The accompanying notes are an integral part of the condensed
consolidated financial statements.
The accompanying notes are an integral part of the condensed
consolidated financial statements.
The accompanying notes are an integral part of the condensed
consolidated financial statements.
The accompanying notes are an integral part of the condensed
consolidated financial statements.
IGENE Biotechnology, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(1) Unaudited consolidated financial statements
The September 30, 2007 condensed consolidated financial
statements presented herein are unaudited, and in the
opinion of management, include all adjustments (consisting
only of normal recurring accruals) necessary for a fair
presentation of financial position, results of operation and
cash flows. Such financial statements do not include all of
the information and footnote disclosures normally included
in financial statements prepared in accordance with
accounting principles generally accepted in the United
States of America. This quarterly report on Form 10-QSB
should be read in conjunction with Igene's Annual Report on
Form 10-KSB/A for the year ended December 31, 2006. The
December 31, 2006 condensed consolidated balance sheet is
derived from the audited balance sheet included therein.
The nine and three months ended September 30, 2006 condensed
consolidated statements of operations, the nine months ended
September 30, 2006 condensed consolidated statement of cash
flows and the December 31, 2006 condensed consolidated
balance sheet contain restated financial data. The Company
historically when valuing the shares underlying the warrants
of the Company, has applied a discount to the value of the
shares based on the illiquidity of the shares, applying such
things as blockage discounts to the value of the shares.
Based on the application of illiquidity discounts the
Company felt it was an immaterial adjustment to record a
valuation to the shares underlying the warrants. The
Company has determined to value the shares underlying the
warrants using quoted market prices in connection with the
Company's issuance of promissory notes and convertible
debentures using a Black Scholes model and ignoring any
discounts for illiquidity of shares or blockage discounts.
(2) Nature of Operations
Igene Biotechnology, Inc. (the "Company" or "Igene") was
incorporated under the laws of the State of Maryland on
October 27, 1981 as "Industrial Genetics, Inc." Igene
changed its name to "IGI Biotechnology, Inc." on August 17,
1983 and to "Igene Biotechnology, Inc." on April 14, 1986.
Igene is located in Columbia, Maryland and is engaged in the
business of industrial microbiology and related
biotechnologies. Igene has operational subsidiaries in
Norway and Chile. The Company is engaged in the business of
developing, marketing, and manufacturing specialty
ingredients for human and animal nutrition. Igene was
formed to develop, produce and market value-added specialty
biochemical products. Igene is a supplier of natural
astaxanthin, an essential nutrient in various feed
applications and a source of pigment for coloring farmed
salmon species. Igene also supplies nutraceutical
ingredients, as well as consumer ready health food
supplements, including astaxanthin. Igene is focused on
fermentation technology, pharmacology, nutrition and health
in its marketing of products and applications worldwide.
Igene has devoted its resources to the development of
proprietary processes to convert selected agricultural raw
materials or feedstocks into commercially useful and cost
effective products for the food, feed, flavor and
agrochemical industries. In developing these processes and
products, Igene has relied on the expertise and skills of
its in-house scientific staff and, for special projects,
various consultants.
In an effort to develop a dependable source of production,
on March 18, 2003, Tate & Lyle PLC ("Tate & Lyle") and the
Company announced a 50:50 joint venture to produce AstaXin(R)
for the aquaculture industry. Production utilized Tate &
Lyle's fermentation capability together with the unique
technology developed by Igene. Part of Tate & Lyle's
existing Selby, England, citric acid facility was modified
to include the production of 1,500 tons per annum of this
product. Tate & Lyle's investment of $25 million included
certain of its facility assets then used in citric acid
production. On October 31, 2007, the Company and Tate and
Lyle terminated this joint venture (see Notes 6 and 11).
The Company is currently researching and conducting due
diligence in connection with entering into a contractual
relationship with a third party production facility to
manufacture AstaXin(R) previously produced by the Joint
Venture.
-9-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(continued)
(3) Uncertainty
Igene has incurred net losses in each year of its existence,
aggregating approximately $48,318,000 from inception to
September 30, 2007 and its liabilities exceeded its assets
by approximately $13,959,000 at that date. These factors
indicate that Igene will not be able to continue in
existence unless it is able to raise additional capital and
attain profitable operations.
As discussed in Subsequent Event (note 11) as of October 31,
2007 Igene has terminated its relationship with the Joint
Venture with Tate & Lyle. Igene maintains the saleable
inventory after the termination of the relationship and is
currently reviewing alternatives for a future manufacturing
alternative. In the interim Igene will sell the existing
inventory in order to maintain its relationship with
customers and use these funds to cover expenses.
(4) Noncash investing and financing activities
During the nine months ended September 30, 2006, 7,375
|
shares of redeemable preferred stock, with a recorded
aggregate value of $141,600, were converted into 14,750
shares of common stock.
During the nine months ended September 30, 2006, Fermic,
Igene's manufacturing agent, earned 545,569 shares of common
stock as part of the manufacturing agreement between Fermic
and the Company. Fermic earned 2,250 shares of common stock
for each kilogram of pure astaxanthin produced and delivered
as part of the agreement. The average price was based on
the market value of the shares at the time the product is
produced. With the distribution in the first quarter of
2006, Fermic has earned the 20,000,000 shares in total
available under the agreement. The 545,569 shares were
earned at an average price of $.056 per share for 2006.
During the nine months ended September 30, 2006, 312,000
shares of common stock were issued as part of employee stock
option exercises. The Company received $10,300 based on an
average exercise price of $.033 per share.
During the nine months ended September 30, 2006, 7,884
warrants were exercised for $788. 7,884 new shares of
common stock were issued pursuant to the exercise.
During the nine months ended September 30, 2006 1,000,000
shares of common stock were issued to the company's new Vice
President of Manufacturing as part of his agreement in
accepting the position. The cost was expensed in the third
quarter as payroll expense, at a cost of $.05 per share,
total expense $50,000.
During the nine months ended September 30, 2007 and 2006,
the Company recorded dividends in arrears on 8% redeemable
preferred stock accumulating at $.48 per share aggregating
to $5,344 and $6,524, respectively on preferred stock. The
accrued interest is included in the carrying value of the
redeemable preferred stock.
(5) Long-Term Liabilities
Igene entered into Convertible Promissory Notes (the
"Convertible Notes") with each of the following note holders
for the following respective amounts (a) NorInnova AS
(formerly Forskningsparken I Tromso AS) for $106,500; (b)
Knut Gjernes for $7,500; (c) Magne Russ Simenson for
$278,000; and (d) Nord Invest AS for $313,000. Each of the
Convertible Notes had a maturity date of November 1, 2004.
On November 18, 2005, each of the Convertible Note Holders
provided Igene with written notice of default under each of
the Convertible Notes.
-10-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(continued)
On November 29, 2006, the Convertible Note holders filed a
complaint against the Company in the Circuit Court of Howard
County, Maryland seeking payment of all outstanding amounts
due under the Convertible Notes, the "Notes Litigation". On
February 23, 2007, the Company paid $762,638, representing
the full amount due including interest, to the Convertible
Note holders as settlement of all claims related to the
Notes Litigation. The complaint was dismissed with
prejudice on March 6, 2007.
The funds to settle the Notes Litigation were provided by
Igene's directors. On February 15, 2007, Igene issued and
sold $762,000 in aggregate principal amount of 5%
convertible debentures, 50% each to certain directors of
Igene. These debentures are convertible into shares of
Igene's common stock at $.02 per share. These debentures,
if not converted earlier, become due on February 15, 2017.
(6) Joint Venture
On March 18, 2003, the Company entered into a Joint Venture
Agreement with Tate & Lyle Fermentation Products Ltd.
("Tate & Lyle"). Pursuant to a Joint Venture Agreement, the
Company and Tate & Lyle agreed to form a joint venture (the
"Joint Venture") to manufacture, market and sell Astaxanthin
and derivative products throughout the world for all uses
other than as a nutraceutical or otherwise for direct human
consumption. Tate & Lyle contributed $24,600,000 in cash to
the Joint Venture, while the Company agreed to transfer to
the Joint Venture its technology relating to the production
of astaxanthin and assets related thereto. These assets were
to be used by the Joint Venture in the same manner as
historically used by the Company. The Company and Tate &
Lyle each had a 50% ownership interest in the Joint Venture
and equal representation on the Board of Directors of the
Joint Venture. The value of the Company's investment in the
Joint Venture was recorded at an amount equal to the book
value of the Company's consideration contributed at the
creation of the Joint Venture. As the cost of the Company's
technology and intellectual property had been previously
expensed and had a carrying amount of zero, the initial
investment in the Joint Venture has been recorded with a
book value of $316,869, which represented the unamortized
production costs contributed to the Joint Venture. The
Company also contributed $6,000 to the capital of the Joint
Venture.
As a result of the Joint Venture, the production, sales and
marketing of Astaxanthin now takes place in the
unconsolidated Joint Venture. From inception on March 18,
2003 through September 30, 2007, Igene's portion of the
Joint Venture's net loss was $21,826,251. The loss was a
result of a 50% interest in the following: Gross profit
from inception was a negative $21,304,462 on sales of
$38,380,752, less manufacturing cost of $59,685,214.
Selling and general and administrative expenses were
$16,542,813, and interest expense was $5,805,227. The
resulting loss was $43,652,502. Igene's 50% portion of the
Joint Venture loss was $21,826,251.
Because the Company accounts for its investment in the Joint
Venture under the equity method of accounting, it would
ordinarily recognize as part of loss from equity the loss of
it's 50% ownership portion of the loss of the Joint Venture.
However, losses in the Joint Venture are recognized only to
the extent of the Investment in and Advances to the Joint
Venture. Losses in excess of this amount are suspended from
recognition in the financial statements and carried forward
to offset Igene's share of the Joint Venture's future
income, if any. Igene does not expect to recognize income
from the Joint Venture until all accumulated unrecognized
losses have been eliminated.
-11-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(continued)
At September 30, 2007, prior to the recognition of its
portion of the Joint Venture loss, Igene's investment in the
Joint Venture consisted of $322,869 and its net advances to
the Joint Venture amounted to $1,007,888, for a total of
$1,330,757. Through December 31, 2006, Igene recognized
$1,491,981 of the $15,922,400 loss, which existed as part of
the Joint Venture. In the first six months of 2007, the
balances of the funds due to Igene was reduced by a net
repayment of $258,628, representing the June 30, 2007
balance of $1,233,353. For the three months ended September
30, 2007, Igene recognized a loss from the advance for that
period of $97,404. This advance decreased the additional
suspended loss of $1,293,769 for the quarter. The
cumulative suspended loss at September 30, 2007 is
$20,495,494 and it will be carried forward to offset Igene's
share of earnings from the Joint Venture, if any. The
balance in the Advances to and Investment in Joint Venture
account on the Company's condensed consolidated financial
statements is zero at September 30, 2007.
On October 31, 2007, the Company and Tate & Lyle terminated
this joint venture (see Note 11).
The following condensed statement displays the activity of
the Joint Venture for the period of initial investment at
March 18, 2003 in the Joint Venture through September 30,
2007. As shown 50% of the activity, limited to Igene's
investment, is recorded as part of Igene's Financial
Statements as loss from investment in the Joint Venture:
September 30,
2007
_______________
ASSETS
CURRENT ASSETS
Cash $ 2,645,000
Account Receivable 4,711,000
Inventory 13,069,000
_______________
20,425,000
OTHER ASSETS
Property, plant and equipment, net 19,668,000
Intangibles 24,614,000
_______________
TOTAL ASSETS $ 64,707,000
===============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses
(majority of which is due to one joint venturer) $ 48,419,000
Working capital loan 7,628,000
_______________
TOTAL LIABILITIES 56,047,000
Equity 8,660,000
_______________
TOTAL LIABILITIES AND EQUITY $ 64,707,000
===============
|
Period from March 18, 2003
(initial investment) to
September 30,
2007
_______________
Net Sales $ 38,380,752
Less: manufacturing cost (59,685,214)
_______________
Gross Profit (Loss) (21,304,462)
Less: selling, general and administrative (16,542,813)
_______________
Operating Loss (37,847,275)
Interest Expense (5,805,227)
_______________
Net Loss $ (43,652,502)
Igene's 50% equity interest in the net loss $ (21,826,251)
_______________
Igene's Investment in and Advances to the Joint Venture (1,330,757)
_______________
Igene's suspended loss at June 30, 2007 $ (20,495,494)
===============
|
-12-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(continued)
The following statement displays the significant activity
for the Joint Venture for the three and nine months ended
September 30, 2007 and 2006.
Three Months Ended Nine Months Ended
_________________________________ _________________________________
Sept 30, 2007 Sept 30, 2006 Sept 30, 2007 Sept 30, 2006
_______________ _______________ _______________ _______________
Net Sales $ 3,544,013 $ 1,995,800 $ 10,607,873 $ 7,450,539
Less: manufacturing cost (4,277,044) (2,267,300) (16,746,356) (8,207,494)
_______________ _______________ _______________ _______________
Gross Profit (Loss) (733,031) (271,500) (6,138,483) (756,955)
Less: selling, general and admin (1,021,530) (897,000) (3,452,526) (2,780,319)
_______________ _______________ _______________ _______________
Operating Loss (1,754,561) (1,168,500) (9,591,009) (3,537,274)
Interest Expense (832,977) (495,100) (2,216,693) (1,619,300)
_______________ _______________ _______________ _______________
Net Loss $ (2,587,538) $ (1,663,600) $ (11,807,702) $ (5,156,574)
=============== =============== =============== ===============
50% equity interest $ (1,293,769) $ (831,800) $ (5,903,851) $ (2,578,287)
Igene's Repayments from and additional
(Investment in and
Advances to the Joint Venture) ( 97,404) 11,299 161,224 (6,964)
_______________ _______________ _______________ _______________
Igene's incremental suspended loss
for period $ (1,196,365) $ (843,099) $ (6,065,075) $ (2,571,323)
=============== =============== =============== ===============
|
(7) Stockholders' Deficiency
As of September 30, 2007, 22,268 shares of authorized but
unissued common stock were reserved for issue upon
conversion of the Company's outstanding preferred stock.
As of September 30, 2007, 72,232,334 shares of authorized
but unissued common stock were reserved for issue and
exercise pursuant to the Company's Employee Stock Option
Plans.
As of September 30, 2007, 23,421,273 shares of authorized
but unissued common stock were reserved for the conversion
of outstanding convertible promissory notes in the aggregate
amount of $1,082,500 held by directors of the Company.
As of September 30, 2007, 66,427,651 shares of authorized
but unissued common stock were reserved for the conversion
of outstanding convertible promissory notes held by
directors of the Company.
As of September 30, 2007, 38,250,000 shares of authorized
but unissued common stock were reserved for the conversion
of outstanding convertible promissory notes issued to the
directors as part of the settlement of the ProBio notes.
As of September 30, 2007, 205,261,073 shares of authorized
but unissued common stock were reserved for the exercise of
outstanding warrants.
(8) Basic and diluted net loss per common share
Basic and diluted net loss per common share for the nine-
month periods ended September 30, 2007 and 2006, are
based on 109,337,072 and 108,067,437 shares, respectively,
of weighted average common shares outstanding. The same
figures for the three month period then ended are based
upon 109,337,072 and 108,337,072 weighted average common
shares outstanding. No adjustment has been made for any
common stock equivalents outstanding because their effects
would be antidilutive as a result of the Company's losses.
As of September 30, 2007 and 2006, potentially dilutive
shares totaled 405,614,599 and 369,969,462, respectively.
-13-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(continued)
(9) Income Taxes
The Company uses the liability method of accounting for
income taxes as required by SFAS No. 109, "Accounting for
Income Taxes". Under the liability method, deferred-tax
assets and liabilities are determined based on differences
between the financial statement carrying amounts and the tax
bases of existing assets and liabilities (i.e., temporary
differences) and are measured at the enacted rates that will
be in effect when these differences reverse. Deferred
income taxes will be recognized when it is deemed more
likely than not that the benefits of such deferred income
taxes will be realized; accordingly, all net deferred income
taxes have been eliminated by a valuation allowance.
(10) Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards Number
157 - Fair Value Measurements ("SFAS 157"). SFAS 157 defines
fair value, establishes a framework for measuring fair value
in generally accepted accounting principles ("GAAP"), and
expands disclosures about fair value measurements. Prior to
SFAS 157, there were different definitions of fair value and
limited guidance for applying those definitions in GAAP.
Moreover, that guidance was dispersed among the many
accounting pronouncements that require fair value
measurements. SFAS 157 clarifies that the exchange price is
the price in an orderly transaction between market
participants to sell the asset or transfer the liability in
the market in which the reporting entity would transact for
the asset or liability, that is, the principal or most
advantageous market for the asset or liability. SFAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2008. The Company is currently
evaluating the impact, if any, that SFAS 157 will have on
its financial position, results of operations and cash
flows.
In June 2006, the Financial Accounting Standards Board
("FASB") issued Financial Accounting Standards Board
Interpretation ("FIN") No. 48, "Accounting for Uncertainty
in Income Taxes-an interpretation of FASB Statement
No. 109." FIN No. 48 provides a comprehensive model for the
recognition, measurement and disclosure in the financial
statements of uncertain tax positions taken or expected to
be taken on a tax return. The Company adopted FIN No. 48
effective January 1, 2007. The interpretation had no impact
on financial position, results of operations, earnings per
share, or cash flows.
In September 2006, the Securities and Exchange Commission
issued SAB No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year
Financial Statements." SAB No. 108 was issued to address
diversity in practice in quantifying financial statement
misstatements. Current practice allows for the evaluation of
materiality on the basis of either (1) the error quantified
as the amount by which the current year income statement was
misstated ("rollover method") or (2) the cumulative error
quantified as the cumulative amount by which the current
year balance sheet was misstated ("iron curtain method").
The guidance provided in SAB 108 requires both methods to be
used in evaluating materiality ("dual approach"). SAB
No. 108 permits companies to initially apply its provisions
either by (1) restating prior financial statements as if the
dual approach had always been used or (2) recording the
cumulative effect of initially applying the "dual approach"
as adjustments to the carrying values of assets and
liabilities as of January 1, 2006 with an offsetting
adjustment recorded to the opening balance of retained
earnings. There were no matters warranting the Company's
consideration under the provisions of SAB No. 108 and,
therefore, it did not have an impact on the Company's
financial position, results of operations, earnings per
share or cash flows.
-14-
IGENE Biotechnology, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(continued)
In February 2007, the FASB issued SFAS No. 159, "The Fair
Value Option for Financial Assets and Financial Liabilities-
Including an Amendment of FASB Statement No. 115." This
Standard allows entities to voluntarily choose, at specified
election dates, to measure many financial assets and
financial liabilities (as well as certain nonfinancial
instruments that are similar to financial instruments) at
fair value. The election is made on an instrument-by-
instrument basis and is irrevocable. If the fair value
option is elected for an instrument, the Statement specifies
that all subsequent changes in fair value for that
instrument shall be reported in earnings. SFAS No. 159 is
effective beginning on January 1, 2008. We are currently
evaluating the impact this new Standard could have on our
financial position and results of operations.
(11) Subsequent Event
On October 31, 2007, Igene Biotechnology, Inc. (the
"Company") and Tate & Lyle Fermentation Products Ltd.
("T&L") entered into a Separation Agreement (the
"Agreement") pursuant to which the Joint Venture
Agreement dated March 19, 2003, as amended, between the
parties (the "Joint Venture") was terminated. As part of
the Agreement, the Company sold to T&L its 50% interest in
the joint venture and the joint venture sold to the Company
its intellectual property, inventory and certain assets
and lab equipment utilized by the Joint Venture. The
purchase price paid by T&L to the Company for its 50%
interest was 50% of the Joint Venture's net working
capital. The purchase price paid by the Company for the
inventory was an amount equal to 50% of the joint venture's
net working capital, the assumption of various liabilities
and the current market price of the inventory, less
specified amounts. The purchase price paid by the Company
for the intellectual property was $1.00. The purchase price
paid by the Company for the assets and lab equipment was
$1,000,000. In addition, the Company agreed to pay to T&L an
amount equal to 5% of the Company's gross revenues from
the sale of astaxanthin up to a maximum of $5,000,000.
T&L agreed for a period of five years not to engage in the
astaxanthin business.
-15-
IGENE Biotechnology, Inc. and Subsidiary