U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
(Mark One)
[x] Quarterly report under Section 13 or 15(D) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 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:
97,047,020 shares as of August 10, 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 in the Joint Venture (including advances). As of the
second quarter of 2004 the Company had an initial investment of and
amounts due from the Joint Venture of $1,020,112. Igene's share of
the loss through June 30, 2004 equaled $2,676,500, exceeding the
total investment by $1,656,388. 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 and $37,058
for the three months and six months ended June 30, 2004,
respectively.
For the convenience of the reader, this Form 10-QSB/A sets forth the
Form 10-QSB originally filed with the SEC on August 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 ......................... 5-6
Consolidated Statements of Operations ................ 7
Consolidated Statements of Stockholders' Deficit...... 8-9
Consolidated Statements of Cash Flows ................ 10
Notes to Consolidated Financial Statements ........... 11-18
Management's Discussion and Analysis of Financial
Conditions and Results of Operations ................. 19-25
PART II - OTHER INFORMATION ......................... 26-27
SIGNATURES ................................................ 28
EXHIBIT INDEX ................................. 29
IGENE BIOTECHNOLOGY, INC.
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
PART I
FINANCIAL INFORMATION
IGENE Biotechnology, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, December 31,
2004 2003
_____________ _____________
(Unaudited)
(Restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 36,586 $ 63,075
Accounts receivable 102,333 156,458
Prepaid expenses and other current assets 30,499 43,675
_____________ _____________
169,418 263,208
OTHER ASSETS
Property and equipment, net 139,307 148,931
Loans receivable from manufacturing agent 118,965 122,964
Other assets 5,195 4,886
_____________ _____________
TOTAL ASSETS $ 432,885 $ 539,989
============= =============
The accompanying notes are an integral part of the financial statements.
-5-
IGENE Biotechnology, Inc. and Subsidiaries
Consolidated Balance Sheets
(continued)
June 30, December 31,
2004 2003
_____________ _____________
(Unaudited)
(Restated)
LIABILITIES, REDEEMABLE PREFERED STOCK
AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 212,035 $ 185,862
Equipment lease payable --- 1,498
_____________ _____________
TOTAL CURRENT LIABILITIES 212,035 187,360
LONG-TERM LIABILITIES
Notes payable 5,842,267 5,842,767
Convertible debentures 4,624,212 4,814,212
Accrued interest 3,800,899 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 $ 18.08
and $17.44, respectively. Authorized
1,312,500 shares, issued 18,509 and 25,605 respectively 334,643 454,745
Carrying amount of redeemable preferred stock,
8% cumulative, convertible, voting, series B,
$.01 par value per share. Stated value $8.80 per share.
Authorized, issued and outstanding zero and 187,500 shares,
respectively, Redemption amount $1,500,000 --- 1,650,000
_____________ _____________
TOTAL LIABILITIES 14,814,056 16,347,356
_____________ _____________
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock --- $.01 par value per share.
Authorized 750,000,000 shares;
issued and outstanding 98,003,270
and 92,747,469 shares, respectively. 980,033 927,475
Additional paid-in capital 24,843,659 22,556,553
Deficit (40,204,863) (39,291,395)
_____________ _____________
TOTAL STOCKHOLDERS' DEFICIT (14,381,171) (15,807,367)
_____________ _____________
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 432,885 $ 539,989
============= =============
The accompanying notes are an integral part of the financial statements.
-6-
IGENE Biotechnology, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
__________________________ __________________________
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
____________ ____________ ____________ ____________
(Restated) (Restated)
REVENUE
_______
Sales - AstaXin(R) $ --- $ 152,705 $ --- $ 463,486
Cost of sales - AstaXin(R) --- 143,962 --- 444,946
____________ ____________ ____________ ____________
GROSS PROFIT --- 8,743 --- 18,540
____________ ____________ ____________ ____________
OPERATING EXPENSES
__________________
Marketing and selling 161,245 118,569 209,267 219,855
Research, development and pilot plant 195,522 223,004 403,932 378,401
General and administrative 210,950 242,388 360,828 384,327
Litigation expense 27,500 --- 40,580 ---
Operating expenses reimbursed by Joint Venture (380,131) (564,381) (743,175) (564,381)
____________ ____________ ____________ ____________
TOTAL OPERATING EXPENSES 215,086 19,580 271,432 418,202
____________ ____________ ____________ ____________
OPERATING LOSS (215,086) (10,837) (271,432) (399,662)
EQUITY IN LOSS OF UNCONSOLIDATED SUB (169,744) (347,000) (202,060) (347,000)
INTEREST EXPENSE (216,015) (177,901) (439,976) (383,132)
____________ ____________ ____________ ____________
NET LOSS FROM CONTINUING OPERATIONS (600,845) (535,738) (913,468) (1,129,794)
DISCONTINUED OPERATIONS
_______________________
Gain on disposal of discontinued operations --- --- --- 237,437
____________ ____________ ____________ ____________
NET LOSS $ (600,845) $ (535,738) $ (913,468) $ (892,357)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE
FROM CONTINUING OPERATIONS $ (0.01) (0.01) $ (0.01) (0.01)
____________ ____________ ____________ ____________
BASIC AND DILUTED NET INCOME (LOSS)
PER COMMON SHARE
FROM DISCONTINUED OPERATIONS $ (0.00) (0.00) $ (0.00) (0.00)
____________ ____________ ____________ ____________
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.01) (0.00) $ (0.01) (0.01)
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
-7-
IGENE Biotechnology, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
(Unaudited)
Redeemable Preferred Stock
(shares/amount)
_____________________________
Balance at January 1, 2003 213,655 $ 1,947,774
Cumulative undeclared dividends
on redeemable preferred stock --- 98,194
Conversion of preferred stock to common (550) (9,416)
Exercise of warrants --- ---
Net loss for the six months ended June 30, 2003 --- ---
============ ============
Balance at June 30, 2003 213,105 $ 2,036,552
============ ============
Balance at January 1, 2004 213,105 $ 2,104,745
Cumulative undeclared dividends
on redeemable preferred stock --- 37,058
Conversion of preferred stock to common (194,596) (1,807,160)
Exercise of warrants --- ---
Net loss for the six months ended June 30, 2004 --- ---
============ ============
Balance at June 30, 2004 (Restated) 18,509 $ 334,643
============ ============
The accompanying notes are an integral part of the financial statements.
-8-
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 --- --- (98,194) --- (98,194)
Shares received and retired in
ProBio Sale (7,000,000) (70,000) (140,000) --- (210,000)
Conversion of preferred stock to common 1,100 11 9,405 --- 9,416
Shares issued for manufacturing agreement 1,130,023 11,301 33,436 --- 44,737
Net loss for the six months ended June 30, 2003 --- --- --- (892,357) (892,357)
============= ============= ============= ============= =============
Balance at June 30, 2003 87,074,869 $ 870,749 $ 22,192,251 $(38,012,859) $(14,949,859)
============= ============= ============= ============= =============
Balance at January 1, 2004 92,747,469 $ 927,475 $ 22,556,553 $(39,291,395) $(15,807,367)
Conversion of redeemable preferred stock 389,192 3,892 1,803,268 --- 1,807,160
Shares issued for manufacturing agreement 1,361,609 13,616 171,263 --- 184,879
Shares reissued for ProBio agreement 1,000,000 10,000 100,000 --- 110,000
Conversion of ProBio debentures 1,900,000 19,000 171,000 --- 190,000
Shares issued for payment of legal services 250,000 2,500 25,000 --- 27,500
Conversion of Notes Payable 5,000 50 325 --- 375
Exercise of employee stock options 350,000 3,500 16,250 --- 19,750
Net loss for the six months ended June 30, 2004 --- --- --- (913,468) (913,468)
============= ============= ============= ============= =============
Balance at June 30, 2004 (Restated) 98,003,270 $ 980,033 $ 24,843,659 $(40,204,863) $(14,381,171)
============= ============= ============= ============= =============
The accompanying notes are an integral part of the financial statements.
-9-
IGENE Biotechnology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
_______________________________
June 30, June 30,
2004 2003
_____________ _____________
(Restated)
Cash flows from operating activities
Net loss $ (913,468) $ (892,357)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation 9,624 11,784
Amortization --- 54,729
Issuance of Shares to Fermtech per ProBio agreement 110,000 ---
Manufacturing cost paid in shares of common stock 184,879 44,736
Issuance of common stock for legal services 27,500 ---
Equity in loss of unconsolidated sub 202,060 347,000
Decrease (increase) in:
Accounts receivable 58,125 373,067
Inventory --- 374,709
Prepaid expenses and other current assets 12,866 43,729
Increase (decrease) in:
Accounts payable and accrued expenses 428,800 29,974
============= =============
Net cash provided by operating activities 120,386 387,371
Cash flows from investing activities
Advances to joint venture (202,060) (421,657)
Capital (expenditures) and sales --- 3,209
Net cash used in investing activities (202,060) (418,448)
============= =============
Cash flows from financing activities
Proceeds (repayment) from borrowing (125) (100,000)
Increase in preferred stock for cumulative dividends
classified as interest 37,058 ---
Payment of equipment lease (1,498) ---
Proceeds from exercise of employee stock options 19,750 ---
Net cash (used) provided by financing activities 55,185 (100,000)
============= =============
Net decrease in cash and cash equivalents (26,489) (131,077)
Cash and cash equivalents at beginning of period 63,075 497,711
============= =============
Cash and cash equivalents at end of period $ 36,586 $ 366,634
============= =============
Supplementary disclosure and cash flow information
__________________________________________________
Cash paid for interest $ 24,347 $ 30,994
Cash paid for income taxes --- ---
See Note (2) for non-cash investing and financing activities.
The accompanying notes are an integral part of the financial statements.
-10-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Financial Statements
(1) Unaudited consolidated financial statements
The June 30, 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 six months ended June 30, 2004, the 194,596
shares of redeemable preferred stock, with a recorded
aggregate value of $1,807,160, were converted into 389,192
shares of common stock. This portion included the 8%
Cumulative Convertible Preferred Stock, Series B and has
relieved the company of this amount from long-term debt.
During the six months ended June 30, 2004, $190,000 of the
$1,000,000 of Convertible Debentures issued as part of the
2001 ProBio purchase, were converted to common stock. These
shares were converted at $.10 per share, for a total of
1,900,000 shares. These shares were issued and the notes
cancelled. This relieved the Company of $190,000 of long-
term debt.
During the six months ended June 30, 2004, 250,000 shares
were issued to the Company's attorney as a bonus in
connection with the settlement of the ADM matter. These
shares were issued at an estimated value of $.11 per share,
aggregating to $27,500. These costs were expensed in the
second quarter as part of the ADM legal expense.
-11-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Financial Statements
(continued)
During the six months ended June 30, 2004, $500 of Notes
Payable were converted using 5,000 warrants at $.075 per
share. The notes and warrants were cancelled and 5,000
shares of common stock were issued.
During the six months ended June 30, 2004, 350,000 shares of
common stock were issued as part of employee stock option
exercises. The Company received $19,750 based on an average
exercise price of $.056 per share.
During the six months ended June 30, 2004 and 2003, Fermic,
Igene's manufacturing agent, earned 1,361,609 and 1,130,023
shares, respectively, of common stock as part of the
manufacturing agreement. Fermic earns 2,250 shares of common
stock for each kilogram pure Astaxanthin produced and
delivered as part of the agreement. The average price is
based on the market value of the shares at the time the
product is produced. Fermic can earn up to 20,000,000
shares in total under the contract. The 1,361,609 shares
were earned at an average price of $.135 per share for 2004,
and 1,130,023 shares were earned at an average price of $.05
per share for 2003. Through June 30, 2004, 12,450,832
shares have been earned. Any shares earned by Fermic will
be issued on a quarterly basis. Igene relied on Section 4(2)
of the Securities Act of 1933, as amended, to issue the
shares to Fermic without registration under that act. Igene
relied on the representations and warranties of Fermic made
in the manufacturing agreement in claiming the
aforementioned exemption.
During the six months ended June 30, 2004 and 2003, the
Company recorded in dividends in arrears on 8% redeemable
preferred stock cumulating at $.32 per share aggregating to
$37,058 and $98,149, respectively on preferred stock. The
accrued interest is included in the carrying value of the
redeemable preferred stock. 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 $37,058 for
the six months ended June 30, 2004.
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
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 $697,243 in advances to the
Joint Venture and a $6,000 capital investment.
In February, 2003, Igene sold its subsidiary ProBio to
Fermtech AS in exchange for aggregate consideration valued
at approximately $343,000, consisting of 7,000,000 shares of
Igene common stock (including 2,000,000 shares that were
placed into escrow and may be reissued to Fermtech as
described below), valued for the purposes of the acquisition
at $.03 per share, plus forgiveness of approximately
$168,000 of debt that Igene owed to ProBio at the time of
purchase in 2001. The escrowed 2,000,000 shares were to
be earned by Fermtech based upon Mr. Benjamin's
continued employment with the Company. As Mr. Benjaminsen
remained employed by Igene through 2003, 1,000,000 of the
escrowed shares of common stock were delivered to Fermtech.
These shares were expensed in the second quarter of 2004, as
a marketing expense of $110,000. If Mr. Benjaminsen remains
employed by Igene through 2004, the remaining 1,000,000
escrowed shares will be released from escrow and delivered
to Fermtech.
-12-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Financial Statements
(continued)
During the six months ended June 30, 2003, the Company
elected to extend 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 the parent's currency, the financial position
and results of operations of Igene Chile are determined
using Igene's reporting currency (US dollars) as the
functional currency. All exchange gains and losses from
remeasurement of monetary assets and liabilities that are
not denominated in US dollars are recognized currently in
income. These losses and gains occurred primarily as a
result of the effect of valuation of the Chilean Peso on
Igene's accounts receivables, which are mostly denominated
in Pesos.
(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 June 30, 2004, Igene's portion of the
Joint Venture's net loss was $2,676,500. The loss was a
result of a 50% interest in the following: Gross profit
from inception was a negative $1,999,000 on sales of
$3,140,000, less manufacturing cost of $5,139,000. Selling
and general and administrative expenses were $3,360,000 and
interest income was $6,000. The resulting loss before tax
was $5,353,000. Igene's 50% portion of the Joint Venture
loss was $2,676,500.
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. Igene does not expect to recognize
income from the Joint Venture until all accumulated
unrecognized losses have been eliminated.
At June 30, 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 $697,243, for a total of
$1,020,112. 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 recognized 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. For the three months ended June 30 2004, Igene
will recognize a loss of $169,744 which is the extent of the
increase in the advance for that period (the June 30,
-13-
Notes to Consolidated Financial Statements
IGENE Biotechnology, Inc. and Subsidiaries
(continued)
2004 balance of $1,020,112 less the March 31, 2004 balance
of $850,368). The remainder of the loss, which is $918,256
for the quarter, will be suspended. The cumulative
suspended loss at June 30, 2004 is $1,656,388 and it will be
carried forward to offset Igene's share of earnings from the
Joint Venture, if any. The balance in the Advances to and
Investment in Joint Venture account on the Company's
financial statements is zero at June 30, 2004.
(6) Stockholders' Equity (Deficit)
As of June 30, 2004 and 2003, 37,018 and 52,310 shares,
respectively, of authorized but unissued common stock were
reserved for issue upon conversion of the Company's
outstanding preferred stock.
As of June 30, 2004 and 2003, 74,354,500 and 74,604,500
shares, respectively, of authorized but unissued common
stock were reserved for issue and exercise pursuant to the
Company's Employee Stock Option Plans.
As of June 30, 2004 and 2003, 10,000,000 and 6,666,666
shares, respectively, of authorized but unissued common
stock were reserved for distribution and exercise pursuant
to a stock option agreement with past officers of the
Company.
As of June 30, 2004 and 2003, 17,565,970 shares of
authorized but unissued common stock were reserved for the
conversion of outstanding convertible promissory notes in
the aggregate amount of $1,082,500 held by directors of the
Company.
As of June 30, 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 June 30, 2004 and 2003, 8,100,000 and 10,000,000
shares, respectively, of authorized but unissued common
stock were reserved for the conversion of outstanding
convertible promissory notes issued as part of the purchase
of ProBio.
As of June 30, 2004 and 2003, 205,261,073 and 198,016,073
shares, respectively, of authorized but unissued common
stock were reserved for the exercise of outstanding
warrants.
As of June 30, 2004 and 2003, 7,549,168 and 10,566,708
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 six-
month periods ended June 30, 2004 and 2003, are based on
94,376,611 and 87,435,688 shares, respectively, of weighted
average common shares outstanding. The same figures for the
three month period then ended are based upon 95,821,138 and
86,525,557 weighted average common shares outstanding. For
purposes of computing net loss per common share, the amount
of net loss has been increased by cumulative undeclared
dividends in arrears on preferred stock in the amount of
$98,194 for the six months ended June 30, 2003. No
adjustment has been made for any common stock equivalents
outstanding because their effects would be antidilutive.
-14-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Financial Statements
(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 $40,200,000 from inception to June
30, 2004 and its liabilities and redeemable preferred stock
exceeded its assets by approximately $14,381,000 at that
date. These factors indicate that Igene will not be able to
continue in existence unless it is able to raise additional
capital and attain profitable operations.
The continuing successful marketing of Igene's product,
AstaXin(R), has permitted Igene the opportunity to attract
additional capital through it's joint venture with Tate and
Lyle. Igene began manufacturing and selling AstaXin(R)
during 1998 and has continued to do so to date, attempting
to increase sales and manufacturing levels. Igene believes
this technology to be highly marketable. Igene hopes to
continue increasing sales of AstaXin(R), eventually
achieving gross profits and, subsequently, profitable
operations, although the achievement of these cannot
be assured.
(10) Stock Based Compensation
The Company accounts for its stock based compensation plans
under the recognition and measurement principles of APB
opinion No. 25, "Accounting for Stock Issued to Employees",
and related interpretations. No stock option based employee
compensation cost is reflected in net income, as all options
granted under the plan had an exercise price equal to the
market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and disclosure
provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", to stock-based
employee compensation for the three and six months ended
June 30:
Three months ended Six months ended
__________________________ __________________________
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
____________ ____________ ____________ ____________
Net loss:
As reported $ (600,845) $ (535,738) $ (913,468) $ (829,357)
Less pro forma stock-based employee
compensation expense determined under
fair value based method net of related
tax effects (156,892) (159,578) (330,447) (264,162)
____________ ____________ ____________ ____________
Net loss $ (757,737) $ (695,316) $(1,243,915) $(1,156,519)
============ ============ ============ ============
Net loss per Share:
Basic - as reported $ (0.01) $ (0.01) $ (0.01) $ (0.01)
Basic - pro forma $ (0.01) $ (0.01) $ (0.01) $ (0.01)
Diluted - as reported $ (0.01) $ (0.01) $ (0.01) $ (0.01)
Diluted - pro forma $ (0.01) $ (0.01) $ (0.01) $ (0.01)
-15-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Financial Statements
(continued)
(11) Recent Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board
("FASB") issued Statements 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". This 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 Financial Accounting Standards Board
("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 liabilities 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 $.3 million
of redeemable preferred stock as a liability as of June 30,
2004.
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 the entities.
FIN 46 requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries
if the entities do not effectively disperse risk among the
involved parties. The provisions of FIN 46 are effective
for all financial statements issued after January 1, 2003.
The Company had no significant variable interest in any
entities which 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.
-16-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Financial Statements
(continued)
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 $2,676,500. The loss was a
result of a 50% interest in the following: Gross profit
from inception was a negative $1,999,000 on sales of
$3,140,000, less manufacturing cost of $5,139,000. Selling
and general and administrative expenses were $3,360,000 and
interest income was $6,000. The resulting loss before tax
was $5,353,000. Igene's 50% portion of the Joint Venture
loss was $2,676,500.
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. The Company's cumulative suspended
loss from the Joint Venture is $1,656,388 at June 30, 2004.
At June 30, 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 $697,243, for a total of
$1,020,112. 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 recognized 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. For the three months ended June 30 2004, Igene
recognized a loss to the extent of the increase in the
advance for that period, $169,744 (the June 30, 2004 balance
of $1,020,112 less the March 31, 2004 balance of $850,368).
The remainder of the loss, which is $918,256 will be
suspended. The Company's cumulative suspended loss at June
30, 2004 is $1,656,388 and will be carried forward to offset
Igene's share of earnings from the Joint Venture, if any.
The balance in the Advances to and Investment in Joint
Venture account on the Company's financial statements is
zero at June 30, 2004.
The following statement displays the significant activity
for the joint venture from the initial investment at March
18, 2003 in the Joint Venture through June 30, 2004. As
shown 50% of the activity is recorded as part of Igene's
Financial Statements as income from investment in Joint
Venture:
June 30,
2004
_____________
(Unaudited)
ASSETS
CURRENT ASSETS
Account Receivable $ 1,028,000
Inventory 112,000
_____________
1,140,000
OTHER ASSETS
Fixed Assets Receivable 21,614,000
Intellectual property 24,614,000
_____________
TOTAL ASSETS $ 47,368,000
=============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,263,000
Working capital loan 224,000
_____________
TOTAL LIABILITIES 3,487,000
Equity 43,881,000
_____________
TOTAL LIABILITIES AND EQUITY $ 47,368,000
=============
-17-
Notes to Consolidated Financial Statements
IGENE Biotechnology, Inc. and Subsidiaries
(continued)
Period from March 18,2003
(initial investment) to
June 30, 2004
_________________________
(unaudited)
Net Sales $ 3,140,000
Less: manufacturing cost (5,139,000)
Gross Profit (Loss) (1,999,000)
Less: selling, general and administrative (3,360,000)
Operating Loss (5,359,000)
Interest Income 6,000
Net Loss $ (5,353,000)
Igene's 50% equity interest in the net loss $ (2,676,500)
Igene's Investment in and Advances to the Joint Venture (1,020,112)
Igene's suspended loss at June 30, 2005 $ (1,656,388)
The following statement displays the significant activity
for the Joint Venture for the three and six month ended
June 30, 2004. As shown, 50% of the activity is recorded as
part of Igene's Financial Statements as income from
investment in Joint Venture:
Three Months Six Months
Ended Ended
June 30, 2004 June 30, 2004
_____________ _____________
Net Sales $ 862,000 $ 2,006,000
Less: manufacturing cost (2,125,000) (3,998,000)
_____________ _____________
Gross Profit (Loss) (1,263,000) (1,982,000)
Less: selling, general and admin (910,000) (1,532,000)
_____________ _____________
Operating Loss (2,173,000) (3,514,000)
Interest Expense (3,000) (10,000)
_____________ _____________
Loss before tax $ (2,176,000) $ (3,524,000)
============= =============
50% equity interest Igene $ (1,088,000) $ (1,762,000)
Igene's additional Investment in
and Advances to the Joint Venture (169,744) (202,060)
_____________ _____________
Igene's incremental suspended loss for period $ (918,256) $ (1,559,940)
============= =============
-18-
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.
Overview of Financial Position
______________________________
During the six-month periods ended June 30, 2004 and 2003,
in addition to the Joint Venture discussed in more detail below,
the following actions materially affected the Company's financial
position.
o During the six months ended June 30, 2004, 194,596 shares of
redeemable preferred stock, with a recorded aggregate value
of $1,807,160, were converted into 389,192 shares of common
stock. This portion included the 8% Cumulative Convertible
Preferred Stock, Series B preferred securities and has
relieved the company of this amount from long-term debt.
o During the six months ended June 30, 2004, $190,000 dollars
of the $1,000,000 of Convertible Debentures issued as part
of the 2001 ProBio purchase, were converted to common stock.
These shares were converted at $.10 per share, for a total
of 1,900,000 shares. These shares were issued and the notes
cancelled, which relieved the Company of $190,000, of long-
term debt.
o Increases in accounts payables and accrued expenses of
$428,800 and decreases in accounts receivable of $58,125
were sources of cash. These were reduced by increases due
from Joint Venture of $202,060.
o The carrying value of redeemable preferred stock was
increased for $37,058 in 2004 and $98,149 in 2003,
reflecting cumulative unpaid dividends on redeemable
preferred stock.
o Proceeds of employee stock options provided $19,750 in cash
flows.
In December 1988, as part of an overall effort to contain costs
and conserve working capital, Igene suspended payment of the
quarterly dividend on its preferred stock. Resumption of the
dividend will require significant improvements in cash flow.
Unpaid dividends cumulate for future payment or addition to the
liquidation preference or redemption value of the preferred
stock. As of June 30, 2004, total dividends in arrears on
Igene's preferred stock total $186,571 ($10.08 per share) and are
included in the carrying value of the redeemable preferred stock.
-19-
IGENE Biotechnology, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
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 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's 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 entered into a lease of real property with
an affiliate of Tate & Lyle in Selby, England upon which the new
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 joint venture. Therefore, Igene
recorded no sales of AstaXin(R) during the six months ended June
30, 2004. Sales of AstaXin(R) during the quarter ended 2003 were
$152,705 and for the six-month period ended June 30, 2003 were
$463,486. Sales activity for the Joint Venture are report below.
Sales have been limited in the past quarters due to insufficient
production quantity. As of June 30, 2003, Igene had sold the
remaining inventory in the Company's possession to the Joint
Venture per the Joint 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 sales
will occur, or that they will be material.
Cost of sales and gross profit
As with sales revenue, future cost of sales and gross
profits will be recognized through the Joint Venture company.
Igene reported no gross profit on sales of AstaXin(R) for the six
months ended June 30, 2004. Gross profit on sales of AstaXin(R)
was $8,743 for the quarter ended June 30, 2003 and was $18,540
for the six month period ended June 30, 2003. Gross profit was 4%
of sales for the six months ended June 30, 2003. The Company
attributes this modest gross profit to a combination of pricing
pressure in the market and inefficiencies in production.
-20-
IGENE Biotechnology, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Management expects the level of gross profit to improve in
the future as a percentage of sales. Demand is expected to
increase as the Company increases customer usage and market
share. Management expects the level of gross profit to improve
with expected increases in production efficiency received from
the Joint Venture with Tate & Lyle offsetting pricing
competition, but can provide no assurances as to future increased
production or gross profit.
Cost of sales for the quarter ended June 30, 2003, was
$143,962. Cost of sales for quarter ended June 30, 2004 was $0.
Marketing and selling expenses
For the quarters ended June 30, 2004 and 2003, Igene
recorded marketing and selling expense in the amount of $161,245
and $118,569, respectively, an increase of $42,676 or 36%. For
the six months ended June 30, 2004 and 2003, Igene recorded
marketing and selling expense in the amount of $209,267 and
$219,855, respectively, a decrease of $10,588 or 5%. As a result
of the disposition of it's ProBio subsidiary in February 2003,
Igene had expected reduced marketing and selling costs incurred
as part of the prior combination with ProBio, such as increased
sales force. In addition, the reduction of salable product
currently available to Igene from its current manufacturer was
expected to cause a corresponding reduction in marketing and
selling expense. The current period marketing and selling
expense increased as a result of recognizing the expense
associated with the shares issued to Fermtech. As Mr.
Benjaminsen remained employed by Igene through 2003, 1,000,000 of
the escrowed shares of common stock were delivered to Fermtech.
A marketing and selling expense of $110,000 was recognized in the
second quarter as a result of the issuance of the shares of
common stock. If Mr. Benjaminsen remains employed by Igene
through 2004, the remaining 1,000,000 escrowed shares will be
released from escrow and delivered to Fermtech. As a result of
the Joint Venture with Tate and Lyle, Igene is expecting an
increase in salable product with a corresponding increase in
marketing and sales costs at the point the new facility increases
its level of production. Additionally, as a result of the Joint
Venture, these expenses are reimbursed to Igene. However, no
assurances can be made in regards to increased production from
the new facility nor with regard to the corresponding increase in
marketing and selling costs.
Research, development and pilot plant expenses
For the quarter ended June 30, 2004 and 2003, Igene recorded
research and development costs in the amount of $195,522 and
$223,004, respectively, a decrease of $27,482 or 12%. For the
six months ended June 30, 2004 and 2003, Igene recorded research
and development costs in the amount of $403,932 and $378,401,
respectively, an increase of $25,531 or 7%. These costs are
expected to remain relatively constant 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
June 30, 2004 and 2003 were $210,950 and $242,388 respectively, a
decrease of $31,438 or 13%. General and administrative expenses
for the six months ended June 30, 2004 and 2003 were $360,828 and
$384,327 respectively, a decrease of $23,499 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.
-21-
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 $27,500 of
litigation expenses for the three months ended June 30, 2004, and
$40,580 for the six months ended June 30, 2004. During the six
months ended June 30, 2004, 250,000 shares were issued to the
Company attorney, as a bonus in connection with the settlement of
the ADM matter. These shares were issued at an estimated value
of $.11 per share, aggregating $27,500. These costs were
expensed in the second quarter as part of the litigation expense.
With the settlement of this matter, the related costs are
expected to cease.
Interest expense
Interest expense for the quarters ended June 30, 2004 and
2003 was $216,015 and $177,901, respectively, an increase of
$38,114 or 21%. For the six months ended June 30, 2004 and 2003,
interest expense was $439,976 and $383,132, respectively, an
increase of $56,844 or 15% 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. It is
expected this number may decrease due to the conversions by
holders of long term debt to equity. This increase is due mainly
to the $37,058 in cumulative dividends accrued from preferred
stock which was recorded as interest expense
Equity in earnings of unconsolidated subsidiary
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 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 $2,676,500. The loss was a result of a 50% interest
in the following: Gross profit from inception was a negative
$1,999,000 on sales of $3,140,000, less manufacturing cost of
$5,139,000. Selling and general and administrative expenses were
$3,360,000 and interest income was $6,000. The resulting loss
before tax was $5,353,000. Igene's 50% portion of the Joint
Venture loss was $2,676,500.
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.
-22-
IGENE Biotechnology, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
At June 30, 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 $697,243, for a total of $1,020,112. 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 recognized 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. For the three months ended June 30 2004, Igene
recognized a loss to the extent of the increase in the advance
for that period, $169,744 (the June 30, 2004 balance of
$1,020,112 less the March 31, 2004 balance of $850,368). The
remainder of the loss, which is $918,256 will be suspended. The
Company's cumulative suspended loss at June 30, 2004 is
$1,656,388 and will be carried forward to offset Igene's share of
earnings from the Joint Venture, if any. The balance in the
Advances to and Investment in Joint Venture account on the
Company's financial statements is zero at June 30, 2004.
The following statement displays the significant activity
from the joint venture for the initial investment at March 18,
2003 in the Joint Venture through June 30, 2004. As shown 50% of
the activity is recorded as part of Igene's Financial Statements
as income from investment in Joint Venture:
June 30,
2004
_____________
(Unaudited)
ASSETS
CURRENT ASSETS
Account Receivable $ 1,028,000
Inventory 112,000
_____________
1,140,000
OTHER ASSETS
Fixed Assets Receivable 21,614,000
Intellectual property 24,614,000
_____________
TOTAL ASSETS $ 47,368,000
=============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,263,000
_____________
Working capital loan 224,000
TOTAL LIABILITIES 3,487,000
Equity 43,881,000
_____________
TOTAL LIABILITIES AND EQUITY $ 47,368,000
=============
Period from March 18, 2003
(initial investment) to
June 30, 2004
__________________________
(unaudited)
Net Sales $ 3,140,000
Less: manufacturing cost (5,139,000)
_____________
Gross Profit (Loss) (1,999,000)
Less: selling, general and administrative (3,360,000)
_____________
Operating Loss (5,359,000)
Interest Income 6,000
_____________
Net Loss $ (5,353,000)
=============
Igene's 50% equity interest in the net loss $ (2,676,500)
Igene's Investment in and Advances to the Joint Venture (1,020,112)
_____________
Igene's suspended loss $ (1,656,388)
=============
-23-
IGENE Biotechnology, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
The following statement displays the significant activity
for the Joint Venture for the three and six month ended June 30,
2004. As shown, 50% of the activity is recorded as part of
Igene's Financial Statements as income from investment in Joint
Venture:
Three Months Six Months
Ended Ended
June 30, 2004 June 30, 2004
_____________ _____________
Net Sales $ 862,000 $ 2,006,000
Less: manufacturing cost (2,125,000) (3,998,000)
_____________ _____________
Gross Profit (Loss) (1,263,000) (1,982,000)
Less: selling, general and admin (910,000) (1,532,000)
_____________ _____________
Operating Loss (2,173,000) (3,514,000)
Interest Expense (3,000) (10,000)
_____________ _____________
Loss before tax $ (2,176,000) $ (3,524,000)
============= =============
50% equity interest Igene $ (1,088,000) $ (1,762,000)
Igene's additional Investment in
and Advances to the Joint Venture (169,744) (202,060)
_____________ _____________
Igene's incremental suspended loss for period $ (918,256) $ (1,559,940)
============= =============
Disposition of ProBio Subsidiary
As reported on Form 8-K filed on 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. Effective December 31, 2002, Mr. Ulve resigned as CEO
and director of Igene and Mr. Benjaminsen ceased acting as our
chief marketing officer, though Mr. Benjaminsen has maintained a
position with Igene.
The amount of consideration paid for ProBio 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 consideration of ProBio's cash flow, cash
position, revenue and revenue prospects.
The equipment and other physical property disposed of
belonging to ProBio included inventory, personal computers, a web
site and trademark, other office equipment and furniture, and
accounts receivables and accounts payables related to
nutraceuticals. For the nine months ended September 30, 2002,
the net operating loss of the division being sold as ProBio was
$340,632, on sales of $1,555,014, and is reflected on the
September 30, 2002 income statement of Igene as a loss from
discontinued operations.
Gain on disposition
Igene sold ProBio to Fermtech AS in exchange for aggregate
consideration valued at approximately $343,000, consisting of
7,000,000 shares of Igene common stock 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. As Mr. Benjaminsen remained
employed by Igene through 2003, 1,000,000 of the escrowed shares
of common stock were delivered to Fermtech. These shares were
expensed in the second quarter of 2004, as a marketing expense of
$110,000. If Mr. Benjaminsen remains employed by Igene through
2004, the remaining 1,000,000 escrowed shares will be released
from escrow and delivered to Fermtech. Gain on disposal 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.
-24-
IGENE Biotechnology, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Net loss and basic and diluted net loss per common share
As a result of the foregoing, the Company reported net
losses of $600,845 and $535,738, respectively, for the quarters
ended June 30, 2004 and 2003, an increase in the loss of $65,107
or 12%. This represents a loss of $.01 per basic and diluted
common share in the quarters ended June 30, 2004 and 2003. The
weighted average number of shares of common stock outstanding of
94,376,611 and 86,692,223, for the quarters ended June 30, 2004
and 2003, respectively, increased by 7,684,388 shares. This
resulted from the weighted average adjustments of the following
transactions: the issuance of 1,905,000 shares issued in
conversion of debentures, 389,192 shares of common stock in
conversion of preferred stock, 3,017,543 shares issued to the
manufacturer as part of the agreement, 1,000,000 shares issued to
Fermtech as part of the ProBio disposition agreement, and 450,000
shares issued as part of employee stock option exercises, and
250,000 shares issued as a bonus to the Company attorney in the
ADM matter.
Liquidity and Capital Resources
Historically, Igene has been funded primarily by equity
contributions and loans from stockholders. As of June 30, 2004,
Igene had working capital of $42,617, and cash and cash
equivalents of $36,586. Currently Igene is also funded by
research and development reimbursements from the Joint Venture.
Cash provided by operating activities during the six-month
period ended June 30, 2004 and 2003 amounted to $120,386 and
$387,371, respectively, a decrease in cash provided of $266,985.
Cash used by investing activities during the six-month period
ended June 30, 2004 and 2003 amounted to $202,060 and $418,448,
respectively, a decrease of $216,388, from reductions in advances
to the joint venture.
Cash was used by financing activities in repayment of loans
in the amount of $100,000 for the six-month period ended June 30,
2003, as opposed to the $55,185 provided by financing activities
for the six-month period ended June 30, 2004. Financing
activities consisted primarily of employee stock option plan
purchases and increases in preferred stock for cumulative
dividends classified as interest.
Over the next twelve months, Igene believes it will need
additional working capital. Igene hopes to achieve profits from
sales of AstaXin(R) through the Joint Venture. This funding is
expected to be received from the new venture with Tate & Lyle.
However, there can be no assurance that projected profits, if
any, from sales, or additional funding from the Joint Venture
will be sufficient for Igene to fund its continued operations.
The Company does not believe that inflation has had a
significant impact on its operations during the six-month periods
ended June 30, 2004 and 2003.
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.
-25-
IGENE Biotechnology, Inc.
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Small Business Issuer Purchases
of Equity Securities.
During the six months ended June 30, 2004, 250,000 shares
were issued to the Company's attorney as a bonus in connection
with the settlement of the ADM matter. These shares were issued
at an estimated value of $.11 per share, aggregating to $27,500.
These costs were expensed in the second quarter as part of the
ADM legal expense.
In February, 2003, Igene sold its subsidiary ProBio to
Fermtech AS in exchange for aggregate consideration valued at
approximately $343,000, consisting of 7,000,000 shares of Igene
common stock (including 2,000,000 shares that were placed into
escrow and may be reissued to Fermtech as described below),
valued for the purposes of the acquisition at $.03 per share,
plus forgiveness of approximately $168,000 of debt that Igene
owed to ProBio at the time of purchase in 2001. The escrowed
2,000,000 shares were to be earned by Fermtech based upon Mr.
Benjamin's continued employment with the Company. As Mr.
Benjaminsen remained employed by Igene through 2003, 1,000,000 of
the escrowed shares of common stock were delivered to Fermtech.
These shares were expensed in the second quarter of 2004, as a
marketing expense of $110,000. If Mr. Benjaminsen remains
employed by Igene through 2004, the remaining 1,000,000 escrowed
shares will be released from escrow and delivered to Fermtech.
Limitation on Payment of Dividends
__________________________________
Dividends on Common Stock are currently prohibited because
of the preferential rights of holders of Preferred Stock. The
Company has paid no cash dividends on its Common Stock in the
past and does not intend to declare or pay any dividends on its
Common stock in the foreseeable future.
Item 3. Defaults Upon Senior Securities.
In December 1988, as part of an overall effort to contain
costs and conserve working capital, the Company suspended payment
of the quarterly dividend on its preferred stock. Resumption of
the dividend will require significant improvements in cash flow.
Unpaid dividends cumulate for future payment or addition to the
liquidation preference or redemption value of the preferred
stock. As of June 30, 2004, total dividends in arrears on the
Company's preferred stock total $186,571 ($10.08 per share) and
are included in the carrying value of the redeemable preferred
stock.
Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of stockholders held on June 8, 2004,
the following matter was submitted for a stockholders' vote and
was approved by the requisite number of votes: the election of
five directors of the Company. The directors nominees were
Stephen F. Hiu, Thomas L. Kempner, Michael G. Kimelman, Sidney R.
Knafel, and Patrick F. Monahan.
Results of the voting were as follows:
Votes Broker
Votes Against or Votes Non-
For Withheld Abstained Votes
__________ __________ __________ __________
(1) Election of Directors
Stephen F. Hiu 73,185,546 98,950 --- ---
Thomas L. Kempner 73,185,546 98,950 --- ---
Michael G. Kimelman 73,185,546 98,950 --- ---
Sidney R. Knafel 73,185,546 98,950 --- ---
Patrick F. Monahan 73,185,546 98,950 --- ---
-26-
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 incorporated herein by reference.
Exhibit 3.2 - Bylaws 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.
-27-
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
-28-
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 incorporated herein by reference.
Exhibit 3.2 - Bylaws 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.
-29-