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, 2007
[ ] 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:
109,337,072 shares of common stock, par value $.01, as of May 1,
2007.
_________________________________________________________________
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
Consolidated Statements of Operations .................... 6
Consolidated Statements of Stockholders' Deficiency ...... 7
Consolidated Statements of Cash Flows .................... 8
Notes to Consolidated Financial Statements ............... 9-15
Management's Discussion and Analysis of Financial
Conditions and Results of Operations ..................... 16-20
Controls and Procedures .................................. 20
PART II - OTHER INFORMATION ............................. 21-22
SIGNATURES .................................................... 23
EXHIBIT INDEX ................................................. 24
-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
March 31, December 31,
2007 2006
____________ ____________
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,198 $ 21,786
Prepaid expenses and other current assets 9,833 14,093
____________ ____________
TOTAL CURRENT ASSETS 14,031 35,879
Property and equipment, net 28,898 33,571
Investment in and advances to unconsolidated joint venture --- ---
Other assets 5,125 5,125
____________ ____________
TOTAL ASSETS $ 48,054 $ 74,575
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 131,035 $ 210,424
Convertible debenture --- 705,000
Accrued interest --- 46,570
____________ ____________
TOTAL CURRENT LIABILITIES 131,035 961,994
LONG-TERM DEBT
Notes payable 5,842,267 5,842,267
Convertible debentures 4,576,212 3,814,212
Accrued interest 5,822,201 5,655,830
REDEEMABLE PREFERRED STOCK
Carrying amount of redeemable preferred stock, 8% cumulative,
Convertible, voting, series A, $.01 par value per share. Stated
value was $19.84 and $19.68, respectively. Authorized 1,312,500
shares, issued and outstanding 11,134 220,899 219,117
____________ ____________
TOTAL LIABILITIES 16,592,614 16,493,420
____________ ____________
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Common stock --- $.01 par value per share. Authorized
750,000,000 shares; issued and outstanding 109,337,072 shares. 1,093,371 1,093,371
Additional paid-in capital 25,659,696 25,659,696
Accumulated deficit (43,297,627) (43,171,912)
____________ ____________
TOTAL STOCKHOLDERS' DEFICIENCY (16,544,560) (16,418,845)
____________ ____________
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 48,054 $ 74,575
============ ============
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,
2007 2006
_____________ _____________
RECOUPMENT OF LOSS (EQUITY IN LOSS) OF JOINT VENTURE $ 58,956 $ (189,902)
_____________ _____________
OPERATING EXPENSES
__________________
Marketing and selling 1,892 42,811
Research, development and pilot plant 252,114 208,649
General and administrative 202,913 224,783
Less operating expenses reimbursed by Joint Venture (445,044) (399,943)
_____________ _____________
TOTAL OPERATING EXPENSES 11,875 76,300
_____________ _____________
OPERATING PROFIT (LOSS) 47,081 (266,202)
_____________ _____________
OTHER INCOME 6,382 ---
INTEREST EXPENSE (179,178) (206,399)
_____________ _____________
NET LOSS $ (125,715) $ (472,601)
============= =============
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, 2007 109,337,072 $ 1,093,371 $ 25,659,696 $(43,171,912) $(16,418,845)
Net loss for the three months ended
March 31, 2007 --- --- --- (125,715) (125,715)
_____________ _____________ _____________ _____________ _____________
Balance at March 31, 2007 109,337,072 $ 1,093,371 $ 25,659,696 $(43,297,627) $(16,544,560)
============= ============= ============= ============= =============
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,
2007 2006
_____________ _____________
Cash flows from operating activities
Net loss $ (125,715) $ (472,601)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation 4,673 4,673
Increase in preferred stock for cumulative dividend
classified as interest 1,781 2,961
Manufacturing cost paid in shares of common stock --- 30,360
(Recoupment of payment) Equity in loss of joint venture (58,956) 189,902
Decrease (increase) in:
Accounts receivable --- 10,312
Prepaid expenses and other current assets 4,260 12,083
Increase (decrease) in
Accounts payable and accrued expenses 40,413 224,664
_____________ _____________
Net cash provided by (used in) operating activities (133,544) 2,354
_____________ _____________
Cash flows from investing activities
Recoupment of payment (advances) to Joint Venture 58,956 (189,902)
_____________ _____________
Net cash provided by (used in) investing activities 58,956 (189,902)
_____________ _____________
Cash flows from financing activities
Proceeds from issuance of convertible debentures 762,000 ---
Repayment of convertible debentures (705,000) ---
Proceeds from exercise of warrants --- 788
Bank overdraft --- 61,715
Proceeds from exercise of employee stock options --- 5,300
_____________ _____________
Net cash provided by financing activities 57,000 67,803
_____________ _____________
Net decrease in cash and cash equivalents (17,588) (119,745)
Cash and cash equivalents at beginning of period 21,786 119,745
_____________ _____________
Cash and cash equivalents at end of period $ 4,198 $ 0
============= =============
Supplementary disclosure and cash flow information
__________________________________________________
Cash paid for interest $ 57,637 $ ---
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, 2007 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, 2006. The December 31,
2006 consolidated balance sheet is derived from the audited
balance sheet included therein.
(2) Nature of Operations
IGENE Biotechnology, Inc. ("Igene") is engaged in the
business of developing, marketing, and manufacturing
specialty ingredients for human and animal nutrition.
Igene was formed on October 27, 1981 to develop, produce and
market value-added specialty biochemical products. Igene is
a supplier of natural astaxanthin, an essential nutrient in
different feed applications and a source of pigment for
coloring farmed salmon species. Igene is also endeavoring
to supply astaxanthin as a nutraceutical ingredient. Igene
is focused on research and development of fermentation
technology, 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 2000, Igene formed a wholly-owned subsidiary, Igene Chile
Comercial, Ltda., in Chile. The subsidiary has a sales and
customer service office in Puerto Varas, Chile, and a
product warehouse in Puerto Montt, Chile. Igene currently
leases manufacturing capacity in Mexico City, Mexico,
through a contract manufacturer on an as needed basis.
In an effort to develop a dependable source of production,
on March 19, 2003, Tate & Lyle PLC and Igene announced a
50:50 joint venture to produce AstaXin(R) for the
aquaculture industry, which we refer to as the "Joint
Venture". Production utilizes Tate & Lyle's fermentation
capability together with the unique technology developed by
Igene. Part of Tate & Lyle's existing citric acid facility
located in Selby, England, was modified to include the
production of this product. Tate & Lyle's investment of $25
million included certain of its facility assets that were
used in citric acid production. The production facility has
been completed and is now in full production.
(3) Noncash investing and financing activities
During the three months ended March 31, 2007 and 2006, the
Company recorded in each quarter dividends in arrears on 8%
redeemable preferred stock cumulating at $.16 per share
aggregating to $1,781 and $2,961, respectively.
During the three months ended March 31, 2006, Fermic,
Igene's manufacturing agent, earned 545,571 shares of common
stock as part of the manufacturing agreement. Fermic earned
2,250 shares of common stock for each kilogram pure
Astaxanthin produced and delivered as part of the agreement.
The average price was based on the market value of the
shares at the time the product was produced. With the
distribution in the first quarter of 2006, Fermic has earned
the 20,000,000 shares in total under the contract.
The 545,571 shares were earned at an average price of $.056
per share. Through March 31, 2006, all 20,000,000 shares
had been earned.
-9-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
(4) Amendment to Long - Term Liabilities
Igene entered into Convertible Promissory Notes (the
"Convertible Notes") with each of the following note holders
for the following respective amounts (a) NorInnova AS
(formerly Forskningsparken I Tromso AS) for $106,500; (b)
Knut Gjernes for $7,500; (c) Magne Russ Simenson for
$278,000; and (d) Nord Invest AS for $313,000. Each of the
Convertible Notes had 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.
On November 29, 2006, the Convertible Note holders filed a
complaint against the Company in the Circuit Court of Howard
County, Maryland seeking payment of all outstanding amounts
due under the Convertible Notes, the "Notes Litigation". On
February 23, 2007, the Company paid $762,638, representing
the full amount due including interest, to the Convertible
Note holders as settlement of all claims related to the
Notes Litigation. The complaint was dismissed with
prejudice on March 6, 2007.
The funds to settle the Notes Litigation were provided by
Igene's directors using the terms offered above to the
debenture holders. On February 15, 2007, Igene issued and
sold $762,000 in aggregate principal amount of 5%
convertible debentures, 50% each to certain directors of
Igene. These debentures are convertible into shares of
Igene's common stock at $.02 per share. These debentures, if
not converted earlier, become due on February 15, 2017.
(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 transferred to the Joint
Venture its technology relating to the production of
astaxanthin and assets related thereto. These assets
continue to be used by the Joint Venture in the same manner
as historically used by the Company. The Company and Tate
each have a 50% ownership interest in the Joint Venture and
equal representation on the Board of Directors of the Joint
Venture. The value of the Company's initial investment in
the Joint Venture has been recorded at an amount equal to
Igene's historical book value. As the cost of the Company's
technology and intellectual property has been previously
expensed and had a carrying amount of zero, the investment
in the Joint Venture was originally recorded with a book
value of $316,869, which represents the unamortized
production costs contributed to the Joint Venture. The
Company also contributed $6,000 to the capital of the Joint
Venture.
Production utilizes Tate's fermentation capability together
with the unique technology developed by Igene. Part of
Tate's existing Selby, England, citric acid facility was
modified to produce up to 1,500 tons per annum of this
astaxanthin. Tate's investment of approximately $25 million
includes certain of its facility assets previously used in
citric acid production. Sales and cost of sales activity
are now recorded as part of the earnings of the
unconsolidated venture.
As a result of the Joint Venture, the production, sales and
marketing of astaxanthin now take place in the
unconsolidated Joint Venture. From inception on March 18,
2003 through March 31, 2007, the Joint Venture's results of
operations included the following: Gross profit from
inception was a negative $19,763,827 on sales of
$31,353,167, less manufacturing cost of $51,116,994.
Selling and general and administrative expenses were
$14,302,539, and interest expense was $4,244,994. The
resulting loss for such period was $38,311,360. Igene's 50%
portion of the Joint Venture loss was $19,155,680 for such
period.
-10-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
Because the Company accounts for its investment in the Joint
Venture under the equity method of accounting, it would
ordinarily recognize a loss representing its 50% equity
interest in the loss of the Joint Venture or the amount that
is guaranteed by the Company, if any. 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 are carried forward to offset
Igene's share of the Joint Venture's future income, if any.
On June 15, 2005, the Company executed a limited guarantee
for one of the debt obligations of the Joint Venture owing
to the Royal Bank of Scotland. Under the terms of the
limited guarantee, the company agreed to guarantee up to
4,200,000 British pounds sterling. The Company subsequently
entered into an agreement with Tate & Lyle (the other 50%
partner in the Joint Venture) where by Tate & Lyle has
agreed to arrange funds for the Joint Venture, without
recourse to The Company, until the Joint Venture produces a
regular monthly cash flow, as defined, for four consecutive
months. As of May 1, 2007, the Joint Venture had not met
the cash flow requirements. The Company has subsequently
been released from the guarantee by the bank.
At March 31, 2007, prior to the recognition of its portion
of the Joint Venture loss, Igene's investment in the Joint
Venture consisted of $322,869 and its net advances to the
Joint Venture amounted to $1,110,156, for a total of
$1,433,025. Through the year ended December 31, 2006, Igene
recognized $1,491,981 of its share of a $15,922,400 loss.
The remainder of $14,430,419, was suspended and will be
carried forward to offset Igene's share of earnings from the
Joint Venture, if any. During the quarter ended March 31,
2007 the balance of funds due to Igene from the Joint
Venture was reduced through repayments to Igene. This net
repayment totaled $58,956, and is treated as a recoupment of
prior loss. In addition the JV incurred an additional loss
of $6,466,560, Igene's 50% share of this was $3,233,280, the
combination increased the suspended loss by $3,292,236,
during the quarter ended March 31, 2007. This brought the
March 31, 2007 suspended loss to $17,722,655. The balance
in the advances to and investment in Joint Venture account
on the Company's financial statements is zero at March 31,
2007.
On March 29, 2007 the Company was informed by their 50%
partner in the Joint Venture, Tate and Lyle, that they
determined to write down their portion of the investment in
the Joint Venture. There has been no impairment charge
reflected by the Joint Venture in the enclosed financial
statements as they have not completed their annual
impairment assessment as of March 31, 2007.
The following schedules display certain account balances of
the Joint Venture as of March 31, 2007 and the period since
initial investment at March 18, 2003 (inception):
-11-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
March 31,
2007
_____________
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,042,000
Accounts Receivable 4,229,000
Inventories 10,491,000
_____________
15,762,000
OTHER ASSETS
Property, plant and equipment, net 20,053,000
Intangibles 24,614,000
_____________
TOTAL ASSETS $ 60,429,000
=============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 35,211,000
Working capital loan 11,812,000
_____________
TOTAL CURRENT LIABILITIES 47,023,000
Equity 13,406,000
_____________
TOTAL LIABILITIES AND EQUITY $ 60,429,000
=============
Period from March 18, 2003
(initial investment) to
March 31, 2007
__________________________
(unaudited)
Net Sales $ 31,353,167
Less: manufacturing cost (51,116,994)
_____________
Gross Profit (Loss) (19,763,827)
Less: selling, general and administrative (14,302,539)
_____________
Operating Loss (34,066,366)
Interest Expense (4,244,994)
_____________
Net Loss $(38,311,360)
=============
Igene's 50% equity interest in the net loss $(19,155,680)
Igene's Investment in and Advances to the Joint Venture (1,433,025)
Igene's suspended loss $(17,722,655)
=============
Quarter ended Quarter ended
March 31, 2007 March 31, 2006
________________ ________________
(unaudited) (unaudited)
Net Sales $ 3,580,288 $ 3,190,139
Less: manufacturing cost (8,178,136) (3,348,894)
________________ ________________
Gross Profit (Loss) (4,597,848) (158,755)
Less: selling, general and administrative (1,212,252) (1,104,719)
________________ ________________
Operating Loss (5,810,100) (1,263,474)
Interest Expense (656,460) (700,900)
________________ ________________
Net Loss before taxes (6,466,560) (1,964,374)
================ ================
Tax Expense --- (1,205,900)
Net Loss before taxes $ (6,466,560) $ (3,170,274)
================ ================
Igene's 50% equity interest in the net loss $ (3,233,280) $ (1,585,137)
Igene's additional Recoupment from
(Investment in and Advances to) the Joint Venture 58,956 (189,902)
________________ ________________
Igene's incremental suspended loss $ (3,292,236) $ (1,395,235)
================ ================
-12-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
(6) Stockholders' Deficiency
As of March 31, 2007, 22,268 shares of authorized but
unissued common stock were reserved for issue upon
conversion of the Company's outstanding preferred stock.
As of March 31, 2007, 72,232,334 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, 2007, 23,421,273 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, 2007, 66,427,651 shares of authorized but
unissued common stock were reserved for the conversion of
outstanding convertible promissory notes held by directors
of the Company.
As of March 31, 2007 38,250,000 shares of authorized but
unissued common stock were reserved for the conversion of
outstanding convertible promissory notes issued as part of
the settlement of the ProBio notes.
As of March 31, 2007, 205,261,073 shares of authorized but
unissued common stock were reserved for the exercise of
outstanding warrants.
(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, 2007 and 2006 are based on
109,337,072 and 107,561,565, respectively, of weighted
average common shares outstanding. No adjustment has been
made for any common stock equivalents outstanding because
their effects would be antidilutive. As of March 31, 2007
and 2006, potentially dilutive shares totaled 487,564,337
and 462,779,784, respectively.
(8) Income Taxes
The Company uses the liability method of accounting for
income taxes as required by SFAS No. 109, "Accounting for
Income Taxes". Under the liability method, deferred-tax
assets and liabilities are determined based on differences
between the financial statement carrying amounts and the tax
bases of existing assets and liabilities (i.e., temporary
differences) and are measured at the enacted rates that will
be in effect when these differences reverse. Deferred
income taxes will be recognized when it is deemed more
likely than not that the benefits of such deferred income
taxes will be realized; accordingly, all net deferred income
taxes have been eliminated by a valuation allowance.
(9) Uncertainty
Igene has incurred net losses in each year of its existence,
aggregating approximately $43,300,000 from inception to
March 31, 2007 and as of March 31, 2007, Igene's liabilities
exceeded its assets by approximately $16,500,000. 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 marketing of Igene's product, AstaXin(R),
permitted Igene to attract additional capital through its
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.
-13-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
(10) Recent Accounting Pronouncements
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. The Company adopted this pronouncement in
the first quarter of 2007. There was no impact on results
of operations, cash flows or financial position.
In September 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards Number
157 - Fair Value Measurements ("SFAS157"). SFAS 157 defines
fair value, establishes a framework for measuring fair value
in generally accepted accounting principles ("GAAP"), and
expands disclosures about fair value measurements.
Prior to SFAS 157, there were different definitions of fair
value and limited guidance for applying those definitions in
GAAP. Moreover, that guidance was dispersed among the many
accounting pronouncements that require fair value
measurements. SFAS 157 clarifies that the exchange price is
the price in an orderly transaction between market
participants to sell the asset or transfer the liability in
the market in which the reporting entity would transact for
the asset or liability, that is, the principal or most
advantageous market for the asset or liability. SFAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. The Company is currently
evaluating the impact, if any, that SFAS 157 will have on
its financial position, results of operations and cash
flows.
In June 2006, the Financial Accounting Standards Board
("FASB") issued Financial Accounting Standards Board
Interpretation ("FIN") No. 48, "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement
No. 109." FIN No. 48 provides a comprehensive model for the
recognition, measurement and disclosure in the financial
statements of uncertain tax positions taken or expected to
be taken on a tax return. The Company adopted FIN No. 48
effective January 1, 2007. The interpretation had no impact
on financial position, results of operations, earnings per
share, or cash flows.
In September 2006, the Securities and Exchange Commission
issued SAB No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year
Financial Statements." SAB No. 108 was issued to address
diversity in practice in quantifying financial statement
misstatements. Current practice allows for the evaluation of
materiality on the basis of either (1) the error quantified
as the amount by which the current year income statement was
misstated ("rollover method") or (2) the cumulative error
quantified as the cumulative amount by which the current
year balance sheet was misstated ("iron curtain method").
The guidance provided in SAB 108 requires both methods to be
used in evaluating materiality ("dual approach"). SAB
No. 108 permits companies to initially apply its provisions
either by (1) restating prior financial statements as if the
dual approach had always been used or (2) recording the
cumulative effect of initially applying the "dual approach"
as adjustments to the carrying values of assets and
liabilities as of January 1, 2006 with an offsetting
adjustment recorded to the opening balance of retained
earnings. There were no matters warranting the Company's
consideration under the provisions of SAB No. 108 and,
therefore, it did not have an impact on the Company's
financial position, results of operations, earnings per
share or cash flows.
-14-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
In February 2007, the FASB issued SFAS No. 159, "The Fair
Value Option for Financial Assets and Financial
Liabilities - Including an Amendment of FASB Statement
No. 115." This Standard allows entities to voluntarily
choose, at specified election dates, to measure many
financial assets and financial liabilities (as well as
certain nonfinancial instruments that are similar to
financial instruments) at fair value. The election is made
on an instrument-by-instrument basis and is irrevocable. If
the fair value option is elected for an instrument, the
Statement specifies that all subsequent changes in fair
value for that instrument shall be reported in earnings.
SFAS No. 159 is effective beginning on January 1, 2008. We
are currently evaluating the impact this new Standard could
have on our financial position and results of operations.
-15-
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 WITHIN THE BIOTECH AGRICULTURE AND
AQUACULTURE INDUSTRIES, 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, INCLUDING THOSE DETAILED IN
"RISK FACTORS" THAT ARE INCLUDED FROM TIME-TO-TIME IN THE
COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS.
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 such 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 and advances
repaid. 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 guaranteed repayment
by the Joint Venture to the Royal Bank of Scotland of 4,200,000
British pounds sterling. 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 the Company until the Joint
Venture produces a regular monthly cash flow, as defined, for
four consecutive months. As of May 1, 2007, the Joint Venture
had not met the cash flow requirements. The Company has
subsequently been released from the guarantee by the bank.
-16-
IGENE Biotechnology, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
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 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.
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
production inefficiency 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 offsetting pricing competition, but can provide
no assurances of future increased production or future profits.
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, 2007 and 2006, Igene
recorded marketing and selling expense in the amount of $1,892
and $42,811, respectively, a decrease of $40,919 or 96%. Over
the past year, the majority of the marketing and selling expenses
are being incurred directly by the Joint Venture rather than
being incurred by Igene and then reimbursed by the Joint Venture.
It is expected that this level of marketing and selling expense
will be constant as the Joint Venture assumes the marketing and
sales function, based on the current level of salable product
currently available. As a result of the Joint Venture, Igene is
expecting an increase in salable product with a corresponding
increase in sales costs incurred at the Joint Venture. These
expenses have been reimbursed to Igene by the Joint Venture.
However no assurances can be made with regard to increased
production from the Joint Venture or the likelihood of future
reimbursements.
Research, development and pilot plant expenses
For the quarters ended March 31, 2007 and 2006, Igene
recorded research and development costs in the amount of $252,114
and $208,649, respectively, an increase of $43,465 or 21%. It is
expected these costs will remain at current increased 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. These costs are currently
funded through reimbursement from the Joint Venture. Igene is
hoping this will lead to an increase in salable product at a
reduced cost to the Joint Venture. However no assurances can be
made in that regard or with respect to future reimbursements from
the Joint Venture.
-17-
IGENE Biotechnology, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Operating expenses
General and administrative expenses for the quarter ended
March 31, 2007 and 2006 were $202,913 and $224,783 respectively,
a decrease of $21,870 or 10%. These costs are expected to
remain constant, at the current level. 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.
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 costs 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,
2007, costs reimbursed by the Joint Venture totaled $445,044.
The costs covered $1,892 of marketing costs, $252,114 of
research and development costs and $191,038 of general and
administrative costs. For the quarter ended March 31, 2006, costs
reimbursed by the Joint Venture totaled $399,943. The costs
covered $42,811 of marketing costs, $208,649 of research and
development costs and $148,483 of general and administrative
costs. Igene can provide no assurance of future reimbursements.
Interest expense
Interest expense for the quarters ended March 31, 2007 and
2006, was $179,178 and $206,399, respectively, a decrease of
$27,221 or 13%. 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.
Equity in earnings of unconsolidated Joint Venture
As a result of the Joint Venture, the production, sales and
marketing of astaxanthin now take place in the unconsolidated
Joint Venture. From inception on March 18, 2003 through March
31, 2007, the Joint Venture's results of operations included the
following: Gross profit from inception was a negative
$19,763,827 on sales of $31,353,167, less manufacturing cost of
$51,116,994. Selling and general and administrative expenses
were $14,302,539, and interest expense was $4,244,994. The
resulting loss was $38,311,360. Igene's 50% portion of the Joint
Venture loss was $19,155,680.
Because the Company accounts for its investment in the Joint
Venture under the equity method of accounting, it would
ordinarily recognize a loss representing its 50% equity interest
in the loss of the Joint Venture or the amount that is guaranteed
by the Company, if any. 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 are
carried forward to offset Igene's share of the Joint Venture's
future income, if any.
On June 15, 2005, the Company executed a limited guarantee
for one of the debt obligations of the Joint Venture owed to the
Royal Bank of Scotland. Under the terms of the limited
guarantee, the Company agreed to guarantee up to 4,200,000
British pounds sterling. 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 May 1, 2007, the
Joint Venture had not met the cash flow requirements. The
Company has subsequently been released from the guarantee by the
bank.
-18-
IGENE Biotechnology, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
At March 31, 2007, prior to the recognition of its portion
of the Joint Venture loss, Igene's investment in the Joint
Venture consisted of $322,869 and its net advances to the Joint
Venture amounted to $1,110,156, for a total of $1,433,025.
Through the year ended December 31, 2006, Igene recognized
$1,491,981 of its share of a $15,922,400 loss. The remainder of
$14,430,419, was suspended and will be carried forward to offset
Igene's share of earnings from the Joint Venture, if any.
During the quarter ended March 31, 2007 the balance of funds due
to Igene from the Joint Venture was reduce through repayments to
Igene. This net repayment totaled $58,956. This amount is
treated as a recoupment of prior loss and added back to the
$14,430,419 suspended loss. In addition the JV incurred an
additional loss of $6,466,560, Igene's 50% share of this was
$3,233,280, the combination increased the suspended loss by
$3,292,236, during the quarter ended March 31, 2007. This brought
the March 31, 2007 suspended loss to $17,722,655. The balance
in the advances to and investment in Joint Venture account on the
Company's financial statements is zero at March 31, 2007.
Net loss and basic and diluted net loss per common share
As a result of the foregoing, the Company reported net
losses of $125,715 and $472,601, respectively, for the quarters
ended March 31, 2007 and 2006, a decrease in the loss of $346,886
or 73%. This represents a loss of $0.00 per basic and diluted
common share in each of the quarters ended March 31, 2007 and
2006. The weighted average number of shares of common stock
outstanding of 109,337,072 and 107,561,566 for the quarters
ended March 31, 2007 and 2006, respectively, has increased by
1,775,506 shares. The increase in outstanding shares resulted
from primarily from the weighted average adjustment of the
issuance 545,569 shares to Igene's manufacturer under the
manufacturing agreement with Fermic, and 1,000,000 shares of
common stock were issued to the Company's new Vice President of
Manufacturing as part of his agreement in accepting the position.
Financial Position
During the quarters ended March 31, 2007 and 2006, in
addition to the matters previously discussed, the following
actions also materially affected the Company's financial
position:
o Increases in accounts payable and accrued expense for the
quarter ended March 31, 2007 of $40,413 was a source of
cash, in addition to a net decrease in prepaid expense of
$4,260;
o The carrying value of redeemable preferred stock was
increased and interest expense recorded in the amounts of
$1,781 in 2007, reflecting cumulative unpaid dividends on
redeemable preferred stock.
o Net proceeds of borrowing provided $57,000 in net cash
provided by financing activities. These funds were used to
pay outstanding interest in the settlement of the Notes
Litigation referenced in Section 4, entitled "Amendment to
Long-Term Liabilities."
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, 2007, total dividends in arrears on
Igene's preferred stock total $131,827 ($11.84 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, 2007,
Igene had negative working capital of $117,004, and cash and cash
equivalents of $4,198. Currently Igene is also funded by
research and development and selling, general and administrative
expense reimbursements from the Joint Venture.
Cash used by operating activities during the three-month
period ended March 31, 2007 equaled $133,544 versus cash provided
by operating activities of $2,354 for the three-month period
ended March 31, 2006.
-19-
IGENE Biotechnology, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Cash provided by investing activities during the three-month
period ended March 31, 2007 equaled $58,956 versus cash used by
investing activities of $189,902 for the three-month period ended
March 31, 2006.
Cash provided by financing activities was $57,000 during the
first quarter of 2007, in settlement of the convertible
debentures and used in payment of interest on those notes. Cash
provided by financing activities was $67,803 during the first
quarter of 2006, this was due primarily to employee stock options
exercised and bank overdraft.
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. 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, 2007 and 2006.
Item 3. Controls and Procedures
As of the end of the most recently completed fiscal quarter, the
Company's management, with the participation of the principal
executive officer and principal financial officer, has evaluated
the effectiveness of the Company's disclosure controls and
procedures, and has concluded that the Company's disclosure
controls and procedures are effective to ensure that information
required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934, as
amended, is accumulated and communicated to the Company's
management, including its principal executive officer and
principal financial officer, as appropriate to allow timely
decisions regarding required disclosure and are effective to
ensure that such information is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules
and forms.
There were no changes in Igene's internal control over financial
reporting that occurred during the last fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
-20-
IGENE Biotechnology, Inc. and Subsidiary
PART II
OTHER INFORMATION
Item 1. Notes Litigation
On November 29, 2006, the Convertible Note holders filed a
complaint against the Company in the Circuit Court of Howard
County, Maryland seeking payment of all outstanding amounts due
under the Convertible Notes, the "Notes Litigation". On February
23, 2007, the Company paid $762,638, including interest, the full
amount due, to the Convertible Note holders as settlement of all
claims related to the Notes Litigation. The complaint was
dismissed with prejudice on March 6, 2007.
The funds to settle the Notes Litigation were provided by
Igene's directors using the terms offered above to the debenture
holders. On February 15, 2007, Igene issued and sold $762,000 in
aggregate principal amount of 5% convertible debentures, 50% each
to certain directors of Igene. These debentures are convertible
into shares of Igene's common stock at $.02 per share. These
debentures, if not converted earlier, become due on February 15,
2017.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
Convertible Debentures to Settle Litigation
The funds to settle the Notes Litigation were provided by
Igene's directors using the terms offered above to the debenture
holders. On February 15, 2007, Igene issued and sold $762,000 in
aggregate principal amount of 5% convertible debentures, 50% each
to certain directors of Igene. These debentures are convertible
into shares of Igene's common stock at $.02 per share. These
debentures, if not converted earlier, become due on February 15,
2017. For more information, see Notes Litigation referenced in
Section 4, entitled "Amendment to Long - Term Liabilities."
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, 2007, total dividends in arrears on the
Company's preferred stock total $131,827 ($11.84 per share) and
are included in the carrying value of the redeemable preferred
stock.
Item 6. Exhibits
(a) Exhibits
Exhibit 3.1 - Articles of Incorporation of the Registrant,
as amended to date, constituting Exhibit 3.1 to
Registration Statement No. 333-41581 on Form SB-2 are
hereby incorporated herein by reference.
Exhibit 3.2 - By-Laws of the Registrant, as amended to date,
constituting Exhibit 3.2 to the Registrant's
Registration Statement No. 33-5441 on Form S-1, are
hereby incorporated herein by reference.
-21-
IGENE Biotechnology, Inc. and Subsidiary
PART II
OTHER INFORMATION
(continued)
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-
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IGENE BIOTECHNOLOGY, INC.
___________________________________
(Registrant)
Date May 14, 2007 By /S/ STEPHEN F. HIU
____________ ___________________________________
STEPHEN F. HIU
President
Date May 14, 2007 By /S/ EDWARD J. WEISBERGER
___________________________________
EDWARD J. WEISBERGER
Chief Financial Officer
-23-
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, as amended to date,
constituting Exhibit 3.2 to the Registrant's
Registration Statement No. 33-5441 on Form S-1, are
hereby incorporated herein by reference.
Exhibit 31(a) - Certification of Principal Executive Officer
pursuant to Rule 13a-14(a) or Rule 15(d)-14(a).
Exhibit 31(b) - Certification of Principal Financial Officer
pursuant to Rule 13a-14(a) or Rule 15(d)-14(a).
Exhibit 32(a) - Certification of Chief Executive Officer
pursuant to 18 U.S.C. SECTION 1350.
Exhibit 32(b) - Certification of Chief Financial Officer
pursuant to 18 U.S.C. SECTION 1350.
-24-