U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
- -------
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO _________
COMMISSION FILE NUMBER: 001-13467
COMMONWEALTH BIOTECHNOLOGIES, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
VIRGINIA 54-1641133
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
601 Biotech Drive, Richmond, Virginia 23235
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(804) 648-3820
(ISSUER'S TELEPHONE NUMBER)
-----------------------------------------
Check mark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No __
As of November 15, 1999 1,643,727 shares of common stock, no par value,
of the registrant were outstanding.
Transitional Small Business Disclosure Format (Check one) Yes:___ No: X
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
COMMONWEALTH BIOTECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
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(UNAUDITED)
----------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 45,949 $ 2,091,586
Accounts Receivable 523,462 302,936
Prepaid Expenses & Inventory 157,771 76,500
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Total Current Assets $ 727,182 $ 2,471,022
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PROPERTY PLANT AND EQUIPMENT, NET $ 7,137,734 $ 7,263,788
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OTHER ASSETS
Restricted Cash $ 412,531 $ 402,991
Bond Issue Cost, net 252,123 260,181
Deposits 3,200 3,200
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Total Other Assets $ 667,854 $ 666,372
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TOTAL ASSETS $ 8,532,770 $ 10,401,182
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LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts Payable & Other Current Liabilities $ 566,380 $ 797,597
Deferred Revenue 67,286
Demand Note 209,680 249,680
------------- -------------
Total Current Liabilities $ 776,060 $ 1,114,563
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Long term Debt Bonds $ 4,000,000 $ 4,000,000
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TOTAL LIABILITIES $ 4,776,060 $ 4 ,114,563
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STOCKHOLDER'S EQUITY
Common Stock, no par value
10,000,000 authorized, September 30, 1999
1,643,727, December 31, 1998 1,633,214 $ - $ -
Additional Paid-in-Capital 8,901,742 8,838,664
Deficit (5,145,032) (3,552,045)
------------- -------------
Total Stockholder's Equity $ 3,756,710 $ 5,286,619
------------- -------------
TOTAL LIABILITIES AND $ 8,532,770 $ 10,401,182
STOCKHOLDERS EQUITY ------------- -------------
</TABLE>
See accompanying notes to condensed financial statements.
2
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COMMONWEALTH BIOTECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
REVENUE
Short Term Projects $ 286,364 $ 188,681 $ 718,958 $ 687,928
Long Term Projects 509,122 97,432 928,263 384,369
Research Grants 17,863 107,687 160,264 196,456
AccuTrac 8,460 - 39,260 -
-------------- -------------- -------------- -------------
Total Revenue $ 821,809 $ 393,800 $ 1,846,745 $ 1,268,753
-------------- -------------- -------------- -------------
COST AND EXPENSES
Cost of Services $ 530,098 $ 252,638 $ 1,208,354 $ 819,312
Sales, Gen. And Admin. 490,698 452,976 1,741,432 1,567,565
Research and Development 92,703 183,258 339,809 396,518
-------------- -------------- -------------- -------------
TOTAL COST AND EXPENSES $ 1,113,499 $ 888,872 $ 3,289,595 $ 2,783,395
-------------- -------------- -------------- -------------
OPERATING LOSS $ (291,690) $ (495,072) $ (1,442,850) $ (1,514,642)
-------------- -------------- -------------- -------------
OTHER INCOME (EXPENSES)
Interest Expense $ (74,543) $ (54,513) $ (224,960) $ (139,080)
Other Income 7,597 91,098 74,823 285,251
-------------- -------------- -------------- -------------
Total Other Income (Expense) $ (66,946) $ 36,585 $ (150,137) $ 146,171
-------------- -------------- -------------- -------------
NET LOSS $ (358,636) $ (458,487) $ (1.592,987) $ (1,368,471)
-------------- -------------- -------------- -------------
LOSS PER SHARE, BASIC $ ( 0.22) $ (0.28) $ (0.97) $ (0.84)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,643,727 1,621,956 1,641,068 1,621,135
</TABLE>
See accompanying notes to condensed financial statements.
3
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COMMONWEALTH BIOTECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
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<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (1,592,987) $ (1,368,471)
Adjustments to reconcile net loss to
net cash used in operating
Activities:
Depreciation and amortization 405,733 220,086
Loss on disposal of equipment - 11,275
Interest earned on restricted cash - (76,967)
Changes in:
Accounts receivable (220,526) (47,101)
Prepaid expenses and inventory (81,272) (15,000)
Restricted Cash (9,540) -
Deferred revenue (59,681) -
Accounts payable and accrued expenses (238,823) (39,871)
NET CASH USED IN OPERATING ACTIVITIES $ (1,797,097) $ (1,298,353)
------------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property, plant and equipment $ (271,618) $ (616,387)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Common Stock $ 63,078 $ 11,700
Bond issue costs - (186,268)
Principal payments on demand note (40,000) (45,000)
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 23,078 $ (219,568)
------------ -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (2,045,637) $ (2,134,308)
CASH AND CASH EQUIVALENTS, BEGINNING $ 2,091,586 $ 6,273,765
------------ ------------
CASH AND CASH EQUIVALENTS, ENDING $ 45,949 $ 4,139,457
============ ============
SUPPLEMENTAL DISCLOSURES
CASH PAID FOR INTEREST $ 216,901 $ 148,060
------------ ------------
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
Notes To Condensed Financial Statements
(1) In the opinion of the Company, the accompanying condensed
financial statements which are unaudited, except for the
condensed balance sheet dated December 31, 1998 contain all
adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of
September 30, 1999 and December 31, 1998 and the results of
operations and cash flows for the three and nine month
periods ended September 30, 1999 and 1998 and cash flows for
the nine month periods ended September 1999 and 1998.
(2) The results of operations for the nine months ended September
30, 1999 and 1998 are not necessarily indicative of the
results to be expected for the full year.
(3) Earnings (loss) per share: The Company follows the guidance
provided in FASB Statement No. 128, Earnings Per Share, which
establishes standards for computing and presenting earnings
per share and applies to entities with publicly held common
stock or potential common stock. Those entities that have only
common stock outstanding are required to present basic
earnings per share amounts. All other entities are required to
present basic and diluted per share amounts. Diluted per share
amounts assume the conversion, exercise or issuance of all
potential common stock instruments such as options, warrants
and convertible securities, unless the effect is to reduce a
loss or increase earnings per share. At September 30, 1999,
the Company had stock options outstanding which were
anti-dilutive since the Company incurred a net loss for
all periods presented.
(4) On September 27, 1999, the Company obtained an unsecured line
of credit in the amount of $400,000 from a corporation solely
owned by a significant stockholder of the Company. Interest is
payable monthly at a rate of 6% on the outstanding balance.
This agreement expires on September 30, 2000. As of
September 30, 1999, there is no outstanding balance.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following should be read in conjunction with the unaudited
Financial Statements and related Notes thereto of Commonwealth Biotechnologies,
Inc. ("the Company") included herein.
OVERVIEW
The Company's revenues are derived principally from providing
macromolecular synthetic and analytical services to researchers in the
biotechnology industry or who are engaged in life sciences research in
government or academic labs throughout the world. Development of innovative
technologies for biotechnology requires sophisticated laboratory techniques, and
the Company provides these services to customers on a contract basis. 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 generally derives revenue from two types of customers:
those who require a discrete set of services ("short-term projects"), and those
who contract with the Company on an extended basis for performance of a variety
of integrated services ("long-term projects"). More often than not, the
Company's customers provide repeat business to the Company. Historically, a
majority of the Company's net revenues have been earned under short-term
projects. However, the Company views long-term projects as the more important
source of revenue and has continued to focus its efforts on identifying
long-term customers. Long-term projects generally range from a few months to
more than a year. Revenues are generally recognized as services are rendered or
as products are delivered. In addition, revenue is also recognized with
performance-based installments payable over the contract duration as milestones
are achieved.
The Company also derives revenues from government grants that partially
fund the Company's research efforts for its proprietary technologies. All
government grants are expense reimbursement grants which provide for
reimbursement on a monthly basis of the Company's direct costs incurred in a
research project, plus indirect costs stated as a percentage of direct costs.
In January 1999, the Company began sales of a new reagent (AccuTracTM)
which facilitates the process of automated DNA sequence analysis. In this
respect, the Company anticipates broadening its revenue base by direct sales of
this reagent to its clients. AccuTracTM, was developed within the Company and
stems directly from the Company's research and development programs.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1998.
REVENUES
Gross revenues increased by $428,009 or 107.3% from $393,800 during the third
quarter of 1998 ("the 1998 Quarter") to $821,809 during the third quarter of
1999 ("the 1999 Quarter").
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Revenues realized from short-term projects increased by $97,683 or
51.8% from $188,681 during the 1998 Quarter to $286,364 during the 1999 Quarter.
This is primarily due to increased sales of DNA synthesis, protein sequencing,
DNA sequencing and miscellaneous services. The continuing business of new
customers as well as repeat business contributed to the increase.
LONG TERM PROJECTS
------------------
Revenues realized from various long-term projects increased by $411,690
or 422.5%, from $97,432 during the 1998 Quarter to $509,122 during the 1999
Quarter. This increase is primarily due to work being done on thirteen projects,
compared to nine that were in progress during the 1998 Quarter. Of the thirteen
projects initiated during the quarter, one customer accounted for 59.2% of the
revenue base.
RESEARCH GRANTS
---------------
The Company experienced a decrease in revenue realized from government
grants in the amount of $89,824, or 83.4%, from $107,687 during the 1998 Quarter
to $17,863 during the 1999 Quarter. This decrease is primarily due to completion
of two of the three grants early in the 1999 Quarter.
ACCUTRAC(TM) REVENUE
--------------------
The Company began sales of a new reagent (AccuTrac(TM)) which
facilitates the process of automated DNA sequence analysis. Revenues during the
1999 Quarter amounted to $8,460. There were no sales during the 1998 Quarter.
COST OF SERVICES
Cost of services consists primarily of laboratory supplies, labor, and
miscellaneous indirect costs. The cost of services increased by $277,460, or
109.8%, from $252,638 during the 1998 Quarter to $530,098 during 1999 Quarter.
DIRECT MATERIALS
----------------
The costs for direct materials increased by $205,206, or 203.0%, from
$101,095 during the 1998 Quarter to $306,301 during the 1999 Quarter. Increased
expenditures in reagent costs were principally for a particular project that the
Company completed during the 1999 Quarter.
DIRECT LABOR
------------
Labor costs increased by $56,688 or 42.9%, from $132,269 during the
1998 Quarter to $188,957 during the 1999 Quarter. This increase reflects a
reallocation of the Company's resources to the general operations of the
business from the research and development area. This reallocation was necessary
to support the additional long-term projects initiated by the Company during the
1999 Quarter.
OTHER COSTS
-----------
Other costs increased by $18,643 or 115.1%, from $16,167 during the
1998 Quarter to $34,840 during the 1999 Quarter. This increase is primarily due
to increase costs in lab equipment repair.
7
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SELLING, GENERAL AND ADMINISTRATIVE
Sales, general and administrative expenses ("SGA") consist primarily of
compensation and related costs for administrative, marketing and sales
personnel, facility expenditures, professional fees, depreciation, office
expenditures and other costs. Total SGA costs increased by $37,722, or 8.3%,
from $452,976 during the 1998 Quarter to $490,698 during 1999 Quarter.
COMPENSATION AND BENEFITS
-------------------------
Total Compensation and Benefits decreased by $8,807 or 5.5% from
$158,857 during the 1998 Quarter to $150,050 during the 1999 Quarter. This
reduction is due to reassigning a portion of management salaries allocated to
direct labor.
FACILITY EXPENSES
-----------------
Facility expenses decreased by $26,002 or 39.4%, from $65,991 during
the 1998 Quarter to $39,989 during the 1999 Quarter. This decrease is primarily
due to the elimination of rental costs for space leased during the 1998 Quarter.
PROFESSIONAL SERVICES
---------------------
Professional fees increased by $18,324 or 122.1%, from $15,011 during
the 1998 Quarter to $33,335 during the 1999 Quarter. This increase is primarily
due to the change in professional insurance to more accurately cover the
contents of the facility. In addition, costs associated with compiling and
publishing the Company's annual report are also included.
TAXES AND LICENSES
------------------
Taxes and licenses increased by $12,440 or 155.0%, from $8,023 during
the 1998 Quarter to $20,463 during the 1999 Quarter. This increase is primarily
due to a increase in personal property taxes paid to the new jurisdiction in
which the facility is located. In addition, initial expenditures for real estate
taxes associated with the new facility were realized during the 1999 Quarter.
DEPRECIATION EXPENSE
--------------------
Depreciation increased by $60,346 or 80.5% from $74,964 during the 1998
Quarter to $135,310 during the 1999 Quarter. Increased depreciation costs are
attributable to the purchase of additional laboratory equipment consistent with
expanding the Company's technology base. In addition, depreciation includes
costs for the new corporate facility in which the Company began full operations
in December 1998. There were no depreciation costs in the 1998 Quarter for any
facility costs by the Company.
MARKETING
---------
Marketing costs decreased by $17,008 or 30.0% from $56,753 during the
1998 Quarter to $39,745 during the 1999 Quarter. Reduction in the use of
non-Company professional media relations work and the elimination of attendance
at several trade show costs contributed to the decline in expenditures.
8
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In September, 1998, the Company entered into a contract with the
Mattson Jack Group to perform a global market assessment of the Company's
potential human therapeutic, HepArrest(TM). Total costs during the 1999 Quarter
of the Mattson Jack Group contract amounted to $2,450.
RESEARCH AND DEVELOPMENT
Research and development costs within the Company fall into two general
categories: grant-related research and development and in-house research and
development. These categories are distinguished in the Company by those
performed in support of government grant-sponsored programs, and those performed
in the absence of such grants and funded from working capital. Total
expenditures for these two categories decreased by $90,554, or 49.4%, from
$183,258 during the 1998 Quarter to $92,703 during the 1999 Quarter.
GRANT RELATED RESEARCH ACTIVITIES
---------------------------------
Expenditures to perform grant-related research activities decreased by
$43,993 or 83.1%, from $52,913 during the 1998 Quarter to $8,920 during the 1999
Quarter. This decrease in costs is primarily due to two of the three grants
being completed early in the quarter.
IN-HOUSE RESEARCH ACTIVITIES
----------------------------
Expenditures made by the Company for in-house research activities
decreased by $44,932 or 49.6%, from $90,662 during the 1998 Quarter to $45,730
during the 1999 Quarter. This decrease is primarily due to the reallocating of
salaries from research and development to direct labor.
OTHER INCOME AND EXPENSES
Interest income decreased by $83,501 or 91.7% from $91,098 during the
1998 Quarter to $7,597 during the 1999 Quarter. Funds derived during the 1999
Quarter represent interest earned from cash on hand. Interest income derived
during the 1998 Quarter resulted from investing the unused portion of the funds
realized by the Company from the private placement of convertible notes in June
1997, and initial public offering of common stock in October 1997. IPO interest
income is also derived from investing the unused portion of the funds-realized
by the Company from the sale (March 1998) of industrial revenue bonds (IRBs)
for construction of the Company's new laboratory facility.
Interest costs increased by $20,029 or 36.7% from $54,513 during the
1998 Quarter to $74,543 during the 1999 Quarter. These costs incurred by the
Company included (1) interest paid to financial institutions as loans made to
the Company; 2) interest paid for the Company's IRBs; and 3) amortization of
costs incurred as a consequence of the completion of the Company's IRB
financing.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998.
REVENUES
Gross revenues increased by $577,992 or 45.6% from $1,268,753 during the 1998
Period ("the 1998 Period") to $1,846,745 during the 1999 Period. ("the 1999
Period").
9
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SHORT TERM PROJECTS
-------------------
Revenues realized from short-term projects increased by $31,030 or 4.5%
from $687,928 during the 1998 Period to $718,958 during the 1999 Period.
Revenues realized from peptide synthesis increased by $33,435 or 22.0% from
$152,211 during the 1998 Period to $185,646 during the 1999 Period. Revenues
attributable to protein sequencing increased by $38,971 or 44.5%, from $87,645
during the 1998 Period to $126,616 during the 1999 Period. Revenues derived from
peptide synthesis and protein sequencing increased primarily due to new
customers placing orders with the Company. Revenues from two new core
technologies, genetic analysis and molecular biology, reported revenues during
the 1999 Period of $8,550 and $20,565 respectfully. Revenues from DNA sequencing
decreased by $121,596 or 39.9% from $304,406 during the 1998 Period to $182,810
during the 1999 Period. This decrease is primarily due to a change in the
marketplace wherein most DNA sequence activities are becoming associated with
long-term projects. DNA and RNA synthesis increased by $23,357 or 54.4% from
$42,906 during the 1998 Period to $66,263 during the 1999 Period. This increase
is primarily due to new customers placing orders with the Company.
LONG TERM PROJECTS
------------------
Revenues realized from various long-term projects increased by $543,894 or
141.5%, from $384,369 during the 1998 period to $928,263 during the 1999 Period.
This increase is primarily due to work being done on twenty-six individual
projects during the 1999 Period compared to only eleven projects in the progress
during the 1998 Period. Of the twenty-six projects initiated during the 1999
Period, one customer accounted for 41.4% of the revenue base. The Company's
management continues to take an active role in negotiating new contracts.
However, management is unable to say with certainty when or whether any
additional long-term contracts will be awarded.
RESEARCH GRANTS
---------------
The Company experienced a decrease in revenue realized from government grants
in the amount of $36,192, or 18.4%, from $196,456 during the 1998 Period to
$160,264 during the 1999 Period. This decrease is primarily due to the
completion of two of the three grants. Those grants were the Phase II Small
Business Technology Research grant (SBTR) from the National Institutes of Health
(NIH) and a Phase I SBIR award from the NIH for development of Rapid Assay
Methods for the Detection of Botulism. The remaining grant, a ($200,000) Phase
II Small Business Innovative Research Award (SBIR) from the United States
Department of Agriculture (USDA) for development of a Diagnostic for Equine
Infectious Anemia Infection is about to begin its second year. Remaining funds
left total $100,000. The Company anticipates completion of the project by August
2000.
ACCUTRAC(TM) REVENUE
--------------------
The Company began sales of a new reagent (AccuTrac(TM)) which
facilitates the process of automated DNA sequence analysis. Revenues during the
1999 Period amounted to $39,260. There were no sales during the 1998 Period.
The Company experiences quarterly fluctuations in all revenue
categories. Continuation of existing projects, or engagement for future projects
is usually dependent upon the customer's satisfaction with the scientific
results provided on initial phases of the scientific program. Continuation of
existing projects or engagement of future projects also often depends upon
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factors beyond the Company's control, such as the timing of product development
and commercialization programs of the Company's customers. The Company is unable
to predict for more than a few months in advance the volume and dollar amount of
future projects in any given period. The combined impact of commencement and
termination of research contracts from several large customers and unpredictable
fluctuations in revenue for laboratory services can result in very large
fluctuations in financial performance from period to period.
COST OF SERVICES
Cost of services consists primarily of labor, laboratory supplies and
miscellaneous indirect costs. The cost of services increased by $389,042 or
47.5%, from $819,312 during the 1998 Period to $1,208,354 during 1999 Period.
The cost of services as a percentage of revenue was 64.5% and 65.4% during 1998
and 1999, respectively.
DIRECT MATERIALS
----------------
The cost for direct materials increased by $218,645, or 58.9%, from
$371,011 during the 1998 Period to $589,656 during the 1999 Period. This
increase is primarily due to work being done on twenty-six individual projects
during the 1999 Period compared to only eleven projects in progress during the
1998 Period. Of the twenty-six projects initiated during the period, one
customer accounted for 21.6% of the material costs during the 1999 Period.
DIRECT LABOR
------------
Labor costs increased by $158,328, or 41.5%, from $381,617 during the
1998 Period to $539,945 during the 1999 Period. This increase reflects a
reallocation of the Company's resources to the general operations of the
business from the research and development area. This reallocation is necessary
to support the additional long-term projects initiated by the Company during the
1999 Period. During the 1999 Period only one employee has been added in Direct
Labor.
SELLING, GENERAL AND ADMINISTRATIVE
Sales, general and administrative expenses ("SGA") consist primarily of
compensation and related costs for administrative, marketing and sales
personnel, facility expenditures, professional fees, consulting, taxes, and
depreciation. Total SGA costs increased by $173,865, or 11.1%, from $1,567,567
during the 1998 Period to $1,741,432 during 1999 Period. As a percentage of
revenue, these costs were 123.5% and 94.3% during 1998 and 1999, respectively.
COMPENSATION AND BENEFITS
-------------------------
Total compensation and benefits decreased by $111,847 or 18.1% from
$617,552 during the 1998 Period to $505,705 during the 1999 Period. This
decrease is primarily attributable to the resignation of one of the Company's
executive officers that has opted to return to his former professional position.
Additional reductions are due to reassigning a portion of management salaries
allocated to direct labor.
FACILITY COSTS
--------------
Costs for facilities decreased by $12,018, or 7.3%, from $164,002
during the 1998 Period to $151,984 during the 1999 Period. The costs for leasing
laboratory space for its operations decreased by $118,712 or 92.4% from $128,379
during the 1998 Period to $9,667 during the 1999 Period. This decrease is
primarily due to the relocation of the Company to its new corporate
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headquarters. However, additional costs associated with the relocation and new
to the Company include electricity ($80,318), gas utility bills ($12,090), water
usage ($2,511), janitorial services ($7,085) and landscaping ($6,383). In the
1998 Period, these costs were included in our monthly lease payment. Telephone
use increased by $8,544 due to a one-time charge for software on the
implementation of the new telephone system.
PROFESSIONAL SERVICES
---------------------
Professional services include professional fees, consulting, dues and
subscriptions and taxes and licenses. Professional services increased by $29,190
or 19.5%, from $149,444 during the 1998 Period to $178,634 to the 1999 Period.
Consulting fees increased due management fees paid for the successful hiring of
a sales representative on the west coast of the United States.
TAXES AND LICENSES
------------------
Taxes and licenses increased by $34,917 or 128.9%, from $27,097 during
the 1998 Period to $62,014 to the 1999 Period. This increase is primarily due to
a increase in personal property taxes paid to the new jurisdiction in which the
facility is located. In addition, initial expenditures for real estate taxes
associated with the new facility were realized during the 1999 Period.
DEPRECIATION EXPENSE
--------------------
Depreciation increased by $182,587 or 84.9% from $215,064 during the
1998 Period to $397,652 during the 1999 Period. Increased depreciation costs are
attributable to the purchase of additional laboratory equipment consistent with
expanding the Company's technology base. In addition depreciation costs include
the new corporate facility which began full operations in December 1998. There
were no depreciation costs in the 1998 Period for any facility costs associated
by the Company.
MARKETING
---------
Marketing costs increased by $46,043 or 24.2%, from $190,114 during the
1998 Period to $236,157 during the 1999 Period. Salaries and fringe benefits,
expenditures for a new brochure, additional advertising in the professional
journals, implementation of an advertising campaign for AccuTrac(TM), contract
costs with a media relations firm, travel, and trade show expenditures
contributed to these increased costs.
In September, 1998, the Company entered into a contract with the
Mattson Jack Group to perform a global market assessment of the Company's
potential human therapeutic, HepArrest(TM). Total costs during the 1999 Period
of the Mattson Jack Group contract amounted to $34,061.
SELLING
-------
Expenditures during the 1999 Period increased by $7,462 or 14.0%, from
$53,353 during the 1998 Period to $60,815 during the 1999 Period. Costs
associated with selling include personnel, travel, and office expenses.
RESEARCH AND DEVELOPMENT
Research and development costs within the Company fall into two general
categories: grant-related research and development and in-house research and
development. These categories are distinguished in the Company by work performed
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in support of government grant-sponsored programs, and those performed in the
absence of such grants and funded from working capital. Total expenditures for
these two categories decreased by $56,709, or 14.3%, from $396,518 during the
1998 Period to $339,809 during the 1999 Period. Total grant-related research and
in-house research as a percentage of revenue were 31.2% and 18.4% during 1998
and 1999, respectively.
GRANT RELATED RESEARCH ACTIVITIES
---------------------------------
Expenditures to perform grant-related research activities increased by
$17,685 or 11.3%, from $155,970 during the 1998 Period to $173,655 during the
1999 Period. Increase costs are primarily due to the completion of two grants
and the continuation of work on remaining grants. All costs associated with
grant related research activities are reimbursed to the Company on a periodic
basis.
Grants completed during the 1999 Period included, a Phase II Small
Business Technology Research grant (SBTR) grant from the National Institutes of
Health (NIH). Expenses incurred through the 1999 Period amounted to $82,356, and
a Phase I SBIR award from the NIH for development of Rapid Assay Methods for the
Detection of Botulism. Expenditures incurred through the 1999 Period amounted to
$32,455. The remaining grant, a ($200,000) Phase II Small Business Innovative
Research Award (SBIR) from the United States Department of Agriculture (USDA),
is for the development of a Diagnostic for Equine Infectious Anemia Infection.
Expenses incurred through the 1999 Period amounted to $58,750. The Company
anticipates completion of the project by August 2000.
IN-HOUSE RESEARCH ACTIVITIES
----------------------------
Expenditures made by the Company for in-house research activities
decreased by $74,395 or 30.9%, from $240,548 during the 1998 Period to $166,153
during the 1999 Period. This decrease is primarily due to the reallocating of
salaries from research and development to direct labor. This reallocation was
necessary to support the additional long-term projects initiated by the Company.
However, the Company continues to be actively engaged in establishing
fundamental methods for genetic testing for agricultural and human applications,
in developing methods of genome sequence analysis, and in pursuing fundamental
research related to potential uses of HepArrest in drug formulation. In addition
the Company is continuing its in-house research and development efforts with
AccuTrac(TM).
OTHER INCOME AND EXPENSES
Interest income (in total) to the Company decreased by $210,428, or
73.8% from $285,251 during the 1998 Period to $74,823 during the 1999 Period.
Interest income to the Company derived during the 1998 Period resulted
from investing the unused portion of the funds realized by the Company from the
private placement of convertible notes in June 1997. These funds decreased by
$175,031, or 84.9% from $206,063 during the 1998 Period to $31,032 during the
1999 Period.
Interest income to the Company was also derived during the 1998 Period
from investing the unused portion of the funds-realized by the Company from the
sale (March 1998) of industrial revenue bonds (IRBs) for construction of the
Company's new facility. These funds decreased by $64,149 or 81.0% from $79,188
during the 1998 Period to $15,039 during the 1999 Period.
Other income of $28,750 represents funds for training assistance
awarded by the Virginia Business Assistance Program (Workforce Services) for new
13
<PAGE>
employees of the Company. This program enables the Company to implement training
both from an orientation as well as safety program for all new employees who
have been with the Company for at least ninety days.
Interest costs incurred by the Company during the 1999 and 1998 Periods
included (1) interest paid to financial institutions as loans made to the
Company; 2) interest paid for the Company's IRBs; and 3) amortization of costs
incurred as a consequence of the completion of the Company's IRB financing.
Total interest expense and amortization increased by $83,577 or 61.7% from
$139,079 during the 1998 Period to $224,959 during the 1999 Period. This
increase is primarily due the payment of nine months interest for the Company's
IRBs during the 1999 Period as compared to six months and fifteen days during
the 1998 Period.
LIQUIDITY AND CAPITAL RESOURCES
Consistent with the Company's implementation of its growth strategy,
1999 showed a net operating cash outflow in the amount of $1,797,097, as
compared to an outflow of $1,298,353 in 1998. The decrease in both years is due
to the continuation of substantial investments made by the Company in facility
costs, personnel, equipment, sales, and marketing efforts. These cost outlays
were made possible by capital realized from the Company's private placement of
convertible notes and initial public offering of public stock. As of September
30, 1999, all proceeds from the initial public offering have been expended.
The Company is now working on funds generated solely by revenues earned.
The Company continues to search for long-term projects as the more important
source of revenue and has continued to focus its efforts on identifying
long-term customers. Long-term projects generally range from a few months to
more than a year. During the 1999 Quarter, the Company was awarded a five year
subcontract with the Illinois Institute of Technology Research Institute
(IITRI) valued at more than $6.5 million. The Company currently has
additional 20 pending contracts with an estimated dollar value of $8.7 million
out for bid with various clients.
Net working capital as of September 30, 1999 and December 31, 1998 was
$(48,878) and $1,356,459 respectively. This decrease is a direct result of
capital expenditures on new scientific instrumentation, computers, and furniture
and fixtures, costs associated with the new facility, implementation of
marketing and selling divisions within the Company, and costs associated with
additional staffing and direct materials necessary to expand the Company's
technology offerings.
IRBs sold by the Company (in the amount of $4.0 million) were issued by
the Virginia Small Business Financing Authority. The IRBs were issued pursuant
to an Indenture of Trust dated March 15,1998, between the Virginia Small
Business Financing Authority and Crestar Bank, a Virginia banking association,
the named Trustee. The IRBs were issued and sold to facilitate construction of
the Company's facility in the Gateway Centre Development at 601 Biotech Drive in
Chesterfield County, Virginia. Funds generated by the sale of the IRBs are
restricted and may only be used for the construction of the Company's new
facility. Construction of the new facility began in early June and was completed
in late November 1998. Of the $4,000,000 issued by the Virginia Small Business
Financing Authority, $412,531 remains as restricted cash on the balance sheet of
the Company as of September 30, 1999. All of the Company's administrative and
research operations have been consolidated into this facility and are fully
operational.
YEAR 2000 PROJECT
The Company is working to resolve the potential impact of the Year 2000
on the ability of the Company's computerized information systems to accurately
14
<PAGE>
process information that may be date-sensitive. Any of the Company's programs
that recognize a date using "00" as the year 1900 rather than 2000 could result
in errors or system failures. The Company is in the process of making its
assessment of the potential impact of the Year 2000 issue. As of November 14,
1999:
o The Company's financial institutions have of addressed Year 2000
compliance issues. All financial institutions that the Company
conducts transactions with are Year 2000 compliant.
o The Company upgraded its general accounting system to a
Year 2000 compliant version. During the first quarter of 1999, the
Company tested the general accounting software. This software is
considered to be Year 2000 compliant.
o The Company has completed the process of updating payroll system to
meet Year 2000 compliance standards.
o The Company believes that equipment purchased by the Company during
1999 and 1998 is considered to be Year 2000 compliant.
o The Company's instrumentation is stand-alone and not networked to
any other systems. The Company believes therefore that its equipment
is not sensitive to dating and therefore will not have to be
replaced or improved.
o The Company is currently communicating with suppliers and customers
to determine the extent to which they have addressed Year 2000
issues. The Company is in the process of contacting its suppliers to
determine if the business operations are Year 2000 compliant. Ninety
surveys have been mailed to our major suppliers to address this
issue on whether they are Year 2000 compliant. As of November 14,
the Company has received sixty-five responses to the survey. Out of
the survey's returned, all have stated that they are Year 2000
compliant or will be in compliance by the middle of the fourth
quarter in 1999. Follow up letters for the remaining surveys
continue to be mailed out to the remaining suppliers. Twenty-four
surveys have been mailed to our major customers to address this
issue on whether they are Year 2000 compliant. As of November 14,
1999, the Company has received twelve responses to the survey.
Out of the survey's returned, all have stated that they are
Year 2000 compliant or will be in compliance by the middle of the
fourth quarter in 1999. Follow up letters for the remaining
surveys continue to be mailed out to the remaining customers.
o The Company believes that it is 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 that are not historical in nature, including the words "anticipated",
"estimate", "should", "expect", "believe", "intend", and similar expressions are
intended to identify forward-looking statements. Such statements are, by their
nature, subject to certain risks and uncertainties.
Among the factors-that could cause the actual results to differ
materially from those projected are the following:
15
<PAGE>
o business conditions and the general economy,
o the development and implementation of the Company's long term
business goals,
o federal, state, and local regulatory environment,
o lack of demand for the Company's services,
o the ability of the Company's customers to perform services similar
to those offered by the Company "in-house,"
o potential cost containment by the Company's customers resulting in
fewer research and development projects,
o The Company's ability to receive accreditation to provide various
services, including, but not limited to paternity testing,
o The Company's ability to hire and retain highly skilled employees,
Other risks, uncertainties, and factors that could cause actual results
to differ materially from those projected are detailed from time to time in
reports filed by the company with the Securities and Exchange Commission,
including Forms 8-K, 10-QSB, and 10-KSB.
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From July 1, 1999 through September 30, 1999, the Company spent
approximately $349,925 of the net proceeds of its initial public offering as
follows: (1) $128,937 on capital expenditures, (2) $11,646 for the development
of the Company's new laboratory facility, (3) $37,246 on marketing, (4) $22,674
on sales, (5) $2,499 on consulting fees for HepArrest, (6) on facility/bond
expenditures $ 66,690 and (7) $80,233 on production operating expenses. As of
September 30, 1999, all proceeds from the initial public offering have been
utilized.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Underwriter's Warrant, as amended (1)
4.3 Form of Management Warrant, as amended (1)
4.4 Indenture of Trust by and between the Virginia
Small Business Financing Authority and Crestar Bank
relating to the issuance of industrial revenue
bonds for the benefit of the Company (2)
10.1 Placement Agreement by and between the Company and
Anderson & Strudwick, Incorporated (1)
10.2 Warrant Agreement between the Company and Anderson
& Strudwick, Incorporated (1)
10.3 Warrant Agreement between the Company and
Richard J. Freer, as amended (1)
10.4 Warrant Agreement between the Company and Thomas R.
Reynolds, as amended (1)
10.5 Warrant Agreement between the Company and Robert B
Harris, as amended (1)
10.6 Employment Agreement for Richard J. Freer (1)
10.7 Employment Agreement for Thomas R. Reynolds (1)
10.8 Employment Agreement for Robert B. Harris (1)
10.9 Executive Severance Agreement for
Richard J. Freer (1)
10.10 Executive Severance Agreement for
Thomas R. Reynolds (1)
10.11 Executive Severance Agreement for
Robert B. Harris (1)
10.12 1997 Stock Incentive Plan, as amended (1)
10.13 Form of Incentive Stock Option Agreement (1)
10.14 Loan Agreement by and between the Virginia Small
Business Financing Authority and the Company (2)
27.1 Financial Data Schedule (3)
- -------------
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No.333-31731, as amended.
(2) Incorporated by reference to the Company's Current Report on Form 8-K,
dated April 6, 1998, File No. 001-13467.
(3) Filed herewith.
(b) Reports on Form 8-K.
During the fiscal period ended September 30, 1999, the Company did not
file any Form 8-K.
18
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
COMMONWEALTH BIOTECHNOLOGIES, INC.
By: /s/ James H. Brennan
-----------------------
James H. Brennan
Controller
November 15, 1999
<TABLE> <S> <C>
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For September 30, 1999 and is qualified in its entirety by reference to such
Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 45,949
<SECURITIES> 0
<RECEIVABLES> 523,462
<ALLOWANCES> 0
<INVENTORY> 58,417
<CURRENT-ASSETS> 727,182
<PP&E> 8,133,057
<DEPRECIATION> 995,323
<TOTAL-ASSETS> 8,532,770
<CURRENT-LIABILITIES> 776,060
<BONDS> 4,000,000
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<COMMON> 760
<OTHER-SE> 3,756,710
<TOTAL-LIABILITY-AND-EQUITY> 8,532,770
<SALES> 1,846,745
<TOTAL-REVENUES> 1,846,745
<CGS> 0
<TOTAL-COSTS> 3,289,595
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 224,959
<INCOME-PRETAX> (1,592,986)
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