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 March 31, 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: 19,211,473
Traditional Small Business Disclosure Format (check one):
Yes X No
<PAGE>
FORM 10QSB
IGENE Biotechnology, Inc.
INDEX
PART I - FINANCIAL INFORMATION
Page
Balance Sheets 5
Statements of Operations 6
Statements of Stockholder's Deficit 7-8
Statements of Cash Flows 9
Notes to Financial Statements 10
Management's Discussion and
Analysis of Financial
Conditions and Results of Operations 12
PART II - OTHER INFORMATION 14
SIGNATURES 15
<PAGE>
IGENE BIOTECHNOLOGY, INC.
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
<PAGE>
PART I
FINANCIAL INFORMATION
<PAGE>
Item 1. Financial Statements
<TABLE>
IGENE Biotechnology, Inc.
Balance Sheets
<CAPTION>
March 31, March 31, December 31,
1998 1997 1997
(Unaudited) (Unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C> <C>
Cash and cash equivalents$ 59,896 $ 4,138 $ 24,548
Accounts receivable 14,494 19,804 14,494
Inventory 192,522 --- ---
Supplies 4,710 --- 4,710
Prepaid expenses 201,321 989 ---
Due from stockholders
and investors 2,615,000 29,540 153,594
Loan receivable 255,500 --- 249,217
TOTAL CURRENT ASSETS 3,343,443 54,471 446,562
OTHER ASSETS
Property and equipment, net 287,847 23,338 297,006
Loan receivable 184,003 --- 250,783
Deferred Charges 285,000 --- ---
Security deposits 10,600 10,600 10,600
TOTAL ASSETS $ 4,110,893 $ 88,409 $ 1,004,952
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 686,495 $ 306,022 $ 515,137
Debenture interest payable 90,000 90,000 45,000
Demand notes payable 475,000 --- ---
Promissory notes payable --- 887,000 2,000,000
TOTAL CURRENT LIABILITIES 1,251,495 1,283,022 2,560,132
LONG-TERM DEBT
Promissory notes payable 6,082,500 --- 1,082,500
Variable rate subordinated
Debenture 1,500,000 1,500,000 1,500,000
TOTAL LIABILITIES 8,833,995 2,783,022 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. Stated value $14.08, $13.44 and
$13.92 per share. Authorized 1,312,500
shares, issued 29,592, 35,842, and
29,592 Shares. 416,655 481,716 411,920
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
$2,640,000, $2,520,000, and
$2,610,000. 1,875 1,875 1,875
Common stock - $.01 par value per share.
Authorized 250,000,000 shares; issued
19,211,473, 18,631,138, and
19,206,473 shares 192,115 186,311 192,065
Additional paid in capital 18,434,775 17,965,485 18,233,670
Deficit (23,768,522) (21,330,002) (22,977,215)
TOTAL STOCKHOLDERS' DEFICIT (5,139,757) (3,176,331) (4,549,605)
TOTAL LIABILITIES
AND STOCKHOLDERS' DEFICIT$4,110,893 $ 88,409 $ 1,004,952
The accompanying notes are an integral part of the financial statements.
<PAGE>
</TABLE>
<TABLE>
IGENE Biotechnology, Inc.
Statements of Operations
(Unaudited)
<CAPTION>
----- Three months ended -----
March 31, March 31,
1998 1997
<S> <C> <C>
Sales $ --- $ 12,194
Cost of Sales 244,726 10,065
Gross Profit (loss) (244,726) 2,129
Selling, general and administrative expenses:
Manufacturing overhead 54,073 ---
Marketing and selling 389 (792)
Research, development and pilot plant 133,202 89,372
General and administrative 135,700 91,289
Litigation expenses 160,962 ---
Total selling, general and
administrative expenses 484,326 179,869
Operating loss (729,052) (177,740)
Other income (expenses):
Interest income 11,503 ---
Interest expense (73,758) (63,129)
Net Loss (791,307) (240,869)
Deficit at beginning of period (22,977,215) (21,089,133)
Deficit at end of period $ (23,768,522) $ (21,330,002)
Net loss per common share $ (1.24) $ (0.01)
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
IGENE Biotechnology, Inc.
Statements of Stockholder's Deficit
(Unaudited)
<CAPTION>
Redeemable
Preferred Preferred Common
Stock Stock Stock
(Shares/ (Shares/ (Shares/
Amount) Amount) Amount)
<S> <C> <C> <C>
Balance at
December 31, 1996 35,842/$458,778 187,500/$1,875 18,631,139/$186,311
Cumulative undeclared
dividends on redeemable
preferred stock $5,734 --- ---
Net loss for quarter ended
March 31, 1997 --- --- ---
Balance at
March 31, 1997 35,842/$481,716 187,500/$1,875 18,631,139/$186,311
Balance at
December 31, 1997 29,592/$411,920 187,500/$1,875 19,206,473/$192,065
Cumulative undeclared
dividends on redeemable
preferred stock $4,735 --- ---
Issuance of common stock
through exercise of
employee stock options --- --- 5,000/$50
Capital contribution-
forgiveness of interest
on promissory notes --- --- ---
Net loss for quarter ended
March 31, 1998 --- --- ---
Balance at
March 31, 1998 29,592/$416,655 187,500/$1,875 19,211,473/$192,115
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
IGENE Biotechnology, Inc.
Statements of Stockholder's Deficit
(Unaudited-Continued)
<CAPTION>
Additional Total
Paid-In Stockholder's
Capital Deficit Deficit
<S> <C> <C> <C>
Balance at
December 31, 1996 $ 17,971,320 $ (21,089,133) $ (2,929,727)
Cumulative undeclared
dividends on redeemable
preferred stock (5,735) --- (5,735)
Net loss for quarter ended
March 31, 1997 --- (240,869) (240,869)
Balance at
March 31, 1997 $ 17,965,485 $ (21,330,002) $ (3,176,331)
Balance at
December 31, 1997 $ 18,233,670 $ (22,977,215) $ (4,549,605)
Cumulative undeclared
dividends on redeemable
preferred stock (4,735) --- (4,735)
Issuance of common stock
through exercise of
employee stock options 200 --- 250
Capital contribution-
forgiveness of interest
on promissory notes 205,640 --- 205,640
Net loss for quarter ended
March 31, 1998 --- (791,307) (792,307)
Balance at
March 31, 1998 $ 18,434,775 $ (23,768,522) $ (5,139,757)
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
IGENE Biotechnology, Inc.
Statements of Cash Flows
(Unaudited)
<CAPTION>
--Three months ended --
March 31, March 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (791,307) $ (240,869)
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation 9,503 1,474
Interest on debenture paid in shares
of common stock 45,000 45,000
Decrease (increase) in:
Accounts receivable --- (9,807)
Inventory (192,522) ---
Prepaid expenses and supplies (201,321) 9,790
Increase (decrease) in:
Accounts payable and
other accrued expenses 126,998 5,223
Net cash used in operating activities (1,003,649) (189,189)
Cash flows from investing activities:
Capital expenditures (344) (5,342)
Net cash used in investing activities (344) (5,342)
Cash flows from financing activities:
Advances to (repayment from) stockholders 28,594 (12,670)
Proceeds from issuance of common stock 250 ---
Issuance of promissory notes --- 170,000
Issuance of demand notes 950,000 ---
Repayments of note receivable 60,497 ---
Net cash provided by financing activities 1,039,341 157,330
Net increase (decrease) in cash
and cash equivalents 35,348 (37,201)
Cash and cash equivalents
at beginning of year 24,548 41,339
Cash and cash equivalents
at end of period $ 59,896 $ 4,138
Supplementary disclosure and cash flow information:
Cash paid for interest $ --- $ ---
Cash paid for income taxes $ --- $ ---
Noncash investing and financing activities:
During the three months ended March 31, 1998 and 1997, the Company recorded
dividends in arrears on 8% redeemable preferred stock at $.16 per share
aggregating $4,735 and $5,735, respectively, which has been removed from paid-in
capital and included in the carrying value of the redeemable preferred stock.
During the three months ended March 31, 1998, the Company issued note payables
of $5,000,000 through a rights offering. Stockholders purchased rights using
$1,875,000 in promissory notes and $475,000 of demand notes. Net proceeds due
from the transfer agent and shareholders of $2,615,000, which is after transfer
agent fees of $35,000, are included as a receivable at March 31, 1998 and were
received in April 1998. Transfer agent fees of $35,000, and legal fees of
$250,000 which have been accrued as of March 31, 1998, have been capitalized as
deferred debt issue costs.
During the three months ended March 31, 1998, the Company cancelled certain
promissory notes and the related amounts due from stockholders of $125,000 by
agreement with the stockholder.
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
During the quarter ended March 31, 1998, the Company began production of
AstaXinr, its astaxanthin pigment product. The Company produced the product
through the use of a contract manufacturer in Mexico, Fermic, S.A. de C.V.
(Fermic). Production costs totaled $437,248, of which $192,522 has been
capitalized as inventory, stated at the lower of cost or market basis. The
remaining $244,726 has been expensed at cost of goods sold and represents a
write-down of inventory to market value. Initial production runs were
inefficient as to production time, downtime, and product waste. These
inefficiencies are presently being corrected, which is expected to result in
production costs on a potentially profitable basis in the near future.
However,
there can be no assurance that such profitable operation will occur or that
they
will be material. The Company had no product sales during the quarter ended
March 31, 1998. On May 13, 1998 the Company sold $100,000 of product to
Fermic,
which is acting as non-exclusive distributor of the product.
Sales revenues and gross profits for the quarter ended March 31, 1997 resulted
from sales of Clandosanr, the Company's nematacide soil treatment product. The
Company has achieved no current sales of this product since it does not current
have a licensed distributor of the product, and has continued to focus its
efforts on AstaXinr.
Manufacturing overhead of $54,073 for the quarter ended March 31, 1998
represents non-production costs associated with the manufacture of AstaXinr.
These costs are expected to continue in similar amount in future periods in the
near future.
Marketing and selling costs of $389 for the quarter ended March 31, 1998
represents marketing efforts for AstaXinr. These cost are expected to remain
low in the near future since the Company has agreed with Fermic that Fermic
will
resell the product, on a non-exclusive basis.
Research and development and pilot plant expenses were $133,202 and $89,372,
respectively for the quarters ended March 31, 1998 and 1997, an increase of
$43,830 or 49%. This increase is causing by additional field studies and
analytical testing of AstaXinr. These costs are expected to continue at
similar
or increased levels as the Company continues research relating to improving
production of AstaXinr and research and development of other future products.
Litigation expenses of $160,962 represent the Company's expenses associated
with
its defense of the suit by Archer Daniels Midland, Inc. (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 $1,000,000 per year. At the present time,
a
range of reasonably possible loss from the litigation cannot be estimated.
Interest income of $11,503 for the quarter ended March 31, 1998 represents
interest earned on cash provided by financing activities during 1997 and the
three months ended March 31, 1998.
Interest expense was $73,758 and $63,129, respectively for the quarters ended
March 31, 1998 and 1997, an increase of $10,629 or 17%. This increase is the
result of the Company's additional financing from notes from stockholders and
debt issued in its rights offering during 1997 and the quarter ended March 31,
1998.
As a result of the foregoing the Company report net losses of $791,307 and
$240,869, or $1.24 and $0.01 per share, respectively, for the quarters ended
March 31, 1998 and 1997. The weighted average number of common shares
outstanding increased to 19,210,417 for the three months ended March 31, 1998
from 18,631,139 for the three months ended March 31, 1997. This increase is
caused by the issuance of 80,000 shares of common stock in lieu of interest
payment on a variable rate subordinated debenture, the issuance of 487,834
shares through the exercise of employee stock options, and the conversion of
6,250 shares of preferred stock into 12,500 shares of common stock during the
twelve month period from March 31, 1997 through March 31, 1998.
<PAGE>
Financial Position
During the quarters ended March 31, 1998 and 1997, the following materially
affected the Company's financial position:
The Company began production of AstaXinr in January of 1998, capitalizing
inventory of $192,522 as of March 31, 1998.
The Company paid an advance of $200,000 to its attorney during the quarter
ended
March 31, 1998, which will be drawn against future costs of on-going
litigation.
This amount is included in prepaid expenses as of March 31, 1998.
The Company is due $2,615,000, which is included as a receivable as of March
31,
1998, from its transfer agent and certain stockholders representing the net
proceeds of the Company's Rights Offering of February 13, 1998, which closed on
March 31, 1998. All amounts due were received in April 1998. The Company
issued long-term promissory notes aggregating $5,000,000 which mature March 31,
2003 and warrants to purchase 50,000,000 shares of common stock at $0.10 per
share expiring March 31, 2008 in association with the Rights Offering.
$2,000,000 of short-term promissory notes and $475,000 of demand notes were
repaid through exercise of Rights in this offering, and $285,000 of deferred
debt issuance were capitalized.
During the quarter ended March 31, 1998 the Company issued $950,000 in demand
notes to certain directors, $475,000 of which were repaid through issue of new
debt in the Company's Rights Offering.
During the quarter ended March 31, 1997 the Company issued $170,000 of short-
term promissory notes.
In December 1988, the Company suspended payment of the quarterly dividend on
its
preferred stock. Resumption of the dividend will require significant
mprovement
in cash flow. Unpaid dividends cumulate for future payment or increase the
liquidation preference or redemption value of the preferred stock. As of March
31 1998 and 1997, total dividends in arrears on the Company's preferred stock
was $1,319,919 and $1,214,980, respectively, of which $179,919 ($6.08 per
share)
and $194,980 ($5.44 per share), respectively, was included in the carrying
value
of the redeemable preferred stock and $1,140,000 and $1,020,000, respectively,
was included in the liquidation preference of preferred stock.
Liquidity and Capital Resources
Historically the Company has been funded primarily by equity contributions, and
loans from stockholders. As of March 31, 1998 the Company had working capital
of $2,091,948 as compared to a working capital deficit of $1,228,551 in March
31, 1997. Working capital increased by $4,205,522 during the quarter ended
March 31, 1998 due primarily to net proceeds receivable from the Company's
Rights Offering of $2,365,000 and the restructuring of $2,000,000 in short-term
debt to long-term maturity through the Rights Offering. The Company had cash
and cash equivalents of $59,896 and $24,548, respectively, as of March 31,
1998
and 1997.
Cash used by operations in the quarters ended March 31, 1998 and 1997 amounted
to $1,003,649 and $189,189, respectively. The increase of $814,460 results
primarily from production costs of AstaXinr, which the Company began
manufacturing in January 1998 and litigation costs relating to the ADM suits
and
counter-suits.
Cash used by investing activities for the quarters ended March 31, 1998 and
1997
amounted to $344 and $5,342, respectively, a decrease of $4,998, representing a
slight decrease in capital expenditures.
Cash provided by financing activities for the quarters ended March 31, 1998 and
1997 amounted to $1,039,341 and $157,330, respectively, an increase of
$882,011
resulting primarily from loans from stockholders during the quarter ended March
31, 1998 of $950,000.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
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 In $250,000 in
payments under the License Agreement. IGENE maintains that ADM is not entitled
to the payments and that additional monies are owed to IGENE. On July 21,
1997,
ADM filed suit against the Company in the U.S. District Court in Greenbelt,
Maryland alleging patent infringement and requesting a preliminary injunction
against the Company to cease the use of its astaxanthin manufacturing process.
ADM's request for injunctive relief was denied. On August 4, 1997, the Company
filed a $300,450,000 contract and trade secrets lawsuit in U.S. District Court
in Baltimore, Maryland against ADM, contending that ADM stole the Company's
formula for making its natural astaxanthin pigment, AstaXinr. The Company is
also claiming breach of contract, in regards to the licensing agreement entered
into by the Company and ADM in 1995. The Company contends that it complied
with
all material terms of this agreement, including concentration levels of its
pigment. The Company's claim was re-asserted as a counterclaim 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
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 are
meritless. Managements basis for this is that ADM claims that the levels of
pigment the Company said it could produce did not meet contract levels.
Management has copies of ADM's internal memos showing that the levels of
pigment
met 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 relating to this litigation.
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, Ramin Abrishamian, the Company's Chief Executive Officer
(CEO) resigned his position as CEO. Mr. Abrishamian continues to serve as a
director of the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
None
<PAGE>
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.
(Registrant)
Date May 15, 1998 By
Stephen F. Hiu
President, Treasurer and Secretary
(On behalf of the Registrant and
as Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 59,896
<SECURITIES> 0
<RECEIVABLES> 14,494
<ALLOWANCES> 0
<INVENTORY> 192,522
<CURRENT-ASSETS> 3,343,443
<PP&E> 455,464
<DEPRECIATION> 167,617
<TOTAL-ASSETS> 4,110,893
<CURRENT-LIABILITIES> 1,251,495
<BONDS> 1,500,000
<COMMON> 192,115
416,655
1,875
<OTHER-SE> 5,333,747
<TOTAL-LIABILITY-AND-EQUITY>0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 244,726
<TOTAL-COSTS> 484,326
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE>73,758
<INCOME-PRETAX> (791,307)
<INCOME-TAX> 0
<INCOME-CONTINUING> (791,307)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (791,307)
<EPS-PRIMARY> (1.24)
<EPS-DILUTED> (1.24)
</TABLE>
