U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number: 001-13467
COMMONWEALTH BIOTECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Virginia
(State or other jurisdiction 54-1641133
of incorporation or organization) (I.R.S. Employer Identification No.)
911 East Leigh Street, Suite G-19, Richmond, Virginia 23219
(Address of principal executive offices)
(804) 648-3820
(Issuer's telephone number)
-----------------------------------------
Check mark 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
As of November 6, 1998, 1,622,464 shares of common stock, without par
value, of the issuer were outstanding.
Transitional Small Business Disclosure Format (Check one)
Yes: No: X
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
COMMONWEALTH BIOTECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
Unaudited
---------
ASSETS
Current Assets
<S> <C> <C>
Cash and Cash Equivalents $ 4,139,457 $ 6,273,765
Accounts Receivable 200,328 153,227
Prepaid Expenses 38,478 56,174
Inventory 21,799 6,799
------------ ------------
Total Current Assets 4,400,062 6,489,965
Property Plant and Equipment, net 3,992,100 1,435,812
------------ ------------
Other Assets
Restricted Cash 1,832,289 --
Bond Issue Cost, net 260,513 --
Deposits and Other 5,000 5,829
------------ ------------
Total Other Assets 2,097,802 5,829
------------ ------------
Total Assets $ 10,489,964 $ 7,931,606
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts Payable & Accrued
Expenses 239,699 279,570
Current Maturities of
Long-term Debt 30,000 30,000
Demand Note 269,680 314,680
------------ ------------
Total Current Liabilities 539,379 624,250
------------ ------------
Long-term Debt less Current
Maturities 4,000,000 --
------------ ------------
Total Liabilities 4,539,379 624,250
------------ ------------
SHAREHOLDERS EQUITY
Common Stock, no par value
10,000,000 authorized
shares, 1,622,464
and 1,620,514 shares
issued and outstanding at
September 30, 1998
and December 31, 1997,
respectively
Paid-in-Capital 8,774,164 8,762,464
Accumulated Deficit (2,823,579) (1,455,108)
------------ ------------
Total Stockholders Equity 5,950,585 7,307,356
------------ ------------
Total Liabilities and Stockholders
Equity $ 10,489,964 $ 7,931,606
============ ============
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September September September September
30,1998 30,1997 30,1998 30,1997
------- ------- ------- -------
REVENUE
<S> <C> <C> <C> <C>
Short-term Projects $ 188,681 $ 181,186 $ 687,928 $ 604,050
Long-term Projects 97,432 87,475 384,369 552,512
Grants 107,687 76,650 196,456 247,961
----------- ----------- ----------- -----------
Total Revenue 393,800 345,311 1,268,753 1,404,523
----------- ----------- ----------- -----------
COST AND EXPENSES
Cost of Services 252,638 294,425 819,312 643,935
Sales, Gen. And Admin 452,976 483,119 1,567,565 732,607
Research and Development 183,258 108,966 396,518 275,574
----------- ----------- ----------- -----------
TOTAL COST AND EXPENSES 888,872 886,510 2,783,395 1,652,116
----------- ----------- ----------- -----------
OPERATING LOSS (495,072) (541,199) (1,514,642) (247,593)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES)
Amortization (2,673) (113,942) (5,755) (113,942)
Interest Expense (51,840) (217,122) (133,325) (227,797)
Interest Income 91,098 27,122 285,251 30,476
----------- ----------- ----------- -----------
Total Other Income
(Expense) 36,585 (303,942) 146,171 (311,263)
----------- ----------- ----------- -----------
NET LOSS $ (458,487) $ (845,141) $(1,368,471) $ (558,856)
============ =========== =========== ===========
Loss per share basic
and diluted (0.2827) (11.8578) (0.8441) (7.8411)
Weighted average common
shares outstanding 1,621,956 71,273 1,621,135 71,273
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, September 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating
activities
Net Loss $(1,368,471) $ (558,855)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and
amortization 220,086 213,728
Loss on disposal of
equipment 11,275 --
Interest earned on
restricted cash (76,967) --
Contributed Services 36,346
Accounts receivable (47,101) (50,089)
Prepaid expenses 17,696 (75,850)
Inventory (15,000) --
Accrued Interest Payable -- 205,446
Accounts payable and accrued
expenses (39,871) 124,854
----------- -----------
Net cash used in operating
activities $(1,298,353) $ (104,420)
=========== ===========
Cash flows from investing
activities
Purchases of property plant and
equipment (616,387) (1,041,929)
=========== ===========
Cash flows from financing
activities
Proceeds from issuance of Common
Stock 11,700 --
Proceeds from purchase of
warrants by founding
shareholders -- 100
Proceeds from notes
payable -- 168,481
Bond issue costs (186,268) --
Payments made for expenses
related to initial
public offering (82,038)
Proceeds from issuance of convertible
subordinated notes, net of deferred
loan costs -- 2,626,269
Principal payments on long-term
debt (45,000) (35,731)
Shareholder distributions -- (96,851)
----------- -----------
Net cash provided by (used in)
financing activities (219,568) 2,580,230
=========== ===========
Net increase (decrease) in cash and cash
equivalents (2,134,308) 1,433,881
Cash and cash equivalents,
beginning 6,273,765 260,357
----------- -----------
Cash and cash equivalents, ending $ 4,139,457 $ 1,694,238
=========== ===========
Supplemental Disclosures
Cash paid for
interest $ 148,060 $ 22,351
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements
<PAGE>
Notes To Condensed Financial Statements
(1) In the opinion of the Company, the accompanying condensed financial
statements which are unaudited, except for the condensed balance sheet
dated December 31, 1997, contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position as of September 30,1998 and December 31, 1997, the results of
operations for the three and nine months ended September 30, 1998 and
1997, and cash flows for the nine months ended September 30, 1998 and
September 30, 1997.
(2) The results of operations for the three months and nine months ended
September 30, 1998 and September 30, 1997, respectively are not
necessarily indicative of the Company's results to be expected for
the full year.
(3) Earnings (loss) per share: The Company follows the guidance provided
in FASB Statement No. 128, Earnings Per Share, which establishes
standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential
common stock. Those entities that have only common stock outstanding
are required to present basic earnings per share amounts. All other
entities are required to present basic and diluted per share
amounts. Diluted per share amounts assume the conversion, exercise
or issuance of all potential common stock instruments such as
options, warrants and convertible securities, unless the effect is
to reduce a loss or increase earnings per share. At September 30,
1998 the Company had stock options outstanding which were
antidilutive. At September 30, 1997, there were no options
outstanding, and, therefore, basic and diluted earnings (loss) per
share were equal.
(4) During the period ended September 30, 1998, the Company issued
industrial revenue bonds in the amount of $4,000,000. Of this amount
$403,919 was invested in land, $266,267 was expended on bond
issuance costs and $1,888,726 was spent on the construction of the
Company's new laboratory facility. The remainder of the funds,
including accumulated interest income of approximately $79,188, is
maintained in other assets as restricted cash. These bonds will
mature between March 15, 2001 and March 15, 2012, and interest will
accrue at annual rates from 5.20% to 6.30%.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following should be read in conjunction with Company's Financial
Statements and Notes thereto included herein.
OVERVIEW
The Company's revenues are derived principally from providing
protein/peptide and DNA/RNA chemistries and related analytical services to
researchers in the biotechnology industry. Development of innovative
technologies for biotechnology requires sophisticated laboratory techniques.
Many participants in the industry do not have the facilities or personnel
necessary to perform these techniques, and contract it out to the Company and
other organizations.
The Company generally serves and derives revenue from two types of
customers: those who require a discrete set of services ("short-term projects"),
and those who contract with the Company on an extended basis for performance of
a variety of integrated services ("long-term projects"). More often than not,
short-term customers provide the Company repeat business. In either case, the
Company has no interest in any technologies which may result from these
services.
The Company also derives revenues from government grants which fund the
bulk of the Company's research efforts for its proprietary technologies. Unlike
its short-term or long-term projects, research and development on the Company's
proprietary technologies focuses on commercializing properties that the Company
owns or licenses from third parties. All government grants are expense
reimbursement grants that provide for reimbursement on a monthly basis of the
Company's direct costs incurred in a research project, plus indirect costs
stated as a percentage of direct costs.
REVENUES
Gross revenues increased by $48,489, or 14.0%, from $345,311 in the fiscal
quarter ended September 30, 1997 (the "1997 Quarter") to $393,800 in the fiscal
quarter ended September 30, 1998 (the "1998 Quarter"). Gross revenues decreased
by $135,770 or 9.7% from $1,404,523 during the nine-month period from January 1,
1997 through September 30, 1997 (the "1997 Period") to $1,268,753 during the
nine-month period from January 1, 1998 through September 30, 1998 (the "1998
Period").
Revenues realized from short-term projects increased by $83,878, or 13.9%,
from $604,050 during the 1997 Period to $687,928 during the 1998 Period.
Revenues from DNA sequence analysis increased by $50,606 or 19.9% from $253,800
during the 1997 Period to $304,406 during the 1998 Period. This increase is
primarily due to the increased volume of work on a per order basis from our
customers. Revenues attributable to protein sequencing increased by $39,570, or
82.3%, from $48,075 during the 1997 Period to $87,645 during the 1998 Period.
Revenues derived from protein sequencing increased primarily due to new
customers placing orders with the Company. Other uncategorized revenues
decreased by $32,442 or 32.9% from $98,454 during the 1997 Period to $66,012
during the 1998 Period. This decrease is primarily due to administrative changes
in invoicing; revenues previously identified as "other" are now more properly
classed under defined work items within the Company. Revenues from amino acid
analysis decreased by $13,610, or 27.7%, from $49,129 during the 1997 Period to
$35,519 during the 1998 Period. This decrease primarily resulted in a reduction
of services associated with one of the Company's major clients. Revenues
realized from long-term projects decreased by $168,143, or 30.4%, from $552,512
during the 1997 Period to $384,369 during the 1998 Period. This decrease is
primarily due to the delay in the awarding of new research contracts for 1998.
The Company is unaware of any specific trends relating to the timing associated
with the award of long-term research contracts. The decision to commence a
long-term project is solely dependent on the client's financial and strategic
ability to initiate such project. However, the Company is aggressively seeking
new long-term contract clients, in part to replace the loss of work experienced
because of the cutbacks in outsourcing by one of its clients, and because the
Company has identified long-term contracts as a major area of potential revenue
growth.
In the 1998 Quarter, the Company received the award of five new
long-term contracts (each valued in excess of $ 25,000), and the award
of eighteen additional projects (each valued in excess of $25,000) remain
pending. The Company anticipates that it will receive the award of at least one
of these additional long-term contracts in the fourth quarter of 1998. Two of
these pending projects are in the area of genetic identity analysis. Although
the Company's management is taking an active role in negotiating these new
contracts, management is unable to say with certainty when or whether these
other new long-term contracts will be awarded. Regardless, it is noteworthy that
the new contracts awarded or being negotiated represent an integration of the
Company's core technologies.
The Company also commenced 13 short- and/or long-term projects (each
valued at less than $25,000) in the 1998 Quarter in the general area of
molecular biology services. This influx of molecular biology projects is a
direct outgrowth of the emphasis placed by the Company's management in
attracting these clients. Molecular biology services were previously identified
by management as a focal area for the Company's future growth.
The Company experienced a decrease in revenue realized from government
grants in the amount of $51,505, or 20.8%, from $247,961 during the 1997 Period
to $196,456 during the 1998 Period. This decrease in revenue is primarily due to
the delay of certain governmental agencies in the awarding of new research
grants.
During the 1998 Period, the Company had one ongoing Phase II Small
Business Technology Research grant (SBTR) from the National Institutes of Health
(NIH). In addition, during the 1998 Quarter, the Company received the award of a
Phase II Small Business Innovative Research award (SBIR) ($238,000) from the
United States Department of Agriculture (USDA) and a Phase I SBIR award
($100,000) from the NIH for development of rapid assays for the detection of
botulism for the period July 1, 1998 to December 30, 1998. Work began in late
September on the Phase II SBIR grant from USDA for diagnosing equine infectious
anemia infections in the amount of $200,000 for the period September 1, 1998
through August 31, 2000.
The Company experiences quarterly fluctuations in all three revenue
categories. Engagement for all future projects is highly dependent upon the
customer's satisfaction with the services previously provided, and upon factors
beyond the Company's control, such as the timing of product development and
commercialization programs of the Company's customers. The Company is unable to
predict for more than a few months in advance the volume and dollar amount of
future projects in any given period. The combined impact of commencement and
termination of research contracts from several large customers and unpredictable
fluctuations in revenue for laboratory services can result in very large
fluctuations in financial performance from quarter to quarter. Until recently,
the Company derived a larger portion of its revenues from short-term projects.
However, during the 1998 Quarter, the Company has undertaken more long-term
contract research projects. As of September 30, 1998, the Company served over
600 clients worldwide.
EXPENSES
Cost of services consists primarily of labor and laboratory supplies. Cost
of services decreased by $41,787, or 14.2%, from $294,425 in the 1997 Quarter to
$252,638 in the 1998 Quarter. Cost of services increased by $175,377, or 27.2%,
from $643,935 during the 1997 Period to $819,312 during the 1998 Period. The
cost of services as a percentage of revenue was 45.8% and 64.6% during the 1997
and 1998 Periods, respectively.
Labor costs increased by $75,932, or 24.8%, from $305,685 during the 1997
Period to $381,617 during the 1998 Period. This increase in labor reflects
personnel that have been hired based on the Company's growth strategy. The costs
for laboratory supplies increased by $58,742, or 18.8%, from $312,269 during the
1997 Period to $371,011 during the 1998 Period. These increased costs are
directly attributable to the purchase of reagents, chemicals and materials for
the startup of the Company's molecular biology laboratory in response to client
demands. Other costs (travel, equipment rental, maintenance of equipment, etc)
increased by $40,703 or 156.7% from $25,981 during the 1997 Period to $66,684
during the 1998 Period.
Sales, general and administrative expenses ("S,G&A") consist primarily of
compensation and related costs for administrative, marketing and sales
personnel, facility expenditures, professional fees, consulting, taxes, and
depreciation. Total S,G&A expenses decreased by $30,143, or 6.2%, from $483,119
in the 1997 Quarter to $452,976 in the 1998 Quarter. Total S,G&A expenses
increased by $834,958, or 114.0%, from $732,607 during the 1997 Period to
$1,567,565 during the 1998 Period. As a percentage of revenue, these costs were
52.2% and 123.6% during the 1997 Period and 1998 Period, respectively.
S,G, & A expenses in the 1998 Quarter decreased from the 1997 Quarter
because $75,000 of the bonus monies paid to the Company's executive officers
were realized in the 1997 Quarter. There was no corresponding expense in the
1998 Quarter. Compensation and benefits expenses increased by $245,120 or 65.8%
from $372,432 during the 1997 Period to $617,552 during the 1998 Period. The
increase in total compensation and benefits expenses in the 1998 Period compared
to the 1997 period is primarily attributable to addition of the Company's
executive officers to the payroll on a full-time basis commencing on July 1,
1998, and to salary and benefit costs for various support personnel hired to
assist in implementing the Company's growth strategy.
Costs for facilities increased by $109,113, or 198.8% from $54,889 during
the 1997 Period to $164,002 during the 1998 Period. Additional space during the
1998 Period was necessary in continuing the Company's growth strategy. Leasing
costs associated with additional laboratory space for operations increased by
$90,608 or 239.9% from $37,771 during the 1997 Period to $128,379 during the
1998 Period. Other facility costs include increases in telephone use ($6,307)
and waste disposal ($10,949). Professional fees increased by $78,104 or 401.3%
from $19,465 during the 1997 Period to $97,569 during the 1998 Period. This
increase was primarily due to legal and accounting costs associated with the
year-end audit, quarterly accounting reviews, general legal support, and
corporate liability insurance costs. Consulting fees increased by $25,159 or
94.2% from $26,716 in the 1997 Period to $51,875 in the 1998 Period. This
increase resulted primarily from the payments made to Board members for three
regularly scheduled quarterly board meetings in the 1998 Period, compared to one
meeting in the 1997 Period. Depreciation increased by $115,279 or 115.5% from
$99,786 during the 1997 Period to $215,065 during the 1998 Period due to the
purchase of additional laboratory equipment consistent with expanding the
Company's technology base.
Marketing costs increased by $128,714 or 209.6% from $61,400 during the
1997 Period to $190,114 during the 1998 Period. Allocation of salaries and
fringe benefits, expenditures for a new Company brochure, additional advertising
in various magazines, contracting of a marketing firm, travel and trade show
expenditures contributed to these increased costs.
Expenditures during the 1998 Period for selling amounted to $53,353.
Expenditures in selling include personnel costs, travel, and office expenses.
There were no expenses for selling during the 1997 Period. Selling expenditures
have been incurred in the 1998 Period as part of the Company's growth strategy.
The Company has hired an account executive to market the Company's technologies.
Total expenditures for grant-related research and development activities,
and for in-house research and development activities, increased by $74,292 or
68.2% from $108,966 in the 1997 Quarter to $183,258 in the 1998 Quarter. The
Company delineates its research and development activities between those
performed under government grants, and those performed in the absence of such
grants and funded from working capital. Thus, expenditures to perform
grant-related research activities increased by $26,223 or 39.5% from $66,373
in the 1997 Quarter to $92,596 in the 1998 Quarter. All of the Company's grant
related expenditures are reimbursed from the appropriate governmental agency.
Expenditures made by the Company for in-house research activities increased by
$48,069 or 112.9% from $42,593 in the 1997 Quarter to $90,662 in the 1998
Quarter. In the 1998 Quarter, as a result of the Company's in-house research and
development efforts, the Company became registered under the Clinical
Laboratories Improvement Act (CLIA) , with pending accreditation by the Virginia
Department of Health, to perform analysis of human clinical samples for the
presence of known genetic markers, and the Company received accreditation by the
United States Department of Agriculture to receive bovine DNA samples from
Europe to perform genetic, lineage, and identity analysis. Lastly, in the 1998
Quarter, the Company passed another accreditation level with the National
Forensic Science Technology Center (NFSTC) to perform DNA identity testing for
submission of data into the Combined DNA Index System (CODIS) data base.
Total expenditures for grant-related research and development activities
and for in-house research and development activities increased by $120,944 or
43.9% from $275,574 during the 1997 Period to $396,518 during the 1998 Period.
Total grant-related research and in-house research as a percentage of revenue
were 19.6% and 31.3% during the 1997 and 1998 Periods, respectively.
Expenditures to perform grant-related research and development activities
decreased by $36,520 or 19.0% from $192,490 during the 1997 Period to $155,970
during the 1998 Period. This decrease is due to the late startup of two new
grants.
Expenditures made by the Company to perform in-house research activities
increased by $157,464 or 189.5% from $83,084 during the 1997 Period to
$240,548 during the 1998 Period. In addition to its in-house research and
development projects for establishing fundamental methods for genetic testing
for agricultural and human applications, the Company is actively engaged in
developing methods of genome sequence analysis, molecular modeling, large scale
peptide synthesis, and novel methods for preparing peptide-enzyme conjugates. In
late September, 1998, the Company entered into a contract with the Mattson Jack
Group to perform a global market assessment of the met and unmet needs of the
Company's heparin antagonist product, HepArrest. Phase one costs of the Mattson
Jack Group contract amounted to $23,271.
<PAGE>
OTHER INCOME AND EXPENSES
Interest income is derived from investing the unused portion of the funds
realized by the Company from the private placement of $3,000,000 aggregate
principal amount of convertible notes (Notes) in June 1997 and the initial
public offering (IPO) of Company's common stock in October 1997. Interest income
is also derived from investing the unused portion of the funds realized by the
Company from the successful sale of $4,000,000 principal amount of industrial
revenue bonds (IRBs) for construction of the Company's new laboratory facility
in March 1999.
Interest income to the Company increased by $63,976 or 235.9% from
$27,122 in the 1997 Quarter to $91,098 in the 1998 Quarter. Interest income
realized from unused funds from the sale of the Notes increased by $30,429 or
111.5% from $27,122 in the 1997 Quarter to $57,371 in the 1998 Quarter. Interest
income earned from the unused portion of the funds realized from the sale of
IRBs amounted to $33,727. There was no interest income from the proceeds of sale
of the IRBs in the 1997 Quarter.
Interest income to the Company increased by $254,775 or 836.0% from
$30,476 in the 1997 Period to $285,251 in the 1998 Period. Interest income
realized from unused funds from the sale of the Notes increased by $175,545 or
575.2% from $30,518 in the 1997 Period to $206,063 in the 1998 Period. Interest
income earned from the unused portion of the funds realized from the sale of
IRBs amounted to $79,188. There was no interest income earned from the unused
portion of the funds realized from the sale of IRBs in the 1997 Period. Interest
income will be reduced in the near future as the Company utilized funds to
compete the development and relocation to the Company's new laboratory facility.
Interest expense incurred by the Company in the 1998 Quarter included (1)
interest paid to financial institutions on loans made to the Company; (2)
interest paid to the trustee for the Company's IRBs; and (3) amortization of
bond costs incurred as a consequence of the completion of the Company's IRB
financing. Interest costs incurred by the Company in the 1997 Quarter included
(1) interest paid to financial institutions as loans made to the Company; (2)
interest expense related to a one time charge as a result of issuance of
theNotes; and (3) amortization of loan costs associated with the Notes.
Interest expense decreased by $165,282 or 76.1% from $217,122 in the 1997
Quarter to $51,840 in the 1998 Quarter. During the 1997 Quarter, the Company
experienced a one-time charge to interest expense amounting to $205,446 as a
result of issuance of the Notes. Interest paid to financial institutions on
loans made to the Company decreased by $4,869 or 41.7%, from $11,676 in the
1997 Quarter to $6,807 in the 1998 Quarter. Interest expense paid to the trustee
for the Company's IRBs was $45,033 in the 1998 Quarter there was no interest
expense associated with the IRBs in the 1997 Quarter. Amortization costs
decreased by $111,269 from 113,942 in the 1997 Quarter to $2,673 in the 1998
Quarter. The 1998 amortization represents loan amortization costs for the new
facility as compared to 1997 costs for the amortization of the Notes.
Interest expense decreased by $94,473 or 41.5% from $227,797 in the 1997
Period to $151,646 in the 1998 Period. During the 1997 Period, the Company
experienced a one-time charge to interest expense amounting to $205,446 as a
result of issuance of the Notes in June 1997. Interest paid to financial
institutions remained relatively flat in both the 1997 Period and 1998 Period.
The total outstanding principal amount of these loans as of September 30, 1998,
is $269,680. Interest expense paid to the trustee for the Company's IRBs was
$111,977 in the 1998 Period. There was no interest expense associated with the
IRBs in the 1997 Period. Amortization cost decreased by $108,187 from 113,942 in
the 1997 Period to $5,755 in the 1998 Period. As previously stated, the 1998
amortization represents loan amortization costs for the new facility as compared
to 1997 costs for the amortization of loans associated with the Notes.
LIQUIDITY AND CAPITAL RESOURCES
Consistent with the Company's implementation of its growth strategy, the
1998 Period showed a decrease in net operating cash flow in the amount of
$1,298,353, as compared to a decrease of $104,420 for the 1997 Period. These
deficits for both the 1998 Period and the 1997 Period are due to substantial
investments in a number of important facets of the Company's business. These
cost outlays were made possible by capital realized from the Company's (i)
private placement of the Notes and are part of (ii) IPO of common stock. These
deficits were fully anticipated by the Company's management. The Company
believes that its liquidity and capital resources will be sufficient to finance
anticipated needs for the foreseeable future.
Net working capital as of December 31, 1997 and September 30, 1998 was
$5,865,715 and $3,860,683 respectively. This decrease is a direct result of
purchases of equipment ($486,543), costs associated with the new facility
($278,007), implementation of marketing and selling divisions within the Company
($243,467), and costs associated with additional staffing and direct materials
necessary to expand the Company's technology offerings ($997,105). Upon the
completion of the Company's new facility and the purchase of laboratory
equipment, the Company's management expects these levels of expenditures to be
significantly reduced.
IRBs were sold by the Company to facilitate construction of the Company's
laboratory facility in Gateway Centre in Chesterfield County, Virginia. The IRB
proceeds are restricted and may only be used for the construction of the
Company's new facility, which began in early June and is anticipated to be
completed in December 1998. All of the Company's administrative and research
operations will be consolidated into this facility as early as the beginning of
December 1998. The Company's capital commitments consist of the construction of
its new laboratory and office facility, the total construction cost of which is
expected to be $5,350,000. Of this amount, $4,000,000 will be paid with the
proceeds from the sale of the IRBs, and $1,350,000 will be paid by the Company
out of working capital.
<PAGE>
YEAR 2000 PROJECT
Many currently installed computer systems and software products are
programmed to assume that the century portion of a date was "19" to conserve the
use of storage and memory. This assumption resulted in the use of two digits
(rather than four) to define an applicable year. Accordingly, computer systems
that rely on two digits to define an applicable year may recognize a date using
"00" as the year 1900, rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process or transmit data or engage in
normal business activities. The Company's ability to operate is, to a large
extent, dependent upon the proper operation of its computer system and those of
its customers. To the extent that Year 2000 issues result in the long-term
inoperability of Company's computer system or those of its customers, the
Company's results of operation and financial condition will be materially and
adversely affected.
The Company is currently in the process of assessing its Year 2000
readiness. This assessment includes a review of the Company's internal
information technology systems, non-information technology systems and the
systems of third parties upon which the Company may rely. There can be no
assurance that the Company's systems, as a whole, are Year 2000 compliant. The
ability to address Year 2000 issues is, to a large extent, dependent upon the
remediation activities of third parties. The Company is requesting statements of
Year 2000 compliance for third party technology providers associated with the
Company's core information systems infrastructure.
The Company is in the process of initiating formal communications with all
of its customers to determine the extent to which the Company is vulnerable to
those third parties' failures to remediate their own year 2000 issues. The
Company expects to complete this process by December 31, 1998.
Although the cost of the Company's Year 2000 remediation program has not
yet been finalized, the Company estimates that these costs will not exceed
$30,000 and, in any event, believes that such costs will not have a material,
adverse effect upon the Company's results of operation or financial condition.
FORWARD LOOKING STATEMENTS
Management has included herein certain forward looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. When used,
statements which are not historical in nature, including the words
"anticipated", "estimate", "should", "expect", "believe", "intend", and similar
expressions are intended to identify forward-looking statements. Such statements
are, by their nature, subject to certain risks and uncertainties. Among the
factors that could cause the actual results to differ materially from those
projected are the following: business conditions and the general economy the
development and implementation of the Company's long-term business goals; the
federal, state, and local regulatory environment; lack of demand for the
Company's services; the ability of the Company's customers to perform services
similar to those offered by the Company "in-house;" and potential cost
containment by the Company's customers resulting in fewer research and
development projects. Other risks, uncertainties, and factors that could cause
actual results to differ materially from those projected are detailed from time
to time in reports filed by the Company with the Securities and Exchange
Commission, including Forms 8-K, 10-QSB, and 10-KSB.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not currently involved in any legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
On October 17, 1997, the Securities and Exchange Commission declared the
Company's Registration Statement on Form SB-2 (File No. 333-31731) effective
(the "Registration Statement"). The Registration Statement related to the
Company's IPO of common stock. Pursuant to the Registration Statement, the
Company registered (i) 1,015,000 shares of common stock (the "IPO Stock"), (ii)
warrants to purchase an aggregate of 101,500 shares of common stock (the
"Underwriter Warrants"), (iii) 101,500 shares of common stock issuable upon the
exercise of the Underwriter Warrants (the "Underwriter Shares") and (iv) 100,000
shares of common stock (the "Management Shares") issuable upon the exercise of
warrants issued to certain executive officers of the Company (the "Management
Warrants"). In addition, the Registration Statement registered the resale of (x)
an aggregate of 541,370 shares of common stock issuable upon the conversion of
certain convertible notes issued by the Company (the "Notes Shares") and (y) the
Management Warrants.
The Company sold: (a) 1,015,000 shares of IPO Stock (aggregate offering
price of $6,090,000), (b) 101,500 Underwriter Warrants (aggregate offering price
of $101.50), and (c) 100,000 Management Warrants (aggregate price of $100).
From October 17, 1997 through September 30, 1998, expenses related to the
Company's initial public offering were approximately $672,422. Of this amount
$487,200 were attributable to underwriting discounts. This amount, however, does
not reflect the issuance of the Underwriter Warrants as additional underwriting
compensation. The net proceeds of the IPO were approximately $5,417,578. Charles
A. Mills, III and Peter C. Einselen, each a director of the Company, also serve
as executive officers of Anderson & Strudwick Incorporated, the underwriter of
the IPO.
From October 17, 1997 through September 30, 1998, the Company spent
approximately $607,823 of the net proceeds of the IPO as follows: (1) $162,986
on capital expenditures, (2) $8,283 for the development of the Company's new
laboratory facility, (3) $56,753 on marketing, (4) $25,054 on sales, (5)
$105,950 on personnel and (6) $248,797 on production operating expenses. The
remaining proceeds are invested in an interest-bearing account at a commercial
bank.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit Number Description of Exhibit
-------------- ----------------------
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Underwriter's Warrant, as amended (1)
4.3 Form of Management Warrant, as amended (1)
4.4 Indenture of Trust by and between the Virginia Small
Business Financing Authority and Crestar Bank
relating to the issuance of industrial revenue bonds
for the benefit of the Company (2)
10.1 Placement Agreement by and between the Company and
Anderson & Strudwick, Incorporated (1)
10.2 Warrant Agreement between the Company and Anderson &
Strudwick, Incorporated (1)
10.3 Warrant Agreement between the Company and Richard J.
Freer, as amended (1)
10.4 Warrant Agreement between the Company and Thomas R.
Reynolds, as amended (1)
10.5 Warrant Agreement between the Company and Gregory A.
Buck, as amended (1)
10.6 Warrant Agreement between the Company and Robert B.
Harris, as amended (1)
10.7 Employment Agreement for Richard J. Freer (1)
10.8 Employment Agreement for Thomas R. Reynolds (1)
10.9 Employment Agreement for Robert B. Harris (1)
10.10 Executive Severance Agreement for Richard J. Freer
(1)
10.11 Executive Severance Agreement for Thomas R. Reynolds
(1)
10.12 1997 Stock Incentive Plan, as amended (1)
10.13 Form of Incentive Stock Option Agreement (1)
10.14 Loan Agreement by and between the Virginia Small
Business Financing Authority and the Company (2)
27.1 Financial Data Schedule (3)
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2, Registration No. 333-31731, as amended.
(2) Incorporated by reference to the Company's Current Report on Form 8-K,
dated April 6, 1998, File No. 001-13467.
(3) Filed herewith.
(b) Reports on Form 8-K.
During the fiscal quarter ended September 30, 1998, the Company filed one
Current Report on Form 8-K, dated August 24, 1998, announcing the resignation of
Gregory A. Buck, Ph.D., who had served as the Company's Senior Vice President,
Chief Scientific Officer, Secretary and Director.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
COMMONWEALTH BIOTECHNOLOGIES, INC.
By: /s/James H. Brennan
-----------------------------------
James H. Brennan
Controller
November 13, 1998
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Exhibit
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Underwriter's Warrant, as amended (1)
4.3 Form of Management Warrant, as amended (1)
4.4 Indenture of Trust by and between the Virginia Small
Business Financing Authority and Crestar Bank
relating to the issuance of industrial revenue bonds
for the benefit of the Company (2)
10.1 Placement Agreement by and between the Company and
Anderson & Strudwick, Incorporated (1)
10.2 Warrant Agreement between the Company and Anderson &
Strudwick, Incorporated (1)
10.3 Warrant Agreement between the Company and Richard J.
Freer, as amended (1)
10.4 Warrant Agreement between the Company and Thomas R.
Reynolds, as amended (1)
10.5 Warrant Agreement between the Company and Gregory A.
Buck, as amended (1)
10.6 Warrant Agreement between the Company and Robert B.
Harris, as amended (1)
10.7 Employment Agreement for Richard J. Freer (1)
10.8 Employment Agreement for Thomas R. Reynolds (1)
10.9 Employment Agreement for Robert B. Harris (1)
10.10 Executive Severance Agreement for Richard J. Freer
(1)
10.11 Executive Severance Agreement for Thomas R. Reynolds
(1)
10.12 1997 Stock Incentive Plan, as amended (1)
10.13 Form of Incentive Stock Option Agreement (1)
10.14 Loan Agreement by and between the Virginia Small
Business Financing Authority and the Company (2)
27.1 Financial Data Schedule (3)
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2, Registration No. 333-31731, as amended.
(2) Incorporated by reference to the Company's Current Report on Form 8-K,
dated April 6, 1998, File No. 001-13467.
(3) Filed herewith.
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