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| CBTE > SEC Filings for CBTE > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
Quarterly Report
The following should be read in conjunction with the Company's Financial Statements and Notes included herein.
Overview
Commonwealth Biotechnologies, Inc. (the "Company" or "CBI") is a specialized life sciences outsourcing business that offers cutting-edge expertise and a complete array of discovery chemistry and biology products and services through its subsidiary companies: CBI Services, Fairfax Identity Labs ("FIL") and Mimotopes Pty Limited ("Mimotopes"). In March 2008, the company entered into a Joint Venture with Beijing-based, Venturepharm Laboratories, Ltd. in order to offer high throughput, low cost drug discovery services through new facilities in China. As of September 30, 2008 Exelgen Limited ("Exelgen") (formerly Tripos Discovery Research Ltd) was closed and is recorded on the annual statements as a discontinued operation.
Business Units
Revenues from all business units 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. This arrangement distinguishes CBI from many other biotechnology companies in that revenues are derived from services rather than from the successful commercialization of a new biotechnology product. CBI believes that Mimotopes, CBI Services and FIL have all developed a strong reputation as leading providers in their respective markets. Finally, in 2008 CBI entered into a Joint Venture with Beijing based Venturepharm Laboratories, Inc. in anticipation of being able to provide scale and scope to its current offerings. The areas of expertise and value propositions are outlined below:
At its Richmond location, CBI Services' core competencies are in the area of genomics and proteomics, principally serving the early stage research and development needs of its clients. These support true drug discovery at the most fundamental stage but also support many of the pre-clinical needs of our clients and, most recently, several clinical trials are being supported. We provide these services under the FDA's Good Laboratory Practices (GLP) Guidelines (21CFR Part 58). CBI is also able to provide clinical trial support under Good Clinical Practices (GCP) Guidelines by virtue of its Clinical Laboratory Improvement Act (CLIA) certification. Finally, CBI is increasing its capability to provide Good Manufacturing Practices (GMP) support for drug product release and drug product testing criteria.
A unique feature of the Richmond location is its Bio-Safety Level 3 (BSL-3) laboratory and it's CDC Registration for Select Agents. The company has capabilities in the area of bacterial and viral organisms and a very strong program in bio-threat toxin analysis. This capability has been at the core of the company's government-based contracts.
Also at the Richmond location is Fairfax Identity Laboratories (FIL). FIL has been at the forefront of DNA technology of profiling for identity since it opened its doors in 1990. FIL's rigorous standards are designed to provide credible evidence that affects decisions regarding criminal trials, paternity, immigration, estate settlement, adoption, and other issues of identity. FIL provides Forensics, Paternity and Convicted Offender DNA Index System ("CODIS") services to government and private concerns. FIL is accredited by the American Association of Blood Banks, the National Forensic Science Technology Center, and the Department of Health, State of New York. All testing is done under CLIA guidelines. Its employees have extensive laboratory and courtroom experience.
The Melbourne-based Mimotopes Pty Ltd was acquired by CBI in 2007. It provides world class research grade peptide synthesis and analysis. They also have several proprietary technologies for the preparation of peptide and small molecule libraries for drug discovery and for epitope analysis in support of its clients' vaccine development programs. They also have a formal peptide alliance with Genzyme Pharmaceuticals, a world class provider of GMP pharmaceutical grade peptides and also enjoys a strong relationship with GL Biochem, a Shanghai-based peptide synthesis and reagent company.
CBI's China based Joint Venture (JV) with Venturepharm Laboratories, Ltd was signed in March, 2008. As of March 31, 2009, no revenues have been generated as the development of the operations have taken longer than anticipated.
All business units cater to the outsourcing requirements of pharmaceutical and biotechnology companies for reagents (such as peptides, proteins and small molecules), as well as drug research and development. The adoption of outsourcing by the pharmaceutical and biotechnology industries is driven by three major deliverables:
(1) Speed. Faster discovery results accelerate the time to fail or advance a drug through the development pipeline. Eliminating bad leads early or shaving weeks or months from the time it takes to get a drug to market can mean millions of dollars in cost savings.
(2) Quality. All the advantages of an accelerated drug discovery program can be jeopardized if the results do not meet the strict quality standards of the pharmaceutical industry. High quality results depend on quality control, quality equipment and quality people.
(3) Cost. Speed and quality are necessary but insufficient conditions for success. The economic scarcity problem of unlimited wants and needs and limited resources applies to drug discovery outsourcing as well. The more suppliers can offer for less, the more successful they will be.
Going Concern
The accompanying financial statements have been prepared on a going concern basis which contemplates realization of assets and satisfaction of liabilities in the normal course of business. If the Company is unable to improve operating results and meet its debt obligations, it may have to cease operations. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Total losses for the Company were $815,103 and $1,111,979 for the quarter ended March 31, 2009 and 2008 respectively. Recent operating losses may continue into future periods and there can be no assurance by management that the Company's financial outlook will improve. For the quarter ended March 31, 2009 and 2008, losses from continuing operations were $815,103 and $1,073,736 respectively. Losses resulting from the discontinued operation were $0 and $38,243 respectively.
The Company generated negative cash flows of $63,719 and $1,555,595 in 2009 and 2008 respectively. Net working capital as of March 31, 2009 and 2008 was ($5,764,067) and (5,256,055) respectively. The negative working capital in the current period is primarily due to continuing losses and increased debt obligations in 2009 that have been moved from long term to short term debt.
The 2009 Period reflects cash used in operating activities of $6,888 as compared to cash used in operating activities of $1,530,032 during the 2008 Period. The reduction over the prior period resulted from savings in selling, general and administrative costs by the Company. Cash provided by investing activities for the 2009 Period was $28,961 in comparison to used in investing activities of $3,193 in the 2008 Period. The net change relates primarily to the proceeds from the sale of the VenturePharm Stock. Cash used in financing activities for 2009 was $62,551 as compared to cash used of $66,323 in the 2008 Period. The elimination of the Exelgen operation should benefit the Company's overall cash position. Additional cash resources will no longer be needed for the payments of the capital leases. The Company estimates a savings of $1.1 million over the remaining life of the Exelgen leases which were due to expire in December 2009.
During 2009, the Company expects to re-negotiate the terms of its outstanding mortgage debt which becomes due in November 2009, including any non compliance with covenants which causes the Company to be in default. The mortgage includes certain restrictive covenants, which require the Company to maintain minimum levels of the current ratio, debt to net worth and cash flow ratio's. At March 31, 2009, the Company was in violation of the covenants, however, the Company was granted a waiver of the covenants by the bank for a period of six months to June 30, 2009. The Company plans to renegotiate its existing covenants calculations with the bank during the second quarter in 2009. In addition, the Company plans to renegotiate the existing mortgage with either the same financial institution or another one. However there is no certainty that the Company will be successful in renegotiating its outstanding mortgage. The Company also believes that it will be able to satisfy its current debt obligations with LH Financial and Fornova through the issuance of common stock in lieu of cash payment, assuming the Company will receive shareholder approval to issue common stock if needed. Subject to compliance with NASDAQ listing standards, the Company believes it will be able to satisfy its debt obligations.
The cash position of the Company will again remain uncertain in 2009. However, the Company will continue to address the immediate needs for cash and liquidity through an aggressive approach on a number of fronts. As indicated previously, when confronted with static revenues and declining cash reserves, management reduced staffing through layoffs and attrition and reduced or eliminated non-production related expenditures. Fiscal practices have been strictly enforced which restricts all material purchases to service on-going work only and serve to minimize all material inventories. Management will continue adhering to these policies for the foreseeable future.
The lack of adequate cash resulting from the inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on its business. The Company is actively exploring the availability of varying financial and strategic transactions, which, if consummated, would address the Company's need to improve its financial condition and/or its operations.
There can be no assurance that any funds required during the next twelve months or thereafter can be generated from operations or that if such required funds are not internally generated that funds will be available from external sources, such as debt or equity financing or other potential sources.
During the last year, the Company's business has undergone substantial change in relation to size, scale and scope of activities. The Company has developed significant capacity in peptide chemistry through the acquisition of Mimotopes. This strategic transaction complements the core capabilities in genomics and proteomics at CBI Services and FIL. In addition, resources have been invested in the establishment of VenturePharm Asia. The Company views this relationship as a key strategy in expanding production capabilities and services which will further the Company's ability to compete in the global market.
As a result of the above, there is substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability or classification of asset carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
The Company's independent auditors have included a paragraph emphasizing "going concern" in their report on the 2008 financial statements. These financial statements do not include any adjustments relating to the recoverability or classification of asset carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
Results of Operations
Three Months Ended March 31, 2009 Compared with Three Months Ended March 31, 2008.
Revenues
During the course of the year, the Company had experienced fluctuations in all revenue categories. Continuation of existing projects or engagement for future projects is usually dependent upon the customer's satisfaction with the scientific results provided in initial phases of the scientific program. Continuation of existing projects or engagement of future projects also often depends upon factors beyond the Company's control, such as the timing of product development and commercialization programs of the Company's customers. The combined impact of commencement and termination of research contracts from several large customers and unpredictable fluctuations in revenue for laboratory services can result in very large fluctuations in financial performance.
Total revenues decreased by $456,038 or 18.9% from $2,408,693 in the Quarter of 2008 to $1,952,655 in the Quarter of 2009.
Revenues realized from commercial contracts decreased by $490,780 or 34.0%, from $1,444,383 in the 2008 Quarter to $953,603 in the 2009 Quarter. Due to the current economic conditions many clients have placed future projects on a temporary hold. Anticipated start-up dates for these projects are expected to begin late in the second quarter.
Revenues realized from government contracts increased by $201,593 or 108.9%, from $185,132 in the 2008 Quarter to $386,725 in the 2009 Quarter. The continuation of the four bio-security based government contracts that were awarded in 2008 led to the increase. Work on these projects, are being renewed and will continue throughout 2009.
Genetic identity revenues increased by $72,195 or 15.7%, from $459,075 in the 2008 Quarter to $531,270 in the 2009 Quarter. The genetic identify sector has grown both organically and through the expansion of service into the global market. The increase in private and immigration testing have led to the increase.
Clinical testing revenues decreased by $257,377 or 92.6%, from $278,020 in the 2008 Quarter to $20,643 in the 2009 Quarter. This decrease resulted from the completion of a clinical trial during the first quarter of the 2008. As mentioned in commercial contracts, many clients have placed any future projects on a temporary hold.
Cost of Services
Cost of services consists primarily of costs associated with direct materials, direct labor and overhead. Cost of services decreased by $92,773 or 5.3%, from $1,754,631 in the 2008 Quarter to $1,661,858 in the 2009 Quarter. Cost of services as a percentage of revenue increased from 72.8% in the 2008 Quarter to 85.1% in the 2009 Quarter. This percentage increase is a direct result of additional materials and labor needed to complete the existing work.
Direct materials increased by $6,722 or 0.1% from $515,541 in the 2008 Quarter to $522,263 in the 2009 Quarter. The cost of direct materials as a percentage of revenue increased from 21.4% in the 2008 Quarter to 26.7% in the 2009 Quarter, respectively. This increase, as a percentage of revenue, correlates to the shift in rely on a greater usage of materials.
Direct labor decreased by $67,644 or 12.9%, from $524,318 in the 2008 Quarter to $456,674 in the 2009 Quarter. The cost of direct labor as a percentage of revenue however, increased from 21.8% in the 2008 Quarter to 23.4% in the 2009 Quarter. The increase as a percentage of revenue primarily relates to the shift in revenues for projects on hand hat are more labor intensive.
Overhead represents costs such as indirect labor, depreciation, freight charges, repairs and miscellaneous supplies indirectly related to a particular project. Overhead decreased by $31,851 or 4.5% from $714,772 in the 2008 Quarter to $682,921 in the 2009 Quarter. The cost of overhead as a percentage of revenue increased from 29.7% in the 2008 Quarter to 35.0% in the 2009 Quarter. Overhead costs from year to year are primarily consistent among all accounts.
Selling, General and Administrative
Selling, 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. The Company sees SGA as a vital portion of the business however, management has made the decision to reduce all costs associated with in these categories.
Total SGA costs decreased by 554,508 or 41.9%, from $1,326,279 in the 2008 Quarter to $771,771 in the 2009 Quarter. The cost of SGA as a percentage of revenue decreased from 55.1% in the 2008 Quarter to 39.5% in the 2009 Quarter.
Total selling and marketing costs decreased by $135,612 or 52.3%, from $259,387 in the 2008 Quarter to $123,775 in the 2009 Quarter. This decrease is primarily due to the reorganization of the sales and marketing team not currently in place.
Total general and administrative expenses decreased by $418,896 or 39.2%, from $1,066,892 in the 2008 Quarter to $647,996 in the 2009 Quarter. As a percentage of revenue, these costs were 44.3% and 33.2% in the 2008 and 2009 Quarters, respectively. Compensation costs decreased by $190,910 or 38.2% from $499,781 in the 2008 Quarter to $308,871 during the 2009 Quarter. This decrease was primarily due to the resignation of Paul D'Sylva in early January and the reduction of salaries by management over the first quarter. Professional fees decreased by $122,755 or 40.1% from $299,807 in the 2008 Quarter to $177,052 in the 2009 Quarter. Across the board reduction in costs associated with legal, accounting and the Sarbanes Oxley requirements contributed to this decrease. Associated office expenses decreased by $40,804 or 48.9% from $83,436 in the 2008 Quarter to $42,632 in the 2009 Quarter. This decrease resulted from the decision in 2009 to curtail all travel costs.
Other Income (Expenses)
Interest income has decreased by $15,525 or 89.7% from $17,300 during the 2008 Quarter to $1,162 in the 2009 Quarter resulting from the decrease in interest earning investments. In addition, the Company had an exchange loss of $11,188 in the 2008 Quarter.
Other expenses incurred by the Company include interest, amortization and loss on investment. Interest expense and amortization decreased by $68,564 or 16.7% from $410,522 in the 2008 Quarter to $341,958 in the 2009 Quarter. The decrease results from a reduction in the swap agreement from the 2008 quarter to the 2009 Quarter of $60,357.
Discontinued Operations
On September 23, 2008, the Company's wholly owned subsidiary, Exelgen Limited ("Exelgen") entered into administration under the jurisdiction of the High Court of Justice, Bristol District Registry, Chancery Division, in the United Kingdom (the "High Court"). Exelgen filed a Notice of appointment of an administrator, appointing PricewaterhouseCoopers LLP effective September 23, 2008.
Administration is the United Kingdom's insolvency process, which is governed by the Enterprise Act 2002. A company must be insolvent as defined in the Insolvency Act of 1986 in order to qualify for administration. Administration is designed to enable a business to be held together while plans are formed either to put in place a financial restructuring to rescue the company, or to sell the business and assets to produce a better result for creditors that would be achieved at liquidation. Exelgen is subject to the protection of the High Court and creditors' enforcement actions and will be automatically stayed while the administrators formulate plans to the sell the business and assets.
The Company's decision and approval by the Board of Directors to enter Administration for the Exelgen operation was based upon various profitability analyses and projections. The subsidiary's inability to support existing operational costs despite restructuring, combined with the lack of securing new contracts, were key factors supporting this action. In the coming period, the appointed administrator will actively pursue the sale of these assets on an individual basis. The Company reported a loss from discontinued operations of $38,243 in the 2008 Quarter with the Exelgen operation.
Liquidity and Capital Resources
Total losses for the Company were $815,103 and $1,111,979 for the quarter ended March 31, 2009 and 2008 respectively. Recent operating losses may continue into future periods and there can be no assurance by management that the Company's financial outlook will improve. For the quarter ended March 31, 2009 and 2008, losses from continuing operations were $815,103 and $1,073,736 respectively. Losses resulting from the discontinued operation were $0 and $38,243 respectively.
The Company generated negative cash flows of $63,719 and $1,555,595 in 2009 and 2008 respectively. Net working capital as of March 31, 2009 and 2008 was ($5,764,067) and ($5,256,055) respectively. The negative working capital in the current period is primarily due to continuing losses and increased debt obligations in 2009 that have been moved from long term to short term debt.
The 2009 Period reflects cash used in operating activities of $6,888 as compared to cash used in operating activities of $1,530,032 during the 2008 Period. The reduction over the prior period resulted from savings in selling, general and administrative costs by the Company. Cash provided by investing activities for the 2009 Period was $28,961 in comparison to used in investing activities of $3,193 in the 2008 Period. The net change relates primarily to the proceeds from the sale of the VenturePharm Stock. Cash used in financing activities for 2009 was $62,551 as compared to cash used of $66,323 in the 2008 Period. The elimination of the Exelgen operation should benefit the Company's overall cash position. Additional cash resources will no longer be needed for the payments of the capital leases. The Company estimates a savings of $1.1 million over the remaining life of the Exelgen leases which were due to expire in December 2009.
During 2009, the Company expects to re-negotiate the terms of its outstanding mortgage debt which becomes due in November 2009, including any non compliance with covenants which causes the Company to be in default. The mortgage includes certain restrictive covenants, which require the Company to maintain minimum levels of the current ratio, debt to net worth and cash flow ratio's. At March 31, 2009, the Company was in violation of the covenants, however, the Company was granted a waiver of the covenants by the bank for a period of six months to June 30, 2009. The Company plans to renegotiate its existing covenants calculations with the bank during the second quarter in 2009. In addition, the Company plans to renegotiate the existing mortgage with either the same financial institution or another one. However there is no certainty that the Company will be successful in renegotiating its outstanding mortgage. The Company also believes that it will be able to satisfy its current debt obligations with LH Financial and Fornova through the issuance of common stock in lieu of cash payment. Subject to compliance with NASDAQ listing standards, the Company believes it will be able to satisfy its debt obligations.
The cash position of the Company will again remain uncertain in 2009. However, the Company will continue to address the immediate needs for cash and liquidity through an aggressive approach on a number of fronts. As indicated previously, when confronted with static revenues and declining cash reserves, management reduced staffing through layoffs and attrition and reduced or eliminated non-production related expenditures. Fiscal practices have been strictly enforced which restricts all material purchases to service on-going work only and serve to minimize all material inventories. Management will continue adhering to these policies for the foreseeable future.
The lack of adequate cash resulting from the inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on its business. The Company is actively exploring the availability of varying financial and strategic transactions, which, if consummated, would address the Company's need to improve its financial condition and/or its operations.
There can be no assurance that any funds required during the next twelve months or thereafter can be generated from operations or that if such required funds are not internally generated that funds will be available from external sources, such as debt or equity financing or other potential sources.
During the last year, the Company's business has undergone substantial change in relation to size, scale and scope of activities. The Company has developed significant capacity in peptide chemistry through the acquisition of Mimotopes. This strategic transaction compliments the core capabilities in genomics and proteomics at CBI Services and FIL. In addition, resources have been invested in the establishment of VenturePharm Asia. The Company views this relationship as a key strategy in expanding production capabilities and services which will further the Company's ability to compete in the global market.
As a result of the above, there is substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability or classification of asset carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
The Company's independent auditors have included a paragraph emphasizing "going concern" in their report on the 2008 financial statements. These financial statements do not include any adjustments relating to the recoverability or classification of asset carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
Critical Accounting Policies
A summary of the Company's critical accounting policies follows:
Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent asset and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue upon the completion of laboratory service projects, or upon the delivery of biologically relevant materials that have been synthesized in accordance with project terms. Laboratory service projects are generally administered under fee-for-service contracts or purchase orders. Any revenues from research and development arrangements, including corporate contracts and research grants, are recognized pursuant to the terms of the . . .
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