U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 March 31, 2004
______________
[ ] 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:
94,275,531 shares of common stock, par value $.01, as of May 12, 2004.
______________________________________________________________________
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
Consolidated Statements of Operations .................... 6
Consolidated Statements of Stockholders' Deficit ......... 7-8
Consolidated Statements of Cash Flows .................... 9
Notes to Consolidated Financial Statements ............... 10-14
Management's Discussion and Analysis of Financial
Conditions and Results of Operations ..................... 15-20
PART II - OTHER INFORMATION ................................. 21
SIGNATURES .................................................... 22
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
March 31, December 31,
2004 2003
_____________ _____________
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 183,551 $ 63,075
Accounts receivable 200,306 156,458
Due from Joint Venture 430,260 495,183
Prepaid expenses and other current assets 37,060 43,675
_____________ _____________
851,177 758,391
OTHER ASSETS
Property and equipment, net 144,119 148,931
Loans receivable from manufacturing agent 118,966 122,964
Investment in unconsolidated Joint Venture 10,717,506 11,391,506
Other assets 4,886 4,886
_____________ _____________
TOTAL ASSETS $ 11,836,654 $ 12,426,678
============= =============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 220,357 $ 185,862
Equipment lease payable 571 1,498
_____________ _____________
TOTAL CURRENT LIABILITIES 220,928 187,360
LONG-TERM LIABILITIES
Notes payable 5,842,767 5,842,767
Convertible debentures 4,814,212 4,814,212
Accrued interest 3,588,007 3,398,272
_____________ _____________
REDEEMABLE PREFERRED STOCK
Carrying amount of redeemable preferred stock, 8% cumulative, convertible,
voting, series A, $.01 par value per share. Stated value was $17.92
and $17.76, respectively. Authorized 1,312,500 shares, issued 25,605 458,970 454,745
_____________ _____________
Carrying amount of redeemable preferred stock,
8% cumulative, convertible, voting, series B, $.01 par value per share.
Stated value was $8.96 and $8.80 respectively, per share. Authorized,
issued and outstanding 187,500 shares. 1,680,000 1,650,000
_____________ _____________
TOTAL LIABILITIES 16,604,884 16,347,356
_____________ _____________
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock --- $.01 par value per share. Authorized 750,000,000 shares;
issued and outstanding 93,722,769and 92,747,469 shares, respectively. 937,228 927,475
Additional paid-in capital 34,534,267 34,471,490
Deficit (40,239,725) (39,319,643)
_____________ _____________
TOTAL STOCKHOLDERS' DEFICIT (4,768,230) (3,920,678)
_____________ _____________
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 11,836,654 $ 12,426,678
============= =============
The accompanying notes are an integral part of the financial
statements.
-5-
IGENE Biotechnology, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three months ended
_______________________________
March 31, March 31,
2004 2003
_____________ _____________
REVENUE
_______
Sales - AstaXin(R) $ --- $ 310,782
Cost of sales - AstaXin(R) --- (300,534)
_____________ _____________
GROSS PROFIT --- 10,247
OPERATING EXPENSES
__________________
Marketing and selling 48,022 101,286
Research, development and pilot plant 208,410 155,397
General and administrative 149,878 141,939
Litigation expense 13,080 ---
Less operating expenses reimbursed by Joint Venture (363,044) ---
_____________ _____________
TOTAL OPERATING EXPENSES 56,346 398,622
_____________ _____________
OPERATING LOSS (56,346) (388,375)
_____________ _____________
EQUITY IN LOSS OF UNCONSOLIDATED SUBSIDIARY (674,000) ---
INTEREST EXPENSE (189,736) (205,231)
_____________ _____________
NET LOSS FROM CONTINUING OPERATIONS (920,082) (593,606)
_____________ _____________
DISCONTINUED OPERATIONS
_______________________
Gain on disposal of discontinued operations --- 237,437
_____________ _____________
NET GAIN FROM DISCONTINUED OPERATIONS --- 237,437
_____________ _____________
NET LOSS $ (920,082) $ (356,169)
============= =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE
FROM CONTINUING OPERATION $ (0.01) $ (0.01)
_____________ _____________
BASIC AND DILUTED NET LOSS PER COMMON SHARE
FROM DISCONTINUED OPERATIONS $ (0.00) $ (0.00)
_____________ _____________
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.01) $ (0.01)
============= =============
The accompanying notes are an integral part of the financial
statements.
-6-
IGENE Biotechnology, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
(Unaudited)
Redeemable Preferred Stock
______________________________________
(shares/amount)
Balance at January 1, 2003 213,155 $ 1,947,774
Cumulative undeclared dividends
on redeemable preferred stock --- 4,185
Exercise of employee stock options --- ---
Exercise of warrants --- ---
Net loss for the three months ended March 31, 2003 --- ---
_____________ _____________
Balance at March 31, 2003 213,155 $ 1,951,959
============= =============
Balance at January 1, 2004 213,105 $ 2,104,745
Cumulative undeclared dividends
on redeemable preferred stock --- 34,225
Exercise of employee stock options --- ---
Exercise of warrants --- ---
Net loss for the three months ended March 31, 2004 --- ---
_____________ _____________
Balance at March 31, 2004 213,105 $ 2,138,970
============= =============
The accompanying notes are an integral part of the financial
statements.
-7-
IGENE Biotechnology, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
(Unaudited - Continued)
Additional Total
Common Stock Paid-in Stockholders'
(shares/amount) Capital Deficit Deficit
___________________________ ______________ ______________ ______________
Balance at January 1, 2002 92,943,746 $ 929,437 $ 22,387,604 $ (37,120,502) $ (13,803,461)
Cumulative undeclared dividends
on redeemable preferred stock --- --- (4,185) --- (4,185)
Shares received and retired in
ProBio Sale (7,000,000) (70,000) (140,000) --- (210,000)
Shares issued for manufacturing agreement 580,711 5,808 8,709 --- 14,517
Net loss for the three months ended
March 31, 2003 --- --- --- (356,169) (356,169)
_____________ _____________ ______________ ______________ ______________
Balance at March 31, 2003 86,524,457 $ 865,245 $ 22,252,128 $ (37,476,671) $ (14,359,298)
============= ============= ============== ============== ==============
Balance at January 1, 2004 92,747,469 $ 927,475 $ 34,471,490 $ (39,319,643) $ (3,920,678)
Cumulative undeclared dividends
On redeemable preferred stock --- --- (34,225) --- (34,225)
Employee stock option exercise 300,000 3,000 15,500 --- 18,500
Shares issued for manufacturing Agreement 675,300 6,753 81,502 --- 88,255
Net loss for the three months ended
March 31, 2004 --- --- --- (920,082) (920,082)
_____________ _____________ ______________ ______________ ______________
Balance at March 31, 2004 93,722,769 $ 937,228 $ 34,534,267 $ (40,239,725) $ (4,768,230)
============= ============= ============== ============== ==============
The accompanying notes are an integral part of the financial
statements.
-8-
IGENE Biotechnology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31, March 31,
2004 2003
_____________ _____________
Cash flows from operating activities
Net loss $ (920,082) $ (356,169)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation 4,812 5,892
Amortization --- 29,129
Manufacturing cost paid in shares of common stock 88,255 14,517
Equity in loss of unconsolidated joint venture 674,000 ---
Decrease (increase) in:
Accounts receivable (39,850) 544,051
Due from Joint Venture 64,923 ---
Inventory --- (407,172)
Prepaid expenses and other current assets 6,615 (49,158)
Increase (decrease) in
Accounts payable and accrued expenses 224,230 (260,910)
_____________ _____________
Net cash provided by (used in) operating activities 102,903 (479,820)
_____________ _____________
Cash flows from investing activities
Net cash used in investing activities --- ---
_____________ _____________
Cash flows from financing activities
Proceeds from borrowing --- 100,000
Repayment of equipment lease payable (927) ---
Proceeds from exercise of employee stock options 18,500 ---
_____________ _____________
Net cash provided by financing activities 17,573 100,000
_____________ _____________
Net increase (decrease) in cash and cash equivalents 120,476 (379,820)
Cash and cash equivalents
at beginning of period 63,075 497,711
_____________ _____________
Cash and cash equivalents
at end of period $ 183,551 $ 117,891
============= =============
Supplementary disclosure and cash flow information
__________________________________________________
Cash paid for interest $ --- $ 141
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.
-9-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Financial Statements
(1) Unaudited consolidated financial statements
The March 31, 2004, 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, 2003.
(2) Noncash investing and financing activities
During the three months ended March 31, 2004 and 2003, the
Company recorded in each quarter dividends in arrears on 8%
redeemable preferred stock cumulating at $.16 per share
aggregating $34,225, which has been removed from paid-in
capital and included in the carrying value of the redeemable
preferred stock.
On March 18, 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 contribute 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. Unamortized production costs in the amount of
$316,869 were contributed to the Joint Venture reducing the
adjustment to additional paid in capital.
On February 4, 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 that ProBio owned (including 2,000,000
shares that 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.
1,000,000 of the escrowed shares of common stock were
delivered to Fermtech. If Mr. Benjaminsen remains employed
by Igene through February 2005, the remaining 1,000,000
escrowed shares will be released from escrow and delivered
to Fermtech.
During the three months ended March 31, 2003, the Company
extended scheduled repayment on demand notes of $6,043,659
and related accrued interest of $2,865,810 until March 31,
2006.
(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 Igene's currency, the financial position and
results of operations of Igene's Chilean subsidiary 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 occur primarily as a result
of the effect of valuation of the Chilean Peso on Igene's
accounts receivables, which are mostly denominated in Pesos.
-10-
IGENE Biotechnology, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(4) Joint Venture
On March 18, 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 contribute 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 Joint
Venture Company. Unamortized production costs in the amount
of $316,869 were contributed to the Joint Venture reducing
the adjustment to additional paid in capital.
The Joint Venture is accounted for under the equity method.
Astaxanthin revenue is recorded on the books of the Joint
Venture. Certain costs incurred by Igene are reimbursed by
the Joint Venture. These reimbursements are reported as a
contra amount in the Operating Expense section of the
Igene's Consolidated Statements of Operations.
(5) Stockholders' Equity (Deficit)
As of March 31, 2004 and 2003, 426,210 and 427,310 shares,
respectively, of authorized but unissued common stock were
reserved for issue upon conversion of the Company's
outstanding preferred stock.
As of March 31, 2004 and 2003, 74,486,000 shares of
authorized but unissued common stock were reserved for
distribution and exercise pursuant to the Company's Employee
Stock Option Plans.
As of March 31, 2004, and 2003, 6,666,666 shares of
authorized but unissued common stock were reserved for
distribution and exercise pursuant to stock option
agreements with past officers of the Company.
As of March 31, 2004 and 2003, 17,565,970 shares of
authorized but unissued common stock were reserved for the
conversion of outstanding convertible promissory notes held
by directors of the Company in the aggregate amount of
1,082,500.
As of March 31, 2004 and 2003, 66,427,651 shares of
authorized but unissued common stock were reserved for the
conversion of outstanding convertible promissory notes held
by directors of the Company.
As of March 31, 2004 and 2003, 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 March 31, 2004 and 2003, 205,266,073 and 198,016,073
shares, respectively, of authorized but unissued common
stock were reserved for the exercise of outstanding
warrants.
As of March 31, 2004 and 2003, 8,235,417 and 11,696,731
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.
-11-
Notes to Consolidated Financial Statements
IGENE Biotechnology, Inc. and Subsidiaries
(continued)
(6) Basic and diluted net loss per common share
Basic and diluted net loss per common share for the three-
month periods ended March 31, 2004 and 2003 is based on
92,747,469 and 86,524,457, 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) Uncertainty
Igene has incurred net losses in each year of its existence,
aggregating approximately $40,200,000 from inception to
March 31, 2004 and its liabilities and redeemable preferred
stock exceeded its assets by approximately $4,768,000 at
that date. These factors indicate that Igene may 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.
Igene will aid the Joint Venture with the manufacturing
process, but will focus on research and sales, 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.
(9) 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
-12-
Notes to Consolidated Financial Statements
IGENE Biotechnology, Inc. and Subsidiaries
(continued)
(9) Stock Based Compensation (continued)
following table illustrates the effect on the 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 periods ended March 31:
2004 2003
_____________ _____________
Net loss:
As reported $ (920,082) $ (356,169)
Less pro forma stock-based employee
compensation expense determined under fair
value based method net of related tax effects (156,892) (171,250)
_____________ _____________
Net loss per common share: (1,076,974) (527,419)
============= =============
Net loss per Share:
Basic - as reported $ (0.01) $ (0.01)
Basic - pro forma $ (0.01) $ (0.01)
Diluted - as reported $ (0.01) $ (0.01)
Diluted - pro forma $ (0.01) $ (0.01)
(10) Recent Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities". SFAS No. 149 amends
and clarifies financial accounting and reporting for
derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement is
effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June
30, 2003. There was no material impact on the Company's
financial condition or results of operations upon adoption
of this Statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity". SFAS No. 150 establishes standards
for how an issuer classifies and measures certain financial
instruments with characteristics of both a liability and
equity. It requires that an issuer classify certain
financial instruments as a liability, although the financial
instrument may previously have been classified as equity.
This Statement is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is
effective at the beginning of the first interim period
beginning after June 15, 2003. The effect of adopting this
pronouncement required the reclassification of $2.04 million
of redeemable preferred stock as a liability as of December
31, 2003.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"),
which explains identification of variable interest entities
and the assessment of whether to consolidate these entities.
FIN 46 requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries
if the entities do not effectively disperse risks among the
involved parties. The provisions of FIN 46 are effective
for all financial statements issued after January 1, 2003.
The Company has no significant variable interests in any
entities that would require disclosure or consolidation. The
Company's investment in the Joint Venture does not meet the
criteria of a variable interest entity under FIN 46.
-13-
Notes to Consolidated Financial Statements
IGENE Biotechnology, Inc. and Subsidiaries
(continued)
(11) Summary of Significant Activity of Joint Venture
The following statement displays the significant activity
for the joint venture for the three-month period ended March
31, 2004. As shown below, 50% of the activity is recorded
as part of Igene's Financial Statements as income from
investment in Joint Venture:
Three Months
March 31,
2004
_____________
Net Sales $ 1,144,000
Less: manufacturing cost (1,863,000)
_____________
Gross Profit (719,000)
Less: selling, general and administrative (622,000)
_____________
Operating Loss (1,341,000)
Interest Income (7,000)
_____________
Loss before tax $ (1,348,000)
=============
50% equity interest Igene $ (674,000)
=============
-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 RISK
AND UNCERTAINTY. CERTAIN STATEMENTS IN THIS REPORT SET FORTH
MANAGEMENT'S INTENTIONS, PLANS, BELIEFS, EXPECTATIONS OR
PREDICTIONS OF THE FUTURE BASED ON CURRENT FACTS AND ANALYSES.
WHEN WE USE THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE,"
"ESTIMATE," "INTEND" OR SIMILAR EXPRESSIONS, WE INTEND TO
IDENTIFY FORWARD-LOOKING STATEMENTS. YOU SHOULD NOT PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH STATEMENT, DUE TO
A VARIETY OF FACTORS, 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, EXCHANGE
RATE FLUCTUATIONS, REDUCED PRODUCT DEMAND, INCREASED COMPETITION,
INABILITY TO PRODUCE REQUIRED CAPACITY, UNAVAILABILITY OF
FINANCING, GOVERNMENT ACTION, WEATHER CONDITIONS AND OTHER
UNCERTAINTIES.
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:
The Joint Venture 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.
The Joint Venture recognizes 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 will enter into a lease of real property
with an affiliate of Tate & Lyle in Selby, England upon which a
new manufacturing facility will be constructed and operated by
the Joint Venture. The Joint Venture is accounted for under the
equity method of accounting as the Company has a 50% ownership
interest.
Results of Operations
_____________________
Sales and other revenue
As part of the Joint Venture agreement, all further sales
are recognized through the venture company. Therefore, Igene
recorded no sales of AstaXin(R) during the quarter ended March
31, 2004. Sales of AstaXin(R) during the quarter ended March 31,
2003, were $310,782. Sales have been limited in the past due to
insufficient production quantity. As of June, 2003, Igene had
sold its remaining inventory to the Joint Venture as part of the
venture agreement. 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 production or sales will
occur, or that if they occur, they will be material.
-15-
IGENE Biotechnology, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Cost of sales and gross profit
As with Sales Revenue, future Cost of Sale and Gross Profit
will be recognized through the Joint Venture. As a result, Igene
reported no gross profit on sales of AstaXin(R) for the quarter
ended March 31, 2004. Gross profit on sales of AstaXin(R) was
$10,247 for the three month period ended March 31, 2003. Gross
profit was 3% of sales for the three months ended March 31, 2003.
The Company attributed the fall in gross profit to a combination
of pricing pressure in the market and inefficiencies in
production. Demand is expected to increase in customer usage and
increases in our market share. Management expects that sales and
gross profits may continue to be limited by the quantities of
AstaXin(R) the Company is able to produce with its presently
available capacity with its contract manufacturer, while the
Joint Venture prepares to produce product. The Company believes
that the lack of capacity should be alleviated as the joint
venture plant begins production in 2004. Sales and gross profit
growth, if any, may be limited unless augmented by these
increases in production, as well as production efficiency
resulting from process research and development. Management
expects the level of gross profit to improve in the future as a
percentage of sales, with expected increases in production
efficiency realized from the Joint Venture with Tate & Lyle
offsetting pricing competition, but can provide no assurances in
that regard to future increased production or future increased
margin.
No cost of sales for the quarter ended March 31, 2004 were
recorded, as compared with cost of sales of $300,534, for the
quarter ended March 31, 2003.
Marketing and selling expenses
For the quarters ended March 31, 2004 and 2003, Igene
recorded Marketing Expense in the amount of $48,022 and $101,286,
respectively, a decrease of $53,264 or 53%. As a result of the
disposition of ProBio, Igene has reduced selling costs that were
incurred as part of the combination, such as a larger sales
force. In addition, the reduction of salable product currently
available to Igene from its current manufacturer has caused a
corresponding reduction in Marketing and Selling expense. As a
result of the Joint Venture with Tate and Lyle, Igene is
expecting an increase in salable product with a corresponding
increase in sales costs at the point the new facility is in
production. Additionally, as a result of the Joint Venture these
expenses will be reimbursed to Igene by the Joint Venture.
However no assurances can be made in regards to increased
production from the new facility or the corresponding increase in
selling costs.
Research, development and pilot plant expenses
For the quarter ended March 31, 2004 and 2003, Igene
recorded research and development costs in the amount of $208,410
and $155,397, respectively, an increase of $53,013 or 34%. Costs
increased in support of increasing the efficiency of the
manufacturing process through experimentation in the Company's
pilot plant, developing higher yielding strains of yeast and
other improvements in the Company's AstaXin(R) technology. Igene
is hoping this will lead to an increase in salable product at a
reduced cost to Igene and the Joint Venture. However, no
assurances can be made in that regard. These costs are currently
funded through reimbursement from the Joint Venture.
Operating expenses
General and administrative expenses for the quarter ended
March 31, 2004 and 2003 were $149,878 and $141,939 respectively,
an increase of $7,939 or 6%. These costs are expected to remain
constant, as Igene works to keep overhead costs at a reduced
level and spend funds on research and development efforts. A
portion of this cost is funded by reimbursement through the Joint
Venture and the remainder will need to be funded through
profitable operations or through contributions from directors;
though neither of these can be assured.
-16-
IGENE Biotechnology, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Litigation expenses
Previously reported litigation (original lawsuit filed July
21, 1997, U.S. District Court, Baltimore, MD) between Archer
Daniels Midland, Inc. ("ADM") and Igene, involving allegations of
patent infringement and counterclaims concerning the theft of
trade secrets, was resolved on September 29, 2003. Resolution of
the dispute between ADM and Igene did not result in an
unfavorable outcome to Igene. Igene will continue to make and
sell its product, AstaXin(R). The Company incurred $13,080 of
litigation expenses for three months ended March 31, 2004. With
the settlement of this matter no future costs associated with
this matter are expected.
Expenses reimbursement by Joint Venture
As part of the Joint Venture agreement, costs incurred by
Igene related to production, research and development, as well as
those related to the marketing of AstaXin(R), are considered
costs of the joint venture and therefore are reimbursed by the
Joint Venture. For the quarter ended March 31, 2004, costs
reimbursed by the Joint Venture totaled $363,044. The costs
covered $48,022 of marketing costs, $208,410 of research and
development costs and $107,000 of general and administrative
costs.
Interest expense
Interest expense for the quarters ended March 31, 2004 and
2003, was $189,736 and $205,231, respectively, a decrease of
$15,495 or 8%. The 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. The decrease
is due to the conversion by holders of long term debt to equity,
through the use of warrant exercise.
Equity in earnings of unconsolidated subsidiary
The following statement displays the significant activity
for the joint venture for the three-month period ended March 31,
2004. As shown below 50% of the activity is recorded as part of
Igene's Financial Statements as income from investment in Joint
Venture:
Three Months
March 31,
2004
_____________
Net Sales $ 1,144,000
Less: manufacturing cost (1,863,000)
_____________
Gross Profit (719,000)
Less: selling, general and administrative (622,000)
_____________
Operating Loss (1,341,000)
Interest Income (7,000)
_____________
Loss before tax $ (1,348,000)
=============
50% equity interest Igene $ (674,000)
=============
As a result of the Joint Venture, the production, sales and
marketing of AstaXin(R) now takes place through the
unconsolidated Joint Venture subsidiary. For the quarter ended
March 31, 2004, Igene's portion of the Joint Venture loss was
$674,000. The loss was a result of a 50% interest in the
following: Gross profit (loss) for the quarter was $(719,000)
on sales of $1,144,000, less manufacturing cost of $1,863,000.
Selling and general and administrative expenses for the period
were $622,000 and interest income (expense) was $(7,000). The
resulting loss before tax was $1,348,000. For the quarter ended
March 31, 2004, Igene's 50% portion of the Joint Venture loss
was $674,000.
-17-
IGENE Biotechnology, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Disposition of ProBio Subsidiary
As reported in the Current Report on Form 8-K filed February
20, 2003, the Company, in an effort to focus on and grow its core
business, 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 resigned as CEO and director of Igene
and Mr. Benjaminsen no longer acts as our chief marketing
officer, effective December 31, 2002, though Mr. Benjaminsen has
maintained a position with Igene.
The amount of consideration paid for the ProBio stock was
determined through arms-length negotiations between Igene
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.
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 that was owned by ProBio
(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. 1,000,000 of the escrowed shares
of common stock were delivered to Fermtech. If Mr. Benjaminsen
remains employed by Igene through February 2005, the remaining
1,000,000 escrowed shares will be released from escrow and
delivered to Fermtech. Gain on disposal 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.
Net loss and basic and diluted net loss per common share
As a result of the foregoing, the Company reported net
losses of $920,082 and $356,169, respectively, for the quarters
ended March 31, 2004 and 2003, an increase in loss of $563,913 or
158%. This represents a loss of $.01 per basic and diluted
common share in each of the quarters ended March 31, 2004 and
2003. The weighted average number of shares of common stock
outstanding of 92,747,469 and 86,524,457for the quarters ended
March 31, 2004 and 2003, respectively, has increased by
4,391,537 shares. This resulted from the weighted average
adjustments of the following transactions: the issuance of
3,750,00 shares of common stock in exercise of warrants,
2,880,607 shares issued to the manufacturer as part of the
agreement, 166,666 shares issued to Mr. Hiu and Mr. Monahan in
lieu of compensation, and 100,000 shares issued as part of
employee stock option exercises.
-18-
IGENE Biotechnology, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Financial Position
During the three-month periods ended March 31, 2004 and
2003, in addition to the joint venture previously discussed, the
following actions also materially affected the Company's
financial position:
- Increases in accounts payable and accrued expense for the
quarter ended March 31, 2004 of $224,230 and decreases in
funds due from the Joint Venture of $64,923 were sources of
cash; these were slightly offset by a $39,850 increase in
accounts receivable as a use of cash;
- Proceeds of employee stock options provided $18,500 in cash
flows; and
- The carrying value of redeemable preferred stock was
increased and paid-in capital available to common
shareholders was decreased by $34,225 in 2004 and $4,185 in
2003, reflecting cumulative unpaid dividends on redeemable
preferred stock.
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 March 31, 2004, total dividends in arrears on
Igene's preferred stock total $254,001 ($9.92 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 March 31, 2004,
Igene had working capital of $630,249, and cash and cash
equivalents of $183,551. Currently Igene is also funded by
research and development reimbursements from the Joint Venture.
Cash provided by (used in) operating activities during the
three-month period ended March 31, 2004 and 2003, amounted to
$102,903 and $(479,820), respectively.
No cash was provided by or used in investing activities for
the three-month period ended March 31, 2004 and 2003.
Cash provided by financing activities was $175,073 during
the first quarter of 2004, this was due to employee stock options
exercised for $18,500, less repayment of lease payable. During
the three months ended March 31, 2003 $100,000 was provided by
financing activities consisting 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 had a significant
impact on its operations during the three-month periods ended
March 31, 2004 and 2003.
-19-
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.
-20-
IGENE Biotechnology, Inc.
PART II
OTHER INFORMATION
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 March 31, 2004, total dividends in arrears on the
Company's preferred stock total $254,001 ($9.92 per share) and
are included in the carrying value of the redeemable preferred
stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1 - Articles of Incorporation of the Registrant,
as amended to date, constituting Exhibit 3.1 to
Registration Statement No. 333-41581 on Form SB-2 are
hereby incorporated herein by reference.
Exhibit 3.2 - By-Laws of the Registrant, constituting
Exhibit 3.2 to the Registrant's Registration Statement
No. 33-5441 on Form S-1, are hereby incorporated herein
by reference.
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.
-21-
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 May 14, 2004 By /s/STEPHEN F. HIU
___________________________
STEPHEN F. HIU
President
Date May 14, 2004 By /s/EDWARD J. WEISBERGER
___________________________
EDWARD J. WEISBERGER
Chief Financial Officer
-22-
EXHIBIT INDEX
Exhibit 3.1 - Articles of Incorporation of the Registrant, as
amended to date, constituting Exhibit 3.1 to Registration
Statement No. 333-41581 on Form SB-2 are hereby
incorporated herein by reference.
Exhibit 3.2 - By-Laws of the Registrant, constituting Exhibit
3.2 to the Registrant's Registration Statement No. 33-5441
on Form S-1, are hereby incorporated herein by reference.
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(s) - 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.