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 September 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:
62,248,881 as of November 2, 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
SIGNATURES 22
-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>
September 30, September 30, December 31,
2000 1999 1999
------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 305,529 $ 12,753 $ 216,297
Accounts receivable 131,932 13,205 24,267
Inventory 808,127 990,320 707,595
Loan receivable --- 223,902 206,780
Prepaid expenses and other current assets 212,148 175,996 153,160
------------- ------------- -------------
TOTAL CURRENT ASSETS 1,457,736 1,416,176 1,308,099
OTHER ASSETS
Property and equipment, net 131,395 342,157 366,484
Deferred Costs, net 522,251 148,199 137,613
Other assets 5,861 4,875 4,876
------------- ------------- -------------
TOTAL ASSETS $ 2,117,243 $ 1,911,407 $ 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>
<CAPTION>
September 30, September 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 $ 644,800 $ 214,185 $ 268,081
LONG-TERM DEBT
Promissory notes payable 6,077,300 6,146,199 6,082,500
Variable rate subordinated debenture 1,500,000 1,500,000 1,500,000
Accrued Interest 1,199,703 729,900 851,550
------------- ------------- -------------
TOTAL LIABILITIES 9,421,803 8,590,284 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 $15.68, $15.04,
and $15.20, respectively. Authorized
1,312,500 shares, issued 26,467, 29,592,
and 26,467 shares, respectively 415,003 445,064 402,298
------------- ------------- -------------
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value per share.
Authorized, 250,000,000 shares;
issued and outstanding 62,208,881,
39,427,508, and 47,598,758 shares,
respectively 622,089 394,275 475,988
Additional paid-in capital 21,325,298 19,687,851 20,238,904
Deficit (29,666,950) (27,206,067) (28,002,249)
------------- ------------- -------------
TOTAL STOCKHOLDERS' DEFICIT (7,719,563) (7,123,941) (7,287,357)
------------- ------------- -------------
TOTAL LIABILITIES, REDEEMABLE
PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT $ 2,117,243 $ 1,911,407 $ 1,817,072
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-6-
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $ 129,575 $ --- $ 388,742 $ ---
Cost of sales 198,702 6,407 471,359 126,252
------------- ------------- ------------- -------------
Gross profit (loss) (69,127) (6,407) (82,617) (126,252)
------------- ------------- ------------- -------------
Selling, General & Administrative expenses:
Marketing and selling 197,586 58,766 456,184 111,691
Research, development and pilot plant 89,629 104,595 267,205 294,995
General and administrative 127,194 74,834 337,296 248,554
Litigation expenses 1,352 75,479 13,248 433,973
------------- ------------- ------------- -------------
Total operating expenses 415,761 313,674 1,073,933 1,089,213
------------- ------------- ------------- -------------
Operating loss (484,888) (320,081) (1,156,550) (1,215,465)
------------- ------------- ------------- -------------
Other income (expense)
Interest expense, net of
interest income of $91, $3,570,
$3,737 and $14,519, respectively (169,298) (173,903) (512,301) (517,609)
Other 2,000 742 4,150 3,916
------------- ------------- ------------- -------------
Net loss $ (652,186) $ (493,242) $ (1,664,701) $ (1,729,158)
============= ============= ============= =============
Net loss per common share $ (0.01) $ (0.01) $ (0.03) $ (0.06)
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-7-
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Statements of Stockholders' Deficit
(Unaudited)
<TABLE>
<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 --- 14,204
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 --- ---
Net loss for nine months ended
September 30, 1999 --- ---
---------- ----------
Balance at September 30, 1999 29,592 $ 445,064
========== ==========
Balance at December 31, 1999 26,467 $ 402,298
Cumulative undeclared dividends
on redeemable preferred stock --- 12,705
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 nine months
ended September 30, 2000 --- ---
---------- ----------
Balance at September 30, 2000 26,467 415,003
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-8-
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Statements of Stockholders' Deficit
(Unaudited - Continued)
<TABLE>
<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 --- --- (14,204) --- (14,204)
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 16,666,668 166,667 833,333 --- 1,000,000
Net loss for nine months ended
September 30, 1999 --- --- --- (1,729,158) (1,729,158)
---------- -------- ------------- ------------- -------------
Balance at September 30, 1999 39,427,508 $394,275 $ 19,687,851 $(27,206,067) $ (7,123,941)
========== ======== ============= ============= =============
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 --- --- (12,705) --- (12,705)
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 10,000,000 100,000 900,000 --- 1,000,000
Net loss for nine months ended
September 30, 2000 --- --- --- (1,664,701) (1,664,701)
---------- -------- ------------- ------------- -------------
Balance at September 30, 2000 62,208,881 $622,089 $ 21,325,298 $(29,666,950) $ (7,719,563)
========== ======== ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-9-
IGENE Biotechnology, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,664,701) $ (1,729,158)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 14,436 55,847
Amortization 60,357 31,757
Interest on debenture paid in shares of common stock 90,000 90,000
Decrease (increase) in:
Accounts receivable (113,801) (13,205)
Inventory (107,582) (120,060)
Prepaid expenses and other current assets (58,989) (49,440)
Increase (decrease) in:
Accounts payable and accrued expenses 724,870 305,587
------------- -------------
Net cash used in operating activities (1,055,410) (1,428,672)
------------- -------------
Cash flows from investing activities:
Proceeds from disposal of equipment --- 460
Capital expenditures (5,358) (28,407)
Refund of security deposit --- 5,725
Repayment of principal of loan receivable --- 45,153
------------- -------------
Net cash provided by (used in) investing activities (5,358) 22,931
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,150,000 1,000,000
Issuance of promissory notes --- 65,699
Repayment of notes --- (12,000)
------------- -------------
Net cash provided by financing activities 1,150,000 1,053,699
Net increase (decrease) in cash
and cash equivalents 89,232 (352,042)
Cash and cash equivalents
at beginning of period 216,297 364,796
------------- -------------
Cash and cash equivalents
at end of period $ 305,529 $ 12,753
============= =============
</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 nine months ended September 30, 2000 and 1999, the
Company recorded dividends in arrears on 8% redeemable preferred
stock at $.48 per share aggregating $12,705 and $14,204,
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, 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 May 2000, Igene agreed to the re-payment of $218,984 in
loans receivable and accrued interest 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 $455,995, 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 nine months ended September 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 nine months ended September 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
$416,395, which represents the value, reduced by current
amortization, of a note receivable and accrued interest of
$218,984 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 $28,600 for the nine months ended September 30,
2000, is included in Cost of Sales and Inventory.
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 nine months
ended September 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 15,800
Finished goods 792,327
-------------
Total inventory $ 808,127
=============
(4) Stockholders' Deficit
At September 30, 2000 and 1999, 52,934 and 59,184 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, 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 September 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 September 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 September 30, 2000 and 1999, 131,759,345 and
117,628,846 shares, respectively, of authorized but unissued
common stock were reserved for the exercise of outstanding
warrants.
As of September 30, 2000, 20,000,000 shares of authorized
but unissued shares of common stock were reserved for
issuance in connection with the production of AstaXin(R)
pursuant to an agreement with Igene's contract manufacturer.
During the nine months ended September 30, 2000, the Company
issued to certain directors 10,000,000 new shares of common
stock at $.10 per share, or $1,000,000 (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 February 8, 2010.
During the nine months ended September 30, 2000, the Company
issued 1,500,000 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 nine months ended September 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 received in this
transaction was $750,000, and a total of 12,500,000 shares
were 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 January 25, 2009.
(5) Net loss per common share
Net loss per common share for the three month periods ended
September 30, 2000 and 1999 is based on 59,170,838 and
36,936,566, respectively, of weighted average common shares
outstanding. Net loss per common share for the nine-month
periods ended September 30, 2000, and 1999 is based on
53,958,670 and 30,846,897, 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 our contract manufacturer in 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
Archer Daniels Midland, Inc. ("ADM") has sued us, alleging
patent infringement and requesting injunctive relief as
well as an unspecified amount of damages. We have filed a
$300,450,000 counterclaim concerning the theft of trade
secrets. The court denied ADM's request for preliminary
injunctive relief. Mediation efforts during 1999 did not
resolve this dispute, which has been returned to the court
for a judicial disposition. Presently, a stay on all
discovery remains in effect while a court-appointed expert
analyzes the yeast products of both parties. We believe
that it is not probable that this dispute will result in an
unfavorable outcome to Igene. Nonetheless, should ADM
prevail, we could be liable for damages, and we could also
lose the right to use a particular strain of yeast.
However, we expect that this will not affect our ability to
make and sell our product, AstaXin(R).
-14-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
(8) Approval of Regulatory Agencies
In a notice published in the Federal Register 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. This ruling is
available to the public in the Federal Register.
In July 2000, the Company also obtained clearance from the
FDA to market its product, AstaXin(R), as a human dietary
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. The FDA
notification and the Company's submissions are available to
the public.
(9) Subsequent Event
During November 2000, the Company received additional
funding of $350,000. The Company will issue 9% demand notes
to the lenders, who are directors of the Company.
-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 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 $129,575 during the
quarter ended September 30, 2000. This is a decrease of
$51,056, or 28%, over sales for the quarter ended June 30, 2000.
Sales of AstaXin(R) for the nine months ended September 30, 2000
totaled $388,742. Based on actual sales for October 2000 of
$134,000, and projections of usage for current customers, sales
for the quarter ending December 31, 2000 are expected to exceed
$400,000. Some sales which were expected to occur during the
quarter ended September 30, 2000 were delayed due to weather
conditions and slower than expected fish growth. These sales are
now expected to occur during the quarter ended December 31, 2000.
During the three months and nine months ended September 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 confirmed that
natural AstaXin(R) is comparable, if not superior to, our
-16-
IGENE Biotechnology, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Results of Operations (continued)
competitor's synthetic product which currently dominates the
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 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, as necessary. Cost of
sales for AstaXin(R) for the quarter ended September 30, 2000 and
1999 of $198,702 and $6,407 increased by $192,295. Cost of sales
of AstaXin(R) for the nine months ended September 30, 2000 and
1999 of $471,359 and $126,252 increased by $345,107, or 273%.
These increases resulted from increased sales of AstaXin(R)in
2000 offset by adjustments to decrease AstaXin(R) inventory to
market value during the nine months ended September 30, 1999.
There have been no additional decreases of AstaXin(R) inventory
to market value during the nine months ended September 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 and production 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
September 30, 2000 and 1999 were $197,586 and $58,766,
respectively, an increase of $138,820, or 236%. Marketing and
selling expenses for the nine months ended September 30, 2000 and
1999 were $456,184 and $111,691, respectively, an increase of
$344,493, or 308%. Future additional marketing expenses are
expected to be funded by revenues from product sales and
additional capital contributions. However, such sales or capital
contributions may not actually occur, or they may not 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 September 30, 2000 and 1999 were $89,629 and
$104,595, respectively, a decrease of $14,966, or 14%. Research,
development and pilot plant expenses for the nine months ended
September 30, 2000 and 1999 were $267,205 and $294,995,
respectively, a decrease of $27,790, or 9%. 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 and additional capital
contributions. However, there can be no assurance that such
sales or capital contributions will occur, or that they will be
material.
General and Administrative Expenses
General and administrative expenses for the three months ended
September 30, 2000 and 1999 were $127,194 and $74,834,
respectively, an increase of $52,360, or 70%. General and
administrative expenses for the nine months ended September 30,
2000 and 1999 were $337,296 and $248,554, respectively, an
increase of $88,742, or 36%. These increases resulted primarily
from legal expenses relating to warrants registered during 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 and additional capital
contributions. However, there can be no assurance that such sales
or capital contributions will occur, or that they will be
material.
Litigation Expenses
Litigation expenses for the three months ended September 30, 2000
and 1999 were $1,352 and $75,479, a decrease of $74,127, or 98%.
Litigation expenses for the nine months ended September 30, 2000
and 1999 were $13,248 and $433,973, a decrease of $420,725, 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 if and to the extent such
funds are obtained. At the present time, a range of reasonably
possible loss from the litigation cannot be estimated.
Net Interest Expense
Net interest expense for the three months ended September 30,
2000 and 1999 was $169,298 and $173,903, respectively, a decrease
of $4,605, or 3%. Net interest expense for the nine months
ended September 30, 2000 and 1999 was $512,301 and $517,609,
respectively, a decrease of $5,308 or 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)
Net Loss and Shares Outstanding
As a result of the foregoing, the Company reported net losses of
$652,186 and $493,242, or $0.01 per share in each period for the
three months ended September 30, 2000, and 1999, and net losses
of $1,664,701 and $1,729,158, or $0.03 and $0.06 per share,
respectively, for the nine months ended September 30, 2000 and
1999.
The weighted average number of shares of common stock outstanding
increased to 53,958,670 for the nine months ended September 30,
2000 from 30,846,897 for the nine months ended September 30,
1999. This increase of 23,111,773 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
3,070,123 shares pursuant to the exercise of warrants, and the
issuance of 18,125,000 shares to directors and other investors
for cash during the twelve month period ended September 30, 2000.
Financial Position
During the nine months ended September 30, 2000 and 1999, the
following materially affected the Company's financial position:
During the nine months ended September 30, 2000, accounts
receivable increased to $131,932 due to current product sales.
During the nine months ended September 30, 2000, Igene agreed to
the re-payment of $218,984 in loans receivable and accrued
interest 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
$455,995, 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 nine months ended September 30, 1999, the Company
issued 16,666,668 new shares of common stock to directors and
other investors at $.06 per share, or $1,000,000. During the
nine months ended September 30, 2000, the Company issued
10,000,000 new shares to certain directors at $.10 per share or
$1,000,000.
During the nine months ended September 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 nine months ended September 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 September 30, 2000 and 1999, total dividends in
arrears on the Company's preferred stock was $203,267 and
$213,062, respectively, which was included in the carrying value
of the redeemable preferred stock.
-19-
IGENE Biotechnology, Inc. and Subsidiary
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Liquidity and Capital Resources
Historically, the Company has been funded primarily by equity
contributions and loans from stockholders. As of September 30,
2000 and 1999, the Company had working capital of $812,936 and
$1,201,991, respectively. Working capital decreased by $389,055
during the twelve month period ended September 30, 2000. The
Company had cash and cash equivalents of $305,529 and $12,753 as
of September 30, 2000 and 1999, respectively. In order to fund
future operations, the Company plans to obtain additional
capitalization from directors and other investors until
profitable operations occur.
Cash used by operations in the nine months ended September 30,
2000 and 1999 amounted to $1,055,410 and $1,428,672,
respectively. This decrease in cash used in operations of
$373,262 resulted from a temporary halt in production of
AstaXin(R) and increased product sales and reduced litigation
expenses during the nine months ended September 30, 2000.
Cash provided (used) by investing activities for the nine months
ended September 30, 2000 and 1999 amounted to $(5,358) and
$22,931, respectively. The decrease of $28,289 in cash provided
by investing activities resulted primarily from a decrease in the
amount of principal repayments on loan receivable during the nine
months ended September 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 nine months ended
September 30, 2000 and 1999 amounted to $1,150,000 and
$1,053,699, respectively, an increase of $96,301.
-20-
IGENE Biotechnology, Inc. and Subsidiary
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Archer Daniels Midland, Inc. ("ADM") has sued us, alleging patent
infringement and requesting injunctive relief as well as an
unspecified amount of damages. We have filed a $300,450,000
counterclaim concerning the theft of trade secrets. The court
denied ADM's request for preliminary injunctive relief.
Mediation efforts during 1999 did not resolve this dispute, which
has been returned to the court for a judicial disposition.
Presently, a stay on all discovery remains in effect while a
court-appointed expert analyzes the yeast products of both
parties. We believe that it is not probable that this dispute
will result in an unfavorable outcome to Igene. Nonetheless,
should ADM prevail, we could be liable for damages, and we could
also lose the right to use a particular strain of yeast.
However, we expect that this will not affect our ability to make
and sell our product, AstaXin(R).
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 nine months ended September 30, 2000, the Company
issued to certain directors 10,000,000 new shares of common stock
at $.10 per share, or $1,000,000 (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.
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K - None
-21-
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 14, 2000 By /s/Stephen F. Hiu
________________________________
Stephen F. Hiu
President and Treasurer
(On behalf of the Registrant and as
Principal Financial Officer)
-22-
