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 June 30, 2006
[ ] Transition report under Section 13 or 15(D) of the Exchange
Act
For the transition period from __________ to __________
Commission file number 0-15888
IGENE Biotechnology, Inc.
_________________________________________________________________
(Exact name of Small Business Issuer as Specified in its Charter)
Maryland 52-1230461
_______________________________ ___________________
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
9110 Red Branch Road, Columbia, Maryland 21045-2024
___________________________________________________
(Address of Principal Executive Offices)
(410) 997-2599
________________________________________________
(Issuer's Telephone Number, Including Area Code)
None
____________________________________________________
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the Issuer: (1) filed all reports required to be filed
by Section 13 or 15(D) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes x No
___ ___
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:
108,337,072 shares of common stock, par value $.01, as of July 13, 2006.
________________________________________________________________________
Transitional Small Business Disclosure Format (check one):
Yes No x
___ ___
-1-
FORM 10-QSB
IGENE Biotechnology, Inc.
INDEX
PART I - FINANCIAL INFORMATION
Page
Consolidated Balance Sheets ............................. 5-6
Consolidated Statements of Operations ................... 7
Consolidated Statements of Stockholders' Deficiency ..... 8
Consolidated Statements of Cash Flows ................... 9
Notes to Consolidated Financial Statements .............. 10-16
Management's Discussion and Analysis of Financial
Conditions and Results of Operations .................... 17-20
Controls and Procedures ................................. 21
PART II - OTHER INFORMATION ............................... 22-23
SIGNATURES ................................................... 24
EXHIBIT INDEX ................................................ 25
-2-
IGENE BIOTECHNOLOGY, INC.
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
-3-
PART I
FINANCIAL INFORMATION
-4-
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Balance Sheets
June 30, December 31,
2006 2005
_____________ _____________
(Unaudited) (Note)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,527 $ 119,745
Accounts receivable 8,526 15,618
Prepaid expenses and other current assets 8,294 20,520
_____________ _____________
TOTAL CURRENT ASSETS 26,347 155,883
Property and equipment, net 40,713 50,059
Loans receivable from manufacturing agent 19,993 19,993
Investment in and advances to
unconsolidated joint venture --- ---
Other assets 5,125 5,125
_____________ _____________
TOTAL ASSETS $ 92,178 $ 231,060
============= =============
Note: The Balance Sheet at December 31, 2005 has been derived from the audited
financial statements at that date.
The accompanying notes are an integral part of the financial
statements.
-5-
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Balance Sheets
(continued)
June 30, December 31,
2006 2005
_____________ _____________
(Unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 165,476 $ 99,285
Convertible debenture 705,000 705,000
Accrued interest 11,750 11,750
_____________ _____________
TOTAL CURRENT LIABILITIES 882,226 816,035
LONG-TERM LIABILITIES
Notes payable 5,842,267 5,842,267
Convertible debentures 3,814,212 3,814,212
Accrued interest 5,275,946 4,902,255
REDEEMABLE PREFERRED STOCK
Carrying amount of redeemable preferred
stock, 8% cumulative, convertible,
voting, series A, $.01 par value per
share. Stated value was $ 19.36
and $19.04, respectively. Authorized
1,312,500 shares, issued 11,134 and
18,509, respectively. 215,554 352,411
_____________ _____________
TOTAL LIABILITIES 16,030,205 15,727,180
_____________ _____________
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Common stock --- $.01 par value per share.
Authorized 750,000,000 shares;
issued and outstanding 108,337,072
and 107,456,869 shares, respectively. 1,083,371 1,074,569
Additional paid-in capital 25,619,696 25,445,450
Accumulated Deficit (42,641,094) (42,016,139)
_____________ _____________
TOTAL STOCKHOLDERS' DEFICIENCY (15,938,027) (15,496,120)
_____________ _____________
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIENCY $ 92,178 $ 231,060
============= =============
Note: The Balance Sheet at December 31, 2005 has been derived
from the audited financial statements at that date.
The accompanying notes are an integral part of the financial
statements.
-6-
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
_________________________ _________________________
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
___________ ___________ ___________ ___________
EQUITY IN REPAID ADVANCES (LOSS)
OF JOINT VENTURE $ 171,639 $ (282,977) $ (18,263) $ (466,070)
OPERATING EXPENSES
__________________
Marketing and selling 47,399 70,876 90,210 119,164
Research, development and pilot plant 237,088 217,082 445,737 383,089
General and administrative 292,231 246,592 517,014 435,500
Operating expenses reimbursed by Joint Venture (459,917) (527,398) (859,860) (938,737)
___________ ___________ ___________ ___________
TOTAL OPERATING EXPENSES 116,801 7,152 193,101 (984)
___________ ___________ ___________ ___________
OPERATING PROFIT (LOSS) 54,838 (290,129) (211,364) (465,086)
LOSS ON DISPOSAL --- (50,000) --- (50,000)
INTEREST EXPENSE (207,192) (192,709) (413,591) (405,789)
___________ ___________ ___________ ___________
NET LOSS $ (152,354) $ (532,838) $ (624,955) $ (920,875)
=========== =========== =========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.00) (0.01) $ (0.01) (0.01)
=========== =========== =========== ===========
The accompanying notes are an integral part of the financial
statements.
-7-
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, 2005 101,732,453 $ 1,017,325 $ 25,138,748 $(40,601,360) $(14,445,287)
Shares issued for manufacturing agreement 2,232,473 22,325 174,912 --- 197,237
Net loss for the six months ended June 30, 2005 --- --- --- (920,875) (920,875)
============= ============= ============= ============= =============
Balance at June 30, 2005 103,964,926 $ 1,039,650 $ 25,313,660 $(41,522,235) $(15,168,925)
============= ============= ============= ============= =============
Balance at January 1, 2006 107,456,869 $ 1,074,569 $ 25,445,450 $(42,016,139) $(15,496,120)
Shares issued for manufacturing agreement 545,569 5,456 24,904 --- 30,360
Conversion of redeemable preferred stock 14,750 148 141,452 --- 141,600
Employee stock option purchase 312,000 3,120 7,180 --- 10,300
Exercise of warrants 7,884 78 710 --- 788
Net loss for the six months ended June 30, 2006 --- --- --- (624,955) (624,955)
_____________ _____________ _____________ _____________ _____________
Balance at June 30, 2006 108,337,072 $ 1,083,371 $ 25,619,696 $(42,641,094) $(15,938,027)
============= ============= ============= ============= =============
The accompanying notes are an integral part of the financial
statements.
-8-
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
_________________________
June 30, June 30,
2006 2005
___________ ___________
Cash flows from operating activities
Net loss $ (624,955) $ (920,875)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depreciation 9,347 9,624
Increase in preferred stock for cumulative dividends
classified as interest 4,743 5,922
Manufacturing cost paid in shares of common stock 30,360 197,237
Equity in loss of joint venture 18,263 466,070
Loss on receivable from disposal of equipment --- 50,000
Decrease (increase) in:
Accounts receivable 7,092 17,845
Prepaid expenses and other current assets 12,225 1,683
Increase (decrease) in:
Accounts payable and accrued expenses 439,882 481,428
___________ ___________
Net cash provided (used) by operating activities (103,043) 308,934
___________ ___________
Cash flows from investing activities
Advances to joint venture (18,263) (466,070)
___________ ___________
Cash flows from financing activities
Proceeds from exercise of warrants 788 ---
Proceeds from exercise of employee stock options 10,300 ---
___________ ___________
Net cash provided by financing activities 11,088 ---
___________ ___________
Net decrease in cash and cash equivalents (110,218) (157,136)
Cash and cash equivalents at beginning of period 119,745 204,248
=========== ===========
Cash and cash equivalents at end of period $ 9,527 $ 47,112
=========== ===========
Supplementary disclosure and cash flow information
__________________________________________________
Cash paid for interest $ 35,250 $ 21,150
Cash paid for income taxes --- ---
See Note (2) for non-cash investing and financing activities.
The accompanying notes are an integral part of the financial
statements.
-9-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(1) Unaudited consolidated financial statements
The June 30, 2006 consolidated financial statements
presented herein are unaudited, and in the opinion of
management, include all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation
of financial position, results of operation and cash flows.
Such financial statements do not include all of the
information and footnote disclosures normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the United States of
America. This quarterly report on Form 10-QSB should be
read in conjunction with Igene's Annual Report on Form 10-
KSB for the year ended December 31, 2005.
(2) Nature of Operations
Igene Biotechnology, Inc. (the "Company" or "Igene") 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, produce and market value-added specialty
biochemical products. Igene is a supplier of natural
astaxanthin, an essential nutrient in various feed
applications and 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 the
Company 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 six months ended June 30, 2006, 7,375 shares of
redeemable preferred stock, with a recorded aggregate value
of $141,600, were converted into 14,750 shares of common
stock. This 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, 2006 and 2005, Fermic,
Igene's manufacturing agent, earned 545,569 and 2,232,473
shares, respectively, of common stock as part of the
manufacturing agreement. Fermic earns 2,250 shares of common
stock for each kilogram of 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 has earned the 20,000,000
shares in total available under the contract. The 545,569
shares were earned at an average price of $.056 per share
for 2006, and 2,232,473 shares were earned at an average
price of $.085 per share for 2005. 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.
-10-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
During the six months ended June 30, 2006, 312,000 shares of
common stock were issued as part of employee stock option
exercises. The Company received $10,300 based on an average
exercise price of $.033 per share.
During the six months ended June 30, 2006, 7,884 warrants
were exercised for $788. 7,884 new shares of common stock
were issued pursuant to the exercise.
During the six months ended June 30, 2006 and 2005, the
Company recorded dividends in arrears on 8% redeemable
preferred stock cumulating at $.32 per share aggregating to
$4,743 and $5,922, respectively on preferred stock. The
accrued interest is included in the carrying value of the
redeemable preferred stock.
(4) Amendment to Long - Term Liabilities
The maturity date of the Company's Notes payable and
Convertible debentures (other than the ProBio Debentures in
the amount of $705,000) has been amended 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 & Lyle"). Pursuant to a Joint Venture Agreement, the
Company and Tate & Lyle 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 & Lyle 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 &
Lyle each have a 50% ownership interest in the Joint Venture
and equal representation on the Board of Directors of the
Joint Venture. 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 Joint 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 June 30, 2006, Igene's portion of the Joint
Venture's net loss was $12,565,036. The loss was a result
of a 50% interest in the following: Gross profit from
inception was a negative $11,514,048 on sales of
$23,199,962, less manufacturing cost of $34,714,010.
Selling and general and administrative expenses were
$11,098,896, and interest expense was $2,517,127. The
resulting loss before tax was $25,130,071. Igene's 50%
portion of the Joint Venture loss was $12,565,036.
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.
-11-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
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 $7,820,000 at July 28, 2006).
The Company subsequently entered into an agreement with Tate
& Lyle (the other 50% partner in the Joint Venture) whereby
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 July
17, 2006, the Joint Venture has not met the cash flow
requirements.
At June 30, 2006, 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 $1,078,228, for a total of
$1,401,097. Through December 31, 2005, Igene recognized
$1,382,834 of the $10,818,549 loss, which existed as part of
the Joint Venture. In the first quarter of 2006, Igene
recognized losses to the extent of the increase in the
advance of $189,902, representing the March 31, 2006 balance
of $1,572,736, less the December 31, 2005 balance of
$1,382,834. For the three months ended June 30 2006, Igene
recognized a gain for the repayment of the advance for that
period of $171,639. This repayment will increase the
suspended loss in addition to the $161,350 loss for the
quarter. The cumulative suspended loss at June 30, 2006 is
$11,163,939 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, 2006.
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 June 30, 2006.
As shown 50% of the activity is recorded as part of Igene's
Financial Statements as loss from investment in the Joint
Venture:
June 30,
2006
_____________
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 5,556,000
Account Receivable 2,209,000
Inventory 8,472,000
_____________
16,237,000
OTHER ASSETS
Property, plant and equipment, net 21,708,000
Intangibles 24,614,000
_____________
TOTAL ASSETS $ 62,559,000
=============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses
(majority of which is due to
one joint venturer) $ 28,006,000
Maturities of debt 9,035,000
_____________
TOTAL LIABILITIES 37,041,000
Equity 25,518,000
_____________
TOTAL LIABILITIES AND EQUITY $ 62,559,000
=============
-12-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
Period from March 18, 2003
(initial investment)
to June 30, 2006
__________________________
(unaudited)
Net Sales $ 23,199,962
Less: manufacturing cost (34,714,010)
______________
Gross Profit (Loss) (11,514,048)
Less: selling, general and administrative (11,098,896)
______________
Operating Loss (22,612,944)
Interest Expense (2,517,127)
______________
Net Loss $ (25,130,071)
==============
Igene's 50% equity interest in the net loss $ (12,565,036)
Igene's Investment in and Advances to the Joint Venture (1,401,097)
______________
Igene's suspended loss at June 30, 2006 $ (11,163,939)
==============
The following statement displays the significant activity
for the Joint Venture for the three and six month ended
June 30, 2006. As shown, 50% of the activity is recorded as
part of Igene's Financial Statements as loss from investment
in Joint Venture:
Three Months Ended Six Months Ended
June 30, 2006 June 30, 2006
__________________ __________________
Net Sales $ 2,264,600 $ 5,454,739
Less: manufacturing cost (2,591,300) (5,940,194)
__________________ __________________
Gross Profit (Loss) (326,700) (485,455)
Less: selling, general and admin (778,600) (1,883,319)
__________________ __________________
Operating Loss (1,105,300) (2,368,774)
Interest Expense (423,300) (1,124,200)
__________________ __________________
Loss before taxes (1,528,600) (3,492,974)
Reversal of tax expense 1,205,900 ---
__________________ __________________
Net Loss $ (322,700) $ (3,492,974)
================== ==================
50% equity interest Igene $ (161,350) $ (1,746,487)
Igene's Repayments from and additional
(Investment in and Advances to the Joint Venture) 171,639 (18,263)
__________________ __________________
Igene's incremental suspended loss for period $ (332,989) $ (1,728,224)
================== ==================
(6) Guarantee of Joint Venture Debt
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 $7,820,000 at July 28, 2006).
The Company subsequently entered into an agreement with Tate
& 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 July 17, 2006, the Joint Venture has not met the cash
flow requirements, therefore Igene is not yet obligated for
any funding to the Joint Venture.
-13-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
(7) Stockholders' Deficiency
As of June 30, 2006, 22,268 shares of authorized but
unissued common stock were reserved for issue upon
conversion of the Company's outstanding preferred stock.
As of June 30, 2006, 73,642,500 shares 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, 2006 10,000,000 shares of authorized but
unissued common stock were reserved for distribution and
exercise pursuant to a stock option agreement with past
officers of the Company.
As of June 30, 2006, 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, 2006, 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, 2006, 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 June 30, 2006, 205,261,073 shares of authorized but
unissued common stock were reserved for the exercise of
outstanding warrants.
(8) Basic and diluted net loss per common share
Basic and diluted net loss per common share for the six-
month periods ended June 30, 2006 and 2005, are based on
107,930,385 and 102,266,230 shares, respectively, of
weighted average common shares outstanding. The same figures
for the three month period then ended are based upon
108,295,152 and 102,794,142 weighted average common shares
outstanding. No adjustment has been made for any common
stock equivalents outstanding because their effects would be
antidilutive.
(9) 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.
(10) Uncertainty
Igene has incurred net losses in each year of its existence,
aggregating approximately $42,600,000 from inception to June
30, 2006 and its liabilities exceeded its assets by
approximately $15,900,000 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 &
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.
-14-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
(11) Stock Based Compensation
Prior to January 1, 2006, 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 month ended
June 30, 2005 June 30, 2005
__________________ __________________
Net loss:
As reported $ (532,838) $ (920,875)
Less pro forma stock-based employee
compensation expense determined under
fair value based method net of related
tax effects --- ---
__________________ __________________
Net loss $ (532,838) $ (920,875)
================== ==================
Net loss per Share:
Basic - as reported $ (0.01) $ (0.01)
Basic - pro forma $ (0.01) $ (0.01)
Diluted - as reported $ (0.01) $ (0.01)
Diluted - pro forma $ (0.01) $ (0.01)
(12) 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. Assessing and
recording the impact SFAS No.151 on the results of
operations, financial position or cash flows is currently
the responsibility of the Joint Venture.
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.
-15-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
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 adopted Statement
123 (R) in the first quarter of fiscal 2006.
-16-
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 its 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.
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 $7,820,000 at
July 28, 2006). The Company subsequently entered into an
agreement with Tate & 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 July 17, 2006, the
Joint Venture has not met the cash flow requirements.
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 operated by the Joint Venture.
-17-
IGENE Biotechnology, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Overview of Financial Position
During the six-month periods ended June 30, 2006 and 2005,
in addition to the Joint Venture discussed in more detail below,
the following actions materially affected the Company's
financial position.
- Increases in accounts payable and accrued expenses of
$439,882 and decreases in accounts receivable and prepaid
expenses of $19,317 were sources of cash. These were
reduced by increases due from Joint Venture of $18,263.
- The carrying value of redeemable preferred stock was
increased by $4,743 in 2006 and $5,922 in 2005, reflecting
cumulative unpaid dividends on redeemable preferred stock.
- During the six months ended June 30, 2006, 7,375 shares of
redeemable preferred stock, with a recorded aggregate value
of $141,600, were converted into 14,750 shares of common
stock. This included the 8% Cumulative Convertible
Preferred Stock, Series B preferred securities and has
relieved the Company of this amount from long-term debt.
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, 2006, total dividends in arrears on
Igene's preferred stock were $126,482 ($11.36 per share) and are
included in the carrying value of the redeemable preferred stock.
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) since the inception of the Joint
Venture on March 18, 2003. Sales have been limited in the past
due to insufficient production quantity.
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, 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 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.
-18-
IGENE Biotechnology, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Marketing and selling expenses
For the quarters ended June 30, 2006 and 2005, Igene
recorded marketing and selling expense in the amount of $47,399
and $70,876, respectively, a decrease of $23,477 or 33%. For the
six months ended June 30, 2006 and 2005, Igene recorded marketing
and selling expense in the amount of $90,210 and $119,164,
respectively, a decrease of $28,954 or 24%. As a result of the
Joint Venture with Tate & 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 concerning increased production from the new facility
or marketing and selling costs; though neither of these can be
assured.
Research, development and pilot plant expenses
For the quarter ended June 30, 2006 and 2005, Igene recorded
research and development costs in the amount of $237,088 and
$217,082, respectively, an increase of $20,006 or 9%. For the
six months ended June 30, 2006 and 2005, Igene recorded research
and development costs in the amount of $445,737 and $383,089,
respectively, an increase of $62,648 or 16%. These costs are
expected to remain relatively constant at the current level 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 though these fundings can not be assured.
Operating expenses
General and administrative expenses for the quarter ended
June 30, 2006 and 2005 were $292,231 and $246,592 respectively,
an increase of $45,639 or 19%. General and administrative
expenses for the six months ended June 30, 2006 and 2005 were
$517,014 and $435,500 respectively, an increase of $81,514 or
19%. These costs are expected to remain constant at this current
level. Cost increases are due to increased audit and reporting
costs. 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 none
of these can be assured.
Interest expense
Interest expense for the quarters ended June 30, 2006 and
2005 was $207,192 and $192,709, respectively, an increase of
$14,483 or 8%. For the six months ended June 30, 2006 and 2005,
interest expense was $413,591 and $405,789, respectively, an
increase of $7,802 or 2%. 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.
-19-
IGENE Biotechnology, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Loss on disposal
During the second quarter of 2005, Igene wrote off a portion
of a receivable for the sale of equipment it had determined would
not be of use in the new Selby facility and recorded a loss of
$50,000.
Net loss and basic and diluted net loss per common share
As a result of the foregoing, the Company reported net
losses of $152,354 and $532,838, respectively, for the quarters
ended June 30, 2006 and 2005, a decrease in the loss of $380,484
or 71%. This represents a loss of $.00 per basic and diluted
common share in the quarters ended June 30, 2006 and 2005. The
weighted average number of shares of common stock outstanding of
108,295,152 and 102,794,142 for the quarters ended June 30, 2006
and 2005, respectively, increased by 5,501,010 shares. This
resulted from the weighted average adjustments of the following
transactions: the issuance of 1,000,000 shares issued to Probio,
3,037,512 shares issued to Fermic as part of a written
manufacturing agreement, and 312,000 shares issued as part of
employee stock option exercises.
Liquidity and Capital Resources
Historically, Igene has been funded primarily by equity
contributions and loans from stockholders. As of June 30, 2006,
Igene had negative working capital of $855,879, and cash and cash
equivalents of $9,527. Currently Igene is also funded by
research and development reimbursements from the Joint Venture.
Cash provided by (used for) operating activities during the
six-month period ended June 30, 2006 and 2005 amounted to
$(103,043) and $308,934, respectively, an increase in cash
provided of $411,977.
Cash used by investing activities during the six-month period
ended June 30, 2006 and 2005 amounted to $18,263 and $466,070,
respectively, an decrease of $447,807, from decreases in advances
to the Joint Venture.
Cash provided by financing activities for the six-month
period ended June 30, 2006 amounted to $11,088. Financing
activities consisted primarily of employee stock option plan
purchases and exercise of warrants.
On June 15th 2005, the Company executed a limited guarantee
for one of the debt obligations of the Joint Venture,
guaranteeing up to 4,200,000 British pounds sterling and
subsequently entered into an agreement with Tate & Lyle to
arrange funds for the Joint Venture, without recourse to Igene
Biotechnology, Inc., until the Joint Venture produces a regular
monthly cash flow, the Joint Venture has not met the cash flow
requirements.
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, 2006 and 2005.
-20-
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.
-21-
IGENE Biotechnology, Inc.
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 June 30, 2005, total dividends in arrears on the
Company's preferred stock total $198,416 ($10.72 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 Troms? 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 have had 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.
-22-
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.
-23-
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IGENE BIOTECHNOLOGY, INC.
________________________________
(Registrant)
Date August 11, 2006 By /S/ STEPHEN F. HIU
_______________ ________________________________
STEPHEN F. HIU
President
Date August 11, 2006 By /S/ EDWARD J. WEISBERGER
_______________ ________________________________
EDWARD J. WEISBERGER
Chief Financial Officer
-24-
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.
-25-