U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] Quarterly report under Section 13 or 15(D) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2005
_____________________________________________
[ ] 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]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [x]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
106,003,661 shares of common stock, par value $.01, as of February 1,
_____________________________________________________________________
2006.
_____
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [x]
FORM 10-QSB
IGENE Biotechnology, Inc.
INDEX
PART I - FINANCIAL INFORMATION
Page
Consolidated Balance Sheets .......................... 5
Consolidated Statements of Operations ................ 6
Consolidated Statements of Stockholders' Deficiency .. 7
Consolidated Statements of Cash Flows ................ 8
Notes to Consolidated Financial Statements ........... 9-14
Management's Discussion and Analysis of Financial
Conditions and Results of Operations ................. 15-18
Controls and Procedures .............................. 19
PART II - OTHER INFORMATION .......................... 20
SIGNATURES ................................................ 21
EXHIBIT INDEX ............................................. 22
IGENE BIOTECHNOLOGY, INC.
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
PART I
FINANCIAL INFORMATION
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Balance Sheets
March 31, December 31,
2005 2004
____________ ____________
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 86,377 $ 204,248
Accounts receivable 80,075 79,638
Prepaid expenses and other current assets 30,944 10,764
____________ ____________
TOTAL CURRENT ASSETS 197,397 294,650
Property and equipment, net 120,092 124,904
Loans receivable from manufacturing agent 70,982 70,982
Investment in and advances to unconsolidated joint venture --- ---
Other assets 5,125 5,125
____________ ____________
TOTAL ASSETS $ 393,596 $ 495,661
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 64,447 $ 78,472
Convertible debenture 705,000 705,000
Accrued interest 29,375 11,750
____________ ____________
TOTAL CURRENT LIABILITIES 798,822 795,222
LONG-TERM DEBT
Notes payable 5,842,267 5,842,267
Convertible debentures 3,814,212 3,814,212
Accrued interest 4,319,955 4,148,681
REDEEMABLE PREFERRED STOCK
Carrying amount of redeemable preferred stock, 8% cumulative,
Convertible, voting, series A, $.01 par value per share.
Stated value was $18.56 and $18.40, respectively. Authorized
1,312,500 shares,issued 18,509 343,527 340,566
____________ ____________
TOTAL LIABILITIES 15,118,783 14,940,948
____________ ____________
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Common stock --- $.01 par value per share. Authorized
750,000,000 shares; issued and outstanding 102,794,142
and 101,732,453 shares, respectively. 1,027,942 1,017,325
Additional paid-in capital 25,236,268 25,138,748
Accumulated Deficit (40,989,397) (40,601,360)
____________ ____________
TOTAL STOCKHOLDERS' DEFICIENCY (14,725,187) (14,445,287)
____________ ____________
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 393,596 $ 495,661
============ ============
The accompanying notes are an integral part of the financial statements.
-5-
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
Three months ended
_____________________________
March 31, March 31,
2005 2004
____________ ____________
EQUITY IN LOSS OF JOINT VENTURE (183,093) (32,316)
OPERATING EXPENSES
__________________
Marketing and selling 48,288 48,022
Research, development and pilot plant 166,007 208,410
General and administrative 188,908 149,878
Litigation expense --- 13,080
Less operating expenses reimbursed by Joint Venture ( 411,339) (363,044)
____________ ____________
TOTAL OPERATING EXPENSES (8,136) 56,346
____________ ____________
OPERATING LOSS (174,957) (88,662)
____________ ____________
INTEREST EXPENSE (213,080) (223,961)
____________ ____________
NET LOSS $ (388,037) $ (312,623)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.00) $ (0.00)
============ ============
The accompanying notes are an integral part of the financial statements.
-6-
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Statements of Stockholders' Deficiency
(Unaudited)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
(shares/amount) Capital Deficit Deficiency
__________________________ _____________ _____________ _____________
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 93,722,769 $ 937,228 $ 22,653,555 $(39,604,018) $(16,013,235)
============ ============ ============= ============= =============
Balance at January 1, 2005 101,732,453 $ 1,017,325 $ 25,138,748 $(40,601,360) $(14,445,287)
Shares issued for manufacturing Agreement 1,061,689 10,617 97,520 --- 108,137
Net loss for the three months ended
March 31, 2005 --- --- --- (388,037) (388,037)
____________ ____________ _____________ _____________ _____________
Balance at March 31, 2005 102,794,142 $ 1,027,942 $ 25,236,268 $(40,989,397) $(14,725,187)
============ ============ ============= ============= =============
The accompanying notes are an integral part of the financial statements.
-7-
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31, March 31,
____________ ___________
2005 2004
Cash flows from operating activities
Net loss $ (388,037) $ (312,623)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation 4,812 4,812
Increase in preferred stock for cumulative dividend
classified as interest 2,961 34,225
Manufacturing cost paid in shares of common stock 108,137 88,255
Equity in loss of joint venture 183,093 32,316
Decrease (increase) in:
Accounts receivable (437) 57,389
Prepaid expenses and other current assets (20,180) 6,615
Increase (decrease) in
Accounts payable and accrued expenses 174,873 224,230
____________ ____________
Net cash provided by operating activities 65,222 135,219
____________ ____________
Cash flows from investing activities
Advances to Joint Venture (183,093) (32,316)
____________ ____________
Net cash used in operating activities (183,093) (32,316)
____________ ____________
Cash flows from financing activities
Repayment of equipment lease payable --- (927)
Proceeds from exercise of employee stock options --- 18,500
____________ ____________
Net cash provided by financing activities --- 17,573
____________ ____________
Net increase (decrease) in cash and cash equivalents (117,871) 120,476
Cash and cash equivalents at beginning of period 204,248 63,075
____________ ____________
Cash and cash equivalents at end of period $ 86,377 $ 183,551
============ ============
Supplementary disclosure and cash flow information
__________________________________________________
Cash paid for interest $ 21,220 $ ---
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.
-8-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(1) Unaudited consolidated financial statements
The March 31, 2005 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 operations and cash flows.
Such financial statements do not include all of the
information and footnote disclosures normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the United States of
America. This quarterly report on Form 10-QSB should be
read in conjunction with Igene's Annual Report on Form 10-
KSB for the year ended December 31, 2004.
(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. Igene
has operational subsidiaries in Norway and Chile. The
Company is engaged in the business of developing, marketing,
and manufacturing specialty ingredients for human and animal
nutrition. Igene was formed to develop and produce 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,
on March 19, 2003, Tate & Lyle PLC ("Tate & Lyle") and Igene
announced a 50:50 joint venture to produce AstaXin(R) for
the aquaculture industry. Production utilizes Tate & Lyle's
fermentation capability together with the unique technology
developed by Igene. Part of Tate & Lyle's existing Selby,
England, citric acid facility has been 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 has commenced.
(3) Noncash investing and financing activities
During the three months ended March 31, 2005 and 2004, the
Company recorded in each quarter dividends in arrears on 8%
redeemable preferred stock cumulating at $.16 per share
aggregating to $2,961 and $34,225, respectively. In
accordance with FASB 150, the dividends accrued in the third
quarter 2003 and thereafter have been reclassified to
interest expense.
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 where reissued to Fermtech based on Mr.
Benjaminsen's continued employment with Igene through 2005),
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.
During the three months ended March 31, 2005 and 2004,
Fermic, Igene's manufacturing agent, earned 1,061,689 and
675,300 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.
-9-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
The 1,061,689 shares were earned at an average price of
$.102 per share for 2005, and the 675,300 shares were earned
at an average price of $.131 per share for 2004. Through
March 31, 2005, 15,791,702 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.
(4) Amendment to Long - Term Liabilities
As of February 15th 2006, the Company's Notes payable and
Convertible debentures (other than the ProBio Debentures in
the amount of $705,000) were in the process of being changed
from a maturity date of March 31, 2006 to March 31, 2009.
Accordingly, such notes payable and convertible debentures
have been classified as long-term on the accompanying
Consolidated Balance Sheet.
(5) Joint Venture
On March 18 2003, the Company entered into a Joint Venture
Agreement with Tate & Lyle Fermentation Products Ltd.
("Tate"). Pursuant to a Joint Venture Agreement, the
Company and Tate agreed to form a joint venture (the "Joint
Venture") to manufacture, market and sell Astaxanthin and
derivative products throughout the world for all uses other
than as a Nutraceutical or otherwise for direct human
consumption. Tate contributed $24,600,000 in cash to the
Joint Venture, while the Company 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 Company'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. From inception on March 18,
2003 through March 31, 2005, Igene's portion of the Joint
Venture's net loss was $6,393,820. The loss was a result of
a 50% interest in the following: Gross profit for the
period was a negative $5,619,088 on sales of $9,138,400,
less manufacturing cost of $14,757,488. Selling and general
and administrative expenses for the period were $6,032,077
and interest expense was $1,136,475. The resulting loss
before tax was $12,787,640. Igene's 50% portion of the
Joint Venture loss was $6,393,820.
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 are recognized only to
the extent of the Investment in and Advances to the Joint
Venture. Losses in excess of this amount are suspended from
recognition in the financial statements 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, 2005, prior to the recognition of its portion
of the Joint Venture loss, Igene's investment in the Joint
Venture consisted of its initial investment of $322,869 and
its net advances to the Joint Venture amounted to $868,531,
for a total of $1,191,400. From inception through the year
ended December 31, 2004, Igene recognized $1,008,307 of the
$4,887,500 loss which existed as part of the Joint venture.
In the first quarter of 2005, Igene recognized losses to the
extent of the increase in the advance $183,093, the March
31, 2005 balance of $1,191,400, less the December 31, 2004
balance of $1,008,307. The remainder of the cumulative loss
which is $5,202,420 is 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, 2005.
-10-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
The following condensed statement displays the activity of
the joint venture for the period of initial investment at
March 18, 2003 in the Joint Venture through March 31, 2005.
As shown 50% of the activity is potentially recorded as part
of Igene's Financial Statements as loss from investment in
Joint Venture:
March 31,
2005
____________
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,320,260
Accounts Receivable 1,571,470
Inventories 1,997,640
____________
4,889,370
OTHER ASSETS
Property, plant and equipment, net 23,787,575
Intangibles 24,614,000
____________
TOTAL ASSETS $53,290,945
============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 9,624,114
Current maturities of debt 2,638,225
____________
TOTAL CURRENT LIABILITIES 12,262,339
Long Term Debt 1,978,068
____________
TOTAL LIABILITIES 14,240,407
Equity 39,050,538
____________
TOTAL LIABILITIES AND EQUITY $53,290,945
============
Period from March 18, 2003
(initial investment) to
March 31, 2005
__________________________
(unaudited)
Net Sales $ 9,138,400
Less: manufacturing cost (14,757,488)
_____________
Gross Profit (Loss) (5,619,088)
Less: selling, general and administrative (6,032,077)
_____________
Operating Loss (11,651,165)
Interest Expense (1,136,475)
_____________
Net Loss $(12,787,640)
=============
Igene's Investment in and Advances to the Joint Venture (1,191,400)
_____________
Igene's suspended loss $ (5,202,420)
=============
Quarter ended
March 31, 2005
______________
(unaudited)
Net Sales $ 2,354,400
Less: manufacturing cost (3,617,488)
______________
Gross Profit (1,263,088)
Less: selling, general and administrative (764,077)
______________
Operating Loss (2,027,165)
Interest Expense (985,475)
______________
Net Loss $ (3,012,640)
==============
Igene's 50% equity interest in the net loss $ (1,506,320)
Igene's additional Investment in and Advances
to the Joint Venture (183,093)
______________
Igene's incremental suspended loss $ (1,323,227)
==============
-11-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
(6) Stockholders' Deficiency
As of March 31, 2005, 37,018 shares of authorized but
unissued common stock were reserved for issue upon
conversion of the Company's outstanding preferred stock.
As of March 31, 2005, 73,954,500 shares of authorized but
unissued common stock were reserved for distribution and
exercise pursuant to the Company's Employee Stock Option
Plans.
As of March 31, 2005, 10,000,000 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, 2005, 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, 2005, 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, 2005 7,050,000 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, 2005, 205,261,073 shares of authorized but
unissued common stock were reserved for the exercise of
outstanding warrants.
As of March 31, 2005, 4,208,297 shares 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, 2005 and 2004 are based on
102,794,142 and 92,932,087, 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.
(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.
-12-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
(9) Uncertainty
Igene has incurred net losses in each year of its existence,
aggregating approximately $41,000,000 from inception to
March 31, 2005 and its liabilities exceeded its assets by
approximately $14,700,000 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 & 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 loss and loss 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:
2005 2004
___________ ___________
Net loss:
As reported $ (388,037) $ (312,623)
Less pro forma stock-based employee
compensation expense determined under fair
value based method net of related tax effects --- (156,892)
___________ ___________
Net loss per common share: (388,037) (469,515)
=========== ===========
Net loss per Share:
Basic - as reported $ (0.00) $ (0.00)
Basic - pro forma $ (0.00) $ (0.00)
Diluted - as reported $ (0.00) $ (0.00)
Diluted - pro forma $ (0.00) $ (0.00)
-13-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
(11) Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151,
"Inventory Costs, an amendment of ARB No.43, Chapter 4."
SFAS amends Accounting Research Bulletin ("ARB") No.43,
Chapter 4, to clarify that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials
(spoilage) should be recognized as current-period charges.
In addition, SFAS No.151 requires that allocation of fixed
production overhead to inventory be based on the normal
capacity of the production facilities. SFAS No.151 is
effective for inventory costs incurred during the fiscal
years beginning after June 15, 2005. The Company is
currently assessing the impact SFAS No.151 will have on the
results of operations, financial position or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting
Changes and Error Corrections"("SFAS 154") which replaces
APB Opinion No. 20 Accounting Changes and SFAS No. 3,
"Reporting Accounting Changes in Interim Financial
Statements-An Amendment of APB Opinion No. 28." SFAS 154
requires retrospective application to prior periods'
financial statement of a voluntary change in accounting
principal unless it is not practical. SFAS 154 is effective
for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005, and is
required to be adopted by the Company in the first quarter
of fiscal 2007. Although the Company will continually
evaluate its accounting policies, management does not
currently believe adoption will have a material impact on
the Company's results of operations, cash flows or financial
position.
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.
On December 16, 2004, the FASB issued FASB Statement No.
123(revised 2004), Share-Based Payment, which is a
revision of FASB Statement No. 123, Accounting for Stock-
Based Compensation. Statement 123(R) supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees. Generally,
the approach in Statement 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R)
requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma
disclosure is no longer an alternative. In April 2005, the
SEC amended the compliance dates for Statement 123(R) from
fiscal periods beginning after June 15, 2005 to fiscal years
beginning after June 15, 2005. The Company expects to adopt
Statement 123 (R) in the fiscal year commencing January 1,
2006.
(12) Subsequent Events
On June 15th 2005, the Company executed a limited guarantee
for one of the debt obligations of the Joint Venture. Under
the terms of the limited guarantee, the Company will
guarantee up to 4,200,000 British pounds sterling
(approximately $7,350,000 at February 10, 2006).
The Company subsequently entered into an agreement with Tate
and Lyle (the other 50% partner in the Joint Venture) where
Tate & Lyle has agreed to arrange funds for the Joint
Venture, without recourse to Igene Biotechnology, Inc. until
the Joint Venture produces a regular monthly cash flow, as
defined, for four consecutive months.
As of February 10, 2006, the Joint Venture has not met the
cash flow requirements, therefore Igene is not obligated for
any funding to the Joint Venture or responsible for the
guarantee mentioned above.
-14-
IGENE Biotechnology, Inc. and Subsidiary
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 are 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 are suspended from
recognition in the financial statements 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 entered into a lease of real property with
an affiliate of Tate & Lyle in Selby, England upon which the
manufacturing facility is being completed 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) since the inception of the Joint
Venture on March 18, 2003. Sales have been limited in the past
due to insufficient production quantity.
-15-
IGENE Biotechnology, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
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 Sales and Gross Profit
is recognized through the Joint Venture. As a result, Igene
reported no gross profit on sales of AstaXin(R) since the
inception of the Joint Venture. The Company attributes poor or
negative gross profit to a combination of pricing pressure in the
market and inefficiencies in production. Management expects that
sales and gross profits may continue to be limited by the
quantities of AstaXin(R) the Company is able to produce while the
Joint Venture continues to complete the production facility.
Sales and gross profit growth, if any, will 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 production efficiency is realized from the Joint
Venture with Tate & Lyle offsetting pricing competition, but can
provide no assurances of future increased production or future
increased margin.
Additionally no cost of sales were recorded as they are also
recorded as part of the Joint Venture activity.
Marketing and selling expenses
For the quarters ended March 31, 2005 and 2004, Igene
recorded Marketing Expense in the amount of $48,288 and $48,022,
respectively, an increase of $266 or less then 1%. It is
expected this level of selling cost will be constant based on the
current level of salable product currently available. As a
result of the Joint Venture with Tate & Lyle, Igene is expecting
an increase in salable product with a corresponding increase in
sales costs at the point the new facility is in full production.
Additionally, as a result of the Joint Venture, these expenses
have been 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, 2005 and 2004, Igene
recorded research and development costs in the amount of $166,007
and $208,410, respectively, a decrease of $42,403 or 20%. It is
expected these costs will again increase to prior year levels 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, 2005 and 2004 were $188,908 and $149,878 respectively,
an increase of $39,030 or 26%. 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.
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.
-16-
IGENE Biotechnology, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
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, 2005, costs
reimbursed by the Joint Venture totaled $411,339. The costs
covered $48,288 of marketing costs, $166,007 of research and
development costs and $197,044 of general and administrative
costs. 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, 2005 and
2004, was $213,080 and $223,961, respectively, a decrease of
$10,881 or 5%. 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 decrease
is due to the reduction in cumulative dividends accrued in the
quarter ended March 31, 2005 from preferred stock which was
recorded as interest expense.
Equity in earnings of unconsolidated Joint Venture
As a result of the Joint Venture, the production, sales and
marketing of Astaxanthin now takes place in the unconsolidated
Joint Venture. From inception on March 18, 2003 through March
31, 2005, Igene's portion of the Joint Venture's net loss was
$6,393,820. The loss was a result of a 50% interest in the
following: Gross profit for the period was a negative $5,619,088
on sales of $9,138,400, less manufacturing cost of $14,757,488.
Selling and general and administrative expenses for the period
were $6,032,077 and interest expense was $1,136,475. The
resulting loss before tax was $12,787,640. Igene's 50% portion
of the Joint Venture loss was $6,393,820.
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 are recognized only to the extent of
the Investment in and Advances to the Joint Venture. Losses in
excess of this amount are suspended from recognition in the
financial statements and carried forward to offset Igene's share
of the Joint Venture's future income, if any.
At March 31, 2005, prior to the recognition of its portion of
the Joint Venture loss, Igene's investment in the Joint Venture
consisted of its initial investment of $322,869 and its net
advances to the Joint Venture amounted to $868,531, for a total
of $1,191,400. From inception through the year ended December
31, 2004, Igene recognized $1,008,307 of the $4,887,500 loss
which existed as part of the Joint venture. In the first quarter
of 2005, Igene recognized losses to the extent of the increase in
the advance $183,093, the March 31, 2005 balance of $1,191,400,
less the December 31, 2004 balance of $1,008,307. The remainder
of the cumulative loss which is $5,202,420 is 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, 2005.
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.
-17-
IGENE Biotechnology, Inc. and Subsidiary
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 $388,037 and $312,623, respectively, for the quarters
ended March 31, 2005 and 2004, an increase in the loss of $75,414
or 24%. This represents a loss of $.00 per basic and diluted
common share in each of the quarters ended March 31, 2005 and
2004. The weighted average number of shares of common stock
outstanding of 101,732,453 and 92,932,087 for the quarters ended
March 31, 2005 and 2004, respectively, has increased by
8,800,366 shares. The increase in outstanding shares resulted
from primarily the weighted average adjustment of the issuance of
2,950,000 shares in conversion of debentures issued in the
purchase of ProBio, the issuance of 250,000 shares of common
stock issued for legal service in the settlement of the ADM
matter, the issuance of 4,027,122 shares to Igene's manufacturer
under the manufacturing agreement with Fermic, 450,000 shares in
issuance for exercise of employee stock incentive plan, 389,192
in conversion of redeemable preferred stock, 1,000,000 shares
reissued to Fermtech as part of the disposition of ProBio.
Financial Position
During the three-month periods ended March 31, 2005 and 2004,
in addition to the Joint Venture previously discussed, the
following actions also materially affected the Company's
financial position:
Increases in accounts payable and accrued expense for the
quarter ended March 31, 2005 of $174,873 was a source of
cash offset by increases in prepaid expense of $20,180 and
increases in funds due from the Joint Venture of $183,093;
The carrying value of redeemable preferred stock was
increased and interest expense recorded in the amounts of
$2,961 and $34,225 in 2005 and in 2004, respectively,
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, 2005, total dividends in arrears on
Igene's preferred stock total $195,455 ($10.56 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, 2005,
Igene had negative working capital of $601,425, and cash and cash
equivalents of $86,377. Currently Igene is also funded by
research and development reimbursements from the Joint Venture.
Cash provided by operating activities during the three-month
period ended March 31, 2005 and 2004, amounted to $65,222 and
$135,219, respectively.
Cash used in investing activities for the three-month period
ended March 31, 2005 and 2004, amounted to $183,093 and $32,316,
respectively .
Cash provided by financing activities was $17,573 during the
first quarter of 2004, this was due to employee stock options
exercised for $18,500. No cash was provided by or used in
financing activities in the first quarter of 2005.
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, 2005 and 2004.
-18-
IGENE Biotechnology, Inc. and Subsidiary
Management's Discussion and Analysis of
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.
-19-
IGENE Biotechnology, Inc. and Subsidiary
PART II
OTHER INFORMATION
Item 2. Unregistered Sales of Equity 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, 2005, total dividends in arrears on the
Company's preferred stock total $195,455 ($10.56 per share) and
are included in the carrying value of the redeemable preferred
stock.
On November 30, 2001, Igene entered into Convertible
Promissory Notes (the "Convertible Notes") with each of the
following note holders for the respective amounts (a) NorInnova
AS (formerly Forskningsparken I Tromso AS) for $106,500; (b) Knut
Gjernes for $7,500; (c) Magne Russ Simenson for $378,000; and (d)
Nord Invest AS for $313,000 (collectively, the "Convertible Note
Holders"). Each of the Convertible Notes has a maturity date of
November 1, 2004. On November 18, 2005, each of the Convertible
Note Holders provided Igene with written notice of default under
each of the Convertible Notes. Igene and the Convertible Note
Holders are currently in discussions to extend the maturity date
of each of the Convertible Notes in return for reducing the
conversion price and increasing the interest rate on each
Convertible Note, however it is not certain such amendment will
be consummated, and so long as an event of default under the
Convertible Note continues to exist, the Convertible Note Holders
have the ability to accelerate the payment of the principal and
interest due and owing on each of the Convertible Notes.
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.
-20-
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 February 15, 2006 By /s/ STEPHEN F. HIU
____________________________
STEPHEN F. HIU
President
Date February 15, 2006 By /s/ EDWARD J. WEISBERGER
____________________________
EDWARD J. WEISBERGER
Chief Financial Officer
-21-
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.
-22-