SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 10549
FORM 10-QSB
[ x ] Quarterly report under Section 13 or 15(d) of the
Securities Exchange
Act of 1934
For the quarterly period ended September 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: 21,814,173
shares as of
November 11, 1998.
Transitional Small Business Disclosure Format (check one):
Yes No x
FORM 10-QSB
IGENE Biotechnology, Inc.
INDEX
PART I - FINANCIAL INFORMATION
Page
Balance Sheets 5-6
Income Statements 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
Condition and Results of Operations 15-19
PART II - OTHER INFORMATION 20
SIGNATURES 23
IGENE BIOTECHNOLOGY, INC.
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 193
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
IGENE Biotechnology, Inc.
Balance Sheets
<CAPTION>
September 30, September 30, December 31,
1998 1997 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 823,135 $ 304,581 $ 24,548
Accounts receivable 10,485 14,494 14,494
Inventory 595,955 --- ---
Supplies 14,145 --- 4,710
Prepaid expenses 359,713 947 ---
Deferred costs --- 92,731 ---
Due from stockholders --- 97,094 153,594
Equipment held for resale --- 512,848 ---
Loan receivable, current portion 268,544 ---
249,217
TOTAL CURRENT ASSETS 2,071,977 1,022,695 446,563
OTHER ASSETS
Property and equipment, net 335,585 53,045 297,006
Loan receivable, net of current portion 46,889 --- 250,783
Debt issue costs 203,773 --- ---
Security deposits 10,600 10,600 10,600
TOTAL ASSETS $ 2,668,824 $ 1,086,340 $ 1,004,952
</TABLE>
The accompanying notes are an integral part of the financial
statements.
<PAGE>
<TABLE>
IGENE Biotechnology, Inc.
Balance Sheets
(continued)
<CAPTION>
September 30, September 30, December 31,
1998 1997
1997
(Unaudited) (Unaudited)
<S> <C> <C> <C>
LIABILITIES, REDEEMABLE PREFERED STOCK
AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 259,461 $
462,669 $
515,137
Debenture interest payable 90,000 90,000 45,000
Promissory notes payable ---
2,332,500 2,000,000
TOTAL CURRENT LIABILITIES 349,461
2,885,169
2,560,137
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
Accrued interest 243,300 ---
---
TOTAL LIABILITIES 8,175,261 4,385,168
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 $14.40, $13.76,
and $13.92, respectively. Authorized
1,312,500 shares, issued 29,592, 35,842,
and 29,592 shares, respectively 426,125
493,186
411,920
STOCKHOLDERS' DEFICIT
Preferred stock, $.01 par value per share,
8% cumulative, convertible, voting,
series A. Authorized, issued and
outstanding 187,500 shares as of
September 30, 1997 and
December 31, 1997. Aggregate
involuntary liquidation value of
$2,580,000, and $2,610,000, respectively. --- 1,875
1,875
Common stock, $.01 par value per share.
Authorized, 250,000,000, 35,000,000 and
35,000,000 shares; issued and
outstanding 21,814,173, 19,143,973,
and 19,206,473 shares, respectively. 218,142
191,440 192,065
Additional paid-in capital 18,653,173 18,062,529
18,233,670
Deficit (24,803,877 ) (22,047,859 )
(22,977,215)
TOTAL STOCKHOLDERS' DEFICIT (5,932,562 )
(3,792,015 )
(4,549,605)
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 2,668,824 $ 1,086,340
$ 1,004,952
</TABLE>
The accompanying notes are an integral part of the financial
statements.
<PAGE>
<TABLE>
IGENE Biotechnology, Inc.
Income Statements
(Unaudited)
<CAPTION>
Three
months
ended Nine months ended
September 30, September 30, September 30,
September 30,
1998 1997 1998
1997
<S> <C> <C> <C> <C>
Sales $ --- $ --- $
203,675 $ 14,394
Cost of sales 34,513 --- 555,607
10,900
Gross profit (loss) (34,513 )
- --- (351,932)
3,494
Selling, General & Administrative expenses:
Manufacturing overhead 24,644 --- 108,601 ---
Marketing and selling 207 2,681 896 7,216
Research, development and pilot plant 138,321 77,637
362,006 255,681
General and administrative 96,821 94,305 413,369
250,812
Litigation expenses 38,318 280,000
222,016
280,000
Total selling, general and
administrative expenses 298,311
454,623 1,106,888
793,709
Operating loss (332,824) (454,623)
(1,458,820) (790,215)
Other income (expense)
Interest income 22,173 --- 59,907 ---
Income from renegotiation of liabilities --- ---
51,204
Loss on disposal of equipment (273 )
- --- (3,553 )
- ---
Interest expense (175,268 ) (86,996
) (424,196)
(219,715)
Net loss $ (486,191 ) $ (541,619)
$ (1,826,662) $ (958,726)
Net loss per common share $ (0.02 )
$ (0.03 )
$ (0.09)
$ (0.05)
</TABLE>
The accompanying notes are an integral part of the financial
statements.
<PAGE
<TABLE>
IGENE Biotechnology, Inc.
Statements of Stockholders' Deficit
(Unaudited)
<CAPTION>
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 --- 17,204 --- ---
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 --- --- --- ---
Net loss for nine months
ended September 30, 1997 --- ---
---
- --
- -
Balance at September 30, 1997 35,842 $ 493,186 187,500
$ 1,875
Balance at December 31, 1997 29,592 $ 411,920 187,500 $
1,875
Cumulative undeclared dividends
on redeemable preferred stock --- 14,205 --- ---
Conversion of preferred stock
to common stock --- --- (187,500) (1,875)
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 --- --- --- ---
Exercise of warrants --- --- --- ---
Capital contribution - forgiveness of
interest on promissory notes --- --- --- ---
Net loss for nine months
ended September 30, 1998 --- ---
---
- --
- -
Balance at September 30, 1998 29,592 $426,125
- --- $ ---
</TABLE>
The accompanying notes are an integral part of the financial
statements.
<PAGE>
<TABLE>
IGENE Biotechnology, Inc.
Statements of Stockholders' Deficit
(Unaudited - Continued)
<CAPTION>
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 --- --- (17,204 )
---
(17,204)
Issuance of common stock
through exercise of
employee stock options 472,834 4,729 18,913 ---
23,642
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 nine months ended
September 30, 1997 --- ---
---
(958,726
) (958,726)
Balance at September 30, 1997 19,143,973 $191,440
$18,062,529 $(22,047,859 ) $
(3,792,015)
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 --- --- (14,205)
---
(14,205)
Conversion of preferred stock
to common stock 375,000 3,750 (1,875) --- ---
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
Exercise of warrants 2,700 27 243 --- 270
Capital contribution - forgiveness of
interest on promissory notes --- --- 205,640 ---
205,640
Net loss for nine months ended
September 30, 1998 --- ---
---
(1,826,662 )
(1,826,662)
Balance at September 30, 1998 $21,814,173 $ 218,142
$18,653,173 $(24,803,877 )
$(5,932,562)
</TABLE>
The accompanying notes are an integral part of the financial
statements.
<PAGE>
<TABLE>
IGENE Biotechnology, Inc.
Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine months ended
September 30, September 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,826,662 ) $
(958,726)
Adjustments to reconcile net loss to net cash provided
By operating activities:
Depreciation 32,578 5,502
Amortization 7,939 ---
Loss on disposal of equipment 3,553 ---
Interest on debenture paid in shares of common stock
90,000 90,000
Decrease (increase) in:
Accounts receivable 4,009
(4,498)
Inventory (595,955
)
- ---
Prepaid expenses and other current assets
(234,148 )
9,831
Increase (decrease) in:
Accounts payable and accrued expenses
265,264
206,869
Net cash used in operating activities
(2,253,422 )
(651,022)
Cash flows from investing activities:
Capital expenditures (86,192 )
(39,075)
Purchase of equipment held for resale ---
(512,848)
Other deferred costs ---
(92,731)
Repayment of principal of loan receivable 184,567 ---
Proceeds from disposal of equipment 11,482
---
Net cash provided by (used in) investing
activities 109,857
(644,654)
Cash flows from financing activities:
Repayments from (advances to) stockholders 28,594
(80,224)
Proceeds from issuance of common stock 270 23,642
Issuance of promissory notes --- 1,615,500
Issuance of demand notes 950,000 ---
Proceeds from rights offering 2,438,288 ---
Repayment of demand notes (475,000 )
--
- -
Net cash provided by financing activities
2,942,152 1,558,918
Net increase (decrease) in cash and cash
equivalents 798,587 263,242
Cash and cash equivalents at beginning of period
24,548
41,339
$ 823,135 $ 304,581
Supplementary disclosure and cash flow information:
Cash paid during the period for interest $
14,569 ---
Cash paid during the period for income taxes --- ---
</TABLE>
The accompanying notes are an integral part of the financial
statements.
<PAGE>
IGENE Biotechnology, Inc.
Statements of Cash Flows
(Unaudited - Continued)
Noncash investing and financing activities:
During the nine months ended September 30, 1998 and 1997, the
Company recorded
dividends in
arrears on 8% redeemable preferred stock at $.48 per share
aggregating $14,205
and $17,204,
respectively, which has been removed from paid-in capital and
included in the
carrying value of
the redeemable preferred stock.
During the nine months ended September 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. As part of
this transaction, the Company also recorded forgiveness of
interest on certain
promissory notes
of $205,640 as additional paid-in capital.
During the nine months ended September 30, 1998, the Company
cancelled certain
promissory notes
payable to, and related amounts due from a stockholder
aggregating $125,000 by
agreement with
the stockholder.
During the nine months ended September 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 nine months ended September 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.
During the nine months ended September 30, 1998, the holder of
187,500 shares
of preferred
stock (par value of $.01 per share or $1,875) as to which
mandatory redemption
rights had been
waived, converted the preferred stock into 375,000 shares of
common stock (par
value of $0.01
per share or $3,750). Paid-in capital has been reduced by
$1,875.
The accompanying notes are an integral part of the financial
statements.
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(1) Unaudited financial statements
The financial statements presented herein as of September 30,
1998 and 1997 and
for the
three month and nine 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 ---
Finished goods 595,955
Total inventory $ 595,955
Inventory has been reduced by $345,961 during the nine months
ended September
30, 1998
to reflect the excess of cost over market value.
(3) Stockholders' Equity (Deficit)
At September 30, 1998 and 1997, 59,184 and 446,684 shares,
respectively, of
authorized
but unissued common stock were reserved for issue upon conversion
of the
Company's
outstanding preferred stock.
As of September 30, 1998 approximately 21,410,000 shares of
authorized but
unissued
common stock were reserved for exercise pursuant to the Company's
1997 and 1986
Stock
Option Plans.
As of September 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 September 30, 1998 and 1997, 13,174,478 and 25,674,478
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
$2,332,500,
respectively, held by directors of the Company.
As of September 30, 1998 and 1997, 100,964,878 and 29,964,878
shares,
respectively, of
authorized but unissued common stock were reserved for the
exercise of
outstanding
warrants.
<PAGE>
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
declined to
stand for re-election at the 1998 annual meeting and therefore
ceased to be a
director
of the Company as of September 29, 1998.
(4) Net loss per common share
Net loss per common share for the nine-month periods ended
September 30, 1998
and 1997
is based on 20,273,882 and 18,976,637, 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.
<PAGE>
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
$222,016 in
the nine
months ended September 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 $24,800,000 from inception to September 30, 1998
and its
liabilities and
redeemable preferred stock exceeded its assets by approximately
$5,900,000 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 nine months ended September 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 September 30, 1999. The Company will also
encourage the
holders
of convertible promissory notes to convert them into common
stock.
<PAGE>
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 nine months ended September 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 during the quarter ended June 30,
1998, which
are
expected to resume in early 1999 at approximately $145,000 per
month. The
Company has
distributed additional samples of AstaXinr to potential customers
during the
quarter
ended September 30, 1998, which are expected to result in
additional sales,
after a
product testing period of not more than three months. 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 nine months ended September 30, 1998 and
1997 of $555,907
and
$10,900, respectively, increased by $545,007. This increase
resulted entirely
from
production of AstaXinr beginning in January 1998. During the
nine months ended
September 30, 1998 a gross loss on sales of AstaXinr of $351,932
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
nine months
ended
September 30, 1998. Production efficiency has improved during
the nine months
ended
September 30, 1998 and the Company expects to have gross profits
on sales of
AstaXinr by
early 1999. However, there can be no assurance that such gross
profits will
occur or
that they will be material. The Company expects to incur
production costs 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 nine months ended
September 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 nine months ended September 30,
1998 was
$108,601,
representing non-production costs associated with support of
manufacturing
efforts for
AstaXinr. Such costs are expected to continue at approximately
$8,000 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 nine months ended
September 30, 1998 and
1997
were $896 and $7,216, respectively, a decrease of $6,320, or 88%.
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 acted as non-exclusive distributor and marketer of
AstaXinr during
the nine
months ended September 30, 1998. The Company is presently using
other
distributing and
marketing methods. Marketing expenses for AstaXinr are expected
to increase,
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.
<PAGE>
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 nine
months ended
September 30,
1998 and 1997 were $362,006 and $255,681, respectively, an
increase of
$106,325, or 42%.
This increase resulted from increased pilot plant capacity and
field studies
relating to
AstaXinr in support of the manufacturing of 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 nine months ended
September 30,
1998 and
1997 were $413,369 and $250,812, respectively, an increase of
$162,557, or 65%.
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 nine months ended
September 30,
1998 in
compensation and benefits over the nine months ended September
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 nine months ended September 30, 1998
of $222,016
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 nine months ended September 30, 1997.
Interest expenses for the nine months ended September 30, 1998
and 1997 were
$424,196
and $219,715, respectively, an increase of $204,481, 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 $200,000 in interest
accrued on
$5,000,000 in 8%
notes issued on March 31, 1998, which interest is payable either
annually or at
the
notes' maturity (March 31, 2003), at the Company's option.
Interest income for the nine months ended September 30, 1998 was
$59,907. 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
nine
months ended September 30, 1997.
<PAGE>
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
$1,826,662 and
$958,726, or $0.09 and $0.05 per share, respectively, for the
nine months ended
September 30, 1998 and 1997. The weighted average number of
shares of common
stock
outstanding increased to 20,273,882 for the nine months ended
September 30,
1998 from
18,976,637 for the nine months ended September 30, 1997. This
increase of
1,311,814
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
10,000 shares pursuant to the exercise of employees' stock
options, the
conversion of
187,500 shares of preferred stock into 375,000 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 September 30, 1998.
Financial Position
During the nine months ended September 30, 1998 and 1997 the
following
materially
affected the Company's financial position:
The Company began producing AstaXinr in January 1998,
capitalizing inventory of
$595,955
as of September 30, 1998.
The Company had sales of $203,675 during May and June of 1998,
which were
included in
accounts receivable as of June 30, 1998, and substantially
collected during the
quarter
ended September 30, 1998.
The Company paid expense advances and retainers of $335,000 to
its attorneys
during the
nine months ended September 30, 1998, which have been capitalized
and are
included in
prepaid expenses as of September 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 and are
being amortized
over the
term of the notes.
During the nine months ended September 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 nine months ended September 30, 1997, the Company
issued $1,615,500
of
convertible promissory notes to directors.
During the nine months ended September 30, 1998 and 1997, the
Company purchased
$86,192
and $39,075, respectively, in research and development and
manufacturing
equipment.
<PAGE>
IGENE Biotechnology, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Financial Position (continued)
During the nine months ended September 30, 1997, the Company
expended $512,848
for
manufacturing equipment and fixtures, which were held for resale
and were sold
in
December 1997 to its contract manufacturer, at cost.
During the nine months ended September 30, 1998 the Company
received principal
repayments of $184,567 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
September 30,
1998 and
1997, total dividends in arrears on the Company's preferred stock
was $189,389
and
$1,286,450, respectively, of which $189,389 ($6.40 per share) and
$206,450
($5.76 per
share), respectively, was included in the carrying value of the
redeemable
preferred
stock as of September 30, 1998 and 1997 and $1,080,000 was
included in the
liquidation
preference of the limited redemption preferred stock as of
September 30, 1997.
In
September 1998 the holder of 187,500 shares of limited redemption
preferred
stock
converted them into 375,000 shares of common stock.
Liquidity and Capital Resources
Historically, the Company has been funded primarily by equity
contributions and
loans
from stockholders. As of September 30, 1998 and 1997, the
Company had working
capital
(deficit) of $1,722,516 and $(1,862,474). Working capital
increased by
$3,584,990
during the twelve-month period ended September 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
$823,135 and
$304,581,
respectively, as of September 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 September 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 nine months ended September 30,
1998 and 1997
amounted to
$2,253,422 and $651,022, respectively. The increase in cash used
in operations
of
$1,602,400 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 nine
months ended
September 30,
1998 and 1997 amounted to $109,857 and $(644,654), respectively.
The increase
of
$413,807 in cash provided by investing activities resulted from
the purchase of
equipment for resale of $512,848 during the nine months ended
September 30,
1997 and the
receipt of principal repayments on loan receivable during the
nine months ended
September 30, 1998 of $184,567.
<PAGE>
IGENE Biotechnology, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Cash provided by financing activities for the nine months ended
September 30,
1998 and
1997 amounted to $2,942,152 and $1,558,918, respectively, an
increase of
$1,383,234
resulting primarily from net proceeds from the rights offering of
$2,438,288
during the
nine months ended September 30, 1998 offset by $1,615,500 in
promissory notes
issued
during the nine months ended September 30, 1997.
Uncertainty
The Company has incurred net losses in each year of its
existence, aggregating
approximately $24,800,000 from inception to September 30, 1998
and its
liabilities and
redeemable preferred stock exceeded its assets by approximately
$5,900,000 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. However, there can be no assurance
that these
measures and
marketing efforts will be successful and that the company will be
able to
continue.
The Company began manufacture and sale of its AstaXinr technology
during the
nine months
ended September 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.
Year 2000 Issues
Many existing computer programs and systems use only the last two
digits to
refer to a
year. Therefore, these programs and systems will not properly
recognize dates,
and may
malfunction when using dates after December 31, 1999. The
Company has made
efforts to
assess its exposure and vulnerability to Year 2000 Issues. This
assessment is
not yet
completed. However, management has determined that certain
consequences of its
Year
2000 Issues may have a material effect on the Company's business,
results of
operations,
or financial condition, without taking into account the Company's
effort to
avoid those
consequences.
The Company presently conducts substantially all of its
manufacturing
operations at the
facility of its contract manufacturer, located in Mexico City,
Mexico. The
Company is
in the process of determining whether the systems of this
contract manufacturer
are Year
2000 Compliant. However, the Company believes that its
manufacturing operation
is not
likely to be materially affected if the contract manufacturer's
internal
systems are not
Year 2000 Compliant. The Company has also not determined, and
may be unable to
determine, whether the municipal infrastructure and utility
providers' systems
in Mexico
City are Year 2000 Compliant. The Company's manufacturing
operations could be
materially affected by power failures or malfunctions caused by
Year 2000
Issues in
Mexico City, if its efforts to mitigate them are unsuccessful.
The Company may
suffer
production interruptions during power failures caused by Year
2000 Issues. The
Company
plans to have sufficient inventory levels on hand to meet demand
in case of
short-term
manufacturing interruptions. The contract manufacturer plans to
obtain back-up
generator power systems in case of prolonged power outages. The
Company does
not
anticipate significant costs associated with addressing these
Year 2000 Issues.
<PAGE
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
$222,016 in
the nine
months ended September 30, 1998 relating to this litigation,
which is on going.
Item 2. Changes in Securities and Use of Proceeds.
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
tock in
the foreseeable future.
With respect to sales of securities not registered under the
Securities Act,
see Note 3
to the financial statements, at page 13 of this report.
Item 3. Defaults Upon Senior Securities.
When and if funds are legally available for such payment under
statutory
restrictions,
the Company may pay annual cumulative dividends on the Preferred
Stock of $.64
per share
on a quarterly basis. During 1988 the Company declared and paid
a cash
dividend of $.16
per share of Preferred Stock. No dividends have been declared or
paid since
1988. Any
resumption of dividend payments on preferred Stock would require
significant
improvement
in cash flow. Preferred Stock dividends are payable when and if
declared by
the
Company's Board. Unpaid dividends accumulate for future payment
or addition to
the
liquidation preference and redemption price of the Preferred
Stock. As of
September 30,
1998 the total amount of dividends in arrears with respect to the
Company's
preferred
Stock was $189,389.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of stockholders held on September 29, 1998,
the following
matters
were submitted to stockholders' vote and were approved by a
majority of votes:
(1) seven
directors were elected: Michael G. Kimelman, Thomas L. Kempner,
Stephen F. Hiu,
Patrick
F. Monahan, Joseph C. Abeles, John A. Cenerazzo, and Sidney R.
Knafel; and (2)
approval
of the appointment of Berenson & Company LLP as the Company's
independent
auditors for
1998.
Results of the voting were as follows:
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Abstained
Unvoted
<S> <C> <C> <C> <C>
(1) Election of Directors
Michael G. Kimelman 17,469,956 55,400 ---
3,970,301
Thomas L. Kempner 17,469,956 55,400 ---
3,970,301
Stephen F. Hiu 17,469,956 55,400 ---
3,970,301
Patrick F. Monahan 17,469,956 55,400 ---
3,970,301
Joseph C. Abeles 17,469,856 55,500 ---
3,970,301
John A. Cenerazzo 17,469,956 55,400 ---
3,970,301
Sidney R. Knafel 17,469,956 55,400 ---
3,970,301
(2) Approval of Auditors 17,472,455 17,301
35,600
3,970,301
</TABLE>
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 remained a
director of the
Company
until September 29, 1998, but he declined to stand for
re-election at the 1998
annual
meeting of that date.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed herewith or incorporated by reference herein
are set forth
in the
following table prepared in accordance with Item 601 of
Regulations S-B.
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 by reference.
3.2 By-Laws, constituting Exhibit 3.2 to the Registrant's
Registration
Statement
No. 33-5441 on Form S-1, are hereby incorporated herein by
reference.
4.1 Form of Variable Rate Convertible Subordinated Debenture Due
2002 (Class
A),
constituting Exhibit 4.4 to Registration Statement No. 33-5441 on
Form S-1, is
hereby incorporated herein by reference.
4.2 Indenture between the Company and American Stock Transfer &
Trust Company
as
Trustee, relating to 8% notes due 2002, constituting Exhibit 4.2
to
Registration Statement No. 333-41581 on Form SB-2, is hereby
incorporated by
reference.
4.3 Warrant agreement between the Company and American Stock
Transfer & Trust
Company, as Warrant Agent relating to warrants expiring 2007,
constituting
Exhibit 4.3 to Registration Statement No. 333-41581 on Form SB-2,
is hereby
incorporated by reference.
<PAGE>
10.1 Form of Conversion and Exchange Agreement used in May 1988
in connection
with
the conversion and exchange by certain holders of shares of
Preferred Stock
for Common Stock and Warrants, constituting Exhibit 10.19 to
Registration
Statement No. 33-5441 on Form S-1, is hereby incorporated herein
by reference.
10.2 Exchange Agreement made as of July 1, 1988 between the
Registrant and
Essex
Industrial Chemicals, Inc. with respect to the exchange of
187,500 shares of
Preferred Stock for a Debenture, constituting Exhibit 10.21 to
Registration
Statement No. 33-5441 on Form S-1, is hereby incorporated herein
by reference.
10.3 Preferred Stockholders' Waiver Agreement dated May 5, 1988,
incorporated
by
reference to the identically numbered exhibit in Form S-1
Registration
Statement No. 33-23266.
10.4 Form of Agreement between the Registrant and Certain
Investors in
Preferred
Stock dated September 30, 1987, incorporated by reference to the
identically
numbered exhibit in Amendment No. 1 to Form S-1 Registration
Statement No. 33-
23266.
10.5 Letter Agreement executed May 11, 1995 between Archer
Daniels Midland and
IGENE Biotechnology, Inc., along with November 11, 1995
Amendment,
constituting Exhibit 10.11 to the Registrant's Report on Form
10-KSB for the
year ended December 31, 1995 is incorporated herein by reference.
10.6 Agreement of Lease effected December 15, 1995 between
Columbia Warehouse
Limited Partnership and IGENE Biotechnology, Inc. constituting
Exhibit 10.13
to the registrant's report on Form 10-KSB for the year ended
December 31, 1995
is incorporated herein by reference.
10.7 Toll Agreement effective as of June 24, 1997 between Igene
Biotechnology,
Inc.
and Fermic, S.A. de C.V., constituting Exhibit 10.9 is
Registration Statement
No. 333-41581 on Form SB-2, is incorporated herein by reference.
(Portions of
this exhibit have been omitted pursuant to a request for
confidential
treatment.)
10.8 Loan agreement dated August 1, 1997 between the Investors
and the Company,
constituting Exhibit 10.7 to Registration Statement No. 333-41581
on Form SB-
2, is hereby incorporated by reference.
27. Financial Data Schedule.
(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.
IGENE Biotechnology, Inc.
(Registrant)
Date November 13, 1998 By /s/Stephen F. Hiu
Stephen F. Hiu
President and Treasurer
(On behalf of the Registrant and as
Principal
Financial Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 823,135
<SECURITIES> 0
<RECEIVABLES> 10,485
<ALLOWANCES> 0
<INVENTORY> 595,955
<CURRENT-ASSETS> 2,071,977
<PP&E> 505,371
<DEPRECIATION> 169,786
<TOTAL-ASSETS> 2,668,824
<CURRENT-LIABILITIES> 349,461
<BONDS> 8,175,261
<COMMON> 218,142
426,125
0
<OTHER-SE> (6,150,704)
<TOTAL-LIABILITY-AND-EQUITY> 2,668,824
<SALES> 203,675
<TOTAL-REVENUES> 203,675
<CGS> 555,607
<TOTAL-COSTS> 1,106,888
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 424,196
<INCOME-PRETAX> (1,826,662)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,826,662)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,826,662)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
