10QSB: Optional form for quarterly and transition reports of small business issuers
Published on May 17, 1999
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 MARCH 31, 1999
_____ 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 May 12, 1999, 1,643,727 shares of common stock, no par value, of
the registrant were outstanding.
Transitional Small Business Disclosure Format (Check one)
Yes: No: X
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
COMMONWEALTH BIOTECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
See accompanying Notes to Condensed Financial Statements.
COMMONWEALTH BIOTECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
See accompanying Notes to Condensed Financial Statements.
COMMONWEALTH BIOTECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
See accompanying Notes to Condensed Financial Statements.
Notes To Condensed Financial Statements
(1) In the opinion of the Company, the accompanying condensed
financial statements which are unaudited, except for the
condensed balance sheet dated March 31, 1999, contain all
adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of March
31, 1999 and December 31, 1998 and the results of operations
and cash flows for the three months ended March 31, 1999 and
1998.
(2) The results of operations for the three months ended March 31,
1999 and 1998 are not necessarily indicative of the results to
be expected for the full year.
(3) Earnings (loss) per share: The Company follows the guidance
provided in FASB Statement No. 128, Earnings Per Share, which
establishes standards for computing and presenting earnings
per share and applies to entities with publicly held common
stock or potential common stock. Those entities that have only
common stock outstanding are required to present basic
earnings per share amounts. All other entities are required to
present basic and diluted per share amounts. Diluted per share
amounts assume the conversion, exercise or issuance of all
potential common stock instruments such as options, warrants
and convertible securities, unless the effect is to reduce a
loss or increase earnings per share. At March 31, 1999 the
Company had stock options outstanding which were anti-dilutive
since the Company incurred a net loss for the three months
then ended.
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
Condensed Financial Statements and Notes included herein.
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 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.
The Company also derives revenues from government grants which fund the
bulk of the Company's research efforts for its proprietary technologies. Unlike
its short-term or long-term contract services, research and development on the
Company's proprietary technologies focuses on commercializing technologies that
the Company owns or licenses from third parties. All government grants are
expense reimbursement grants that 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.
In January 1999, the Company began sales of a new reagent
(AccuTrac(TM)) that facilitates the process of automated DNA sequence analysis.
In this respect, the Company anticipates broadening its revenue base by direct
sales of this reagent to its clients. AccuTrac(TM), was developed within the
Company and stems directly from the Company's research and development programs.
REVENUES
Gross revenues increased by $13,431 or 2.7% from $499,237 during the
first quarter of 1998 ("the 1998 Quarter") to $512,668 during the first quarter
of 1999 ("the 1999 Quarter").
SHORT-TERM PROJECTS
Revenues realized from short-term projects remained relatively flat
from the 1998 Quarter to the 1999 Quarter at approximately $220,238.
Revenues realized from Peptide Synthesis increased by $16,768 or 35.3%
from $47,521 during the 1998 Quarter to $64,289 during the 1999 Quarter.
Revenues attributable to protein sequencing increased by $12,661, or 52.5%, from
$24,125 during the 1998 Quarter to $36,786 during the 1999 Quarter. Revenues
derived from peptide synthesis and protein sequencing increased primarily due to
new customers placing orders with the Company. Revenues from two new core
technologies, Genetic Analysis and Molecular Biology, reported revenues during
the 1999 Quarter of $6,000 and $16,940 respectfully. There were no sales during
the 1998 Quarter for these services. Revenues from DNA Sequencing decreased by
$43,113 or 75.7% from $95,881 during the 1998 Quarter to $54,568 during the 1999
Quarter. This decrease is primarily due to the completion of two major projects
undertaken and completed by the Company during the 1998 Quarter.
Other "uncategorized" revenues decreased by $21,185 or 60.3% from
$35,125 during the 1998 Quarter to $13,940 during the 1999 Quarter. This
decrease is primarily due to administrative changes in invoicing; revenues
previously identified as "Other" are now more properly classed under defined
work items within the Company. Revenues realized from all other core
technologies remained essentially constant.
LONG-TERM PROJECTS
Revenues realized from various long-term projects decreased by $16,394
or 7.6%, from $230,711 during the 1998 Quarter to $214,317 during the 1999
Quarter. This increase is primarily due to work being done on fourteen
individual projects compared to only five projects in progress during the 1998
Quarter. The Company's management continues to take an active role in
negotiating new contracts. However, management is unable to say with certainty
when or whether any additional long-term contracts will be awarded.
RESEARCH GRANTS
The Company experienced an increase in revenue realized from government
grants in the amount of $23,975, or 48.9%, from $48,988 during the 1998 Quarter
to $72,963 during the 1999 Quarter. This increase is primarily due to the
continuation of work on three grants. During the first quarter of 1999 the
Company had one ongoing Phase II Small Business Technology Research grant (SBTR)
from the National Institutes of Health (NIH). Revenues earned in the 1999
Quarter amounted to $19,065. In addition, the Company was awarded a ($200,000)
Phase II Small Business Innovative Research Award (SBIR) from the United States
Department of Agriculture (USDA) for development of a Diagnostic for Equine
Infectious Anemia Infection. Revenues earned in the 1999 Quarter amounted to
$19,782. The Company anticipates completion of the project by August, 2000. The
Company was also awarded a Phase I SBIR ($100,000) from the NIH for development
of rapid assay methods for the detection of Botulism. Revenues earned in the
1999 Quarter amounted to $34,112. The Company anticipates this project will be
completed by May 1999. Work began in late September on both grants.
ACCUTRAC(TM) REVENUE
The Company began sales of a new reagent (AccuTrac(TM)) that
facilitates the process of automated DNA sequence analysis. Revenues during the
1999 Quarter amounted to $5,150. There were no sales during the 1998 Quarter.
The Company experiences quarterly 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 on 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 Company is unable
to predict for more than a few months in advance the volume and dollar amount of
future projects in any given period. The combined impact of commencement and
termination of research contracts from several large customers and unpredictable
fluctuations in revenue for laboratory services can result in very large
fluctuations in financial performance from period to period.
EXPENSES
Cost of services consists primarily of labor, laboratory supplies and
miscellaneous indirect costs. The cost of services increased by $54,957, or
21.5%, from $255,722 during the 1998 Quarter to $310,679 during 1999 Quarter.
The cost of services as a percentage of revenue was 70.2% and 60.1% during 1998
and 1999, respectively.
DIRECT LABOR
Labor costs increased by $32,711, or 27.1%, from $120,772 during the
1998 Quarter to $153,483 during the 1999 Quarter. This increase reflects a
reallocation of the Company's resources to the general operations of the
business from the research and development area. This reallocation is necessary
to support the additional long-term projects initiated by the Company during the
1999 Quarter.
DIRECT MATERIALS
The costs for direct materials increased by $18,479, or 15.0%, from
$123,351 during the 1998 Quarter to $141,830 during the 1999 Quarter. These
increased costs are directly attributable to the increased purchase of reagents,
chemicals and miscellaneous materials used in all the laboratories, and
increases in market prices of raw materials as well as relatively higher costs
for specialized reagents necessary to perform analyses that the Company was not
offering during the 1998 Quarter.
SELLING, GENERAL AND ADMINISTRATIVE
Sales, general and administrative expenses ("SGA") consist primarily of
compensation and related costs for administrative, marketing and sales
personnel, facility expenditures, professional fees, consulting, taxes, and
depreciation. Total SGA costs increased by $71,991, or 13.4%, from $537,064
during the 1998 Quarter to $609,055 during 1999 Quarter. As a percentage of
revenue, these costs were 139.% and 118.8% during 1998 and 1999, respectively.
COMPENSATION AND BENEFITS
Total compensation and benefits decreased by $30,137 or 14.5% from
$207,714 during the 1998 Quarter to $177,577 during the 1999 Quarter. This
decrease is primarily attributable to the resignation of one of the Company's
executive officers, who opted to return to his former academic position.
Additional reductions are due to reassigning a portion of management salaries
allocated to direct labor and research and development.
FACILITY COSTS
Costs for facilities increased by $16,590, or 35.0%,from $47,405 during
the 1998 Quarter to $63,995 during the 1999 Quarter. The costs for leasing
laboratory space for its operations decreased by $30,914 or 76.2% from $40,581
during the 1998 Quarter to $9,667 during the 1999 Quarter. This decrease is
primarily due to the relocation of the Company to its new corporate
headquarters. However, additional costs associated with the relocation and new
to the Company include electricity ($26,657), gas utility bills ($7,845), water
usage ($1,627), and janitorial services ($3,185). In the 1998 Quarter, these
costs were included in our monthly lease payment. Telephone use increased by
$6,806 due to a one time charge for software for the implementation of the new
telephone system.
PROFESSIONAL SERVICES
Professional fees decreased by $11,551 or 24.7%, from $46,724 during
the 1998 Quarter to $35,173 to the 1999 Quarter. This decrease is primarily due
to the reduction of legal costs associated with the day to day operations.
Consulting fees increased by $7,667 or 51.5 from $15,000 during the 1998 Quarter
to $22,667 during the 1999. This increase is due to the payment of a management
fee for the successful hiring of a sales representative on the west coast. Taxes
and license fees increased by 13,759 or 335.0% from 4,107 during the 1998
Quarter to $17,866 during the 1999 Quarter.
DEPRECIATION EXPENSE
Depreciation increased by $60,896 or 87.5% from $69,595 during the 1998
Quarter to $130,491 during the 1999 Quarter. Increased depreciation costs are
attributable to the purchase of additional laboratory equipment consistent with
expanding the Company's technology base. In addition, depreciation costs include
the new corporate facility that began full operations in December 1998. There
were no depreciation costs in the 1998 Quarter for any facility costs by the
Company.
MARKETING
Marketing costs increased by $15,985 or 22.5%, from $70,957 during the
1998 Quarter to $86,942 during the 1999 Quarter. Salaries and fringe benefits,
expenditures for a new brochure, additional advertising in the professional
journals, implementation of an advertising campaign for AccuTracTM, contract
costs with a media relations firm, travel, and trade show expenditures
contributed to these increased costs.
In September, 1998, the Company entered into a contract with the
Mattson Jack Group to perform a global market assessment of the Company's
potential human therapeutic, HepArrestTM. Total costs during the 1999 Quarter of
the Mattson Jack Group contract amounted to $16,458.
SELLING
Expenditures during the 1999 Quarter for selling amounted to $15,458.
Costs associated with selling include personnel, travel, and office expenses.
During the 1999 Quarter, the Company hired an Account Executive for the Western
Region to identify new clients. There were no expenses for selling during the
1998 Quarter.
RESEARCH AND DEVELOPMENT
Research and development costs within the Company fall into two general
categories: grant-related research and development and in-house research and
development. These categories are distinguished in the Company by those
performed in support of government grant-sponsored programs, and those performed
in the absence of such grants and funded from working capital. Total
expenditures for these two categories increased by $16,409, or 16.1%, from
$102,229 during the 1998 Quarter to $118,638 during the 1999 Quarter. Total
grant-related research and in-house research as a percentage of revenue were
29.6% and 23.1% during 1998 and 1999, respectively.
GRANT RELATED RESEARCH ACTIVITIES
Expenditures to perform grant-related research activities increased by
$33,674 or 126.3%, from $26,672 during the 1998 Quarter to $60,346 during the
1999 Quarter. Increase costs are primarily due to the continuation of work on
three grants.
During the first quarter of 1999 the Company had one ongoing Phase II
Small Business Technology Research grant (SBTR) grant from the National
Institutes of Health (NIH). Expenses incurred through the 1999 Quarter amounted
to $18,689. In addition, the Company was awarded a ($200,000) Phase II Small
Business Innovative Research Award (SBIR) from the United States Department of
Agriculture (USDA) for development of a Diagnostic for Equine Infectious Anemia
Infection. Expenses incurred through the 1999 Quarter amounted to $16,625. The
Company anticipates to complete the project by August, 2000. The Company was
also awarded a Phase I SBIR ($100,000) from the NIH for development of rapid
assay methods for the detection of Botulism. Expenditures incurred through the
1999 Quarter amounted to $24,866. The Company anticipates to complete this
project by May 1999. Work began in late September on both grants.
IN-HOUSE RESEARCH ACTIVITIES
Expenditures made by the Company for in-house research activities
decreased by $17,265 or 22.9%, from $75,557 during the 1998 Quarter to $58,292
during the 1999 Quarter. This decrease is primarily due to the reallocating of
salaries from research and development to direct labor. This reallocation was
necessary to support the additional long term projects initiated by the Company.
However, the Company continues to be actively engaged in establishing
fundamental methods for genetic testing for agricultural and human applications,
in developing methods of genome sequence analysis, and in pursuing fundamental
research related to potential uses of HepArrest in drug formulation. In
addition, the Company is continuing its in-house research and development
efforts with AccuTrac(TM).
OTHER INCOME AND EXPENSES
Interest income is derived from investing the unused portion of the
funds realized by the Company from the private placement of convertible notes in
June 1997, and initial public offering of common stock in October 1997 (IPO).
Interest income is also 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.
Other income represents funding from the Virginia Business Assistance Program
for the training of new employees. Interest income to the Company decreased by
$56,580, or 68.5% from $82,639 during the 1998 Quarter to 26,059 during the 1999
Quarter. Interest income realized from unused funds from the IPO decreased due
to the use of the funds throughout the 1998 fiscal year. Interest income earned
from the unused portion of the funds realized from the sale of IRBs remained
relatively flat for the 1998 Quarter as compared to the 1999 Quarter. Other
Income of $28,193, as mentioned above, represents funds for training assistance
awarded by the Virginia Business Assistance Program (Workforce Services) for new
employees of the Company. This program enables the Company to implement training
both from an orientation as well as safety program for all new employees who
have been with the Company for at least ninety days.
Interest costs incurred by the Company during the 1999 Quarter
included (1) interest paid to financial institutions as loans made to the
Company; (2) interest paid for the Company's IRBs; and (3) amortization of costs
incurred as a consequence of the completion of the Company's IRB financing.
Interest costs incurred by the Company during the 1998 Quarter included (1)
interest paid to financial institutions an loans made to the Company; and (2)
interest paid for the Company's IRBs. Interest expenses increased by $55,313 or
308.5% from $17,928 during the 1998 Quarter to $73,241 during the 1999 Quarter.
This increase is primarily due the payment of three months interest for the
Company's IRBs during the 1999 Quarter as compared to fifteen days during the
1998 Quarter.
LIQUIDITY AND CAPITAL RESOURCES
Consistent with the Company's implementation of its growth strategy,
1999 showed a decrease in net operating cash flow in the amount of $828,526, as
compared to a decrease of $228,662 in 1998. This decrease in both years is due
to substantial investments being made by the Company in facility costs,
personnel, equipment, sales, and marketing efforts, and these cost outlays were
made possible by capital realized from the Company's private placement of
convertible notes and initial public offering of common stock. The use of cash
in 1999 was fully anticipated by Management. However, based on expected cash
out-flow, management anticipates that unless the Company becomes profitable, the
remaining cash available invested by the Company will be needed for general
operations.
Net working capital as of March 31, 1999 and March 31, 1998 was
$1,165,686 and $5,739,919 respectively. This decrease is a direct result of
capital expenditures on new scientific instrumentation, computers, and furniture
and fixtures, costs associated with the new facility, implementation of
marketing and selling divisions within the Company, and costs associated with
additional staffing and direct materials necessary to expand the Company's
technology offerings.
IRBs sold by the Company (in the amount of $4,000,000) were issued by
the Virginia Small Business Financing Authority. The IRBs were issued pursuant
to an Indenture of Trust dated March 15,1998, between the Virginia Small
Business Financing Authority and Crestar Bank, a Virginia banking association,
the named trustee. The IRBs were issued and sold to facilitate construction of
the Company's facility in the Gateway Centre Development at 601 Biotech Drive in
Chesterfield County, Virginia. Funds generated by the sale of the IRBs are
restricted and may only be used for the construction of the Company's new
facility. Construction of the new facility began in early June and was completed
in late November,1998. Of the $4,000,000 issued by the Virginia Small Business
Financing Authority, $402,991 remains as restricted cash on the balance sheet of
the Company as of March 31,1999. All of the Company's administrative and
research operations have been consolidated into this facility and are fully
operational.
YEAR 2000 PROJECT
The Company is working to resolve the potential impact of the Year 2000
on the ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. Any of the Company's programs
that recognize a date using "00" as the year 1900 rather than 2000 could result
in errors or system failures. The Company is in the process of making its
assessment of the potential impact of the Year 2000 issue. As of May 14, 1999:
o The Company's financial institutions are in the process of
addressing Year 2000 compliance issues. Approximately 85% of
the financial institutions that the Company conducts
transactions are Year 2000 compliant and anticipate the
process to be completed by the end of the third quarter of
1999.
o During 1998, the Company upgraded its general accounting
system to a Year 2000 compliant version. During the first
quarter of 1999, the Company tested the general accounting
software. This software is considered to be Year 2000
compliant.
o The Company has completed the process of updating payroll
system to meet Year 2000 compliance standards.
o The Company believes that equipment purchased by the Company
during 1999 and 1998 is considered to be Year 2000 compliant.
o The Company's instrumentation is stand alone and not networked
to any other systems. The Company believes therefore that this
equipment is not date sensitive and therefore will not have to
be replaced or improved.
o The Company is currently communicating with suppliers and
customers to determine the extent to which they have addressed
Year 2000 issues. The Company is in the process of contacting
its suppliers to determine if the business operations are Year
2000 compliant. The Company has mailed eighty-five surveys to
its major suppliers to address this issue on whether they are
Year 2000 compliant. As of May 7, 1999, the Company has
received twenty responses to the survey. Out of the survey's
returned, twelve have stated that they are Year 2000
compliant. The remaining survey's stated that they are in the
process of being compliant. Follow up letters for the
remaining survey will be mailed out in the second quarter of
1999. The Company is also in the process of mailing out the
surveys to our customers. This process will begin in the next
few weeks. The Company expects to complete its Year 2000
compliance assessment of its suppliers and customers during
the third quarter of 1999.
The Company believes that it will complete its Year 2000 program by the
end of the third quarter of 1999. The Company believes that costs associated
with Year 2000 compliance will not exceed $30,000, and will not have a material
adverse impact on the Company's financial position.
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 which are not historical in nature, including the words
"anticipated", "estimate", "should", "expect", "believe", "intend", and similar
expressions are intended to identify forward-looking statements. Such statements
are, by their nature, subject to certain risks and uncertainties.
Among the factors-that could cause the actual results to differ
materially from those projected are the following:
o business conditions and the general economy,
o the development and implementation of the Company's long term business
goals,
o federal, state, and local regulatory environment,
o lack of demand for the Company's services,
o the ability of the Company's customers to perform services similar to
those offered by the Company "in-house,"
o potential cost containment by the Company's customers resulting in
fewer research and development projects,
o The Company's ability to receive accreditation to provide various
services, including, but not limited to paternity testing,
o The Company's ability to hire and retain highly skilled employees,
Other risks, uncertainties, and factors that could cause actual results
to differ materially from those projected are detailed from time to time in
reports filed by the company with the Securities and Exchange Commission,
including Forms 8-K, 10-QSB, and 10-KSB.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From October 17, 1997 through March 31, 1999, the Company spent
approximately $789,348 of the net proceeds of its initial public offering as
follows: (1) $216,093 on capital expenditures, (2) $210,558 for the development
of the Company's new laboratory facility, (3) $86,942 on marketing, (4) $15,458
on sales, (5) $36,657 on consulting fees for HepArrest, (6) on facility/bond
expenditures $ 73,389 and (7) $150,251 on production operating expenses. The
remaining proceeds are invested in an interest-bearing account at a commercial
bank.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-2, Registration No. 333-31731, as amended.
(2) Incorporated by reference to the Company's Current Report on Form 8-K,
dated April 6, 1998, File No. 001-13467.
(3) Filed herewith.
(b) Reports on Form 8-K.
During the fiscal quarter ended March 31, 1999, the Company filed one
Current Report on Form 8-K, dated March 19, 1999, announcing the resignation of
Charles A. Mills, III from the Company's Board of Directors.
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
May 14, 1999
EXHIBIT INDEX
(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.