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, 2000
[ ] 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 Identification No.)
Incorporation or organization)
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:
59,708,881 as of July 31, 2000.
Transitional Small Business Disclosure Format (check one):
Yes No x
-1-
FORM 10-QSB
IGENE Biotechnology, Inc. and Subsidiary
INDEX
PART I - FINANCIAL INFORMATION
Page
Consolidated Balance Sheets 5-6
Consolidated Statements of Operations 7
Consolidated Statements of Stockholder's Deficit 8-9
Consolidated Statements of Cash Flows 10-11
Notes to Consolidated Financial Statements 12-15
Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-20
PART II - OTHER INFORMATION 21-22
SIGNATURES 23
-2-
IGENE BIOTECHNOLOGY, INC. AND SUBSIDIARY
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
-3-
PART I
FINANCIAL INFORMATION
-4-
Item 1. Financial Statements.
<TABLE>
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Balance Sheets
<CAPTION>
June 30, June 30, December 31,
2000 1999 1999
------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 100,099 $ 63,185 $ 6,297
Accounts receivable 96,036 8,955 24,267
Inventory 627,180 990,320 707,595
Loan receivable, current portion --- 206,780 206,780
Prepaid expenses and other current assets 204,004 223,482 153,160
------------ ------------ ------------
TOTAL CURRENT ASSETS 1,027,319 1,492,722 1,308,099
OTHER ASSETS
Property and equipment, net 131,825 356,404 366,484
Deferred Costs, net 541,217 158,784 137,613
Other assets 4,876 4,875 4,876
------------ ------------ ------------
TOTAL ASSETS $ 1,705,237 $ 2,012,785 $ 1,817,072
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Balance Sheets
(continued)
<TABLE>
June 30, June 30, December 31,
2000 1999 1999
------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 294,268 $ 231,971 $ 268,081
LONG-TERM DEBT
Promissory notes payable 6,077,300 6,158,199 6,082,500
Variable rate subordinated debenture 1,500,000 1,500,000 1,500,000
Accrued Interest 1,086,043 608,250 851,131
------------ ------------ ------------
TOTAL LIABILITIES 8,957,611 8,498,420 8,702,131
------------ ------------ ------------
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 $15.52, $14.88,
and $15.20, respectively. Authorized
1,312,500 shares, issued 26,467, 29,592,
and 26,467 shares, respectively 410,768 440,329 402,298
------------ ------------ ------------
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value per share.
Authorized, 250,000,000 shares;
issued and outstanding 56,208,881,
34,427,600, and 47,598,758 shares,
respectively. 562,089 344,275 475,988
Additional paid-in capital 20,789,533 19,442,586 20,238,904
Deficit (29,014,764) (26,712,825) (28,002,249)
------------ ------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (7,663,142) (6,925,964) (7,287,357)
------------ ------------ ------------
TOTAL LIABILITIES, REDEEMABLE
PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT $ 1,705,237 $ 2,012,785 $ 1,817,072
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-6-
<TABLE>
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three months ended Six months ended
---------------------- --------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 180,631 $ --- $ 259,167 $ ---
Cost of sales 185,224 99,409 272,657 119,845
---------- ---------- ------------ ------------
Gross profit (loss) (4,593) (99,409) (13,490) (119,845)
---------- ---------- ------------ ------------
Selling, General & Administrative expenses:
Marketing and selling 179,457 46,475 258,598 52,925
Research, development and pilot plant 84,967 90,101 177,576 190,400
General and administrative 125,233 80,902 210,102 170,546
Litigation expenses 850 182,757 11,896 358,494
---------- ---------- ------------ ------------
Total operating expenses 390,507 400,235 658,172 772,365
---------- ---------- ------------ ------------
Operating loss (395,100) (499,644) (671,662) (892,210)
---------- ---------- ------------ ------------
Other income (expense)
Interest expense, net of
interest income of $3,544, $4,277,
$3,646 and $10,948, respectively (169,217) (173,059) (343,003) (343,706)
Other 2,150 --- 2,150 ---
---------- ---------- ------------ ------------
Net loss $(562,167) $(672,704) $(1,012,515) $(1,235,916)
========== ========== ============ ============
Net loss per common share $ (0.01) $ (0.02) $ (0.02) $ (0.04)
========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-7-
<TABLE>
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Statements of Stockholders' Deficit
(Unaudited)
<CAPTION>
Redeemable Preferred Stock
(shares/amount)
---------------------------
<S> <C> <C>
Balance at December 31, 1998 29,592 $ 430,860
Cumulative undeclared dividends
on redeemable preferred stock --- 9,469
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 fees --- ---
Issuance of shares of common stock
pursuant to direct purchases
by certain directors and other
accredited investors (note 3) --- ---
Net loss for six months ended
June 30, 1999 --- ---
---------- ----------
Balance at June 30, 1999 29,592 $ 440,329
========== ==========
Balance at December 31, 1999 26,467 $ 402,298
Cumulative undeclared dividends
on redeemable preferred stock --- 8,470
Exercise of employee stock options --- ---
Exercise of warrants --- ---
Issuance of common stock in lieu of
cash in payment of interest on
subordinated debenture --- ---
Issuance of common stock pursuant to
Direct purchases by certain directors --- ---
Net loss for six months
ended June 30, 2000 --- ---
---------- ----------
Balance at June 30, 2000 26,467 410,768
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-8-
<TABLE>
IGENE Biotechnology, Inc. and Subsidiary
Consolidated 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, 1998 21,854,173 $ 218,542 $18,738,038 $(25,476,909) $(6,520,329)
Cumulative undeclared dividends
on redeemable preferred stock --- --- (9,469) --- (9,469)
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 fees 866,667 8,666 41,084 --- 49,750
Issuance of shares of common stock
pursuant to direct purchases
by certain directors and other
accredited investors (note 3) 11,666,760 116,668 583,332 --- 700,000
Net loss for six months ended
June 30, 1999 --- --- --- (1,235,916) (1,235,916)
---------- --------- ----------- ------------- ------------
Balance at June 30, 1999 34,427,600 $ 344,276 $19,442,585 $(26,712,825) $(6,925,964)
========== ========= =========== ============= ============
Balance at December 31, 1999 47,598,758 $ 475,988 $20,238,904 $(28,002,249) $(7,287,357)
Cumulative undeclared dividends
on redeemable preferred stock --- --- (8,470) --- (8,470)
Exercise of employee stock options 1,500,000 15,000 135,000 --- 150,000
Exercise of warrants 3,070,123 30,701 (25,501) --- 5,200
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 pursuant
to direct purchases by
certain directors 4,000,000 40,000 360,000 --- 400,000
Net loss for six months ended
June 30, 2000 --- --- --- (1,012,515) (1,012,515)
---------- --------- ----------- ------------- ------------
Balance at June 30, 2000 56,208,881 $ 562,089 $20,789,533 $(29,014,764) $(7,663,142)
========== ========= =========== ============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-9-
<TABLE>
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Six months ended
June 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,012,515) $(1,235,916)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation 9,624 41,600
Amortization 29,186 21,172
Interest on debenture paid in shares of common stock 90,000 90,000
Decrease (increase) in:
Accounts receivable (353,031) (8,955)
Inventory 79,073 (120,060)
Prepaid expenses and other current assets (52,186) (108,404)
Increase (decrease) in:
Accounts payable and accrued expenses 544,627 231,472
------------ ------------
Net cash used in operating activities (665,222) (1,089,091)
------------ ------------
Cash flows from investing activities:
Proceeds from disposal of equipment --- 460
Capital expenditures (976) (28,407)
Refund of security deposit --- 5,725
Repayment of principal of loan receivable --- 44,003
------------ ------------
Net cash provided by (used in) investing activities (976) 21,781
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 550,000 700,000
Issuance of promissory notes --- 65,699
------------ ------------
Net cash provided by financing activities 550,000 765,699
------------ ------------
Net decrease in cash
and cash equivalents (116,198) (301,611)
Cash and cash equivalents
at beginning of period 216,297 364,796
------------ ------------
Cash and cash equivalents
at end of period $ 100,099 $ 63,185
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-10-
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited - Continued)
Noncash investing and financing activities:
During the six months ended June 30, 2000 and 1999, the Company
recorded dividends in arrears on 8% redeemable preferred stock at
$.32 per share aggregating $ 8,470 and $9,469, 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, 2000 and 1999 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, 2000, Igene agreed to the
repayment of $206,780 in loans receivable and the sale of
equipment having a net book value of $226,011 as part of a
reduction in manufacturing fees under a new contract with
the Company's contract manufacturer of AstaXin(R). The book value
of the loan receivable and equipment, totaling $432,791, has been
recorded as a deferred cost which is being amortized as
manufacturing occurs over the six year term of this contract,
which will expire May 2006.
During the six months ended June 30, 2000, holders of 3,994,500
warrants issued in the March 1998 Rights Offering exercised those
warrants using $5,200 of notes payable to Igene and utilizing
927,377 warrants in cashless exercises. 3,070,123 new shares
were issued and $5,200 of notes payable were cancelled in these
transactions.
During the six months ended June 30, 1999, the Company satisfied
accounts payable of $20,000 and advanced $29,750 for legal
retainers by issuing 866,667 shares of common stock to counsel in
on-going litigation.
The accompanying notes are an integral part of the consolidated
financial statements.
-11-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The consolidated interim financial statements included
herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote
disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and
regulations, although the Company believes that the
disclosures are adequate to make the information presented
not misleading.
These statements reflect all adjustments, consisting of
normal recurring adjustments which, in the opinion of
management, are necessary for fair presentation of the
information contained therein. It is suggested that these
consolidated financial statements be read in conjunction
with the financial statements and notes thereto included in
the Company's annual report on form 10-KSB for the year
ended December 31, 1999. The Company follows the same
accounting policies in preparation of interim reports,
except as described in note (2) to the consolidated
financial statements.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
During June 2000 the Company formed a wholly-owned
subsidiary in Chile. These consolidated financial
statements include the accounts of the Company and of its
wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in
consolidation.
Deferred Costs
Deferred costs include deferred manufacturing costs of
$418,765, which represents the value, reduced by current
amortization, of a note receivable of $206,780 and
manufacturing equipment with a net book value of $226,011.
These assets have been cancelled and sold, respectively, in
consideration for a reduction in manufacturing fees over the
six year term of a new manufacturing contract which became
effective in May 2000. These deferred manufacturing costs
are being amortized over the term of the contract, and such
amortization, in the amount of $14,026 for the six months
ended June 30, 2000, is included in Cost of Sales.
Foreign Currency Translation and Transactions
Since the day-to-day operations of the Company's foreign
subsidiary in Chile are dependent on the economic
environment of the parent's currency, the financial position
and results of operations of the Company's foreign
subsidiary are determined using the Company's reporting
currency (US dollars) as the functional currency. All
exchange gains and losses from remeasurement of monetary
assets and liabilities that are not denominated in US
dollars are recognized currently in income. These gains and
losses were immaterial in amount during the six months ended
June 30, 2000.
Statements of Cash Flows
The Company has determined that the effect of foreign
exchange rate changes on cash flows is not material.
-12-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
(3) Inventories
Inventory, stated at lower of cost, on a first-in first-out
basis, or market value, represents AstaXin(R) manufactured and
held for sale, as follows:
Raw materials $ ---
Work-in-process ---
Finished goods 627,180
--------------
Total inventory $ 627,180
==============
(4) Stockholders' Deficit
At June 30, 2000 and 1999, 52,934 shares of authorized but
unissued common stock were reserved for issue upon
conversion of the Company's outstanding preferred stock.
As of June 30, 2000 and 1999, 19,910,166 and 21,410,166
shares, respectively, of authorized but unissued common
stock were reserved for exercise pursuant to the Company's
Employee Stock Option Plans.
As of June 30, 2000 and 1999, 200,000 and 280,000 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, 2000 and 1999, 13,174,478 shares of
authorized but unissued common stock were reserved for the
conversion of outstanding convertible promissory notes in
the aggregate amount of $1,082,000 held by directors of the
Company.
As of June 30, 2000 and 1999, 131,759,345 and 113,462,178
shares, respectively, of authorized but unissued common
stock were reserved for the exercise of outstanding
warrants.
As of June 30, 2000, 6,000,000 shares of authorized but
unissued shares of common stock were reserved for issuance
upon receipt of $600,000 in funding for operations pursuant
to a $1,000,000 commitment by certain directors of the
Company on February 8, 2000.
As of June 30, 2000, 20,000,000 shares of authorized but
unissued shares of common stock were reserved for issuance
pursuant to the production of AstaXin(R)in an agreement with
Igene's contract manufacturer.
During the six months ended June 30, 2000, the Company
issued to certain directors 4,000,000 new shares of common
stock at $.10 per share, or $400,000 (the Company incurred
no offering expenses). The Company did not use the services
of any agent or underwriter in distributing these shares.
The sale of shares was exempt from registration pursuant to
Section 4(2) of the Securities Act. The Company relied on
information provided by the purchasers of the shares,
indicating that they were directors of the Company, in
claiming exemption from the registration obligations of the
Securities Act of 1933, as amended. This stock was issued
pursuant to a commitment dated February 8, 2000 for a total
of $1,000,000. The market price on that date was $.10 per
share. In return for this commitment, these directors also
received, on February 8, 2000, warrants to purchase
10,000,000 shares of common stock at $0.10 per share,
expiring in 10 years.
During the six months ended June 30, 2000, the Company
issued 1,500,00 new shares of common stock at $.10 per
share, or $150,000, pursuant to the exercise of employee
stock options.
-13-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
(4) Stockholders' Deficit (continued)
During the six months ended June 30, 2000, holders of
3,994,500 warrants issued in the March 1998 Rights Offering
exercised those warrants using $5,200 of notes payable to
Igene and utilizing 927,377 warrants in cashless exercises.
3,070,123 new shares were issued and $5,200 of notes payable
were cancelled in these transactions.
On January 25, 1999 the Company issued to certain directors
and other accredited investors 4,166,667 new shares of
common stock at $.06 per share, or $250,000, which was the
current market price of the stock on that date. These
investors also committed to purchase an additional 8,333,333
new shares of common stock at $.06 per share, or $500,000 by
July 31, 1999. The total funding to be received in this
transaction is $750,000, and a total of 12,500,000 shares
will be issued at $.06 per share. In return for committing
to this funding, these investors also received, as of
January 25, 1999, warrants to purchase 12,500,000 shares of
common stock at $.06 per share, expiring in 10 years. As of
June 30, 1999, $700,000 of the committed funding has been
received from investors and 11,666,667 shares have been
issued at $.06 per share.
(5) Net loss per common share
Net loss per common share for the three month periods ended
June 30, 2000 and 1999 is based on 53,899,650 and
30,132,254, respectively, of weighted average common shares
outstanding. Net loss per common share for the six-month
periods ended June 30, 2000, and 1999 is based on 51,323,947
and 27,751,637, 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
cumulative undeclared dividends in arrears on preferred
stock.
(6) Commitments
On May 20, 2000 the Company signed a Memorandum of
Understanding whereby it renewed its manufacturing agreement
with Fermic, S.A. de C.V. (Fermic) of Mexico City, Mexico.
Production began under this Memorandum on May 20, 2000
while a detailed contract is being drafted. The major terms
of the agreement provide for the exclusive manufacture of
AstaXin(R) by Fermic during a six year term. Fermic will be
paid a monthly fee based on manufacturing capacity provided
and will also be issued shares of Igene's common stock based
on the amount of AstaXin(R) produced, up to a maximum of
20,000,000 shares over the term of the contract.
(7) Contingencies
On July 21, 1997, ADM filed suit against the Company in the
U.S. District Court in Baltimore, Maryland alleging patent
infringement and requesting injunctive relief and an
unspecified amount of damages predicated on the alleged
infringement, which alleged infringement pertains to the
Company's astaxanthin manufacturing process. On August 4,
1997, the Company filed a $300,450,000 contract and trade
secrets counterclaim against ADM, alleging theft of trade
secrets. The Company is also claiming breach of contract,
in regards to a licensing agreement entered into by the
Company and ADM in 1995. The Company contends that it
complied with all material terms of this agreement. 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
patent infringement allegations. To date, a stay on all
discovery has been imposed by the court, while a court-
appointed expert analyzes the yeast products of both
parties. Pursuant to an order issued by the judge on July
16, 1999, both the Company and ADM have communicated to the
court their willingness to pursue a mediated settlement of
this dispute.
-14-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
(7) Contingencies (continued)
During the period from October 1, 1999 through October 28,
1999, the parties were unable to resolve the dispute through
mediation. Thus, the litigation has been returned to the
court for a judicial disposition. 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 consolidated balance
sheets. The Company had expenses of $850 and $182,757
respectively, in the six months ended June 30, 2000 and 1999
relating to this litigation, which is on-going.
(8) Subsequent Events
On July 17, 2000, the Company received $350,000 in a
purchase of new stock by certain directors of 3,500,000
shares of common stock at $0.10 per share. This transaction
was the third in a planned series of purchases of common
stock pursuant to a commitment, on February 8, 2000, to
purchase stock in the total amount of $1,000,000.
In a notice published in the Federal Register of July 6,
2000, the FDA announced the amendment of its color additive
regulations to provide for the safe use of phaffia yeast,
such as that in the Company's product, AstaXin(R), as a
color additive in aquaculture feeds. This ruling, which is
effective August 8, 2000, allows the Company to market its
product, AstaXin(R), for aquaculture feeds and fish produced
in or imported into the United States.
In July 2000, the Company also obtained market clearance
from the FDA to sell its product, AstaXin(R), as a human
nutritional supplement in the United States. Scientific
literature indicates that natural astaxanthin, such as that
in the Company's product, AstaXin(R), may offer health
benefits for humans due to its antioxidant properties.
-15-
IGENE Biotechnology, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
EXCEPT FOR HISTORICAL FACTS, ALL MATTERS DISCUSSED IN THIS
REPORT, WHICH ARE FORWARD LOOKING, INVOLVE A HIGH DEGREE OF RISKS
AND UNCERTAINTIES. POTENTIAL RISKS AND UNCERTAINTIES INCLUDE,
BUT ARE NOT LIMITED TO, COMPETITIVE PRESSURES FROM OTHER
COMPANIES AND WITHIN THE BIOTECH INDUSTRY, ECONOMIC CONDITIONS IN
THE COMPANY'S PRIMARY MARKETS AND OTHER UNCERTAINTIES DETAILED
FROM TIME-TO-TIME IN THE COMPANY'S SECURITIES AND EXCHANGE
COMMISSION FILINGS.
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.
Overview
Igene Biotechnology, Inc. (Igene) is engaged in the business of
developing, marketing, and manufacturing industrial microbiology
and related biotechnology products. Igene's major product is
AstaXin(R), a dried yeast product made from a proprietary strain
of yeast which it has developed. AstaXin(R) is a natural source
of astaxanthin, the pigment which imparts the characteristic red
color to the flesh of salmon, shrimp and certain other types of
fish and shellfish. In the ocean, these fish and shellfish
obtain astaxanthin from krill and other planktonic crustaceans in
their diet. However, without the addition of astaxanthin to the
feed of farm raised fish and shellfish, their flesh would be a
pale, off-white color, which is less appealing to consumers.
Based on estimates of worldwide production of farm raised salmon,
Igene believes that the worldwide market for astaxanthin as a
feed additive for aquaculture exceeds $200,000,000 annually.
Scientific literature also indicates that natural astaxanthin,
such as that in AstaXin(R), may offer health benefits for humans
due to its antioxidant properties, which exceed those of vitamin
E, vitamin C, beta-carotene and other carotenoids. The Company
is presently manufacturing, marketing and selling AstaXin(R) as a
color additive for aquaculture feeds, and is also preparing to
market this product as a human nutritional supplement.
Results of Operations
On July 6, 2000, a U.S. FDA ruling, which was effective August 8,
2000, allowed Igene to market AstaXin(R) for fish feeds and fish
produced in or sent to the United States. As a result of this
U.S. FDA ruling, and approvals in 1999 from the Canadian
equivalent agency, Igene began to market AstaXin(R) in the United
States and Canada in July 2000. In July 2000, Igene also
obtained market clearance from the U.S. FDA to sell AstaXin(R) as
a human nutritional supplement in the United States.
Sales
Sales of AstaXin(R) for aquaculture feed were $180,631 during the
quarter ended June 30, 2000. This is an increase of 130% over
sales for the preceding quarter of $78,536. Sales of AstaXin(R)
for the six months ended June 30, 2000 totaled $259,167. Based
on actual sales through July 2000, orders received and
projections of the usage for current customers, sales for the
quarter ended September 30, 2000 are expected to exceed $400,000.
During the three months and six months ended June 30, 1999 Igene
had no sales of AstaXin(R) while the Company conducted what was
probably the largest commercial fish feeding study in the world,
using AstaXin(R) in Chile in cooperation with more than a dozen
fish producers. Results obtained from this study and an
independent study conducted in Norway by Akvaforsk confirm that
natural AstaXin(R) is comparable, if not superior to, its
competitor' synthetic product which currently dominates the
-16-
IGENE Biotechnology, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Results of Operations (continued)
market. The Akvaforsk study also confirmed the stability of
AstaXin(R) through the commercial feed production process and
showed the efficiency of Igene's proprietary enzyme technology
for making 98% of the astaxanthin available for uptake by the
fish and more than twice as effective as other competitors'
processes. Igene believes that sales of AstaXin(R)for aquaculture
will continue to grow, due to both increased sales in Chile and
marketing in the United States and Canada. However, there can be
no assurance that such sales will occur or that they will be
material.
Now that U.S. FDA market clearance has been obtained, Igene also
plans to market AstaXin(R) as a human nutritional supplement.
Scientific literature indicates that natural astaxanthin, such as
from AstaXin(R), may offer certain health benefits for humans due
to its antioxidant properties, which exceed those of vitamin E,
vitamin C, beta-carotene and other carotenoids.
Cost of Sales
Igene resumed commercial production of AstaXin(R) in May 2000 and
entered into a six year exclusive agreement with its contract
manufacturer in Mexico City, Mexico. Igene is now capable of
tripling its production capacity for AstaXin(R) within three
months, and to nine fold within a year, if necessary. Cost of
sales for AstaXin(R) for the quarter ended June 30, 2000 and 1999
of $185,224 and $99,409 increased by $85,815, or 86%. Cost of
sales of AstaXin(R) for the six months ended June 30, 2000 and
1999 of $272,657 and $119,845 increased by $152,812, or 128%.
These increases resulted from increased sales of AstaXin(R)in
2000 offset by adjustments to decrease AstaXin(R) inventory to
market value during the six months ended June 30, 1999. There
have been no additional decreases of AstaXin(R) inventory to
market value during the six months ended June 30, 2000, due to
increases in production efficiency. Igene expects to achieve
gross profits on sales of AstaXin(R) in the near future, as sales
levels increase. However, there can be no assurance that such
gross profits will occur or that they will be material. Igene
expects that cost of sales for AstaXin(R) will continue to
increase, due to sales increases, and they are expected to be
funded by product sales. Igene plans to expand production
capacity as needed to meet increasing demand for AstaXin(R).
However, there can be no assurance that demand will, in fact,
increase or that such increases will be material.
Marketing and Selling Expenses
Igene has engaged a full-time consultant to obtain approval and
market AstaXin(R) in Europe as a feed additive for aquaculture
and also to market AstaXin(R) worldwide as a human nutritional
supplement. Igene's executive employees continue to travel
extensively to support the two full-time technical
representatives at its Chilean subsidiary's office. Marketing
expenses for AstaXin(R) are expected to continue to increase as
Igene markets AstaXin(R) in the United States and Canada.
Marketing and selling expenses for the three months ended June
30, 2000 and 1999 were $179,457 and $46,475, respectively, an
increase of $132,982, or 286%. Marketing and selling expenses
for the six months ended June 30, 2000 and 1999 were $258,598 and
$52,925, respectively, an increase of $205,673, or 389%. Future
additional marketing expenses are expected to be funded by
revenues from product sales. However, there can be no assurance
that such sales will occur, or that they will be material.
-17-
IGENE Biotechnology, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Results of Operations (continued)
Research, Development and Pilot Plant Expenses
Research, development and pilot plant expenses for the three
months ended June 30, 2000 and 1999 were $84,967 and $90,101,
respectively, a decrease of $5,134, or 6%. Research, development
and pilot plant expenses for the six months ended June 30, 2000
and 1999 were $177,576 and $190,400, respectively, a decrease of
$12,824, or 7%. These expenses are expected to continue at
approximately $30,000 per month in support of increasing the
efficiency of the AstaXin(R) manufacturing process through
experimentation in the pilot plant and through improving
proprietary technology. These expenses are expected to be funded
by sales. However, there can be no assurance that such sales
will occur, or that they will be material.
General and Administrative Expenses
General and administrative expenses for the three months ended
June 30, 2000 and 1999 were $125,233 and $80,902, respectively,
an increase of $44,331, or 55%. General and administrative
expenses for the six months ended June 30, 2000 and 1999 were
$210,102 and $170,546, respectively, an increase of $39,538, or
23%. These increases resulted primarily from costs associated
with the annual shareholder's meeting which was held in June 2000
(in 1999 this meeting was not held until the third quarter) and
from increased legal expenses relating to warrants exercised in
2000. General and administrative expenses are expected to
continue at approximately $35,000 per month in the near term,
and are expected to be funded by sales. However, there can be no
assurance that such sales will occur, or that they will be
material.
Litigation Expenses
Litigation expenses for the three months ended June 30, 2000 and
1999 were $850 and $182,757, a decrease of $181,907, or 99%.
Litigation expenses for the six months ended June 30, 2000 and
1999 were $11,896 and $358,494, a decrease of $346,598, or 97%.
These amounts represent the expenses associated with Igene's
defense of the suit by ADM alleging patent infringement
pertaining to Igene's astaxanthin manufacturing process and
Igene's counter-suit. These expenses have decreased while a
court imposed stay on discovery remains in effect and a court-
appointed expert analyzes the yeast products of both parties.
These expenses are expected to increase when and if the
litigation moves to a courtroom phase. Management expects to
recover these legal expenses through damage awards and
preservation of the commercial product rights associated with
AstaXin(R). However, there can be no assurance that the Company
will receive damage awards or that its rights will be preserved.
Igene's expenditures for this litigation will continue based on
management's continuing assessments of the potential costs versus
the potential benefits of its litigation efforts. These
expenses are expected to be funded by additional capital
contributions or loans from directors. At the present time, a
range of reasonably possible loss from the litigation cannot be
estimated.
Net interest expense for the three months ended June 30, 2000 and
1999 was $169,217 and $173,059, respectively, a decrease of
$3,842, or 2%. Net interest expense for the six months ended
June 30, 2000 and 1999 was $343,003 and $343,706, respectively, a
decrease of $703 or less than 1%. It is expected that net
interest expense will decrease if note holders will use
outstanding notes to exercise outstanding warrants issued to
them, when and if the Company achieves profitable operations.
However, there can be no assurance that such profitable
operations will occur, or that they will be material or that the
holders will in fact use their notes to exercise their warrants.
-18-
IGENE Biotechnology, Inc. and Subsidiary
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
$562,167 and $672,704, or $0.01 and $.02 per share for the three
months ended June 30, 2000, and 1999, and net losses of
$1,012,515 and $1,235,916, or $0.02 and $0.04 per share,
respectively, for the six months ended June 30, 2000 and 1999.
The weighted average number of shares of common stock outstanding
increased to 53,899,650 for the six months ended June 30, 2000
from 30,132,254 for the six months ended June 30, 1999. This
increase of 23,767,396 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
conversion of 3,125 shares of preferred stock into 6,250 shares
of common stock, the issuance of 1,500,000 shares pursuant to the
exercise of employee stock options, the issuance of 3,068,323
shares pursuant to the exercise of warrants, and the issuance of
17,125,001 shares to directors and other investors for cash
during the twelve month period ended June 30, 2000.
Financial Position
During the six months ended June 30, 2000 and 1999 the following
materially affected the Company's financial position:
The Company capitalized inventory of $990,320 as of June 30, 1999
due to production. During the six months ended June 30, 2000
inventory decreased to $627,180 due to product sales, offset by
production.
During the six months ended June 30, 2000 accounts receivable
increased to $96,036 due to current product sales.
The Company paid expense advances and retainers of $330,000 to
its attorneys during the six months ended June 30, 1999, which
have been capitalized and are included in prepaid expenses as of
June 30, 2000 and 1999, as reduced by fees billed, and which are
being drawn down against costs associated with on-going
litigation against ADM.
During the six months ended June 30, 2000, Igene agreed to the
repayment of $206,780 in loans receivable and the sale of
equipment having a net book value of $226,011 as part of a
reduction in manufacturing fees under a new contract with the
Company's contract manufacturer of AstaXin(R). The book value of
the loan receivable and equipment, totaling $432,791, has been
recorded as a deferred cost which is being amortized as
manufacturing occurs over the six year term of this contract,
which will expire May 2006.
During the six months ended June 30, 1999 the Company issued
11,666,667 new shares of common stock to directors and other
investors at $.06 per share, or $700,000. During the six months
ended June 30, 2000 the Company issued 4,000,000 new shares to
certain directors at $.10 per share or $400,000.
During the six months ended June 30, 1999 the Company purchased
$28,407 of research and development and manufacturing equipment.
During the six months ended June 30, 2000, holders of 3,994,500
warrants issued in the March 1998 Rights Offering exercised those
warrants using $5,200 of notes payable to Igene and utilizing
927,377 warrants in cashless exercises. 3,070,123 new shares
were issued and $5,200 of notes payable were cancelled in these
transactions.
-19-
IGENE Biotechnology, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Financial Position (continued)
During the six months ended June 30, 2000 the Company issued
1,500,000 new shares of common stock pursuant to the exercise of
employee stock options at $.10 per share or $150,000.
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, 2000 and 1999, total dividends in arrears
on the Company's preferred stock was $199,032 and $203,593,
respectively, which was included in the carrying value of the
redeemable preferred stock.
Liquidity and Capital Resources
Historically, the Company has been funded primarily by equity
contributions and loans from stockholders. As of June 30, 2000
and 1999, the Company had working capital of $733,051 and
$1,260,751, respectively. Working capital decreased by $527,700
during the twelve month period ended June 30, 2000. The Company
had cash and cash equivalents of $100,099 and $63,185 as of June
30, 2000 and 1999, respectively. In order to continue to fund
operations in the near term, until profitable operations occur,
the Company plans to obtain additional capitalization from
directors and other investors.
Cash used by operations in the six months ended June 30, 2000 and
1999 amounted to $665,222 and $1,089,091, respectively. This
decrease in cash used in operations of $423,869 resulted from a
temporary halt in production of AstaXin(R) and increased product
sales and reduced litigation expenses during the six months ended
June 30, 2000.
Cash provided (used by) by investing activities for the six
months ended June 30, 2000 and 1999 amounted to $(976) and
$21,781, respectively. The decrease of $22,757 in cash provided
by investing activities resulted primarily from a decrease in the
amount of principal repayments on loan receivable during the six
months ended June 30, 2000. This loan was repaid in May 2000
through a reduction in fees in the Company's new manufacturing
contract.
Cash provided by financing activities for the six months ended
June 30, 2000 and 1999 amounted to $550,000 and $765,699,
respectively, a decrease of $215,699, resulting primarily from a
decrease in proceeds from issue of new common stock during the
six months ended June 30, 2000.
-20-
IGENE Biotechnology, Inc. and Subsidiary
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On July 21, 1997, ADM filed suit against the Company in the U.S.
District Court in Baltimore, Maryland alleging patent
infringement and requesting injunctive relief and an unspecified
amount of damages predicated on the alleged infringement, which
alleged infringement pertains to the Company's astaxanthin
manufacturing process. On August 4, 1997, the Company filed a
$300,450,000 contract and trade secrets counterclaim against ADM,
alleging theft of trade secrets. The Company is also claiming
breach of contract, in regards to a licensing agreement entered
into by the Company and ADM in 1995. The Company contends that
it complied with all material terms of this agreement. 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 patent
infringement allegations. To date, a stay on all discovery has
been imposed by the court, while a court-appointed expert
analyzes the yeast products of both parties. Pursuant to an
order issued by the judge on July 16, 1999, both the Company and
ADM have communicated to the court their willingness to pursue a
mediated settlement of this dispute. During the period from
October 1, 1999 through October 28, 1999, the parties were unable
to resolve the dispute through mediation. Thus, the litigation
has been returned to the court for a judicial disposition. 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 consolidated balance
sheets. The Company had expenses of $850 and $182,757
respectively, in the six months ended June 30, 2000 and 1999
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
stock in the foreseeable future.
During the six months ended June 30, 2000, the Company issued
to certain directors 4,000,000 new shares of common stock at $.10
per share, or $400,000 (the Company incurred no offering
expenses). The Company did not use the services of any agent or
underwriter in distributing these shares. The sale of shares was
exempt from registration pursuant to Section 4(2) of the
Securities Act. The Company relied on information provided by the
purchasers of the shares, indicating that they were directors
of the Company, in claiming exemption from the registration
obligations of the Securities Act of 1933, as amended. This stock
was issued pursuant to a commitment dated February 8, 2000 for a
total of $1,000,000. The market price on that date was $.10 per
share. In return for this commitment, these directors also
received, on February 8, 2000, warrants to purchase 10,000,000
shares of common stock at $0.10 per share, expiring in 10 years.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of stockholders held on June 6, 2000, the
following matters were submitted to stockholders' vote and were
approved by a majority of votes: (1) seven directors were
elected: Joseph C. Abeles, John A. Cenerazzo, Stephen F. Hiu,
Thomas L. Kempner, Michael G. Kimelman, Sidney R. Knafel, and
Patrick F. Monahan; and (2) approval of the appointment of
Berenson & Company LLP as the Company's independent auditors for
2000.
-21-
IGENE Biotechnology, Inc. and Subsidiary
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
continued)
<TABLE>
Results of the voting were as follows:
<CAPTION>
Votes Votes Votes
For Against Abstained
------------ ------------ ------------
<S> <C> <C> <C>
(1) Election of Directors
Joseph C. Abeles 43,678,272 57,090 ---
John A. Cenerazzo 43,678,272 57,090 ---
Stephen F. Hiu 43,678,272 57,090 ---
Thomas L. Kempner 43,678,272 57,090 ---
Michael G. Kimelman 43,678,272 57,090 ---
Sidney R. Knafel 43,678,272 57,090 ---
Patrick F. Monahan 43,678,272 57,090 ---
(2) Approval of Auditors 43,554,308 114,764 66,290
</TABLE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8K - None
-22-
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
IGENE Biotechnology, Inc.
________________________________
(Registrant)
Date August 14, 2000 By /s/Stephen F. Hiu
Stephen F. Hiu
President and Treasurer
(On behalf of the Registrant and as
Principal Financial Officer)
-23-
