<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
------- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number: 001-13467
COMMONWEALTH BIOTECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Virginia 54-1641133
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
601 Biotech Drive, Richmond, Virginia 23235
(Address of principal executive offices)
(804) 648-3820
(Issuer's telephone number)
_________________________________________
Check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
------- ------
As of November 10, 2000, 2,076,164 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.
<TABLE>
<CAPTION>
Commonwealth Biotechnologies, Inc.
Balance Sheets
---------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
----------------- ---------------
(Unaudited) (Note 1)
<S> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 2,135,747 $ 31,630
Accounts receivable 705,927 458,677
Prepaid expenses and inventory 134,678 70,269
---------------------------------------------------------------------------------------------------------------------------------
Total current assets 2,976,352 560,576
---------------------------------------------------------------------------------------------------------------------------------
Property and Equipment, net 7,184,675 7,019,109
Other Assets
Restricted cash 434,607 418,047
Bond issue costs, net 241,379 249,437
Accounts receivable 70,638 -
Deposits 3,200 3,200
---------------------------------------------------------------------------------------------------------------------------------
Total other assets 749,824 670,684
---------------------------------------------------------------------------------------------------------------------------------
$10,910,851 $ 8,250,369
---------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Demand note payable $ 149,680 $ 199,680
Line of credit - 282,000
Current portion of capital lease 119,063 -
Accounts payable and other current liabilities 397,800 480,726
Deferred revenue 8,857 5,460
---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 675,400 967,866
---------------------------------------------------------------------------------------------------------------------------------
Deferred Revenue 70,638 -
Long Term Debt
Bonds payable 4,000,000 4,000,000
Capital lease 194,230 -
---------------------------------------------------------------------------------------------------------------------------------
Total long term debt 4,194,230 4,000,000
---------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, no par value, 10,000,000 shares authorized - -
September 30, 2000 - 2,084,045; December 31,
1999 - 1,643,727 shares issued and outstanding
Additional paid-in capital 11,913,270 8,925,742
Accumulated deficit (5,942,687) (5,643,239)
---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 5,970,583 3,282,503
---------------------------------------------------------------------------------------------------------------------------------
$10,910,851 $ 8,250,369
---------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Commonwealth Biotechnologies, Inc.
Statements of Operations
--------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
---------------------------------------------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
-------------- ---------------- ----------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue
Short term projects $ 383,973 $ 286,364 $ 877,516 $ 718,958
Long term projects 592,496 509,122 2,341,605 928,263
Research grants 20,154 17,863 82,838 160,264
AccuTrac 3,010 8,460 8,800 39,260
-------------------------------------------------------------------------------------------------------------------
Total revenue 999,633 821,809 3,310,759 1,846,745
-------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Cost of services 640,744 530,098 1,804,348 1,208,354
Sales, general & administrative 558,541 490,699 1,446,203 1,741,432
Research and development 30,641 92,703 132,410 339,809
-------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,229,926 1,113,500 3,382,961 3,289,595
-------------------------------------------------------------------------------------------------------------------
Operating loss (230,293) (291,691) (72,202) (1,442,850)
Other income (expenses)
Interest expense (86,152) (74,543) (252,994) (224,960)
Interest income 8,087 7,597 25,748 74,823
-------------------------------------------------------------------------------------------------------------------
Total other income (expense) (78,065) (66,946) (227,246) (150,137)
-------------------------------------------------------------------------------------------------------------------
Net loss $ (308,358) $ (358,637) $ (299,448) $(1,592,987)
-------------------------------------------------------------------------------------------------------------------
Basic loss per common share $ (0.18) $ (0.22) $ (0.17) $ (0.97)
-------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Commonwealth Biotechnologies, Inc.
Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------------
Nine Months Ended
---------------------------------------------
September 30, 2000 September 30, 1999
--------------------- --------------------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $(299,448) $(1,592,987)
Adjustments to reconcile net income (loss) to net cash used
in operating activities
Depreciation and amortization 449,784 405,732
Changes in:
Accounts receivable (317,888) (220,526)
Prepaid expenses and inventory (64,410) (81,272)
Accounts payable and accrued expenses (82,926) (238,823)
Deferred revenue 74,035 (59,681)
----------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (240,853) (1,787,557)
----------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of property, plant and equipment (210,466) (271,618)
----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (210,466) (271,618)
----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from issuance of common stock 2,987,528 63,078
Principal payments on demand note payable (415,532) (40,000)
Restricted cash (16,560) (9,540)
----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,555,436 13,538
----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,104,117 (2,045,637)
Cash and cash equivalents, beginning of period 31,630 2,091,586
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $2,135,747 $ 45,949
----------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Capital lease obligation $ 378,825 $ -
Cash payments for interest 226,865 220,241
----------------------------------------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
4
<PAGE>
Commonwealth Biotechnologies, Inc.
Notes To Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited financial statements (except for the balance sheet at
December 31,1999, which is derived from audited financial statements) have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and Regulation S-B. Accordingly, they do not include all
of the information required by generally accepted accounting principles for
complete financial statements. In the opinion of the Company, all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
financial position and the results of operations for the periods presented have
been included. The results of operations for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
Note 2. Earnings (Loss) Per Share
The Company follows the guidance provided in SFAS 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
only basic per share amounts. Diluted per share amounts assume the conversion,
exercise or issuance of all potential common stock instruments such as warrants
and convertible securities, unless the effect is to reduce a loss or increase
earnings per share. At September 30, 2000, the Company had stock options and
warrants outstanding that were anti-dilutive since the Company incurred a net
loss for all periods presented.
Note 3. Proposed Business Acquisition
On May 30, 2000, the Company signed a letter of intent to acquire the drug
development business of SRA Life Sciences, Inc. (SRA). On October 2, 2000, the
Company announced that it has withdrawn its offer to acquire SRA.
Note 4. Sale of Common Stock
On September 27, 2000, the Company completed a private placement of 348,000
shares of common stock at a purchase price of $7.471 per share and warrants
to purchase an additional 348,000 shares of common stock. The warrants are
divided into two equal portions with one half having the right to purchase one
share of common stock at a price of $6.50 per share for a period of eighteen
months, and the other half having the right to purchase one share of common
stock at a purchase price of $6.50 per share for a period of five years. The
purchase agreement requires the Company to use its best efforts to prepare and
file with the Securities and Exchange Commission as soon as practicable a
registration statement under the Securities Act with respect to the resale of
these securities. Net proceeds to the Company from this private placement
amounted to $2,384,803 and are to be used to pay off the line of credit and for
general working capital needs. The purchaser of the common stock and warrants
is a significant stockholder of the Company and is the lender on the line of
credit to be paid off by the proceeds.
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 Company's Financial
Statements and Notes included herein.
Business Considerations
In October 1997, the Company closed its initial public offering (IPO) and
received net proceeds of $5,417,578, net of underwriting and other costs. In
connection with the IPO, the underwriters purchased warrants for 101,500 shares
of common stock. The warrants are exercisable for a period of five years at an
exercise price of $9.90 per share.
Since 1997 and through 1999, the Company incurred recurring operating losses due
to increased operating costs without corresponding increases in revenues.
Through 1999, these deficits were substantially funded through use of funds
obtained from the private placement and IPO. The Company has also used proceeds
from its offerings for capital acquisitions, which were primarily funded through
its issuance of Industrial Revenue Development Bonds. At December 31, 1999, the
Company had used virtually all of the funds received in connection with its
offerings and is currently relying on operations for future cash flows.
Management believes that the Company will be able to overcome the 1999 working
capital deficit and generate positive net cash flows. The following highlights
describe significant factors that have occurred in the third quarter of 2000
with respect to continued operations:
o On September 27, 2000, the Company completed a private placement of
common stock and warrants to purchase common stock and received net
proceeds of $2,384,803 (see notes to financial statements). The proceeds
are to be used to pay off the line of credit and for general working
capital needs.
o In the fourth quarter of 1999, the Company was awarded a five-year
subcontract valued at $8.5 million with the Illinois Institute of
Technology Research Institute. During the third quarter of 2000, the
second year of this contract was awarded to the Company and is expected
to provide revenues of approximately $1.5 million. This revenue will be
recognized during the fourth quarter of 2000 and the first
three-quarters of 2001.
o At September 30,2000, the Company has approximately twenty-four
contracts out for bid with various potential customers. These contracts,
if awarded, would provide the Company with approximately $3.8 million to
$6.5 million in revenues over the next two to three years.
. o Management continues to monitor and reduce operating costs.
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
6
<PAGE>
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 revenues have been earned under short-term projects. However, the
Company views long-term projects as the more important source of revenue, and
has continued to focus its efforts on identifying long-term customers. Long-term
projects generally range from a few months to more than a year. Revenues are
generally recognized as services are rendered or as products are delivered. In
addition, revenue is also recognized with performance-based installments payable
over the contract duration as milestones are achieved.
The Company also derives revenues from government grants that partially fund the
Company's research efforts for its proprietary technologies. All government
grants are expense reimbursement grants which provide for reimbursement on a
monthly basis of the Company's direct costs incurred in a research project, plus
indirect costs stated as a percentage of direct costs.
The Company realized a loss from operations for the three months and nine
months ended September 30, 2000 of $308,358 and $299,448, respectively. These
results are consistent with the Company's business plan for 2000. The nine
month results for 2000 is improved over the loss in the same period in 1999 of
$1,592,987 due to an increase of $1,413,342 in revenues from long-term
contracts. This improvement reflects managements continuing efforts to identify
and obtain long-term contracts.
Results of Operations
Three Months Ended September 30, 2000 Compared with Three Months Ended September
30, 1999.
Revenues
The Company experiences 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 in 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 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.
Gross revenues increased by $177,824 or 21.6% from $821,809 during the third
quarter of 1999 ("the 1999 Quarter") to $999,633 during the third quarter of
2000 ("the 2000 Quarter").
Revenues realized from short-term projects increased $97,609 or 34.1% from
$286,364 during the 1999 Quarter to $383,973 during the 2000 Quarter. Even with
management's decision to focus on long-term projects, the Company stills views
short-term work as a potential revenue source. Historically, net revenues have
been earned under short-term projects, however, the Company views long-term
7
<PAGE>
projects as the more important source of revenue, (as mentioned below) and has
continued to focus its efforts on identifying long-term customers.
Revenues realized from various long-term projects increased by $83,374 or 16.4%,
from $509,122 during the 1999 Quarter to $592,496 during the 2000 Quarter. This
increase is primarily due to work being done on nineteen individual projects
compared to fourteen projects in progress during the 1999 Quarter. Of the
$592,496 in long-term contracts, one major client represents 37.2% of the
revenue earned during the quarter. This project was awarded from the Illinois
Institute of Technology Research Institute (see "Business Considerations")
During the third quarter of 2000, the second year of this contract was awarded
to the Company and is expected to provide revenues of approximately $1.5
million. This revenue will be recognized during the fourth quarter of 2000 and
the first three-quarters of 2001. The Company's management continues to take an
active role in negotiating new contracts.
The Company experienced a modest increase in revenue realized from government
grants in the amount of $2,291, or 12.8%, from $17,863 during the 1999 Quarter
to $20,154 during the 2000 Quarter. Despite this small increase in revenues from
government grants, such revenues are declining as all outstanding grants will
be completed in the fourth quarter 2000.
The Company experienced a decrease in revenue realized from AccuTrac in the
amount of $5,450, or 64.4%, from $8,460 during the 1999 Quarter to $3,010 during
the 2000 Quarter. This decrease is primarily due to purchases in 1999 after the
initiation of the product into the market which has not continued in 2000.
Expenses
Cost of Services. Cost of services consists primarily of labor, laboratory
supplies and miscellaneous indirect costs. The cost of services increased by
$110,646, or 20.9%, from $530,098 during the 1999 Quarter to $640,744 during
2000 Quarter. The cost of services as a percentage of revenue was 64.1% and
64.5% during 2000 and 1999, respectively.
Labor costs increased by $167,542, or 88.7%, from $188,957 during the 1999
Quarter to $356,499 during the 2000 Quarter. This increase reflects a
reallocation of the Company's resources to the general operations of the
business from the research and development and General and Administrative areas.
This reallocation is necessary to support the additional long-term projects
currently in progress. The costs for direct materials decreased by $92,423, or
30.2%, from $306,301 during the 1999 Quarter, to $213,878 during the 2000
Quarter. These decreased costs are directly attributable to the winding down of
year 1 of the Illinois Institute of Technology Research Institute project. This
project during the quarter was more labor intensive and less dependant on
materials. Other costs increased by $35,526, or 102.1%, from $34,840 during the
1999 Quarter to $70,366 during the 2000 Quarter. This increase in costs is due
to additional postage, repair of general equipment and lease expenditures on
equipment.
Sales, 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 $67,842, or
13.8%, from $490,699 during the 1999 Quarter to $558,541 during 2000 Quarter. As
a percentage of revenue, these costs were 55.8% and 59.7% during 2000 and 1999,
respectively.
8
<PAGE>
Total Compensation and Benefits decreased by $10,323 or 6.9% from $150,050
during the 1999 Quarter to $139,727 during the 2000 Quarter. This decrease is
primarily attributable to the reallocation of personnel in the administrative
area to work on the subcontract from the Illinois Institute of Technology
Research Institute.
Facility costs increased by $16,005 or 40.0% from $39,989 during the 1999
Quarter to $55,994 during the 2000 quarter. This increase is primarily due to
higher expenditures related to utility costs during the quarter.
Professional fees increased by $48,849, or 98.2%, from $49,722 during the 1999
Quarter to $98,571 during the 2000 Quarter. This increase is primarily due to
the additional expenditures associated with management's proposed acquisition of
SRA Life Sciences, Inc. and production costs associated with the annual report.
As discussed in note 3 of the notes to the financial statements, management
decided in the third quarter to not acquire SRA.
Taxes increased by $7,044, or 34.4%, from $20,463 during the 1999 Quarter to
$27,507 during the 2000 Quarter. This increase is primarily due to the
revaluation of real estate taxes on the company's facility.
Marketing costs decreased by $11,841 or 29.8%, from $39,745 during the 1999
Quarter to $27,904 during the 2000 Quarter. Reductions in advertising, public
relations and payments for consulting services contributed to the decrease in
marketing costs.
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 by those
performed in support of government grant-sponsored programs, and those performed
in the absence of such grants which are funded from working capital. Total
expenditures for these two categories decreased by $62,062, or 66.9%, from
$92,703 during the 1999 Quarter to $30,641 during the 2000 Quarter. Total grant-
related research and in-house research as a percentage of revenue were 3.1% and
11.3% during 2000 and 1999, respectively.
Expenditures to perform grant-related research activities decreased by $41,253
or 87.8%, from $46,973 during the 1999 Quarter to $5,720 during the 2000
Quarter. This decrease is primarily due to the elimination of two of the three
grants. The Company anticipates completion of the remaining project by November
2000.
Expenditures made by the Company for in-house research activities decreased by
$20,808 or 45.4%, from $45,730 during the 1999 Quarter to $24,922 during the
2000 Quarter. This decrease is primarily attributable to the reallocation of
personnel in the research and development area to work on the subcontract from
the Illinois Institute of Technology Research Institute.
Other Income (Expenses)
Interest income to the Company remained relatively flat showing a modest
increase of $490 or 6.4% from $7,597 during the 1999 Quarter to $8,087 during
9
<PAGE>
the 2000 Quarter. Interest income is 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 is also derived from overnight investments.
Interest costs incurred by the Company during the 1999 and 2000 Quarter's
included (1) interest paid to financial institutions for 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.
Interest expense increased by $11,609 or 15.6% from $74,543 during the 1999
Quarter to $86,152 during the 2000 Quarter.
Results of Operations
Nine Months Ended September 30, 2000 Compared with Nine Months Ended September
30, 1999.
Revenues
Gross revenues increased by $1,464,014 or 79.3% from $1,846,745 for the nine
months ended September 30, 1999 ("the 1999 Period") to $3,310,759 for the nine
months ended September 30, 2000. ("the 2000 Period").
Revenues realized from short-term projects increased by $158,558, or 22.1%
from $718,958 during the 1999 Period to $877,516 during the 2000 Period. This
increase is primarily due to the startup of Paternity testing. Revenues realized
from this activity have amounted to $181,159 during the 2000 period compared to
$8,550 in the 1999 Period. Historically, a majority of the Company's net
revenues have been earned under short-term projects. However, the Company stills
views long-term projects as the more important source of revenue, (as mentioned
below) and has continued to focus its efforts on identifying long-term
customers.
Revenues realized from various long-term projects increased by $1,413,342 or
152.3%, from $928,263 during the 1999 Period to $2,341,605 during the 2000
Period. Of the total revenue in long-term contracts, one major client represents
50.5% of the revenue earned during the period. This project was awarded from the
Illinois Institute of Technology Research Institute (see "Business
Considerations"). This five-year subcontract provided approximately $1.1
million in gross cash flow during this fiscal year. During the third quarter of
2000, the second year of this contract was awarded to the Company and is
expected to provide revenues of $1.5 million. This revenue will be recognized
during the fourth quarter of 2000 and the first three-quarters of 2001. At
September 30,2000, the Company has approximately twenty-four contracts out for
bid with various potential customers. These contracts, if awarded, would provide
the Company with approximately $3.8 million to $6.5 million in revenues over the
next two to three years.
The Company experienced a decrease in revenue realized from government grants in
the amount of $77,426, or 48.3%, from $160,264 during the 1999 Period to $82,838
during the 2000 Period. This decrease is primarily due to the elimination of two
of the three grants. The Company anticipates completion of the remaining project
by November 2000.
10
<PAGE>
The Company experienced a decrease in revenue realized from AccuTrac in the
amount of $30,460, or 77.6%, from $39,260 during the 1999 Period to $8,800
during the 2000 Period. This decrease is primarily due to purchases in 1999
after the initiation of the product into the market which was not continued in
2000.
Expenses
Cost of Services. Cost of services consists primarily of labor, laboratory
supplies and miscellaneous indirect costs. The cost of services increased by
$595,994, or 49.3%, from $1,208,354 during the 1999 Period to $1,804,348 during
2000 Period. The cost of services as a percentage of revenue was 54.5% and
65.4% during 2000 and 1999, respectively.
Labor costs increased by $454,446, or 84.2%, from $539,995 during the 1999
Period to $994,441 during the 2000 Period. This increase reflects a reallocation
of the Company's resources to the general operations of the business from the
research and development and General and Administrative areas. This reallocation
is necessary to support the additional long-term projects currently in progress.
The costs for direct materials increased by $83,474, or 14.2%, from $589,656
during the 1999 Period, to $673,130 during the 2000 Period. These increased
costs are directly attributable to the increase in revenues. Other costs
increased by $58,024, or 73.7%, from $78,753 during the 1999 Period to $136,777
during the 2000 Period. This increase in costs is due to increases in additional
postage, maintenance and repairs of equipment and lease expenditures on
equipment.
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 decreased by $295,229, or
17.0%, from $1,741,432 during the 1999 Period to $1,446,203 during 2000 Period.
As a percentage of revenue, these costs were 43.7% and 94.3% during 2000 and
1999, respectively.
Total Compensation and Benefits decreased by $229,623 or 45.4% from $505,705
during the 1999 Period to $276,082 during the 2000 Period. This decrease is
primarily attributable to the reallocation of personnel in the administrative
area to work on the subcontract from the Illinois Institute of Technology
Research Institute.
Professional fees increased by $72,838, or 40.8%, from $178,633 during the 1999
Period to $251,471 during the 2000 Period. This increase is primarily due to the
additional expenditures associated with management's proposed acquisition of SRA
Life Sciences, Inc. and production costs associated with the annual report. As
discussed in note 3 of the notes to the financial statements, management decided
in the third quarter to not acquire SRA.
Taxes increased by $13,378, or 21.6%, from $62,014 during the 1999 Period to
$75,392 during the 2000 Period. This increase is primarily due to the
revaluation of real estate taxes on the Company's facility.
Depreciation increased by $26,179, or 6.6%, from $397,652 during the 1999 Period
to $423,831 during the 2000 Period. This increase is primarily due to the
purchases of new equipment during the period.
11
<PAGE>
Office expenses increased by $21,580, or 28.5%, from $75,736 during the 1999
Period to $97,316 during the 2000 Period. This increase is primarily due to
additional supplies needed to support the operations of the Company.
Marketing costs decreased by $168,527 or 71.4%, from $236,157 during the 1999
Period to $67,630 during the 2000 Period. Reductions in advertising, public
relations and payments for consulting services contributed to the decrease in
marketing costs.
Sales costs decreased by $34,447 or 56.6%, from $60,815 during the 1999 Period
to $26,368 during the 2000 Period. Reorganization of the sales department
contributed to the decrease in costs.
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 by those
performed in support of government grant-sponsored programs, and those performed
in the absence of such grants which are funded from working capital. Total
expenditures for these two categories decreased by $207,399, or 61.0%, from
$339,809 during the 1999 Period to $132,410 during the 2000 Period. Total grant-
related research and in-house research as a percentage of revenue were 4.0% and
18.4% during 2000 and 1999, respectively.
Expenditures to perform grant-related research activities decreased by $112,669
or 64.9%, from $173,656 during the 1999 Period to $60,987 during the 2000
Period. This decrease is primarily due to the elimination of two of the three
grants. The Company anticipates completion of the remaining project by November
2000.
Expenditures made by the Company for in-house research activities decreased by
$94,730 or 57.0%, from $166,153 during the 1999 Period to $71,423 during the
2000 Period. This decrease is primarily attributable to the reallocation of
personnel in the research and development area to work on the subcontract from
the Illinois Institute of Technology Research Institute.
Other Income (Expenses)
Interest income to the Company decreased by $49,075, or 65.6% from $74,823
during the 1999 Period to $25,748 during the 2000 Period. Interest income has
been 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 on this segment
decreased due to the reduction in funds used for the completion of the project.
Other income decreased primarily due to the termination of funding from the
Virginia Business Assistance Program (Workforce Services) for the training of
new employees.
Interest costs incurred by the Company during the 1999 and 2000 Period's
included (1) interest paid to financial institutions for loans made to the
12
<PAGE>
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.
Interest expense increased by $28,034 or 12.5% from $224,960 during the 1999
Period to $252,994 during the 2000 Period.
Liquidity and Capital Resources
The 2000 Period reflected a decrease in cash of $240,853 from operating
activities, as compared to a decrease of $1,787,557 from operating activities
during the 1999 Period. The significant cash outflow for 1999 was primarily due
to substantial investments made by the Company in facility costs, personnel,
equipment, sales, and marketing efforts. The cost outlays in 1999 were made
possible by capital realized from the Company's private placement of convertible
notes and initial public offering of public stock.
Net working capital (deficit) as of September 30, 2000 and December 31, 1999 was
$2,300,952 and ($407,290) respectively. This increase is a direct result of
additional record revenues for the Company as well as significant cost cutting
measures adopted by management. In addition, on September 27, 2000, the Company
completed a private placement of common stock and warrants to purchase common
stock and received net proceeds of $2,384,803 (see notes to financial
statements). The proceeds are to pay off the line of credit and for general
working capital needs.
The Company continues to search for long-term projects as the more important
source of revenue and has continued to focus its efforts on identifying long-
term customers. Long-term projects generally range from a few months to more
than a year. In the fourth quarter of 1999, the Company was awarded a five-year
subcontract with the Illinois Institute of Technology Research Institute. The
contract is valued at approximately $8.5 million and has provided approximately
$1.1 million in gross cash flow for the 2000 Period. During the third quarter
of 2000, the second year of this contract was awarded to the Company and is
expected to provide revenues of approximately $1.5 million. This revenue will be
recognized during the fourth quarter of 2000 and the first three-quarters in
2001.
At September 30,2000, the Company has approximately twenty-four contracts out
for bid with various potential customers. These contracts, if awarded, would
provide the Company with approximately $3.8 million to $6.5 million in revenues
over the next two to three years.
Forward Looking Statements
Management has included herein certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. When used, statements
that are not historical in nature, including the words "anticipated",
"estimate", "should", "expect", "believe", "intend", and similar expressions are
intended to identify forward-looking statements. Such statements are, by their
nature, subject to certain risks and uncertainties.
Among the factors that could cause the actual results to differ materially from
those projected are the following:
o business conditions and the general economy,
o the development and implementation of the Company's long-term business
goals,
13
<PAGE>
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, and
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.
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
Not applicable.
Item 3. Defaults Upon Senior Securities
On September 27, 2000, the Company completed a private placement of
348,000 shares of common stock at a purchase price of $7.471 per share and
warrants to purchase an additional 348,000 shares of common stock. The
warrants are divided into two equal portions with one half having the
right to purchase one share of common stock at a price of $6.50 per share
for a period of eighteen months, and the other half having the right to
purchase one share of common stock at a purchase price of $6.50 per share
for a period of five years.
This transaction was exempt from federal securities registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
14
<PAGE>
<TABLE>
<CAPTION>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit Number Description of Exhibit
<S> <C>
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Underwriter's Warrant, as amended (1)
4.3 Form of Management Warrant, as amended (1)
4.4 Indenture of Trust by and between the Virginia Small Business
Financing Authority and Crestar Bank relating to the issuance
of industrial revenue bonds for the benefit of the Company (2)
10.1 Placement Agreement by and between the Company and Anderson &
Strudwick, Incorporated (1)
10.2 Warrant Agreement between the Company and Anderson & Strudwick,
Incorporated (1)
10.3 Warrant Agreement between the Company and Richard J. Freer, as
amended (1)
10.4 Warrant Agreement between the Company and Thomas R. Reynolds,
as amended (1)
10.5 Warrant Agreement between the Company and Robert B. Harris, as
amended (1)
10.6 Employment Agreement for Richard J. Freer (1)
10.7 Employment Agreement for Thomas R. Reynolds (1)
10.8 Employment Agreement for Robert B. Harris (1)
10.9 Executive Severance Agreement for Richard J. Freer (1)
10.10 Executive Severance Agreement for Thomas R. Reynolds (1)
10.11 Executive Severance Agreement for Robert B. Harris (1)
10.12 1997 Stock Incentive Plan, as amended (1)
10.13 Form of Incentive Stock Option Agreement (1)
10.14 Loan Agreement by and between the Virginia Small Business
Financing Authority and the Company (2)
27.1 Financial Data Schedule (3)
</TABLE>
-----------------------
(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. On September 27, 2000, a report on Form 8-K was
filed in reference to the completion of the $2.6 million private placement of
common stock and warrants to purchase common stock.
15
<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 and Principal Accounting Officer
November 14, 2000
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
<S> <C>
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Underwriter's Warrant, as amended (1)
4.3 Form of Management Warrant, as amended (1)
4.4 Indenture of Trust by and between the Virginia Small Business
Financing Authority and Crestar Bank relating to the issuance
of industrial revenue bonds for the benefit of the Company (2)
10.1 Placement Agreement by and between the Company and Anderson &
Strudwick, Incorporated (1)
10.2 Warrant Agreement between the Company and Anderson & Strudwick,
Incorporated (1)
10.3 Warrant Agreement between the Company and Richard J. Freer, as
amended (1)
10.4 Warrant Agreement between the Company and Thomas R. Reynolds,
as amended (1)
10.5 Warrant Agreement between the Company and Robert B. Harris, as
amended (1)
10.6 Employment Agreement for Richard J. Freer (1)
10.7 Employment Agreement for Thomas R. Reynolds (1)
10.8 Employment Agreement for Robert B. Harris (1)
10.9 Executive Severance Agreement for Richard J. Freer (1)
10.10 Executive Severance Agreement for Thomas R. Reynolds (1)
10.11 Executive Severance Agreement for Robert B. Harris (1)
10.12 1997 Stock Incentive Plan, as amended (1)
10.13 Form of Incentive Stock Option Agreement (1)
10.14 Loan Agreement by and between the Virginia Small Business
Financing Authority and the Company (2)
27.1 Financial Data Schedule (3)
</TABLE>
------------------
(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.
