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, 1998
[ ] 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 54-1641133
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
601 BIOTECH DRIVE
RICHMOND, VIRGINIA 23235
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (804) 648-3820
Securities registered pursuant Securities registered pursuant to Section
to Section 12(b) of the Act: 12(g) of the Act:
NONE COMMON STOCK, WITHOUT PAR
VALUE PER SHARE
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, 1998 were
$1,604,267.
The aggregate market value of the shares of common stock, without par
value ("Common Stock"), of the registrant held by non-affiliates on March 21,
1999 was approximately $10,756,745, based upon the closing sales price of these
shares of $8.281 per share, as reported on the Nasdaq SmallCap Market on
March 21, 1999.
As of March 21, 1999 there were 1,638,464 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 15, 1999 are incorporated by
reference into Part III of this Form 10-KSB.
Portions of the registrant's 1998 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 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 to researchers in the
biotechnology industry or to researchers who are engaged in life sciences
research in government or academic labs throughout the world.
The Company provides these services to customers on a contract basis and
derives its revenues from these services, and not only 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
derived from successful commercialization of 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 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 in-house proprietary technologies. The
Company is developing its own technologies in the general areas of
anti-coagulation, genomic sequence analysis, and development of diagnostic test
kits.
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 hopes to broaden its revenue base by direct sales of this
reagent to its clients. AccuTrac was developed within the Company and stems
directly from the Company's in-house R&D programs.
GROWTH STRATEGY
The Company's strategy for growth includes:
EXPANSION OF ITS ANALYTICAL 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. Having
secured a significantly larger laboratory facility and additional
research equipment, the Company has the capacity to generate
substantially greater revenues from its core services, to offer new
technologies, and to improve profit margins through more efficient
operations.
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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 these areas:
The Company hired an Account Executive for the Eastern Region who
worked throughout 1998 to identify new clients and to bring
additional work to the Company. In March, 1999, the Company hired
an Account Executive for the Western Region, who will primarily
serve clients in California. This individual will be primarily
targeting biotechnology companies and government agencies.
The Company has engaged the services of Ballas and Partners,
Richmond, VA, a media relations firm, to assist the Company in
design and implementation of new marketing strategies, to enhance
the Company's visibility, and to aide the Company in identifying
and reaching new customers.
REGULATORY COMPLIANCE. The Company has been registered under the
Clinical Laboratories Improvement Act (CLIA), with pending accreditation
by the Virginia Department of Health. Registration under the CLIA
guidelines enables the Company to accept human samples for analysis and
to perform analysis of human clinical samples for the presence of known
genetic markers.
The Company was accredited in 1998 under the guidelines of the National
Forensic Science Technology Center, (NFSTC), to perform DNA identity
testing for submission of data into the Combined DNA Index System
(CODIS) data base, and is one of only eight commercial facilities
nationwide accredited by the NFSTC to perform criminal (felony) DNA
database testing for submission into the FBI CODIS database.
The Company expects accreditation soon from the American Association of
Blood Banks (AABB) and the Company has participated in a validation
study through the College of American Pathologists (CAP). The Company
operates under GLP (Good Laboratory Practices) and has been accredited
by the United States Department of Agriculture to receive bovine DNA
samples from Europe to perform genetic, lineage, and identity analysis.
The Company participated in an international study to validate bovine
DNA identity testing in conjunction with a study group located in
Denmark, and in addition, is establishing DNA identity testing in
horses.
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. Already, the Company has made
inroads in establishing new service technologies and in offering these
services to its customers. In 1999, the Company will increase its
capacity or improve its analytical 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 1999.
GENOME SEQUENCING. We have developed comprehensive sequencing
capabilities of human, animal, plant, and microbial pathogen
genomes.
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GENETIC ANALYSIS. The Company has established a Genetic Testing
Group and is now positioned to begin analysis of human samples
for the presence of genetic markers of known human pathologies.
We have already begun analysis for a long-term contract client,
for example, of human samples for the presence of the "p53 gene,"
a marker for cancer.
CBI is also ready to begin analysis of samples for the presence
of many other marker genes. In 1999, we will focus new marketing
efforts on our capabilities in this area, and are striving to
make Genetic Analysis a larger revenue producing technology for
the Company.
IDENTITY TESTING AND PATERNITY TESTING BY GENETIC ANALYSIS. In
our new facility, the Company has established a DNA Reference
Laboratory containing all the necessary work areas required to
provide genetic identity and paternity testing. The Company is
thus ready to begin offering paternity testing and DNA
fingerprinting to the general public and to various state and
federal agencies, and already has submitted bids for performing
DNA fingerprint analysis for the Departments of Criminal Justice
of different States.
In February, 1999, the Company hired a new Director of Human
Genetics and Genetic Analysis. This scientist has many years
experience in growing genetic analysis and paternity testing as a
revenue source for his former employer, and the Company expects
that his presence will bring immediate visibility to the Company
in these important areas.
MOLECULAR BIOLOGY. While not truly a new technology at the
Company, we have made a concerted effort to identify clients who
contract with the Company to pursue comprehensive molecular
biology projects. In the last quarter of 1998, more than 15
individual molecular biology projects were initiated at the
Company and throughout 1999, we intend to expand these services
even more by offering large scale bacterial fermentation to our
clients.
CENTRALIZED COMPUTER FACILITIES. The Company has acquired a more
centralized server for databasing and analysis, and has
established a sophisticated company-wide intranet in our new
facility. New software packages have been installed to upgrade
our accounting capabilities, and to permit more efficient data
handling, storage, backup, and analysis.
EXPANDED DNA SYNTHESIS SERVICES. The Company provides "protein
nucleic acids" (PNAs) to numerous clients under a broad licensing
agreement with Perseptive Biosystems, Inc., Framingham, MA. In
addition, demand for DNA/RNA synthesis continues to increase, and
in particular, the Company is one of the few offering commercial
RNA synthesis.
EXPANDED CELL CULTURE AND BACTERIAL CULTURE SERVICES. The Company
has established a state-of-the-art cell culture facility in its
new facility and offers large scale cell culture services to its
clients. In 1999, the Company will establish large scale
bacterial fermentation capabilities for overexpression of target
proteins.
EXPANDED MASS SPECTRAL ANALYSIS SERVICES. The Company has
installed and now operates a MALDI-TOF mass spectrometer and so
can offer mass spectral analysis of virtually all macromolecules,
including proteins, peptides, DNA, RNA, and PNAs. MALDI-TOF
analysis complements electrospray (ES) mass spec and HPLC-ES-mass
spec analyses also offered by the Company.
ANALYTICAL SUPPORT SERVICES
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In order to analyze and 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, 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. 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 resulting from 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 analytical techniques, such as 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 pharmaceutical
industry researchers to major government sponsors of research, such as the
National Institutes of Health. 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. A new, one page
promotional brochure has been compiled and is sent to all potential customers.
The Company has instituted "fax-on-demand" for customers who seek technology
descriptions and pricing information.
CUSTOMERS
Our customers are private companies, academic institutions and
government agencies throughout the world. Virtually all our clients are engaged
in life sciences research, and use our technologies to provide data and results
which support their individual research programs. As of December, 1998, the
Company's client lists exceeded 700 customers world-wide.
SHORT-TERM RESEARCH PROJECTS.
On average, in 1998, the Company added 24 new customers per month. Of
its domestic customers, 53.3 % are private companies, and 46.7% are university
or governmental labs. The Company added 31 new foreign clients in 1998, from
such places as Argentina, Australia, Canada, China, Columbia, Denmark, Germany,
Greece, Hong Kong, India, Israel, Italy, Japan, Korea, Mexico, Malaysia, Norway,
Spain, Sweden, Switzerland, the United Kingdom, and Uruguay.
The Company's customers come to us from many sources. The Company
advertises in the professional journals, exhibits at trade shows, and has its
own Web page from which a potential customers 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 us using simple key word search terms. Of course,
favorable word-of-mouth advertising is key to our
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success, and has brought us many new investigators within a single research
based institution. All inquiries to the Company receive immediate and personal
attention.
LONG-TERM RESEARCH PROJECTS
CBI is committed to identifying long-term contractual clients. During
1998, one of our major long-term contractual clients brought much of their work
back "in-house" due to a change in their corporate philosophy. Loss of this
revenue stream affected the bottom line of CBI throughout 1998. However, CBI
signed 9 new long-term contracts or agreements in the last quarter of 1998 and
as of December 1998, the Company had many long-term contract proposals pending
with many different potential customers.
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 the
results. If the project involves 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 analytical services provided in accordance
with the Company's standard fee structure and typically retains all rights to
any intellectual property resulting from the analysis.
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
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technologies, the intellectual property rights to which the Company will own.
Usually, the goal of these research efforts 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. However, in some instances, the Company is both the manufacturer
and distributor of its own products.
In 1998, the Company completed a Phase I Small Business Innovative
Research Award ("SBIR") from the United States Department of Agriculture, (USDA)
in the amount of $55,000, and was awarded a new Phase I SBIR grant from the
National Institutes of Health totaling $100,000, and a Phase II SBIR award from
the USDA ($ 200,000). The Company is in the second and final year of its Phase
II Small Business Technology Transfer Award ($500,000) from the National
Institutes of Health and currently has several other grant applications pending
with various Federal and State agencies. Revenues from federally funded
contracts are recognized on a cost reimbursement basis.
INTELLECTUAL PROPERTY
HEPARREST(TM)
US Patent #5,877,153, was issued March 2, 1999 to the Company and a
Continuation in Part to the same patent has been filed and is pending. Both
patents relate to an anti-coagulation technology the Company is developing. A
PCT patent based on the US patent will issue shortly, and national patents on
this technology have also been filed and are pending in Europe, Japan, and
Canada.
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 compound has been trademarked as HepArrest(TM). The Company
commissioned an independent consulting firm, the Mattson Jack Group, Mendon, NY,
to assess the market potential of HepArrest, if our compound were to receive
approval from the Food and Drug Administration as a human pharmaceutical.
Mattson Jack determined that there would be a substantial market for a safe and
effective drug with a proven clinical profile of HepArrest.
The Company's strategy will be to license this technology to a
creditable corporate partner(s) who are well positioned to take HepArrest
through all the laboratory and clinical trials necessary to commercialize the
compound. In exchange, the Company expects a licencing fee and subsequent
royalties against sales. To this end, the Company has contracted with the
Mattson Jack Group to help identify and negotiate with likely strategic
corporate partners. In the meantime, the Company will continue to compile
preclinical data on the efficacy and safety of HepArrest.
To yield a commercial product, HepArrest will require extensive
additional testing and government approval. As a result, there can be no
assurance that commercial products will result from these technologies, all of
which should be considered highly speculative.
A REAGENT TO AID AUTOMATED DNA SEQUENCE ANALYSIS, ACCUTRAC(TM)
The Company developed a novel laboratory reagent that markedly improves
the accuracy and reliability of automated DNA sequence analysis protocols. Such
protocols are in-use world-wide, and the Company believes that its reagent will
be adopted for use by many of the facilities that currently perform
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DNA sequence analysis. The Company filed for US patent protection for its
reagent, termed AccuTrac (TM). The Company announced the implementation of
AccuTrac at the Institute for Genome Research meeting in January 1999, and
presented additional products based on AccuTrac at the Human Genome meeting,
March 1999. The Company is aggressively marketing AccuTrac over the internet and
with print ads in the professional journals. Initially, for a limited time,
AccuTrac was given to qualified investigators at no cost, but the Company has
already begun selling this reagent.
OTHER TECHNOLOGIES
The Company is actively pursuing development of an immunoassay for
equine infections 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. The work is funded by
SBIR awards from the USDA totaling $250,000. 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 is pursuing field trials of this test, and hopes to gain USDA
approval for its use. The Company hopes to enter into negotiations with a
corporate partner interested in commercializing this diagnostic assay.
The Company is developing a rapid assay for detecting the presence of
the botulism bacteria in foodstuffs. Under a Phase I SBIR award from the
National Institutes of Health ($100,000), the Company is developing novel enzyme
substrates to detect the presence of botulinum toxins.
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 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 34 full time and 1 part time employees,
including 10 employees in administration, marketing, sales, and customer
relations, 1 computer network specialist, 11 employees in research and
development, and 24 employees in laboratory operations; some employees in
research and development also participate in laboratory operations. Nine of the
Company's employees hold doctorate
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degrees, and 7 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 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 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 has a license from the Nuclear Regulatory Commission
("NRC") for the operation of its laboratory facility.
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. 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.
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ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES
Construction of our new facility was completed in November, 1998 at an
overall cost of about $ 5.1 million dollars financed primarily through the
Virginia Small Business Financing Authority (the "VSBFA") which issued $
4,000,000 in tax exempt Industrial Revenue Bonds ("IRBs") for the benefit of the
Company. The Company's new facility encompasses 32,000 square feet of
state-of-the-art laboratory and administrative space. The building is designed
to facilitate movement of samples throughout each laboratory, and where
necessary, to maintain and ensure custody of samples. The building houses
expansion space which was purposefully left undeveloped to accommodate new
technologies as they come on board.
The Company took possession of its new facility in late November, 1998,
and all labs were fully operational in the new facility by mid December, 1998.
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
No matter was submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The information set forth on page 10 of the Company's 1999 Annual Report
to Shareholders under the caption "Market for Common Equity" is incorporated
herein by reference.
USE OF PROCEEDS OF IPO
From October 1, 1998 through December 31, 1998, the Company spent
approximately $1,605,187 of the net proceeds of the initial public offering as
follows: (1) $1,184,136 on facility expenditures, (2) $227,951 on capital
expenditures, (3) $163,639 on marketing, (4) $22,998 on sales and, (5) $6,463 on
production operating expenditures. Through 1998, the Company spent approximately
$3,429,330 of the net proceeds of the initial public offering. The remaining
proceeds are invested in an interest-bearing account at a commercial bank.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information set forth on pages 10 through 18 of the Company's 1998
Annual Report to Shareholders under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is incorporated
herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements and the related notes thereto,
together with the report of McGladrey & Pullen, LLP, set forth on pages 19
through 29 of the Company's 1998 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.
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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 15, 1998 (the "Proxy Statement")
under the caption "Proposal 1: Election of Directors" is incorporated herein by
reference.
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.
12
<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 Anderson &
Strudwick, Incorporated ("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 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 Loan Agreement between the Company and the Virginia Small
Business Financing Authority (2)
13.1 Annual Report to Shareholders for the Fiscal Year Ended
December 31, 1998 incorporated in Form 10-KSB (3)
16.1 Letter on change in certifying accountant (4)
23.1 Letter of Consent from McGladrey & Pullen LLP (3)
23.2 Letter of Consent from Goodman & Company (3)
27.1 Financial Data Schedule (3)
- -----------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-31731.
(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.
(4) Incorporated by reference to Amendment No. 1 to the Company's Current
Report on Form 8-K, filed on March 12, 1998.
13
<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:
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 Robert B. Harris, as amended (1)
4. Employment Agreement between the Company and Richard J. Freer (1)
5. Employment Agreement between the Company and Thomas R. Reynolds (1)
6. Employment Agreement between the Company and Robert B. Harris (1)
7. Executive Severance Agreement between the Company and Richard J. Freer (1)
8. Executive Severance Agreement between the Company and Thomas R. Reynolds (1)
9. Executive Severance Agreement between the Company and Robert B. Harris (1)
10. 1997 Stock Incentive Plan (1)
- ------------------------
(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, 1998, the Company filed the
following report on Form 8-K:
1. Form 8-K, dated November 17, 1998, relating to the receipt of a
report relating to HepArrest, the Company's lead human
pharmaceutical.
14
<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 31, 1999 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.
NAME TITLE(S) DATE
---- ------- ----
/s/ Richard J. Freer, Ph.D. Chairman and Director March 31, 1999
- -------------------------- (Principal Executive Officer)
Richard J. Freer, Ph.D.
/s/ Robert B. Harris, Ph.D. President and Director March 31, 1999
- ---------------------------
Robert B. Harris, Ph.D.
/s/ Thomas R. Reynolds, Senior Vice President, March 31, 1999
- ------------------------ Secretary and Director
Thomas R. Reynolds,
s/ James H. Brennan, Controller (Principal March 31, 1999
- --------------------- Financial and Accounting
James H. Brennan Officer)
/s/ Peter C. Einselen Director March 31, 1999
- ---------------------
Peter C. Einselen
/s/ George F. Allen Director March 31, 1999
- -------------------
George F. Allen
15
[LOGO] COMMONWEALTH
BIOTECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
1998
Annual
Report
[GRAPHIC]
<PAGE>
ABBOTT LABS, INC.
ALCON LABS, INC.
ALL INDIA INSTITUTE OF MEDICAL SCIENCES
ALLEGHENY UNIVERSITY HEALTH SCI. CTR.
ALLERGAN
ALPHA THERAPEUTICS
AMHERST UNIVERSITY
ANAGEN
ANIMUNE
ANTEX BIOLOGICALS
ANTIGEN EXPRESS, INC.
ARRENHIUS UNIVERSITY
BAXTER HEALTHCARE, INC.
BAYER CORPORATION
BAYLOR COLLEGE MEDICINE
BIOMOLECULES, INC.
BIOSCREEN TESTING
BIOTECH RESEARCH LABS
BLM GROUP
BOSTON UNIVERSITY
BREASTEK, INC.
BRISTOL MYERS SQUIBB
BROWN UNIVERSITY
CASE WESTERN RESERVE UNIVERSITY
CENTERS FOR DISEASE CONTROL
CENTRAL N.Y. STATE RESEARCH INSTITUTE
CERELA
CHICAGO INSTITUTE NEURO SURG. & NEURO RES.
CHILDREN'S HOSPITAL PITTSBURGH
CHINESE UNIVERSITY HONG KONG
CIENCI ESTEVES
CKD RESEARCH INSTITUTE
CLEVELAND CLINIC
COLUMBIA UNIVERSITY
CONTHERAPEUTICS
CORNELL UNIVERSITY
CORNING DIAGNOSTICS
CYTOS PHARMACEUTICALS, INC.
DADE BEHRING, INC.
DARTMOUTH UNIVERSITY
DEKALB GENETICS, INC.
DEMETER BIOTECHNOLOGIES, INC.
DIONEX CORPORATION
DNAX, INC.
DUKE UNIVERSITY
DUPONT EXPERIMENTAL STATION
DUQUESNE UNIVERSITY
DYAD PHARMACEUTICALS, INC.
EAST CAROLINA SCHOOL MEDICINE
EASTERN VA MEDICAL SCHOOL
EDITEK, INC.
EMISPHERE, INC.
FLORIDA STATE UNIVERSITY
FRESENIUS MEDICAL CENTER
GE CORPORATE RESEARCH CENTER
GENELABS TECHNOLOGIES, INC.
GENEWORKS, LLC
GENOME THERAPEUTICS
GEORGETOWN UNIVERSITY
GEORGIA INSTITUTE TECH
GLAXO WELLCOME CORPORATION
GLIATECH
GLYCOMED, INC.
GREENHARBOR MEDICAL GROUP
HARVARD SCHOOL OF PUBLIC HEALTH
HENRY FORD HOSPITAL
HERSHEY MEDICAL CENTER
HOFFMAN LA ROCHE
HONG KONG UNIVERSITY SCIENCE & TECHNOLOGY
HOPE HEART INSTITUTE
IDEXX LABS
IMMCO DIAGNOSTICS
IMMUNO CONCEPTS
IMMUNODIAGNOSTICS LABS
IMPERIAL COLLEGE OF LONDON
INCYTE PHARMACEUTICALS
INDIA INSTITUTE MED. EDUC. AND RES.
INDIANA UNIVERSITY
INNOVAGEN
INSMED PHARMACEUTICALS, INC.
INTESCO, INC.
ISIS PHARMACEUTICALS
ITP PARTNERS
JOSLIN DIABETES RESEARCH CENTER
KOREA UNIVERSITY
KYOTO UNIVERSITY
KYUNPOOK NATIONAL UNIVERSITY
LAB BIOQUIMICO JARDIN PAULISTA
LABBIOMEX
LEUKOSITE, INC.
LIFE TECHNOLOGIES, INC.
LOFSTRAND LABS
LOS ALAMOS NATIONAL LABS
LSU MEDICAL CENTER
MASSACHUSETTS GENERAL HOSPITAL
MASSACHUSETTS INTITUTE TECHNOLOGY
MAYEE WOMEN'S RESEARCH INSTITUTE
MAYO FOUNDATION
MCGILL UNIVERSITY
MCMASTER UNIVERSITY
MEDAREX, INC.
MEDICAL COLLEGE OF GEORGIA
MEDICAL COLLEGE OF SOUTH CAROLINA
MERCATOR GENETICS
MERCK AND CO.
MIAMI UNIVERSITY
MIAMI UNIVERSITY OF OHIO
MICROSCIENCES INC.
MIWON, INC.
MOLECULAR CARDIOLOGY INSTITUTE
MONSANTO CORPORATION
MOUNT HOLYOKE COLLEGE
MOUNT SINAI HOSPITAL BALTIMORE
MOUNT SINAI MEDICAL CENTER
NATIONAL CANCER INSTITUTE
NATIONAL INSTITUTES OF HEALTH
NEMOURS RESEARCH FOUNDATION
NEUROTHERAPEUTICS, INC.
NEW YORK UNIVERSITY
NIAGRA UNIVERSITY
NORTH AMERICAN VACCINE
NORTH CAROLINA STATE UNIVERSITY
NORTHERN ARIZONA STATE UNIVERSITY
NOVARTIS, INC.
NPS PHARMACEUTICALS, INC.
OHIO STATE UNIVERSITY
ONCOGENESIS
ORAVAX, INC.
OREGON STATE UNIVERSITY
ORTHO DIAGNOSTICS, INC.
PATERNITY AND FORENSIC LABS
PATHOGENESIS CORPORATION
PENN STATE UNIVERSITY
PERSEPTIVE BIOSYSTEMS, INC.
<PAGE>
TO THE SHAREHOLDERS
OF COMMONWEALTH
BIOTECHNOLOGIES, INC.
[GRAPHIC]
What an amazing first full year
of operations as a publicly
traded corporation!
We are proud and excited to present
to you our 1998 scientific
marketing and financial results.
The year has been one of
growth, innovation,
and unprecedented recognition
for the company.
<PAGE>
[GRAPHIC]
1998 Highlights
January
A Richmond Times Dispatch article announced that we would construct a
new $4 million facility in Gateway Centre, Chesterfield County.
March
We received "Notice of Allowance" of all claims from the U.S. Patent Office for
our lead human pharmaceutical product, HepArrest(TM). (The full patent was
issued in March 1999.) We received exceptional news press for that patent,
including Reuters, PRNewswire, and the Times Dispatch, to mention a few. This
coverage brought us to the attention of other potential client pharmaceutical
companies.
April
Pharmaceutical News Daily and the Washington Post both acknowledged
HepArrest(TM). The Post noted that the rise in the market price of CBI stock
"outpaced the broader market."
[GRAPHIC]
May
CBI was named winner of the Emerging Technology award sponsored by the Greater
Richmond Technology Council. Former Virginia Governor George Allen accepted a
directorship on our Board of Directors.
June
HepArrest(TM) was again featured in Emerging Pharmaceuticals, and CBI was named
the recipient of two new Small Business Innovative Research awards from the
National Institutes of Health and the United States Department of Agriculture.
[GRAPHIC]
September
CBI was featured in the Wall Street Transcript, a retail investors equity
research publication. WST features Wall Street's top analysts discussing key
sectors and stock picks, as well as money manager and CEO interviews.
October
CBI was accredited under the Clinical Laboratories Improvement Act (CLIA) to
perform analysis of human clinical samples for the presence of known genetic
markers. We also anticipate accreditation by the American Association of Blood
Banks, and have participated in a validation study of the College of American
Pathologists.
November
The Mattson Jack Group, an independent consulting firm, issued its report
indicating a market potential of over $250 million in worldwide sales for
HepArrest(TM), assuming it meets approval by the Food and Drug Administration
following clinical trials.
CBI's new facility was finished on time and on budget. We took occupancy on
November 25th.
[GRAPHIC]
December
All operations and personnel were relocated in our new state-of-the-art facility
by December 7.
We filed for U.S. patent protection for our new product, AccuTrac(TM).
January 1999
CBI launched AccuTrac(TM) with introduction at The Institute for Genomic
Research meeting. Free samples were distributed to the major sequencing
facilities in the country and around the world. AccuTrac(TM) sales represent a
strong new revenue stream for CBI.
<PAGE>
- --------------------------------------------------------------------------------
New Products Assist in Heart Surgery and DNA Sequencing
- --------------------------------------------------------------------------------
[GRAPHIC]
HepArrest(TM)
CBI's lead human pharmaceutical, HepArrest(TM) is a new heparin binding peptide
compound used primarily during open-heart surgery. During cardiovascular
procedures, the intense blood thinning effects of the anticoagulant heparin must
be reversed to restore normal blood clotting at the end of the surgery. This
reversal prevents unwanted bleeding and related post-operative complications.
Protamine, the only available approved antidote, causes frequent toxic side
effects. If approved by the FDA, HepArrest(TM) is intended for use as a safe,
effective antidote for the anticoagulant effects of heparin.
AccuTrac(TM)
AccuTrac(TM) is a new tool used as an aid in automated DNA sequencing. During
DNA sequencing, a process called electrophoresis is applied to a sequencing
reaction mixture. Molecules move quickly through an acrylamide gel because of
the electric fields. AccuTrac(TM) uses a fluorescent dye label to mark each DNA
"lane." DNA fragments migrate through any of 96 lanes - or tracks - within that
gel. Those lanes in the gel hold the samples that are read by the automated
sequencer.
With AccuTrac(TM), all 96 lanes are identified whether they contain data or not.
By preventing the possible misidentifications caused by "skipped" lanes,
AccuTrac(TM) removes the need for manual review and lane assignment.
AccuTrac(TM) enables organizations to optimize data quality and reduce both cost
and time required to process DNA samples.
[GRAPHIC]
<PAGE>
Our Core Business
The mainstay of CBI continues to be its core technology business for life
sciences investigations. We utilize such tools as custom synthetic organic and
bioorganic chemistries, spectroscopy services, and a full complement of protein,
DNA/RNA and genetic identity and analysis testing services. The resulting
research generally develops into new diagnostics, new pharmaceuticals and/or
greater understanding of molecular structure and function.
We have successfully recruited internationally known Senior Scientists,
including most recently, a Group Leader for Human Genetic Identity and Analysis.
This new scientist is charged with growing the Human Genetics aspect of our
business, which we view as an expanding market.
- ---------------------------
PHONE 800.735.9224
- ---------------------------
FAX 804.648.2641
- ---------------------------
ADDRESS
601 Biotech Drive
Richmond, Virginia 23235
- ---------------------------
Email
[email protected]
- ---------------------------
WEB PAGE
www.cbi-biotech.com
- ---------------------------
Expanded Marketing Efforts
In the last quarter of 1998, nine firms signed new long-term contracts or
agreements valued between $1,245,177 and $1,756,277 (depending on the final
scope of the actual work). Also in that quarter, we contracted for 13 new
molecular biology projects. By the end of December, we had 19 additional
contracts and/or grants under consideration with total valuation of over $6
million dollars. We are now adding new molecular biology projects at a rate of
3-5 per month, and serve over 700 clients worldwide.
We have done a great deal in 1998 to expand our marketing efforts. We have
revised and improved our web page, and developed a new Company brochure. Fully
40% of our work comes to us over the Internet, and our new building is
completely networked to our own computer server.
We look forward to 1999 with excitement. We are well on target toward another
very successful year. We will continue to expand our marketing and research
efforts. In 1999, we will complete the pre-clinical trials of HepArrest(TM), and
are seeking strategic partners to help us commercialize it. To that end, we have
retained the services of the Mattson Jack Group to assist CBI in negotiations
for licensing and royalty rights. We have also filed for Canadian, European, and
Japanese patent protection for HepArrest(TM).
Thanks for Your Support
We invite your questions and inquiries. You may reach us by phone, fax or
e-mail. We encourage you to visit our web page or drop by our offices in
Chesterfield County. We look forward to seeing you at the 1999 Annual Meeting of
Shareholders, which we're holding in our new facility.
To all our hard-working employees, to our consultants, our Board of Directors
and our stockholders, we say thanks.
With best regards,
/s/ Richard J. Freer, Ph.D. /s/ Robert B. Harris, Ph.D
- ------------------------------------- ----------------------------------------
Richard J. Freer, Ph.D. Robert B. Harris, Ph.D
Chairman of the Board President
/s/ Thomas R. Reynolds /s/ James H. Brennan
- ------------------------------------- ----------------------------------------
Thomas R. Reynolds James H. Brennan
Senior Vice-President, Secretary Controller
<PAGE>
[GRAPHIC]
PART I - THE COMPANY
Company Overview
CBI is an example of the "new biotechnology model." Let us explain.
Traditionally, biotechnology companies are established with venture capital or
seed funds, and are dependent upon getting a product to market within the first
3-5 years of their existence. By contrast, CBI was founded in 1992 to provide
sophisticated research and development services on a contract basis to the
biotechnology industry.
In other words, CBI does not depend on commercialization of any product for this
revenue. Rather, cash generated from contract services is used to operate the
Company, with small amounts used to supplement government and private grants.
These grants are used to develop CBI's own intellectual properties through
research and development of proprietary products.
At first, CBI was one of only a few taking this approach to biotechnology. Over
time several companies have realized the merit to this business strategy. Others
are now beginning to support in-house R&D efforts through development and sales
of chemicals and reagents. Reagents are specialty chemicals such as AccuTrac(TM)
used in the course of research.
Our clients come from private companies, academic institutions and government
agencies throughout the world. Virtually all our clients are engaged in some
form of Life Sciences Research, and use our technologies to provide data and
results to support their individual research programs.
In general, clients fall into one of two categories: those who require a
discrete set of analyses ("short-term projects"), and those who contract with
the Company on an extended basis for a variety of integrated analytical services
("long-term projects"). A strong measure of customer satisfaction, both short-
and long-term project customers frequently send us repeat business.
[PHOTO]
5
<PAGE>
Analytical Support Services
Our core business provides state-of-the-art DNA/RNA and protein/peptide
technologies. We often combine these technologies with sophisticated biophysical
techniques, such as calorimetry, spectroscopy and mass spectral analysis. These
supplementary techniques help us understand the fundamental molecular nature of
the compounds we study. This combination allows CBI to provide clients with
"one-stop shopping" for biotechnology services.
We market our services using promotional brochures and our web site. Many of our
clients come to us through the Web. As a matter of fact, a full 40% of all
orders received in the last half of 1998 came from clients who found us on the
Internet!
Short-Term Research Projects
On average in 1998, CBI added 24 new customers per month. Of its domestic
customers, 53.3% were from private companies, while 46.7% came from university
or government labs. CBI added 31 new foreign clients in 1998 from all over the
world, including North and South America, Europe, Asia and the Near East.
Customer Sources
CBI advertises through professional journal ads, trade show exhibits and our web
site. Potential customers are able to download order forms directly from the web
site, or actually place the order electronically if desired. CBI is also
cross-listed on several biotechnology, biochemistry, and molecular biology
search services, allowing customers to find us using simple key-word search
terms.
[GRAPHIC]
WORLD MAP
Total new foreign clients in 1998: 31
Biotechnology is truly a global industry!
Argentina, Australia, Canada, China, Columbia, Denmark, Germany, Greece, Hong
Kong, India, Israel, Italy, Japan, Korea, Mexico, Malaysia, Norway, Spain,
Sweden, Switzerland, United Kingdom, Uruguay
6
<PAGE>
[PHOTO]
Favorable word-of-mouth advertising has brought us many new customers. We often
receive inquiries from several new investigators within a single research-based
institution.
All inquiries receive immediate and personal attention. With our "fax on demand"
service, clients can easily request information about our services 24 hours a
day. Customers continue to comment favorably on their phone, fax, and e-mail
interactions with CBI staff.
Long-Term Research Projects
CBI is committed to identifying long-term contracts. These provide a reliable
revenue source, often allowing us to add to our scientific staff. During 1998,
one of our major long-term contractual clients took much of their work back
"in-house" due to a change in their corporate philosophy. Loss of this revenue
stream did affect CBI's bottom line throughout fiscal year 1998.
We mounted a recovery by signing nine new long-term contracts or agreements in
the last quarter, valued up to $1,756,277 (depending on the scope of the work to
be done). As of December, we had over 19 additional long-term contracts pending
with a total valuation of over $6 million dollars. CBI will continue to focus on
signing long-term contractual clients throughout 1999.
New Technologies
at CBI
Genetic Analysis
After establishing a Genetic Testing Group, CBI was registered under the
Clinical Laboratories Act (CLIA), with pending accreditation by the Virginia
Department of Health. Registration under the CLIA guidelines enables CBI to
accept human clinical samples, and to perform
7
<PAGE>
[GRAPHIC]
"In 1997 paternity testing performed at AABB-certified laboratories was an $87
million market!"
analyses of those samples for the presence of genetic markers for known human
pathologies. For example, we have already begun analysis for a long-term
contract client to detect the presence of the "p53 gene," a marker for cancer.
CBI is also prepared to begin sample analysis for the presence of many other
marker genes. In 1999, we will focus our marketing efforts on making Genetic
Analysis a larger revenue-producing technology for CBI.
Identity Testing and Paternity
Testing by Genetic Analysis
We have established a DNA Reference Laboratory in our new facility containing
all the necessary work areas required to provide genetic identity and paternity
testing.
DNA Identity Testing
In 1998, the National Forensic Science Technology Center (NFSTC) accredited CBI
to perform DNA identity testing for submission of data into the Combined DNA
Index System (CODIS) database. CODIS is used by the FBI to compare DNA
fingerprints (traces) from crime scenes with that of known felons. CBI is one of
only eight commercial facilities nationwide NFSTC has accredited to perform
criminal DNA database testing for submission into CODIS. CBI has already
submitted bids for performing DNA fingerprint analysis for the Departments of
Criminal Justice in different states.
Paternity Testing
We expect accreditation soon by the American Association of Blood Banks (AABB).
We have also participated in validation study through the College of American
Pathologists (CAP). Through these two organizations, we are now ready to begin
offering paternity testing to the general public and to various state and
federal agencies. A fact well worth noting, according to a 1998 report from the
AABB, paternity testing in 1997 performed at AABB-certified laboratories was an
$87 million market! In 1999, CBI will aggressively market its capabilities in
these areas.
[PHOTO]
8
<PAGE>
Agricultural/Veterinary Genetic
Testing Services
CBI has also been accredited by the U.S. Department of Agriculture to receive
bovine DNA samples from Europe. We can now perform bovine genetic, lineage, and
identity analysis. CBI participated in an international study to validate bovine
DNA identity testing in conjunction with a study group located in Denmark. We
are also establishing the capacity for DNA identity testing in horses.
Molecular Biology
Our recent focus on identifying clients who are looking for comprehensive
molecular biology services is beginning to pay off. In the last quarter of 1998,
we initiated more than 15 individual molecular biology projects, more than five
times the number of projects undertaken at CBI since its inception. Often, these
contracts call for CBI to clone a gene, overproduce the protein, and
characterize the particular protein product. Many proteins are vaccines,
antibodies, or components of diagnostic kits. CBI is unique in that it has all
of the services in-house to complete this type of project.
We attribute this success in the molecular biology services to concerted
marketing efforts, to the addition of highly competent scientists, and to
favorable word-of-mouth advertising. Throughout 1999, we intend to expand these
services by offering large scale bacterial fermentation to our clients, which
allows us to overproduce large amounts of particular proteins.
Proprietary Research
& Development
As a rule, CBI does not retain intellectual property rights on work done for its
short-term clients, and rarely retains intellectual property rights for work
done for its long-term clients. However, CBI is actively pursuing R&D programs
to develop its own products. HepArrest(TM) is a prime example, the U.S. patent
for which was issued in March 1998. In addition, CBI has filed for Canadian,
Japanese, and European patents for HepArrest(TM). CBI has also filed for U.S.
patent protection for AccuTrac(TM).
Growth Strategy
In 1999, our focus will be to increase our various revenue lines through
expanded advertising and marketing efforts. We will be more select in the trade
shows we attend, to carefully target our markets. We have also hired a West
Coast sales account executive to help move CBI to the forefront of
biotechnology contract firms in that region.
We have identified a director for the Human Genetics and Identity division of
CBI. Dr. Douglas Oliveri, formerly of Applied Genetics, Inc., Austin, Texas, is
a recognized leader in the field of Human Genetics and Identity, who will help
grow this segment of CBI's services.
Dr. Oliveri can provide expert testimony in paternity and forensic court cases.
We continue to expand our instrumentation capacity to both maintain and expand
our long-term client base, and to attract additional customers as well. The
Company continually seeks to identify trends, and to develop related new
products and services to meet the changing needs of our customers.
[GRAPHIC]
CBI has been accredited by the United States Department of Agriculture to
receive bovine DNA samples from Europe to perform genetic, lineage, and identity
analysis.
[PHOTO]
9
<PAGE>
PART II - Stockholder Matters
Market for Common Equity
The Company completed its initial public offering of Common Stock on October 28,
1997 at a price per share of $6.00. Since that time, the Common Stock has traded
on the NASDAQ Small Cap Market ("NASDAQ"). The following table sets forth the
range of high and low sales price per share of Common Stock for 1998.
<TABLE>
<CAPTION>
================================================================================
Period High Stock Price Low Stock Price
- --------------------------------------------------------------------------------
<S> <C> <C>
1st Quarter, 1998 $ 10.50 $ 7.50
- --------------------------------------------------------------------------------
2nd Quarter, 1998 $ 11.25 $ 9.00
- --------------------------------------------------------------------------------
3rd Quarter, 1998 $ 10.75 $ 5.625
- --------------------------------------------------------------------------------
4th Quarter, 1998 $ 9.875 $ 5.50
- --------------------------------------------------------------------------------
</TABLE>
On March 1, 1999, the last reported sales price for a share of the Company's
Common Stock on NASDAQ was $8.625. As of March 1, 1999, there were 70 holders of
record of the Company's Common Stock and approximately 771 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.
Selected Financial Data
Set forth below is selected financial data with respect to the Company for the
years ended December 31, 1998 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."
Management's Discussion
and Analysis of Financial
Condition and Results
of Operation.
The following should be read in conjunction with "Selected Financial Data" and
the Company's Audited Financial Statements and Notes thereto included herein.
<TABLE>
<CAPTION>
===========================================================================================================================
For the Years Ended
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operational Data:
- ---------------------------------------------------------------------------------------------------------------------------
Revenues $ 1,604,267 $ 1,761,308
- ---------------------------------------------------------------------------------------------------------------------------
Net Loss $ (2,096,937) $ (1,168,821)
- ---------------------------------------------------------------------------------------------------------------------------
Loss Per Common Share, Basic and Diluted $ (1.29) $ (3.55)
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Average Common Shares Outstanding $ 1,622,340 329,480
- ---------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
- ---------------------------------------------------------------------------------------------------------------------------
Total Current Assets $ 2,471,022 $ 6,489,965
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $ 10,401,182 $ 7,931,606
- ---------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities $ 1,114,563 $ 624,250
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 5,114,563 $ 624,250
- ---------------------------------------------------------------------------------------------------------------------------
Total Stockholders Equity $ 5,286,619 $ 7,307,356
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
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 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.
The Company also derives revenues from government grants which fund the bulk of
the Company's research efforts for its proprietary technologies. Unlike its
short-term or long-term contract services, research and development on the
Company's proprietary technologies focuses on commercializing technologies the
Company owns or licenses from third parties. 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.
During 1998, the Company developed AccuTrac(TM), a new reagent, which
facilitates the process of automated DNA sequence analysis. In this respect, the
Company hopes to broaden its revenue base by direct sales of this reagent to its
customers and anticipates selling AccuTrac(TM) to its customers in 1999.
Revenues
Gross revenues decreased by $157,041 or 8.9% from $1,761,308 during the year
ended December 31, 1997 ("1997") to $1,604,267 during the year ended December
31,1998 ("1998").
Short-Term Projects
Revenues realized from short term projects, which is included in the Statement
of Operations as Laboratory Services, increased by $22,698, or 2.7%, from
$853,810 during 1997 to $876,508 during 1998. Revenues from peptide synthesis
increased by $47,424 or 34.6% from $137,210 during 1997 to $184,632 during 1998.
Revenues attributable to protein sequencing increased by $43,840, or 55.1%, from
$79,545 during 1997 to $123,385 during 1998. Revenues derived from both peptide
synthesis and protein sequencing increased primarily due to new customers
placing orders with the Company, and to repeat large orders from existing
customers.
Revenues from amino acid analysis decreased by $18,368, or 28.1%, from $65,282
during 1997 to $46,914 during 1998. This decrease is primarily due to one of the
Company's major clients ceasing its out-source research program with the
Company.
Other "uncategorized" revenues decreased by $50,214 or 36.8% from $136,541
during 1997 to $86,327 during 1998. This decrease is primarily due to
administrative changes in invoicing; revenues previously identified as "Other"
are now more properly classed under defined work items within the Company.
Revenues realized from other core technologies remained essentially constant.
Long-Term Projects
Revenues realized from various long-term projects, which is included in the
Statement of Operations as Contract Research, decreased by $94,552, or 16.8%,
from $561,007 during 1997 to $466,455 during 1998. This decrease is primarily
due to the delay in the awarding of new research contracts for 1998, which has
the effect of shifting revenue from 1998 to future periods. As mentioned under
the category of Short-Term Projects, this decrease is also due to the cutbacks
in outsourced services by one of the Company's principal clients. As of December
1998, the Company had approximately 15 additional long-term contract proposals
pending with many different potential customers. Although the Company's
Management is taking an active role in negotiating these new contracts,
management is unable to say with certainty when or whether these other new
long-term contracts will be awarded.
11
<PAGE>
Research Grants
The Company experienced a decrease in revenue realized from government grants in
the amount of $85,187, or 24.6%, from $346,491 during 1997 to $261,304 during
1998. This decrease is primarily due to completion of work on two grants. During
1998, the Company had one ongoing Phase II Small Business Technology Research
grant (SBTR) grant from the National Institutes of Health (NIH). In addition,
during 1998, the Company was awarded 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. Revenues earned through December 31, 1998 amounted to $32,500. The
Company anticipates to complete the project by August, 2000. The Company was
also awarded a Phase I SBIR ($100,000) from the NIH for development of rapid
assay methods for the detection of Botulism. Revenues earned through December
31, 1998 amounted to $62,421. The Company anticipates completion of the project
by April 1999. Work began in late September on both grants.
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.
The Company experiences quarterly fluctuations in all revenue categories.
Engagements for all future projects are highly dependent upon the customer's
satisfaction with the services previously provided, and upon factors beyond the
Company's control, such as the timing of product development and
commercialization programs of the Company's customers. The Company is unable to
predict for more than a few months in advance the volume and dollar amount of
future projects in any given period. The combined impact of commencement and
termination of research contracts from several large customers and unpredictable
fluctuations in revenue for laboratory services can result in very large
fluctuations in financial performance from period to period.
Expenses
Cost of services consists primarily of labor and laboratory supplies. The cost
of services increased by $331,328, or 41.7%, from $794,236 during 1997 to
$1,125,564 during 1998. The cost of services as a percentage of revenue was
45.1% and 70.2% during 1997 and 1998, respectively.
Direct Labor
Labor costs increased by $172,670, or 50.9%, from $338,994 during 1997 to
$511,664 during 1998. The increase in labor costs reflects the Company's growth
strategy as more qualified personnel are hired full-time to perform the
laboratory services. In 1998, the Company was fully staffed for the entire year,
but 1997 labor costs reflect only nine months operations with the same number of
employees. In addition, in 1998, fringe benefits for all employees associated
with laboratory services were allocated to compensation and benefits under
labor. Total costs associated with the increase in fringe benefits amounted to
$42,492. Fringe benefits during 1997 were recorded under general and
administrative.
Direct Materials
The costs for direct materials increased by $106,357, or 25.2%, from $421,612
during 1997 to $527,969 during 1998. These increased costs are directly
attributable to the increased purchase of reagents, chemicals and miscellaneous
materials used in all the laboratories, and increases in market prices of raw
materials as well as relatively higher costs for specialized reagents necessary
to perform analyses that the Company was not offering in 1997, such as automated
C-terminal sequence analysis.
12
<PAGE>
Other Costs
"Other costs" (travel, equipment rental, maintenance of equipment, etc.)
increased by $58,906 or 218.0% from $27,025 during 1997 to $85,931 during 1998.
This increase was due to the rental of instrumentation necessary to be validated
for a particular set of DNA analysis ($20,293). The Company sought validation on
this particular instrument because it was required for submission of a long-term
contract proposal. The instrument was returned and the lease terminated when the
Company was not awarded the contract. Other increases included, repairs and
maintenance on equipment ($23,164), and freight delivery to the Company's
clients ($5,861).
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 $947,610, or 73.1%, from $1,297,005
during 1997 to $2,244,615 during 1998. As a percentage of revenue, these costs
were 73.6% and 139.9% during 1997 and 1998, respectively.
Compensation and Benefits
Total Compensation and Benefits increased by $162,111 or 26.1% from $620,722
during 1997 to $782,833 during 1998. The increase is primarily attributable to
addition of the Company's executive officers to the payroll on a full-time basis
during 1998. These executive officers were full time employees of the Company
for only six months during 1997. Salary and benefit costs also increased due to
various support personnel hired to assist in implementing the Company's growth
strategy.
Facility Costs
Costs for facilities increased by $151,861, or 168.8%, from $89,984 during 1997
to $241,845 during 1998. The costs for leasing of additional laboratory space
for its operations increased by $95,104 from 1997 to 1998. Additional space
during 1998 was necessary to support the Company's expanded technology
offerings. Once the Company relocated to its new facility in late November,1998,
the Company cancelled its contract on all its leased space. Other facility costs
include increases in telephone use ($8,767), waste disposal ($32,402), and
electricity ($18,909).
Professional Services
Professional fees increased by $10,221 or 7.9%, from $128,946 during 1997 to
$139,167 during 1998. This increase was primarily due to legal and accounting
costs associated with the year-end audit, quarterly accounting reviews, general
legal support, legal costs associated with obtaining patents, and corporate
liability insurance costs. Consulting fees increased by $11,496 or 23.2 from
$49,504 during 1997 to $61,000 during 1998. Consulting fees include payments
made to Board members for four regularly scheduled Quarterly Board meetings
during 1998, compared to two meetings during 1997. Taxes and License fees
increased by 31,901 or 267.3% from 11,934 during 1997 to $43,835 during 1998.
This increase is associated with the paying of property taxes based on equipment
purchased during 1997 and 1998.
Depreciation Expense
Depreciation increased by $153,735 or 98.4% from $156,198 during 1997 to
$309,933 during 1998. Increased depreciation costs are attributable to the
purchase of additional laboratory equipment consistent with expanding the
Company's technology base, and the first month of depreciation on the Company's
new corporate facility.
Other Costs
Other costs increased by $61,618 or 169.1% from $36,436 during 1997 to $98,054
during 1998. This increase was primarily attributable to the relocation costs
from the move to the new corporate offices.
13
<PAGE>
Marketing
Marketing costs increased by $254,780 or 257.4%, from $98,982 during 1997 to
$353,762 during 1998. Salaries and fringe benefits, expenditures for a new
brochure, additional advertising in the professional journals, 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 1998 of the Mattson Jack Group
contract amounted to $101,083.
Selling
Expenditures during 1998 for selling amounted to $76,351. Costs associated with
selling include personnel, travel, and office expenses. During 1998, the Company
hired an Account Executive for the Eastern Region to identify new clients. There
were no expenses for Selling during 1997. Selling expenditures have been
incurred in 1998 as part of the Company's growth strategy.
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 $99,862, or 17.4%, from
$574,860 during 1997 to $474,998 during 1998. Total grant-related research and
in-house research as a percentage of revenue were 32.6% and 29.6% during 1997
and 1998, respectively.
Grant Related Research Activities
Expenditures to perform grant-related research activities decreased by
$195,017,or 49.0%, from $397,974 during 1997 to $202,957 during 1998. All of the
Company's grant-related expenditures are reimbursed from the appropriate
governmental agency. This decrease is mainly due to completion of on-going
research programs during 1998.
In-house Research Activities
Expenditures made by the Company for in-house research activities increased by
$95,155 or 53.8%, from $176,886 during 1997 to $272,041 during 1998. The Company
is 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.
During 1998, as a direct result of the Company's in-house research and
development efforts, the Company perfected AccuTrac(TM) as a reagent to
facilitate automated DNA sequence analysis. The Company's in-house research
efforts in 1998 resulted in registration under the Clinical Laboratories
Improvement Act (CLIA), with pending accreditation by the Virginia Department of
Health. Registration under CLIA guidelines allows the Company to perform
analysis of human clinical samples for the presence of known genetic markers.
Further, in 1998, as a result of the Company's in-house research and development
efforts, the Company received accreditation by the United States Department of
Agriculture to receive bovine DNA samples from Europe to perform genetic,
lineage, and identity analysis and lastly, the Company passed another
accreditation level with the National Forensic Science Technology Center (NFSTC)
to perform DNA identity testing for submission of data into the Combined DNA
Index System (CODIS) data base.
Other Interest Income and
Interest Expenses
Interest income is derived 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. Interest
income is also derived from investing the unused portion of the funds realized
by the Company from the successful sale (March 1998) of Industrial Revenue Bonds
(IRBs) for construction of the Company's new facility.
14
<PAGE>
Interest Income
Interest income to the Company increased by $236,631, or 257.2% from $91,997
during 1997 to $328,628 during 1998. Interest income realized from unused funds
from the IPO increased by $148,056, or 160.8% from $92,039 during 1997 to
$240,095 during 1998. Interest income earned from the unused portion of the
funds realized from the sale of IRBs amounted to $88,532. There was no interest
income earned from the unused portion of the funds realized from the sale of
IRBs during 1997.
Interest Expense
Interest costs incurred by the Company during 1998 included (1) interest paid to
financial institutions on loans made to the Company; (2) interest paid to the
Trustee for the Company's IRBs; and (3) amortization of bond costs incurred as a
consequence of the completion of the Company's IRB financing. Interest costs
incurred by the Company during 1997 included (1) interest paid to financial
institutions on loans made to the Company; (2) interest expense related to a one
time charge as a result of issuance of the Notes in June 1997; and (3)
amortization of loan costs associated with the Company's private placement of
$3,000,000 aggregate principal amount of convertible notes.
Interest expenses decreased by $54,871 or 23.7% from $231,108 during 1997 to
$176,237 during 1998. During 1997, the Company experienced a one-time charge to
interest expense amounting to $204,039 as a result of issuance of the
convertible notes in June 1997. Interest paid to financial institutions remained
relatively constant in both 1997, $27,069, and 1998, $29,425. The total
outstanding principal amount of these loans as of December 31, 1998, was
$249,680. Interest expense paid to the Trustee for the Company's IRBs was
$146,812 during 1998. There was no interest expense associated with the IRB's in
1997. Bond amortization cost decreased by $116,500 from $124,918 during 1997 to
$8,418 during 1998. The 1998 amortization represents loan amortization costs for
the new facility as compared to 1997 costs for the amortization of loans
associated with the Company's private placement of $3,000,000 aggregate
principal amount of convertible notes.
For the 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.
15
<PAGE>
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
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 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 totalling $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.
16
<PAGE>
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 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
Consistent with the Company's implementation of its growth strategy, 1998 showed
a decrease in net operating cash flow in the amount of $1,788,671, as compared
to a decrease of $711,615 in 1997. This decrease in both years is due to
substantial investments being made by the Company in personnel, equipment,
sales, and marketing efforts, and these cost outlays were made possible by
capital realized from the Company's Private Placement of convertible notes and
initial public offering of common stock. The use of cash in 1998 was fully
anticipated by management. However based on expected cash out-flow, management
anticipates that unless the Company becomes profitable, the remaining cash
available invested by the Company will be needed for general operations.
Net working capital as of December 31, 1997 and December 31, 1998 was $5,865,715
and $1,356,458 respectively. This decrease is a direct result of capital
expenditures on new scientific instrumentation, computers, and furniture and
fixtures ($956,547), costs associated with the new facility ($1,694,868),
implementation of marketing and selling divisions within the Company ($430,113),
and costs associated with additional staffing and direct materials necessary to
expand the Company's technology offerings ($1,427,719).
IRBs sold by the Company (in the amount of $4,000,000) 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, $402,991 remains as restricted cash on the balance sheet of
the Company as of December 31, 1998. All of the Company's administrative and
research operations have been consolidated into this facility and were fully
operational by mid December 1998.
17
<PAGE>
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 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 cause 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 March 1, 1999:
o The Company's financial institutions are in the process of addressing Year
2000 compliance issues. These financial institutions anticipate completion
of this review in the first quarter of 1999.
o During 1998, the Company upgraded its general accounting system to a Year
2000 compliant version.
o The Company is in the process of updating its payroll system to meet Year
2000 compliance standards, and will complete this effort by the end of the
first quarter of 1999.
o The Company is currently evaluating older equipment to see if such
equipment meets Year 2000 compliance standards and anticipates completion
of this review during the second quarter of 1999.
o The Company believes that all equipment purchased during 1998 is Year 2000
compliant.
o The Company believes that equipment performing analytical data research is
not date sensitive, 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. Of the
Company's 10 major suppliers, a majority is either Year 2000 compliant or
expects to be in compliance by the end of the second quarter of 1999. The
Company is in the process of contacting customers to see if their business
operations are Year 2000 compliant. As of March 1, 1999, the Company
contacted twenty three percent of its customers. The Company expects to
complete its Year 2000 compliance assessment of its suppliers and customers
during the first and second quarters of 1999.
The Company believes that it will complete its Year 2000 program by the end of
the third quarter of 1999. The Company expects that the costs associated with
Year 2000 compliance will not exceed $30,000, and will not have an adverse
material impact on the Company's financial position.
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
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:
o Business conditions and the general economy
o The development and implementation of the Company's long-term business
goals, including new areas of expertise, such as paternity testing, DNA
testing in horses, and large scale bacterial fermentation
o The 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
o The Company's ability to obtain foreign patent protection for HepArrest
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.
18
<PAGE>
[LOGO]
McGLADREY & PULLEN, LLP
--------------------------------------------
Certified Public Accountants and Consultants
Independent Auditor's Report
To the Board of Directors and Stockholders
Commonwealth Biotechnologies, Inc.
Richmond, Virginia
We have audited the accompanying balance sheet of Commonwealth Biotechnologies,
Inc. as of December 31, 1998 and the related statements of operations, changes
in stockholders' equity, and cash flows for the year 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 audit. The financial statements of Commonwealth Biotechnologies, Inc. for
the year ended December 31, 1997 were audited by other auditors whose report,
dated February 9, 1998, expressed an unqualified opinion.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements referred to above present fairly,
in all material respects, the financial position of Commonwealth
Biotechnologies, Inc. as of December 31, 1998, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/ McGLADREY & PULLEN, LLP
Richmond, Virginia
January 22, 1999
19
<PAGE>
Commonwealth Biotechnologies, Inc.
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
===========================================================================================
1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 2,091,586 $ 6,273,765
Accounts receivable (Note 3) 302,936 153,227
Prepaid expenses 76,500 62,973
- -------------------------------------------------------------------------------------------
Total current assets 2,471,022 6,489,965
Property and Equipment, less accumulated depreciation
1998 $597,671; 1997 $290,970 (Notes 2, 3 and 4) 7,263,788 1,435,812
- -------------------------------------------------------------------------------------------
Other Assets
Bond issuance costs, less accumulated amortization $8,418 260,181 --
Restricted cash (Note 4) 402,991 --
Deposits and other 3,200 5,829
- -------------------------------------------------------------------------------------------
Total other assets 666,372 5,829
$ 10,401,182 $ 7,931,606
============================================================================================
Liabilities and Stockholders' Equity
Current Liabilities
Demand note payable (Note 3) $ 249,680 $ 314,680
Accounts payable and other current liabilities 797,597 309,570
Deferred revenue 67,286 --
- -------------------------------------------------------------------------------------------
Total current liabilities 1,114,563 624,250
Bonds Payable (Note 4) 4,000,000 --
- -------------------------------------------------------------------------------------------
Total liabilities 5,114,563 624,250
- -------------------------------------------------------------------------------------------
Commitments (Note 6)
Stockholders' Equity
Common stock, no par value, 10,000,000 shares authorized,
1998 1,633,214; 1997 1,620,514, shares issued and
outstanding -- --
Additional paid-in capital 8,838,664 8,762,464
Accumulated deficit (3,552,045) (1,455,108)
- -------------------------------------------------------------------------------------------
Total stockholders' equity 5,286,619 7,307,356
- -------------------------------------------------------------------------------------------
$ 10,401,182 $ 7,931,606
============================================================================================
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
Commonwealth Biotechnologies, Inc.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
================================================================================
1998 1997
================================================================================
<S> <C> <C>
Revenue (Note 7):
Laboratory services $ 876,508 $ 853,810
Contract research 466,455 561,007
Government grants 261,304 346,491
- --------------------------------------------------------------------------------
Total revenue 1,604,267 1,761,308
- --------------------------------------------------------------------------------
Costs and expenses:
Cost of services 1,125,564 794,236
Sales, general and administrative 2,244,615 1,297,005
Research and development 474,998 574,859
- --------------------------------------------------------------------------------
Total costs and expenses 3,845,177 2,666,100
- --------------------------------------------------------------------------------
Operating loss (2,240,910) (904,792)
- --------------------------------------------------------------------------------
Other income (expense):
Interest expense (Note 4) (184,655) (356,026)
Interest income 328,628 91,997
- --------------------------------------------------------------------------------
Total other income (expense) 143,973 (264,029)
- --------------------------------------------------------------------------------
Net loss $(2,096,937) $(1,168,821)
================================================================================
Loss per common share, basic and diluted $ (1.29) $ (3.55)
================================================================================
</TABLE>
See Notes to Financial Statements
21
<PAGE>
Commonwealth Biotechnologies, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
===========================================================================================================
Number Additional
of Shares Paid-In Accumulated
Outstanding Capital Deficit Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 71,273 $ 135,422 $ 26,847 $ 162,269
Contributed services (Note 5) -- 36,346 -- 36,346
Distribution to stockholders -- -- (96,851) (96,851)
Conversion to C Corporation -- 216,283 (216,283)
Purchase of warrants by founding stockholders -- 100 -- 100
Conversion of convertible subordinated notes
to common stock at a conversion price of
$6 per share, net of unamortized costs 500,000 2,751,187 -- 2,751,187
Initial public offering ("IPO") of
1,015,000 shares of common stock at
$6 per share, net of costs 1,015,000 5,417,578 -- 5,417,578
Effect of interest expense on convertible notes
paid in common stock at $6 per share 34,241 205,446 -- 205,446
Purchase of warrants by underwriters of IPO -- 102 -- 102
Net loss -- -- (1,168,821) (1,168,821)
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,620,514 8,762,464 (1,455,108) 7,307,356
Issuance of common stock 12,700 76,200 -- 76,200
Net loss -- -- (2,096,937) (2,096,937)
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,633,214 $ 8,838,664 $(3,552,045) $ 5,286,619
===========================================================================================================
</TABLE>
See Notes to Financial Statements.
22
<PAGE>
Commonwealth Biotechnologies, Inc.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
==============================================================================================
1998 1997
==============================================================================================
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(2,096,937) $(1,168,821)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 319,180 283,471
Issuance of common stock for interest
on convertible notes -- 205,446
Contributed services -- 36,346
Changes in assets and liabilities:
Accounts receivable (149,709) (36,790)
Prepaid expenses (13,527) (61,893)
Restricted cash (402,991) --
Accounts payable 488,027 230,626
Deferred revenue 67,286 (200,000)
- ---------------------------------------------------------------------------------------------
Net cash used in operating activities (1,788,671) (711,615)
- ---------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchases of property and equipment (6,137,909) (1,348,400)
Deposits 1,800 4,525
- ---------------------------------------------------------------------------------------------
Net cash used in investing activities (6,136,109) (1,343,875)
- ---------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from issuance of bonds payable, net of issuance cost 3,731,401 488,161
Principal payments on long-term debt and note payable (65,000) (366,461)
Stockholder distributions -- (96,851)
Proceeds from IPO of common stock, net of costs -- 5,417,578
Purchase of warrants -- 202
Proceeds from issuance of common stock 76,200 --
Proceeds from issuance of convertible subordinated notes,
net of deferred loan costs -- 2,626,269
- ---------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,742,601 8,068,898
Net increase (decrease) in cash and cash equivalents (4,182,179) 6,013,408
Cash and cash equivalents:
Beginning 6,273,765 260,357
- ---------------------------------------------------------------------------------------------
Ending $ 2,091,586 $ 6,273,765
=============================================================================================
Supplemental Disclosure of Cash Flow Information
Cash payments for interest $ 165,678 $ 27,069
=============================================================================================
</TABLE>
See Notes to Financial Statements.
23
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Commonwealth Biotechnologies, Inc., (the "Company"), was
formed on September 30, 1992, 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
intended to lead to intellectual properties.
A summary of the Company's significant accounting policies follows:
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
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 a milestone, 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. At times, the Company maintains cash balances in excess of
FDIC insured amounts.
Property and equipment: Property and equipment are recorded at cost.
Depreciation is computed principally by the straight-line method over the
following estimated useful lives 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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
<S> <C>
Buildings 39.5
- ----------------------------------------------------------
Laboratory and computer equipment 5.0
- ----------------------------------------------------------
Furniture and fixtures and office equipment 7.0
- ----------------------------------------------------------
Automobile 5.0
- ----------------------------------------------------------
</TABLE>
Other assets: Bond issuance costs consist of origination costs associated with
the 1998 bond issue and are being amortized over twenty-five years using the
straight-line method, which is not materially different than the effective
interest method. Amortization expense was $8,418 for the year ended December 31,
1998.
Income taxes: The Company elected Subchapter S Corporation status from its
inception through June 1997. Accordingly, the taxable income of the Company has
been "passed-through" to its stockholders, and they have been subject to the tax
on any income earned by the Company.
As more fully described in Note 10, the Company organized a private placement
offering of convertible subordinated notes in June, 1997, which caused the
income tax status of the Company to change from S Corporation status to C
Corporation status. Therefore, at June 25, 1997, the undistributed earnings were
treated as a constructive distribution to the original stockholders and as a
contribution to additional paid-in capital.
As a C Corporation, the Company is responsible for income taxes payable
resulting from earnings subsequent to June 25, 1997.
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a
24
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
Research and 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.
Internal research and development cost, which are included in research and
development cost in the statement of operations, were $272,041 and $176,886 for
the years ended December 31, 1998 and 1997, respectively.
Loss Per Common Share: Basic loss per share has been computed on the basis of
the weighted-average number of common shares outstanding. Common shares issuable
upon exercise of the employee stock options (see Note 11) have not been included
in the computation because their inclusion would have had an anti-dilutive
effect applicable to the net loss. Following is information regarding the
computation of loss per share data for the years ended December 31, 1998 and
1997, respectively.
<TABLE>
<CAPTION>
==============================================================================================
1998 1997
- ----------------------------------------------------------------------------------------------
Numerator Denominator Numerator Denominator
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic Loss Per Share
Loss available to stockholders $(2,096,937) -- $(1,168,821) --
Average shares outstanding -- 1,622,340 -- 329,480
Effect of Dilutive Shares -- -- -- --
</TABLE>
Reclassifications: Certain amounts in the 1997 financial statements have been
reclassified, with no effect on the results of operations or stockholders'
equity, to conform to the classifications adopted in 1998.
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 2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
=================================================================================
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Land $ 403,919 $ --
Building 4,783,107 --
Laboratory and computer equipment 2,473,938 1,662,346
Furniture, fixtures and office equipment 175,858 39,800
Automobile 24,637 24,637
- ---------------------------------------------------------------------------------
7,861,459 1,726,783
Less accumulated depreciation 597,671 290,971
- ---------------------------------------------------------------------------------
$ 7,263,788 $ 1,435,812
=================================================================================
</TABLE>
Depreciation expense was $309,933 and $156,918 for the years ended December 31,
1998 and 1997, respectively.
25
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 3. Demand Notes Payable
The Company has a demand note payable with a bank, which bears interest at the
bank's prime rate plus 1% (8.75% at December 31, 1998). The note has no stated
maturity and is collateralized by a security interest in the Company's accounts
receivable, equipment and intangibles. The balance was $249,680 and $314,680 at
December 31, 1998 and 1997, respectively.
Note 4. Bonds Payable
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Bonds payable consist of:
Industrial Revenue Development Bonds Series 1998A, 5.2%-7.0%, payable in monthly
installments of interest only through March 15, 2000, annual installments of
principal and interest from March 15, 2001 through March 15, 2023, secured by
a first deed of trust on land and building
with a carrying value of $5,174,878 $ 3,670,000
Industrial Revenue Development Bonds Series 1998B, 8.0%, payable in monthly
installments of interest only through March 15, 2023 and a final payment of
$330,000 due March 15, 2023, secured by a second deed of trust on land and
building with a carrying value of
$5,174,878 330,000
- ------------------------------------------------------------------------------------------------
$ 4,000,000
Maturities of long-term debt are as follows:
Year Amount
1999 $ --
2000 --
2001 85,000
2002 90,000
2003 95,000
Thereafter 3,730,000
- ------------------------------------------------------------------------------------------------
$ 4,000,000
================================================================================================
</TABLE>
The total interest expense reported in the Statements of Operations for the
years ended December 31, 1998 and 1997 was $184,655 and $356,026, respectively.
During 1998, $53,815 of interest was capitalized as part of the cost of the
Company's new laboratory facility. No interest was capitalized in 1997.
Note 5. Commitments and Contingencies
Leases: During 1997 through November 1998, the Company leased its laboratory and
office space under an operating lease. Upon moving to its new facility in
November 1998, the leases were cancelled. Total rent expense for all operating
leases for each of the years ended December 31, 1998 and 1997, was $174,662 and
$69,141, respectively.
Sales commitments: At December 31, 1998, the Company is performing services
under contract with several companies. These companies include Insmed
Pharmaceuticals (Richmond, Virginia), BLM Group (Cambridge, Massachusetts),
Strategic Diagnostics (Newark, Delaware), Creative Bio Molecular (Hopkinton,
Massachusetts), Santa Cruz Aids Research Foundation (Santa Cruz, California),
Sulzer Carbomedics (Austin, Texas), AXO Diagnostics (Gaithersburg, Maryland),
Clayton Foundation (Houston, Texas), Genetic Therapy, Inc. (Gaithersburg,
Maryland), Lofstrand Labs (Gaithersburg, Maryland), Bristol Meyers Squibb
(Princeton, New Jersey), and Dupont Pharmaceuticals (Wilmington, Delaware).
Employment Agreements: On June 24, 1997, the Company entered into employment
agreements with its 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,
26
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
15% of the Company's pretax net income for the preceding fiscal year. For the
fiscal year ended December 31, 1998, there were no bonuses for the Company's
executive officers.
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 1997. 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.
Note 6. Retirement Plan
The Company maintains a 401(k) Plan (the "Plan") which covers substantially all
employees. Under the Plan, employees may elect to defer a portion of their
salary, up to the maximum allowed by law, and the Company will match the
contribution up to 1% of the employee's salary. The Company made contributions
of $6,309 to the Plan in 1998 (None in 1997).
Note 7. Major Customers
During 1997, the Company derived revenues from two customers amounting to
$377,932 and $226,239, respectively, and comprised of 34% of the total revenue
for 1997. For the year ended December 31, 1998, there were no revenue
concentrations.
Note 8. Compensation and Benefit Costs
Compensation and benefit costs are included in the statements of operations as
follows:
<TABLE>
<CAPTION>
========================================================================================================
1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost of services $ 511,664 $ 338,994
Selling, general and administrative expenses 782,833 620,721
Research and development costs 378,619 361,925
- --------------------------------------------------------------------------------------------------------
$ 1,673,116 $ 1,321,640
========================================================================================================
</TABLE>
Note 9. Income Taxes
The difference between expected income tax benefits and income tax benefits
recorded in the financial statements is explained below:
<TABLE>
<CAPTION>
========================================================================================================
1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income taxes (credits) computed at 34% statutory rate $ (712,959) $ (397,399)
Change in valuation allowance 775,461 429,098
Other (62,502) (31,699)
- --------------------------------------------------------------------------------------------------------
$ -- $ --
========================================================================================================
</TABLE>
27
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
Notes to Financial Statements
- ----------------------------------------------------------------------------
The significant components of deferred income tax assets and liabilities as of
December 31 consist of the following:
<TABLE>
<CAPTION>
============================================================================
1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Effect of net operating loss $1,190,578 $ 463,329
Other 182,047 41,629
- ----------------------------------------------------------------------------
1,372,625 504,958
Deferred tax liabilities:
Tax depreciation in excess of book depreciation 168,066 75,860
- ----------------------------------------------------------------------------
Net deferred tax asset before valuation allowance 1,204,559 429,098
Less valuation allowance 1,204,559 429,098
- ----------------------------------------------------------------------------
Net deferred tax asset $ -- $ --
============================================================================
</TABLE>
Operating loss carryforwards of approximately $2,382,000 and $1,119,000 may be
used to offset future taxable income, which were generated in the years ended
December 31, 1998 and 1997, respectively. The loss carryforwards expire in 2018
and 2012, respectively.
Note 10. Private Placement and Initial Public Offering
On June 24, 1997, the Company declared a 93.78-for-1 stock split which has been
retroactively reflected in the accompanying financial statement and related
notes.
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. The Company received net proceeds of
$2,626,269, after underwriting and other offering costs of $373,731. Each note
carried interest at the rate of 20% and was converted 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 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 at $.001 per share, and will be exercisable for a period of
ten years expiring June 2007 at an exercise price of $9.90 per share.
On October 25, 1997, the Company completed its initial public offering (IPO) and
received net proceeds of $5,417,578, after underwriting and other offering costs
of $844,922, which includes $172,500 representing the approximate fair value of
warrants issued to the underwriters, as described in the following paragraph.
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 11. Stock Compensation
The Company adopted its Stock Incentive Plan (the "Plan") on June 24, 1997. The
Plan provides for the granting to employees, officers, directors, consultants
and certain other nonemployees of the Company of options to purchase shares of
common stock. A maximum of 410,000 shares of common stock may be issued pursuant
to the Plan. 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 founders of
the Company, and 140,000 shares will be reserved for incentive awards to be
granted to others.
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
(within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended), the exercise price will not be less than 100% of the fair market value
of shares covered at the time of the grant, or 110% for incentive stock options
granted to persons who own more than 10% of the Company's voting shares. 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.
28
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
The Company applies Accounting Principles Board 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 loss and loss per share would have
increased to the proforma amounts indicated below as if the Plan had been in
effect for the periods presented:
<TABLE>
<CAPTION>
================================================================================
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net loss:
As reported, historically $ (2,096,937) $ (1,168,821)
Proforma (2,263,110) (1,471,037)
Loss per common share:
As reported, historically (1.29) (3.55)
Proforma (1.39) (4.46)
</TABLE>
Under FASB No. 123, the fair value of each management stock option and warrant
is estimated on the date of grant using the Black-Scholes option pricing model.
The following weighted-average assumptions were used for grants in 1998 and
1997, respectively: No dividend yield, expected volatility of 76% and 34%,
risk-free interest rate of 5.1% and 5.5%, and expected lives of 5 years.
Stock option and warrant transactions are summarized as follows:
<TABLE>
<CAPTION>
===========================================================================================
Weighted Weighted
Average Average
Exercise Exercise
1998 Price 1997 Price
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options and warrants outstanding,
beginning of year 515,900 $9.23 -- $ --
Granted 32,400 8.25 515,900 9.23
Exercised (12,700) 6.00 -- --
Lapsed (3,850) 6.00 -- --
- ------------------------------------------------------------------------------------------
Options and warrants outstanding,
end of year 531,750 $9.11 515,900 $9.23
- ------------------------------------------------------------------------------------------
Options and warrants exercisable,
end of year 346,808 $9.05 77,564 $8.36
- ------------------------------------------------------------------------------------------
Weighted-average fair value per option and warrant
for options and warrants granted during the year $5.71 $1.70
- ------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options and warrants
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
===================================================================================== ======================================
Outstanding Exercisable
- ------------------------------------------------------------------------------------- --------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Remaining Exercise Exercise
Prices Number Contractual Life Price Number Price
Per Share Outstanding (Years) Per Share Exercisable Per Share
- ------------------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.50 - 7.00 93,450 9 $ 6.00 70,750 $ 6.00
7.50 - 9.00 27,200 10 7.85 8,800 7.85
9.25 - 10.00 411,100 7 9.90 267,258 9.90
- ------------------------------------------------------------------------------------- --------------------------------------
$ 5.50 - 10.00 531,750 8 $ 9.11 346,808 $ 9.05
===================================================================================== ======================================
</TABLE>
29
<PAGE>
[PHOTO]
The Executive Officers and Board of Directors
Executive Officers
Richard J. Freer, Ph.D Robert B. Harris, Ph.D.
Chairman of the Board President
Thomas R. Reynolds James H. Brennan, MBA
Senior Vice President and Secretary Controller
Directors
Richard J. Freer, Ph.D. Robert B. Harris, Ph.D.
Chairman of the Board President
Thomas R. Reynolds Charles A. Mills
Senior Vice President and Secretary Director and CEO,
Anderson & Strudwick, Inc.
Peter Einselen The Honorable George F. Allen
Director, and Senior Vice President, Director, and Partner,
Anderson & Strudwick, Inc. McGuire, Woods, Battle & Boothe, LLP
30
<PAGE>
[PHOTO]
Corporate Information
Corporate Office: Transfer Agent and Registrar
Commonwealth Biotechnologies, Inc. American Securities Transfer
601 Biotech Drive and Trust, Inc.
Richmond, Virginia 23235 938 Quail Street, Suite 101
Denver, Colorado 80215-5513
phone: 800-735-9224; 804-648-3820
fax: 804-648-2641
email: [email protected] Independent Auditors
web site: www.cbi-biotech.com
McGladrey and Pullen, LLP
General Counsel 1051 East Cary Street
Richmond, Virginia 23218
LeClair Ryan
A Professional Corporation
707 East Main Street
Richmond, Virginia 23219
31
<PAGE>
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QUEST INTERNATIONAL
RAJIV GHANDI BIOTECH CENTER
RESEARCH TRIANGLE INSTITUTE
RIBI IMMUNOCHEM
RICE UNIVERSITY
ROCHE INSTITUTE MOLECULAR BIOLOGY
ROCKEFELLER UNIVERSITY
ROCKY MOUNTAIN LABS
ROSWELL PARK CANCER INSTITUTE
RUTGERS UNIVERSITY
SAN FRANCISCO STATE UNIVERSITY
SCANTIBODIES, INC.
SCHEPENS EYE INSTITUTE
SCHERING PLOUGH
SCRIPPS RESEARCH INSTITUTE
SEARLE RESEARCH AND DEVELOPMENT
SIGMA
SIGNET LABS
SKIRBALL INSTITUTE
SLOAN KETTERING CANCER INSTITUTE
SMALL MOLECULE THERAPEUTICS
SMITH KLINE BEECHAM
SOMATIX THERAPEUTICS
ST. ELIZABETH'S MEDICAL COLLEGE
ST. JUDE'S RESEARCH HOSPITAL
ST. LOUIS UNIVERSITY
STAR BIOCHEMICALS
STRATEGIC DIAGNOSTICS
SUNY BROOKLYN
SUNY BUFFALO
SUNY STONY BROOK
SYMBIOTECH
SYSTEMIX
TAMPA BAY RESEARCH INSTITUTE
TEL AVIV UNIVERSITY
TEMPLE UNIVERSITY SCHOOL OF MEDICINE
TEMPLE UNIVERSITY TRC
THERMOGEN, INC.
TRIARCO INDUSTRIES
TRITON CHITOS, INC.
TULANE UNIVERSITY
U.S. ARMY ABERDEEN
U.S. DEPT OF AGRICULTURE RESEARCH LABS
UNICAMP, INC.
UNILEVER, INC.
UNITED STATES SURGICAL CORPORATION
UNIVAX, INC.
UNIVERSITY OF KENTUCKY
UNIVERSITY DE LA REPUBLICA
UNIVERSITY OF AKRON
UNIVERSITY OF ALABAMA
UNIVERSITY OF ALABAMA BRIMINGHAM
UNIVERSITY OF ALASKA AT ANCHORAGE
UNIVERSITY OF ALASKA AT FAIRBANKS
UNIVERSITY OF ALBERTA
UNIVERSITY OF ARKANSAS
UNIVERSITY OF BERGEN
UNIVERSITY OF BOLOGNA
UNIVERSITY OF CALIFORNIA AT SAN DIEGO
UNIVERSITY OF CALIFORNIA AT SAN FRANCISCO
UNIVERSITY OF CALIFORNIA AT BERKELEY
UNIVERSITY OF CALIFORNIA AT LOS ANGELES
UNIVERSITY OF CAPETOWN
UNIVERSITY OF CINCINNATI
UNIVERSITY OF COLOGNE
UNIVERSITY OF COLORADO
UNIVERSITY OF CONNECTICUT
UNIVERSITY OF FLORIDA HEALTH SCI. CTR.
UNIVERSITY OF GENEVA
UNIVERSITY OF ICELAND
UNIVERSITY OF IDAHO
UNIVERSITY OF ILLINOIS
UNIVERSITY OF ILLINOIS CHICAGO CIRCLE
UNIVERSITY OF IOWA
UNIVERSITY OF KANSAS
UNIVERSITY OF LOUISVILLE
UNIVERSITY OF MANITOBA
UNIVERSITY OF MARYLAND BALTIMORE
UNIVERSITY OF MARYLAND COLLEGE PARK
UNIVERSITY OF MEDICINE AND DENTISTRY N.J.
UNIVERSITY OF MICHIGAN
UNIVERSITY OF MINNESOTA
UNIVERSITY OF NEW MEXICO
UNIVERSITY OF OKLAHOMA
UNIVERSITY OF PENNSYLVANIA
UNIVERSITY OF PITTSBURGH
UNIVERSITY OF RICHMOND
UNIVERSITY OF ROCHESTER
UNIVERSITY OF SAO PAULO
UNIVERSITY OF SASSAIRI
UNIVERSITY OF SOUTHERN CALIFORNIA
UNIVERSITY OF SOUTHERN MISSISSIPPI
UNIVERSITY OF TEXAS
UNIVERSITY OF TEXAS HEALTH SCI. CTR.
UNIVERSITY OF TORONTO
UNIVERSITY OF VIRGINIA
UNIVERSITY OF WATERLOO
UPPSALA UNIVERSITY
VA MEDICAL CENTER, RICHMOND
VA MEDICAL CENTER, SYRACUSE
VANDERBILT UNIVERSITY
VERTX PHARMACEUTICALS
VIMS
VIRGINIA COMMONWEALTH UNIVERSITY
VIRGINIA STATE UNIVERSITY
VIGINIA TECH
VIRGINIA UNION UNIVERSITY
VITEX, INC.
VYSIS, INC.
WAKE FOREST UNIVERSITY
WAKO CHEMICALS, INC.
WALTHER ONCOLOGY CENTER
WASHINGTON STATE UNIVERSITY
WAYNE STATE UNIVERSITY
WHEELER INSTITUTE
WOLPERT POLYMERS
WRIGHT PATTERSON AIR FORCE COMMAND
WYETH LABS
XENOVIA
XOMA CORPORATION
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the incorporation of our
report, dated January 22, 1999, incorporated by reference in this annual report
of Commonwealth Biotechnologies, Inc. on Form 10-KSB, into the Company's
previously filed Form S-8 Registration Statement File No. 333-51995.
/s/ McGladrey & Pullen, LLP
Richmond, Virginia
March 30, 1999
Exhibit 23.2
Consent of Independent Auditor
The Board of Directors
Commonwealth Biotechnologies, Inc.
We consent to the incorporation by reference, in the Registration Statement on
Form S-8 of Commonwealth Biotechnologies, Inc. filed on May 6, 1998, of our
report, dated February 9, 1998, on the balance sheets of Commonwealth
Biotechnologies, Inc. as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity, and cash flows for the years
then ended, which report is incorporated by reference from the 1997 Annual
Report on Form 10-KSB of Commonwealth Biotechnologies, Inc. We also consent to
the reference of this firm under the caption of "Experts" in such Registration
Statement.
/s/ Goodman & Company, L.L.P.
Richmond, Virginia
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
For December 31st, 1998 AND IS QUALIFIED IN ITS ENTITITY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 2,091,586
<SECURITIES> 0
<RECEIVABLES> 302,936
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,471,022
<PP&E> 7,263,788
<DEPRECIATION> (597,670)
<TOTAL-ASSETS> 10,401,182
<CURRENT-LIABILITIES> 1,114,563
<BONDS> 4,000,000
0
0
<COMMON> 0
<OTHER-SE> 5,286,219
<TOTAL-LIABILITY-AND-EQUITY> 10,401,182
<SALES> 1,604,267
<TOTAL-REVENUES> 1,604,267
<CGS> 0
<TOTAL-COSTS> 3,845,177
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (184,655)
<INCOME-PRETAX> (2,096,937)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,096,937)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,096,937)
<EPS-PRIMARY> (1.290)
<EPS-DILUTED> (1.290)
</TABLE>
