U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
- ------- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO __________
COMMISSION FILE NUMBER: 001-13467
COMMONWEALTH BIOTECHNOLOGIES, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
VIRGINIA 54-1641133
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
601 Biotech Drive, Richmond, Virginia 23235
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(804) 648-3820
(ISSUER'S TELEPHONE NUMBER)
-----------------------------------------
Check mark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
As of August 13, 1999, 1,643,727 shares of common stock, no par value,
of the registrant were outstanding.
Transitional Small Business Disclosure Format (Check one) Yes: No: X
-- --
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
COMMONWEALTH BIOTECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(UNAUDITED)
---------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 351,476 $ 2,091,586
Accounts Receivable 347,540 302,936
Prepaid Expenses & Inventory 158,848 76,500
----------- -------------
Total Current Assets $ 857,864 $ 2,471,022
PROPERTY PLANT AND EQUIPMENT, NET $ 7,132,459 $ 7,263,788
----------- -------------
OTHER ASSETS
Restricted Cash $ 407,015 $ 402,991
Bond Issue Cost, net 254,809 260,181
Deposits 3,200 3,200
----------- -------------
Total Other Assets $ 665,024 $ 666,372
----------- -------------
TOTAL ASSETS $ 8,655,347 $ 10,401,182
=========== =============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts Payable & Other Current Liabilities $ 315,320 $ 797,597
Deferred Revenue - 67,286
Demand Note 224,680 249,680
----------- ------------
Total Current Liabilities $ 540,000 $ 1,114,563
----------- ------------
Long term Debt Bonds $ 4,000,000 $ 4,000,000
----------- ------------
TOTAL LIABILITIES $ 4,540,000 $ 5,114,563
----------- ------------
STOCKHOLDER'S EQUITY
Common Stock, no par value
10,000,000 authorized, June 30, 1999
1,643,727, December 31, 1998 1,633,214 $ - $ -
Additional Paid-in-Capital 8,901,742 8,838,664
Deficit (4,786,395) (3,552,045)
----------- ------------
Total Stockholder's Equity $ 4,115,347 $ 5,286,619
----------- ------------
TOTAL LIABILITIES AND $ 8,655,347 $ 10,401,182
STOCKHOLDERS EQUITY =========== ============
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
NDED JUNE 30, 1999 ENDED JUNE 30, 1998 ENDED JUNE 30, 1999 ENDED JUNE 30, 1998
<S> <C>
REVENUE
Short Term Projects $ 212,357 $ 189,432 $ 432,595 $ 499,245
Long Term Projects 204,824 146,501 419,140 286,937
Research Grants 69,438 39,783 142,401 88,771
AccuTrac 25,650 - 30,800 -
-------------- ------------- ------------ -------------
Total Revenue $ 512,269 $ 375,716 $ 1,024,936 $ 874,953
-------------- -------------- ------------- -------------
COST AND EXPENSES
Cost of Services $ 367,577 $ 310,953 $ 678,256 $ 566,675
Sales, Gen. And Admin. 641,679 577,526 1,250,734 1,114,590
Research and Development 128,467 110,268 247,105 213,260
-------------- -------------- ------------- ------------
TOTAL COST AND EXPENSES $ 1,137,723 $ 998,747 $ 2,176,095 $ 1,894,525
-------------- -------------- ------------- ------------
OPERATING LOSS $ (625,454) $ (623,031) $ (1,151,159) $ (1,019,572)
-------------- -------------- ------------- ------------
OTHER INCOME (EXPENSES)
Interest Expense $ (74,489) $ (66,265) $ (150,417) $ (84,565)
Other Income 12,974 111,514 67,226 194,153
-------------- -------------- ------------- -------------
Total Other Income (Expense) $ (61,515) $ 45,249 $ (83,191) $ 109,588
-------------- -------------- -------------- -------------
NET LOSS $ (686,969) $ (577,782) $ (1.234,350) $ (909,984)
============== ============== ============== =============
LOSS PER SHARE, BASIC $ ( 0.42) $ (0.36) $ (0.75) $ (0.56)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 1,642,397 1,620,918 1,639,716 1,620,717
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (1,234,350) $ (909,984)
Adjustments to reconcile loss to
net cash used in operating
Activities:
Depreciation and amortization 267,741 142,448
Loss on disposal of equipment - 11,275
Interest earned on restricted cash - (45,461)
Changes in:
Accounts receivable (44,604) (15,328)
Prepaid expenses & Inventory (82,348) (25,400)
Restricted Cash (4,024) -
Customer deposits (59,736) -
Accounts payable and accrued expenses (489,828) (58,065)
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES $ (1,647,149) $ (900,515)
============ ===========
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property plant and equipment $ (131,039) $ (426,794)
============ ===========
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Common Stock $ 63,078 $ 7,200
Bond issue costs - (184,697)
Principal payments on demand note (25,000) (30,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 38,078 $ (207,497)
============ ============
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (1,740,110) $(1,534,806)
CASH AND CASH EQUIVALENTS, BEGINNING $ 2,091,586 $ 6,273,765
============ =============
CASH AND CASH EQUIVALENTS, END ING $ 351,476 $ 4,738,959
============ =============
SUPPLEMENTAL DISCLOSURES
CASH PAID FOR INTEREST $ 145,041 $ 70,925
------------ -------------
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
Notes To Condensed Financial Statements
(1) In the opinion of the Company, the accompanying condensed
financial statements which are unaudited, except for the
condensed balance sheet dated December 31, 1998 contain all
adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of June
30, 1999 and December 31 1998 and the results of operations
and cash flows for the three and six months periods ended June
30, 1999 and 1998 and cash flows for the six month periods
ended June 30, 1999 and 1998.
(2) The results of operations for the six months ended June 30,
1999 and 1998 are not necessarily indicative of the results to
be expected for the full year.
(3) Earnings (loss) per share: The Company follows the guidance
provided in FASB Statement No. 128, Earnings Per Share, which
establishes standards for computing and presenting earnings
per share and applies to entities with publicly held common
stock or potential common stock. Those entities that have only
common stock outstanding are required to present basic
earnings per share amounts. All other entities are required to
present basic and diluted per share amounts. Diluted per share
amounts assume the conversion, exercise or issuance of all
potential common stock instruments such as options, warrants
and convertible securities, unless the effect is to reduce a
loss or increase earnings per share. At June 30, 1999 the
Company had stock options outstanding which were anti-dilutive
since the Company incurred a net loss for all periods
presented.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following should be read in conjunction with the unaudited
Financial Statements and related Notes thereto of Commonwealth Biotechnologies,
Inc. ("the Company") included herein.
OVERVIEW
The Company's revenues are derived principally from providing
macromolecular synthetic and analytical services to researchers in the
biotechnology industry or who are engaged in life sciences research in
government or academic labs throughout the world. Development of innovative
technologies for biotechnology requires sophisticated laboratory techniques and
the Company provides these services to customers on a contract basis. The
Company's customers consist of private companies, academic institutions and
government agencies, all of which use biological processes to develop products
for health care, agricultural, and other purposes.
The Company generally derives revenue from two types of customers:
those who require a discrete set of services ("short-term projects"), and those
who contract with the Company on an extended basis for performance of a variety
of integrated services ("long-term projects"). More often than not, the
Company's customers provide repeat business to the Company. Historically, a
majority of the Company's net revenues have been earned under short-term
projects. However, the Company views long-term projects as the more important
source of revenue, and has begun to focus its efforts on identifying long-term
customers. Long-term projects generally range from a few months to more than a
year. Revenue from these services is generally recognized as services are
rendered or as products are delivered. In some cases, a portion of the contract
fee is paid at the time the project has commenced, with performance-based
installments payable over the contract duration as milestones are achieved.
The Company also derives revenues from government grants that 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,
which 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.
In January 1999, the Company began sales of a new reagent (AccuTracTM)
which facilitates the process of automated DNA sequence analysis. In this
respect, the Company anticipates broadening its revenue base by direct sales of
this reagent to its clients. AccuTracTM, was developed within the Company and
stems directly from the Company's R&D programs.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998.
6
<PAGE>
REVENUES
Gross revenues increased by $136,553 or 36.3% from $375,716 during the second
quarter of 1998 ("the 1998 Quarter") to $512,269 during the second quarter of
1999 ("the 1999 Quarter").
SHORT TERM PROJECTS
-------------------
Revenues realized from short-term projects increased by $22,925 or
12.1% from $189,432 during the 1998 Quarter to $212,357 the 1999 Quarter. This
increase is primarily due to increased sales of peptide synthesis and amino acid
analysis for new customers placing orders with the Company. Revenues realized
from all other core technologies remained essentially constant.
LONG TERM PROJECTS
------------------
Revenues realized from various long-term projects increased by $58,323
or 39.8%, from $146,501 during the 1998 Quarter to $204,824 during the 1999
Quarter. This increase is primarily due to work being done on fourteen
individual projects, compared to six projects in progress during the 1998
Quarter.
RESEARCH GRANTS
---------------
The Company experienced an increase in revenue realized from government
grants in the amount of $29,655, or 74.5%, from $39,783 during the 1998 Quarter
to $69,438 during the 1999 Quarter. This increase is primarily due to the
continuation of work on three grants during the 1999 Quarter, compared to only
one grant during the 1998 Quarter.
ACCUTRAC(TM)REVENUE
-------------------
The Company began sales of a new reagent (AccuTracTM) which facilitates
the process of automated DNA sequence analysis. Revenues during the 1999 Quarter
amounted to $25,560. There were no sales during the 1998 Quarter.
COST OF SERVICES
Cost of services consists primarily of laboratory supplies, labor, and
miscellaneous indirect costs. The cost of services increased by $56,624, or
18.2%, from $310,953 during the 1998 Quarter to $367,577 during 1999 Quarter.
DIRECT MATERIALS
----------------
The costs for direct materials decreased by $5,037, or 3.4%, from
$146,561 during the 1998 Quarter to $141,524 during the 1999 Quarter. Increased
controls in the ordering of reagents contributed to the decrease of costs.
DIRECT LABOR
------------
Labor costs increased by $68,927, or 53.6%, from $128,577 during the
1998 Quarter to $197,504 during the 1999 Quarter. This increase reflects a
reallocation of the Company's resources to the general operations of the
business from the research and development area. This reallocation is necessary
7
<PAGE>
to support the additional long-term projects initiated by the Company during the
1999 Quarter.
SELLING, GENERAL AND ADMINISTRATIVE
Sales, general and administrative expenses ("SGA") consist primarily of
compensation and related costs for administrative, marketing and sales
personnel, facility expenditures, professional fees, depreciation, office
expenditures and other costs. Total SGA costs increased by $64,153, or 10.0%,
from $577,526 during the 1998 Quarter to $641,679 during 1999 Quarter.
COMPENSATION AND BENEFITS
-------------------------
Total Compensation and Benefits decreased by $72,902 or 29.0% from
$250,979 during the 1998 Quarter to $178,077 during the 1999 Quarter. This
decrease is primarily attributable to the resignation of one of the Company's
executive officers, who opted to return to his former academic position.
Additional reductions are due to reassigning a portion of management salaries
allocated to direct labor and research and development.
PROFESSIONAL SERVICES
---------------------
Professional fees increased by $19,669 or 24.9%, from $78,829 during
the 1998 Quarter to $98,498 during the 1999 Quarter. This increase is primarily
due costs associated with compiling and publishing the Company's annual report.
In addition, initial expenditures for real estate taxes associated with the new
facility were realized during the 1999 Quarter.
DEPRECIATION EXPENSE
--------------------
Depreciation increased by $61,345 or 87.0% from $70,505 during the 1998
Quarter to $131,850 during the 1999 Quarter. Increased depreciation costs are
attributable to the purchase of additional laboratory equipment consistent with
expanding the Company's technology base. In addition, depreciation includes
costs for the new corporate facility in which the Company began full operations
in December 1998. There were no depreciation costs in the 1998 Quarter for any
facility costs by the Company.
MARKETING
---------
Marketing costs increased by $47,067 or 75.4%, from $62,402 during the
1998 Quarter to $109,469 during the 1999 Quarter. Salaries and fringe benefits,
expenditures for a new brochure, additional advertising in the professional
journals, implementation of an advertising campaign for AccuTracTM, 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, HepArrestTM. Total costs during the 1999 Quarter of
the Mattson Jack Group contract amounted to $15,102.
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 increased by $18,199, or 16.5%, from
$110,268 during the 1998 Quarter to $128,467 during the 1999 Quarter.
8
<PAGE>
GRANT RELATED RESEARCH ACTIVITIES
---------------------------------
Expenditures to perform grant-related research activities increased by
$30,629 or 85.8%, from $35,707 during the 1998 Quarter to $66,336 during the
1999 Quarter. Increase costs are primarily due to the continuation of work on
three grants.
IN-HOUSE RESEARCH ACTIVITIES
----------------------------
Expenditures made by the Company for in-house research activities
decreased by $12,197 or 16.4%, from $74,328 during the 1998 Quarter to $62,131
during the 1999 Quarter. This decrease is primarily due to the reallocating of
salaries from research and development to direct labor.
OTHER INCOME AND EXPENSES
Interest income decreased by $98,540 or 88.4% from $111,514 during the
1998 Quarter to $12,974 during the 1999 Quarter. These funds are 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 (IPO). 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. Interest income in both categories
decreased due to the use of these funds throughout the 1998 fiscal year.
Interest costs increased by $8,249 or 13.0% from $63,554 during the
1998 Quarter to $71,803 during the 1999 Quarter. These costs incurred by the
Company included (1) interest paid to financial institutions as loans made to
the Company; (2) interest paid for the Company's IRBs; and (3) amortization of
costs incurred as a consequence of the completion of the Company's IRB
financing.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998.
REVENUES
Gross revenues increased by $149,983 or 17.1% from $874,953 during the 1998
Period ("the 1998 Period") to $1,024,936 during the 1999 Period. ("the 1999
Period").
SHORT TERM PROJECTS
-------------------
Revenues realized from short-term projects decreased by $66,650 13.4%
from $499,245 during the 1998 Period to $432,595 during the 1999 Period.
Revenues realized from peptide synthesis increased by $32,682 or 38.0% from
$85,940 during the 1998 Period to $118,622 during the 1999 Period. Revenues
attributable to protein sequencing increased by $11,606 or 18.0%, from $64,325
during the 1998 Period to $75,931 during the 1999 Period. Revenues derived from
peptide synthesis and protein sequencing increased primarily due to the
continuation of new customers placing orders with the Company. Revenues from two
new core technologies, Genetic Analysis and Molecular Biology, reported revenues
during the 1999 Period of $6,300 and $20,565 respectfully. There were no sales
during the 1998 Period for these services. Revenues from DNA Sequencing
decreased by $144,380 or 58.2% from $248,178 during the 1998 Period to $103,798
during the 1999 Period. This decrease is primarily due to a change in the
marketplace wherein most DNA sequence activities are becoming associated with
long-term projects. DNA and RNA synthesis increased by $12,674 or 44.3% from
$28,590 during the 1998 Period to $41,264 during the 1999 Period. This increase
is primarily due to new customers placing orders with The Company.
9
<PAGE>
Other "uncategorized" revenues decreased by $16,993 or 34.6% from
$49,156 during the 1998 Period to $32,163 during the 1999 Period. This decrease
is primarily due to administrative changes in invoicing; revenues previously
identified as "Other" are now more properly classed under defined work items
within the Company. Revenues realized from all other core technologies remained
essentially constant.
LONG TERM PROJECTS
------------------
Revenues realized from various long-term projects increased by $132,203
or 46.1%, from $286,937 during the 1998 period to $419,140 during the 1999
Period. This increase is primarily due to work being done on twenty-two
individual projects during the 1999 Period compared to only eight projects in
progress during the 1998 Period. The Company's management continues to take an
active role in negotiating new contracts. However, management is unable to say
with certainty when or whether any additional long-term contracts will be
awarded.
RESEARCH GRANTS
---------------
The Company experienced an increase in revenue realized from government
grants in the amount of $53,630, or 60.4%, from $88,771 during the 1998 Period
to $142,401 during the 1999 Period. This increase is primarily due to the
continuation of work on three grants. During the 1999 Period, the Company had
one ongoing Phase II Small Business Technology Research grant (SBTR) from the
National Institutes of Health (NIH). Revenues earned in the 1999 Period amounted
to $51,801. In addition, 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 in the 1999 Period amounted to $53,548. The Company
anticipates completion of the project by August, 2000. The Company was also
awarded a Phase I SBIR award ($100,000) from the NIH for development of Rapid
Assay Methods for the Detection of Botulism. Revenues earned in the 1999 Period
amounted to $37,052. The Company anticipates this project will be completed by
July 1999. Work began on the last two grants in late September 1998.
ACCUTRAC(TM) REVENUE
--------------------
The Company began sales of a new reagent (AccuTrac(TM)) which
facilitates the process of automated DNA sequence analysis. Revenues during the
1999 Period amounted to $30,800. There were no sales during the 1998 Period.
The Company experiences quarterly fluctuations in all revenue
categories. Continuation of existing projects, or engagement for future projects
is usually dependent upon the customer's satisfaction with the scientific
results provided on initial phases of the scientific program. Continuation of
existing projects or engagement of future projects also often depends upon
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.
10
<PAGE>
COST OF SERVICES
Cost of services consists primarily of labor, laboratory supplies and
miscellaneous indirect costs. The cost of services increased by $111,581 or
19.7%, from $566,675 during the 1998 Period to $678,256 during 1999 Period. The
cost of services as a percentage of revenue was 64.8% and 66.2% during 1998 and
1999, respectively.
DIRECT LABOR
------------
Labor costs increased by $101,638, or 40.8%, from $249,350 during the
1998 Period to $350,988 during the 1999 Period. This increase reflects a
reallocation of the Company's resources to the general operations of the
business from the research and development area. This reallocation is necessary
to support the additional long-term projects initiated by the Company during the
1999 Period.
DIRECT MATERIALS
----------------
The costs for direct materials increased by $13,442, or 5.0%, from
$269,913 during the 1998 Period to $283,355 during the 1999 Period. This
moderate increase reflects the Company's concerted efforts to hold down costs.
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 $136,144, or 12.2%, from $1,114,591
during the 1998 Period to $1,250,734 during 1999 Period. As a percentage of
revenue, these costs were 127.4% and 122.0% during 1998 and 1999, respectively.
COMPENSATION AND BENEFITS
-------------------------
Total Compensation and Benefits decreased by $103,038 or 22.5% from
$458,693 during the 1998 Period to $355,655 during the 1999 Period. This
decrease is primarily attributable to the resignation of one of the Company's
executive officers who has opted to return to his former professional position.
Additional reductions are due to reassigning a portion of management salaries
allocated to direct labor and research and development.
FACILITY COSTS
--------------
Costs for facilities increased by $13,983, or 14.3%, from $98,012
during the 1998 Period to $111,995 during the 1999 Period. The costs for leasing
laboratory space for its operations decreased by $73,915 or 88.4% from $83,582
during the 1998 Period to $9,667 during the 1999 Period. This decrease is
primarily due to the relocation of the Company to its new corporate
headquarters. However, additional costs associated with the relocation and new
to the Company include electricity ($57,724), gas utility bills ($11,722), water
usage ($2,296), janitorial services ($5,135) and landscaping ($4,697). In the
1998 Period, these costs were included in our monthly lease payment. Telephone
use increased by $5,721 due to a one-time charge for software on the
implementation of the new telephone system.
11
<PAGE>
PROFESSIONAL SERVICES
---------------------
Professional services include professional fees, consulting, dues and
subscriptions and taxes and licenses. Professional Services increased by $29,968
or 21.4%, from $144,803 during the 1998 Period to $174,771 to the 1999 Period.
This increase is primarily due to personnel property, real estate, and sales tax
paid by The Company during the 1999 Period. Consulting fees increased due to the
payment of a management fee for the successful hiring of a sales representative
on the west coast.
DEPRECIATION EXPENSE
--------------------
Depreciation increased by $122,241 or 87.3% from $140,101 during the
1998 Period to $262,342 during the 1999 Period. Increased depreciation costs are
attributable to the purchase of additional laboratory equipment consistent with
expanding the Company's technology base. In addition depreciation costs include
the new corporate facility which began full operations in December 1998. There
were no depreciation costs in the 1998 Period for any facility costs associated
by the Company.
MARKETING
---------
Marketing costs increased by $63,053 or 47.3%, from $133,359 during the
1998 Period to $196,412 during the 1999 Period. Salaries and fringe benefits,
expenditures for a new brochure, additional advertising in the professional
journals, implementation of an advertising campaign for AccuTrac(TM), contract
costs with a media relations firm, travel, and trade show expenditures
contributed to these increased costs.
In September, 1998, the Company entered into a contract with the
Mattson Jack Group to perform a global market assessment of the Company's
potential human therapeutic, HepArrest(TM). Total costs during the 1999 Period
of the Mattson Jack Group contract amounted to $31,561.
SELLING
-------
Expenditures during the 1999 Period increased by $9,841 or 34.8%, from
$28,300 during the 1998 Period to $38,141 during the 1999 Period. Costs
associated with selling include personnel, travel, and office expenses.
RESEARCH AND DEVELOPMENT
Research and development costs within the Company fall into two general
categories: grant-related research and development and in-house research and
development. These categories are distinguished in the Company by work performed
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 increased by $33,845, or 15.9%, from $213,260 during the
1998 Period to $247,105 during the 1999 Period. Total grant-related research and
in-house research as a percentage of revenue were 24.4% and 24.1% during 1998
and 1999, respectively.
12
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GRANT RELATED RESEARCH ACTIVITIES
---------------------------------
Expenditures to perform grant-related research activities increased by
$63,308 or 99.9%, from $63,374 during the 1998 Period to $126,682 during the
1999 Period. Increase costs are primarily due to the continuation of work on
three grants. All costs associated with grant related research activities are
reimbursed to the Company on a periodic basis.
During the 1999 Period, the Company had one ongoing Phase II Small
Business Technology Research grant (SBTR) grant from the National Institutes of
Health (NIH). Expenses incurred through the 1999 Period amounted to $50,137. In
addition, 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. Expenses incurred through the 1999 Period amounted to $44,613. The
Company anticipates completion of the project by August, 2000. The Company was
also awarded a Phase I SBIR award ($100,000) from the NIH for development of
Rapid Assay Methods for the Detection of Botulism. Expenditures incurred through
the 1999 Period amounted to $31,931. The Company anticipates the project to be
completed by July 1999. Work began in late September 1998, on the last two
grants.
IN-HOUSE RESEARCH ACTIVITIES
----------------------------
Expenditures made by the Company for in-house research activities
decreased by $29,463 or 19.7%, from $149,886 during the 1998 Period to $120,423
during the 1999 Period. This decrease is primarily due to the reallocating of
salaries from research and development to direct labor. This reallocation was
necessary to support the additional long-term projects initiated by the Company.
However, the Company continues to be actively engaged in establishing
fundamental methods for genetic testing for agricultural and human applications,
in developing methods of genome sequence analysis, and in pursuing fundamental
research related to potential uses of HepArrest in drug formulation. In addition
the Company is continuing its in-house research and development efforts with
AccuTrac(TM).
OTHER INCOME AND EXPENSES
Interest income 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 (IPO).
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.
Other income represents funding from the Virginia Business Assistance Program
for the training of new employees.
Interest income to the Company decreased by $119,183, or 80.0% from
$148,692 during the 1998 Period to $29,509 during the 1999 Period. Interest
income realized from unused funds from the IPO decreased due to the use of these
funds throughout the 1999 and 1998 fiscal years. Interest income earned from the
unused portion of the funds realized from the sale of IRBs decreased by $35,937,
or 79.1% from $45,461 during the 1998 Period to $9,524 during the 1999 Period.
Interest income realized from sale of the IRB's decreased due to the use of
these funds throughout the 1999 and 1998 fiscal years. Other Income of $28,193,
as mentioned above, represents funds for training assistance awarded by the
Virginia Business Assistance Program (Workforce Services) for new employees of
the Company. This program enables the Company to implement training both from an
orientation as well as safety program for all new employees who have been with
the Company for at least ninety days.
13
<PAGE>
Interest costs incurred by the Company during the 1999 and 1998 Periods
included (1) interest paid to financial institutions as loans made to the
Company; 2) interest paid for the Company's IRBs; and 3) amortization of costs
incurred as a consequence of the completion of the Company's IRB financing.
Total interest expenses increased by $63,562 or 78.0% from $81,483 during the
1998 Period to $145,041 during the 1999 Period. This increase is primarily due
the payment of six months interest for the Company's IRBs during the 1999 Period
as compared to three months and fifteen days during the 1998 Period.
LIQUIDITY AND CAPITAL RESOURCES
Consistent with the Company's implementation of its growth strategy,
1999 showed a net operating cash outflow in the amount of $1,647,149, as
compared to an outflow of $900,515 in 1998. The decrease in both years is due to
the continuation of substantial investments made by the Company in facility
costs, personnel, equipment, sales, and marketing efforts. These cost outlays
were made possible by capital realized from the Company's private placement of
convertible notes and initial public offering of common stock. The use of cash
in 1999 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 June 30, 1999 and June 30, 1998 was $317,864
and $4,459,702 respectively. This decrease is a direct result of capital
expenditures on new scientific instrumentation, computers, and furniture and
fixtures, costs associated with the new facility, implementation of marketing
and selling divisions within the Company, and costs associated with additional
staffing and direct materials necessary to expand the Company's technology
offerings.
IRBs sold by the Company (in the amount of $4,000,000) 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, $404,369 remains as restricted cash on the balance sheet of
the Company as of June 30, 1999. All of the Company's administrative and
research operations have been consolidated into this facility and are fully
operational.
YEAR 2000 PROJECT
The Company is working to resolve the potential impact of the Year 2000
on the ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. Any of the Company's programs
that recognize a date using "00" as the year 1900 rather than 2000 could result
in errors or system failures. The Company is in the process of making its
assessment of the potential impact of the Year 2000 issue. As of August 14,
1999:
14
<PAGE>
o The Company's financial institutions are in the process of
addressing Year 2000 compliance issues. Approximately 85% of
the financial institutions that the Company conducts
transactions are Year 2000 compliant and anticipate the
process to be completed by the end of the third quarter of
1999.
o During 1998 the Company upgraded its general accounting system
to a Year 2000 compliant version. During the first quarter of
1999, the Company tested the general accounting software. This
software is considered to be Year 2000 compliant.
o The Company has completed the process of updating payroll
system to meet Year 2000 compliance standards.
o The Company believes that equipment purchased by the Company
during 1999 and 1998 is considered to be Year 2000 compliant.
o The Company's instrumentation is stand alone and not networked
to any other systems. The Company believes therefore that our
equipment 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. The Company is in the process of contacting
its suppliers to determine if the business operations are Year
2000 compliant. Ninety surveys have been mailed to our major
suppliers to address this issue on whether they are Year 2000
compliant. As of August 2, 1999, the Company has received
fifty-one responses to the survey. Out of the survey's
returned, all have stated that they are Year 2000 compliant or
will be in compliance by the third quarter in 1999. Follow up
letters for the remaining survey will be mailed out. Twenty-
four surveys have been mailed to our major customers to
address this issue on whether they are Year 2000 compliant. As
of August 2, 1999, the Company has received six responses to
the survey. Out of the survey's returned, all have stated that
they are Year 2000 compliant or will be in compliance by the
third quarter in 1999. Follow up letters for the remaining
survey will be mailed out.
The Company believes that it will complete its Year 2000 program by the
end of the third quarter of 1999. The Company believes that costs associated
with Year 2000 compliance will not exceed $30,000,and will not have a material
adverse 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 which are not historical in nature, including the words
"anticipated", "estimate", "should", "expect", "believe", "intend", and similar
expressions are intended to identify forward-looking statements. Such statements
are, by their nature, subject to certain risks and uncertainties.
Among the factors-that could cause the actual results to differ
materially from those projected are the following:
15
<PAGE>
o business conditions and the general economy,
o the development and implementation of the Company's long term
business goals,
o federal, state, and local regulatory environment,
o lack of demand for the Company's services,
o the ability of the Company's customers to perform services
similar to those offered by the Company "in-house,"
o potential cost containment by the Company's customers resulting
in fewer research and development projects,
o The Company's ability to receive accreditation to provide
various services, including, but not limited to paternity
testing,
o The Company's ability to hire and retain highly skilled
employees,
Other risks, uncertainties, and factors that could cause actual results
to differ materially from those projected are detailed from time to time in
reports filed by the company with the Securities and Exchange Commission,
including Forms 8-K, 10-QSB, and 10-KSB.
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From April 1, 1999 through June 30, 1999, the Company spent approximately
$848,975 of the net proceeds of its initial public offering as follows: (1)
$202,581 on capital expenditures, (2) $154,492 for the development of the
Company's new laboratory facility, (3) $94,366 on marketing, (4) $22,682 on
sales, (5) $22,616 on consulting fees for HepArrest, (6) on facility/bond
expenditures $ 66,690 and (7) $285,547 on production operating expenses. The
remaining proceeds are invested in an interest-bearing account at a commercial
bank.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 15, 1999, the Company held its Annual Meeting of Shareholders.
The following were the results of the meeting:
(1) The shareholders elected Robert B. Harris, Ph.D. and Peter C. Einselen
as Class II directors to serve until the Company's Annual Meeting of
Shareholders in 2002 or until their successors are elected and shall have
qualified. The votes were as follows:
Votes Withheld /
Director Votes Cast For Votes Cast Against Broker Non-Votes
Robert B. Harris, 986,849 12,600
Ph.D.
Peter C. Einselen 986,849 12,600
(2) The shareholders elected George F. Allen as a Class III director to
serve until the Company's Annual Meeting of Shareholders in 2001 or until his
successor is elected and shall have qualified. The votes were as follows:
Votes Withheld /
Director Votes Cast For Votes Cast Against Broker Non-Votes
George F. Allen 985,545 14,600
17
<PAGE>
(3) The shareholders of the Company ratified the appointment of McGladrey &
Pullen, LLP as independent auditors of the Company for the fiscal year ending
December 31, 1999. The votes were as follows:
Votes Withheld /
Votes Cast For Votes Cast Against Broker Non-Votes
983,545 3,700 12,504
The following individuals' terms as directors of the Company continued
after the meeting:
Director Name Class Term Expires
Thomas R. Reynolds I 2001
Richard J. Freer, Ph.D. III 2000
Raymond H. Cypress, D.V.M., Ph.D. I 2001
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Underwriter's Warrant, as amended (1)
4.3 Form of Management Warrant, as amended (1)
4.4 Indenture of Trust by and between the Virginia Small
Business Financing Authority and Crestar Bank relating to
the issuance of industrial revenue bonds for the benefit of
the Company (2)
10.1 Placement Agreement by and between the Company and Anderson
& Strudwick, Incorporated (1)
10.2 Warrant Agreement between the Company and Anderson &
Strudwick, Incorporated (1)
10.3 Warrant Agreement between the Company and Richard J. Freer,
as amended (1)
10.4 Warrant Agreement between the Company and Thomas R.
Reynolds, as amended (1)
10.5 Warrant Agreement between the Company and Robert B. Harris,
as amended (1)
10.6 Employment Agreement for Richard J. Freer (1)
10.7 Employment Agreement for Thomas R. Reynolds (1)
18
<PAGE>
10.8 Employment Agreement for Robert B. Harris (1)
10.9 Executive Severance Agreement for Richard J. Freer (1)
10.10 Executive Severance Agreement for Thomas R. Reynolds (1)
10.11 Executive Severance Agreement for Robert B. Harris (1)
10.12 1997 Stock Incentive Plan, as amended (1)
10.13 Form of Incentive Stock Option Agreement (1)
10.14 Loan Agreement by and between the Virginia Small Business
Financing Authority and the Company (2)
27.1 Financial Data Schedule (3)
- -----------------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-31731, as amended.
(2) Incorporated by reference to the Company's Current Report on Form 8-K,
dated April 6, 1998, File No. 001-13467.
(3) Filed herewith.
(b) Reports on Form 8-K.
During the fiscal period ended June 30, 1999, the Company filed one
Current Report on Form 8-K, dated May 17, 1999, announcing the appointment of
Raymond H. Cypress to the Company's Board of Directors.
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
COMMONWEALTH BIOTECHNOLOGIES, INC.
By: /s/ James H. Brennan
---------------------------------
James H. Brennan
Controller
August 13,1999
20
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
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