SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 10549
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, 1998
[ ] 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
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
21,441,473
Traditional Small Business Disclosure Format (check one):
Yes x No
<PAGE>
FORM 10-QSB
IGENE Biotechnology, Inc.
INDEX
PART I - FINANCIAL INFORMATION
Page
Balance Sheets 5-6
Statements of Operations 7
Statements of Stockholder's Deficit 8-9
Statements of Cash Flows 10-11
Notes to Financial Statements 12-14
Management's Discussion and Analysis
of Financial Conditions and
Results of Operations 15-19
PART II - OTHER INFORMATION 20
SIGNATURES 21
<PAGE>
IGENE BIOTECHNOLOGY, INC.
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 193
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
IGENE Biotechnology, Inc.
Balance Sheets
<CAPTION>
June 30, June 30, December 31,
1998 1997 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and
cash equivalents $ 1,414,683 $ 101,911 $ 24,548
Accounts receivable 210,275 15,309 14,494
Inventory 216,156 --- ---
Supplies 4,710 --- 4,710
Prepaid expenses 354,086 1,219 ---
Deferred costs --- 45,925 ---
Due from stockholders --- 40,097 153,594
Equipment held
for resale --- 283,762 ---
Loan receivable,
current portion 261,940 --- 249,217
2,461,850 488,223 446,563
OTHER ASSETS
Property and
equipment, net 327,948 33,955 297,006
Loan receivable,
net of current portion 116,552 --- 250,783
Debt issue costs 211,712 --- ---
Security deposits 10,600 10,600 10,600
TOTAL ASSETS $3,128,662 $ 532,778 $ 1,004,952
LIABILITIES, REDEEMABLE PREFERED STOCK
AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable
and accrued expenses$ 521,427 $ 396,130 $ 515,137
Debenture
interest payable 45,000 45,000 45,000
Promissory
notes payable --- 1,372,500 2,000,000
TOTAL
CURRENT
LIABILITIES 566,427 1,813,630 2,560,137
LONG-TERM DEBT
Promissory note
payable 6,082,500 --- 1,082,500
Variable rate
subordinated
debenture 1,500,000 1,500,000 1,500,000
TOTAL
LIABILITIES 8,148,927 3,313,630 5,142,637
COMMITMENTS
AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK
Carrying amount
of redeemable preferred
stock, 8% cumulative,
convertible, voting,
series A, $.01 par value
per share. Redemption
value $14.24, $13.50,
and $13.92, respectively.
Authorized 1,312,500
shares, issued 29,592,
35,842,and 29,592 shares,
respectively 421,390 487,451 411,920
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<PAGE>
- -5-
IGENE Biotechnology, Inc.
Balance Sheets
(continued)
<TABLE>
June 30, June 30, December 31,
1998 1997 1997
(Unaudited)(Unaudited)
<S> <C> <C> <C>
STOCKHOLDERS' DEFICIT
Preferred stock, $.01 par
value per share,
8% cumulative, convertible,
voting, series A. Authorized,
issued and outstanding
187,500 shares.
Aggregate involuntary
Liquidation value of
$2,670,000, $2,550,000, and
2,610,000 shares, respectively. 1,875 1,875 1,875
Common stock, $.01 par value
per share. Authorized,
250,000,000 shares;
issued and outstanding
21,441,473,18,671,139, and
19,206,473 shares,
respectively. 214,415 186,711 192,065
Additional paid-in capital 18,659,740 18,049,351 18,233,670
Deficit (24,317,685)(21,506,240)(22,977,215)
TOTAL STOCKHOLDERS' DEFICIT (5,441,655) (3,268,303) (4,549,605)
TOTAL LIABILITIES AND
STOCKHOLDERS'DEFICIT $ 3,128,662 $ 532,778 $1,004,952
The accompanying notes are an integral part of the financial
statements.
</TABLE>
- -6-
<PAGE>
IGENE Biotechnology, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Sales $ 203,675 $ 2,200 $ 203,675 $ 14,394
Cost of sales 276,368 835 521,094 10,900
Gross profit (loss) (72,693) 1,365 (317,419) 3,494
Selling, General & Administrative expenses:
Manufacturing
overhead 29,884 --- 83,957 ---
Marketing and
selling 300 5,327 689 4,535
Research,
development
and pilot plant 90,483 88,672 223,685 178,044
General and
administrative 180,847 65,218 316,548 156,507
Litigation expenses 22,737 --- 183,698 ---
Total selling, general and
administrative
expenses 324,251 159,217 808,577 339,086
Operating loss (396,944) (157,852) (1,125,996) (335,592)
Other income (expense)
Interest income 26,231 --- 37,734 ---
Income from
renegotiation
of liabilities --- 51,204 --- 51,204
Loss on disposal
of equipment (3,280) --- (3,280) ---
Interest expense (175,170) (69,590) (248,928) (132,719)
Net loss $(549,163)$(176,238) $(1,340,470) $ (417,107)
Net loss per
common shares $ (0.03)$ (0.01) $ (0.07) $ (0.02)
The accompanying notes are an integral part of the financial
statements.
</TABLE>
- -7-
<PAGE>
IGENE Biotechnology, Inc.
Statements of Stockholders' Deficit
(Unaudited)
<TABLE>
Redeemable
Preferred Stock Preferred Stock
(shares/amount) (shares/amount)
<S> <C> <C> <C> <C>
Balance at
December 31, 1996 35,842 $ 475,982 187,500 $ 1,875
Cumulative
undeclared
dividends
on redeemable
preferred stock --- 11,469 --- ---
Issuance of
common stock
in lieu of cash
in payment of
interest on
subordinated
debenture --- --- --- ---
Net loss for
six months ended
June 30, 1997 --- --- --- ---
Balance at
June 30, 1997 35,842 $ 487,451 187,500 $ 1,875
Balance at
December 31, 1997 29,592 $ 411,920 187,500 $ 1,875
Cumulative
undeclared
dividends on
redeemable
preferred stock --- 9,470 --- ---
Issuance of
common stock
through exercise
of employee
stock options --- --- --- ---
Issuance of
common stock
in lieu of
cash in payment
of interest on
subordinated
debenture --- --- --- ---
Issuance of
common stock
in lieu of
cash in payment
of legal retainers
and fees --- --- --- ---
Capital
contribution -
forgiveness of
interest on
promissory notes --- --- --- ---
Net loss for
six months
ended June 30, 1998 --- --- --- ---
Balance at
June 30, 1998 29,592 $ 421,390 187,500 $ 1,875
The accompanying notes are an integral part of the financial
statements.
</TABLE>
- -8-
<PAGE>
IGENE Biotechnology, Inc.
Statements of Stockholders' Deficit
(Unaudited - Continued)
<TABLE>
Additional Total
Common Stock Paid-in
Stockholders'
(shares/amount) Capital Deficit Deficit
<S> <C> <C> <C> <C> <C>
Balance at
December 31,
1996 18,631,139 $186,311
$17,971,220$(21,089,133)$(2,929,727)
Cumulative
undeclared
dividends
on redeemable
preferred
stock --- --- (11,469) --- (11,469)
Issuance of
common stock
in lieu
of cash in
payment of interest
on subordinated
debenture 40,000 400 89,600 --- 90,000
Net loss
for six months
ended June
30, 1997 --- --- --- (417,107) (417,107)
Balance
at June
30, 1997 18,671,139$186,711 $18,049,351 $(21,506,240)
$(3,268,303)
Balance at
December 31,
1997 19,206,473 192,065 18,233,670 (22,977,215)$
(4,549,605)
Cumulative
undeclared
dividends
on redeemable
preferred stock --- --- (9,470) ---
(9,470)
Issuance of
common stock
through exercise
of employee
stock options 5,000 50 200 ---
250
Issuance of
common stock
in lieu of
cash in payment
of interest on
subordinated
debenture 40,000 400 89,600 ---
90,000
Issuance of
common stock
in lieu of
cash in payment
of legal
retainers
and fees 2,190,000 21,900 140,100 ---
162,000
Capital
contribution -
forgiveness of
interest on
promissory notes --- --- 205,640 ---
205,640
Net loss
for six months
ended June
30, 1998 --- --- --- (1,340,470)
(1,340,470)
Balance at
June 30,
1998 21,441,473 $214,415 18,659,740 $(24,317,685)
$(5,441,655)
The accompanying notes are an integral part of the financial
statements.
</TABLE>
- -9-
<PAGE>
IGENE Biotechnology, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30, June 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,340,470) $
(417,107)
Adjustments to reconcile
net loss to net cash provided
By operating activities:
Depreciation 20,325 2,675
Loss on disposal of equipment 3,280 ---
Interest on debenture
paid in shares of common stock 90,000 90,000
Decrease (increase) in:
Accounts receivable (195,781)
(5,313)
Inventory (216,156) ---
Prepaid expenses and
other current assets (219,086) 9,559
Increase (decrease) in:
Accounts payable and
accrued expenses 238,930 95,331
Net cash used in
operating activities (1,618,958) (224,855)
Cash flows from investing activities:
Capital expenditures (59,052) (17,159)
Purchase of equipment
held for resale --- (283,762)
Other deferred costs --- (45,925)
Repayment of principal
of loan receivable 121,508 ---
Proceeds from
disposal of equipment 4,505 ---
Net cash used in
investing activities 66,961 (346,846)
Cash flows from financing activities:
Repayments from (advances to)
stockholders 28,594 (23,227)
Proceeds from issuance
of common stock 250 ---
Issuance of promissory notes --- 655,500
Issuance of demand notes 950,000 ---
Proceeds from rights offering 2,438,288 ---
Repayment of demand notes (475,000) ---
2,942,132 632,273
Net increase (decrease)
in cash and
cash equivalents 1,390,135 60,572
Cash and cash equivalents
at beginning of period 24,548 41,339
$ 1,414,683 $ 101,911
The accompanying notes are an integral part of the financial
statements.
</TABLE>
- -10-
<PAGE>
IGENE Biotechnology, Inc.
Statements of Cash Flows
(Unaudited - Continued)
Noncash investing and financing activities:
During the six month ended June 30, 1998 and 1997, the Company
recorded dividends in arrears on 8% redeemable preferred stock at
$.32 per share aggregating $9,470 and $11,469, respectively,
which has been removed from paid-in capital and included in the
carrying value of the redeemable preferred stock.
During the six months ended June 30, 1998, the Company issued
notes payable of $5,000,000 through a rights offering.
Stockholders purchased rights, using $1,875,000 in promissory
notes and $475,000 of demand notes due to the Company,
resulting in net cash proceeds of $2,438,288 which is after fees
associated with the offering of $211,712. Theses related
fees have been capitalized as Debt issue costs and will be
amortized over the term of the debt.
During the six months ended June 30, 1998, the Company cancelled
certain promissory notes and related amounts due from
a stockholder aggregating $125,000 by agreement with the
stockholder.
During the six months ended June 30, 1998 and 1997 the Company
issued 40,000 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 12% in the amount
of $90,000 in each period. Shares may be issued in lieu of cash
under the terms of the debenture agreement at the higher of $2.25
per share or market price per share. The stock was issued and
related interest was paid at $2.25 per share, or $90,000, in each
period.
During the six months ended June 30, 1998 the Company issued
stock in lieu of cash payments for legal services rendered
and legal retainers aggregating $162,000, based on the market
price per share of common stock on the dates of the related
agreements. The Company recorded the issue, on May 20, 1998, of
190,000 shares of common stock at $0.142 per share, or $27,000,
per an agreement effective August 27, 1997, by reducing trade
accounts payable to the Company's patent counsel by $27,000. The
Company also recorded the issue, on April 29, 1998 and June
26,1998 of a total of 2,000,000 shares of common stock at $.0675
per share, or $135,000, per agreements effective February 20,
1998, by recording $135,000 in prepaid expenses, representing
legal retainers on deposit with litigation counsel.
The accompanying notes are an integral part of the financial
statements.
- -11-
IGENE Biotechnology, Inc.
Notes to Financial Statements
(1) Unaudited financial statements
The financial statements presented herein as of June 30, 1998 and
1997 and for the three month and six month periods then ended 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 operation and cash flows. 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
Inventory, stated at lower of cost, on a first-in first-out
basis, or market value, represents AstaXinr manufactured
and held for sale, as follows:
Raw materials $ ---
Work-in-process 832
Finished goods 215,324
Total inventory $ 216,156
Inventory has been reduced by $309,207 during the six months
ended June 30, 1998 to reflect the excess of cost over market
value.
(3) Stockholders' Equity (Deficit)
At June 30, 1998 and 1997, 59,184 and 71,684 shares,
respectively, of authorized but unissued common stock
were reserved for issue upon conversion of the Company's
outstanding preferred stock.
As of June 30, 1998 approximately 22,000,000 shares of authorized
but unissued common stock were reserved for exercise pursuant to
the Company's 1997 and 1986 Stock Option Plans.
As of June 30, 1998 and 1997, 280,000 and 360,000 shares,
respectively, of authorized but unissued common stock were
reserved for issuance for payment 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 June 30, 1998 and 1997, 13,174,478 and 15,970,774 shares,
respectively, of authorized but unissued common stock were
reserved for the conversion of outstanding convertible promissory
notes in the aggregate amount of $1,082,000 and $1,372,500,
respectively, held by directors of the Company.
As of June 30, 1998 and 1997, 100,964,878 and 20,261,174 shares,
respectively, of authorized but unissued common stock were
reserved for the exercise of outstanding warrants.
- -12-
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(3) Stockholders' Equity (Deficit) (continued)
On February 13, 1998, the Company distributed to holders of
common shares and equivalents, transferable rights to purchase an
aggregate of $5,000,000 of 8% Notes due March 31, 2003.
Subscribing shareholders also received warrants to purchase
common stock at $0.10 per share aggregating 50,000,000 shares.
The offering was fully subscribed and expired on March 31, 1998.
The Company issued $5,000,000 in notes which shareholders
purchased using $1,875,000 in outstanding promissory notes and
$475,000 in outstanding demand notes. The Company was charged a
total of $211,712 in fees relating to the offering, resulting in
net proceeds of $2,438,288.
The Company has capitalized $211,712 in fees and costs associated
with this debt issue, which will be amortized over 5 years, the
term of the notes payable.
On April 6, 1998, the Company extended 4,290,400 in outstanding
warrants to purchase common stock, which were to expire on April
3, 1998 to April 3, 2008.
On April 6, 1998, the Company issued 9,500,000 warrants to
purchase common stock, at $0.10 per share, to certain directors
who were the lenders of $950,000 in demand notes issued in 1998.
The Company also issued 4,000,000 warrants to purchased common
stock at $0.10 per share, expiring 5 years from issue, to Mr.
Michael Kimelman, the chairman of the board of directors.
The Company agreed, on February 20, 1998, to issue 2,000,000
shares of common stock to its legal counsel, in payment of
retainers for on-going litigation relating to ADM, as described
in note (5). The stock was issued in May and June of 1998 at
$.0675 per share, or $135,000.
In May of 1998 the Company also issued 190,000 shares of common
stock to its patent counsel in payment of outstanding fees,
pursuant to an agreement dated August 27, 1997. The stock was
issued in May of 1998 at $0.142 per share, the market price as of
the date of the agreement, for an aggregate amount of $27,000.
Effective April 16, 1998, the Company issued 3,350,000 employee
stock options to its employees at $0.10 per of share of common
stock, expiring on the sooner of ten years from date of issue or
ten days following cessation of employment.
Effective May 1, 1998, the Company issued 1,500,000 stock options
to its CEO, Ramin Abrishamian, expiring two years from the date
of issue. Effective May 1, 1998, Mr. Abrishamian resigned his
position as CEO of the Company. Mr. Abrishamian presently
remains a director of the Company, but has declined to stand for
re-election at the 1998 annual meeting.
(4) Net loss per common share
Net loss per common share for the six-month periods ended June
30, 1998 and 1997 is based on 19,636,887 and 18,650,919,
respectively, of weighted average common shares outstanding. For
purposes of computing net loss per common share, the amount of
net loss has been increased by dividends declared and cumulative
undeclared dividends in arrears on preferred stock.
- -13-
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(5) Contingencies
In May 1995, the Company signed a non-exclusive licensing
agreement with Archer Daniels Midland Company (ADM) for the
manufacture and sale of AstaXinr. On February 29, 1996 ADM
informed the Company that it had decided not to utilize the
technology and requested that IGENE return approximately $250,000
in payments made to IGENE under the licensing agreement. IGENE
maintains that ADM is not entitled to the return of payments
and that additional monies are owed to IGENE. On July 21, 1997,
ADM filed suit against IGENE in the U.S. District Court in
Greenbelt, Maryland alleging patent infringement and requesting a
preliminary injunction against IGENE to cease the use of its
astaxanthin manufacturing process. ADM's request for injunctive
relief was denied. On August 4, 1997, IGENE filed a $300,450,000
contract and trade secrets lawsuit in U.S. District Court in
Baltimore, Maryland against ADM, contending that ADM stole
IGENE's formula for making its natural astaxanthin pigment,
AstaXinr. IGENE is also claiming breach of contract, in regards
to the licensing agreement entered into by IGENE and ADM in 1995.
IGENE contends that it complied with all material terms of this
agreement, including concentration levels of its pigment.
IGENE's claim was re-asserted as a counter-claim against ADM and
the two cases were joined in the District Court in Baltimore,
Maryland on August 24, 1997. On September 10, 1997 the District
Court denied ADM's request for a preliminary injunction on the
basis that ADM could not demonstrate a likelihood of success on
the merits of its case. Management believes ADM's claims to be
meritless. Management's basis for this is that ADM claims that
the levels of pigment IGENE said it could produce did not meet
contract levels. Management has copies of ADM's internal memos
showing that the levels of pigment meet the contract
specifications. It is Management's contention that it is not
probable that this dispute will result in an unfavorable outcome.
Accordingly, no liability has been reflected in the accompanying
balance sheet. The Company had expenses of $658,185 in 1997, and
$183,698 in the six months ended June 30, 1998 relating to this
litigation, which is on-going. The Company presently estimates
that the cost of this litigation will be approximately $1,000,000
per year. At the present time, a range of reasonably possible
loss cannot be estimated.
(6) Uncertainty
The Company has incurred net losses in each year of its
existence, aggregating approximately $24,300,000 from
inception to June 30, 1998 and its liabilities and redeemable
preferred stock exceeded its assets by approximately
$5,400,000 at that date. These factors indicate that the Company
will not be able to continue in existence unless it
is able to raise additional capital and attain profitable
operations.
Management has instituted a program of significant cost
reductions, deferred all except immediately necessary
capital expenditures, and suspended payment of dividends on the
Company's preferred stock. The implementation of these measures
to conserve working capital together with the successful
marketing and licensing of the company's products, which
management hopes to achieve, may permit the Company to attract
additional capital and enable it to continue.
The Company has contracted with a manufacturer and began
manufacture and sale of its AstaXinr technology during the six
months ended June 30, 1998. The Company believes this technology
to be highly marketable.
To increase working capital, the Company issued a rights offering
in February 1998 which along with projected sales revenue, the
Company believes will provide sufficient cash for operations
through June 30, 1999. The Company will also encourage the
holders of convertible promissory notes to convert them into
common stock.
- -14-
IGENE Biotechnology, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Certain statements in this report set forth management's
intentions, plans, beliefs, expectations or predictions of
the future based on current facts and analyses. Actual results
may differ materially from those indicated in such statements,
due to a variety of factors including reduced product demand,
increased competition, government action, weather conditions, and
other factors.
Results of Operations
Sales revenue for the six months ended June 30, 1998 and 1997 of
$203,675 and $14,394 respectively, increased by $189,281. The
revenue earned in 1998 resulted entirely from sales of AstaXinr,
which are expected to continue for the near term at approximately
$145,000 per month. However, there can be no assurance that such
sales will continue to occur or that they will be profitable.
The Company began production of AstaXinr in January of 1998 using
a contract manufacturer. Sales revenue earned in 1997 resulted
entirely from sales of ClandoSanr. No sales of ClandoSanr have
occurred during 1998 due to reduced marketing efforts for this
product, as the Company concentrated on AstaXinr production in
1997 and 1998. The Company continues to be interested in
ClandoSanr, however, and plans to make marketing arrangements
with distributors in the future.
Cost of sales for the six months ended June 30, 1998 and 1997 of
$521,094 and $10,900, respectively, increased by $510,194. This
increase resulted entirely from production of AstaXinr beginning
in January 1998. During the six months ended June 30, 1998 a
gross loss on sales of AstaXinr of $317,419 was recorded. This
resulted from inefficiencies in the initial production runs,
which caused the costs of production to exceed the market value
of the product during the six months ended June 30, 1998.
Production efficiency has improved during the six months
ended June 30, 1998 and the Company expects to have gross profits
on sales of AstaXinr for the quarter ended September 30, 1998.
However, there can be no assurance that such gross profits will
occur or that they will be material. The Company expects to
incur cost of sales of approximately $138,000 per month in the
near term, which are expected to be funded by product sales.
Once the Company is producing and selling AstaXinr at a
gross profit, management plans to consider expanding production
capacity to meet an expected increasing demand for AstaXinr.
During the six months ended June 30, 1997, a gross profit of
$3,494 resulted entirely from sales of ClandoSanr. There were no
sales or gross profits on sales of ClandoSanr during 1998. See
also the preceding paragraph.
Manufacturing overhead for the six months ended June 30, 1998 was
$ 83,957, representing non-production costs associated with
support of manufacturing efforts for AstaXinr. Such costs are
expected to continue at approximately $5,000 per month in the
near term, and are expected to be funded by product sales. There
were no manufacturing overhead costs in 1997, since manufacture
of AstaXinr did not begin until January of 1998.
Marketing and selling expenses for the six months ended June 30,
1998 and 1997 were $689 and $4,535, respectively, a decrease of
$3,846, or 85%. This decrease resulted from decreased marketing
efforts for ClandoSanr in 1998 from 1997. Marketing expenses for
AstaXinr have been minimal to date, since the Company's contract
manufacturer has been acting as non-exclusive distributor and
marketer of AstaXinr during the six months ended June 30, 1998.
Marketing expenses for AstaXinr are expected to increase if and
when the Company increases production capacity, since the Company
will need to increase its sales, and so will need to make
additional marketing efforts either on its own or with the help
of other distributors and/or marketers. These additional
expenses are expected to be funded by revenues from product
sales.
- -15-
IGENE Biotechnology, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Results of Operations (continued)
Research, development and pilot plant expenses for the six months
ended June 30, 1998 and 1997 were $223,685 and $178,044,
respectively, an increase of $45,641, or 26%. This increase
resulted from increased pilot plant capacity and field studies
relating to AstaXinr in support of the beginning of manufacturing
efforts for this product. These expenses are expected to
continue at approximately $25,000 per month in support of
increasing the efficiency of the manufacturing process through
experimentation in the pilot plant and through improving the
Company's technology. These expenses are expected to be funded
through approximately June 1999 by available cash from previous
financing activities, and by profitable operations beyond that
date, if profitable operations have occurred.
General and administrative expenses for the six months ended June
30, 1998 and 1997 were $316,548 and $156,507, respectively, an
increase of $160,041, or 102%. This increase resulted primarily
from the hiring of a CEO on July 1, 1997, which resulted in an
increase of approximately $92,000 for the six months ended June
30, 1998 in compensation and benefits over the six months ended
June 30, 1997, during which time the Company did not have a CEO.
Other significant components of this increase were an increase of
approximately $30,000 caused by increased international travel
and communications involved in the support of manufacturing and
marketing of AstaXinr, an increase of $21,000 in accounting
consultant and shareholder administration expenses caused by the
increased reporting requirements associated with the Company's
rights offering of February 1998, and contract manufacturing
activities which began in January 1998. General and
administrative expenses are expected to continue in the near
future at approximately $36,000 per month. These expenses are
expected to be funded through approximately June 1999 by
available cash from previous financing activities, and by
profitable operations beyond that date, if profitable operations
have occurred. The Company does not plan to hire a replacement
CEO in the near future, and will be operated by its President and
Board of Directors, and a full-time controller has been hired
to eliminate the need for accounting consultant services.
Litigation expenses for the six months ended June 30, 1998 of
$183,698 represent the Company's expenses associated with its
defense of the suit by ADM and the Company's counter-suit.
Management expects to recover legal expenses through damage
awards and preservation of the commercial product rights
associated with AstaXinr. However, there can be no assurance
that the Company will receive damage awards or that its rights
will be preserved. The Company estimates that the cost of this
litigation will be approximately $1,000,000 per year. At the
present time, a range of reasonably possible loss from the
litigation cannot be estimated. There were no litigation
expenses incurred during the six months ended June 30, 1997.
Interest expenses for the six months ended June 30, 1998 and 1997
were $248,928 and $132,719, respectively, an increase of
$116,209, or 88%. This increase resulted primarily from $13,800
in interest paid on demand notes issued during the first quarter
of 1998, which have been completely repaid or cancelled through
exercise of rights in the offering of February 1998; and from
$100,000 in interest accrued on $5,000,000 in 8% notes issued
through exercise of rights in the offering of February 1998,
which interest is payable either annually or at the notes'
maturity (March 31, 2003), at the Company's option.
Interest income for the six months ended June 30, 1998 was
$26,231.00. This represents excess cash proceeds from the rights
offering which were placed in short-term interest bearing
investment accounts. No interest income was earned during the
six months ended June 30, 1997.
- -16-
IGENE Biotechnology, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Results of Operations (continued)
As a result of the foregoing, the Company reported net losses of
$1,340,470 and $417,107, or $0.07 and $0.02 per share,
respectively, for the six months ended June 30, 1998 and 1997.
The weighted average number of shares of common stock outstanding
increased to 19,636,887 for the six months ended June 30, 1998
from 18,650,919 for the six months ended June 30, 1997. This
increase of 985,968 weighted average shares is caused by the
issuance of 80,000 shares of common stock in lieu of interest
payments on the variable rate subordinated debenture, the
issuance of 487,834 shares pursuant to the exercise of employees'
stock options, the conversion of 6,250 shares of
preferred stock into 12,500 shares of common stock, and the
issuance of 2,190,000 shares of stock in payment of
legal fees and retainers during the twelve month period ended
June 30, 1998.
Financial Position
During the six months ended June 30, 1998 and 1997 the following
materially affected the Company's financial position:
The Company began producing AstaXinr in January 1998,
capitalizing inventory of $216,156 as of June 30, 1998.
The Company had sales of $203,675 during May and June of 1998,
which are included in accounts receivable as of June 30, 1998.
The Company paid expense advances and retainers of $335,000 to
its attorneys during the six months ended June 30, 1998, which
have been capitalized and are included in prepaid expenses as of
June 30, 1998; and which will be drawn down against future costs
associated with on-going litigation against ADM.
The Company issued, on March 31, 1998, $5,000,000 of long-term
notes payable pursuant to its rights offering of February 13,
1998. The notes mature on March 31, 2003 with interest payable
at 8% payable either annually or at maturity, at the Company's
option. The Company also issued warrants to purchase 50,000,000
shares of common stock at $0.10 per share expiring March 31,
2008. Short-term promissory notes of $1,875,000 and demand
notes of $475,000 were repaid through exercise of rights in this
offering, and $211,712 of related debt issue costs were
capitalized.
During the six months ended June 30, 1998, the Company issued
$950,000 in demand notes to certain directors, $475,000 of which
were repaid pursuant to the issuance of new debt in the rights
offering, and $475,000 of which were repaid in cash.
During the six months ended June 30, 1997, the Company issued
$655,500 of short-term convertible promissory notes to directors.
During the six months ended June 30, 1998 and 1997, the Company
purchased $59,052 and $17,159, respectively, in research and
development and manufacturing equipment.
- -17-
IGENE Biotechnology, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Financial Position (continued)
During the six months ended June 30, 1997, the Company expended
$329,987 for manufacturing equipment and fixtures, which were
held for resale and were sold in December 1997 to its contract
manufacturer, at cost.
During the six months ended June 30, 1998 the Company received
principal repayments of $121,508 on its loan receivable from its
contract manufacturer, which financed the manufacturer's purchase
of $500,000 of manufacturing equipment from the Company, at cost.
In December of 1988, the Company suspended payment of the
quarterly dividend on its preferred stock. Resumption of the
dividend will require significant improvement in cash flow.
Unpaid dividends cumulate for future payment or increase the
liquidation preference or redemption value of the preferred
stock. As of June 30, 1998 and 1997, total dividends in arrears
on the Company's preferred stock was $1,354,654 and $1,250,715,
respectively, of which $184,654 ($6.24 per share) and $200,715
($5.60 per share), respectively, was included in
the carrying value of the redeemable preferred stock and
$1,170,000 and $1,050,000, respectively, 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 and loans from stockholders. As of
June 30, 1998 and 1997, the Company had working capital (deficit)
of $1,895,423 and $(1,325,407). Working capital increased by
$3,220,830 during the twelve month period ended June 30, 1998.
This increase resulted from net proceeds from the Company's
rights offering of February 1998 of $2,438,288 and the
restructuring of $1,875,000 in short-term debt to long-term
maturities through the rights offering. The Company had cash and
cash equivalents of $1,414,683 and $101,911, respectively, as of
June 30, 1998 and 1997.
The Company believes that as a result of the proceeds from the
rights offering, and projected product sales revenue, it will
have sufficient cash liquidity to operate through June 30, 1999.
However, there can be no assurances that additional sales will
occur or that they will be profitable.
Cash used by operations in the six months ended June 30, 1998 and
1997 amounted to $1,618,958 and $224,855, respectively. The
increase in cash used in operations of $1,394,103 resulted from
production costs related to the production of AstaXinr, which the
Company began manufacturing in January 1998 and litigation costs
associated with the Company's suit against ADM.
Cash provided by (used in) investing activities for the six
months ended June 30, 1998 and 1997 amounted to $66,961 and
$(346,846), respectively. The increase of $413,807 in cash
provided by investing activities resulted from the purchase of
equipment for resale of $283,762 during the six months ended June
30, 1997 and the receipt of principal repayments on loan
receivable during the six months ended June 30, 1998 of $121,508.
Cash provided by financing activities for the six months ended
June 30, 1998 and 1997 amounted to $2,942,132 and $632,273,
respectively, an increase of $2,309,859 resulting primarily from
net proceeds from the rights offering of $2,438,288 during the
six months ended June 30, 1998.
- -18-
IGENE Biotechnology, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Uncertainty
The Company has incurred net losses in each year of its
existence, aggregating approximately $24,300,000 from
inception to June 30, 1998 and its liabilities and redeemable
preferred stock exceeded its assets by approximately
$5,400,000 at that date. These factors indicate that the Company
will not be able to continue in existence unless it
is able to raise additional capital and attain profitable
operations.
Management has instituted a program of significant cost
reductions, deferred all except immediately necessary
capital expenditures, and suspended payment of dividends on the
Company's preferred stock. The implementation of these measures
to conserve working capital together with the successful
marketing and licensing of the company's products, which
management hopes to achieve, may permit the Company to attract
additional capital and enable it to continue.
The Company has contracted with a manufacturer and began
manufacture and sale of its AstaXinr technology during the six
months ended June 30, 1998. The Company believes this technology
to be highly marketable.
To increase working capital, the Company issued a rights offering
in February 1998 which along with projected sales revenue, the
Company believes will provide sufficient cash for operations
through June 30, 1999. The Company will also encourage the
holders of convertible promissory notes to convert them into
common stock.
- -19
IGENE Biotechnology, Inc.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
In May 1995, the Company signed a non-exclusive licensing
agreement with Archer Daniels Midland Company (ADM) for the
manufacture and sale of AstaXinr. On February 29, 1996 ADM
informed the Company that it had decided not to utilize the
technology and requested that IGENE return approximately $250,000
in payments made to IGENE under the licensing agreement. IGENE
maintains that ADM is not entitled to the return of payments
and that additional monies are owed to IGENE. On July 21, 1997,
ADM filed suit against IGENE in the U.S. District Court in
Greenbelt, Maryland alleging patent infringement and requesting a
preliminary injunction against IGENE to cease the use of its
astaxanthin manufacturing process. ADM's request for injunctive
relief was denied. On August 4, 1997, IGENE filed a $300,450,000
contract and trade secrets lawsuit in U.S. District Court in
Baltimore, Maryland against ADM, contending that ADM stole
IGENE's formula for making its natural astaxanthin pigment,
AstaXinr. IGENE is also claiming breach of contract, in regards
to the licensing agreement entered into by IGENE and ADM in 1995.
IGENE contends that it complied with all material terms of this
agreement, including concentration levels of its pigment.
IGENE's claim was re-asserted as a counter-claim against ADM and
the two cases were joined in the District Court in Baltimore,
Maryland on August 24, 1997. On September 10, 1997 the District
Court denied ADM's request for a preliminary injunction on the
basis that ADM could not demonstrate a likelihood of success on
the merits of its case. Management believes ADM's claims to be
meritless. Management's basis for this is that ADM claims that
the levels of pigment IGENE said it could produce did not meet
contract levels. Management has copies of ADM's internal memos
showing that the levels of pigment meet the contract
specifications. It is Management's contention that it is not
probable that this dispute will result in an unfavorable outcome.
Accordingly, no liability has been reflected in the accompanying
balance sheet. The Company had expenses of $658,185 in 1997, and
$183,698 in the six months ended June 30, 1998 relating to this
litigation, which is on-going.
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
Effective May 1, 1998, Mr. Ramin Abrishamian, the Company's Chief
Executive Officer (CEO) resigned his position as CEO. Mr.
Abrishamian presently remains a director of the Company, but has
declined to stand for re-election at the 1998 annual meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none
(b) Reports on Form 8-K - none
- -20-
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Igene Biotechnology, Inc.
(Registrant)
Date August 14, 1998 By /s/Stephen F. Hiu
Stephen F. Hiu
President, Treasurer and Secretary
(On behalf of the Registrant and as
Principal
Financial Officer)
- -21-
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