<PAGE>
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, 1999
[ ] 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 to Securities registered pursuant to
Section 12(b) of the Act: Section 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 ___
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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, 1999 were
$2,565,132.
The aggregate market value of the shares of common stock, without par
value ("Common Stock"), of the registrant held by non-affiliates on March 24,
2000 was approximately $13,743,445, based upon the closing sales price of these
shares of $12.875 per share, as reported on the Nasdaq SmallCap Market on March
24, 2000. As of March 24, 2000 there were 1,728,164 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 27, 2000 are incorporated by
reference into Part III of this Form 10-KSB.
Portions of the registrant's 1999 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
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Item 1. Description of Business
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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 solely 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
(AccuTrac/TM/) 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 research and development 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
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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 Web site, and by
word-of-mouth recommendations. The Company has decreased its print-ad
marketing but has worked its emphasis on Internet marketing. In March,
1999, the Company hired an Account Executive for the Western Region who
serves clients in California. This individual is primarily targeting
biotechnology companies on the west coast of the United States. 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 is registered under the Clinical
---------------------
Laboratories Improvement Act (CLIA), with pending accreditation by the
American Association of Blood Banks. 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 a few commercial facilities
nationwide accredited by the NFSTC to perform criminal (felony) DNA
database testing for submission into the FBI CODIS database. All of the
Company's operations fall under GLP Good Laboratory Practices.
Expansion into New Service Technologies. The Company continues to
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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 2000, the Company expects to continue to
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. The Company has expanded its
contract DNA sequencing services and offers sophisticated
sequence data analysis.
Genetic Analysis. The Company has established a Genetic
Testing Group and has begun testing of human samples for the
presence of genetic markers of known human pathologies.
Currently, the Company performs upwards of 25 private
paternity cases per month, and expects to grow this revenue
stream significantly. The Company has placed a major marketing
focus on attracting new private paternity cases. This includes
saturation marketing in the yellow page listings of
neighboring metropolitan areas and increased exposure on the
Internet, including a separate "paternity" Web site. The
Company has printed paternity brochures and has distributed
them to regional practice law firms. The Company has signed
two different agreements to perform paternity tests for
private cases from Japan and Korea.
The Company is also ready to begin analysis of samples for the
presence of many other marker genes. The Company will continue
to focus new marketing efforts on its capabilities in this
area, and is striving to make Genetic Analysis a larger
revenue producing technology for the Company.
Identity Testing and Paternity Testing by Genetic Analysis.
In its 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 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.
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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, management has made a concerted effort to identify
clients that contract with the Company to pursue comprehensive
molecular biology projects.
Genomics. The Company recognized early that genomics was to
become a critical component of understanding all life
processes. The Company established a sophisticated genomics
program over the course of last year. The Company has expanded
its repertoire of genome analysis capabilities and is now
offering Taqman/TM/ real time PCR analysis for genome studies.
In addition to this new technology platform, the Molecular
Biology group at the Company has perfected new cloning methods
which speed up the process of genome sequence determination.
The Company's TaqmanTM capabilities will soon be highlighted
on its Web site.
Centralized Computer Facilities. The Company has acquired a
more centralized server for databasing and analysis, and has
established a sophisticated company-wide intranet in its new
facility. New software packages have been installed to upgrade
its accounting capabilities, and to permit more efficient data
handling, storage, backup, and analysis and data.
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.
Expanded Mass Spectral Analysis Services. The Company has
installed and now operates a MALDI-TOF mass spectrometer and
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.
Bio Organic Chemistry. In the last year, the Company
contracted to perform complex chemical synthesis of analogs of
natural products. These compounds are being viewed as
potential human pharmaceuticals. Chemical synthesis represents
a new growth area for the Company and, as demand warrants, its
staff will increase in this area.
Analytical Support Services
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 that can perform these
analytical services. Instead, they choose to contract with the Company for these
services.
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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, 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 that 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 Web site. A 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
The Company's customers are private companies, academic institutions
and government agencies throughout the world. Virtually all clients are engaged
in life sciences research, and use the Company's technologies to provide data
and results that support their individual research programs. As of December
1999, the Company's client lists exceeded 1,000 customers world-wide.
On average, in 1999, the Company added nearly 25 new customers per
month. The Company initiated nearly 90 work orders per month. Of its domestic
customers, 60% are private companies, and 40% are university or governmental
labs. The Company added 58 new foreign clients in 1999, 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 are derived from many sources. The Company
advertises in the professional journals, exhibits at trade shows, and has its
own Web site from which a potential customers may directly download order forms
and place an order, if desired. The Company recieves about 200 inquires per
month for its services from the Internet. The Company is also cross-listed on
several biotechnology, biochemistry, and molecular biology search services, so
that potential customers may find the Company using simple key word search
terms. In addition, favorable word-of-mouth advertising is key to the Company's
success, and has brought the Company many new investigators within a single
research based institution.
CBI is committed to identifying long-term contractual clients. 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.
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Operations
Requests for quotes from potential customers are received via phone,
e-mail, from the Company's Web site, or by hard copy directed to the Company's
business coordinator or laboratory manager. All inquiries are answered by direct
mailing of the Company's brochure and price lists, with follow up phone calls,
where appropriate. Price quotes for small projects on routine analytical
procedures are generated by scientists that possess the expertise necessary to
respond. 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 straightforward, 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 that 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 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.
Intellectual Property
HepArrest/TM/
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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.
National patents on this technology have also been filed and are pending in
Europe, Japan, and Canada.
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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 the compound were to receive
approval from the Food and Drug Administration as a human pharmaceutical.
Mattson Jack determined that there may 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
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, Mattson Jack Group has compiled a qualified list of
potential licensing partners whose own corporate strengths match the needs of
the Company.
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/
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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 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.
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 expects 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 researching alternative applications of HepArrest/TM/,
outside the area of cardiovascular surgery. As work progresses, the Company will
seek patent protection for such applications.
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
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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 believes that it 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 Web site
(www.cbi-biotech.com) and is listed with several bio-technical and biomedical
oriented sites on the Internet.
Human Resources
The Company currently has 33 full time employees, including 8 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. Ten of the Company's employees hold
doctorate 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 in the Company's
industry are pricing, expertise, and range of services offered, and the Company
believes that it competes effectively on all of these factors.
Government Regulation
The Company does not require government regulatory approvals to provide
its current services. Numerous federal, state and local agencies, such as
environmental, working condition and other similar regulators, have jurisdiction
to take action that could have a material adverse effect upon the Company's
ability to do business. The Company believes that it is in general compliance
with existing federal, state and local laws and regulations and does not
anticipate that 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.
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The commercialization of the Company's proprietary technologies will 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 expects to license these technologies to third parties having the
necessary facilities and expertise, which would assume responsibility for and
control of regulatory matters.
Item 2. Description of Property
-----------------------
Facilities
Construction of the Company's 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 which issued $4,000,000 in tax
exempt Industrial Revenue Bonds 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 develop.
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
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No matter was submitted to a vote of security holders during the fourth
quarter of 1999.
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PART II
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Item 5. Market for Common Equity and Related Stockholder Matters.
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Market Information
The Company's common stock is traded on the Nasdaq SmallCap Market
under the symbol "CBTE." The following table sets forth the high and low sales
prices for the Company's common stock for the indicated periods during 1998 and
1999, as reported on the Nasdaq SmallCap Market. The Company completed its
initial public offering in October 1997 at a price of $6.00 per share. On March
24, 2000, the closing price of the Company's common stock, as reported by the
Nasdaq SmallCap Market was 12.875 per share. As of March 15, 2000, there were 41
holders of record of the common stock.
<TABLE>
<CAPTION>
1998 High Sales Price Per Share ($) Low Sales Price Per Share ($)
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<S> <C> <C>
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First Quarter 10.50 7.50
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Second Quarter 11.25 9.00
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Third Quarter 10.75 5.625
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Fourth Quarter 9.875 5.5
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1999
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First Quarter 9.25 7.875
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Second Quarter 9.00 6.438
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Third Quarter 6.563 4.188
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Fourth Quarter 10.250 4.750
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</TABLE>
The Company has never paid cash dividends on its capital stock. The
Company currently intends to retain earnings, if any, for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
-------------
The information set forth on pages 7 through 17 of the Company's 1999
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 18
through 27 of the Company's 1999 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 the firm McGladrey & Pullen, LLP as independent public accountants to audit
the Company's consolidated financial statements.
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PART III
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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 27, 2000 (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.
11
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Item 13. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
<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)
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, 1999
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)
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.
</TABLE>
12
<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, 1999, the Company did not
file any Current Reports on Form 8-K.
13
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMMONWEALTH BIOTECHNOLOGIES, INC.
Date: March 30, 2000 By: /s/ Robert B. Harris, Ph.D.
---------------------------
Robert B. Harris, Ph.D
President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Title(s) Date
---- -------- ----
<S> <C> <C>
/s/ Richard J. Freer, Ph.D. Chairman and Director (Principal March 30, 2000
- --------------------------- Executive Officer)
Richard J. Freer, Ph.D.
/s/ Robert B. Harris, Ph.D. President and Director March 30, 2000
- ---------------------------
Robert B. Harris, Ph.D.
/s/ Thomas R. Reynolds, Senior Vice President, Secretary and March 30, 2000
- ------------------------ Director
Thomas R. Reynolds,
s/ James H. Brennan, Controller (Principal Financial and March 30, 2000
- --------------------- Accounting Officer)
James H. Brennan
/s/ Peter C. Einselen Director March 30, 2000
- ---------------------
Peter C. Einselen
/s/ George F. Allen Director March 30, 2000
- -------------------
George F. Allen
/s/ Dr. Raymond H. Cypess Director March 30, 2000
- -------------------------
Dr. Raymond H. Cypess
</TABLE>
14
<PAGE>
To the Shareholders of
Commonwealth Biotechnologies, Inc.
CBI was founded with a single employee working in one laboratory.
Today, CBI has a staff of 37, including ten doctoral scientists. Our
client base has grown to over 1,000 investigators. We invite you to
scan the names on the inside covers of this report. You'll find our
clients are private companies, academic institutions and government
agencies from across the globe.
1999 was a year of financial challenge for CBI, but we are moving
forward into 2000 confident of our mission and excited by our
prospects.
1999 was also our third year of operations as a public
company and marked the first full year of operations in our new
facility in Richmond, Virginia. The building not only consolidated
all our operations under one roof, it also allowed us to efficiently
integrate our technologies, saving both time and money. Here's an
example. Last year, we completed three comprehensive projects for
one client in less than four months' time. The revenues realized
were about $440,000, and it would not have been possible to
do these projects if we had not been in our new facility.
Further, this particular client designated CBI a selected vendor as a
consequence of our efficiency and the quality of the work we
delivered. To our mutual satisfaction, CBI has been chosen to perform
several projects of similar magnitude for this same client during the
course of 2000.
[GRAPHIC]
1
<PAGE>
1999 Highlights
In 1999, CBI teamed with the Illinois Institute of Technology Research Institute
(IITRI) to pursue federally funded research projects. In August, IITRI notified
us that our joint application for proprietary protocol development work had been
funded. According to IITRI:
"...allocating money (to CBI) was not a decision made lightly. First off,
(CBI) has the science down cold. We looked around and ... they're like
night and day compared to other companies." (Richmond Times Dispatch,
September 1999)
Initially, this was a five-year contract award for $6 million in total. The
funding agency recently increased the contract valuation by nearly 40% over the
first 12 months, or by an additional $1.5 million (PR News Wire, December 1999;
Richmond Times Dispatch, December 1999). Consequently, over the entire five-
year period, the IITRI contract is now valued at about $8.5 million, allowing
for even modest increments in contract valuation with each award year. The
contract amount was increased because IITRI and the funding agency both
recognize CBI's expertise and capabilities. This is a unique opportunity for
CBI. To successfully complete the work, we will involve just about every
employee, and will utilize virtually every technology at CBI.
There were many other highlights in 1999:
March CBI was issued the United States patent for HepArrest(TM), our lead
human pharmaceutical product. Other patents protecting this property will
likely be issued in 2000. Since March, we have been actively engaged in
negotiations with potential Big Pharma licensing partners for further
development of HepArrest(TM). A successful partnership with a Big Pharma
partner will lead to commercialization of the product. It will also bring
licensing fees and royalty payments to CBI (if HepArrest(TM) succeeds in
clinical trials and meets compliance regulations). Royalties to CBI will
provide a sustained high level of revenues in future years.
[GRAPHIC]
April CBI was named a finalist in the Breakthrough Technologies category of
the Greater Richmond Technology Council.
May CBI announced that it was ready to begin paternity testing based on its
ability to rapidly and efficiently perform DNA sequence analysis (Inside
Business, May 1999). From a modest start of one or two analyses per month, we
now process more than 30 samples monthly, and our sample stream has been growing
at a rapid rate. We recently negotiated contracts to perform paternity tests for
clients in the Pacific Rim, notably in Korea and Japan. We anticipate
accreditation by the American Association of Blood Banks in 2000, which will
allow us to compete more effectively for public money contracts to perform
paternity testing. Because of our concerted marketing efforts in this area, CBI
now routinely receives upwards of 100 inquiries per month for paternity testing.
May We held a dedication ceremony at the new CBI facility. We announced that
Dr. Ray Cypess, President and CEO of the American Type Culture Collection in
Manassas, Virginia, had been appointed to our Board of Directors. Dr. Cypess
served as the keynote speaker at the ceremony. Dr. Cypess is an internationally
recognized scientist and a major supporter of biotechnology in Virginia. We are
pleased to have his input in shaping the future of CBI.
July CBI was awarded the "Virginia Technology Fast 50" honor by Deloitte and
Touche LLP of Richmond. In other recognition, Virginia Business July 1999 named
CBI to its "Sweet 16" of best performing IPO stocks in Virginia.
September CBI was recognized for its outstanding scientific achievement as an
awardee of a "Phase II Small Business Innovative Research" award from the United
States Department of Agriculture.
2
<PAGE>
September CBI announced a second teaming agreement with Schwartz Electro
Optics, Inc., a major defense contractor (Inside Business, September 1999).
Our goal is to developing a bio defense system that uses laser technology to
sample and analyze man-made clouds from a safe distance.
November CBI was featured in the Wall Street Transcript as an example of the
new "paradigm" for biotechnology start-up companies.
CBI's Foundation
The mainstay of CBI continues to be our platform technology business. We offer
custom synthetic, organic and bioorganic chemistries, spectroscopy services and
a full complement of protein, DNA/RNA and genetic identity and analysis testing
services. CBI has approximately 15 to 18 contracts out for bid with various
potential customers. If awarded, these contracts would provide revenues of
approximately $16 million to $18 million over the next two to three years. From
September through December 1999, CBI signed nine new contracts with a collective
valuation of nearly $2.6 million. These revenues will be realized throughout
2000. CBI's recruitment efforts have resulted in our hiring highly qualified
scientists, who in turn make these strong services and contracts possible. We
are excited by the international recognition these employees garner.
In the last year, CBI has begun to see the fruits of our efforts in redefining
our client base. We now present ourselves to prospective clients as a
"project-oriented" company, capable of moving any size project from conception
to practice. Our rapidly expanding track record in securing long-term contract
commitments is evidence of our success in this area.
Thanks for Your Support
CBI is ready for the new millennium, not only in terms of our compliance with
computer issues, but also in terms of our abilities to meet the new challenges
of science. To all our hard-working employees, we again owe our thanks and
gratitude. We also acknowledge the contributions of Mr. Charles Mills, who
resigned from our Board in 1999 to pursue other interests. To our current Board
of Directors, our CBI consultants, and our shareholders, we again say thanks.
With best regards,
[GRAPHIC] [GRAPHIC]
Richard J. Freer, Ph.D. Robert B. Harris, Ph.D.
Chairman of the Board President
[GRAPHIC] [GRAPHIC]
Thomas R. Reynolds James H. Brennan
Senior Vice President, Controller
Secretary
We invite your questions and inquires, and we look forward to seeing you at the
2000 Annual Meeting of Shareholders, which will be held at our new facility.
Phone: 800-735-9224
Fax: 804-648-2641
Email: [email protected] or
[email protected]
Web: www.cbi-biotech.com.
Address: 601 Biotech Drive
Richmond, VA 23235
3
<PAGE>
CBI's Business Style
Since 1992, CBI has provided sophisticated research and development services to
the biotechnology industry on a contract basis. We continue to pave the way for
the new model of biotechnology. Our success does not depend on commercializing
any single product. Rather, CBI combines the platform technology business of
life sciences contract research with extramural grant funds that are used to
develop our own intellectual properties.
Virtually all our clients are engaged in life sciences research. They use CBI's
technologies to generate data and results that support their individual research
programs. As of December 1999, the CBI client list exceeded 1000 investigators,
60% of which are in private companies. Our clients are located in 55 countries
around the world.
Our Core Focus - One Stop Services
CBI's primary focus continues to be state-of-the-art DNA/RNA and protein/peptide
technologies. Genome sequence determination is a growing core business for us.
CBI was recently awarded two contracts for total genome sequence determination
of different bacteria. Three additional contracts for genome sequencing projects
are pending with potential clients. These technologies are often combined with
sophisticated biophysical techniques, such as calorimetry, spectroscopy, and
mass spectral analysis so that CBI can provide "one stop-shopping" for
biotechnology services. All our technologies are fully detailed in our
promotional brochures and on our Web site. We are also now equipped with
fax-on-demand services for potential customers who want CBI's literature
(1-877-329-4224). The Internet is a major gateway for CBI product orders - more
than 50% of all orders, and more than 60% of all inquiries come to us from the
Internet.
CBI has focused on changing clientele to those who are engaged in project
research. In the past several years we watched prices and technologies change.
It became increasingly clear that it would be very difficult for CBI to sustain
our business if we had to rely on investigators who sent us individual samples
for analysis. It was simply not economically viable to grow CBI's business on
individual analyses orders or on individual limited DNA sequencing project
orders. Thus, we now present ourselves as a comprehensive project company. We
have made significant progress in negotiating and signing long-term contractual
clients who provide a base income to CBI.
Here are illustrations of that change in focus.
. As mentioned in the shareholder letter, last year we completed three
projects for one client in less than four months time. Contract value:
$440,000. This same client has selected CBI to perform several projects of
similar magnitude during the course of 2000.
. CBI was awarded a research contract from IITRI. Contract value: $8.5
million over the course of five years. This contract will bring about $1.5
million to CBI in 2000.
. At any given moment, CBI routinely has more than 15 contract proposals
pending with various clients. Contract value: in excess of $16 million. In
the period September through December 1999, CBI signed eight new contracts
with a collective valuation of nearly $1.1 million. These revenues will be
realized throughout the year 2000.
Technologies at CBI
Genomics
CBI recognized early that genomics would become a critical component of
understanding all life processes. The company established a sophisticated
genomics program over the course of 1999. We are the recipients of two contracts
for genomic sequence analysis of two microbes known to be involved in human
pathology. We expect to complete this work in 2002. Several additional proposals
to undertake new genome sequence analysis projects are pending.
[GRAPHIC]
CBI has expanded its repertoire of genome analysis capabilities and is now
offering Taqman(TM) real time PCR analysis for genome studies. In addition to
this new technology platform, the Molecular Biology group at CBI has perfected
new cloning methods that speed up the process of genome sequence determination.
Our Taqman(TM) capabilities will soon be highlighted on our web page. Together,
these new technologies allow us to become a significant player in the genomics
arena.
4
<PAGE>
Identity and Paternity Testing by Genetic Analysis
CBI has established a DNA Reference Laboratory containing all the necessary work
areas required to provide genetic identity and paternity testing. This
technology represents a major growth area for us. We currently process more than
30 paternity cases per month, and our sample queue continues to grow. We
recently signed a contract to perform paternity testing on samples received from
the Pacific Rim countries, notable Korea and Japan. CBI is aggressively pursuing
the private sector for paternity testing and has posted a paternity testing web
page. The site is cross-listed by keyword on several Internet search engines,
and is listed in the Yellow Pages(TM) under "Paternity Testing" in several major
metropolitan areas in the Middle Atlantic Region. CBI printed a Paternity
Testing brochure and distributed it to all members of the Association of Legal
Administrators in Virginia and the surrounding states.
CBI is also accredited to perform DNA identity testing for submission of data
into the F.B.I. Combined DNA Index System (CODIS) database. We are competing for
state contracts to perform CODIS test analysis of the penal population. In using
private companies like ours, states hope to clear their huge backlog of samples.
[GRAPHIC]
Genetic Analysis
CBI has established a Genetic Testing Group and has been registered under the
Clinical Laboratories Improvement Act (CLIA). This registration enables us to
accept human samples for analysis, as well as to perform analysis of human
clinical samples for the presence of known genetic markers. We have already
completed a contract for analysis of human tissue samples for the presence of
p53, a genetic marker for cancer.
Molecular Biology
CBI continues its focus on molecular biology project research. We have expanded
our services to include bacterial and eucaryotic cell over-expression of
recombinant proteins. Numerous major clients have engaged our services in this
area. Moving forward, we are exploring expanding our capacity for cell and
bacterial cultures to even higher volumes so that we can bid on larger projects.
Bioorganic Chemistry
In the last year, CBI was contracted to perform complex
chemical syntheses of analogs of natural products. These compounds are being
viewed as potential human pharmaceuticals. Chemical synthesis represents a new
growth area for CBI and, as demand warrants, our staff will be increased in this
area.
Other Technologies
In 1999, CBI was contracted to perform projects that integrated all aspects of
our technology base. For one client, we have successfully developed an
immunoassay for the presence of specific antibodies in human serum samples. Our
work has allowed this client to seek FDA filing for a new diagnostic kit for
early detection of cancer. For another client, we are isolating and
characterizing bioactive compounds from tissue sources that possess anti-viral
activity. For yet another client, we are isolating and characterizing bioactive
compounds from cell culture that are reported to mediate changes in human
metabolism. The list continues:
. We isolated plant DNA for determination of genomic sequence and performed
DNA library searches for gene discovery.
. We developed new techniques for preparation of DNA for genomic sequence
analysis.
. We isolated and determined the amino acid sequence of proteins associated
with bone growth.
CBI's reputation as a state-of-the-art provider of biotechnical services has
grown immensely during the past year. As a result, we count among our clients
most of the very large companies involved in life sciences research.
5
<PAGE>
Proprietary Research And Development
CBI is actively pursuing research and development programs to develop
proprietary products. United States patent #5,877,153 was issued to the Company
for one of these products, HepArrest(TM), and the continuation in part to this
patent has been filed in the United States, Canada, Japan, and Europe. CBI
anticipates that one or all of these continuations to our patent will issue in
2000.
HepArrest(TM)
HepArrest(TM) is intended for use in acute surgical situations where the
anticoagulant effects of heparin must be reversed. Restoration of clotting
function is critical post-surgery to prevent unwanted bleeding and related
post-operative complications. CBI's strategy for HepArrest(TM) is to complete
all pre-clinical trials and to present a viable technology to a licensing
partner. We are optimistic that this partnership will be created in 2000, and
that our partner will take HepArrest(TM) through the investigational new drug
(IND) process as well as the human trials necessary for approval from the FDA
and other regulatory agencies. To this end, CBI submitted confidential
information packages last year to Big Pharma companies whose product profiles
matched the likely market for HepArrest(TM). These companies each have a
financial basis suitable for development of a new human pharmaceutical. In the
latter part of the 1999, CBI entered into active negotiations to license
HepArrest(TM) with two of these companies. We hope to enter into a licensing
agreement with one of these Big Pharma companies in 2000.
HepArrest(TM) is patented in the United States and is recognized under the
Patent Cooperative Treaty (PCT). National patent filings for HepArrest(TM) are
pending in Europe, Canada, and Japan, the three largest potential markets for
HepArrest(TM) outside of the United States.
Depending on when the process is started, CBI anticipates that the product could
be launched as early as 2004 and could capture a significant portion of the
market shortly thereafter. Of course, this assumes that HepArrest(TM) will be
successful in clinical trials and that its use will be approved by various
regulatory agencies at home and abroad. The first indicated use of HepArrest(TM)
will be for coronary artery bypass graft (CABG) surgical procedures, where the
anticoagulant effects of heparin must be reversed. However, CABG procedures are
only one of the many potential clinical uses of HepArrest(TM). CBI's management
team and consultants are working closely with our potential partners to help
shape the best possible agreement for both parties.
At present, HepArrest(TM) has no other viable competitors. Even if a new product
were to be developed shortly, HepArrest(TM) is appreciably ahead in the
commercialization process. If HepArrest(TM)continues to perform in clinical
trials as it has in pre-clinical trials, it is not unimaginable that
HepArrest(TM) could capture a significantly higher market share than 65%.
While HepArrest(TM) represents the hard work of many current and former CBI
employees; we must recognize the seminal contributions of Dr. Michael Sobel,
Chief of Cardiovascular Surgery, Syracuse VA Medical Center. Dr. Sobel is a long
time collaborator and friend of CBI. His expertise in completing the
pre-clinical physiology experiments with HepArrest(TM) was instrumental in
bringing us to this point.
We look forward to "the 2000 HepArrest(TM) story" with great anticipation.
AccuTrac(TM)
AccuTrac(TM) is a reagent that facilitates the process of automated DNA sequence
analysis. The United States Patent Office notified CBI in February 2000 that our
patent application claims for AccuTrac(TM) were allowed. CBI is currently
selling AccuTrac(TM) worldwide. We recently signed a non-exclusive agreement
with Cosmo Bio Co., Ltd. of Tokyo for distribution of AccuTrac(TM) in Japan.
Cosmo Bio Co., Ltd, is one of the leading distributors of chemical and
biological reagents in Japan. As part of our agreement, Cosmo Bio Co., Ltd.,
will mount an aggressive marketing campaign for AccuTrac(TM). The campaign will
target investigators in Japanese companies and research institutions who are
involved in DNA sequencing projects. A second distribution agreement with an
additional Japanese company is pending.
We anticipate a growing market for AccuTrac(TM) as more investigators become
familiar with our product.
6
<PAGE>
STOCKHOLDER MATTERS
Market for Common Equity
The Company completed its initial public offering on October 28, 1997 at a price
per share of $ 6.00. Since that time, the Common Stock has traded on the NASDAQ
Small Cap Market ("NASDAQ"). The following table sets forth the range of high
and low sales price per share of Common Stock for 1999.
========================================================================
Period High Stock Price Low Stock Price
- ------------------------------------------------------------------------
1st Quarter, 1999 $ 9.250 $ 7.875
- ------------------------------------------------------------------------
2nd Quarter, 1999 $ 9.000 $ 6.438
- ------------------------------------------------------------------------
3rd Quarter, 1999 $ 6.563 $ 4.188
- ------------------------------------------------------------------------
4th Quarter, 1999 $ 10.250 $ 4.750
- ------------------------------------------------------------------------
On March 15, 2000 the last reported sales price for a share of the Company's
Common Stock on NASDAQ was $17.875. As of March 15, 2000, there were 41 holders
of record of the Company's Common stock and approximately 1,027 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, 1999 and December 31, 1998, 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, 1999 December 31, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operational Data:
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues: $ 2,565,132 $ 1,604,267 $ 1,761,308
- -----------------------------------------------------------------------------------------------------------------------------------
Net Loss $ (2,091,194) $ (2,096,937) $ (1,168,821)
- -----------------------------------------------------------------------------------------------------------------------------------
Loss Per Common Share, Basic and Diluted $ (1.27) $ (1.29) $ (3.55)
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 1,641,738 1,622,340 329,480
===================================================================================================================================
Balance Sheet Data:
- -----------------------------------------------------------------------------------------------------------------------------------
Total Current Assets $ 560,576 $ 2,471,022 $ 6,485,965
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 8,250,369 $ 10,401,182 $ 7,931,606
- -----------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities $ 967,866 $ 1,114,563 $ 624,250
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 4,967,866 $ 5,114,563 $ 624,250
- -----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders equity $ 3,282,503 $ 5,286,619 $ 7,307,356
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Business Considerations
In October 1997, the Company closed its IPO and received 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 has 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 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 has 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 from new contracts, as
described below, and by continued monitoring and reduction of operating costs.
The following highlights describe significant factors contemplated in
management's plans with respect to continued operations:
. 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 is expected to
provide approximately $1.5 million in gross cash flow for the year ended
December 31, 2000.
. Approximately eight new contracts were entered into during the last quarter
of 1999, with estimated gross revenues of $1.1 million for the year 2000.
. At December 31, 1999, the Company has approximately 15 - 18 contracts out
for bid with various potential customers. These contracts, if awarded,
would provide the Company with approximately $8.5 - $13.5 million in
additional revenues over the next two to three years.
. Management will continue to monitor and reduce operating costs.
. Subsequent to year-end, approximately $575,000 in funds were received from
the exercise of stock options. In addition, management anticipates that, if
the stock price remains strong, additional capital will be received in 2000
from the exercise of management and underwriter warrants. This could total
in excess of $1 million.
. Continue to seek a pharmaceutical partner to begin clinical trials with
regulatory bodies and to market HepArrest(TM) worldwide.
. Actively market recently patented product - AccuTrac(TM).
Overview
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. Development of innovative technologies for
biotechnology requires sophisticated laboratory techniques, and the Company
provides these services to customers on a contract basis. The Company's
customers consist of private companies, academic institutions and government
agencies, all of which use biological processes to develop products for health
care, agricultural, and other purposes.
The Company generally derives revenue from two types of customers: those who
require a discrete set of services ("short-term projects"); and those who
contract with the Company on an extended basis for performance of a variety of
integrated services ("long-term projects"). More often than not, the Company's
customers provide repeat business to the Company. Historically, a majority of
the Company's net revenues have been earned under short-term projects. However,
the Company views long-term projects as the more important source of revenue,
and has continued to focus its efforts on identifying long-term customers.
Long-term projects generally range from a few months to more than a year.
Revenues are generally recognized as services are rendered or as products are
delivered. In addition, revenue is also recognized with performance-based
installments payable over the contract duration as milestones are achieved.
The Company also derives revenues from government grants that partially fund the
Company's research efforts for its proprietary technologies. All government
grants are expense reimbursement grants which provide for
8
<PAGE>
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.
Revenues
Gross revenues increased by $960,865, or 59.9%, from $1,604,267 during the year
ended December 31, 1998 ("1998") to $2,565,132 during the year ended December
31,1999 ("1999").
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.
Short-Term Projects
Revenues realized from short-term projects, which is included in the Statement
of Operations as Laboratory Services, increased by $16,144, or 1.8%, from
$876,508 during 1998 to $892,652 during 1999.
Revenues realized from peptide synthesis increased by $33,601, or 18.2%, from
$184,632 during 1998 to $218,233 during 1999. Revenues attributable to protein
sequencing increased by $44,869, or 36.4%, from $123,385 during 1998 to $168,254
during 1999. Revenues derived from peptide synthesis and protein sequencing
increased primarily due to new customers placing orders with the Company.
Revenues realized from molecular biology increased by $15,408, or 154.7%, from
$9,957 during 1998 to $25,365 during 1999. Revenues from the new core
technologies, Genetic Analysis, reported revenues during 1999 of $30,410.
Revenues from DNA Sequencing decreased by $169,986, or 44.7%, from $380,575
during 1998 to $210,589 during 1999. This decrease is primarily due to a change
in the marketplace wherein most DNA sequence activities are becoming associated
with long- term projects.
Other "uncategorized" revenues increased by $15,410, or 17.9%, from $86,327
during 1998 to $101,737 during 1999. This increase is primarily due to
additional work from our customers not previously done in prior years. These
classifications are usually one-time events. 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, increased by $990,855, or 212.4%,
from $466,455 during 1998 to $1,457,310 during 1999.
This increase is primarily due to work being done on 27 individual projects
during 1999 compared to only 14 projects during 1998. Of the 27 projects
initiated during the year, two customers accounted for 28.3% and 20.2% of the
long-term contract revenue base, respectively. 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 additional long-term
contracts will be awarded.
Research Grants
The Company experienced a decrease in revenue realized from government grants in
the amount of $87,554, or 33.5%, from $261,304 during 1998 to $173,750 during
1999. This decrease is primarily due to completion of two of the three grants.
Those grants were the Phase II Small Business Technology Research grant (SBTR)
from the National Institutes of Health (NIH); and a Phase I SBIR award from the
NIH for development of Rapid Assay Methods for the Detection of Botulism. The
remaining grant, a ($200,000) Phase II Small Business Innovative Research Award
(SBIR) from the United States Department of Agriculture (USDA) for development
of a Diagnostic for Equine Infectious Anemia Infection has begun its second
year. Remaining funds left a total of $82,839. The Company anticipates
completion of the project by August 2000.
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AccuTrac(TM) Revenue
The Company began sales of a new reagent, (AccuTrac(TM)) which facilitates the
process of automated DNA sequence analysis. Revenues during 1999 amounted to
$41,420. There were no sales during 1998.
In February, 2000, CBI was notified of allowance of its claims on its United
States patent application for AccuTrac(TM). CBI is selling AccuTrac(TM)worldwide
and, just recently, signed a non-exclusive agreement with Cosmo Bio Co., Ltd.,
of Tokyo for distribution of AccuTrac(TM)in Japan. Cosmo Bio Co., Ltd, is one of
the leading distributors of chemical and biological reagents in Japan and, as
part of our agreement, Cosmo Bio Co., Ltd., will mount an aggressive marketing
campaign for AccuTrac(TM),which will target investigators involved in DNA
sequencing projects in Japanese companies and research institutions. An
additional distribution agreement with a second Japanese company is pending.
Expenses
Cost of services consists primarily of labor and laboratory supplies. The cost
of services increased by $550,114, or 48.9%, from $1,125,564 during 1998 to
$1,675,677 during 1999. The cost of services as a percentage of revenue was
70.2% and 65.3% during 1998 and 1999, respectively.
Direct Materials
The costs for direct materials increased by $242,575, or 45.9%, from $527,969
during 1998 to $770,544 during 1999. Increases in direct materials were twofold.
First, the Company experienced increases from suppliers in purchases of
reagents, chemicals and miscellaneous materials used in all the laboratories.
Second, additional work being done on twenty-seven individual projects during
1999, compared to only 14 projects during 1998. Of the 27 projects initiated,
one customer accounted for 18.7% of the material costs during 1999.
Direct Labor
Labor costs increased by $265,656, or 51.9%, from $511,664 during 1998 to
$777,320 during 1999. This increase reflects a reallocation of the Company's
resources to the general operations of the business from the research and
development area. In addition, due to the increase in long-term contracts,
personnel assigned to Selling, General and Administrative (SG&A) performed
additional responsibilities in the laboratories.
Other Costs
Other costs (postage, travel, equipment rental, maintenance of equipment, etc)
increased by $41,882, or 48.7%, from $85,931 during 1998 to $127,813 during
1999. This increase was due to the repair and maintenance on equipment of
$28,861. Other increases included waste removal of $14,289, subcontracting
services of $9,729 and freight delivery to the Company's clients of $16,304.
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 $126,992, or 5.7%, from $2,244,615
during 1998 to $2,371,608 during 1999. As a percentage of revenue, these costs
were 139.9% and 92.5% during 1998 and 1999, respectively.
Compensation and Benefits
Total compensation and benefits decreased by $134,739,
or 17.2%, from $782,833 during 1998 to $648,094 during 1999. 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.
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Facility Costs
Costs for facilities decreased by $24,283, or 10.0%, from $241,845 during 1998
to $217,562 during 1998. This decrease is primarily due to the elimination of
leased laboratory costs associated with the relocation of the Company to its new
corporate headquarters. Additional costs associated with the relocation (and new
to the Company) include electricity of $110,620, gas utility bills of $15,501,
water usage of $4,388 and janitorial services of $9,035. Other facility costs
include increases in telephone use of $35,307, facility maintenance costs of
$7,259 and association fees of $9,511.
Professional Services
Professional fees increased by $65,610, or 32.8%, from $200,167 during 1998 to
$265,777 during 1999. 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.
Taxes and Licenses
Taxes and license fees increased by $66,773, or 152.3%, from $43,835 during 1998
to $110,608 during 1999. This increase is primarily due to an increase in
personal property taxes paid to the new jurisdiction where the facility is
located. In addition, initial expenditures were realized during 1999 for
Virginia sales tax and real estate taxes associated with the new facility.
Depreciation Expense
Depreciation increased by $220,479, or 71.1%, from $309,933 during 1998 to
$530,412 during 1999. Increased depreciation costs are attributable to the
purchase of additional laboratory equipment consistent with expanding the
Company's technology base, and the 12 months of depreciation on the Company's
new corporate facility. There were no depreciation costs during 1998 for any
facility costs associated by the Company.
Marketing
Marketing costs decreased by $60,100, or 17.0%, from $352,762 during 1998 to
$292,662 during 1999. Reduction in the use of non-Company professional media
relations work and the elimination of attendance at several trade show costs
contributed to the decline in expenditures. 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 amounted to $101,083, compared to $66,667 during 1999.
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 $95,245, or 20.1%, from
$474,998 during 1998 to $379,753 during 1999. Total grant-related research and
in-house research as a percentage of revenue were 29.6% and 14.8% during 1998
and 1999, respectively.
Grant-Related Research Activities
Expenditures to perform grant-related research activities decreased by $18,666,
or 9.2%, from $202,957 during 1998 to $184,293 during 1999. All of the Company's
grant-related expenditure are reimbursed from the appropriate governmental
agency. This decrease in costs is primarily due to two of the three grants being
completed during 1999.
Grants completed during 1999 included a Phase II Small Business Technology
Research grant (SBTR) grant from the National Institutes of Health (NIH).
Expenses incurred through 1999 amounted to $82,356; and a Phase I SBIR award
from the NIH for development of Rapid Assay Methods for the Detection of
Botulism. Expenditures incurred through 1999 amounted to $32,455. The remaining
grant, a ($200,000) Phase II Small Business Innovative Research Award (SBIR)
from the United States Department of Agriculture (USDA), is for the development
of a Diagnostic for Equine Infectious Anemia
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Infection. Expenses incurred through 1999 amounted to $70,084. The Company
anticipates completion of the project by August 2000.
In-House Research Activities
Expenditures made by the Company for in-house research activities decreased by
$76,580 or 28.2%, from $272,041, during 1998 to $195,461 during 1999. 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(TM) in drug formulation. In addition the Company is continuing
its in-house research and development efforts with AccuTrac(TM).
Other Income and Expenses
Interest income (in total) to the Company decreased by $249,634, or 76.0%, from
$328,628 during 1998 to $78,993 during 1999.
Interest income to the Company derived during 1998 resulted from investing the
unused portion of the funds realized by the Company from the private placement
of convertible notes in June 1997. These funds decreased by $208,636, or 86.9%
from $240,096 during 1998 to $31,460 during 1999.
Interest income to the Company was also derived during 1998 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. These funds decreased by $67,977, or 76.8%, from $88,532
during 1998 to $20,555 during 1999.
Interest costs incurred by the Company during the 1999 and 1998 included: (1)
interest paid to financial institutions as loans made to the Company: 2)
interest paid for the Company's IRBs; and 3) amortization of costs incurred as a
consequence of the completion of the Company's IRB financing. Total interest
expense and amortization increased by $123,626, or 66.9%, from $184,655 during
1998 to $308,281 during 1999. This increase is primarily due the payment of 12
months interest for the Company's IRBs during 1999 as compared to nine months
and 15 days during 1998.
For the Year Ended December 31, 1998 versus December 31,1997
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 outsource 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.
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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.
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) 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.
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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.
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 payment 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.
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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.
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(TM) 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. 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 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. Interest
income is also derived from
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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
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.
Other 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.
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 $2,072,244, as compared to an
outflow of $1,385,680 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. As of September 30, 1999, all
proceeds from the initial public offering have been expended.
Net working capital as of December 31, 1999 and December 31, 1998 was ($407,290)
and $1,356,459 respectively. This decrease is a direct result of capital
expenditures for 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. During 1999 the Company obtained a $400,000 line of credit. As of
December 1999, the Company expended $300,000 of the line. The Company
anticipates paying down the line by September 2000.
The Company is now working on funds generated solely by revenues earned. The
Company continues to search for long-term projects as the more important source
of revenue and has continued to focus its efforts on identifying long-term
customers. Long-term projects generally range from a few months to more than a
year. 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 is expected to provide
approximately $1.5 million in gross cash flow for the year ended December 31,
2000. At December 31, 1999, the Company has approximately 15 - 18 contracts out
for bid with various potential customers. These contracts, if awarded, would
provide the
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Company with approximately $8.5 - $13.5 million in revenues over the next two to
three years. In addition, CBI has signed eight new contracts with a collective
valuation of nearly $1.1 million. These revenues will be realized throughout
2000.
On February 17, 2000, the Company received funds totaling $99,000 from a former
Director of the Company. These funds were to exercise 10,000 options at $9.90
per share. On February 22, 2000, funds totaling $474,151 were received from the
same individual to exercise 47,894 shares at $9.90 per share.
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
Richmond, 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, $418,047 remains as restricted cash on the balance sheet of the
Company as of December 31, 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 has worked to resolve the potential impact of the Year 2000 (Y2K) on
the ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. Systems that do not properly
recognize such information could generate erroneous data.
The Company developed a plan for Y2K information systems compliance, including
its core processing system. Phases of the plan included: awareness, which is
management's knowledge and recognition of the Y2K issue and appointment of
project team to address the impact on the Company; assessment of the magnitude
of the Y2K issue; resolution, which involved the process of reprogramming or
replacement of all existing systems which were not Y2K compliant; validation,
which was the testing phase; and implementation, which was the final phase that
involved the placing of revised and tested systems into operation. Management
believes that the Company's core systems are Y2K compliant. As of March 9, 2000,
the Company has not suffered any setbacks due to the Y2K issue.
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:
. business conditions and the general economy
. the development and implementation of the Company's long term business
goals,
. federal, state, and local regulatory environment
. lack of demand for the Company's services
. the ability of the Company's customers to perform services similar to those
offered by the Company "in-house"
. potential cost containment by the Company's customers resulting in fewer
research and development projects
. the Company's ability to receive accreditation to provide various services,
including, but not limited to paternity testing
. 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.
17
<PAGE>
[GRAPHIC]
MCGLADREY & PULLEN, LLP
-----------------------
Certified Public Accountants
Independent Auditor's Report
To the Board of Directors and Stockholders
Commonwealth Biotechnologies, Inc.
Richmond, Virginia
We have audited the accompanying balance sheets of Commonwealth Biotechnologies,
Inc. as of December 31, 1999 and 1998 and the related statements of operations,
changes in stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commonwealth Biotechnologies,
Inc. as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ McGladrey & Pullen, LLP
Richmond, Virginia
February 11, 2000
18
<PAGE>
Commonwealth Biotechnologies, Inc.
BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
==============================================================================================================
1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 31,630 $ 2,091,586
Accounts receivable (Note 3) 458,677 302,936
Prepaid expenses 70,269 76,500
- --------------------------------------------------------------------------------------------------------------
Total current assets 560,576 2,471,022
- --------------------------------------------------------------------------------------------------------------
Property and Equipment (Notes 2, 3 and 4) 7,019,109 7,263,788
- --------------------------------------------------------------------------------------------------------------
Other Assets
Bond issuance costs, less accumulated amortization
1999 $19,161; 1998 $8,418 249,437 260,181
Restricted cash (Note 4) 418,047 402,991
Deposits and other 3,200 3,200
- --------------------------------------------------------------------------------------------------------------
Total other assets 670,684 666,372
- --------------------------------------------------------------------------------------------------------------
$ 8,250,369 $ 10,401,182
==============================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities
Demand note payable (Note 3) $ 199,680 $ 249,680
Line of credit 282,000 --
Accounts payable and other current liabilities 480,726 797,597
Deferred revenue 5,460 67,286
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 967,866 1,114,563
- --------------------------------------------------------------------------------------------------------------
Bonds Payable (Note 4) 4,000,000 4,000,000
- --------------------------------------------------------------------------------------------------------------
Total liabilities 4,967,866 5,114,563
- --------------------------------------------------------------------------------------------------------------
Commitments (Notes 5 and 6)
Stockholders' Equity
Common stock, no par value, 10,000,000 shares authorized,
1999 1,643,727; 1998 1,633,214, shares issued and
outstanding -- --
Additional paid-in capital 8,925,742 8,838,664
Accumulated deficit (5,643,239) (3,552,045)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,282,503 5,286,619
- --------------------------------------------------------------------------------------------------------------
$ 8,250,369 $ 10,401,182
==============================================================================================================
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
Commonwealth Biotechnologies, Inc.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
================================================================================
1999 1998
- --------------------------------------------------------------------------------
Revenue (Note 7):
Laboratory services $ 892,652 $ 876,508
Contract research 1,457,310 466,455
Product sales 41,420 --
Government grants 173,750 261,304
- --------------------------------------------------------------------------------
Total revenue 2,565,132 1,604,267
- --------------------------------------------------------------------------------
Costs and expenses (Note 8):
Cost of services 1,675,677 1,125,564
Sales, general and administrative 2,371,608 2,244,615
Research and development 379,753 474,998
- --------------------------------------------------------------------------------
Total costs and expenses 4,427,038 3,845,177
- --------------------------------------------------------------------------------
Operating loss (1,861,906) (2,240,910)
- --------------------------------------------------------------------------------
Other income (expense):
Interest expense (Note 4) (308,281) (184,655)
Interest income 78,993 328,628
- --------------------------------------------------------------------------------
Total other income (expense) (229,288) 143,973
- --------------------------------------------------------------------------------
Net loss $(2,091,194) $(2,096,937)
================================================================================
Loss per common share, basic and diluted $ (1.27) $ (1.29)
================================================================================
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
====================================================================================================================================
Number Additional
of Shares Paid-In Accumulated
Outstanding Capital Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 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 8,838,644 (3,552,045) 5,286,619
Issuance of common stock 10,513 63,078 -- 63,078
Fair value of options issued in connection
with line of credit (Note 3) -- 24,000 -- 24,000
Net loss -- -- (2,091,194) (2,091,194)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 1,643,727 $ 8,925,742 $(5,643,239) $ 3,258,503
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
Commonwealth Biotechnologies, Inc.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
=========================================================================================================================
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(2,091,194) $(2,096,937)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 547,156 319,180
Changes in assets and liabilities:
Accounts receivable (155,741) (149,709)
Prepaid expenses 6,232 (13,527)
Accounts payable (316,871) 488,027
Deferred revenue (61,826) 67,286
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,072,244) (1,385,680)
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchases of property and equipment (285,734) (6,137,909)
Deposits -- 1,800
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (285,734) (6,136,109)
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from issuance of bonds payable, net of issuance cost -- 3,731,401
Restricted cash (15,056) (402,991)
Principal payments on long-term debt and note payable (50,000) (65,000)
Proceeds form line of credit 300,000 --
Proceeds from issuance of common stock 63,078 76,200
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 298,022 3,339,610
- -------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2,059,956) (4,182,179)
Cash and cash equivalents:
Beginning 2,091,586 6,273,765
- -------------------------------------------------------------------------------------------------------------------------
Ending $ 31,630 $ 2,091,586
=========================================================================================================================
Supplemental Disclosure of Cash Flow Information
Cash payments for interest $ 291,538 $ 165,678
=========================================================================================================================
</TABLE>
See Notes to Financial Statements.
21
<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
leading 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 asset and liabilities and
disclosure of contingent asset 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 the performance of services 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:
- ------------------------------------------------------------
Buildings 39.5
- ------------------------------------------------------------
Laboratory and computer equipment 5.0
- ------------------------------------------------------------
Furniture and fixtures and office equipment 7.0
- ------------------------------------------------------------
Automobile 5.0
- ------------------------------------------------------------
Other assets: Bond issuance costs consist of origination cost associated with
the 1998 bond issue and are being amortized over twenty-five years using the
effective interest method. Amortization expense was $10,743 and $8,418 for the
year ended December 31, 1999 and 1998, respectively.
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss carryforwards 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 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 $199,316 and $272,041 for
the years ended December 31, 1999 and 1998, 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 10) 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, 1999 and
1998, respectively.
22
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
Notes to Financial Statements
================================================================================
<TABLE>
<CAPTION>
===========================================================================================================================
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Numerator Denominator Numerator Denominator
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic Loss Per Share
Loss available to stockholders $(2,091,194) -- $(2,096,937) --
Average shares outstanding -- 1,641,738 -- 1,622,340
Effect of Dilutive Shares -- -- -- --
</TABLE>
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:
================================================================================
1999 1998
- --------------------------------------------------------------------------------
Land $ 403,919 $ 403,919
Building 4,816,507 4,783,107
Laboratory and computer equipment 2,659,965 2,473,938
Furniture, fixtures and office equipment 242,164 175,858
Automobile 24,637 24,637
- --------------------------------------------------------------------------------
8,147,192 7,861,459
Less accumulated depreciation 1,128,083 597,671
- --------------------------------------------------------------------------------
$7,019,109 $7,263,788
================================================================================
Depreciation expense was $530,412 and $309,933 for the years ended December 31,
1999 and 1998, respectively.
Note 3. Demand Notes Payable and Line-of-Credit
The Company has a demand note payable with a bank, which bears interest at the
bank's prime rate plus 1% (9.5% at December 31, 1999). The note has no stated
maturity and is collateralized by a security interest in the Company's accounts
receivable, equipment and intangibles.
The Company has an unsecured line-of-credit in the amount of $400,000 from a
corporation solely owned by a significant shareholder of the Company. Interest
is payable monthly at a rate of 6% on the outstanding balance, which is due
September 30, 2000. Related interest expense was $2,918 for the year ended
December 31, 1999.
As part of the line-of-credit, the Company issued an option to acquire 10,000
common shares to shareholder of the lender. These options have been credited to
additional paid-in capital at their fair value with a corresponding reduction in
the recorded amount of the outstanding borrowing. The resulting discount is
being amortized as an increase to interest expense over the life of the
line-of-credit.
23
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
Notes to Financial Statements
================================================================================
Note 4. Bonds Payable
- --------------------------------------------------------------------------------
Bonds payable consist of:
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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 $5,062,004 $ 3,670,000 $ 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
$5,062,004 330,000 330,000
- -------------------------------------------------------------------------------------------------------------------------
$ 4,000,000 $ 4,000,000
=========================================================================================================================
</TABLE>
The bond agreements require the Company to maintain debt service reserve funds
which are held by a trustee. Debt service reserve funds are included in the
balance sheets as restricted cash.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Amount
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
2000 $ --
2001 85,000
2002 90,000
2003 95,000
2004 100,000
Thereafter 3,630,000
- -------------------------------------------------------------------------------------------------------------------------
$ 4,000,000
=========================================================================================================================
</TABLE>
The total interest expense reported in the Statements of Operations for the
years ended December 31, 1999 and 1998 was $308,281 and $184,655, 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 1999.
Note 5. Commitments and Contingencies
Leases: 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 canceled. Total rent expense for all operating leases,
including equipment leases for each of the years ended December 31, 1999 and
1998, was $27,580 and $174,662, respectively.
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, 15% of the
Company's pretax net income for the preceding fiscal year. For the fiscal year
ended December 31, 1999 and 1998, there were no bonuses for the Company's
executive officers.
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 $8,138 and $6,309 to the Plan in 1999 and 1998, respectively.
24
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
Notes to Financial Statements
================================================================================
Note 7. Major Customers
During 1999, the Company derived revenues from two customers amounting to
$413,059 and $294,613, respectively, and comprised of 28% of the total revenue
for 1999. 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:
================================================================================
1999 1998
- --------------------------------------------------------------------------------
Cost of services $ 777,320 $ 511,664
Selling, general and administrative expenses 648,094 782,833
Research and development costs 319,849 378,619
- --------------------------------------------------------------------------------
$1,745,263 $1,673,116
- --------------------------------------------------------------------------------
Note 9. Income Taxes
The difference between expected income tax benefits and income tax benefits
recorded in the financial statements is explained below:
================================================================================
1999 1998
- --------------------------------------------------------------------------------
Income taxes (credits) computed at 35%
statutory rate $(731,918) $(733,928)
Change in valuation allowance 830,883 775,461
Other, primarily state income tax benefit (98,965) (41,533)
- --------------------------------------------------------------------------------
$ -- $ --
- --------------------------------------------------------------------------------
The significant components of deferred income tax assets and liabilities as of
December 31 consist of the following:
================================================================================
1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Effect of net operating loss $2,247,779 $1,190,578
Other 78,984 182,047
- --------------------------------------------------------------------------------
2,326,763 1,372,625
Deferred tax liabilities:
Tax depreciation in excess of book depreciation 291,321 168,066
- --------------------------------------------------------------------------------
Net deferred tax asset before valuation allowance 2,035,442 1,204,559
Less valuation allowance 2,035,442 1,204,559
- --------------------------------------------------------------------------------
Net deferred tax asset $ -- $ --
================================================================================
Operating loss carryforwards of approximately $2,420,000 and $2,382,000 may be
used to offset future taxable income, which were generated in the years ended
December 31, 1999 and 1998, respectively. The loss carryforwards expire in 2019
and 2018, respectively.
Note 10. 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 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 have been reserved and granted for incentive awards to be granted to the
founders of the Company, and 61,000 shares are reserved for incentive awards to
be granted to others. Additionally, the Company has reserved an aggregate of
201,500 shares of common stock for issuance upon exercise of the Underwriter's
Warrants (100,000) and the Management warrants (101,500).
25
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
Notes to Financial Statements
================================================================================
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 stock. Options
granted under the Plan generally vest over a five-year period from the date of
grant and are exercisable for ten years, except that the term may not exceed
five years for incentive stock options granted to persons who own more than 10%
of the Company's outstanding common stock.
The Company applies 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:
================================================================================
1999 1998
- --------------------------------------------------------------------------------
Net loss:
As reported, historically $ (2,091,194) $ (2,096,937)
Proforma (2,185,093) (2,304,273)
Loss per common share:
As reported, historically (1.27) (1.29)
Proforma (1.33) (1.42)
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 1999, 1998
and 1997, respectively: No dividend yield, expected volatility of 76%, 76% and
34%, risk-free interest rate of 6.5%, 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
1999 Price 1998 Price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options and warrants outstanding,
beginning of year 531,750 $ 9.11 515,900 $ 9.23
Granted 18,750 5.31 32,400 8.25
Exercised (10,513) 6.00 (12,700) 6.00
Lapsed (12,700) 6.43 (3,850) 6.00
- -------------------------------------------------------------------------------------------------------------------------------
Options and warrants outstanding,
end of year 527,287 $ 8.83 531,750 $ 9.11
- -------------------------------------------------------------------------------------------------------------------------------
Options and warrants exercisable,
end of year 402,340 $ 9.11 346,808 $ 9.05
===============================================================================================================================
Weighted-average fair value per option and warrant
for options and warrants granted during the year $ 3.66 $ 5.71
===============================================================================================================================
</TABLE>
26
<PAGE>
COMMONWEALTH BIOTECHNOLOGIES, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
The following table summarizes information about stock options and warrants
outstanding at December 31, 1999:
<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 90,687 8 $ 5.86 73,937 $ 5.88
7.50 - 9.00 30,900 9 7.99 10,540 7.95
9.25 - 10.00 405,700 6 9.90 317,363 9.90
$ 5.50 - 10.00 527,287 7 $ 8.83 401,840 $ 9.11
====================================================================================================================
</TABLE>
In addition to the above summary, during 1999, the Company committed to issue
15,700 options which have measurement dates during the year ended December 31,
2000.
Note 11. Business Considerations
In June 1997, the Company sold 60 convertible subordinated notes, with a
principal amount of $50,000, in a private placement offering at an offering
price of $50,000 per note. Each note was automatically converted into a minimum
of 8,333.33 shares of the Company's stock at the closing of the Company's
initial public offering (IPO). The Company received net proceeds of $2,626,269,
net of underwriting and other offering costs.
Upon 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 are exercisable for a period of ten years at an exercise price of $9.90
per share.
In October 1997, the Company closed its 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 has 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 has 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 from new contracts, as
described below, and by continued monitoring and reduction of operating costs.
The following highlights describe significant factors contemplated in
management's plans with respect to continued operations:
. 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 is expected to
provide approximately $1.5 million in gross cash flow for the year ended
December 31, 2000.
. Approximately eight new contracts, with estimated gross revenues of $1.1
million for the year 2000, were entered into during the last quarter of
1999.
. At December 31, 1999, the Company has approximately 15 - 18 contracts out
for bid with various potential customers. These contracts, if awarded,
would provide the Company with approximately $8.5 - $13.5 million in
additional revenues over the next two to three years.
. Management will continue to monitor and reduce operating costs.
. Subsequent to year end, approximately $575,000 in funds were received from
the exercise of stock options. In addition, management anticipates that, if
the stock price remains strong, additional capital will be received in 2000
from the exercise of management and underwriter warrants. This could total
in excess of $1 million.
. Continue to seek a pharmaceutical partner to begin clinical trials with
regulatory bodies and to market HepArrest worldwide.
. Actively market our recently patented product - Accutrac.
27
<PAGE>
[PHOTO]
The Executive Officers and Board of Directors
<TABLE>
<S> <C>
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 Dr. Raymond Cypess
Senior Vice President and Secretary Director and CEO, American Type Culture
Collection
Peter Einselen The Honorable George F. Allen
Director, and Senior Vice President, Director, and Partner,
Anderson & Strudwick, Inc. McGuire, Woods, Battle & Boothe, LLP
Corporate Information
Corporate Office: Patent Counsel
Commonwealth Biotechnologies, Inc. Burns Doan Swecker and Mathis, LLP
601 Biotech Drive 1737 King Street
Richmond, Virginia 23235 Alexandria, Virginia 22314
phone: 800-735-9224; 804-648-3820
fax:804-648-2641 Transfer Agent and Registrar
email: [email protected] American Securities Transfer
web site: www.cbi-biotech.com and Trust, Inc.
938 Quail Street, Suite 101
Denver, CO
General Counsel
Independent Auditors
LeClair Ryan
A Professional Corporation McGladrey and Pullen, LLP
707 East Main Street, 11th Floor 1051 East Cary Street
Richmond, Virginia 23219 Richmond, Virginia 23226
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28
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the incorporation of our
report, dated February 11, 2000, 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.
Richmond, Virginia
March 30, 2000
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
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<SECURITIES> 0
<RECEIVABLES> 458,677
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 560,576
<PP&E> 8,147,192
<DEPRECIATION> (1,128,083)
<TOTAL-ASSETS> 8,250,369
<CURRENT-LIABILITIES> 967,866
<BONDS> 4,000,000
0
0
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<TOTAL-LIABILITY-AND-EQUITY> 8,250,369
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<INCOME-CONTINUING> (2,091,194)
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<CHANGES> 0
<NET-INCOME> (2,091,194)
<EPS-BASIC> (1.27)
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