10KSB: Optional form for annual and transition reports of small business issuers [Section 13 or 15(d), not S-B Item 405]
Published on March 31, 1998
18
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, 1997
[ ] 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 56-1641133
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
911 East Leigh Street, Suite G-19
Richmond, Virginia 23219
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (804) 648-3820
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, 1997 were
$1,761,308.
The aggregate market value of the shares of common stock, without par
value ("Common Stock"), of the registrant held by non-affiliates on March 23,
1998 was approximately $13,355,029, based upon the closing sales price of these
shares as reported on the Nasdaq SmallCap Market on March 23, 1998.
As of March 30, 1998 there were 1,620,514 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 14, 1998 are incorporated by
reference into Part III of this Form 10-KSB.
Portions of the registrant's 1997 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
Item 1. Description of Business.
Overview
Commonwealth Biotechnologies, Inc. (the "Company") was founded in 1992
by four experienced research scientists 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 (protein/peptide, and DNA/RNA chemistries) to researchers in the
biotechnology industry or who are engaged in life sciences research in
government or academic labs.
The Company provides these services to customers on a contract basis
and derives its revenues from these services, and not 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
directly dependent on successfully commercializing 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 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, 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 government agencies. These research grants support the
bulk of the Company's research efforts on its own proprietary technologies. The
Company is developing its own technologies in the areas of anti-coagulation,
cell targeting, and genomic sequence analysis.
Growth Strategy
The Company's strategy for growth includes:
Expansion of its 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. By securing a
significantly larger laboratory facility and additional research
equipment, the Company will have the capacity to generate substantially
greater revenues from its core services, to offer new technologies, and
to improve profit margins through more efficient operations.
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 World Wide Web
Home Page, and by word-of-mouth recommendations. The Company has
increased its print-ad marketing and will continue to utilize these
other strategies to attract customers. However, the Company will also
expand its sales and marketing capabilities in three areas:
The Company is currently recruiting sales representatives to
cover three major biotechnology areas of the Country: the
Boston/New York/New Jersey area, the San Diego area, and the
San Francisco Bay area. It is anticipated that two (2)
full-time sales representatives will be trained in the field
and that these individuals will be primarily targeting
pharmaceutical and biotechnology companies and government
agencies.
The Company has engaged Advantage Consulting, Inc. to
facilitate its ability to successfully compete for contracts
with the U.S. Department of Defense and the Department of
Justice, both of which have an interest in DNA technologies.
The Company plans to engage an advertising and marketing firm
to advise the Company on new strategies and tools to enhance
both the Company's visibility, and its ability to identify and
reach new customers.
Regulatory Compliance. The Company expects to come into compliance with
GLP (Good Laboratory Practices) and CLIA (Clinical Laboratory
Improvement Act) guidelines, which will enable the Company to offer
services to customers requiring compliance with those standards.
Expansion into New Service Technologies. The Company continues to
critically examine new technologies with a view to expanding its
customer base and sources of revenue. The Company has already made
inroads in establishing new service technologies and offering these
services to its customers. In 1998, the Company will 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. The Company will continue to expand
these services in 1998 through the acquisition of additional
sequencing instrumentation, and through the development of a
Bioinformatics Group.
Genome Sequencing. The Company is developing
comprehensive genome sequencing capabilities in parallel with
the development of the Bioinformatics Group. The Company is
already sequencing human microbial pathogens.
Genetic Analysis. The Company has established a Genetic
Testing Group and is evaluating several likely applications,
including screening for mutations in several genes associated
with human hereditary diseases, and for genes in which
mutations confer an increased probability for the development
of specific cancers during the lifetime of the individual.
Identity Testing by Genetic Analysis. Many states have
mandated that people passing through the criminal justice
system be sampled and that their genetic fingerprints be
determined. However, most state laboratories lack the
facilities and people necessary to perform these assays. The
Company is positioned to provide these services and is
establishing a DNA Reference Laboratory containing all the
necessary work areas required to provide these services. The
Company expects to become accredited for performance of this
service in early 1998.
Centralized Computer Facilities. The Company will acquire and
maintain a more centralized server for databasing and
analysis, and to develop a more sophisticated company-wide
intranet. We are also evaluating powerful software packages to
permit more efficient data handling, storage, backup, and
analysis.
Expanded DNA Synthesis Services. DNA analogs called "Protein
Nucleic Acids" or PNAs, are insensitive to nucleases that
degrade DNA, and hybridize with more specificity and stability
to complementary DNA. The Company has negotiated an agreement
with Perseptive Biosystems, Inc. to synthesize and distribute
PNAs in the Mid-Atlantic region of the United States. In
addition, demand for DNA/RNA synthesis continues to increase,
and in particular, the Company is one of the few offering
commercial RNA synthesis.
Bioorganic Mimetic Chemistry. Incorporation of organic
"mimetic" structures into drugs often leads to enhanced
stability and oral availability of the drug. The Company now
offers synthesis of these mimetic structures, and expects
demand to increase for this service.
Expanded Mass Spectroscopy Services and Carbohydrate
Analytical Services. The Company is studying whether to
establish a full-service mass spectral facility in its new
laboratories and whether sufficient demand exists for
initiating detailed carbohydrate analytical services.
Analytical Support Services
In order to 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, scientific and 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 which can perform these
analytical services, and instead they choose to contract with the Company for
these services.
The Company is a fee-for-service contractor and typically takes no
ownership position in the intellectual property rights of the services it
performs under contract for 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 which offer integrated DNA/RNA and protein/peptide
technologies and none that offer these technologies combined with sophisticated
biophysical techniques, such as RNA synthesis, DNA synthesis, PNA synthesis,
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 players in the pharmaceutical industry to major government
sponsors of research, such as the National Institutes of Health ("NIH"). 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 World Wide Web page. Some of these services
include:
Oligonucleotide Synthesis. Nucleotides are the building blocks of DNA
and RNA. The Company provides both routine syntheses and custom synthesis
chemistries for design of special nucleotide derivatives. Very few commercial
companies offer custom RNA synthesis or synthesis of RNA/DNA hybrid molecules,
and the Company has been successful in supplying
these specialized products to academic and commercial customers. In addition,
the Company now produces PNAs.
Protein/Peptide Synthesis. Assembly of amino acids into chains creates
synthetic peptides. Equipment purchased with a portion of the proceeds from its
initial public offering (the "IPO") have substantially increased the Company's
capacity for peptide synthesis. The Company plans to add two additional
synthesizers in the near future.
DNA Sequencing. Sequencing is essentially the reverse process of
synthesis. In a typical experiment, a customer will require 10-20 sequencing
reactions. However, a number of customers require thousands of sequencing
reactions, for which the Company offers aggressive discounts in pricing.
Peptide/Protein Sequencing. Analysis of the order of amino acids in
proteins and enzymes is an important analytical tool. The Company provides
N-terminal sequence analysis. New instruments which have been ordered will allow
the Company to offer automated C-terminal sequence analysis.
Peptide/Protein Compositional Analysis. Analysis of the amino acids
that compose a protein or peptide is used to verify purity of synthesized
peptides and to determine the make-up of newly discovered proteins or enzymes.
Customers
The Company currently provides similar products and support to more
than 400 researchers at more than 350 different institutions world-wide.
Short-Term Research Projects. On average, in 1997, the Company added 16
new customers per month. Of its domestic customers, 59% work in private
companies, and 41% are located in university or governmental labs. In 1997, the
Company added 19 new foreign research institutes in Japan, India, Greece,
Columbia, Korea, Norway, Spain, Sweden, and Canada.
In 1997, the Company averaged 66 new orders per month. The nature of
these orders vary widely; some are for relatively straight-forward chemistries
which take a minimum amount of time to complete, while other orders are for more
complicated procedures which take several weeks to complete.
The Company's customers come from many sources. The Company advertises
in the professional journals, exhibits at trade shows, and has its own Web page
from which a potential customer may directly download order forms and place an
order, if desired. 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. Of course, favorable
word-of-mouth advertising is key to our success, and has brought us many new
investigators within a single research-based institution. All inquiries to the
Company receive immediate and personal attention. Quotations are usually sent
back to a potential customer within
the day, and certainly within 24 hours. Customers continue to comment favorably
on their phone, fax, and email interactions with the Company's staff personnel.
Long-Term Research Projects. The Company actively pursues long-term
research contracts with government, private, and university research institutes.
Some contracts are to perform services to a customers' list of specifications,
while other contracts are to perform basic research into a problem of interest
to the customer. The Company is able to attract these customers because of the
breadth of technologies that it offers. In 1997, one private industry customer,
with research facilities in 4 locations in 3 different states (27 different
principal investigators), accounted for approximately 21% of the Company's total
gross revenues. The Company regularly bills this (and other) customers against
numerous standing purchase orders. The Company completed several research
contracts in 1997 resulting in total aggregate revenue of $561,007.
Operations
Requests for quotes from potential customers are received via phone,
e-mail, from the Company's World Wide Web page, or by hard copy directed to the
Company's business coordinator or laboratory manager. All inquiries are answered
by direct mail of the Company brochure and price lists, with follow up phone
calls, where appropriate. Price quotes for small projects or routine analytical
procedures are generated by scientists who possess the expertise necessary to
respond appropriately. 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 straight-forward, 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 his
results. If the project entails 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, which 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 services provided in accordance with the
Company's standard fee structure and typically retains all rights to any
developments 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. CBI does
not foresee itself as a manufacturer of any products that might result from
these research efforts; rather, the goal of these projects 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. The Company has completed three different Phase I
Small Business Technology Transfer Research ("SBTTR") grants from NIH ($100,000
each), has completed the first year of a Phase II SBTTR grant from NIH
($235,000), and is in the second year of the Phase II SBTTR grant from NIH
($265,000). The Company has also completed a Phase I Small Business Innovative
Research Award ("SBIR") from the United States Department of Agriculture
($55,000), and has made application for the Phase II SBIR award ($ 250,000). The
Company has several other grant applications pending with various Federal and
State agencies. Revenues from federally funded contracts are recognized on a
cost reimbursement basis. The Company generally receives grant payments
semi-monthly, with the amount of each payment being determined by the amount of
the costs incurred in the immediately preceding two-week period.
Intellectual Property
The Company's principal intellectual property rights consist of a
patent relating to an anti-coagulation technology it is developing. 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 Company was issued a patent relating to
its anti-coagulation technology in March 1998, but to yield commercial products,
these technologies will require extensive
additional testing and government approval. As a result, there can be no
assurance that commercial products will result from these technologies.
An unexpected finding from its heparin antagonist research program
was that the Company's compounds are effective stabilizing agents for certain
human peptide pharmaceuticals. In this respect, the compound has the potential
to effectively replace protamine in these formulations. This would be desirable
because patients who receive protamine-stabilized drug formulations are at
increased risk of severe allergic response ("anaphylaxis") if they ever receive
protamine in conjunction with heparin therapy. The Company intends to establish
its patent position for this application of its technology, but there can be no
assurance that a commercial product will result.
The Company has assigned to RhoMed Inc. its interest in a patent for
high affinity chemotactic peptides which can be used in radiological detection
of infections, inflammations, and deep seated abscesses. The peptide structures
were designed with intellectual input from the Company's scientists, and the
compounds themselves were prepared at the Company. The Company will receive a
continuing royalty based on sales of a diagnostic kit which incorporates the
peptides. To date, RhoMed has not commercialized a diagnostic kit based on the
peptides under patent, and there can be no assurance that commercial products
will result from these technologies.
The Company is actively pursuing development of an immunoassay for
equine infectious 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. Initially funded by a
$ 55,000 grant from the United States Department of Agriculture (the "USDA")
(the only award of its kind from the USDA for equid related health problems),
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 will assess its patent position for
its test, and hopes to enter into negotiations with a corporate partner
interested in commercializing this diagnostic assay.
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 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 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 World Wide Web Home Page
(www.cbi-biotech.com) and is listed with several biotechnical and biomedical
oriented sites on the World Wide Web.
Human Resources
The Company currently has 33 full time and three part time employees,
including eight employees in administration, one employee in marketing and
customer relations, eight employees in research and development, one computer
network specialist, and 25 employees in laboratory operations. Some employees in
research and development also participate in laboratory operations. Seven of the
Company's employees hold doctorate degrees, and six 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 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 will also require a new license from the Nuclear
Regulatory Commission ("NRC") for the operation of its planned new laboratory
facility. The Company estimates that the time period of obtaining the NRC
license should not exceed three months.
The commercialization of the Company's proprietary technologies would
also be subject to extensive government regulation and approval requirements,
including the need for pre-clinical laboratory and animal tests and human
clinical trials for FDA approval of human pharmaceutical products. 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 would
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
The Company currently occupies 12,000 square feet of laboratory and
office space in two adjacent buildings. The lease for one location continues
through the year 2000 and is subject to cancellation by the Company upon nine
months' notice. The lease for the other location continues through May 31, 1998,
is renewable for additional one year terms and is subject to cancellation by the
Company upon three months' notice.
As part of its growth strategy, the Company requires considerably more
space for its laboratory facilities. On March 24, 1998, the Virginia Small
Business Financing Authority (the "VSBFA") issued $4,000,000 in tax exempt
industrial revenue bonds ("IRBs") for the benefit of the Company, the proceeds
from the sale of which, together with other available funds, will be used to
acquire, construct and equip a 30,000 square foot facility in Chesterfield,
Virginia. The Company anticipates that it will relocate to its new facility in
the fourth quarter of 1998.
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.
On September 1, 1997, the shareholders of the Company, by unanimous
written consent, amended the Company's 1997 Stock Incentive Plan (the "Incentive
Plan") to increase the number of shares of the Company's Common Stock issuable
thereunder from 376,667 shares to 410,000 shares. Of the 410,000 shares issuable
under the Incentive Plan, 270,000 shares were reserved for issuance to the
Company's founders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information
The information set forth on page 9 of the Company's 1997 Annual Report
to Shareholders under the caption "Market for Common Equity" is incorporated
herein by reference.
Private Placements of Securities
On June 25, 1997, the Company sold subordinated convertible notes in an
aggregate principal amount of $3,000,000 to 42 accredited investors in an
offering exempt from registration pursuant to Rule 506 of Regulation D
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
Such notes accrued interest from June 25, 1997 until October 28, 1997, the date
of the Company's IPO, at a rate of 20% per annum, payable in shares of Common
Stock at a rate of $6.00 per share. Anderson & Strudwick Incorporated ("A&S")
served as placement agent in connection with such private placement and received
a $240,000 placement fee.
On June 25, 1997, the Company issued warrants to purchase an aggregate
of 100,000 shares of Common Stock to the four founders of the Company for $.001
per warrant (the "Management Warrants"). Each Management Warrant entitles the
holder to purchase one share of Common Stock at an exercise price of $9.90 per
share. Such warrants are exercisable between June 25, 1998 and June 25, 2007.
The sale and issuance of the Management Warrants were exempt from the
registration provisions of the Securities Act by virtue of Section 4(2) thereof
as
transactions not involving any public offering. The resale of the Management
Warrants was registered pursuant to the Company's Registration Statement on Form
SB-2, Registration No. 333-31731.
On October 28, 1997, the Company issued warrants to purchase an
aggregate of 101,500 shares of Common Stock to A&S, the underwriter for the IPO
(the "Underwriter Warrants"). The price paid by A&S for the Underwriter Warrants
was $.001 per warrant. Such warrants have an exercise price of $9.90 per share
and are exercisable between October 28, 1998 and October 17, 2002. The sale and
issuance of the Underwriter Warrants were exempt from the registration
provisions of the Securities Act by virtue of Section 4(2) thereof as
transactions not involving any public offering. The resale of the Underwriter
Warrants was registered pursuant to the Company's Registration Statement on Form
SB-2, Registration No. 333-31731.
As of December 31, 1997, the Company issued incentive stock options to
purchase an aggregate of 317,200 shares of Common Stock to certain employees of
the Company pursuant to the Incentive Plan. Such options have exercise prices
equal to the fair market value of the Common Stock on the date of grant. Each
option granted pursuant to the Incentive Plan is exercisable for a period of ten
years following the grant thereof. The issuance by the Company of incentive
stock options pursuant to the Incentive Plan was exempt from the registration
provisions of the Securities Act by virtue of Rule 701 promulgated thereunder.
Use of Proceeds of IPO
On October 28, 1997, the Company completed its IPO of Common Stock. The
underwriter of the IPO was A&S. Pursuant to the Company's Registration Statement
on Form SB-2, Registration No. 333-31731, the Company registered an aggregate of
1,015,000 shares of Common Stock for an aggregate offering price of $6,090,000.
The expenses incurred by the Company in connection with the IPO, including
underwriting commissions and other expenses paid to A&S, were approximately
$687,200, resulting in net proceeds to the Company of $5,402,800. As of December
31, 1997, the Company had not expended any of the IPO proceeds, which are
currently invested in an interest-bearing account at a commercial bank.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information set forth on pages 10 through 14 of the Company's 1997
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 Goodman & Company, L.L.P., set forth on pages 15
through 27 of the Company's 1997 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, subject to the approval of the Company's shareholders, the firm McGladrey
& Pullen, LLP as independent public accountants to audit the Company's
consolidated financial statements for the fiscal year ended December 31,1998. If
the appointment of McGladrey & Pullen, LLP is not approved by the shareholders,
the matter will be referred to the Audit Committee for further review.
PART III
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 14, 1998 (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.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description of Exhibit
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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
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 Gregory A.
Buck, as amended (1)
10.6 Warrant Agreement between the Company and Robert B.
Harris, as amended (1)
10.7 Employment Agreement for Richard J. Freer (1)
10.8 Employment Agreement for Thomas R. Reynolds (1)
10.9 Employment Agreement for Gregory A. Buck (1)
10.10 Employment Agreement for Robert B. Harris (1)
10.11 Executive Severance Agreement for Richard J. Freer (1)
10.12 Executive Severance Agreement for Thomas R. Reynolds (1)
10.13 Executive Severance Agreement for Gregory A. Buck (1)
10.14 Executive Severance Agreement for Robert B. Harris (1)
10.15 1997 Stock Incentive Plan, as amended (1)
13.1 Portions of Annual Report to Shareholders for the Fiscal
Year Ended December 31, 1997 Incorporated in Form 10-KSB
(2)
16.1 Letter on change in certifying accountant (3)
27.1 Financial Data Schedule (2)
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(1) Incorporated by reference to the Company's Registration
Statement on Form SB-2, Registration No. 333-31731.
(2) Filed herewith.
(3) Incorporated by reference to Amendment No. 1 to the Company's
Current Report on Form 8-K, filed on March 12, 1998.
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:
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(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, 1997, the Company filed the
following report on Form 8-K:
1. Form 8-K, dated December 23, 1997, relating to the announcement of
the Company's plans to develop a new research facility.
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, 1998 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.