U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Amendment #1)
(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 No x
___ ___
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
___ ___
Explanatory Note:
As disclosed in the Notification of Late Filing filed by Igene
Biotechnology, Inc. (the "Registrant") with the Commission on April
1, 2005 (the "Notification"), Berenson LLP ("Berenson"), the
Registrant's independent registered public accounting firm, has
questioned the Registrant's historical method of recording the value
of its 50% interest in its joint venture with Tate & Lyle PLC (the
"Joint Venture"), as reflected in the Registrant's previously issued
consolidated financial statements contained in the Registrant's
Annual Report on Form 10-KSB for the year ended December 31, 2003 and
consolidated interim financial statements contained in the
Registrant's Quarterly Reports on Form 10-QSB for the quarterly
periods ended March 31, 2004, June 30, 2003 and 2004, and September
30, 2003 and 2004 (collectively, the "Financial Statements").
As disclosed in the Notification, the Registrant contacted the Office
of Chief Accountant of the Commission requesting further guidance on
this accounting matter. The Registrant engaged in discussions with
the Staff of the Commission relating to the accounting treatment of
the Registrant's interest in the Joint Venture. The Commission
advised the registrant that the historical accounting treatment was
not appropriate. In a letter dated May 12, 2005, and received by the
Company on the same date, Berenson notified the Registrant that the
Financial Statements should no longer be relied upon because of
errors in those Financial Statements. The Registrant is now in the
process of correcting and restating the Financial Statements (the
"Restatement"). The Registrant has filed restatements for the
quarterly periods ended June 30, 2003 and September 30, 2003 and the
annual report for the year ended December 31, 2003. The registrant
plans to file the remainder of the restated Financial Statements as
soon as is practicable after the necessary corrections have been
made.
The historical Financial Statements filed with the Commission treated
the Registrant's investment in the Joint Venture under the equity
method of accounting as a one-line caption on its consolidated
balance sheet and consolidated statement of operations with the
excess of fair value of such investment in the Joint Venture over the
historical cost basis of consideration paid for such investment
reflected as an adjustment to additional paid-in capital.
The Restatement of the Financial Statements pertains primarily to the
manner in which the Registrant recorded the investment in the Joint
Venture in the Financial Statements. The Registrant has been advised
that while the Registrant's investment in the Joint Venture has been
correctly accounted for under the equity method of accounting as a
one-line caption on its consolidated balance sheets and consolidated
statements of operations, the Registrant's investment in the Joint
Venture should have been recorded at an amount equal to the value of
the Registrant's consideration contributed at the creation of the
Joint Venture (not as the excess of fair value of the Registrant's
investment in the Joint Venture over the historical cost basis). As
a result, the investment in the Joint Venture should have been
initially recorded with a value of $316,869; rather than the
$12,300,000 initially recorded in the Financial Statements.
The Company can not recognize losses of the Joint Venture beyond its
investment (including advances) in the Joint Venture. As of the
first quarter of 2004 the Company had an initial investment of and
amounts due from the Joint Venture of $850,368. Igene's share of the
loss through March 31, 2004 equaled $1,588,494, exceeding the total
investment by $738,126. This excess loss, and all future losses
incurred as a result of the Joint Venture, that are in excess of the
Company's investment and advances, will be suspended until the point
that the profits of the Joint Venture, if any, exceed the incurred
losses.
As in the originally issued financial statements, the Company's
preferred stock has been classified as liabilities in the restated
financial statement in accordance with the Statement of Financial
Accounting Standards No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity"
("FASB 150"). However the amounts previously stated as dividends
after the effective date of FASB 150, which was at the beginning of
the third quarter of 2003, have been recharacterized as interest
expense in the restated financial statements. The
recharacterization increases interest expense by $34,225 for the
three months ended March 31, 2004.
For the convenience of the reader, this Form 10-QSB/A sets forth the
Form 10-QSB originally filed with the SEC on May 14, 2004 (the "Form
10-QSB") in its entirety. However, this Form 10-QSB/A only amends
and restates Items [1 and 2 of Part I] of the Form 10-QSB, in each
case, solely as a result of, and to reflect the Restatement and no
other information in the Form 10-QSB is amended hereby. The
foregoing items have not been updated to reflect other events
occurring after the original filing date of the Form 10-QSB or to
modify or update those disclosures affected by subsequent events. In
addition, pursuant to the rules of the SEC, Item 6 of Part II of the
Form 10-QSB has been amended to contain currently-dated
certifications from the Company's Chief Executive Officer and Chief
Financial Officer, as required by Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002. The certifications of the Company's
Chief Executive Officer and Chief Financial Officer are attached to
this Form 10-QSB/A as Exhibits 31(a), 31(b), 32(a) and 32(b).
Except for the foregoing amended information, this Form 10-QSB/A
continues to speak as of the original filing date of the Form 10-QSB,
and the Company has not updated the disclosure contained herein to
reflect events that occurred at a later date. Other events occurring
after the filing of the Form 10-QSB or other disclosures necessary to
reflect subsequent events are addressed, or will be addressed, in
subsequent filings with the SEC.
FORM 10-QSB/A
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 ............ 10-16
Management's Discussion and Analysis of Financial
Conditions and Results of Operations .................. 17-23
PART II - OTHER INFORMATION ............................ 24
SIGNATURES ................................................. 25
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)
(Restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 183,551 $ 63,075
Accounts receivable 103,067 156,458
Prepaid expenses and other current assets 37,060 43,675
_____________ _____________
323,678 263,208
OTHER ASSETS
Property and equipment, net 144,119 148,931
Loans receivable from manufacturing agent 118,966 122,964
Other assets 4,886 4,886
_____________ _____________
TOTAL ASSETS $ 591,649 $ 539,989
============= =============
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 93,722,769 and
92,747,469 shares, respectively. 937,228 927,475
Additional paid-in capital 22,653,555 22,556,553
Deficit (39,604,018) (39,291,395)
_____________ _____________
TOTAL STOCKHOLDERS' DEFICIT (16,013,235) (15,807,367)
_____________ _____________
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 591,649 $ 539,989
============= =============
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
_____________ _____________
(Restated)
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 (32,316) ---
INTEREST EXPENSE (223,961) (205,231)
_____________ _____________
NET LOSS FROM CONTINUING OPERATIONS (312,623) (593,606)
_____________ _____________
DISCONTINUED OPERATIONS
_______________________
Gain on disposal of discontinued operations --- 237,437
_____________ _____________
NET GAIN FROM DISCONTINUED OPERATIONS --- 237,437
_____________ _____________
NET LOSS $ (312,623) $ (356,169)
============= =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE
FROM CONTINUING OPERATION $ (0.00) $ (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 $ (0.00) $ (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 (Restated) 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, 2003 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 $ 22,556,553 $(39,291,395) $(15,807,367)
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 --- --- --- (312,623) (312,623)
____________ ____________ _____________ _____________ _____________
Balance at March 31, 2004 (Restated) 93,722,769 $ 937,228 $ 22,653,555 $(39,604,018) $(16,013,235)
============ ============ ============= ============= =============
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
_____________ _____________
(Restated)
Cash flows from operating activities
Net loss $ (312,623) $ (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 32,316 ---
Decrease (increase) in:
Accounts receivable 57,389 544,051
Due from Joint Venture (32,316) ---
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 68,678 (479,820)
_____________ _____________
Cash flows from investing activities
Net cash used in investing activities --- ---
_____________ _____________
Cash flows from financing activities
Proceeds from borrowing --- 100,000
Increase in preferred stock for cumulative dividend
classified as interest 34,225 ---
Repayment of equipment lease payable (927) ---
Proceeds from exercise of employee stock options 18,500 ---
_____________ _____________
Net cash provided by financing activities 51,798 100,000
_____________ _____________
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/A should be
read in conjunction with Igene's Annual Report on Form 10-
KSB/A for the year ended December 31, 2003.
(2) Nature of Operations
Igene Biotechnology, Inc. (the "Company") was incorporated
under the laws of the State of Maryland on October 27, 1981
as "Industrial Genetics, Inc." Igene changed its name to
"IGI Biotechnology, Inc." on August 17, 1983 and to "Igene
Biotechnology, Inc." on April 14, 1986. Igene is located in
Columbia, Maryland and is engaged in the business of
industrial microbiology and related biotechnologies. As a
result of the stock purchase, ProBio became our wholly-owned
subsidiary. Igene has operational subsidiaries in Norway
and Chile. IGENE Biotechnology, Inc. (the "Company") is
engaged in the business of developing, marketing, and
manufacturing specialty ingredients for human and animal
nutrition. Igene was formed to develop, produce and market
value-added specialty biochemical products. Igene is a
supplier of natural astaxanthin, an essential nutrient in
different feed applications and as a source of pigment for
coloring farmed salmon species. Igene also supplies
nutraceutical ingredients, as well as consumer ready health
food supplements, including astaxanthin. Igene is focused
on fermentation technology, pharmacology, nutrition and
health in its marketing of products and applications
worldwide.
Igene has devoted its resources to the development of
proprietary processes to convert selected agricultural raw
materials or feedstocks into commercially useful and cost
effective products for the food, feed, flavor and
agrochemical industries. In developing these processes and
products, Igene has relied on the expertise and skills of
its in-house scientific staff and, for special projects,
various consultants.
In an effort to develop a dependable source of production,
March 19, 2003, Tate & Lyle PLC and Igene Biotechnology,
Inc. announced a 50:50 joint venture to produce AstaXin(R)
for the aquaculture industry. Production will utilize Tate &
Lyle's fermentation capability together with the unique
technology developed by Igene. Part of Tate & Lyle's
existing Selby, England, citric acid facility will be
modified to include the production of 1,500 tons per annum
of this product. Tate & Lyle's investment of $25 million
includes certain of its facility assets currently used in
citric acid production. Commercial production is expected to
commence in the calendar year 2004.
(3) 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 to $34,225 and $4,185, respectively. In
accordance with FASB 150, the dividends accrued in the third
quarter 2003 and thereafter have been reclassified to
interest expense. This reclassification increases interest
expense by $34,225.
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 transferred 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 investment in the Joint
Venture has been recorded at an amount equal to the book
value of the Registrant's consideration contributed at the
-10-
IGENE Biotechnology, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
creation of the Joint Venture. As the cost of the Company's
technology and intellectual property has been previously
expensed and has a carrying amount of zero, the investment
in the Joint Venture has been initially recorded with a book
value of $316,869, which represents the unamortized
production costs contributed to the Joint Venture. In
addition to the Company's initial investment in the Joint
Venture, the Company has made $527,499 in advances to the
Joint Venture and a $6,000 capital investment.
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.
(4) 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.
(5) Joint Venture
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 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 investment in the Joint
Venture has been recorded at an amount equal to the book
value of the Registrant's consideration contributed at the
creation of the Joint Venture. As the cost of the company's
technology and intellectual property has been previously
expensed and has a carrying amount of zero, the initial
investment in the Joint Venture has been recorded with a
book value of $316,869, which represents the unamortized
production costs contributed to the Joint Venture. Added to
this was a purchase of common stock in the new venture of
$6,000.
As a result of the Joint Venture, the production, sales and
marketing of Astaxanthin now takes place in the
unconsolidated Joint Venture subsidiary. From inception on
March 18, 2003 through March 31, 2004, Igene's portion of
the Joint Venture's net loss was $1,588,500. The loss was a
result of a 50% interest in the following: Gross profit for
the year was a negative $736,000 on sales of $2,278,000,
less manufacturing cost of $3,014,000. Selling and general
and administrative expenses for the period were $2,450,000
and interest income was $9,000. The resulting loss before
tax was $3,177,000. Igene's 50% portion of the Joint
Venture loss was $1,588,500.
-11-
Notes to Consolidated Financial Statements
IGENE Biotechnology, Inc. and Subsidiaries
(continued)
Because the Company accounts for its investment in the Joint
Venture under the equity method of accounting, it would
ordinarily recognize as part of loss from equity the loss of
it's 50% ownership portion of the loss of the Joint Venture.
However, losses in the Joint Venture will be recognized only
to the extent of the Investment in and Advances to the Joint
Venture. Losses in excess of this amount will be suspended
from recognition in the financial statement and carried
forward to offset Igene's share of the Joint Venture's
future income, if any. Igene does not expect to recognize
income from the Joint Venture until all accumulated
unrecognized losses have been eliminated.
At March 31, 2004, prior to the recognition of its portion
of the Joint Venture loss, Igene's investment in the Joint
Venture consisted of its $322,869 and its net advances to
the Joint Venture amounted to $527,499, for a total of
$850,368. For the year ended December 31, 2003, Igene
recognized $818,052 of the $914,494 loss which existed as
part of the Joint venture in that year. In the first
quarter of 2004, Igene will recognize losses to the extent
of the increase in the advance $32,316, the March 31, 2004
balance of $850,368, less the December 31, 2003 balance of
$818,052. The remainder of the cumulative loss which is
$738,132 will be suspended and will be carried forward to
offset Igene's share of future earnings, if any, from the
Joint Venture. The balance in the Advances to and
Investment in Joint Venture account on the Company's
financial statements is zero at March 31, 2004.
(6) 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.
(7) 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 are based on
92,932,084 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 prior to the third quarter of
2003, the effective date of FASB 150 . 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)
(8) 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.
(9) Uncertainty
Igene has incurred net losses in each year of its existence,
aggregating approximately $39,600,000 from inception to
March 31, 2004 and its liabilities including redeemable
preferred stock exceeded its assets by approximately
$16,013,000 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.
(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 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 $ (312,623) $ (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: (469,515) (527,419)
=========== ===========
Net loss per Share:
Basic - as reported $ (0.00) $ (0.01)
Basic - pro forma $ (0.00) $ (0.01)
Diluted - as reported $ (0.00) $ (0.01)
Diluted - pro forma $ (0.00) $ (0.01)
-13-
Notes to Consolidated Financial Statements
IGENE Biotechnology, Inc. and Subsidiaries
(continued)
(11) 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.
(12) Summary of Significant Activity of Joint Venture
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 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 investment in the Joint
Venture has been recorded at an amount equal to the book
value of the Registrant's consideration contributed at the
creation of the Joint Venture. As the cost of the Company's
technology and intellectual property has been previously
expensed and has a carrying amount of zero, the initial
investment in the Joint Venture has been recorded with a
book value of $316,869, which represents the unamortized
production costs contributed to the Joint Venture. Added to
this was a purchase of common stock in the new venture of
$6,000.
As a result of the Joint Venture, the production, sales and
marketing of Astaxanthin now takes place in the
unconsolidated Joint Venture subsidiary. From inception on
March 18, 2003 through March 31, 2004, Igene's portion of
the Joint Venture's net loss was $1,588,500. The loss was a
result of a 50% interest in the following: Gross profit for
the period was a negative $736,000 on sales of $2,278,000,
less manufacturing cost of $3,014,000. Selling and general
and administrative expenses for the period were $2,450,000
and interest income was $9,000. The resulting loss before
tax was $3,177,000. Igene's 50% portion of the Joint
Venture loss was $1,588,500.
-14-
Notes to Consolidated Financial Statements
IGENE Biotechnology, Inc. and Subsidiaries
(continued)
Because the Company accounts for its investment in the Joint
Venture under the equity method of accounting, it would
ordinarily recognize as part of loss from equity the loss of
it's 50% ownership portion of the loss of the Joint Venture.
However, losses in the Joint Venture will be recognized only
to the extent of the Investment in and Advances to the Joint
Venture. Losses in excess of this amount will be suspended
from recognition in the financial statement and carried
forward to offset Igene's share of the Joint Venture's
future income, if any.
At March 31, 2004, prior to the recognition of its portion
of the Joint Venture loss, Igene's investment in the Joint
Venture consisted of its $322,869 and its net advances to
the Joint Venture amounted to $527,499, for a total of
$850,368. For the year ended December 31, 2003, Igene
recognized $818,052 of the $914,494 loss which existed as
part of the Joint venture in that year. In the first
quarter of 2004, Igene will recognize losses to the extent
of the increase in the advance $32,316, the March 31, 2004
balance of $850,368, less the December 31, 2003 balance of
$818,052. The remainder of the cumulative loss which is
$738,132 will be suspended and will be carried forward to
offset Igene's share of earnings from the Joint Venture.
The balance in the Advances to and Investment in Joint
Venture account on the Company's financial statements is
zero at March 31, 2004.
The following statement displays the significant activity
for the joint venture for the initial investment at March
18, 2003 in the Joint Venture through March 31, 2004. As
shown 50% of the activity is potentially recorded as part of
Igene's Financial Statements as income or loss from
investment in Joint Venture:
March 31,
2004
_____________
(Unaudited)
ASSETS
CURRENT ASSETS
Account Receivable $ 1,152,000
Inventory 79,000
_____________
1,231,000
OTHER ASSETS
Fixed Assets Receivable 21,614,000
Intellectual property 24,614,000
_____________
TOTAL ASSETS $ 47,459,000
=============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,092,000
Working capital loan 311,000
_____________
TOTAL LIABILITIES 1,403,000
Equity 46,056,000
_____________
TOTAL LIABILITIES AND EQUITY $ 47,459,000
=============
-15-
Notes to Consolidated Financial Statements
IGENE Biotechnology, Inc. and Subsidiaries
(continued)
Period from March 18, 2003
(initial investment) to
March 31, 2004
__________________________
(unaudited)
Net Sales $ 2,278,000
Less: manufacturing cost (3,014,000)
_____________
Gross Profit (Loss) (736,000)
Less: selling, general and administrative (2,450,000)
_____________
Operating Loss (3,186,000)
Interest Income 9,000
Net Loss $ (3,177,000)
=============
Igene's 50% equity interest in the net loss $ (1,588,500)
Igene's Investment in and Advances to the Joint Venture (850,368)
_____________
Igene's suspended loss $ (738,132)
=============
Quarter ended
March 31, 2003
__________________________
(unaudited)
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)
_____________
Net Loss $ (1,348,000)
=============
Igene's 50% equity interest in the net loss $ (674,000)
Igene's additional Investment in and Advances to the Joint Venture (32,316)
_____________
Igene's incremental suspended loss $ (641,684)
=============
-16-
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 investment in the Joint Venture is accounted for under
the equity method whereby the Company's 50% ownership percentage
in the Joint Venture's equity is reflected as an asset and the
changes in the Joint Venture's equity as a result of its
operations is reflected in the company's consolidated statement
of operations subject to certain limitations. Igene's share of
losses in the Joint Venture will be recognized only to the extent
of Igene's consideration paid for it's initial investment in the
Joint Venture and any net advances Igene has made to the Joint
Venture. Losses in excess of this amount will be suspended from
recognition in the financial statement and carried forward to
offset Igene's share of the Joint Venture future income, if any.
Income in the future, if any, will only be recognized once all
previously deferred losses have been exhausted. The Company
evaluates its investment in the Joint Venture for impairment, as
it does for all other assets. The accounting policies followed
by the Joint Venture are in conformity with accounting principals
generally accepted in the United States of America.
The Joint Venture will entered into a lease of real property
with an affiliate of Tate & Lyle in Selby, England upon which the
manufacturing facility is being constructed and operated by the
Joint Venture.
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
-17-
IGENE Biotechnology, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
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.
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 modest 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 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.
-18-
IGENE Biotechnology, Inc. and Subsidiaries
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 $223,961 and $205,231, respectively, an increase of
$18,730 or 9%. 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. This increase
is due to the $34,225 in cumulative dividends accrued in the
quarter ended March 31, 2004 from preferred stock which was
recorded as interest expense
Equity in earnings of unconsolidated subsidiary
As a result of the Joint Venture, the production, sales and
marketing of Astaxanthin now takes place in the unconsolidated
Joint Venture subsidiary. From inception on March 18, 2003
through March 31, 2004, Igene's portion of the Joint Venture's
net loss was $1,588,500. The loss was a result of a 50% interest
in the following: Gross profit for the year was a negative
$736,000 on sales of $2,278,000, less manufacturing cost of
$3,014,000. Selling and general and administrative expenses for
the period were $2,450,000 and interest income was $9,000. The
resulting loss before tax was $3,177,000. Igene's 50% portion of
the Joint Venture loss was $1,588,500.
Because the Company accounts for its investment in the Joint
Venture under the equity method of accounting, it would
ordinarily recognize as part of loss from equity the loss of it's
50% ownership portion of the loss of the Joint Venture. However,
losses in the Joint Venture will be recognized only to the extent
of the Investment in and Advances to the Joint Venture. Losses
in excess of this amount will be suspended from recognition in
the financial statement and carried forward to offset Igene's
share of the Joint Venture's future income, if any.
At March 31, 2004, prior to the recognition of its portion of
the Joint Venture loss, Igene's investment in the Joint Venture
consisted of its $322,869 and its net advances to the Joint
Venture amounted to $527,499, for a total of $850,368. For the
year ended December 31, 2003, Igene recognized $818,052 of the
$914,494 loss which existed as part of the Joint venture in that
year end. In the first quarter of 2004, Igene will recognize
losses to the extent of the increase in the advance $32,316, the
March 31, 2004 balance of $850,368, less the December 31, 2003
balance of $818,052 the remainder will be suspended and will be
carried forward to offset Igene's share of earnings from the
Joint Venture. The balance in the Advances to and Investment in
Joint Venture account on the Company's financial statements is
zero at March 31, 2004.
The following statement displays the significant activity
for the joint venture for the initial investment at March 18,
2003 in the Joint Venture through March 31, 2004. As shown 50%
of the activity is recorded as part of Igene's Financial
Statements as income from investment in Joint Venture:
-19-
IGENE Biotechnology, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
March 31,
2004
_______________
(Unaudited)
ASSETS
CURRENT ASSETS
Account Receivable $ 1,152,000
Inventory 79,000
_______________
1,231,000
OTHER ASSETS
Fixed Assets Receivable 21,614,000
Intellectual property 24,614,000
_______________
TOTAL ASSETS $ 47,459,000
===============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,092,000
Working capital loan 311,000
_______________
TOTAL LIABILITIES 1,403,000
Equity 46,056,000
_______________
TOTAL LIABILITIES AND EQUITY $ 47,459,000
===============
Period from March 18, 2003
(initial investment) to
March 31, 2004
__________________________
(unaudited)
Net Sales $ 2,278,000
Less: manufacturing cost (3,014,000)
_______________
Gross Profit (Loss) (736,000)
Less: selling, general and administrative (2,450,000)
_______________
Operating Loss (3,186,000)
Interest Income 9,000
_______________
Net Loss $ (3,177,000)
===============
Igene's 50% equity interest in the net loss $ (1,588,500)
Igene's Investment in and Advances to the Joint Venture (850,368)
_______________
Igene's suspended loss $ (738,132)
===============
Quarter ended
March 31, 2003
__________________________
(unaudited)
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)
_______________
Net Loss $ (1,348,000)
===============
Igene's 50% equity interest in the net loss $ (674,000)
Igene's additional Investment in and Advances to the Joint Venture (32,316)
_______________
Igene's incremental suspended loss $ (641,684)
===============
-20-
IGENE Biotechnology, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Igene's share of net loss in the Joint Venture will be
recognized only to the extent of Igene's consideration exchanged
for its ownership portion of the Joint Venture as well as any
advances made to the Joint Venture. Losses in excess of Igene's
consideration and advances will not be recognized in Igene's
Financial Statements but will be carried forward and will offset
future income of the Joint Venture, if any.
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 $312,623 and $356,169, respectively, for the quarters
ended March 31, 2004 and 2003, an decrease in loss of $43,546 or
12%. 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.
-21-
IGENE Biotechnology, Inc. and Subsidiaries
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:
o Increases in accounts payable and accrued expense for the
quarter ended March 31, 2004 of $224,230 and decreases in
accounts receivable of $57,388 were sources of cash that
were slightly offset by increases in funds due from the
Joint Venture of $32,316;
o Proceeds of employee stock options provided $18,500 in cash
flows; and
o 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 $102,750, 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
$68,678 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 $51,798 during the
first quarter of 2004, this was due to employee stock options
exercised for $18,500 and expense classified as interest for
cumulative dividend, 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.
-22-
IGENE Biotechnology, Inc. and Subsidiaries
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.
-23-
IGENE Biotechnology, Inc. and Subsidiaries
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
(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.
-24-
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 September 28, 2005 By /s/STEPHEN F. HIU
__________________ ________________________________
STEPHEN F. HIU
President
Date September 28, 2005 By /s/EDWARD J. WEISBERGER
__________________ ________________________________
EDWARD J. WEISBERGER
Chief Financial Officer
-25-
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(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.