,188
____________ ____________
TOTAL ASSETS $13,615,271 $ 3,209,253
============ ============
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,
2003 2002
____________ ____________
(Unaudited)
LIABILITIES, REDEEMABLE PREFERED STOCK
AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 496,996 $ 595,646
Notes payable - directors 150,000 250,000
Liabilities to be disposed of --- 655,763
Equipment lease payable 3,249 3,590
____________ ____________
TOTAL CURRENT LIABILITIES 650,245 1,504,999
LONG-TERM LIABILITIES
Notes payable 6,043,659 6,043,659
Convertible debentures 4,814,212 4,814,212
Equipment lease payable, net of current portion --- 1,205
Accrued interest 3,037,332 2,700,865
____________ ____________
TOTAL LIABILITIES 14,545,448 15,064,940
____________ ____________
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK
Carrying amount of redeemable preferred
stock, 8% cumulative, convertible,
voting, series A, $.01 par value per
share. Stated value was $ 17.44
and $17.12, respectively. Authorized
1,312,500 shares, issued 26,155 shares 456,223 447,774
____________ ____________
Carrying amount of redeemable preferred stock,
8% cumulative, convertible, voting, series B,
$.01 par value per share. Stated value $8.00 per share.
Authorized, issued and outstanding 187,000 shares.
Redemption amount $1,500,000 1,500,000 1,500,000
____________ ____________
STOCKHOLDERS' DEFICIT
Common stock --- $.01 par value per share.
Authorized 750,000,000 shares;
issued and outstanding 87,073,769
and 92,943,746 shares, respectively. 870,738 929,437
Additional paid-in capital 34,255,721 22,387,604
Deficit (38,012,859) (37,120,502)
____________ ____________
TOTAL STOCKHOLDERS' DEFICIT (2,886,400) (13,803,461)
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $13,615,271 $ 3,209,253
============ ============
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,
2003 2002 2003 2002
____________ ____________ ____________ ____________
REVENUE
_______
Sales - AstaXin(R) $ 152,705 $ 660,664 $ 463,486 $ 1,168,915
Cost of sales - AstaXin(R) 143,962 603,981 444,946 1,034,641
____________ ____________ ____________ ____________
GROSS PROFIT 8,743 56,683 18,540 134,274
____________ ____________ ____________ ____________
OPERATING EXPENSES
__________________
Marketing and selling (32,530) 126,620 68,756 271,417
Research, development and pilot plant (27,702) 141,626 127,695 322,017
General and administrative 79,812 155,170 221,751 387,995
____________ ____________ ____________ ____________
TOTAL OPERATING EXPENSES 19,580 423,416 418,202 981,429
____________ ____________ ____________ ____________
OPERATING LOSS (10,837) (366,733) (399,662) (847,155)
____________ ____________ ____________ ____________
EQUITY IN EARNINGS(LOSS)OF UNCONSOLIDATED SUB (347,000) --- (347,000) ---
INTEREST EXPENSE (177,901) (305,350) (383,132) (523,491)
____________ ____________ ____________ ____________
NET LOSS FROM CONTINUING OPERATIONS (535,738) (672,083) (1,129,794) (1,370,646)
____________ ____________ ____________ ____________
DISCONTINUED OPERATIONS
_______________________
Net loss from discontinued operations --- (115,331) --- (133,003)
Gain on disposal of discontinued operations --- --- 237,437 ---
____________ ____________ ____________ ____________
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS --- (115,331) 237,437 (133,003)
____________ ____________ ____________ ____________
NET LOSS $ (535,738) $ (787,414) $ (892,357) $(1,503,649)
____________ ____________ ____________ ____________
BASIC AND DILUTED NET LOSS PER COMMON SHARE
FROM CONTINUING OPERATIONS $ (0.01) $ (0.01) $ (0.01) $ (0.02)
____________ ____________ ____________ ____________
BASIC AND DILUTED NET INCOME (LOSS)PER COMMON SHARE
FROM DISCONTINUED OPERATIONS $ (0.00) $ (0.00) $ (0.00) $ (0.00)
____________ ____________ ____________ ____________
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.01) $ (0.01) $ (0.01) $ (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, 2002 26,405 $ 435,154
Cumulative undeclared dividends
on redeemable preferred stock --- 8,450
Exercise of employee stock options --- ---
Exercise of warrants --- ---
Net loss for the six months ended June 30, 2002 --- ---
______________ ______________
Balance at June 30, 2002 26,405 $ 443,604
============== ==============
Balance at January 1, 2003 213,155 $ 1,947,774
Cumulative undeclared dividends
on redeemable preferred stock --- 8,449
Exercise of employee stock options --- ---
Exercise of warrants --- ---
Net loss for the six months ended June 30, 2003 --- ---
______________ ______________
Balance at June 30, 2003 213,155 $ 1,956,223
============== ==============
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, 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) (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)
=========== =========== ============= ============= ============= =============
Balance at January 1, 2003 92,943,746 $ 929,437 $ 22,387,604 $(37,120,502) --- $(13,803,461)
Cumulative undeclared dividends
on redeemable preferred stock --- --- (8,450) --- --- (8,450)
Shares received and retired in
ProBio Sale (7,000,000) (70,000) (140,000) --- --- (210,000)
Investment in unconsolidated joint venture --- --- 11,983,131 --- --- 11,983,131
Shares issued for manufacturing agreement 1,130,023 11,301 33,435 --- --- 44,736
Net loss for the six months ended
June 30, 2003 --- --- --- (892,357) --- (892,357)
___________ ___________ _____________ _____________ _____________ _____________
Balance at June 30, 2003 87,073,769 $ 870,738 $ 34,255,721 $(38,012,859) $ --- $ (2,886,400)
=========== =========== ============= ============= ============= =============
The accompanying notes are an integral part of the financial statements.
-9-
IGENE Biotechnology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
__________________________________
June 30, June 30,
2003 2002
_____________ _____________
Cash flows from operating activities
Net loss $ (892,357) $ (1,503,649)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation 11,784 26,455
Amortization 54,729 58,257
Foreign currency translation adjustment --- 106,422
Manufacturing cost paid in shares of common stock 44,736 97,209
Interest on debenture paid in shares of common stock --- 90,000
Equity in earnings of unconsolidated sub 347,000 ---
Decrease (increase) in:
Accounts receivable (48,590) 221,359
Inventory 374,709 (791,899)
Prepaid expenses and other current assets 43,729 (183,491)
Increase (decrease) in:
Accounts payable and accrued expenses 29,974 (1,003,797)
_____________ _____________
Net cash used in operating activities (34,286) (875,540)
_____________ _____________
Cash flows from investing activities
Capital (expenditures) & sales 3,209 (425,334)
Deposits and other assets --- (93,722)
_____________ _____________
Net cash (used) provided by investing activities 3,209 (519,106)
_____________ _____________
Cash flows from financing activities
Proceeds (repayment) from borrowing (100,000) 1,000,000
Proceeds of long-term debt --- 301,600
_____________ _____________
Net cash (used) provided by financing activities (100,000) 1,301,600
_____________ _____________
Net decrease in cash and cash equivalents (131,077) (93,046)
Cash and cash equivalents at beginning of period 497,711 394,487
_____________ _____________
Cash and cash equivalents at end of period $ 366,634 $ 301,441
============= =============
Supplementary disclosure and cash flow information
__________________________________________________
Cash paid for interest $ 30,994 $ 508
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 Subsidiary
Notes to Financial Statements
(1) Unaudited consolidated financial statements
The June 30, 2003, consolidated financial statements 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, 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, 2002.
(2) Noncash investing and financing activities
During the six months ended June 30, 2003 and 2002, the Company
recorded in each quarter dividends in arrears on 8% redeemable
preferred stock cumulating at $.16 per share aggregating $8,449,
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, 2003, the Company entered into
a Joint Venture Agreement with Tate & Lyle Fermentation Products
Ltd. ("Tate") Pursuant to a Joint Venture Agreement, the Company
and Tate agreed to form a joint venture (the "Joint Venture") to
manufacture, market and sell Astaxanthin and derivative products
throughout the world for all uses other than as a Nutraceutical or
otherwise for direct human consumption. Tate contributed
$24,600,000 in cash to the Joint Venture, while the Company has
agreed to transfer to the Joint Venture its technology relating to
the production of Astaxanthin and assets related thereto. These
assets will continue to be used by the Joint Venture in the same
manner as historically used by the Company. The Company and Tate
each have a 50% ownership interest in the Joint Venture and equal
representation on the Board of Directors of the Company. The value
of the Company's technology investment was deemed equivalent to cash
contribution of Tate & Lyle. Unamortized production costs in the
amount of $316,869 were contributed to the Joint Venture reducing
the adjustment to additional paid in capital.
During the six months ended June 30, 2003, Igene sold its subsidiary
ProBio to Fermtech AS in exchange for aggregate consideration valued
at approximately $343,000, consisting of 7,000,000 shares of Igene
common stock (including 2,000,000 shares that were placed into
escrow and may be reissued to Fermtech as described below), valued
for the purposes of the acquisition at $.03 per share, plus
forgiveness of approximately $168,000 of debt that Igene owed to
ProBio at the time of purchase in 2001. Provided Mr. Benjaminsen
remains employed by Igene through 2003, 1,000,000 of the escrowed
shares of common stock will be delivered to Fermtech. If Mr.
Benjaminsen remains employed by Igene through 2004, the remaining
1,000,000 escrowed shares will be released from escrow and delivered
to Fermtech.
During the six months ended June 30, 2003, the Company extended
repayment on demand notes of $6,043,659 and related accrued interest
of $2,865,810 until March 31, 2006.
During the six months ended June 30, 2002 the company issued 40,000
shares of common stock 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.
(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 Pesos.
-11-
IGENE Biotechnology, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(4) Inventories
As part of the Joint Venture Agreement, inventory will be maintained
by the joint venture. As a result Igene sold the remainder of it's
inventory and plans to no longer maintain inventory. December 31,
2002 figures for inventory are stated at lower of cost, on a first-
in first-out basis, or market value; work in process, and finished
goods represents product manufactured and held for sale are as
follows:
June 30, December 31,
2003 2002
____________ ____________
Work-in-process - AstaXin(R) $ --- $ 11,308
Finished goods - AstaXin(R) --- 363,401
____________ ____________
Total inventory $ --- $ 374,709
(5) Stockholders' Equity (Deficit)
As of June 30, 2003 and 2002, 52,310 and 52,810 shares respectively
of authorized but unissued common stock were reserved for issue upon
conversion of the Company's outstanding preferred stock.
As of June 30, 2003 and 2002, 74,604,500 shares, 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, 2003, 6,666,666 shares, of authorized but unissued
common stock were reserved for distribution and exercise pursuant to
a stock option agreement with past officers of the Company, which
options shall be valid and executable until January 22, 2004.
As of June 30, 2002, 40,000 shares of authorized but unissued common
stock were reserved for issuance for payment of interest on the
variable rate subordinated debenture.
As of June 30, 2003 and 2002, 17,565,970 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, 2003 and 2002, 66,427,651 and 31,427,651 shares,
respectively, of authorized but unissued common stock were reserved
for the conversion of outstanding convertible promissory notes held
by directors of the Company.
As of June 30, 2003 and 2002 10,000,000 shares of authorized but
unissued common stock were reserved for the conversion of
outstanding convertible promissory notes issued as part of the
purchase of ProBio.
As of June 30, 2003 and 2002, 198,016,073 and 188,016,085 shares,
respectively, of authorized but unissued common stock were reserved
for the exercise of outstanding warrants.
As of June 30, 2003 and 2002, 10,566,708 and 12,488,213 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.
(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, 2003 and 2002 is based on 86,524,457 and
76,207,730, 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 in the amount of $8,449 and
$8,450 for the six months ended June 30, 2003 and 2002,
respectively. No adjustment has been made for any common stock
equivalents outstanding because their effects would be antidilutive.
-12-
Notes to Consolidated Financial Statements
IGENE Biotechnology, Inc. and Subsidiaries
(continued)
(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. On July 3, 2003 the presiding judge set a
court date of July 5, 2004 to return to trail. 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, 2003 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). Igene has had no expenses for the six months
ended June 30, 2003 and 2002 relating to this on-going litigation.
With the resumption of matters it is expected Igene will again need
to bear legal cost related to this matter.
(9) Uncertainty
Igene has incurred net losses in each year of its existence,
aggregating approximately $38,000,000 from inception to June 30,
2003 and its liabilities and redeemable preferred stock exceeded its
assets by approximately $2,886,400 at that date. These factors
indicate that Igene will not be able to continue in existence unless
it is able to raise additional capital and attain profitable
operations.
The continuing successful marketing of Igene's product, AstaXin(R),
has permitted Igene the opportunity to attract additional capital
through it's venture with Tate and Lyle. Igene began manufacturing
and selling AstaXin(R) during 1998 and has continued to do so to
date, attempting to increase sales and manufacturing levels. Igene
believes this technology to be highly marketable. Igene hopes to
continue increasing sales of AstaXin(R), eventually achieving gross
profits and, subsequently, profitable operations, although the
achievement of these cannot be assured.
During 2002 Igene continued to fund its operations through the
issuance of warrants and convertible debentures through direct
purchases and loans by directors and other accredited investors.
This provided additional capital of $1,550,000.
-13-
Notes to Consolidated Financial Statements
IGENE Biotechnology, Inc. and Subsidiaries
(continued)
(10) Stock Based Compensation
The company accounts for those plans under the recognition and
measurement principles of APB opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. No stock option
based employee compensation cost is reflected in net income, as all
options granted under the plan had an exercise price equal to the
market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-
Based Compensation" and disclosure provisions of SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure",
to stock-based employee compensation for the three and six months
ended June 30:
Three months ended Six months ended
__________________________ __________________________
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
____________ ____________ ____________ ____________
Net loss:
As reported $ (535,738) $ (787,414) $ (892,357) $(1,503,649)
Less pro forma stock-based employee
compensation expense determined under fair
value based method net of related tax
effects (159,578) (171,250) (264,162) (342,500)
____________ ____________ ____________ ____________
Net loss $ (695,316) $ (958,664) $(1,156,519) $(1,846,149)
============ ============ ============ ============
Net loss per Share:
Basic - as reported $ (0.01) $ (0.01) $ (0.01) $ (0.02)
Basic - pro forma $ (0.01) $ (0.01) $ (0.01) $ (0.02)
Diluted - as reported $ (0.01) $ (0.01) $ (0.01) $ (0.02)
Diluted - pro forma $ (0.01) $ (0.01) $ (0.01) $ (0.02)
(11) Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation ("FIN") No. 46 "Consolidation of Variable
Interest Entities" which clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements". The
provision of FIN No. 46 are effective July 1, 2003 for variable
interest entities created before January 31, 2003. The company
believes that the implementation of the standard will not have a
material effect on its financial statements.
-14-
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.
Critical Accounting Policies
____________________________
The preparation of our financial statements in conformity with
accounting principles generally accepted in the U.S. requires management
to make judgments, assumptions and estimates that affect the amounts
reported in our financial statements and accompanying notes. Actual
results could differ materially from those estimates. The following are
critical accounting policies important to our financial condition and
results presented in the financial statements and require management to
make judgments and estimates that are inherently uncertain:
Our inventories are stated at the lower of cost or market. Cost is
determined using a weighted-average approach, which approximates the
first-in first-out method. If the cost of the inventories exceeds their
expected market value, provisions are recorded for the difference between
the cost and the market value. Inventories consist of currently marketed
products.
We are currently involved in certain legal proceedings as discussed
in Item 3, "Legal Proceedings," in Part I. As of June 30, 2003, 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, 2003 balance sheet.
We recognize revenue from product sales when there is persuasive
evidence that an arrangement exists, delivery has occurred, the price is
fixed and determinable, and collectibility is reasonably assured.
Allowances are established for estimated uncollectible amounts, product
returns and discounts.
The Joint Venture as referred to in the following Recent
Developments paragraph, will enter into a lease of real property with an
affiliate of Tate in Selby, England upon which a new manufacturing
facility will be constructed and operated by the Joint Venture.
-15-
IGENE Biotechnology, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Recent Developments
___________________
On March 18, 2003, Igene Biotechnology, Inc. (the "Company") entered
into a Joint Venture Agreement (the "JV Agreement") with Tate & Lyle
Fermentation Products Ltd. ("Tate"). Pursuant to the JV Agreement, the
Company and Tate agreed to form a joint venture (the "Joint Venture") to
manufacture, market and sell Astaxanthin and derivative products
throughout the world for all uses other than as a Nutraceutical or
otherwise for direct human consumption. Tate has agreed to contribute
$24,614,000 in cash to the Joint Venture, while the Company has agreed to
transfer to the Joint Venture its technology relating to the production
of Astaxanthin and assets related thereto. These assets will continue to
be used by the Joint Venture in the same manner as used by the Company.
Each of Igene and Tate will have a 50% ownership interest in the Joint
Venture and will have equal representation on the Board of Directors of
the Company.
Results of Operations
_____________________
Sales and other revenue
Sales of AstaXin(R) during the quarter ended June 30, 2003 and 2002,
were $152,705 and $660,664, respectively, a decrease of $507,959 or 77%.
Sales for the six-month periods ended June 30, 2003 and 2002, were
$463,486 and $1,168,915, respectively, a decrease of $705,429 or 60%.
Sales have been limited in the past quarters due to insufficient
production quantity. In addition, as of the middle of June, Igene had
sold the remaining inventory in the Company's possession prior to the
consummation of the JV Agreement. At this point all further sales will
be recognized through the venture company and are expected to increase as
production increases. Management anticipates that the Joint Venture with
Tate & Lyle will provide a more dependable product flow. However, there
can be no assurance of the dependability of production, or that 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 $8,743 for the quarter ended
June 30, 2003. This is a decrease of $47,940 from the $56,683 for the
same quarter in the preceding year. Gross profit on sales of AstaXin(R)
was $18,540 for the six month period ended June 30, 2003 which is a
decrease of $115,734 from the $134,274 for the six months ended June 30,
2002. Gross profit fell from 11% of sales for the six months ended June
30, 2002, to 4% for the six months ended June 30, 2003. The company
attributes the fall in gross profit to a combination of pricing pressure
in the market and inefficiencies in production. Management expects the
level of gross profit to improve in the future as a percentage of sales,
with expected increases in production efficiency received from the joint
venture with Tate & Lyle offsetting pricing competition, but can provide
no assurances in that regard. Demand is expected to increase both due to
seasonal increases in customer usage and increases in our market share.
Management expects that sales and gross profits may be limited by the
quantities of AstaXin the Company is able to produce with its presently
available capacity with its contract manufacturer, while the joint
venture prepares to produce product. Sales and gross profit growth, if
any, may be limited unless augmented by increases in production
efficiency resulting from process research and development.
The preceding resulted in cost of sales for the quarter ended June
30, 2003 and 2002 of $143,962 and $603,981, respectively, a decrease of
$460,019 or 76%. The reduction in cost was a result of reduced quantity
produced, not a result of increased production efficiencies.
Marketing and selling expenses
For the quarter ended June 30, 2003 Igene recorded a negative
Marketing Expense in the amount of $32,530. As a result of the Joint
Venture with Tate and Lyle, the Joint Venture will be responsible of the
costs related to marketing. As a result of this any costs associated
with the marketing of AstaXin(R) will be reimbursed by the Joint Venture.
As the Venture was consummated as of March 3, 2003, Igene was reimbursed
in the second quarter for the expenses incurred in the first quarter of
2003 as well as the second quarter expenses.
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IGENE Biotechnology, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Research, development and pilot plant expenses
For the quarter ended June 30, 2003 Igene recorded a negative
Research, development and pilot plant expense, in the amount of $27,702.
As a result of the Joint Venture with Tate and Lyle, the Joint Venture
will be responsible for the costs related to research. As a result of
this, any costs associated with the development of AstaXin(R) will be
reimbursed by the Joint Venture. As the venture was consummated as of
March 3, 2003, Igene was reimbursed in the second quarter for the
expenses incurred in the first quarter of 2003 as well as the second
quarter expenses.
Operating expenses
General and administrative expenses for the quarters ended June 30,
2003 and 2002 were $79,812 and $155,170, respectively, a decrease of
$75,358 or 49%. This decrease results concurrently with the disposition
of ProBio Nutraceuticals, reducing additional management and the related
overhead incurred. In addition, as with the Marketing and Research costs
the joint venture is reimbursing Igene for the General and Administrative
expenses that are associated with the Marketing and Research of
AstaXin(R). This is expected to defray the general operating costs.
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 Archer Daniels Midland, Inc. (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 its
rights will be preserved. The Company incurred no litigation expenses
for six months ended June 30, 2003 and 2002. On July 3, 2003 the
presiding judge set a court date of July 5, 2004, to return to trial.
Costs of litigation will continue in the future at levels 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, if any.
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, 2003 financial statements. With the resumption of
matters it is expected Igene will again need to bear legal cost related
to this matter.
Interest expense
Interest expense for the quarters ended June 30, 2003 and 2002 was
$305,350 and $177,901, respectively, a decrease of $127,449 or 41%.
This interest expense 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.
Equity in earnings of unconsolidated subsidiary
As a result of the joint venture the former production sales and
marketing of Astaxanthin will take place as part of the unconsolidated
subsidiary. For the initial quarter ended June 30, 2003, Igene's portion
of the joint venture loss was $347,000. The loss was a result of a 50%
interest in the following: Gross profit for the quarter was $11,000 on
sales of $102,000 less manufacturing cost of $91,000. Selling and
general and administrative expenses for the period were $716,000 and
interest income was $11,000. The resulting loss before tax was $694,000.
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IGENE Biotechnology, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Disposition of ProBio Subsidiary from discontinued operations
As reported on Form 8-K filed on February 20, 2003, the Company, in
an effort to focus on and grow its core business, has disposed of all
10,000 of the issued and outstanding shares of capital stock of its
former subsidiary, ProBio Nutraceuticals, AS, a Norwegian corporation.
Fermtech AS, a joint stock company incorporated in the Kingdom of Norway
and owned equally by our then chief executive officer, Stein Ulve and our
then-chief marketing officer, Per Benjaminsen, purchased the shares of
ProBio. Mr. Ulve has resigned as CEO and director of Igene and Mr.
Benjaminsen has retired as our chief marketing officer, effective as of
December 31, 2002.
The amount of consideration paid for ProBio was determined through
arms-length negotiations between Igene Biotechnology, Inc. management, on
behalf of Igene, and Mr. Ulve, on behalf of Fermtech. The principles
followed in determining the amount paid for the ProBio shares involved a
consideration of ProBio's cash flow, cash position, revenue and revenue
prospects.
The equipment and other physical property disposed of belonging to
ProBio includes inventory, personal computers, a web site and trademark,
other office equipment and furniture, and accounts receivables and
accounts payables related to nutraceuticals. For the six months ended
June 30, 2002, the net operating loss of the division being sold as
ProBio are $133,003 on sales of $1,131,206 and are reflected on the June
30, 2002 income statement as loss from discontinued operations.
Gain on disposition
Igene sold ProBio to Fermtech AS in exchange for aggregate
consideration valued at approximately $343,000, consisting of 7,000,000
shares of Igene common stock (including 2,000,000 shares that were placed
into escrow and may be reissued to Fermtech as described below), valued
for the purposes of the acquisition at $.03 per share, plus forgiveness
of approximately $168,000 of debt that Igene owed to ProBio at the time
of purchase in 2001. Provided Mr. Benjaminsen remains employed by Igene
through 2003, 1,000,000 of the escrowed shares of common stock will be
delivered to Fermtech. If Mr. Benjaminsen remains employed by Igene
through 2004, the remaining 1,000,000 escrowed shares will be released
from escrow and delivered to Fermtech. Gain on disposal for during the
first quarter of 2003 was $237,427. This gain was a one-time occurrence
as a result of the disposition of the assets and liabilities associated
with ProBio Nutraceuticals.
Net loss and basic and diluted net loss per common share
As a result of the foregoing, the Company reported net losses of
$535,738 and $787,414, respectively, for the quarters ended June 30, 2003
and 2002, a decrease in the loss of $251,676 or 32%. This represents a
loss of $.01 per basic and diluted common share in each of the quarters
ended June 30, 2003 and 2002. The weighted average number of shares of
common stock outstanding of 86,524,457 and 77,045,178, for the quarters
ended June 30, 2003 and 2002, respectively, has increased by 9,479,279
shares. This resulted from the issuance of 194,400 shares of common stock
in exercise of warrant, 12,000,000 shares issued to Mr. Gerson as
manufacturing agent, 1,921,501 shares issued to the manufacturer as part
of the agreement, 1,600,000 shares issued to Mr. Hiu and Mr. Monahan in
lieu of compensation, reduced by the retirement of 7,000,000 shares
retired as part of the disposition of ProBio.
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IGENE Biotechnology, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Financial Position
During the six-month periods ended June 30, 2003 and 2002, in
addition to the Joint Venture previously discussed, the following actions
also materially affected the Company's financial position.
o Igene sold or transferred all of its inventory during the quarter
ended June 30, 2002, the result was an increase in cash to operating
activities of $374,000.
o The carrying value of redeemable preferred stock was increased and
paid-in capital available to common shareholders was decreased by
$8,449 in 2003 and 2002, reflecting cumulative unpaid dividends on
redeemable preferred stock.
o During the quarter ended June 30, 2003, $100,000 cash was used for
the repayment of previous financing activity.
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, 2003, total dividends in
arrears on Igene's preferred stock total $246,903 ($9.44 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, 2003, Igene had
working capital of $471,727, and cash and cash equivalents of $366,634.
Cash used by operating activities during the six-month period ended
June 30, 2003 and 2002 amounted to $34,286 and $875,540, respectively, a
decrease in cash used of $841,254.
Cash of $3,209 was provided by investing activities on asset sales
for the six months ended June 30, 2003, rather than the $519,106 used for
the six-month period ended June 30, 2002.
Cash was used by financing activities in repayment of loans in the
amount of $100,000 for the six-month period ended June 30, 2003 as
opposed to the $1,301,600 provided by financing activities for the six-
month period ended June 30, 2002. Financing activities consisted
principally of notes from directors.
Over the next twelve months, Igene believes it will need additional
working capital. Igene hopes to achieve profits from sales of AstaXin(R)
through the Joint Venture. This funding is expected to be received from
the new venture with Tate & Lyle. However, there can be no assurance
that projected profits, if any, from sales, or additional funding from
the Joint Venture will be sufficient for 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, 2003
and 2002.
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IGENE Biotechnology, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Item 3. Controls and Procedures
As of the end of the most recently completed fiscal quarter, the
Company's management, with the participation of the principal executive
officer and principal financial officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures, and has concluded
that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange Act of
1934, as amended, is accumulated and communicated to the Company's
management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding
required disclosure and are effective to ensure that such information is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
There were no changes in Igene's internal control over financial
reporting that occurred during the last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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IGENE Biotechnology, Inc.
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. On July 3, 2003 the presiding
judge set a court date of July 5, 2004, to return to trial. 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, 2003 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 period
ended June 30, 2003 and 2002 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.
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, 2003, total dividends in
arrears on the Company's preferred stock total $246,903($9.44 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 June 13, 2003, the
following matters were submitted to stockholders' vote and were approved
by the requisite number of votes: (1) the election of six directors of
the Company: Stephen F. Hiu, Thomas L. Kempner, Michael G. Kimelman,
Sidney R. Knafel, and Patrick F. Monahan; and (2) the ratification of the
appointment of Stegman & Company as the Company's independent auditors
for the fiscal year ending December 31, 2003.
Results of the voting were as follows:
Votes Broker
Votes Against or Votes Non-
For Withheld Abstained Votes
__________ __________ __________ __________
(1) Election of Directors
Stephen F. Hiu 59,875,824 178,650 --- ---
Thomas L. Kempner 59,875,824 178,650 --- ---
Michael G. Kimelman 59,875,824 178,650 --- ---
Sidney R. Knafel 59,875,824 178,650 --- ---
Patrick F. Monahan 59,875,824 178,650 --- ---
(2) Ratification of Auditors 59,952,074 91,400 11,000 ---
Item 5. Other Information
None.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31(a) - Certification of Principal Executive Officer
pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
Exhibit 31(b) - Certification of Principal Financial Officer
pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
Exhibit 32(a) - Certification of Chief Executive Officer pursuant to
18 U.S.C. SECTION 1350.
Exhibit 32(b) - Certification of Chief Financial Officer pursuant to
18 U.S.C. SECTION 1350.
(b) Reports on Form 8-K
On May 6, 2003 Igene filed a Current Report on Form 8-K disclosing
the terms for the Joint Venture Agreement entered into as of March
18, 2003 between Tate & Lyle Fermentation Products Ltd., a
subsidiary of Tate & Lyle PLC and Igene Biotechnology, Inc.
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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, 2003 By /s/STEPHEN F. HIU
___________________________
STEPHEN F. HIU
President
Date August 14, 2003 By /s/EDWARD J. WEISBERGER
__________________________
EDWARD J. WEISBERGER
Chief Financial Officer
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EXHIBIT INDEX
Exhibit 31(a) - Certification of Principal Executive Officer
pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
Exhibit 31(b) - Certification of Principal Financial Officer
pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
Exhibit 32(a) - Certification of Chief Executive Officer pursuant
to 18 U.S.C. SECTION 1350.
Exhibit 32(b) - Certification of Chief Financial Officer pursuant
to 18 U.S.C. SECTION 1350.
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