FORM 10QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 10549 (Mark One) [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 0-15888 . IGENE Biotechnology, Inc. (Exact name of Registrant as specified in its charter) Maryland 52-1230461 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 9110 Red Branch Road, Columbia, Maryland 21045-2020 (Address of principal executive officers) (Zip code) Registrant's telephone number, including area code: (410) 997-2599 None (Former name, former address and former fiscal year, if changed since last report) Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 The number of shares outstanding of the Registrant's $.01 par value Common Stock as of September 30, 1996 is 18,604,472 . FORM 10QSB IGENE Biotechnology, Inc. INDEX Page PART I - FINANCIAL INFORMATION Balance Sheets ................................................. 4 Statements of Operations ....................................... 5 Statements of Stockholder's Equity (Deficit) ................... 6 Statements of Cash Flows ....................................... 8 Notes to Financial Statements .................................. 9 Management's Discussion and Analysis of Financial Conditions and Results of Operations ..................... 11 PART II - OTHER INFORMATION ....................................... 15 SIGNATURES ........................................................ 16 IGENE BIOTECHNOLOGY, INC. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 PART I - FINANCIAL INFORMATION IGENE Biotechnology, Inc. Balance Sheets September 30, September 30, December 31, 1996 1995 1995 (Unaudited) (Unaudited) ASSETS Current assets: Cash and cash equivalents . $ 35,975 $ 72,940 $ 8,326 Accounts receivable ........ 47,509 10,470 11,129 Inventories - finished goods --- 1,240 --- Supplies ................... 7,009 --- --- Due from stockholder ....... --- --- 44,680 Prepaid expenses ........... 953 2,153 --- Total current assets .. 91,446 86,803 64,135 Property and equipment, net .. 25,353 31,825 29,520 Security deposits ............ 10,600 10,600 10,600 Total assets...........$ 127,399 $ 129,228 $ 104,255 LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and other accrued expenses ........... 268,486 247,887 271,127 Debenture interest payable . 60,000 60,000 30,000 Promissory Notes payable ... 558,770 536,300 100,000 Total current liabilities 887,256 844,187 401,127 Long term liabilities: Variable rate subordinated debenture .................. 1,500,000 1,500,000 1,500,000 Total liabilities ..... 2,387,256 2,344,187 1,901,127 Redeemable preferred stock -- 8% cumulative, convertible, voting, Series A, $.01 par value per share; redemption value $13.12, $12.48 and $12.64 per share. Authorized 920,000 shares; issued 35,842 38,342, and 38,342 shares................... 470,247 478,508 484,643 Stockholders' deficit: Preferred stock -- $.01 par value per share. 8% cumulative, convertible, voting, Series A. Authorized and issued 187,500 shares (aggregate involuntary liquidation value of $2,460,000, 2,340,000, and 2,370,000)............... 1,875 1,875 1,875 Common stock -- $.01 par value per share. Authorized 35,000,000 shares; issued 18,604,472, 14,255,738, and 18,572,805 shares ....... 186,045 142,557 185,728 Additional paid-in capital . 17,917,221 17,296,148 17,843,142 Deficit .................... (20,835,245) (20,134,047) (20,312,260) Total stockholders' equity (deficit) ....... (2,730,104) (2,693,467) (2,281,515) $ 127,399 $ 129,228 $ 104,255 See accompanying notes to financial statements IGENE Biotechnology, Inc. Statements of Operations (Unaudited) ----- Three months ended ---- ----- Nine months ended ----- September 30, September 30, September 30, September 30, 1996 1995 1996 1995 Sales ...$ 9,241 $ 9,203 $ 40,315 $ 18,445 Cost of sales 3,927 5,447 22,310 13,004 Gross profit from sales of product .. 5,314 3,756 18,005 5,441 Technology licensing income .....$ --- $ --- $ --- $ 200,000 Technology services income ....... --- 10,750 64,158 19,750 Net revenue .. 5,314 14,506 82,163 225,191 Selling, general and administrative expenses: Marketing and selling ... 1,323 3,399 3,918 5,936 Research, development and pilot plant84,123 91,288 241,049 265,579 General and administrative 93,082 93,469 245,848 212,704 178,528 188,156 490,815 484,219 Operating income .. (173,214) (173,650) (408,652) (259,028) Other income (expenses): Investment income .. 105 308 106 435 Other income (loss) ... --- 184 --- 296 Interest expense .. (43,621) (30,066) (114,439) (100,041) Forgiveness of interest on promissory notes ..... --- --- --- 33,395 Net income (loss) . (216,730) (203,224) (522,985) (324,943) Net loss per common share $ (0.01) $ (0.02 ) $ (0.03) $ (0.03) See accompanying notes to financial statement IGENE Biotechnology, Inc. Statements of Stockholder's Equity (Deficit) (Unaudited) Redeemable Preferred Preferred Common Stock Stock Stock (shares/amount) (shares/amount) (shares/amount) Balance at December 31, 1994. 38,592/$463,104 187,500/$1,875 13,028,571/$130,285 Cumulative undeclared dividend on redeemable preferred stock ....... $18,404 --- --- Issuance of 1,200,000 shares of common stock to certain directors of the Company ........ --- --- 1,200,000/$12,000 Issuance of 26,667 shares of common stock in lieu of cash payment for interest on subordinated debenture . --- --- 26,667/$267 Conversion of preferred stock into common stock .....250/($3,000) --- 500/$5 Net loss for nine months ended September 30, 1995. --- --- --- Balance at September 30, 1995 ... 38,342/$478,508 187,500/$1,875 14,255,738/$142,557 Balance at December 31, 1995..... 38,342/$484,643 187,500/$1,875 18,572,805/$185,728 Cumulative undeclared dividends on redeemable preferred stock........... $17,204 --- --- Issuance of 26,667 shares of common stock in lieu of cash payment for interest on subordinated debenture ... --- --- 26,667/$267 Conversion of preferred stock to common stock ........ (2,500)/$(31,600) --- 5,000/$50 Net Loss for nine months ended September 30, 1996.. --- --- --- Balance at September 30, 1996... 35,842/$470,247 187,500/$1,875 18,604,472/$186,045 See accompanying notes to financial statements IGENE Biotechnology, Inc. Statements of Stockholder's Deficit (Unaudited- Continued) Additional Paid-In Total Stockholder's Capital Deficit Deficit Balance at December 31, 1994..... 17,113,824 $(19,809,104) $(2,563,120) Cumulative undeclared dividend on redeemable preferred stock ....... (18,404) --- (18,404) Issuance of 1,200,000 shares of common stock to certain directors of the Company ..... 138,000 --- 150,000 Issuance of 26,667 shares of common stock in lieu of cash payment for interest on subordinated debenture ... 59,733 --- 60,000 Conversion of preferred stock into common stock... 2,995 --- 3,000 Net loss for nine months ended September 30, 1995. --- (324,943) (324,943) Balance at September 30, 1995 ..$ 17,296,148 $ (20,134,047) $ (2,693,467) Balance at December 31, 1995... $ 17,843,142 $ (20,312,260) $ (2,281,515) Cumulative undeclared dividends on redeemable preferred stock......... (17,204) --- (17,204) Issuance of 26,667 shares of common stock in lieu of cash payment for interest on subordinated debenture .. 59,733 --- 60,000 Conversion of preferred stock to common stock ..... 31,550 --- 31,600 Net Loss for nine months ended September 30, 1996.. --- (522,985) (522,985) Balance at September 30, 1996 ...$ 17,917,221 $ (20,835,245) $(2,730,104) See accompanying notes to financial statements IGENE Biotechnology, Inc. Statements of Cash Flows (Unaudited) ---- Nine months ended --- September 30, September 30, 1996 1995 Cash flows from operating activities: Net loss ...................................$ (522,985) $( 324,943) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .............. 4,167 5,743 Interest on debenture paid in shares of common stock........................ 60,000 60,000 Changes in assets and liabilities: Increase (decrease) in debenture interest payable ...................... 30,000 30,000 Increase (decrease) in accounts payable and other accrued expenses ................ (2,641) 9,865 Decrease (increase) in accounts receivable . (36,380) 320 Decrease (increase) in prepaid expenses and deposits .............................. (953) (715) Decrease (increase) in inventories ......... --- (1,240) Decrease (increase) in supplies ............ (7,009) --- Net cash used in operating activities ...... (475,801) (220,970) Cash flows from investing activities: Capital expenditures ....................... --- (2,369) Sales of Equipment ......................... --- --- Net cash used in investing activities ........ --- (2,369) Cash flows from financing activities: Proceeds from private stock subscription ... --- 150,000 Amount due from stockholders ............... 44,680 --- Issuance of promissory notes ............... 458,770 126,750 Net cash provided by (used in) financing activities ....................... 503,450 276,750 Net increase (decrease) in cash and cash equivalents ........................... 27,649 53,411 Cash and cash equivalents at beginning of year . 8,326 19,529 Cash and cash equivalents at end of period .$ 35,975 $ 72,940 Supplementary disclosure - cash paid for interest .....................$ --- $ --- - cash paid for taxes ............$ --- --- Noncash investing and financing activities: During the nine months ended September 30, 1996 and 1995, the Company issued 26,667 shares of common stock in each period in payment of interest on the variable rate subordinated debenture. If paid in cash, the interest would have been payable at 8% during each period, or $60,000. Shares may be issued in lieu of cash per the debenture agreement at the higher of $2.25 per share or market price per share. The stock was issued and related interest expense for the three months and nine months ended September 30, 1996 and 1995 were recorded at $2.25 per share, or $60,000 in the aggregate in each period. During the three months and nine months ended September 30, 1996 and 1995, the Company recorded dividends in arrears on 8% redeemable preferred stock at $.48 and $.48 per share, respectively aggregating $17,204 and $18,404, respectively in each period which has been removed from paid-in capital and included in the carrying value of the redeemable preferred stock. See accompanying notes to financial statements IGENE Biotechnology, Inc. NOTES TO FINANCIAL STATEMENTS (Unaudited) (1) Unaudited Financial Statements The financial statements presented herein as of September 30, 1996 and 1995 and for the nine-month and the three month periods ended September 30, 1996 and 1995 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 and results of operations. Such financial statements do not include all of the information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles. (2) Inventories None. (3) Stockholders' Equity As of September 30, 1996 and 1995, 71,684 and 76,684, shares of authorized but unissued common stock were reserved for issuance upon conversion of the Company's outstanding preferred stock. As of September 30, 1996 and 1995, 2,000,000 and 1,200,000 shares of authorized but unissued common stock were reserved for exercise pursuant to the 1986 Stock Option Plan. As of September 30, 1995 the Company has reserved shares for the exercise of Warrants to purchase an aggregate of 252,400 shares of Common Stock to Kimelman & Baird, LLC, at $.75 per share expiring June 26, 1996. The Warrants were issued to the aforementioned for acting as placement agent in the Company's private placement of $510,500 in gross proceeds which closed June 26, 1992 and there are substantial restrictions against the transfer of these Warrants. The Warrants were not publicly traded and there were no trades of these Warrants before the June 26, 1996 expiration date. As of September 30, 1996 and 1995, 800,000 shares of authorized but unissued common stock were reserved for issuance upon reinvestment of interest on the variable rate subordinated debenture and 375,000 shares of authorized but unissued common stock were reserved for issuance upon conversion of the variable rate subordinated debenture. As of September 30, 1996 and 1995, 24,588,248 and 3,995,374 shares, respectively, of Common Stock were reserved for the conversion of Promissory Notes and the issue of Warrants subject to that conversion. The Promissory Notes are held by Directors of the Company. (4) Net Loss Per Common Share Net income (loss) per common share for the three month and nine month periods ended September 30, 1996 and 1995 is based on 18,604,472 and 18,595,214 weighted average shares, respectively, for 1996, and on 13,668,781 and 13,253,507 weighted average shares, respectively, for 1995. For purposes of computing net income (loss) per common share, net income (loss) has been adjusted to include cumulative undeclared dividends in arrears on preferred stock. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Sales revenue for the nine month period ended September 30, 1996, increased from $18,445 in the nine-month period ended September 30, 1995 to $40,315 in the corresponding period in 1996. This increase (118%) resulted from an increase in domestic sales of ClandoSan to several large distributors for the product. Costs of product sales as a percentage of product sales decreased from 59% for the third quarter of 1995 to 43% for the third quarter of 1996. Total revenue for the nine-month period ending September 30, 1996 decreased by approximately $134,000, compared with the corresponding period in 1995 and reflects a one-time technology licensing fee received in the second quarter of 1995. Additional sales of ClandoSan will depend on continued marketing arrangements with distributors for the product and the Company's own limited direct sales. The Company expects to continue to focus its efforts on AstaXin and is in discussion with potential manufacturing and marketing partners for the product. Demonstration production runs are planned for third quarter 1996. Product from these runs will be used for fish feeding trials and to text market the product. Long-term production and sale of AstaXin will depend on the Company's ability to find suitable manufacturing partners as it has no commercial scale manufacturing facilities of its own. Research, development and pilot plant expenses decreased by 7.8% for the current quarter and 9.2% for the nine-month period ended September 30, 1996 when compared to the corresponding periods in 1995. This decrease was primarily a result of decreases in equipment repairs and utility expenses. Research and development costs may be expected to increase gradually in support of increased manufacturing efforts for AstaXin , but would be offset by technology licensing and sales of the product. Marketing expenses decreased by 61% and 34% for the quarter and nine months ended September 30, 1996, respectively as a result of decreased expenses for product samples and freights and are related solely to the Company's ClandoSan product. Marketing expenses related to AstaXin could be expected to increase if production and sales increase, and will depend on marketing arrangements with distributors of the product. This income would be offset by revenue from sales of product. General and administrative expenses were approximately the same for the third quarter of 1996 when compared to the corresponding period in 1995, and approximately 15% higher for the nine-month period ended September 30, 1996 versus the same nine-month period ended September 30, 1995. This increase resulted from increased payroll expense incurred following the hiring of a Chief Executive officer in January 1996, and an increase in business travel related to AstaXin . A portion of the increase was offset by a decrease in rent and occupancy expense resulting from a newly negotiated lease which took effect in 1996. Interest expense for the nine-month period ended September 30, 1996 increased by approximately $14,400 over the same period in the prior year and reflects the increase in prime interest rate and the issuance of additional promissory notes to certain directors of the Company during the nine-months ended September 30, 1996. As a result of the forgoing, the Company reported net loss of $216,730, or $.01 per common share during the third quarter of 1996, compared to a net loss of $203,224, or $.02 per common share in the same period in 1995. The weighted average number of common shares outstanding increased to 18,604,472 in the third quarter of 1996 from 18,595,214 in the third quarter of 1995. This increase in shares reflects the issuance of common stock as payment of interest on a variable note subordinated debenture, and the conversion of 2,500 shares of redeemable preferred stock into 5,000 shares of common stock of the Company. Financial Position In December 1988, 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 increase the liquidation preference or redemption value of the preferred stock. As of September 30, 1996, total dividends in arrears on the Company's preferred stock was $1,143,511 of which $183,511 ($5.12 per share) was included in the carrying value of the redeemable preferred stock and $960,000 ($5.12 per share) was included in the liquidation preference of the limited redemption preferred stock. Liquidity and Capital Resources Historically, the Company has been funded primarily by equity contributions, loans from stockholders and license fees. As of September 30, 1996, the Company had a working capital deficit of $795,810, and cash and cash equivalents of $36,000, consisting principally of proceeds from Promissory Notes issued to certain Directors of the Company, as described below. IGENE continues to focus on research and development of its products, achieving only minimal sales of its ClandoSan and AstaXin products. Cash used by operations for the nine months ended September 30, 1996 amounted to $475,801 while cash used by operations during the corresponding period in 1995 amounted to $229,970 because of a one-time technology licensing fee received in second quarter 1995. In 1995 the amount of cash required to fund operations was offset through a Licensing Agreement for AstaXin with Archer-Daniels-Midland Co. ("ADM"), Decatur, Illinois, signed in May 1995. The Agreement provided for a cash payment of $200,000 at signing and a royalty based on sales. On February 29, 1996, ADM terminated its Licensing Agreement with the Company. Consequently, additional cash was required to fund 1996 operations. The Company is actively seeking other potential manufacturers for AstaXin , and is in discussion with other potential manufacturers of its AstaXin technology. The Company believes this technology to be highly marketable. No cash was provided by investing activities for the quarters ended September 30, 1996 and September 30, 1995. This is reflective of the Company's continued plan to minimize capital expenditures, since existing equipment is believed to be sufficient to meet the needs of the Company for the foreseeable future. The following is a summary of the Company's financing activities for 1995 and the nine months ended September 30, 1996: On January 23, 1995, and March 7, 1995 the Company issued promissory notes to certain directors of the Company (Kimelman, Kempner, Abeles, Cenerazzo, Knafel) for a total aggregate consideration of $126,750. The notes specify that interest will be paid quarterly in arrears at Prime Rate. In addition, at any time before repayment, the value of the notes may be converted to common shares of the Company at $.1875 per share for the notes issued January 23, 1995; and at $.125 per share for the notes issued March 7, 1995. On December 14, 1995 the January 23, 1995 and March 7, 1995 notes were terminated, with equal amounts of common stock and warrants being issued in their place equal to the principal amount of each of the notes divided by $.125 which was the per share price of the stock at the time. On May 11, 1995 the Company and Archer-Daniels-Midland Company signed a non- exclusive licensing agreement for AstaXin . The Agreement provided for an initial payment of $200,000 and royalties based on sales. In addition, the Company received $24,415 in 1995 for technology services pertaining to the Agreement. The Company also received payment of $25,000 in December, 1995 under the terms of the Agreement. On February 29, 1996 Archer-Daniels-Midland Company terminated its licensing agreement with the Company. On August 15, 1995 certain directors of the Company (Kimelman, Kempner, Abeles, Cenerazzo, Knafel) agreed to purchase 1,200,000 shares of common stock from the Company at $.125 per share for an aggregate purchase amount of $150,000 in order to provide needed working capital. At its Annual Meeting on December 14, 1995 the shareholders of the Company approved the conversion of all promissory notes issued to certain directors of the Company (Kimelman, Kempner, Abeles, Cenerazzo, Knafel, and Low-Beer) from August 1993 until March 7, 1995, into common stock, along with warrants to purchased additional shares of common stock at a price of $.125 per share at any time during the period from April 3, 1995 to April 3, 1998, all shares being equal to the aggregate principal amount of the loans divided by $.125, which was the fair market value of the common stock as quoted on April 3, 1995 by the National Quotation Bureau. These shares were issued on December 31, 1995. On November 16, and December 22, 1995, the Company issued Promissory Notes to certain Directors of the Company for an aggregate consideration of $100,000. These notes specify that at any time prior to repayment the holder has the right to convert the notes to common stock of the Company at $.05 per share and to receive a warrant for an equivalent number of common shares at $.05 per share. $55,320 of this total was received prior to December 31, 1995, the remaining $44,680 was received during January 1996. On February 9, 1996 and March 11, 1996, the Company issued promissory notes to certain directors of the Company (Kimelman, Kempner, Abeles, Cenerazzo, Knafel) for an aggregate consideration of $140,000. These notes specify that at any time prior to repayment the holder has the right to convert the note to common stock of the Company at $.10 per share for the note issued February 9, 1996 and at $.09 per share for the note issued March 11, 1996, and to receive warrants for an equivalent number of common shares at $.10 per share for the note issued February 9, 1996 and at $.09 per share for the note issued March 11, 1996. The promissory notes are due on demand with interest charged at the prime rate. On April 23, May 9, and June 7, 1996, the Company issued promissory notes to certain directors of the Company (Kimelman, Kempner, Abeles, Cenerazzo, Knafel) for an aggregate consideration of $177,000. These notes specify that at any time prior to repayment the holder has the right to convert the note to common stock of the Company at $.09 per share for the note issued April 23, 1996, $.06 per share for the note issued May 9, 1996, and $.05 per share for the note issued June 7, 1996, and to receive warrants for an equivalent number of common shares at $.09 per share for the note issued April 23, 1996, $.06 per share for the note issued May 9, 1996, and $.05 per share for the note issued June 7, 1996. The promissory notes are due on demand with interest charged at the prime rate. On July 24, and September 24, 1996, the Company issued promissory notes to certain directors of the Company (Kimelman, Kempner, Abeles, Cenerazzo, Knafel) for an aggregate consideration of $160,000. These notes specify that at any time prior to repayment the holder has the right to convert the note to common stock of the Company at $.115 per share for the note issued July 24, 1996, and $.125 per share for the note issued September 24, 1996, and to receive warrants for an equivalent number of common shares at $.115 per share for the note issued July 24, 1996, and $.125 per share for the note issued September 24, 1996. The promissory notes are due on demand with interest charged at the prime rate. As of September 30, 1996 a total of $18,230 of the Promissory Notes issued above had not yet been funded. In the long-term, the Company is continuing its development of additional AstaXin technology which it hopes to license and market to benefit future periods' operations. The Company does not believe that inflation has had a significant impact on the Company's operations during the past two years. FORM 10QSB IGENE Biotechnology, Inc. PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8K (a) Exhibits None (b) Reports on Form 8K None Item 7. Subsequent Events None. FORM 10QSB SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IGENE Biotechnology, Inc. (Registrant) Date: November 15, 1996 /s/ Stephen F. Hiu Stephen F. Hiu President, Treasurer and Secretary (On behalf of the Registrant and as Principal Financial Officer)