10KSB: Optional form for annual and transition reports of small business issuers [Section 13 or 15(d), not S-B Item 405]

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 ___
-

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.
-

PART I
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Item 1. Description of Business
-----------------------

Overview

Commonwealth Biotechnologies, Inc (the "Company") was founded in 1992
to provide sophisticated research and development support services on a contract
basis to the biotechnology industry. The Company's customers consist of private
companies, academic institutions and government agencies, all of which use
biological processes to develop products for health care, agricultural and other
purposes. The Company's revenues are derived principally from providing
macromolecular synthetic and analytical services to researchers in the
biotechnology industry or to researchers who are engaged in life sciences
research in government or academic labs throughout the world.

The Company provides these services to customers on a contract basis
and derives its revenues from these services, and not only from sales of
commercial products resulting from the research. This arrangement distinguishes
the Company from many other biotechnology companies in that the Company's
revenues are not 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.

2

Expansion of its Marketing Capabilities. The Company has expanded its
---------------------------------------
customer base primarily through placement of print ads in several
periodicals and industry sourcebooks, by attendance at a limited number
of trade shows, seminars and meetings, through its own 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
---------------------------------------
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.

3

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.

4

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.

5

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/
- ------------

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.

6

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/
- --------------------------------------------------------------

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

7

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.

8

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
---------------------------------------------------

No matter was submitted to a vote of security holders during the fourth
quarter of 1999.

9

PART II
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Item 5. Market for Common Equity and Related Stockholder Matters.
---------------------------------------------------------

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.