18
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
[ ] TRANSITION REPORT UNDER 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.
(Name of small business issuer in its charter)
Virginia 56-1641133
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
911 East Leigh Street, Suite G-19
Richmond, Virginia 23219
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (804) 648-3820
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Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act:
None Common Stock, without par value per share
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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 issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No ___
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ].
The issuer's revenues for the year ended December 31, 1997 were
$1,761,308.
The aggregate market value of the shares of common stock, without par
value ("Common Stock"), of the registrant held by non-affiliates on March 23,
1998 was approximately $13,355,029, based upon the closing sales price of these
shares as reported on the Nasdaq SmallCap Market on March 23, 1998.
As of March 30, 1998 there were 1,620,514 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its Annual
Meeting of Shareholders to be held on April 14, 1998 are incorporated by
reference into Part III of this Form 10-KSB.
Portions of the registrant's 1997 Annual Report to Shareholders are
incorporated by reference into Part II of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one:)
Yes ___ No X.
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PART I
Item 1. Description of Business.
Overview
Commonwealth Biotechnologies, Inc. (the "Company") was founded in 1992
by four experienced research scientists to provide sophisticated research and
development support services on a contract basis to the biotechnology industry.
The Company's customers consist of private companies, academic institutions, and
government agencies, all of which use biological processes to develop products
for health care, agricultural and other purposes. The Company's revenues are
derived principally from providing macromolecular synthetic and analytical
services (protein/peptide, and DNA/RNA chemistries) to researchers in the
biotechnology industry or who are engaged in life sciences research in
government or academic labs.
The Company provides these services to customers on a contract basis
and derives its revenues from these services, and not from sales of commercial
products resulting from the research. This arrangement distinguishes the Company
from many other biotechnology companies in that the Company's revenues are not
directly dependent on successfully commercializing a new biotechnology product.
The Company has developed a strong reputation as a leading provider of
biotechnology research and development analytical services. The Company is
focusing its expansion efforts on the maintenance and expansion of long-term
relationships with customers in the biotechnology industry and in establishing
new customer relationships. The Company has implemented new technologies to
provide new services to its customers, and is continuing to develop new products
and services to meet the changing needs of its customers.
In general terms, the Company serves 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 and
long-term project customers send the Company repeat business.
The Company also derives a portion of its revenues from research grants
funded by various Federal government agencies. These research grants support the
bulk of the Company's research efforts on its own proprietary technologies. The
Company is developing its own technologies in the areas of anti-coagulation,
cell targeting, and genomic sequence analysis.
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Growth Strategy
The Company's strategy for growth includes:
Expansion of its Instrumentation Capacity. The Company believes there
is significant demand for additional services of the type the Company
currently offers. The Company's capacity to service this demand has
been constrained by the limitations of its facilities and need to make
significant capital expenditures on equipment. By securing a
significantly larger laboratory facility and additional research
equipment, the Company will have the capacity to generate substantially
greater revenues from its core services, to offer new technologies, and
to improve profit margins through more efficient operations.
Expansion of its Marketing Capabilities. The Company has expanded its
customer base primarily through placement of print-ads in several
periodicals and industry sourcebooks, by attendance at a limited number
of trade shows, seminars, and meetings, through its own World Wide Web
Home Page, and by word-of-mouth recommendations. The Company has
increased its print-ad marketing and will continue to utilize these
other strategies to attract customers. However, the Company will also
expand its sales and marketing capabilities in three areas:
The Company is currently recruiting sales representatives to
cover three major biotechnology areas of the Country: the
Boston/New York/New Jersey area, the San Diego area, and the
San Francisco Bay area. It is anticipated that two (2)
full-time sales representatives will be trained in the field
and that these individuals will be primarily targeting
pharmaceutical and biotechnology companies and government
agencies.
The Company has engaged Advantage Consulting, Inc. to
facilitate its ability to successfully compete for contracts
with the U.S. Department of Defense and the Department of
Justice, both of which have an interest in DNA technologies.
The Company plans to engage an advertising and marketing firm
to advise the Company on new strategies and tools to enhance
both the Company's visibility, and its ability to identify and
reach new customers.
Regulatory Compliance. The Company expects to come into compliance with
GLP (Good Laboratory Practices) and CLIA (Clinical Laboratory
Improvement Act) guidelines, which will enable the Company to offer
services to customers requiring compliance with those standards.
Expansion into New Service Technologies. The Company continues to
critically examine new technologies with a view to expanding its
customer base and sources of revenue. The Company has already made
inroads in establishing new service technologies and offering these
services to its customers. In 1998, the Company will increase its
capacity or improve its analytical service offerings in the following
areas:
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DNA Sequence Analysis. The Company has positioned itself to be
at the forefront in the development and application of new
genome based technologies. The Company has expanded its
contract DNA sequencing services and offers sophisticated
sequence data analysis. The Company will continue to expand
these services in 1998 through the acquisition of additional
sequencing instrumentation, and through the development of a
Bioinformatics Group.
Genome Sequencing. The Company is developing
comprehensive genome sequencing capabilities in parallel with
the development of the Bioinformatics Group. The Company is
already sequencing human microbial pathogens.
Genetic Analysis. The Company has established a Genetic
Testing Group and is evaluating several likely applications,
including screening for mutations in several genes associated
with human hereditary diseases, and for genes in which
mutations confer an increased probability for the development
of specific cancers during the lifetime of the individual.
Identity Testing by Genetic Analysis. Many states have
mandated that people passing through the criminal justice
system be sampled and that their genetic fingerprints be
determined. However, most state laboratories lack the
facilities and people necessary to perform these assays. The
Company is positioned to provide these services and is
establishing a DNA Reference Laboratory containing all the
necessary work areas required to provide these services. The
Company expects to become accredited for performance of this
service in early 1998.
Centralized Computer Facilities. The Company will acquire and
maintain a more centralized server for databasing and
analysis, and to develop a more sophisticated company-wide
intranet. We are also evaluating powerful software packages to
permit more efficient data handling, storage, backup, and
analysis.
Expanded DNA Synthesis Services. DNA analogs called "Protein
Nucleic Acids" or PNAs, are insensitive to nucleases that
degrade DNA, and hybridize with more specificity and stability
to complementary DNA. The Company has negotiated an agreement
with Perseptive Biosystems, Inc. to synthesize and distribute
PNAs in the Mid-Atlantic region of the United States. In
addition, demand for DNA/RNA synthesis continues to increase,
and in particular, the Company is one of the few offering
commercial RNA synthesis.
Bioorganic Mimetic Chemistry. Incorporation of organic
"mimetic" structures into drugs often leads to enhanced
stability and oral availability of the drug. The Company now
offers synthesis of these mimetic structures, and expects
demand to increase for this service.
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Expanded Mass Spectroscopy Services and Carbohydrate
Analytical Services. The Company is studying whether to
establish a full-service mass spectral facility in its new
laboratories and whether sufficient demand exists for
initiating detailed carbohydrate analytical services.
Analytical Support Services
In order to experiment with cell components and macromolecules,
researchers need to analyze, sequence, purify, synthesize, and characterize
those components. Thus, the Company's business is dependent upon the use of
sophisticated, scientific and analytical equipment. In light of increasing cost
pressures, many companies, universities, and research institutions seek to avoid
incurring the costs to equip and staff laboratories which can perform these
analytical services, and instead they choose to contract with the Company for
these services.
The Company is a fee-for-service contractor and typically takes no
ownership position in the intellectual property rights of the services it
performs under contract for either short-term or long-term contract customers. A
key to the growth of the Company has been to integrate a number of foundation
technologies and provide a broad range of capabilities to customers who
otherwise must go to several different sources for their needs. Since commencing
operations, the Company has become noted for providing a wide range of services
relating to design, synthesis, purification, and analysis of peptides, proteins,
and oligonucleotides.
Providing a wide range of services is an important element of the
Company's competitive strategy. Virtually all of its closest competitors provide
either DNA level technologies or protein/peptide level technologies. There are
few major competitors which offer integrated DNA/RNA and protein/peptide
technologies and none that offer these technologies combined with sophisticated
biophysical techniques, such as RNA synthesis, DNA synthesis, PNA synthesis,
calorimetry, spectroscopy, and mass spectral analysis. Thus, the Company can
provide complete research programs to its customers. "One stop biotechnology
shopping" has proved attractive in securing long-term contracts with customers
ranging from major players in the pharmaceutical industry to major government
sponsors of research, such as the National Institutes of Health ("NIH"). The
Company believes it has earned a reputation as a leading provider of high
quality DNA sequencing - a reputation which has enabled it to obtain key
contracts with universities, major pharmaceutical, and biotechnology companies
throughout the world.
The services offered by the Company are fully detailed in its
promotional brochures, and on its World Wide Web page. Some of these services
include:
Oligonucleotide Synthesis. Nucleotides are the building blocks of DNA
and RNA. The Company provides both routine syntheses and custom synthesis
chemistries for design of special nucleotide derivatives. Very few commercial
companies offer custom RNA synthesis or synthesis of RNA/DNA hybrid molecules,
and the Company has been successful in supplying
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these specialized products to academic and commercial customers. In addition,
the Company now produces PNAs.
Protein/Peptide Synthesis. Assembly of amino acids into chains creates
synthetic peptides. Equipment purchased with a portion of the proceeds from its
initial public offering (the "IPO") have substantially increased the Company's
capacity for peptide synthesis. The Company plans to add two additional
synthesizers in the near future.
DNA Sequencing. Sequencing is essentially the reverse process of
synthesis. In a typical experiment, a customer will require 10-20 sequencing
reactions. However, a number of customers require thousands of sequencing
reactions, for which the Company offers aggressive discounts in pricing.
Peptide/Protein Sequencing. Analysis of the order of amino acids in
proteins and enzymes is an important analytical tool. The Company provides
N-terminal sequence analysis. New instruments which have been ordered will allow
the Company to offer automated C-terminal sequence analysis.
Peptide/Protein Compositional Analysis. Analysis of the amino acids
that compose a protein or peptide is used to verify purity of synthesized
peptides and to determine the make-up of newly discovered proteins or enzymes.
Customers
The Company currently provides similar products and support to more
than 400 researchers at more than 350 different institutions world-wide.
Short-Term Research Projects. On average, in 1997, the Company added 16
new customers per month. Of its domestic customers, 59% work in private
companies, and 41% are located in university or governmental labs. In 1997, the
Company added 19 new foreign research institutes in Japan, India, Greece,
Columbia, Korea, Norway, Spain, Sweden, and Canada.
In 1997, the Company averaged 66 new orders per month. The nature of
these orders vary widely; some are for relatively straight-forward chemistries
which take a minimum amount of time to complete, while other orders are for more
complicated procedures which take several weeks to complete.
The Company's customers come from many sources. The Company advertises
in the professional journals, exhibits at trade shows, and has its own Web page
from which a potential customer may directly download order forms and place an
order, if desired. The Company is also cross listed on several biotechnology,
biochemistry, and molecular biology search services, so that potential customers
may find the Company using simple key word search terms. Of course, favorable
word-of-mouth advertising is key to our success, and has brought us many new
investigators within a single research-based institution. All inquiries to the
Company receive immediate and personal attention. Quotations are usually sent
back to a potential customer within
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the day, and certainly within 24 hours. Customers continue to comment favorably
on their phone, fax, and email interactions with the Company's staff personnel.
Long-Term Research Projects. The Company actively pursues long-term
research contracts with government, private, and university research institutes.
Some contracts are to perform services to a customers' list of specifications,
while other contracts are to perform basic research into a problem of interest
to the customer. The Company is able to attract these customers because of the
breadth of technologies that it offers. In 1997, one private industry customer,
with research facilities in 4 locations in 3 different states (27 different
principal investigators), accounted for approximately 21% of the Company's total
gross revenues. The Company regularly bills this (and other) customers against
numerous standing purchase orders. The Company completed several research
contracts in 1997 resulting in total aggregate revenue of $561,007.
Operations
Requests for quotes from potential customers are received via phone,
e-mail, from the Company's World Wide Web page, or by hard copy directed to the
Company's business coordinator or laboratory manager. All inquiries are answered
by direct mail of the Company brochure and price lists, with follow up phone
calls, where appropriate. Price quotes for small projects or routine analytical
procedures are generated by scientists who possess the expertise necessary to
respond appropriately. Quotes for more complex projects are developed
collaboratively by the Company personnel having the requisite expertise. Most
quotations are sent back to the inquiring scientist within one working day.
Incoming orders are logged onto the Company's project management
system, assigned a work order number, and delivered to the appropriate scientist
designated to oversee and coordinate all aspects of the particular project. The
work to be done is scheduled on the appropriate instruments, and all necessary
reagents or other supplies needed to complete the project are ordered as needed.
Every customer is required to sign a service agreement prior to the Company
initiating any requested work.
As a long-term project is completed, progress reports are usually sent
to the customer detailing the results found to date, and the conclusions to be
drawn. If the project is relatively straight-forward, such as an amino acid
analysis, spectroscopy, or DNA sequence analysis, the results are faxed or
e-mailed to the customer prior to sending the customer the hard copy of his
results. If the project entails a synthesis of a peptide or oligonucleotide, for
example, the product is sent to the customer by express mail service. Every
product is accompanied by a data sheet, which details the physicochemical
properties of the compound, including the results of all analytical tests
performed which support the claimed purity and composition. The customer is
invoiced upon completion of the work, or at particular points in the work
program. The customer pays for the services provided in accordance with the
Company's standard fee structure and typically retains all rights to any
developments resulting from the analysis.
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All data generated at the Company are archived for the customer. Where
appropriate, the data are archived on selected storage media, such as back up
tapes or computer disks. A file is maintained for every customer, and these
files are also archived. The Company employs appropriate security measures to
ensure the confidentiality of customer information.
The Company operates under strict standard operating protocols ("SOPs")
which detail the particular technologies used to complete the work in progress.
SOPs are made available to the customer upon request. In addition, the Company's
technical team follows standard operating procedures which help to produce
consistent, high quality results.
Proprietary Research And Development
The Company generally does not retain intellectual property rights on
work done for its customers. In contrast, in its proprietary research and
development programs, the Company is developing its own technologies. CBI does
not foresee itself as a manufacturer of any products that might result from
these research efforts; rather, the goal of these projects is to bring a
particular technology to a patentable stage, and then license the technology to
another company. If the technology is commercialized, the Company may realize
licensing and/or royalty fees. The Company has completed three different Phase I
Small Business Technology Transfer Research ("SBTTR") grants from NIH ($100,000
each), has completed the first year of a Phase II SBTTR grant from NIH
($235,000), and is in the second year of the Phase II SBTTR grant from NIH
($265,000). The Company has also completed a Phase I Small Business Innovative
Research Award ("SBIR") from the United States Department of Agriculture
($55,000), and has made application for the Phase II SBIR award ($ 250,000). The
Company has several other grant applications pending with various Federal and
State agencies. Revenues from federally funded contracts are recognized on a
cost reimbursement basis. The Company generally receives grant payments
semi-monthly, with the amount of each payment being determined by the amount of
the costs incurred in the immediately preceding two-week period.
Intellectual Property
The Company's principal intellectual property rights consist of a
patent relating to an anti-coagulation technology it is developing. The
Company's anti-coagulation technology is an experimental new compound that
counteracts the effects of heparin, which is used to prevent blood clotting
during open heart surgery and other surgical procedures involving significant
intervention into the circulatory system. The only drug currently available to
counteract heparin exhibits toxicity and other adverse side effects, so its use
is primarily restricted to open heart surgery and emergencies. However, the
inability to counteract the effects of heparin can result in bleeding
complications. Initial tests indicate that compounds the Company has developed
can neutralize heparin's anticoagulant activity without displaying the toxicity
associated with the existing drug. The Company was issued a patent relating to
its anti-coagulation technology in March 1998, but to yield commercial products,
these technologies will require extensive
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additional testing and government approval. As a result, there can be no
assurance that commercial products will result from these technologies.
An unexpected finding from its heparin antagonist research program
was that the Company's compounds are effective stabilizing agents for certain
human peptide pharmaceuticals. In this respect, the compound has the potential
to effectively replace protamine in these formulations. This would be desirable
because patients who receive protamine-stabilized drug formulations are at
increased risk of severe allergic response ("anaphylaxis") if they ever receive
protamine in conjunction with heparin therapy. The Company intends to establish
its patent position for this application of its technology, but there can be no
assurance that a commercial product will result.
The Company has assigned to RhoMed Inc. its interest in a patent for
high affinity chemotactic peptides which can be used in radiological detection
of infections, inflammations, and deep seated abscesses. The peptide structures
were designed with intellectual input from the Company's scientists, and the
compounds themselves were prepared at the Company. The Company will receive a
continuing royalty based on sales of a diagnostic kit which incorporates the
peptides. To date, RhoMed has not commercialized a diagnostic kit based on the
peptides under patent, and there can be no assurance that commercial products
will result from these technologies.
The Company is actively pursuing development of an immunoassay for
equine infectious anemia. All equids are at risk for equine infectious anemia
(EIA). All animals must be tested for the virus, and any animal found positive
must be destroyed. Current tests for the presence of the virus are subject to
false positive (and false negative) results. False positive results are
unacceptable because valuable animals (for instance, race horses) may be
put-down. False negative results are potentially devastating because infected
animals could then move freely amongst equine populations. Initially funded by a
$ 55,000 grant from the United States Department of Agriculture (the "USDA")
(the only award of its kind from the USDA for equid related health problems),
the Company has developed a novel test which should effectively eliminate false
positive and false negative reactions, and at the same time, afford a greater
level of testing sensitivity. The Company will assess its patent position for
its test, and hopes to enter into negotiations with a corporate partner
interested in commercializing this diagnostic assay.
The Company anticipates that its ability to secure and protect patents
and other intellectual property rights will become increasingly important to the
business of the Company in the event its proprietary research programs yield
technologies which can be commercialized. There can be no assurance that the
Company will be successful in securing and protecting intellectual property
rights, or that its activities will not infringe on the intellectual property
rights of others.
The Company takes appropriate steps to protect its intellectual
property rights and those of its customers. The Company's practice is to require
its employees and consultants to execute non-disclosure and proprietary rights
agreements upon commencement of employment or consulting arrangements with the
Company. These agreements acknowledge the Company's exclusive ownership of all
intellectual property developed by the individual during the course of
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his work with the Company and require that all proprietary information disclosed
to the individual by the Company or its customers remain confidential.
Marketing
The Company has expanded its customer base primarily through
word-of-mouth referrals and attendance at a limited number of trade shows,
seminars and meetings. Because of its ability to offer a wide range of
biotechnology research services, the Company enjoys a favorable reputation among
its customers, and many new customers come to the Company by word-of-mouth
recommendation. The Company has constructed its own World Wide Web Home Page
(www.cbi-biotech.com) and is listed with several biotechnical and biomedical
oriented sites on the World Wide Web.
Human Resources
The Company currently has 33 full time and three part time employees,
including eight employees in administration, one employee in marketing and
customer relations, eight employees in research and development, one computer
network specialist, and 25 employees in laboratory operations. Some employees in
research and development also participate in laboratory operations. Seven of the
Company's employees hold doctorate degrees, and six have master's degrees. None
of the Company's employees are represented by a labor union. The Company has
experienced no work stoppages and believes its relations with its employees to
be good.
Competition
The Company faces several types of competition. The Company believes
there are between 12 and 15 companies concentrating on peptide synthesis and
about 20 other companies offering DNA related services in the United States.
Very few companies offer both DNA/RNA and protein/peptide analysis. Other
competition comes from divisions of larger research oriented companies or
university core facilities. The principal competitive factors are pricing,
expertise, and range of services offered, and the Company believes that it
competes effectively on all of these factors.
Government Regulation
The Company does not require government regulatory approvals to provide
its current services. Numerous federal, state and local agencies, such as
environmental, working condition and other similar regulators, have jurisdiction
to take action that could have a material adverse effect upon the Company's
ability to do business. The Company believes that it is in general compliance
with existing federal, state and local laws and regulations and does not
anticipate that
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continuing compliance will have any material effect upon the capital
expenditures, earnings or competitive position of the Company.
The Company anticipates that its pursuit of its growth strategy will
subject the Company to a heightened level of government regulation of its
operations. For example, in pursuing opportunities to provide analytical
services to customers seeking the approval of the United States Food and Drug
Administration (the "FDA") of products, the Company's operations will become
subject to compliance with standards established by the FDA, including
inspections by the FDA and other federal, state and local agencies regarding
work performed by the Company on specific FDA submission projects. If
significant violations are discovered during an inspection, the Company may be
restricted from undertaking additional work on projects until the violations are
remedied. The Company will also require a new license from the Nuclear
Regulatory Commission ("NRC") for the operation of its planned new laboratory
facility. The Company estimates that the time period of obtaining the NRC
license should not exceed three months.
The commercialization of the Company's proprietary technologies would
also be subject to extensive government regulation and approval requirements,
including the need for pre-clinical laboratory and animal tests and human
clinical trials for FDA approval of human pharmaceutical products. The Company
does not have, and does not anticipate developing, the facilities and expertise
necessary to obtain FDA approval for or to manufacture any pharmaceutical
products that may result from its technologies. Instead, the Company would
license these technologies to third parties having the necessary facilities and
expertise, which would assume responsibility for and control of regulatory
matters.
Item 2. Description of Property.
Facilities
The Company currently occupies 12,000 square feet of laboratory and
office space in two adjacent buildings. The lease for one location continues
through the year 2000 and is subject to cancellation by the Company upon nine
months' notice. The lease for the other location continues through May 31, 1998,
is renewable for additional one year terms and is subject to cancellation by the
Company upon three months' notice.
As part of its growth strategy, the Company requires considerably more
space for its laboratory facilities. On March 24, 1998, the Virginia Small
Business Financing Authority (the "VSBFA") issued $4,000,000 in tax exempt
industrial revenue bonds ("IRBs") for the benefit of the Company, the proceeds
from the sale of which, together with other available funds, will be used to
acquire, construct and equip a 30,000 square foot facility in Chesterfield,
Virginia. The Company anticipates that it will relocate to its new facility in
the fourth quarter of 1998.
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Item 3. Legal Proceedings
The Company is not presently involved in any litigation nor, to the
knowledge of the Company's management, is any litigation threatened against the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
On September 1, 1997, the shareholders of the Company, by unanimous
written consent, amended the Company's 1997 Stock Incentive Plan (the "Incentive
Plan") to increase the number of shares of the Company's Common Stock issuable
thereunder from 376,667 shares to 410,000 shares. Of the 410,000 shares issuable
under the Incentive Plan, 270,000 shares were reserved for issuance to the
Company's founders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information
The information set forth on page 9 of the Company's 1997 Annual Report
to Shareholders under the caption "Market for Common Equity" is incorporated
herein by reference.
Private Placements of Securities
On June 25, 1997, the Company sold subordinated convertible notes in an
aggregate principal amount of $3,000,000 to 42 accredited investors in an
offering exempt from registration pursuant to Rule 506 of Regulation D
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
Such notes accrued interest from June 25, 1997 until October 28, 1997, the date
of the Company's IPO, at a rate of 20% per annum, payable in shares of Common
Stock at a rate of $6.00 per share. Anderson & Strudwick Incorporated ("A&S")
served as placement agent in connection with such private placement and received
a $240,000 placement fee.
On June 25, 1997, the Company issued warrants to purchase an aggregate
of 100,000 shares of Common Stock to the four founders of the Company for $.001
per warrant (the "Management Warrants"). Each Management Warrant entitles the
holder to purchase one share of Common Stock at an exercise price of $9.90 per
share. Such warrants are exercisable between June 25, 1998 and June 25, 2007.
The sale and issuance of the Management Warrants were exempt from the
registration provisions of the Securities Act by virtue of Section 4(2) thereof
as
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transactions not involving any public offering. The resale of the Management
Warrants was registered pursuant to the Company's Registration Statement on Form
SB-2, Registration No. 333-31731.
On October 28, 1997, the Company issued warrants to purchase an
aggregate of 101,500 shares of Common Stock to A&S, the underwriter for the IPO
(the "Underwriter Warrants"). The price paid by A&S for the Underwriter Warrants
was $.001 per warrant. Such warrants have an exercise price of $9.90 per share
and are exercisable between October 28, 1998 and October 17, 2002. The sale and
issuance of the Underwriter Warrants were exempt from the registration
provisions of the Securities Act by virtue of Section 4(2) thereof as
transactions not involving any public offering. The resale of the Underwriter
Warrants was registered pursuant to the Company's Registration Statement on Form
SB-2, Registration No. 333-31731.
As of December 31, 1997, the Company issued incentive stock options to
purchase an aggregate of 317,200 shares of Common Stock to certain employees of
the Company pursuant to the Incentive Plan. Such options have exercise prices
equal to the fair market value of the Common Stock on the date of grant. Each
option granted pursuant to the Incentive Plan is exercisable for a period of ten
years following the grant thereof. The issuance by the Company of incentive
stock options pursuant to the Incentive Plan was exempt from the registration
provisions of the Securities Act by virtue of Rule 701 promulgated thereunder.
Use of Proceeds of IPO
On October 28, 1997, the Company completed its IPO of Common Stock. The
underwriter of the IPO was A&S. Pursuant to the Company's Registration Statement
on Form SB-2, Registration No. 333-31731, the Company registered an aggregate of
1,015,000 shares of Common Stock for an aggregate offering price of $6,090,000.
The expenses incurred by the Company in connection with the IPO, including
underwriting commissions and other expenses paid to A&S, were approximately
$687,200, resulting in net proceeds to the Company of $5,402,800. As of December
31, 1997, the Company had not expended any of the IPO proceeds, which are
currently invested in an interest-bearing account at a commercial bank.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information set forth on pages 10 through 14 of the Company's 1997
Annual Report to Shareholders under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is incorporated
herein by reference.
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Item 7. Financial Statements.
The Company's financial statements and the related notes thereto,
together with the report of Goodman & Company, L.L.P., set forth on pages 15
through 27 of the Company's 1997 Annual Report to Shareholders are incorporated
herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Goodman & Company, L.L.P. ("Goodman") served as the Company's
independent public accountants for the fiscal years ended December 31, 1995,
December 31, 1996 and December 31, 1997. For various business reasons, the Audit
Committee recommended the dismissal of Goodman to the Company's Board of
Directors, and on February 23, 1998, the Board officially terminated its
business relationship with Goodman. Goodman's reports on the Company's financial
statements for each of the last two fiscal years did not contain an adverse
opinion or disclaimer of opinion. Similarly, Goodman did not modify either such
report as to uncertainty, audit scope or accounting principles. There were no
disagreements between the Company and Goodman regarding any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
Upon the recommendation of the Audit Committee of the Company's Board
of Directors, the Board of Directors of the Company appointed on February 23,
1998, subject to the approval of the Company's shareholders, the firm McGladrey
& Pullen, LLP as independent public accountants to audit the Company's
consolidated financial statements for the fiscal year ended December 31,1998. If
the appointment of McGladrey & Pullen, LLP is not approved by the shareholders,
the matter will be referred to the Audit Committee for further review.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Directors
The information relating to the directors of the Company set forth in
the Company's definitive proxy statement relating to the Company's Annual
Meeting of Shareholders to be held on April 14, 1998 (the "Proxy Statement")
under the caption "Proposal 1: Election of Directors" is incorporated herein by
reference.
<PAGE>
Executive Officers
The information relating to the executive officers of the Company set
forth in the Proxy Statement under the caption "Executive Compensation -
Executive Officers of the Company" is incorporated herein by reference.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
The information relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, is set forth in the Proxy Statement
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" is
incorporated herein by reference.
Item 10. Executive Compensation.
The information set forth in the Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information set forth in the Proxy Statement under the caption
"Voting Securities and Principal Holders Thereof" is incorporated herein by
reference.
Item 12. Certain Relationships and Related Transactions.
The information set forth in the Proxy Statement under the caption
"Certain Relationships and Related Transactions" is incorporated herein by
reference.
<PAGE>
Item 13. 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)
10.1 Placement Agreement by and between the Company and
A&S (1)
10.2 Warrant Agreement between the Company and A&S (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 Gregory A. Buck (1)
10.10 Employment Agreement for Robert B. Harris (1)
10.11 Executive Severance Agreement for Richard J. Freer (1)
10.12 Executive Severance Agreement for Thomas R. Reynolds (1)
10.13 Executive Severance Agreement for Gregory A. Buck (1)
10.14 Executive Severance Agreement for Robert B. Harris (1)
10.15 1997 Stock Incentive Plan, as amended (1)
13.1 Portions of Annual Report to Shareholders for the Fiscal
Year Ended December 31, 1997 Incorporated in Form 10-KSB
(2)
16.1 Letter on change in certifying accountant (3)
27.1 Financial Data Schedule (2)
- -----------------------
(1) Incorporated by reference to the Company's Registration
Statement on Form SB-2, Registration No. 333-31731.
(2) Filed herewith.
(3) Incorporated by reference to Amendment No. 1 to the Company's
Current Report on Form 8-K, filed on March 12, 1998.
<PAGE>
Executive Compensation Plans and Arrangements
The following is a list of all executive compensation plans
and arrangements filed as exhibits to this annual report on Form 10-KSB or
incorporated herein by reference:
<TABLE>
<CAPTION>
<S> <C>
1. Warrant Agreement between the Company and Richard J. Freer, as amended (1)
2. Warrant Agreement between the Company and Thomas R. Reynolds, as amended (1)
3. Warrant Agreement between the Company and Gregory A. Buck, as amended (1)
4. Warrant Agreement between the Company and Robert B. Harris, as amended (1)
5. Employment Agreement between the Company and Richard J. Freer (1)
6. Employment Agreement between the Company and Thomas R. Reynolds (1)
7. Employment Agreement between the Company and Gregory A. Buck (1)
8. Employment Agreement between the Company and Robert B. Harris (1)
9. Executive Severance Agreement between the Company and Richard J. Freer (1)
10. Executive Severance Agreement between the Company and Thomas R. Reynolds (1)
11. Executive Severance Agreement between the Company and Gregory A. Buck (1)
12. Executive Severance Agreement between the Company and Robert B. Harris (1)
13. 1997 Stock Incentive Plan (1)
</TABLE>
- ------------------------
(1) Incorporated by reference to the Company's Registration
Statement on Form SB-2, Registration No. 333-31731.
(b) Reports on Form 8-K
During the three months ended December 31, 1997, the Company filed the
following report on Form 8-K:
1. Form 8-K, dated December 23, 1997, relating to the announcement of
the Company's plans to develop a new research facility.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMMONWEALTH BIOTECHNOLOGIES, INC.
Date: March 30, 1998 By: /s/ Robert B. Harris, Ph.D.
---------------------------
Robert B. Harris, Ph.D
President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Title(s) Date
<S> <C>
/s/ Richard J. Freer, Ph.D. Chairman and Director (Principal March 30, 1998
- ---------------------------
Richard J. Freer, Ph.D. Executive Officer)
/s/ Robert B. Harris, Ph.D. President and Director March 30, 1998
- ---------------------------
Robert B. Harris, Ph.D.
/s/ Gregory A. Buck, Ph.D. Senior Vice President, Chief March 30, 1998
- --------------------------
Gregory A. Buck Scientific Officer, Secretary and
Director
/s/ Thomas R. Reynolds, Ph.D. Senior Vice President and Director March 30, 1998
- -----------------------------
Thomas R. Reynolds, Ph.D.
/s/ Charles A. Mills, III Director March 30, 1998
- -------------------------
Charles A. Mills, III
/s/ Peter C. Einselen Director March 30, 1998
- ---------------------
Peter C. Einselen
</TABLE>
The Company
- --------------------------------------------------------------------------------
Overview of the Company
The Company was founded in 1992 by four experienced research scientists to
provide sophisticated research and development support services on a contract
basis to the biotechnology industry. The Company's customers consist of private
companies, academic institutions, and government agencies, all of which use
biological processes to develop products for health care, agricultural, and
other purposes. The Company has developed a strong reputation as a leading
provider of biotechnology research and development analytical services.
The Company's revenues are derived principally from providing macromolecular
synthetic and analytical services (protein/peptide, and DNA/RNA chemistries) to
researchers in the biotechnology industry or those who are engaged in life
sciences research in government or academic labs. This arrangement
distinguishes the Company from many other biotechnology companies because the
Company's revenues are not directly dependent on successfully commercializing a
new biotechnology product.
In general terms, the Company serves two types of customers: those who require
a discrete set of analyses ("short-term projects"); and, those who contract
with the Company on an extended basis for performance of a variety of
integrated analytical services ("long-term projects"). More often than not,
short-term and long-term project customers send the Company repeat business.
The Company also derives a portion of its revenues from research grants funded
by various Federal agencies. These research grants support the bulk of the
Company's research efforts on its own proprietary technologies.
Analytical Support Services
Providing a wide range of services is an important element of the Company's
competitive strategy. There are few major competitors which offer integrated
DNA/RNA and protein/peptide technologies, and none that offer these
technologies combined with sophisticated biophysical techniques, such as
calorimetry, spectroscopy, and mass spectral analysis. Thus, the Company can
provide "one stop shopping" for biotechnology services.
4
<PAGE>
The services offered by the Company are fully detailed in its promotional
brochures and on its Web page. Some of these services include:
Oligonucleotide Synthesis. Nucleotides are the building blocks of DNA and RNA.
The Company provides both routine syntheses and custom synthesis chemistries
for design of special nucleotide derivatives. Very few commercial companies
offer custom RNA synthesis or synthesis of RNA/DNA hybrid molecules, and the
Company has been successful in supplying these specialized products to academic
and commercial customers. In addition, the Company now produces peptide nucleic
acids (PNAs) under a broad license from Perseptive Biosystems, Framingham, MA.
Protein/Peptide Synthesis. Assembly of amino acids into chains creates
synthetic peptides. Recently purchased equipment has added to the Company's
capacity for peptide synthesis.
DNA Sequencing. Sequencing is essentially the reverse process of synthesis. In
a typical experiment, a customer will require 10-20 sequencing reactions.
However, a number of customers require thousands of sequencing reactions, for
which the Company offers aggressive discounts in pricing.
Peptide/Protein Sequencing. Analysis of the order of amino acids in proteins
and enzymes is an important analytical tool. The Company provides N-terminal
sequence analysis, and with new instruments to be installed in 1998, the
Company will offer automated C-terminal sequence analysis.
Peptide/Protein Compositional Analysis. Analysis of the amino acids that
compose a protein or peptide is used to verify purity of synthesized peptides
and to determine the make-up of newly discovered proteins or enzymes. Usually,
two or three analyses are required for a complete compositional determination.
Short-term Research Projects.
On average, in 1997, the Company added 16 new customers per month. At the end
of 1997, the Company's customer base included over 400 researchers at more than
350 different institutions world-wide. Of its domestic customers, 59% work in
private companies, and 41% are located in university or governmental labs. In
1997, the Company added 19 new foreign research institutes in Japan, India,
Greece, Columbia, Korea, Norway, Spain, Sweden, and Canada.
Of the Company's domestic customer base, 59% work in private labs, and 41% work
in university or government labs
In 1997, the Company averaged 66 new orders per month. The nature of these
orders vary widely; some are for relatively straight-forward chemistries which
take a minimum amount of time to complete, while other orders are far more
complicated procedures which take several weeks to complete.
Number of orders for new work received monthly by the Company in 1997.
Customers come to the Company from many sources. The Company advertises in
professional journals, exhibits at trade shows, and has its own Web page from
which potential customers may directly download order forms
5
<PAGE>
and place an order, if desired. The Company is also cross listed on several
biotechnology, biochemistry, and molecular biology search services, so that
potential customers may find us using simple key word search terms. Of course,
favorable word-of-mouth advertising is key to the Company's success, and has
brought many new investigators within a single research based institution. All
inquiries to the Company receive immediate and personal attention. Quotations
are usually sent back to a potential customer within the day, and certainly
within 24 hours. Customers continue to comment favorably on their phone, fax,
and e-mail interactions with CBI staff personnel.
Long-term Research Projects
The Company actively pursues long-term research contracts with government,
private, and university research institutes. Some contracts are to perform
research services to a customer's list of specifications, while other contracts
are to perform basic research into a problem of interest to the customer. The
Company is able to attract these customers because of the breadth of
technologies that it offers. In 1997, revenues realized from contract research
customers totaled $561,007 and in the first quarter of 1998, the Company has
already signed research contracts totaling over $300,000.
Proprietary Research And Development
As a rule, the Company does not retain intellectual property rights on work
done for short-term projects, and only rarely retains intellectual property
rights for work done on long-term projects. In contrast, the Company is
developing its own technologies in its proprietary research and development
programs. CBI does not foresee itself as a manufacturer of any products that
might result from these research efforts; rather, the goal of these projects is
to bring a particular technology to a patentable stage, and then license the
technology to another company. If the technology is commercialized, the Company
may realize licensing and/or royalty fees.
Presently, the Company's Research and Development activities fall into five
general areas.
Development of heparin antagonists for clinical use. Heparin is a
complex, negatively charged, polysaccharide molecule which is used
worldwide as an anti-coagulant ("blood thinner"). Virtually every patient
who undergoes invasive cardiovascular surgery (bypass, angioplasty, etc.)
receives heparin as an anti-coagulant. Unfortunately, humans do not
metabolize heparin very well, and in many acute surgical situations, the
patient is administered another drug, "protamine," to rid the body of
heparin.
Protamine therapy, however, is fraught with potential complications,
including hypotension, platelet lysis, and in some cases, death.
CBI has developed a protamine replacement (the "Compound"). Initially
funded by a $ 100,000 grant from the National Institutes of Health (NIH),
CBI is now in the second year of a $500,000 award for this project. The
Company has filed patent applications for the Compound, and CBI
management is hopeful that these patents will issue in 1998.
Research work is continuing in 1998 to assess the efficacy and toxicity
of the Compound in animal models of cardiovascular surgery. Further, in
1998, the Company hopes to enter licensing discussions with potential
corporate partners.
Stabilization of peptide drugs; a novel application of the Company's lead
heparin antagonist Compound. An unexpected finding from the Company's
heparin antagonist research program was that the Compound is an effective
stabilizing agent for particular human peptide pharmaceuticals. In this
respect, the Compound has the potential to effectively replace protamine
in these formulations. This would be desirable because patients who
receive protamine-stabilized drug formulations are at increased risk of
severe allergic response ("anaphylaxis") if they ever receive protamine
in conjunction with heparin therapy.
In 1998, CBI expects to seek patent protection for this use of the
Compound as a stabilizing agent.
Creation of heparin structures with defined biological activities.
Heparin is a mixture of molecules which are "pluripotent"; that is,
heparin possesses diverse biological activities, including
anti-coagulant, anti-platelet, and anti-smooth muscle cell proliferative
activities.
The Company, and its collaborators at the Upstate VA Medical Center,
Syracuse, NY, have developed methods to refine heparin into sub-fractions
which
6
<PAGE>
possess defined bio-activities. If successful, the clinician will have an
array of heparins at his disposal for use in particular surgical
situations; a purely anti-thrombotic heparin for use in surgeries
involving the venous system (for example, phlebitis), an anti-platelet
heparin for use in surgeries involving the arterial system (for example,
angioplasty or bypass), and a heparin which will be useful to prevent re-
occlusion of arteries by smooth muscle cells following surgical
intervention ("restenosis").
Initially funded by a research grant from the NIH, work is continuing on
this project under the auspices of a 4-year, $220,000 renewable contract
from the Central New York Research Institute. In 1998, CBI will continue
its work to identify and characterize defined chemical structures of
heparin based on this initial research.
Development of an immunoassay for equine infectious anemia. All horses
are at risk for Equine Infectious Anemia (EIA) and must be tested for the
virus. Any animal found positive must be destroyed. Current tests for the
presence of the virus are subject to false positive (and false negative)
results. False positive results are unacceptable because valuable animals
(for instance, race horses), may be euthanized. False negative results
are potentially devastating because infected animals could then move
freely amongst equine populations.
Initially funded by a $55,000 grant from the United States Department of
Agriculture (the only award of its kind from the USDA for equid related
health problems), the Company has developed a novel test which should
effectively eliminate false positive and false negative reactions, and at
the same time, afford a greater level of testing sensitivity.
The Company has made application to the USDA for a $250,000 grant to
continue this research project. Further, in 1998, CBI will assess its
patent position for its test, and hopes to enter into negotiations with a
corporate partner interested in commercializing this diagnostic assay.
Novel approaches to genomic sequence analysis; detection of MDR
(Multi-drug resistant) M. tuberculosis. The goal of this project is to
develop a test for the rapid detection of multi-drug resistant
Myobacterium tuberculosis from clinical samples. Studies have shown that
mutations in particular genes of the bacterium result in drug resistance,
and therefore, to accurately determine the precise nature of the
infectious organism, it is necessary to know the sequence of the genes.
Under the auspices of a $ 100,000 grant from the NIH, the Company is
developing a direct genomic DNA sequencing technology for application to
such diagnostic and prognostic infectious disease problems.
In addition to these research programs, the Company is a named co-inventor on
US Patent #5,700,444, "Chemotactic Peptide Pharmaceutical Applications," issued
to RhoMed Inc., Albuquerque, NM. This patent describes the synthesis and use of
peptides which bind and carry medically useful metal ions to sites of infection
and inflammation. The compounds are intended for radiological detection and
imaging of deep seated abscesses which will allow the physician to administer
the appropriate antibiotic.
The peptide structures protected under this patent were designed with
intellectual input from the Company's scientists, and the compounds themselves
were prepared at the Company. The Company assigned its ownership rights to the
invention to RhoMed Inc., in return for a continuing royalty against future
worldwide sales of a diagnostic kit which incorporates these peptides, should
such a kit ever be commercialized.
Each of these technologies is at an early stage of development and
commercialization will require additional research. Therefore, the Company
cannot determine at this time whether any of these technologies will prove
commercially viable.
Growth Strategy
The Company intends to focus its expansion efforts on the maintenance and
expansion of long term relationships with customers in the biotechnology
industry as well as establishing new customer relationships. The Company will
seek to identify trends that impact its customers and develop new products and
services to meet the changing needs of its customers. In 1998, the Company will
embark on:
o Expansion of its Instrumentation Capacity. The Company believes there is
significant demand for additional services of the type the Company
currently offers, but is unable to meet this demand because of
7
<PAGE>
limitations in its instrumentation inventory and constraints of its
current facilities. In securing a significantly larger laboratory
facility and additional research equipment, the Company will have the
capacity to generate substantially greater revenues from its core
services and to improve profit margins through more efficient operations.
o Expansion of its Marketing Capabilities. The Company has expanded its
customer base primarily through placement of print ads in several
periodicals and industry sourcebooks, by attendance at a limited number
of trade shows, seminars, and meetings, through its own World Wide Web
Home Page, and by word-of-mouth recommendations. While the Company will
continue to utilize these strategies to attract customers, in 1998, the
Company will also be expanding its sales and marketing capabilities in
three areas.
First, the Company is currently recruiting sales representatives to cover
the three major biotechnology areas of the United States: the Boston/New
York/New Jersey area, the San Diego area, and the San Francisco Bay area.
It is anticipated that two full-time sales representatives will be
trained and in the field by the second quarter of 1998. These individuals
will be primarily targeting pharmaceutical and biotechnology companies
and government agencies.
Second, the Company has engaged Advantage Consulting, Inc., of Annandale,
VA, to facilitate its ability to successfully compete for contracts with
the U.S. Department of Defense and the Department of Justice, both of
which have an interest in DNA technologies.
Finally, the Company plans to engage an advertising and marketing firm to
advise the Company on new strategies and tools to enhance both the
Company's visibility, and its ability to identify and reach new
customers. The Company is currently interviewing several firms and
expects to make a decision early in 1998.
o Regulatory Compliance. By enhancing its facilities and expertise, the
Company believes it will be able to satisfy regulatory requirements for
performance of its analytical services. For example, the Company performs
only limited laboratory work under Good Laboratory Practices (GLP)
conditions; in 1998, the Company expects to come into compliance with GLP
and Clinical Laboratory Improvement Act (CLIA) guidelines for all its
technologies.
o Expansion into New Service Technologies. The Company continues to
critically examine new technologies with a view towards expanding its
customer base and sources of revenue. Hence, in 1998, the Company will
increase its capacity or improve its service offerings in the following
areas:
DNA sequence analysis. The Company has positioned itself to be at the
forefront in the development and application of new genome based
technologies. We have expanded our contract DNA sequencing services and
offer sophisticated sequence data analysis. We will continue to expand
these services in 1998 through the acquisition of additional sequencing
instrumentation and through the development of a Bioinformatics Group.
Genome Sequencing. We are developing comprehensive genome sequencing
capabilities in parallel with the development of the Company's
Bioinformatics Group. We are already sequencing human microbial
pathogens.
Genetic Analysis. CBI has established a Genetic Testing Group and is
evaluating several likely applications, including screening for mutations
in several genes associated with human hereditary diseases, and for genes
in which mutations confer an increased probability for the development of
specific cancers during the lifetime of the individual.
Identity Testing by Genetic Analysis. Many states have mandated that
people passing through the criminal justice system be sampled and that
their genetic fingerprints be determined. However, most state
laboratories lack the facilities and people necessary to perform these
assays. The Company is positioned to provide these services and is
establishing a DNA Reference Laboratory containing all the necessary work
areas required to provide these services. The Company expects to become
accredited for performance of this service in early 1998.
Centralized Computer Facilities. The Company will acquire and maintain a
more centralized server for databasing and analysis and to develop a more
sophisticated company-wide intranet. We are also
8
<PAGE>
evaluating powerful software packages to permit more efficient data
handling, storage, backup, and analysis.
DNA/RNA/PNA Synthesis. CBI now offers PNA synthesis and has developed a
steady customer base for RNA synthesis. Currently, CBI is one of the few
companies successfully offering RNA synthesis.
Bioorganic Mimetic Chemistry. Incorporation of organic "mimetic"
structures into drugs often leads to enhanced stability and oral
availability of the drug. CBI now offers synthesis of these mimetic
structures, and expects demand to increase for this service.
Expanded mass spectroscopy services and Carbohydrate Analytical Services.
The Company is studying whether to establish a full-service mass spectral
facility in its new laboratories and whether sufficient demand exists for
initiating detailed carbohydrate analytical services.
Stockholder Matters
- --------------------------------------------------------------------------------
Market for Common Equity
The Company completed its initial public offering on October 28, 1997 at a
price per share of $ 6.00. Since that time, the Common Stock has traded on the
Nasdaq Smallcap Market ("Nasdaq"). The following table sets forth the range of
high and low sales price per share of Common Stock for the period following the
completion of the Company's initial public offering.
High Low
Stock Stock
Period Price Price
- -------------------------- ---------- ----------
Fourth Quarter (beginning
October 28, 1997) $ 9.00 $ 6.00
On March 6, 1998, the last reported sales price for a share of the Company's
Common Stock on Nasdaq was $7 5/8. As of March 6, 1998, there were 81 holders
of record of the Company's Common stock and approximately 892 beneficial
holders.
The Company has not paid any cash dividends on its Common Stock. The Company
intends to retain its earnings to finance the growth and development of its
business and does not expect to declare or pay dividends in the foreseeable
future. The declaration of dividends is within the discretion of the Company.
However, the Company's ability to pay dividends may be constrained by certain
provisions of its industrial revenue bond financing.
Prior to its initial public offering, the Company made distributions as an S
corporation from undistributed earnings to its stockholders, including amounts
to fund the payments of their individual tax liabilities attributable to their
allocation of the Company's income. Such distributions totaled $79,533 and
$96,851 in 1996 and 1997, respectively.
9
<PAGE>
Selected Financial Data
Set forth below is selected financial data with respect to the Company for the
years ended December 31, 1996 (as an S Corporation) and December 31, 1997,
which has been derived from the audited financial statements of the Company.
The selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Conditions and Results of
Operation."
<TABLE>
<CAPTION>
For the years Ended
December 31, 1997 December 31, 1996
------------------- ------------------
<S> <C> <C>
Statement of Operations:
Revenues: $ 1,761,308 $ 989,925
Net Income (loss) $ <1,168,821> $ 110,088
Earnings per common and common equivalent share. $ <3.55> $ 1.54
Weighted average common shares outstanding 329,480 71,273
Net income (loss) before income tax expenses $ <1,168,821> $ 110,088
Income tax expense -- $ 49,651
Proforma net income (loss)(1) $ <1,168,821> $ 60,437
Proforma earnings (loss) per common and common equivalent share $ <0.72> $ 0.12
Proforma Weighted average common and common equivalent shares
outstanding(2) 1,620,514 506,273
Balance Sheet Data:
Total Current Assets $ 6,489,965 $ 377,874
Total Assets $ 7,931,606 $ 634,193
Total Liabilities $ 624,250 $ 471,924
Total Stockholders equity $ 7,307,356 $ 162,269
</TABLE>
(1) The above financial data gives retroactive effect to conversion from S
Corporation to C Corporation status for federal income tax purposes.
(2) The above financial data gives retroactive effect to the 93.78-for-one
stock split effective June 24, 1997, to shares relating to the issuance of
the Conversion Shares, and to the anti-diluitive effect of the Management
Warrants converted using the Treasury Stock method.
Changes in and Disagreements with Accountants
Goodman and Company, LLP ("Goodman") served as the Company's independent pubic
accountants for the fiscal years ended December 31, 1995, December 31, 1996 and
December 31, 1997. For various business reasons, the Audit Committee of the
Company's Board of Directors (the "Audit Committee") recommended the dismissal
of Goodman to the Company's Board of Directors, and on February 23, 1998, the
Company officially terminated its business relationship with Goodman. Goodman's
reports on the Company's financial statements for each of the last two fiscal
years did not contain an adverse opinion or disclaimer of opinion. Similarly,
Goodman did not modify either such report as to uncertainty, audit scope, or
accounting principles. There were no disagreements between the Company and
Goodman regarding any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
Upon the recommendation of the Audit Committee of the Company's Board of
Directors, the Board of Directors of the Company appointed on February 23,
1998, subject to approval of the Company's shareholders, the firm of McGladrey
and Pullen, LLP, as independent public accountants to audit the Company's
consolidated financial statements for the fiscal year ended December 31, 1998.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following should be read in conjunction with "Selected Financial Data" and
the Company's Audited 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
10
<PAGE>
biotechnology industry. The biotechnology industry has experienced rapid growth
in recent years based on the development of innovative technologies. The
development process 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. Since commencing operations in 1992, the Company has experienced
significant growth in revenues as the Company's reputation in the industry has
grown.
In general terms, the Company serves 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 and long-term
project customers send the Company repeat business.
For the purpose of consistency between the financial reports of the Company's
operations as reported in the Prospectus for the Company's IPO, the 10-QSB
filing for the third quarter 1997, for the 10-KSB filing for 1997, and for this
Annual Report to Shareholders, the term "Laboratory Services" is used to
describe revenue and expenses associated with short-term projects, and the term
"Contract Services" is used to describe revenue and expenses associated with
long-term projects. As the Company goes forward, the terms Laboratory Services
and Contract Services will be replaced with short-term and long-term project
revenues and expenses, respectively.
The Company also derives a portion of its revenues from research grants funded
by various Federal agencies. These research grants support the bulk of the
Company's research efforts on its own proprietary technologies.
Year Ended December 31, 1997
versus December 31,1996
Revenues
Gross revenues increased by $771,382 or 77.9%, from $989,925 during the fiscal
year ended December 31, 1996 ("1996" to $1,761,308 during the fiscal year ended
December 31, 1997 ("1997").
Revenues realized from laboratory services increased $371,224 or 76.9% from
$482,586 in 1996 to $853,810 in 1997, with the DNA sequence analysis service
showing the largest percentage revenue increase, in the amount of $220,599 or
144.9% from $152,256 in 1996 to $372,855 in 1997. Revenues attributable to
peptide synthesis increased by $74,572 or 119.1%, from $62,638 in 1996 to
$137,210 in 1997.
Revenue realized from various contract research projects increased by $234,232
or 71.7%, from $326,776 in 1996 to $561,007 in 1997. This increase was due
primarily to funds received in early 1997 from one major private industry
customer.
In addition, the Company experienced an increase in revenue realized from
government grants in the amount of $165,928 or 91.9% from $180,563 in 1996 to
$346,491 in 1997. These grants were provided by the National Institutes of
Health and the United States Department of Agriculture, under the auspices of
two different Small Business Technology Transfer Research Grants and a Small
Business Innovative Research award. The government grants are expense
reimbursement grants which provide for reimbursement of the Company's direct
costs incurred, plus indirect costs as a percentage of direct costs. The
Company generally receives grant payments semi-monthly, with the amount of each
payment being determined by the amount of the costs incurred in the immediately
preceding two week period.
Management believes that this increase in revenue is primarily attributable to
an expanded customer base and to larger orders from individual customers, both
of which result from the Company's enhanced reputation in the industry, and to
more effective advertising activities.
The Company experiences quarterly fluctuations in revenues which arise
primarily from variations in research contracts. Revenue fluctuations also
result from the dynamic nature of the Company's laboratory services. Engagement
for subsequent 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
11
<PAGE>
services can result in very large fluctuations in financial performance from
quarter to quarter.
The biotechnology industry is currently progressing through a consolidation
stage wherein some potential customers are cutting back on research and
development, while others are trying to perform their own research services
in-house. In either situation, there is a reduced dependence on the Company to
perform its services for customers. If this trend continues, the Company
expects that it may derive a larger portion of its revenues from laboratory
services. Thus, the Company may experience a pronounced shift from contract
research to laboratory services, which may result in a less predictable revenue
stream.
Performance of contract research for five customers was completed in 1997. Two
of these customers have initiated a new contract research projects with the
Company, and in addition, the Company has signed three additional research
contracts which began in January, 1998. The Company has bids for several
contracts pending, an award of any of which would have a significant impact on
revenues.
Expenses
Cost of services consists primarily of labor and laboratory supplies. Cost of
services increased by $556,510 or 234.1% from $237,726 in 1996 to $794,236 in
1997. The cost of services as a percentage of revenue was 24.0% and 45.1% in
1996 and 1997, respectively. These increased costs are directly attributable to
hiring new personnel, to acquisition of reagents, chemicals, materials and so
forth necessary to implement the Company's growth strategy. Labor costs
increased by $234,291 or 223.8% from $104,703 in 1996 to $338,994 in 1997. The
cost of reagents increased by $131,338 or 307.6% from $42,700 in 1996 to
$174,038 in 1997. The cost of miscellaneous materials increased by $142,236 or
500.8% from $28,404 in 1996 to $170,641 in 1997. The cost of services is
subject to fluctuation and can cause results of operations to fluctuate from
quarter to quarter, particularly if the Company purchases supplies but does not
record the revenue from the performance of services until a subsequent quarter.
Sales, general and administrative expenses consist primarily of compensation
and related costs for administrative personnel, depreciation and amortization,
professional fees and advertising. Sales, general and administrative expenses
increased by $973,186 or 300.5% from $323,820 in 1996 to $1,297,005 in 1997.
Sales, general and administrative expenses as a percentage of revenue were
32.7% in 1996 and 73.6% in 1997. Compensation and benefit expenses increased by
$507,739 or 449.4% from $112,983 in 1996 to $620,722 in 1997. This was due in
large part to the full-time employment of the four founders of the Company and
to payment of bonuses to the executive officers totaling $150,000. Also
included in compensation and benefit expenses is a $60,000 bonus paid to a
former officer of the Company. Rent payments increased by $60,850 or 733.9%
from $8,291 in 1996 to $69,641 in 1997. Professional fees increased by $62,025
or 145.8% from $42,544 in 1996 to $104,569 in 1997. This increase was primarily
due to the Company's need for additional outside business and scientific
consulting expertise. Depreciation increased by $104,262 or 200.8% from $51,936
in 1996 to $156,198 in 1997. Increased depreciation was attributable to the
purchase of additional equipment in the latter part of 1997.
Expenditures for government grant related research and development activities
increased by $138,911 or 118.2% from $117,544 in 1996 to $256,455 in 1997.
Expenditures to perform research and development for establishing fundamental
technologies in the Company, or expended in performance of grant related
research activities supplemented by the Company increased by $149,683 or 550.2%
from $27,203 in 1996 to $176,886 in 1997. Expenditures for research and
development performed on behalf of contract research customers decreased by
13.6% or $22,219 from $163,737 in 1996 to $141,518 in 1997. Research and
development activities performed by third parties at the behest of the Company
amounted to $56,750 in 1997, and were zero in 1996. Total research and
development costs as a percentage of revenue were 31.2% in 1996 and 32.6% in
1997.
Other Income and Expenses
The Company realized interest income in 1997 of $91,997; there was essentially
no interest income in 1996. The increase in interest income was primarily due
from investing the funds from the Private Placement (as described below) and
the Company's initial public offering.
Interest paid by the Company in 1997 included (1) interest paid to financial
institutions on loans made to the Company; (2) interest expenses associated
incurred as a
12
<PAGE>
consequence of completion of the Private Placement in June, 1997; and (3)
interest expenses for amortization of loan costs also incurred as a consequence
of the completion of the Private Placement.
Interest paid to financial institutions on loans made to the Company increased
by $16,968 or 167.9% from $10,101 in 1996 to $27,069 in 1997. The Company
experienced an increase in interest expenses associated with the Private
Placement of $204,039 in 1997, and an increase in amortization of loan costs
associated with the Private Placement of $124,918.
Liquidity and Capital Resources
On June 24,1997, the Company declared a 93.78-for-1 stock split. On June 25,
1997, the Company sold in a private placement of securities ("Private
Placement"), 60 convertible subordinated notes with a principal amount of
$50,000 per note. Each note had an interest rate of 20% and was payable upon
the conversion of the note into shares of the Company's common stock. Interest,
in the form of additional shares of common stock, was paid through the date of
the conversion. Each note automatically converted into 8,333.33 shares
(exclusive of interest) of the Company's common stock at the closing of the
Company's initial public offering ("IPO") on October 28, 1997. The net proceeds
of the Private Placement were $2,629,269.
On October 28, 1997, the Company completed its IPO of 1,015,000 shares of common
stock at a price of $6.00 per share. The Company's net proceeds from the IPO
were $5,417,578.
Operating cash flow for 1996 and 1997 was $409,136 and <$711,615>,
respectively. Net working capital as of December 31, 1996 and 1997 was $91,637
and $5,865,715, respectively. Increases in cash and net working capital in 1997
were due to the private placement and initial public offerings. During the
first quarter of 1997, the Company received the proceeds of a term loan from a
financial institution in the amount of $102,800. The Company also financed the
purchase of a vehicle under a term loan in the amount of $23,682. In addition,
the Company received the proceeds of a demand loan from a financial institution
in the amount of $42,000. During October 1997, the Company consolidated its
demand and term notes into a single term loan, payable on demand.
For 1997, the Company made capital expenditures on new scientific
instrumentation, including computers, amounting to $1,348,399, compared to
expenditures of $194,798 in 1996. As part of it's growth strategy, the Company
expects to incur approximately $3,100,000 of capital expenditures, consisting
of approximately $2,100,000 for laboratory equipment and approximately
$1,000,000 for fitting up of it's new facility. The Company expects to incur
these expenditures during the next eighteen months. In the meantime, available
funds are invested in interest bearing accounts at a commercial bank.
In 1997, the Company, as an S Corporation, made distributions to its
shareholders which totaled an aggregate of $96,851 in 1997 and $79,533 in 1996.
In June 1997, the Company altered its taxable status to that of a corporation
governed by Subchapter C of the Internal revenue Code of 1986, as amended.
Year Ended December 31, 1996
versus December 31, 1995
Revenues
Gross revenue increased $620,624, or 168.0%, from $369,301 for the fiscal year
ended December 31, 1995 ("1995") to $989,925 for the fiscal year ended December
31, 1996. This increase in revenue was attributable to an increase in new
customer accounts, which contributed $453,502, or 73%, of the increase, and to
larger orders with existing customers, which contributed $167,122, or 27%, of
the increase, for all types of services provided by the Company in 1996, except
for peptide synthesis which experienced a nominal decrease of $6,380, or 1.7%
of total 1995 revenue. This decrease was more than offset by an increase in
revenues from DNA sequencing services in the amount of $109,298, or 254.4%,
from $42,958 in 1995 to $152,256 in 1996. The beneficial increase in revenue
for 1996 was achieved with minimal advertising and marketing effort.
Revenue earned from government grants also increased approximately threefold
from $109,820 in 1995 to $185,564 in 1996. All of the aforementioned grant
revenue was used to fund research on the Company's proprietary technologies.
Management asserts that increases in revenues were attributable to the
Company's enhanced reputation in the industry and to more effective advertising
activities. These activities included the introduction of a tiered pricing
structure with services billed at lower rates and initial price
13
<PAGE>
concessions made as a component of the Company's aggressive entry into the
government and academic sectors.
Expenses
Cost of services consists primarily of labor and laboratory supplies. Cost of
services increased 197.3% from $79,948 to $237,726 for the years ended December
31, 1995 and 1996, respectively. This increase was consistent with the
increased growth experienced in revenue. Cost of services as a percentage of
revenue was 21.6% and 24.0% in 1995 and 1996, respectively.
Sales, general and administrative expenses consist primarily of compensation
and related costs, depreciation and amortization, professional fees and
advertising. Sales, general and administrative expenses increased from $220,891
to $323,820, or 46.6%, in 1995 and 1996, respectively. Sales, general and
administrative expenses as a percentage of revenue were 59.8% and 32.7% in 1995
and 1996, respectively. The decrease in the percentage relationship of sales,
general and administrative expenses to revenue was primarily attributable to
cost containment measures and economies of scale realized with the growth in
revenues.
Research and development costs in 1995 were primarily related to developing and
improving protocols for the automated sequencing group. Research and
development costs in 1996 were related to the development of new and expanded
services. Research and development costs were $69,861 and $308,484, or 18.9%
and 31.2% of revenue, in 1995 and 1996, respectively. The increase of $238,623
in 1996 research and development costs represented an increase of 341.6% over
the amount reported for 1995. Most of these costs, however, were funded by
grant awards from government sources.
Year 2000 Project
The year 2000 presents problems for businesses that are dependent on computer
hardware and software to perform date dependent calculations and logic
comparisons. A great deal of software and microchip technology was developed
utilizing two digit years rather than four digit years (example: 97 instead of
1997). Technology utilizing two digit years will most likely not be able to
distinguish the year 2000 from 1900, and therefore may shut down or perform
miscalculations and comparisons as much as 100 years off.
Management is fully aware this presents a potential business disruption, and
has begun a program of due diligence in addressing the impact of the Year 2000
on the Company and its operations. Once identified, areas of exposure will be
prioritized as to severity and time to cure, with a plan developed to make the
Company Year 2000 compliant. Management anticipates the Company will be year
2000 compliant.
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 "anticipate,"
"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 actual results to differ materially from those projected are
the following: business conditions and the general economy; the federal, state,
and local regulatory environment; availability of tax exempt bond financing
with favorable terms and conditions; 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 form time to time in reports filed
by the Company with the securities and exchange commission, including Forms
8-K, 10-QSB, and 10-KSB.
14
<PAGE>
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Financial Statements Page
<S> <C>
Report of Independent Auditors 16
Balance Sheets as of December 31, 1997 and 1996 17
Statements of Operations for the Years Ended December 31, 1997 and 1996 18
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997 and 19
1996
Statements of Cash Flows for the Years Ended December 31, 1997 and 1996 20
Notes to Financial Statements 21-27
</TABLE>
15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
Board of Directors and Stockholders
Commonwealth Biotechnologies, Inc.
We have audited the accompanying balance sheets of Commonwealth
Biotechnologies, Inc. (the Company) as of December 31, 1997 and 1996, and the
related statements of operations, changes in stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commonwealth Biotechnologies,
Inc. at December 31, 1997 and 1996, and the results of its operations and cash
flows for the years then ended in conformity with generally accepted accounting
principles.
GOODMAN AND COMPANY, LLP
7301 Forest Avenue
Richmond, Virginia
February 9, 1998
16
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------- -------------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 6,273,765 $ 260,357
Accounts receivable 153,090 116,437
Interest receivable 137 0
Prepaid expenses 56,174 1,080
Inventory 6,799 0
- ----------------------------------------------------------- ------------ ---------
Total current assets 6,489,965 377,874
- ----------------------------------------------------------- ------------ ---------
Property and equipment, net 1,435,812 243,611
- ----------------------------------------------------------- ------------ ---------
Other assets
Organization costs, net 829 3,183
Deposits 5,000 9,525
- ----------------------------------------------------------- ------------ ---------
Total other assets 5,829 12,708
=========================================================== ============ =========
$ 7,931,606 $ 634,193
- ----------------------------------------------------------- ------------ ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 279,570 $ 48,944
Current portion of long-term debt 30,000 37,293
Demand note 314,680 0
Deferred revenue 0 200,000
- ----------------------------------------------------------- ------------ ---------
Total current liabilities 624,250 286,237
- ----------------------------------------------------------- ------------ ---------
Long-term debt 0 185,687
- ----------------------------------------------------------- ------------ ---------
Total liabilities 624,250 471,924
- ----------------------------------------------------------- ------------ ---------
Stockholders' equity
Common stock, no par value, 10,000,000 shares authorized,
1,620,514 and 71,273 shares issued and outstanding,
respectively, at December 31, 1997 and 1996 760 760
Additional paid in capital 8,761,704 134,662
Retained earnings (deficit) (1,455,108) 26,847
- ----------------------------------------------------------- ------------ ---------
Total stockholders' equity 7,307,356 162,269
- ----------------------------------------------------------- ------------ ---------
$ 7,931,606 $ 634,193
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31, 1997 1996
- -------------------------------------------- ----------------- ------------
<S> <C> <C>
Revenue
Laboratory services $ 853,810 $ 482,586
Contract research 561,007 326,776
Government grants 346,491 180,563
- -------------------------------------------- ------------- ---------
Total revenue 1,761,308 989,925
- -------------------------------------------- ------------- ---------
Costs and expenses
Cost of services 794,236 237,726
Sales, general and administrative 1,297,005 323,820
Research and development 574,859 308,484
Total cost and expenses 2,666,100 870,030
- -------------------------------------------- ------------- ---------
Operating income (expense) (904,792) 119,895
Other income (expense)
Loan fees (124,918) 0
Interest expense (231,108) (10,102)
Interest income 91,997 295
- -------------------------------------------- ------------- ---------
Total other income (expense) (264,029) (9,807)
- -------------------------------------------- ------------- ---------
Net income (loss) $ (1,168,821) $ 110,088
============================================ ============= =========
Earnings (loss) per common share $ (3.55) $ 1.54
============================================ ============= =========
Weighted average common shares outstanding 329,480 71,273
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Additional Retained
of Shares Common Paid-In Earnings
Outstanding Stock Capital (Deficit) Total
------------- -------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 71,273 760 65,604 (3,708) 62,656
Net income 0 0 0 110,088 110,088
Contributed services 0 0 69,058 0 69,058
Distributions 0 0 0 (79,533) (79,533)
- ----- ------ --- ------ ------- -------
Balance at December 31, 1996 71,273 760 134,662 26,847 162,269
Contributed services for the six months ended
June 30, 1997 0 0 36,346 36,346
Distribution to shareholders through June 30,
1997 0 0 0 (96,851) (96,851)
Effects of conversion to C Corporation 0 0 216,283 (216,283) 0
Purchase of warrants by founding shareholders 0 0 100 0 100
Conversion of convertible subordinated notes
to common stock at a conversion price of
$6.00 share, net of unamortized costs 500,000 0 2,751,187 0 2,751,187
Effects of initial public offering (IPO) of
1,015,000 shares of common stock at $6.00
per share, net of costs 1,015,000 0 5,417,578 0 5,417,578
Effect of interest expense on convertible notes
paid in common stock at $6.00 per share 34,241 0 205,446 0 205,446
Purchase of warrants by underwriters of IPO 102 0 102
Net loss for the year ended December 31,
1997 0 0 0 (1,168,821) (1,168,821)
- ----- --------- --- --------- ---------- ----------
Balance at December 31, 1997 1,620,514 $ 760 $ 8,761,704 $ (1,455,108) $ 7,307,356
========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996
- ------------------------------------------------------------------ ----------------- ------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (1,168,821) $ 110,088
- ------------------------------------------------------------------ ------------- ----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 283,471 54,382
Issuance of common stock for interest on convertible notes 205,446 0
Contributed services 36,346 69,058
Changes in:
Accounts receivable (36,653) (37,422)
Interest receivable (137) 0
Prepaid expenses (55,094) (1,080)
Inventory (6,799) 0
Accounts payable 230,626 15,940
Deferred revenue (200,000) 198,170
- ------------------------------------------------------------------ ------------- ----------
Total adjustments 457,206 299,048
- ------------------------------------------------------------------ ------------- ----------
Net cash provided by (used in)
operating activities (711,615) 409,136
- ------------------------------------------------------------------ ------------- ----------
Cash flows from investing activities
Purchases of property and equipment (1,348,400) (194,798)
Deposits 4,525 (9,125)
- ------------------------------------------------------------------ ------------- ----------
Net cash used in investing activities (1,343,875) (203,923)
- ------------------------------------------------------------------ ------------- ----------
Cash flows from financing activities
Proceeds from issuance of long-term debt 488,161 231,000
Principal payments on long-term debt (366,461) (33,578)
Principal payments on capital lease obligations 0 (63,860)
Shareholder distributions (96,851) (79,533)
Proceeds from IPO of common stock, net of costs 5,417,578 0
Purchase of warrants by founding shareholders 100 0
Purchase of warrants by underwriter 102 0
Proceeds from issuance of convertible subordinated notes, net of
deferred loan costs 2,626,269 0
- ------------------------------------------------------------------ ------------- ----------
Net cash provided by financing activities 8,068,898 54,029
- ------------------------------------------------------------------ ------------- ----------
Net increase in cash and cash equivalents 6,013,408 259,242
Cash and cash equivalents, beginning of year 260,357 1,115
- ------------------------------------------------------------------ ------------- ----------
Cash and cash equivalents, end of year $ 6,273,765 $ 260,357
================================================================== ============= ==========
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 27,069 $ 10,102
====================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
NOTE 1 -- ORGANIZATION
Commonwealth Biotechnologies, Inc., (the "Company"), was formed on September
30, 1992 as a Virginia Subchapter S Corporation, for the purpose of providing
specialized analytical laboratory services for the life scientist. The Company
provides basic research services in the general areas of protein/peptide and
DNA/RNA chemistries. Such services include synthesis, sequence analysis,
composition analysis, protein purification and biophysical characterization of
biologically relevant materials. The Company also pursues its own research and
development leading to intellectual properties. In June 1997, the company
altered its taxable status to a corporation governed by Subchapter C of the
Internal Revenue Code.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenue and related profit upon the completion of
laboratory service projects, or upon the delivery and acceptance of
biologically relevant materials that have been synthesized in accordance with
project terms. Laboratory service projects are generally administered under
fee-for-service contracts or purchase orders. Any revenues from research and
development arrangements, including corporate contracts and research grants,
are recognized pursuant to the terms of the related agreements as work is
performed, or as scientific milestones, if any, are achieved. Amounts received
in advance of services to be performed, or acceptance of milestones, are
recorded as deferred revenue.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
expense is recorded over the estimated useful lives of the assets. The
straight-line method is used by the Company in providing depreciation and
amortization for financial reporting purposes. The cost of repairs and
maintenance is expensed as incurred. The estimated useful lives of assets are
as follows:
Laboratory and computer 30 months to 5 years
equipment
Furniture and fixtures and office 7 years
equipment
Automobile 5 years
Other Assets
Other assets consist of the organizational costs associated with the formation
of the Company and are amortized over five years.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method), or
market.
Income Taxes
The Company elected Subchapter S Corporation status effective January 1, 1993.
Accordingly, the taxable income of the Company has been "passed-through" to its
shareholders, and they have been subject to the tax on any income earned by the
Company.
As more fully described in Note 13, the Company organized a private placement
offering of convertible subordinated notes, which caused the income tax status
of the Company to change. Management believes that the Company is no longer
eligible for S Corporation status effective June 25, 1997. Therefore, at June
25, 1997, the undistributed earnings were treated as a constructive
distribution to the original shareholders and as a contribution to additional
paid-in capital. As a C Corporation, the Company will be responsible for income
taxes payable resulting from earnings subsequent to June 25, 1997.
Additionally, under the provisions of Financial Accounting Standards Board
("FASB") Statement No. 109, Accounting for Income Taxes, deferred tax assets
and liabilities are computed based on the
21
<PAGE>
difference between the financial statement and tax bases of assets and
liabilities using currently enacted tax rates.
At December 31, 1997, the Company's deferred taxes consist of differences
attributable to the cash basis of accounting and accelerated methods of
depreciation used for income tax purposes. The Company also has loss
carryforwards for tax return purposes.
Research & Development
Costs incurred in connection with research and development activities are
expensed as incurred. These consist of direct and indirect costs associated
with specific research and development projects.
Advertising Costs
The Company expenses all advertising costs as incurred. Total advertising
expense for the years ended December 31, 1997 and 1996 was $61,248 and $25,008,
respectively.
Earnings (Loss) Per Common Share
The Company adopted FASB Statement No. 128, Earnings Per Share, on December 31,
1997. This statement establishes standards for computing and presenting
earnings per share (EPS). This statement supersedes standards previously set in
APB Opinion No. 15, Earnings Per Share. The statement requires dual
presentation of basic and diluted EPS on the face of the income statement, and
it requires a reconciliation of the numerator and denominator of the basic EPS
with the numerator and denominator of the basic EPS with the numerator and
denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
In computing diluted EPS, only potential common shares
that are dilutive -- those that reduce earnings per share -- are included. The
exercise of options and warrants or conversion of convertible securities is not
assumed if the result would be antidilutive, such as when a loss from
continuing operations is reported. Consequently, the effect of options,
warrants and convertible notes is not considered in computing diluted EPS and,
therefore, basic and diluted EPS are the same.
Credit Risk
The Company provides laboratory services primarily to researchers in North
America (United States, Canada). Other major clients are located in South
America (Brazil, Colombia), in the far east (Japan, Korea), and in Europe
(Norway, Sweden, Germany, Italy, France, Greece). For projects exceeding
$5,000, the Company mitigates its credit risk by requiring a deposit of 50% of
total anticipated billings. The Company performs ongoing credit evaluations of
its customers and generally does not require additional collateral on its
laboratory services. However, the Company provides a charge to bad debts when,
in the opinion of management, such balances are not deemed to be collectible.
The Company invests its excess cash in high quality commercial paper, U.S.
Government Agency discount notes and certificates of deposits which are
administered by an institutional investment firm. Their balances are insured up
to $500,000 (with a limit of $100,000 for cash) by the Securities Investor
Protection Corporation (SIPC). The institutional firm has private insurance in
addition to the SIPC, which provides additional protection to the Company. In
addition, excess bank account balances are invested in overnight deposits
managed by a financial institution. At times these deposits may exceed the
federally insured limits of the financial institution.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
22
<PAGE>
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
1997 1996
-------------- ------------
Laboratory and computer
equipment $ 1,662,346 $ 359,476
Furniture and fixtures 3,754 1,925
Office equipment 30,971 11,908
Automobile 24,637 --
Leasehold improvements 5,075 5,075
- ------------------------------ ----------- ---------
1,726,783 378,384
Less accumulated depreciation
and amortization (290,971) (134,773)
- ------------------------------ ----------- ---------
Property and equipment, net $ 1,435,812 $ 243,611
Depreciation expense for the years ended December 31, 1997 and 1996, amounted
to $156,198 and $51,936, respectively.
NOTE 4 -- DEMAND NOTE
On November 4, 1997, the Company consolidated it's debt through a demand note
payable with Crestar Bank in the amount of approximately $320,000, which bears
interest payable at the bank's prime rate plus 1%. The note is collateralized
by a security interest in the Company's accounts receivable, chattel paper,
equipment and intangibles. As of December 31, 1997, the balance due was
$314,680.
NOTE 5 -- LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996, consists of:
1997 1996
------------ -------------
Term note payable at an interest rate
of 8.75% to Crestar Bank,
collateralized by a security interest
in the Company's accounts
receivable, chattel paper,
equipment and intangibles, and
due in equal monthly payments of
principal and interest of $4,150
through October 2001. This noted
was incorporated in the
consolidation financing noted
above. $ -- $ 19,298
Enterprise Zone incentive loan
payable to the City of Richmond,
collateralized by equipment and
due in ten annual installments of
$3,000 plus interest at 3%
beginning in September 1997.
Enterprise Zone incentive loans
provide for an alternative means of
repayment in lieu of cash. Each
year, any increase over 1996 in real
estate, machinery and tools, and
business licenses taxes will directly
curtail, on a dollar for dollar basis,
the interest and then principal
payments on the loan. 30,000 30,000
- ------------------------------------------- ------- ---------
30,000 222,980
Less -- current portion of long-term
debt (30,000) (37,293)
- ------------------------------------------- ------- ---------
$ -- $ 185,687
23
<PAGE>
NOTE 6 -- CAPITAL LEASE OBLIGATIONS
The Company acquired, in January 1994, certain computer equipment for its
laboratory from Hewlett Packard Company under a capital lease in the amount of
$104,500. The lease terms called for monthly lease payments of $2,049 to be
made through December 1998 at an implicit lease rate of 8.44%. The lease was
paid off during 1996. Accumulated depreciation and depreciation expense on the
assets subject to capital lease amounted to $83,600 and $20,900, at December
31, 1997 and 1996, respectively.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
Leases
During 1997 and 1996, the Company was engaged in a noncancellable operating
lease for its laboratory and office space from the Virginia Biotechnology
Research Park in Richmond, Virginia as a sub-landlord for the City of Richmond.
The monthly rental payment through the culmination of the lease, at June 30,
1997, was $691.
Beginning July 1, 1997, the Company leased its current laboratory and office
space directly from the City of Richmond. The monthly rental payment will
increase to $3,222. The initial term of the lease will extend through June 30,
2000, however, either party may cancel the lease with nine months notice.
As of January 1, 1998, the Company began leasing two suites from the Virginia
Biotechnology Research Park located in the Biotech One building. The monthly
rental payment is $6,069. The term of the lease is through May 31, 1998, at
which time, it may be renewed for additional ninety day increments.
The Company also leases certain of its office equipment under a noncancellable
lease agreement which expires in February 2001.
Future minimum payments under these noncancellable operating leases are as
follows:
1998 $ 73,140
1999 42,794
2000 23,460
2001 688
2002 --
- ----------- ---------
$ 140,082
Total rent expense for all operating leases for each of the years ended
December 31, 1997 and 1996, was $69,141 and $8,291, respectively.
Sales Commitments
In December 1996, the Company entered into a contract with one customer to
perform structural studies on a proprietary protein product totaling
approximately $200,000, which was recorded as deferred revenue at year-end.
At December 31, 1997 and 1996, the Company is performing services under
contract with several companies. These companies include Insmed Pharmaceuticals
(Richmond, Virginia), Bayer Corporation (Clayton, North Carolina, Raleigh,
North Carolina, West Haven, Connecticut and Berkeley, California), Breastek,
Inc. (Charleston, South Carolina) and Somatix Therapeutics Corporation
(Alameda, California). The company is the major biochemistry subcontractor to a
grant issued by the University of New Mexico, Department of Chemical and
Nuclear Engineering at Albuquerque, New Mexico.
Sponsored Research Contract and Consulting Agreement
The Company entered into a sponsored research agreement (the "Agreement") with
Virginia Commonwealth University (the "University") on November 15, 1992.
Unless canceled by written notification by either party, the Agreement
automatically renews annually. The Agreement allows CBI personnel access to
equipment located within the academic laboratories of certain professors, who
are also officers of the Company. The laboratories are located on the campus of
the Medical College of Virginia (an affiliate of the University). The Agreement
carries a fee for service schedule, which allows for payment to the University
for use of the equipment. The Company has since purchased its own equipment and
reduced its dependence on the University's equipment to a level that total
payments made to the University are approximately $1,200 per calendar quarter.
This contract and consulting agreement ended on August 1, 1997.
NOTE 8 -- RETIREMENT PLAN
Effective October 1, 1996, the Company adopted an employee 401(k) retirement
plan. Qualified employees may contribute up to 15% of their gross pay to the
plan. Employee contributions are limited to amounts established
24
<PAGE>
by law. The Company may make matching contributions to the plan as determined
by the Board of Directors subject to the limitations under the Internal Revenue
Code. The Company made no contributions to the Plan in 1996 or 1997.
NOTE 9 -- MAJOR CUSTOMERS
During 1997 and 1996, the Company had the following revenue concentrations that
exceeded 10% of total revenue:
1997 1996
------------ ----------
Bayer Pharmaceuticals, AG $ 377,932 $
Small Business Technology
Transfer Research Grant
Phase II 226,239 63,773
Small Business Technology
Transfer Research 2 Grant
Phase I -- 90,766
Small Business Technology
Transfer Research 3 Grant
Phase I -- 26,025
University of New Mexico
Grant -- 124,423
These contracts represented 40.91% and 30.81% of total revenue in 1997 and
1996, respectively.
NOTE 10 -- COMPENSATION AND BENEFIT COSTS
Compensation and benefit costs are included in the statements of operations as
follows:
1997 1996
-------------- ------------
Cost of services $ 338,994 $ 104,703
Selling, general and adminis-
trative expenses 620,721 112,983
Research and development
costs 361,925 170,415
- ------------------------------ ----------- ---------
$ 1,321,640 $ 388,101
NOTE 11 -- INCOME TAXES
The difference between expected income tax expense (benefit) and income tax
expense recorded in the financial statement is explained below.
1997
---------------
Income taxes computed at
34% statutory rate $ (397,399)
Statutory limitations of loss
carryovers 381,472
Contributed services 12,358
Other 3,569
Income tax expense $ --
==========================================================
The significant components of deferred income tax assets and liabilities as of
December 31 consist of the following:
1997
------------
Deferred tax assets:
Effect of net operating loss $ 463,329
Accrual basis to cash basis conversion 41,629
- ---------------------------------------------------- ---------
504,958
Deferred tax liabilities:
Tax depreciation in excess of book depreciation (75,860)
- ---------------------------------------------------- ---------
Net deferred tax asset before valuation allowance 429,098
Less -- valuation allowance (429,098)
- ---------------------------------------------------- ---------
Net deferred tax asset $ --
================================================================
Tax return operating loss carryforwards were approximately $1,122,000 at
December 31, 1997.
NOTE 12 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has determined, based on available market information and
appropriate valuation methodologies, that the fair value of its financial
instruments approximates carrying value. The carrying amounts of cash and cash
equivalents, accounts receivable and accounts payable approximate fair value
due to the short-term maturity of the instruments. The carrying amounts of debt
approximates fair value because the interest rates under the credit agreement
are predominantly variable, based on current market conditions.
NOTE 13 -- PRIVATE PLACEMENT AND INITIAL PUBLIC OFFERING ("IPO")
On June 24, 1997, the Company declared a 93.78-for-1 stock split which has been
retroactively reflected in the accompanying financial statements.
On June 25, 1997, the Company sold 60 convertible subordinated notes ("notes"),
with a principal amount of $50,000, in a private placement offering at an
offering price of $50,000 per note. Each note bears interest at the rate of 20%
and is payable upon the conversion of the note into shares of the Company's
common stock. Interest was paid through the date of the conversion in the form
of additional shares of common stock, which were issued based on a conversion
price of $6.00 for each share of common stock. Each note was automatically
converted into a minimum of 8,333.33 shares of the Company's common stock, upon
the earlier of the closing of the Company's proposed IPO, or on June 25, 1998,
the maturity date. Upon conversion, the actual number of shares issued equaled
the principal amount of the notes
25
<PAGE>
plus accrued interest divided by the stated conversion price of $6.00. The
Company received net proceeds of $2,626,269, after underwriting and other
offering costs of $373,731.
Upon the closing of the private placement offering, the Company issued warrants
to members of Management for the purchase of 100,000 shares of common stock.
The warrants were issued to the management team at $.001 per share, and will be
exercisable for a period of ten years at an exercise price of $9.90 per share.
On July 21, 1997, the Company filed a Form SB-2 Registration Statement with the
Securities and Exchange Commission for the sale of 1,015,000 shares of common
stock. The proceeds are expected to be used to acquire laboratory equipment,
additional personnel, expand existing facilities, expand marketing and
advertising and fund working capital. On October 25, 1997, the Company closed
the IPO and received net proceeds of $5,417,578, after underwriting and other
offering costs of $672,422. On October 29, 1997, the Company began trading on
the NASDAQ exchange using the symbol "CBTE".
On November 13, 1997, Anderson & Strudwick (the "Underwriters") purchased
warrants for 101,500 shares of common stock. The warrants were issued to the
Underwriter at $.001 per share, and will be exercisable for a period of five
years at an exercise price of $9.90 per share.
NOTE 14 -- STOCK COMPENSATION
The Company adopted its Incentive Plan (the "Plan") on June 24, 1997. The
Incentive Plan provides for the granting to employees, officers, directors,
consultants and certain non-employees of the Company of options to purchase
shares of common stock. The maximum number of shares of common stock that may
be issued pursuant to options under the Plan is 410,000. This amount is subject
to adjustment in the event of a stock split, stock dividend or other change in
the common stock or capital structure of the Company. Of the maximum number of
shares to be issued under the Plan, 270,000 will be reserved for incentive
awards to be granted to the four founders of the Company, and 140,000 shares
will be reserved for incentive awards to be granted to other persons.
Incentive awards may be in the form of stock options, restricted stock,
incentive stock or tax offset rights. In the case of incentive stock options or
non-qualified stock options, the exercise price will not be less than 100% of
the fair market value of shares covered at the time of the grant. Options
granted under the Plan generally vest over a five year period from the date of
grant and are exercisable for ten years, except that the term may not exceed
five years for incentive stock options granted to persons who own more than 10%
of the Company's outstanding common stock.
The Company applies APB Opinion No. 25 and related accounting interpretations
in accounting for its Plan and, accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's Plan been determined based
on the fair value at the grant dates for awards under the Plan consistent with
the method prescribed by FASB No. 123, Accounting for Stock-Based Compensation,
the Company's net income and earnings per share would have been reduced to the
proforma amounts indicated below as if the Plan had been in effect for the
periods presented:
December 31,
1997
-----------------
Net income (loss)
As reported, historically $ (1,168,821)
Proforma $ (1,330,841)
Earnings (loss) per common share
As previously reported, historically $ (3.55)
Proforma $ (4.04)
Under FASB No. 123, the fair value of each management warrant is estimated on
the date of grant using the Black-Scholes option pricing model. The following
assumptions were used for grants made during 1997: No dividend yield, expected
volatility of 34%, risk free interest rate of 5.5%, and expected lives of 5
years.
Stock option transactions are summarized as follows:
Weighted
Average
Exercise
Price Per
1997 Share
---------- ----------
Options outstanding --
beginning of year -- $ --
Granted 314,400 8.80
Exercised -- --
Lapsed -- --
- ------------------------ ------- -------
Options outstanding --
end of year 314,400 $ 8.80
- ------------------------ ------- -------
Options exercisable --
end of year 77,564 $ 6.69
26
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Remaining Exercise Exercise
Prices Number Contractual Price Number Price
Per Share Outstanding Life (years) Per Share Exercisable Per Share
- --------------- ------------- -------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
$ 6.00 107,400 10 $ 6.00 70,109 $ 6.00
$ 8.25 7,000 10 $ 8.25 -- $ 8.25
$ 9.90 200,000 8 $ 9.90 7,455 $ 9.90
----------- ------- -- ------- ------ -------
$ 6.00-9.90 314,400 9 $ 8.80 77,564 $ 6.37
</TABLE>
NOTE 15 -- EMPLOYMENT AGREEMENTS
On June 24, 1997, the Company entered into employment agreements with its four
founders. Each of the agreements has a term of five years with specified base
salaries and provide for successive one-year terms. In addition, except for
1997, the employment agreements provide the Company's executive officers with
annual bonuses equal to, in the aggregate, 15% of the Company's pre-tax net
income for the preceding fiscal year. For the fiscal year ending December 31,
1997, the bonuses for the Company's executive officers were $150,000.
In connection with the aforementioned employment agreements, the Company has
recognized the fair value for services rendered by its founders in its
financial statements. The financial statement recognition is achieved by
reflecting a charge against income for contributed services and a contribution
to additional paid-in capital for all of the periods presented. The fair value
of the charges have been established based on the approximate number of hours
worked by the Company's founders annually, and application of a base hourly
rate that increases approximately 5% annually to the approximate hourly rate
reflected in the agreement applied at June 24, 1997.
The contributed services charged against income amounted to $36,346 and $69,058
for the years ended December 1997 and 1996, respectively. Of these amounts, the
charges allocated to sales, general and administrative expenses the years ended
December 31, 1997 and 1996, were $33,173 and $63,029, respectively. The
contributed services allocated to research and development costs for the years
ended December 31, 1997 and 1996, were $3,173 and $6,029, respectively.
NOTE 16 -- SUBSEQUENT EVENT
During January 1998, the Company announced that they will be locating to a new
30,000 square foot state-of-the-art laboratory facility located in Chesterfield
County, Virginia. The Company has already received approval from the Industrial
Development Authority and the Board of Supervisors of Chesterfield County,
Virginia to issue $4,000,000 of Industrial Revenue Bonds. An inducement
resolution has been approved by the Virginia Small Business Financing
Authority. Final approval to issue the Bonds is expected in mid-February. The
Company anticipates ground breaking in mid-March, 1998, with occupancy expected
to occur in mid to late third quarter of 1998.
* * * * *
27
<PAGE>
The Executive Officers and Board of Directors
- --------------------------------------------------------------------------------
Executive Officers
Richard J. Freer, Ph.D.
Chairman of the Board
Robert B. Harris, Ph.D.
President
Gregory A. Buck, Ph.D.
Senior Vice President and
Chief Scientific Officer
Thomas R. Reynolds,
Senior Vice President
Directors
Richard J. Freer, Ph.D.
Chairman of the Board
Robert B. Harris, Ph.D.
President
Gregory A. Buck, Ph.D.
Vice President, Chief Scientific Officer, and Secretary
Thomas R. Reynolds
Vice President
Charles A. Mills
Director and CEO, Anderson & Strudwick, Inc.
Peter Einselen
Director and Senior Vice President, Anderson & Strudwick, Inc.
Corporate Information
- --------------------------------------------------------------------------------
[Company photo -- employees]
The Company owes its success to the loyalty, dedication, and commitment of its
employees.
Corporate Office:
Commonwealth Biotechnologies, Inc.
911 East Leigh St., Suite G-19
Richmond, VA 23219
phone: 800-735-9224; 804-648-3820
fax: 804-648-2641
email: [email protected]
web site: www.cbi-biotech.com
General Counsel
LeClair Ryan,
A Professional Corporation
707 East Main St, 11th Floor
Richmond, VA 23219
Transfer Agent and Registrar
American Securities Transfer and Trust, Inc.,
938 Quail St., Suite 101
Denver, CO
Independent Auditors
Goodman and Company, LLP
7301 Forest Ave.
Richmond, VA 23226
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S BALANCE SHEET AND STATEMENT OF OPERATIONS
FOR DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,273,765
<SECURITIES> 0
<RECEIVABLES> 153,090
<ALLOWANCES> 0
<INVENTORY> 6,799
<CURRENT-ASSETS> 6,489,965
<PP&E> 1,726,783
<DEPRECIATION> 290,971
<TOTAL-ASSETS> 7,931,606
<CURRENT-LIABILITIES> 624,250
<BONDS> 0
0
0
<COMMON> 760
<OTHER-SE> 7,306,596
<TOTAL-LIABILITY-AND-EQUITY> 7,931,605
<SALES> 0
<TOTAL-REVENUES> 1,761,308
<CGS> 0
<TOTAL-COSTS> 2,666,100
<OTHER-EXPENSES> 124,918
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 231,108
<INCOME-PRETAX> (1,168,821)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,168,821)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,168,821)
<EPS-PRIMARY> (3.55)
<EPS-DILUTED> (3.55)
</TABLE>
