<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
------- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number: 001-13467
COMMONWEALTH BIOTECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Virginia 54-1641133
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
601 Biotech Drive, Richmond, Virginia 23235
(Address of principal executive offices)
(804) 648-3820
(Issuer's telephone number)
_________________________________________
Check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No _____
-------
As of August 14, 2000, 1,728,164 shares of common stock, no par value, of the
registrant were outstanding.
Transitional Small Business Disclosure Format (Check one) Yes: No: X
---- -----
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Commonwealth Biotechnologies, Inc.
Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------- ---------------
(Unaudited)
<S> <C>
Assets
Current Assets
Cash and cash equivalents $ 342,625 $ 31,630
Accounts receivable 597,729 458,677
Prepaid expenses and inventory 177,495 70,269
---------------------------------------------------------------------------------------------------------------------------
Total current assets 1,117,849 560,576
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Property and Equipment, net 6,920,093 7,019,109
Other Assets
Restricted cash 429,085 418,047
Bond issue costs, net 244,065 249,437
Accounts receivable 59,022 -
Deposits 3,200 3,200
---------------------------------------------------------------------------------------------------------------------------
Total other assets 735,372 670,684
---------------------------------------------------------------------------------------------------------------------------
$ 8,773,314 $ 8,250,369
---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Demand note payable $ 164,680 $ 199,680
Line of credit 294,000 282,000
Current portion of capital lease 42,252 -
Accounts payable and other current liabilities 283,466 480,726
Deferred revenue 6,545 5,460
---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 790,943 967,866
---------------------------------------------------------------------------------------------------------------------------
Deferred Revenue 59,022 -
Long Term Debt
Bonds payable 4,000,000 4,000,000
Capital lease 29,211 -
---------------------------------------------------------------------------------------------------------------------------
Total long term debt 4,029,211 4,000,000
---------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, no par value, 10,000,000 shares authorized - -
June 30, 2000 - 1,736,045; December 31, 1999 -
1,643,727 shares issued and outstanding
Additional paid-in capital 9,528,467 8,925,742
Accumulated deficit (5,634,329) (5,643,239)
---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,894,138 3,282,503
---------------------------------------------------------------------------------------------------------------------------
$ 8,773,314 $ 8,250,369
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
2
<PAGE>
Commonwealth Biotechnologies, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
------------------------------ ----------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------------- ------------ ------------ ----------
(Unaudited) (Unaudited)
<S> <C>
Revenue
Short term projects $ 274,274 $ 212,357 $ 493,544 $ 432,595
Long term projects 801,386 204,824 1,749,109 419,140
Research grants 46,956 69,438 62,684 142,401
AccuTrac 2,630 25,650 5,790 30,800
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Total revenue 1,125,246 512,269 2,311,127 1,024,936
------------------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Cost of services 538,528 367,577 1,166,544 678,256
Sales, general & administrative 520,806 641,679 887,662 1,250,734
Research and development 62,904 128,467 98,828 247,105
------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,122,238 1,137,723 2,153,034 2,176,095
------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 3,008 (625,454) 158,093 (1,151,159)
Other income (expenses)
Interest expense (81,512) (74,489) (166,843) (150,417)
Interest income 10,739 12,974 17,660 67,226
------------------------------------------------------------------------------------------------------------------------------
Total other income (expense) (70,773) (61,515) (149,183) (83,191)
------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (67,765) $ (686,969) $ 8,910 $(1,234,350)
------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share $(0.04) $(0.42) $0.01 $(0.75)
Diluted earnings (loss) per common share (0.04) (0.42) 0.01 (0.75)
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
3
<PAGE>
Commonwealth Biotechnologies, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
-------------------
June 30, 2000 June 30, 1999
--------------- ---------------
(Unaudited)
<S> <C>
Cash Flows from Operating Activities
Net income (loss) $ 8,910 $(1,234,350)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization 292,958 267,741
Changes in:
Accounts receivable (198,074) (44,604)
Prepaid expenses and inventory (107,226) (82,348)
Accounts payable and accrued expenses (197,260) (489,828)
Deferred revenue 60,107 (59,736)
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Net cash used in operating activities (140,585) (1,643,125)
--------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of property, plant and equipment (86,319) (131,039)
--------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (86,319) (131,039)
--------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from issuance of common stock 602,725 63,078
Principal payments on demand note payable (53,788) (25,000)
Restricted cash (11,038) (4,024)
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 537,899 34,054
--------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 310,995 (1,740,110)
Cash and cash equivalents, beginning of period 31,630 2,091,586
--------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 342,625 $ 351,476
--------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Capital lease obligation $ 90,250 $ -
Cash payments for interest 153,085 145,041
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
4
<PAGE>
Commonwealth Biotechnologies, Inc.
Notes To Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited financial statements (except for the balance sheet at
December 31,1999, which is derived from audited financial statements) have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and Regulation S-B. Accordingly, they do not include all of
the information required by generally accepted accounting principles for
complete financial statements. In the opinion of the Company, all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
financial position and the results of operations for the periods presented have
been included. The results of operations for the three and six months ended June
30, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000.
Note 2. Earnings (Loss) Per Share
Basic earnings (loss) per share has been computed on the basis of the weighted
average number of common shares outstanding. Diluted earnings (loss) per share
include common shares issuable upon exercise of the employee stock options when
their inclusion would have the effect of reducing the earnings or increasing the
loss per share amounts. For the three months ended June 30, 2000 and the 1999
periods, the common shares issuable upon exercise of the employee stock options
would have had an anti-dilutive effect and therefore were excluded from the
calculation. Following is information regarding the computation of earnings
(loss) per share data for the periods presented.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------ ------------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------------- ----------------- --------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Weighted average shares
outstanding used for basic EPS 1,736,045 1,642,397 1,709,186 1,639,716
Plus incremental shares from
assumed issuance of stock
Options - - 140,295 -
--------------- ----------------- --------------- -----------------
Weighted average shares
outstanding used for diluted EPS 1,736,045 1,642,397 1,849,481 1,639,716
--------------- ----------------- --------------- -----------------
</TABLE>
5
<PAGE>
Commonwealth Biotechnologies, Inc.
Notes To Financial Statements
Note 3. Proposed Business Acquisition
On May 30, 2000, the Company signed a letter of intent to acquire the drug
development business of SRA Life Sciences, Inc. (SRA). SRA's drug development
business provides strategic project management, regulatory consulting, and
outsourcing management of Phase I and II clinical trials for pharmaceutical and
biotechnology clients. Before the proposed acquisition can take place, certain
conditions must be met, including but not limited to due diligence by the
Company. In addition, the letter of intent provided for a 60-day period for the
Company to evaluate more completely the impact of this acquisition on the
Company's core business strategy of providing complete pre-clinical project
management. While the 60-day period expired on July 30, 2000, discussions
between the Company and SRA are continuing.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following should be read in conjunction with the Company's Financial
Statements and Notes included herein.
Business Considerations
In October 1997, the Company closed its initial public offering (IPO) and
received net proceeds of $5,417,578, net of underwriting and other costs. In
connection with the IPO, the underwriters purchased warrants for 101,500 shares
of common stock. The warrants are exercisable for a period of five years at an
exercise price of $9.90 per share.
Since 1997 and through 1999, the Company incurred recurring operating losses due
to increased operating costs without corresponding increases in revenues.
Through 1999, these deficits were substantially funded through use of funds
obtained from the private placement and IPO. The Company has also used proceeds
from its offerings for capital acquisitions, which were primarily funded through
its issuance of Industrial Revenue Development Bonds. At December 31, 1999, the
Company had used virtually all of the funds received in connection with its
offerings and is currently relying on operations for future cash flows.
Management believes that the Company will be able to overcome the 1999 working
capital deficit and generate positive net cash flows 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 twelve new contracts, with estimated gross revenues of
$1.1 million, were entered into during the period ended June 2000.
. At June 30, 2000, the Company has approximately thirty contracts out for bid
with various potential customers. These contracts, if awarded, would provide
the Company with approximately $6.8 million to $10.6 million in revenues over
the next two to three years.
. Management will continue to monitor and reduce operating costs.
. During the period ended June 30, 2000, approximately $575,000 in funds was
received from the exercise of stock options. Additional capital may be
received in 2000 from the exercise of management and underwriter warrants if
the value of the stock improves.
. Continue to seek a pharmaceutical partner to begin clinical trials with
regulatory bodies and to market HepArrestTM worldwide.
. Continue to actively market AccuTracTM.
7
<PAGE>
Overview
The Company's revenues are derived principally from providing macromolecular
synthetic and analytical services to researchers in the biotechnology industry
or who are engaged in life sciences research in government or academic labs
throughout the world. Development of innovative technologies for biotechnology
requires sophisticated laboratory techniques and the Company provides these
services to customers on a contract basis. The Company's customers consist of
private companies, academic institutions and government agencies, all of which
use biological processes to develop products for health care, agricultural, and
other purposes.
The Company generally derives revenue from two types of customers: those who
require a discrete set of services ("short-term projects"), and those who
contract with the Company on an extended basis for performance of a variety of
integrated services ("long-term projects"). More often than not, the Company's
customers provide repeat business to the Company. Historically, a majority of
the Company's net revenues have been earned under short-term projects. However,
the Company views long-term projects as the more important source of revenue,
and has continued to focus its efforts on identifying long-term customers. Long-
term projects generally range from a few months to more than a year. Revenues
are generally recognized as services are rendered or as products are delivered.
In addition, revenue is also recognized with performance-based installments
payable over the contract duration as milestones are achieved.
The Company also derives revenues from government grants that partially fund the
Company's research efforts for its proprietary technologies. All government
grants are expense reimbursement grants which provide for reimbursement on a
monthly basis of the Company's direct costs incurred in a research project, plus
indirect costs stated as a percentage of direct costs.
Results of Operations
Three Months Ended June 30, 2000 Compared with Three Months Ended June 30, 1999.
Revenues
The Company experiences fluctuations in all revenue categories. Continuation of
existing projects, or engagement for future projects is usually dependent upon
the customer's satisfaction with the scientific results provided in initial
phases of the scientific program. Continuation of existing projects or
engagement of future projects also often depends upon factors beyond the
Company's control, such as the timing of product development and
commercialization programs of the Company's customers. The combined impact of
commencement and termination of research contracts from several large customers
and unpredictable fluctuations in revenue for laboratory services can result in
very large fluctuations in financial performance.
Gross revenues increased by $612,977 or 119.7% from $512,269 during the second
quarter of 1999 ("the 1999 Quarter") to $1,125,246 during the second quarter of
2000 ("the 2000 Quarter").
8
<PAGE>
Revenues realized from short-term projects increased $61,917 or 29.2% from
$212,357 during the 1999 Quarter to $274,274 during the 2000 Quarter. Even with
management's decision to focus on long-term projects, the Company stills views
short-term work as a potential revenue source. Historically, net revenues have
been earned under short-term projects, however, the Company views long-term
projects as the more important source of revenue, (as mentioned below) and has
continued to focus its efforts on identifying long-term customers.
Revenues realized from various long-term projects increased by $596,562 or
291.3%, from $204,824 during the 1999 Quarter to $801,386 during the 2000
Quarter. This increase is primarily due to work being done on fifteen individual
projects compared to twelve projects in progress during the 1999 Quarter. Of the
$801,386 in long-term contracts, one major client represents 52.2% of the
revenue earned during the quarter. This project was awarded from the Illinois
Institute of Technology Research Institute. This five-year subcontract 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. The Company's
management continues to take an active role in negotiating new contracts. In
addition, six new contracts with estimated gross revenues of $600,000 for the
year 2000 were entered into during the second quarter 2000.
The Company experienced a decrease in revenue realized from government grants in
the amount of $22,482, or 32.4%, from $69,438 during the 1999 Quarter to $46,956
during the 2000 Quarter. This decrease is primarily due to the elimination of
two of the three grants. The Company anticipates completion of the remaining
project by August 2000.
The Company experienced a decrease in revenue realized from AccuTrac in the
amount of $23,020, or 89.7%, from $25,650 during the 1999 Quarter to $2,630
during the 2000 Quarter. This decrease is primarily due to heavy purchases in
1999 after the initiation of the product into the market.
Expenses
Cost of Services. Cost of services consists primarily of labor, laboratory
supplies and miscellaneous indirect costs. The cost of services increased by
$170,951, or 46.5%, from $367,577 during the 1999 Quarter to $538,528 during
2000 Quarter. The cost of services as a percentage of revenue was 47.9% and
71.8% during 2000 and 1999, respectively.
Labor costs increased by $104,786, or 53.1%, from $197,504 during the 1999
Quarter to $302,290 during the 2000 Quarter. This increase reflects a
reallocation of the Company's resources to the general operations of the
business from the research and development and General and Administrative areas.
This reallocation is necessary to support the additional long-term projects
currently in progress. The costs for direct materials increased by $56,183, or
39.7%, from $141,524 during the 1999 Quarter, to $197,707 during the 2000
Quarter. These increased costs are directly attributable to the increase in
revenues for the quarter. Other costs increased by $15,891, or 70.2%,
from $22,639 during the 1999 Quarter to $38,530 during the 2000 Quarter. This
increase in costs is due to additional postage and lease expenditures on
equipment.
9
<PAGE>
Sales, General and Administrative. Sales, general and administrative expenses
("SGA") consist primarily of compensation and related costs for administrative,
marketing and sales personnel, facility expenditures, professional fees,
consulting, taxes, and depreciation. Total SGA costs decreased by $120,873, or
18.8%, from $641,679 during the 1999 Quarter to $520,806 during 2000 Quarter. As
a percentage of revenue, these costs were 46.3% and 125.3% during 2000 and 1999,
respectively.
Total Compensation and Benefits decreased by $61,116 or 34.3% from $178,078
during the 1999 Quarter to $116,962 during the 2000 Quarter. This decrease is
primarily attributable to the reallocation of personnel in the administrative
area to work on the subcontract from the Illinois Institute of Technology
Research Institute.
Professional fees increased by $24,873, or 54.2%, from $45,853 during the 1999
Quarter to $70,726 during the 2000 Quarter. This increase is primarily due to
the additional expenditures in legal and production costs associated with the
annual report.
Marketing costs decreased by $85,636 or 78.2%, from $109,469 during the 1999
Quarter to $23,833 during the 2000 Quarter. Reductions in advertising, public
relations and payments consulting services contributed to the decrease in
marketing costs.
Research and Development. Research and development costs within the Company
fall into two general categories: grant-related research and development and in-
house research and development. These categories are distinguished by those
performed in support of government grant-sponsored programs, and those performed
in the absence of such grants which are funded from working capital. Total
expenditures for these two categories decreased by $65,563, or 51.0%, from
$128,467 during the 1999 Quarter to $62,904 during the 2000 Quarter. Total
grant-related research and in-house research as a percentage of revenue were
5.6% and 25.1% during 2000 and 1999, respectively.
Expenditures to perform grant-related research activities decreased by $25,984
or 39.2%, from $66,336 during the 1999 Quarter to $40,352 during the 2000
Quarter. This decrease is primarily due to the elimination of two of the three
grants. The Company anticipates completion of the remaining project by August
2000.
Expenditures made by the Company for in-house research activities decreased by
$39,579 or 63.7%, from $62,131 during the 1999 Quarter to $22,552 during the
2000 Quarter. This decrease is primarily attributable to the reallocation of
personnel in the research and development area to work on the subcontract from
the Illinois Institute of Technology Research Institute.
Other Income (Expenses)
Interest income to the Company remained relatively flat showing a modest
decrease of $2,235, or 17.2% from $12,974 during the 1999 Quarter to $10,739
during the 2000 Quarter. Interest income is derived from investing the unused
portion of the funds-realized by the Company from the successful sale (March,
1998) of Industrial Revenue Bonds (IRBs) for construction of the Company's new
facility. Interest income is also derived from overnight investments.
Interest costs incurred by the Company during the 1999 and 2000 Quarter's
included (1) interest paid to financial institutions for loans made to the
Company; 2) interest paid for the Company's IRBs; and 3) amortization of costs
incurred as a consequence of the completion of the Company's IRB financing.
Interest expense increased by $7,023 or 9.8% from $74,489 during the 1999
Quarter to $81,512 during the 2000 Quarter.
10
<PAGE>
Results of Operations
Six Months Ended June 30, 2000 Compared with Six Months Ended June 30, 1999.
Revenues
Gross revenues increased by $1,286,191 or 125.5% from $1,024,936 during the 1999
Period ("the 1999 Period") to $2,311,127 during the 2000 Period. ("the 2000
Period").
Revenues realized from short-term projects remained increased from $60,949 or
14.1% from $432,595 during the 1999 Period to $493,544 during the 2000 Period.
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, (as mentioned below) and has continued to focus its
efforts on identifying long-term customers.
Revenues realized from various long-term projects increased by $1,329,969 or
317.3%, from $419,140 during the 1999 Period to $1,749,109 during the 2000
Period. This increase is primarily due to work being done on twenty-one
individual projects. Of the $1,749,109 in long-term contracts, one major client
represents 54.9% of the revenue earned during the period. This project was
awarded from the Illinois Institute of Technology Research Institute. This five-
year subcontract 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. The Company's management continues to take an active role in
negotiating new contracts. In addition twelve new contracts, with estimated
gross revenues of $1.1 million for the year 2000, were entered into during the
2000 Period. At June 30, 2000, the Company has approximately 27-31 contracts out
for bid with various potential customers. These contracts, if awarded, would
provide the Company with approximately $6.8 - $10.6 million in revenues over the
next two to three years.
The Company experienced a decrease in revenue realized from government grants in
the amount of $79,717, or 56.0%, from $142,401 during the 1999 Period to $62,684
during the 2000 Period. This decrease is primarily due to the elimination of two
of the three grants. The Company anticipates completion of the remaining project
by August 2000.
The Company experienced a decrease in revenue realized from AccuTrac in the
amount of $25,010, or 81.2%, from $30,800 during the 1999 Period to $5,790
during the 2000 Period. This decrease is primarily due to heavy purchases in
1999 after the initiation of the product into the market.
Expenses
Cost of Services. Cost of services consists primarily of labor, laboratory
supplies and miscellaneous indirect costs. The cost of services increased by
$488,288, or 72.0%, from $678,256 during the 1999 Period to $1,166,544 during
2000 Period. The cost of services as a percentage of revenue was 50.5% and
66.2% during 2000 and 1999, respectively.
11
<PAGE>
Labor costs increased by $289,894, or 82.6%, from $350,988 during the 1999
Period to $640,882 during the 2000 Period. This increase reflects a reallocation
of the Company's resources to the general operations of the business from the
research and development and General and Administrative areas. This reallocation
is necessary to support the additional long-term projects currently in progress.
The costs for direct materials increased by $175,897, or 62.1%, from $283,355
during the 1999 Period, to $459,252 during the 2000 Period. These increased
costs are directly attributable to the increase in revenues. Other costs
increased by $22,498, or 51.2%, from $43,913 during the 1999 Period to $66,411
during the 2000 Period. This increase in costs is due to increases in additional
postage and lease expenditures on equipment.
Selling, General and Administrative. Sales, general and administrative expenses
("SGA") consist primarily of compensation and related costs for administrative,
marketing and sales personnel, facility expenditures, professional fees,
consulting, taxes, and depreciation. Total SGA costs decreased by $363,072, or
29.0%, from $1,250,734 during the 1999 Period to $887,662 during 2000 Period.
As a percentage of revenue, these costs were 38.4% and 122.0% during 2000 and
1999, respectively.
Total Compensation and Benefits decreased by $219,301 or 61.7% from $355,655
during the 1999 Period to $136,354 during the 2000 Period. This decrease is
primarily attributable to the reallocation of personnel in the administrative
area to work on the subcontract from the Illinois Institute of Technology
Research Institute.
Costs for facilities decreased by $20,062, or 16.8%, from $119,460 during the
1999 Period to $99,398 during the 2000 Period. This decrease is primarily due to
the elimination of rental lab space required prior to moving into the new
facility.
Professional fees increased by $31,643, or 18.1%, from $174,771 during the 1999
Period to $206,414 during the 2000 Period. This increase is primarily due to the
additional expenditures in legal, production costs associated with the annual
report, and additional coverage in business insurance.
Marketing costs decreased by $156,686 or 79.8%, from $196,412 during the 1999
Period to $39,726 during the 2000 Period. Reductions in advertising, public
relations and payments consulting services contributed to the decrease in
marketing costs.
Research and Development. Research and development costs within the Company
fall into two general categories: grant-related research and development and in-
house research and development. These categories are distinguished by those
performed in support of government grant-sponsored programs, and those performed
in the absence of such grants which are funded from working capital. Total
expenditures for these two categories decreased by $148,277, or 60.0%, from
$247,105 during the 1999 Period to $98,828 during the 2000 Period. Total grant-
related research and in-house research as a percentage of revenue were 4.3% and
24.1% during 2000 and 1999, respectively.
Expenditures to perform grant-related research activities decreased by $71,415
or 56.4%, from $126,682 during the 1999 Period to $55,267 during the 2000
Period. This decrease is primarily due to the elimination of two of the three
grants. The Company anticipates completion of the remaining project by August
2000.
12
<PAGE>
Expenditures made by the Company for in-house research activities decreased by
$76,862 or 63.8%, from $120,423 during the 1999 Period to $43,561 during the
2000 Period. This decrease is primarily attributable to the reallocation of
personnel in the research and development area to work on the subcontract from
the Illinois Institute of Technology Research Institute.
Other Income (Expenses)
Interest income to the Company decreased by $49,566, or 73.7% from $67,226
during the 1999 Period to $17,660 during the 2000 Period. Interest income has
been derived from investing the unused portion of the funds realized by the
Company from the successful sale (March 1998) of Industrial Revenue Bonds (IRBs)
for construction of the Company's new facility. Interest income on this segment
decreased due to the reduction in funds used for the completion of the project.
Other income decreased primarily due to the termination of funding from the
Virginia Business Assistance Program (Workforce Services) for the training of
new employees.
Interest costs incurred by the Company during the 1999 and 2000 Period's
included (1) interest paid to financial institutions for loans made to the
Company; 2) interest paid for the Company's IRBs; and 3) amortization of costs
incurred as a consequence of the completion of the Company's IRB financing.
Interest expense increased by $16,426 or 10.9% from $150,417 during the 1999
Period to $166,843 during the 2000 Period.
Liquidity and Capital Resources
The 2000 Period reflected a decrease in cash of $140,585 from operating
activities, as compared to a decrease of $1,643,125 from operating activities
during the 1999 Period. The significant cash outflow for 1999 was primarily due
to substantial investments made by the Company in facility costs, personnel,
equipment, sales, and marketing efforts. The cost outlays in 1999 were made
possible by capital realized from the Company's private placement of convertible
notes and initial public offering of public stock.
Net working capital (deficit) as of June 30, 2000 and December 31, 1999 was
$326,906 and $(407,290) respectively. This increase is a direct result of
additional record revenues for the Company as well as significant cost cutting
measures adopted by management
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 June 30, 2000, the Company has approximately 27 - 31 contracts out for bid
with various potential customers. These contracts, if awarded, would provide
the Company with approximately $6.8- $10.6 million in revenues over the next two
to three years. In addition, CBI has signed 12 new contracts with a collective
valuation of nearly $1.1 million. These revenues will be realized throughout the
year 2000.
13
<PAGE>
In February 2000, the Company received funds totaling $573,151 from an
individual who was at one time a Director in the Company. These funds were
received from the exercise of options.
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, and
. 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.
14
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not currently involved in any legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On April 27, 2000, the Company held its Annual Meeting of Shareholders.
The following were the results of the meeting:
(1) The Shareholders elected Richard J. Freer, Ph.D. and George F. Allen as
Class III directors to serve until the Company's Annual Meeting of Shareholders
in 2003 or until their successors are elected and shall have qualified. The
votes were as follows:
Votes Withheld /
Director Votes Cast For Votes Cast Against Broker Non-Votes
Richard J. Freer, Ph.D. 1,425,114 1,100
George F. Allen 1,425,114 1,100
(2) The shareholders elected Raymond H. Cypess as a Class I director to
serve until the Company's Annual Meeting of Shareholders in 2001 or until his
successor is elected and shall have qualified. The votes were as follows:
Votes Withheld /
Director Votes Cast For Votes Cast Against Broker Non-Votes
Raymond H. Cypess 1,425,114 1,100
(3) The shareholders of the Company ratified the appointment of McGladrey &
Pullen, LLP as independent auditors of the Company for the fiscal year ending
December 31, 2000. The votes were as follows:
Votes Withheld /
Votes Cast For Votes Cast Against Broker Non-Votes
1,423,819 2,400 --
The following individuals' terms as directors of the Company continued after
the meeting:
Director Name Class Term Expires
Thomas R. Reynolds I 2001
Robert B. Harris II 2002
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit Number Description of Exhibit
4.1 Form of Common Stock Certificate (1)
4.2 Form of Underwriter's Warrant, as amended (1)
4.3 Form of Management Warrant, as amended (1)
4.4 Indenture of Trust by and between the Virginia Small Business
Financing Authority and Crestar Bank relating to the issuance
of industrial revenue bonds for the benefit of the Company (2)
10.1 Placement Agreement by and between the Company and Anderson &
Strudwick, Incorporated (1)
10.2 Warrant Agreement between the Company and Anderson & Strudwick,
Incorporated (1)
10.3 Warrant Agreement between the Company and Richard J. Freer, as
amended (1)
10.4 Warrant Agreement between the Company and Thomas R. Reynolds,
as amended (1)
15
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10.5 Warrant Agreement between the Company and Robert B. Harris, as
amended (1)
10.6 Employment Agreement for Richard J. Freer (1)
10.7 Employment Agreement for Thomas R. Reynolds (1)
10.8 Employment Agreement for Robert B. Harris (1)
10.9 Executive Severance Agreement for Richard J. Freer (1)
10.10 Executive Severance Agreement for Thomas R. Reynolds (1)
10.11 Executive Severance Agreement for Robert B. Harris (1)
10.12 1997 Stock Incentive Plan, as amended (1)
10.13 Form of Incentive Stock Option Agreement (1)
10.14 Loan Agreement by and between the Virginia Small Business
Financing Authority and the Company (2)
27.1 Financial Data Schedule (3)
-----------------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2, Registration No. 333-31731, as amended.
(2) Incorporated by reference to the Company's Current Report on Form 8-K,
dated April 6, 1998, File No. 001-13467.
(3) Filed herewith.
(b) No Reports on Form 8-K were filed for the period covered by this report.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
COMMONWEALTH BIOTECHNOLOGIES, INC.
By: /s/ James H. Brennan
--------------------
James H. Brennan
Controller and Principal Accounting Officer
August, 2000
16
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Exhibit
4.1 Form of Common Stock Certificate (1)
4.2 Form of Underwriter's Warrant, as amended (1)
4.3 Form of Management Warrant, as amended (1)
4.4 Indenture of Trust by and between the Virginia Small Business
Financing Authority and Crestar Bank relating to the issuance
of industrial revenue bonds for the benefit of the Company (2)
10.1 Placement Agreement by and between the Company and Anderson &
Strudwick, Incorporated (1)
10.2 Warrant Agreement between the Company and Anderson & Strudwick,
Incorporated (1)
10.3 Warrant Agreement between the Company and Richard J. Freer, as
amended (1)
10.4 Warrant Agreement between the Company and Thomas R. Reynolds,
as amended (1)
10.5 Warrant Agreement between the Company and Robert B. Harris, as
amended (1)
10.6 Employment Agreement for Richard J. Freer (1)
10.7 Employment Agreement for Thomas R. Reynolds (1)
10.8 Employment Agreement for Robert B. Harris (1)
10.9 Executive Severance Agreement for Richard J. Freer (1)
10.10 Executive Severance Agreement for Thomas R. Reynolds (1)
10.11 Executive Severance Agreement for Robert B. Harris (1)
10.12 1997 Stock Incentive Plan, as amended (1)
10.13 Form of Incentive Stock Option Agreement (1)
10.14 Loan Agreement by and between the Virginia Small Business
Financing Authority and the Company (2)
27.1 Financial Data Schedule (3)
-------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2, Registration No. 333-31731, as amended.
(2) Incorporated by reference to the Company's Current Report on Form 8-K,
dated April 6, 1998, File No. 001-13467.
(3) Filed herewith.
17
