Form: 10QSB

Optional form for quarterly and transition reports of small business issuers

August 14, 2001

10QSB: Optional form for quarterly and transition reports of small business issuers

Published on August 14, 2001


U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

(Mark One)

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
------- OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended June 30, 2001

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 whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
- ------- --------

As of August 14, 2001, 2,076,164 shares of common stock, no par value, of the
registrant were outstanding.

Transitional Small Business Disclosure Format (Check one) Yes: No: X
------

Commonwealth Biotechnologies, Inc.

INDEX



Page
Number
PART I. FINANCIAL INFORMATION ------


Condensed Consolidated Balance Sheets June 30, 2001 and 3
December 31, 2000

Condensed Consolidated Statements of Operations, Three Months 4
and Six Months Ended June 30, 2001 and 2000

Condensed Consolidated Statements of Cash Flows, Six Months 5
Ended June 30, 2001 and 2000

Notes To Consolidated Financial Statements 6

Management's Discussion and Analysis 9

PART II. OTHER INFORMATION 17

SIGNATURES 19



2

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.



Commonwealth Biotechnologies, Inc.
Balance Sheets
- ---------------------------------------------------------------------------------------------------------------------------------

June 30, December 31,
2001 2000
------------- -------------
(Unaudited)

Assets
Current Assets
Cash and cash equivalents $ 483,265 $ 587,156
Accounts receivable 1,036,799 792,071
Investments ------- 995,789
Prepaid expenses and inventory 353,922 94,866
- ---------------------------------------------------------------------------------------------------------------------------------
Total current assets 1,873,986 2,469,882
- ---------------------------------------------------------------------------------------------------------------------------------
Property and Equipment, net 6,948,102 7,153,852
- ---------------------------------------------------------------------------------------------------------------------------------
Other Assets
Restricted cash 462,367 445,020
Bond issue costs, net 233,321 238,693
Contract acquisition costs 91,524 33,047
Deposits -- 3,200
- ---------------------------------------------------------------------------------------------------------------------------------
Total other assets 787,212 719,960
- ---------------------------------------------------------------------------------------------------------------------------------

$ 9,609,300 $10,343,694
=========== ===========
- ---------------------------------------------------------------------------------------------------------------------------------

Liabilities and Stockholders' Equity
Current Liabilities
Demand note payable $ 104,680 $ 134,680
Current maturities of long term debt and capital lease 203,974 207,431
Accounts payable and other current liabilities 632,516 548,914
Deferred revenue 23,659 25,718
- ---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 964,829 916,743
- ---------------------------------------------------------------------------------------------------------------------------------
Long Term Debt
- ---------------------------------------------------------------------------------------------------------------------------------
Bonds payable 3,825,000 3,915,000
Capital lease 111,335 162,386
- ---------------------------------------------------------------------------------------------------------------------------------
Total long term debt 3,936,335 4,077,386
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, no par value, 10,000,000 shares authorized -- --
June 30, 2001- 2,076,164; December 31, 2000 - 2,076,164 shares issued and outstanding
Additional paid-in capital 11,893,939 11,905,864
Accumulated deficit (7,185,803) (6,565,155)
Accumulated other comprehensive income -- 8,856
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 4,708,136 5,349,565
- ---------------------------------------------------------------------------------------------------------------------------------

- ---------------------------------------------------------------------------------------------------------------------------------
$ 9,609,300 $10,343,694
=========== ===========
- ---------------------------------------------------------------------------------------------------------------------------------


See Notes to Financial Statements.

3



Commonwealth Biotechnologies, Inc.
Statements of Operations
- ----------------------------------------------------------------------------------------------------------------------------


Three Months Ended Six Months Ended
------------------------------- ---------------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
-------------- ------------- ------------- -----------
(Unaudited) (Unaudited)


Revenue
Lab Services $ 146,884 $ 218,323 $ 287,866 $ 398,381
Commercial contracts 443,570 382,948 1,091,944 767,026
Government contracts 395,675 465,394 866,145 1,044,767
Food safety / microbiology 2,500 -- 2,500 --
Genetic identity 58,238 55,701 133,542 94,583
Clinical services 12,205 -- 36,805 --
License fees 400,000 -- 400,000 --
Product sales 4,020 2,630 6,540 5,790
Other revenue 2,749 250 3,985 580
- ----------------------------------------------------------------------------------------------------------------------------

Total revenue 1,465,841 1,125,246 2,829,327 2,311,127
- ----------------------------------------------------------------------------------------------------------------------------

Costs of services
Direct Labor 286,913 193,528 645,264 447,670
Direct Materials 147,286 115,858 349,869 257,707
Subcontractor Costs 6,246 5,590 99,422 16,230
Overhead 575,306 395,187 1,057,413 758,806
- ----------------------------------------------------------------------------------------------------------------------------

Total costs of services 1,015,751 710,163 2,151,968 1,480,413

Selling, General & Administrative 594,360 412,075 1,218,074 672,623
- ----------------------------------------------------------------------------------------------------------------------------

Operating income (loss) (144,270) 3,008 (540,715) 158,091
- ----------------------------------------------------------------------------------------------------------------------------

Other income (expenses)
Interest expense (24,907) (81,512) (143,301) (166,842)
Interest income 23,024 10,739 63,368 17,661
- ----------------------------------------------------------------------------------------------------------------------------

Total other income (expense) (1,883) (70,773) (79,933) (149,181)
- ----------------------------------------------------------------------------------------------------------------------------

Net income (loss) $ (146,153) $ (67,765) $ (620,648) $ 8,910
- ----------------------------------------------------------------------------------------------------------------------------

Basic and diluted earnings (loss) per common share $(0.07) $(0.04) $(0.30) $0.01
- ----------------------------------------------------------------------------------------------------------------------------


See Notes to Financial Statements

4



Commonwealth Biotechnologies, Inc.
Statements of Cash Flows
- -----------------------------------------------------------------------------------------------------------------------------------


Six Months Ended
------------------------------
June 30, 2001 June 30, 2000
------------- -------------
(Unaudited)

Cash Flows from Operating Activities
Net income (loss) $ (620,648) $ 8,910
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization 417,691 292,958
Realized gains on sale of investments (20,565) --
Non-cash license fee (200,000) --
Changes in:
Accounts receivable (44,728) (198,074)
Prepaid expenses and inventory (259,056) (107,226)
Accounts payable and other current liabilities 83,602 (197,260)
Deposits 3,200 --
Deferred revenue (2,059) 60,107
- -----------------------------------------------------------------------------------------------------------------------------------

Net cash used in operating activities (643,063) (140,585)
- -----------------------------------------------------------------------------------------------------------------------------------

Cash Flows from Investing Activities
Contract acquisition costs (150,000) --
Purchase of debt securities for sale (298,889) --
Sale of debt securities for sale 1,305,204 --
Purchases of property, plant and equipment (115,863) (86,319)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by ( used in) investing activities 742,452 (86,319)
- -----------------------------------------------------------------------------------------------------------------------------------

Cash Flows from Financing Activities
Proceeds from issuance of common stock (11,925) 602,725
Principal payments on demand note payable and long term debt (174,508) (53,788)
Restricted cash (17,347) (11,038)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used in) by financing activities (203,870) 537,899
- -----------------------------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents (103,891) 310,995
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents, beginning of period $ 587,156 $ 31,630
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 483,265 $ 342,625
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash payments for interest $ 137,929 $ 153,085
- -----------------------------------------------------------------------------------------------------------------------------------

Supplemental schedule of non-cash investing and financing activities
Capital lease obligation incurred for use of equipment $ -- $ 90,250




See Notes to Financial Statements.

5

Commonwealth Biotechnologies, Inc.
Notes To Financial Statements

Note 1. Basis of Presentation

The accompanying unaudited financial statements (except for the balance sheet at
December 31, 2000, which is derived from audited financial statements) have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and Regulation S-B. Accordingly, they do not include all
of the information required by generally accepted accounting principles for
complete financial statements. In the opinion of the Company, all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
financial position and the results of operations for the periods presented have
been included. The results of operations for the three and six months ended
June 30, 2001 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2001.

Note 2. Earnings (Loss) Per Share

The Company follows the guidance provided in FASB Statement No. 128 which
requires dual presentation of basic and diluted earnings per share with a
reconciliation of the numerator and denominator of the earnings per share
computations. Basic per share amounts are based on the weighted average shares
of common stock outstanding. Diluted earnings per share 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. Potential common stock is not considered in loss
periods because their effect would be anti-dilutive. Accordingly, this
presentation has been adopted for all periods presented. The basic and diluted
weighted average shares outstanding are as follows:


Three Months Six Months
Ended June 30, Ended June 30,

2001 2000 2001 2000
--------- ---------- ---------- ----------

Weighted average shares outstanding
shares used for basic EPS 2,076,164 1,736,045 2,076,164 1,708,186
Plus incremental shares from assumed
Issuance of stock options -- -- -- 140,295
---------- ---------- ---------- ----------
Weighted average outstanding shares
used for diluted EPS 2,076,164 1,736,045 2,076,164 1,849,481
========== ========== ========== ==========

Net Income (loss) $ (146,153) $ (67,765) $ (620,648) $ 8,910
========== ========== ========== ==========

Basic and diluted earnings (loss)
Per share $ (.07) $ (.04) $ (.30) $ .01
========== ========== ========== ==========





6

Note 3. Contract Purchase

On January 1, 2001, the Company purchased contracts and rights to pending
contracts held by the drug development group of SRA Life Sciences, Inc. of Falls
Church, Virginia for $150,000. In connection with this purchase, the Company
incurred acquisition costs, during 2000, totaling $33,047. These costs have been
capitalized and will be amortized over the life of the contracts which all
expire in 2001.

Note 4. Patent Agreement

On April 30, 2001, the Company signed a patent license agreement with Applied
Biosystems Group of PE Corporation, New York. This license agreement grants
Applied Biosystems a non-exclusive, worldwide, perpetual, non-assignable license
under the Patent. This enables them to research, develop, make, have made,
import, market, use, sell, have sold, offer to sale, distribute, have
distributed and otherwise exploit products and services and to pass on to end
user customers of Applied Biosystems or its distributors the right to use such
product and services. The Company received licensing fees of $400,000 in the
second quarter, of which $200,000 was received in cash and the remaining
$200,000 in product and service credits.

Note 5. Business Considerations

In June 1997, the Company sold 60 convertible subordinated notes, with a
principal amount of $50,000, in a private placement offering at an offering
price of $50,000 per note. Each note was automatically converted into a minimum
of 8,333.33 shares of the Company's stock at the closing of the Company's
initial public offering (IPO). The Company received proceeds of $2,626,269, net
underwriting and other offering costs.

Upon closing of the private placement offering, the Company issued warrants to
management for the purchase of 100,000 shares of common stock. The warrants are
exercisable for a period of ten years at an exercise price of $9.90 per share.

In October 1997, the Company closed its initial public offering (IPO) and
received net proceeds of $5,417,578, net of underwriting and other costs. In
connection with the IPO, the underwriters purchased warrants for 101,500 shares
of common stock. The warrants are exercisable for a period of five years at an
exercise price of $9.90 per share.

Since 1997 and through June 30, 2001, the Company has incurred recurring
operating losses due to increased operating costs without corresponding
increases in revenues. Through 1999, these deficits were substantially funded
through use of funds obtained from the private placement and the IPO. The
Company has also used proceeds from its offerings for capital acquisitions,
which were primarily funded through its issuance of Industrial Revenue
Development Bonds. On September 27, 2000 the Company completed a private
placement of 348,000 shares of common stock and warrants that provided net
proceeds of $2,350,397. The proceeds received from the private placement were
used to pay off the line of credit and to fund general working capital needs.

7

As mentioned above, the Company received licensing fees of $400,000 in the
second quarter, of which $200,000 was received in cash and the remaining
$200,000 in product and service credits.

Management believes that the Company will be able to generate positive net cash
flows from new and existing contracts and by continued monitoring and reduction
of operating costs in 2001. In addition, the Company views commercial, drug
development and government contracts as the more important source of revenue and
is continuing to focus its efforts in these areas.






8

Item 2. Management Discussion and Analysis

The following should be read in conjunction with the Company's Financial
Statements and Notes included herein.

Business Considerations (see Note # 5 to the Financial Statements)

Overview

The Company's revenues are derived principally from providing macromolecular
synthetic and analytical services to researchers in the biotechnology industry
or who are engaged in life sciences research in government or academic labs
throughout the world. Development of innovative technologies for biotechnology
requires sophisticated laboratory techniques and the Company provides these
services to customers on a contract basis. The Company's customers consist of
private companies, academic institutions and government agencies, all of which
use biological processes to develop products for health care, agricultural, and
other purposes.

The Company generally derives revenue from two types of customers: those who
require a discrete set of services ("lab services"), and those who contract with
the Company on an extended basis for performance of a variety of integrated
services ("commercial, drug development and government contracts"). More often
than not, the Company's customers provide repeat business to the Company. The
Company views commercial, drug development and government contracts as the more
important source of revenue. The Company has continued to focus its efforts on
identifying these customers. These contracts generally range from a few months
to more than a year. Revenues are generally recognized as services are rendered
or as products are delivered. In addition, revenue is also recognized with
performance-based installments payable over the contract duration as milestones
are achieved.

The Company also derives revenues from genetic identity and clinical services.
There has been a dramatic and constant increase in the number of private
paternity cases implemented at the Company. The Company routinely processes
upwards of 125 inquiries per month. The Company implemented rapid and novel
techniques for genotyping analysis that have been applied to cell culture lines.
Consequently, the company performs identity and lineage analysis on different
cell lines for various clients.

The Company realized a loss from operations for the six months ended June 30,
2001 of $620,648. These results were expected in the Company's revised business
plan. This deficit resulted because certain new and existing contracts did not
produce expected revenues as they were either postponed to subsequent periods or
did not materialize.



Results of Operations

Three Months Ended June 30, 2001 Compared with Three Months Ended June 30, 2000.

The Company experiences fluctuations in all revenue categories. Continuation of
existing projects, or engagement for future projects is usually dependent upon

9

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.

Revenues

Gross revenues increased by $340,595 or 30.3% from $1,125,246 during the second
quarter of 2000 (the "2000 Quarter") to $1,465,841 during second quarter of 2001
(the "2001 Quarter").

Revenues realized from lab services decreased by $71,439 or 32.7% from $218,323
during the 2000 Quarter to $146,884 during the 2001 Quarter. Even with
management's decision to focus on commercial and government projects, the
Company continues to view lab services as a potential revenue source.
Historically, net revenues have been earned from lab services, however, the
Company views commercial and government projects as the more important source of
revenue (as mentioned below) and has continued to focus its efforts on
identifying long-term customers.

Revenues realized from various commercial contracts increased by $60,222 or
15.8%, from $382,948 during the 2000 Quarter to $443,570 during the 2001
Quarter. This increase is primarily due to work being done on forty-four
individual projects in progress compared to fourteen projects in progress during
the 2000 Quarter. Of the $443,570 in commercial contracts, revenues earned from
the quarter were not associated with any one major client.

Revenues realized from various government contracts decreased by $69,719 or
15.0%, from $465,394 during the 2000 Quarter to $395,675 during the 2001
Quarter. This category primarily consists of the project that was awarded from
the Illinois Institute of Technology Research Institute (see "Business
Considerations"). During the third Quarter of 2000, the second year of this
contract was awarded to the Company and provided revenues of approximately $1.2
million. This revenue was recognized during the first six months of 2001. The
Company's management continues to take an active role in negotiating new
contracts.

In 2001, the Company implemented rapid and novel techniques for genotyping
analysis that have been applied to cell culture lines. Consequently, the Company
performs identity and lineage analysis on different cell lines for various
clients. Total revenue derived from genotyping services alone amounted to
$12,205 during the 2001 Quarter.

On April 30, 2001 the Company signed a patent license agreement with Applied
Biosystems Group of PE Corporation, New York (see Note #4 to the Financial
Statements). The Company received licensing fees of $400,000 in the second
quarter, of which $200,000 was received in cash and the remaining $200,000 in
product and service credits.

10

Cost of Services

Cost of services consists primarily of materials, labor, subcontractor costs and
overhead. The cost of services increased by $305,588 or 43.0%, from $710,163
during the 2000 Quarter to $1,015,751 during 2001 Quarter. The cost of services
as a percentage of revenue was 69.3% and 63.1% during the 2001 and 2000
quarters, respectively. This percentage increase was primarily due to additional
expenditures in overhead costs (see below.)

Labor costs increased by $93,385, or 48.3%, from $193,528 during the 2000
Quarter to $286,913 during the 2001 Quarter. This increase reflects an increase
in personnel from quarter to quarter.

The costs for direct materials increased by $31,428, or 27.1%, from $115,858
during the 2000 Quarter, to $147,286 during the 2001 Quarter. These increased
costs are directly attributable to the increase of revenue generated by the
Company.

Overhead cost consists of indirect labor, depreciation, freight charges, repairs
and miscellaneous supplies not directly related to a particular project. Total
overhead costs increased by $180,119, or 45.6%, from $395,187 during the 2000
Quarter to $575,306 during the 2001 Quarter. These costs increased due to items
purchased that could not be directly charged against any particular project.

Sales, General and Administrative

Sales, general and administrative expenses ("SGA") consist primarily of
compensation and related costs for administrative, marketing and sales
personnel, facility expenditures, professional fees, consulting, taxes, and
depreciation. Total SGA costs increased by $182,285, or 44.2%, from $412,075
during the 2000 Quarter to $594,360 during 2001 Quarter. As a percentage of
revenue, these costs were 40.5% and 36.6% during 2001 and 2000, respectively.

Total compensation and benefits increased by $49,815 or 43.4% from $114,867
during the 2000 Quarter to $164,682 during the 2001 Quarter. This increase is
primarily attributable to the reallocation of personnel that were once charged
to work on the subcontract from the Illinois Institute of Technology Research
Institute back to the administrative area. In addition, three employees were
added to assist in the administrative support of the Company. Facility costs
increased by $25,901 or 54.3% from $47,715 during the 2000 Quarter to $73,616
during the 2001 Quarter. This increase is primarily due to rent paid for the
offices of the drug development group. Professional fees increased by $51,565,
or 68.6%, from $75,118 during the 2000 Quarter to $126,683 during the 2001
Quarter. This increase is primarily due to consulting fees incurred to insure
the continuation of a smooth transition of the drug development offices. In
addition, the Company opted to increase its coverage in personal liability.
Legal fees increased due to the defense required under patent number 6,110,683
(see Note 4 to the Financial Statements). Marketing costs increased by $74,088
or 210.0%, from $35,280 during the 2000 Quarter to $109,368 during the 2001
Quarter. During the second quarter of 2001, the Company continued to increase
its marketing exposure throughout the marketplace with major increases in
advertising and public relations.

11

Other Income (Expenses)

Interest income increased by $12,285, or 114.4% from $10,739 during the 2000
Quarter to $23,024 during the 2001 Quarter. Interest income has been derived
from investing the unused portion of the restricted cash realized by the Company
from the successful sale (March 1998) of Industrial Revenue Bonds (IRBs) for
construction of the Company's new facility. Interest income also increased due
to the investing of the proceeds received from the private placement on
September 27, 2000.

Interest costs incurred by the Company during the 2000 and 2001 Quarter's
included 1) interest paid to financial institutions for loans made to the
Company; 2) interest paid for the Company's IRBs; and 3) amortization of costs
incurred as a consequence of the completion of the Company's IRB financing.
Interest expense and amortization decreased $56,605 or 69.4% from $81,512 during
the 2000 Quarter to $24,907 during the 2001 Quarter. This decrease is due to the
payments of principal of long term debt.


Results of Operations

Six Months Ended June 30, 2001 Compared with Six Months Ended June 30, 2000.

Revenues

Gross revenues increased by $518,200 or 22.4% from $2,311,127 during the 2000
Period ("the 2000 Period") to $2,829,327 during the 2001 Period. ("the 2000
Period").

Revenues realized from lab services decreased by $110,515 or 27.7% from $398,381
during the 2000 Period to $287,866 during the 2001 Period. As mentioned in the
results of operations for the quarter, the Company continues to view lab
services as a potential revenue source. However, the Company views commercial
and government projects as the more important source of revenue (as mentioned
below) and has continued to focus its efforts on identifying long-term
customers.

Revenues realized from various commercial contracts increased by $324,918 or
42.4%, from $767,026 during the 2000 Period to $1,091,944 during the 2001
Period. This increase is primarily due to work being done on sixty individual
projects compared to nineteen projects in progress during the 2000 Period. Of
the $1,091,944 in commercial contracts one major client represents 15.2% of the
revenue earned during the 2001 Period.

Revenues realized from various government contracts decreased by $178,622 or
17.1%, from $1,044,767 during the 2000 Period to $866,145 during the 2001
Period. As mentioned in the results from operations for the quarter, this
category primarily consists of the project that was awarded from the Illinois
Institute of Technology Research Institute (see "Business Considerations").
During the third Quarter of 2000, the second year of this contract was awarded
to the Company and provided revenues of approximately $1.2 million. This revenue
was recognized during the first six months of 2001. The Company's management
continues to take an active role in negotiating new contracts.

12

Revenues realized from various genetic testing increased by $38,959 or 41.2%,
from $94,583 during the 2000 Period to $133,452 during the 2001 Period. This
increase is due to a dramatic and constant increase in the number of private
paternity cases during the 2001 Period.

In 2001, the Company implemented rapid and novel techniques for genotyping
analysis that have been applied to cell culture lines. Consequently, the
company performs identity and lineage analysis on different cell lines for
various clients. Total revenue derived from genotyping services alone amounted
to $36,805 during the 2001 Period.

On April 30, 2001 the Company signed a patent license agreement with Applied
Biosystems Group of PE Corporation, New York (see Note #4 to the Financial
Statements). The Company received licensing fees of $400,000 in the second
quarter, of which $200,000 was received in cash and the remaining $200,000 in
product and service credits.

Cost of Services

Cost of services consists primarily of materials, labor, subcontractor costs and
overhead. The cost of services increased by $671,555 or 45.3%, from $1,480,413
during the 2000 Period to $2,151,968 during 2001 Period. The cost of services
as a percentage of revenue was 76.1% and 64.1% during the 2001 and 2000 Periods,
respectively. This percentage increase was primarily due to additional
expenditures in subcontractor costs (see below).

Labor costs increased by $197,594, or 44.1%, from $447,670 during the 2000
Period to $645,264 during the 2001 Period. This increase reflects an increase
in personnel.

The costs for direct materials increased by $92,162, or 35.8%, from $257,707
during the 2000 Period, to $349,869 during the 2001 Period. These increased
costs are directly attributable to the increase of revenue generated by the
Company.

Subcontractor costs increased by $83,192, or 512.6%, from $16,230 during the
2000 Period to $99,422 during the 2001 Period. This increase is due to costs
incurred from subcontractors in the new drug development activity.

Overhead cost consists of indirect labor, depreciation, freight charges, repairs
and miscellaneous supplies not directly related to a particular project. Total
overhead costs increased by $298,607 or 39.4%, from $758,806 during the 2000
Period to $1,057,413 during the 2001 Period. These costs increased due to items
purchased that could not be directly charged against any particular project.

Sales, General and Administrative

Sales, general and administrative expenses ("SGA") consist primarily of
compensation and related costs for administrative, marketing and sales
personnel, facility expenditures, professional fees, consulting, taxes, and
depreciation. Total SGA costs increased by $545,451, or 81.1%, from $672,623
during the 2000 Period to $1,218,074 during 2001 Period. As a percentage of
revenue, these costs were 43.1% and 29.1% during 2001 and 2000, respectively.

13

Total compensation and benefits increased by $210,275 or 150.9% from $139,332
during the 2000 Period to $349,607 during the 2001 Period. As mentioned in the
results from operations for the quarter, this increase is primarily attributable
to the reallocation of personnel that were once charged to work on the
subcontract from the Illinois Institute of Technology Research Institute back to
the administrative area. In addition, three employees were added to assist in
the administrative support of the Company. Facility costs increased by $56,609
or 61.8% from $91,663 during the 2000 Period to $148,272 during the 2001 Period.
This increase is primarily due to rent paid for the offices of the drug
development group. Maintenance and repairs increased by $18,269, or 236.2%, from
$7,734 during the 2000 Period to $26,003 during the 2001 Period. This increase
is primarily due additional operating leased equipment needed to support the
offices of the drug development group.
Professional fees increased by $92,721, or 65.9%, from $140,645 during the 2000
Period to $233,366 during the 2001 Period. This increase is primarily due to
consulting fees incurred to insure the continuation of a smooth transition of
the drug development offices. In addition, the Company opted to increase its
coverage in personal liability for both the corporate and drug development
offices. Legal fees increased due to the defense required under patent number
6,110,683 (see Note 4 to the Financial Statements). Marketing costs increased by
$165,700 or 318.8%, from $51,981 during the 2000 Period to $217,681 during the
2001 Period. During the 2001 Period, the Company opted to increase its marketing
exposure with major increases in advertising and public relations.

Other Income (Expenses)

Interest income increased by $45,707, or 258.8% from $17,661 during the 2000
Period to $63,368 during the 2001 Period. Interest income has been derived from
investing the unused portion of the restricted cash realized by the Company from
the successful sale (March 1998) of Industrial Revenue Bonds (IRBs) for
construction of the Company's new facility. Interest income also increased due
to the investing of the proceeds received from the private placement on
September 27, 2000.

Interest costs incurred by the Company during the 2000 and 2001 Periods included
1) interest paid to financial institutions for loans made to the Company; 2)
interest paid for the Company's IRBs; and 3) amortization of costs incurred as a
consequence of the completion of the Company's IRB financing. Interest expense
decreased $23,541 or 14.1% from $166,842 during the 2000 Period to $143,301
during the 2001 Period. This decrease is due to the payments of principal of
long-term debt.

Liquidity and Capital Resources

The 2001 Period reflected a decrease in cash of $643,063 from operating
activities, as compared to a decrease of $140,585 from operating activities
during the 2000 Period. The significant cash outflow for 2001 was primarily due
to substantial investments made by the Company in facility costs, personnel,
equipment, sales, and marketing efforts. The cost outlays in 2001 were made
possible by capital realized from the Company's private placement on September
27, 2000.

14

Net working capital as of June 30, 2001 and December 31, 2000 was $909,157 and
$1,553,139 respectively. This decrease is a direct result of the significant
loss in the Period of $620,648. Cash flows from new and existing contracts that
were expected to occur in the first quarter either were postponed to subsequent
periods or did not materialize.

On April 30, 2001, the Company signed a patent license agreement with Applied
Biosystems Group of PE Corporation, New York. This license agreement grants
Applied Biosystems a non-exclusive, worldwide, perpetual, non-assignable license
under the Patent. This enables them to research, develop, make, have made,
import, market, use, sell, have sold, offer to sale, distribute, have
distributed and otherwise exploit products and services and to pass on to end
user customers of Applied Biosystems or its distributors the right to use such
product and services. The Company received licensing fees of $400,000 of which
$200,000 was received in cash in the second quarter and the remaining $200,000
in product and service credits.

The Company continues to search for long-term projects as the more important
source of revenue and has continued to focus its efforts on identifying long-
term customers. Long-term projects generally range from a few months to more
than a year. In the fourth quarter of 1999, the Company was awarded a five-year
subcontract with the Illinois Institute of Technology Research Institute. The
contract is valued at approximately $8.5 million. During the third quarter of
2000, the second year of this contract was awarded to the Company and is
expected to provide revenues of approximately $1.2 million. This revenue was
recognized during the first six months of 2001.

Management has in the past and will continue to seek additional equity and or
debt financing in the future to further the Company's development. In addition,
management believes that the Company will be able to generate positive net cash
flows from new and existing contracts and by continued monitoring and reduction
of operation costs in 2001.

Forward Looking Statements

Management has included herein certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. When used, statements
that are not historical in nature, including the words "anticipated",
"estimate", "should", "expect", "believe", "intend", and similar expressions are
intended to identify forward-looking statements. Such statements are, by their
nature, subject to certain risks and uncertainties.

Among the factors that could cause the actual results to differ materially from
those projected are the following:

o business conditions and the general economy,

o the development and implementation of the Company's long-term business
goals,

15

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, and

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.




16

PART II
OTHER INFORMATION

Item 1. Legal Proceedings

On November 22, 2000, the Company filed a complaint in the United States
District Court for the Eastern District of Virginia, Richmond Division, styled
Commonwealth Biotechnologies, Inc. v. PE Corporation d/b/a Applied Biosystems
Group (f/k/a PE Biosystems Group), The Gel Company and Genome Therapeutics
Corporation, in which the Company sought unspecified damages and injunctive
relief for alleged patent infringement, misappropriation of trade secrets and
antitrust violations relating to the Company's patent (U.S. Patent No.
6,110,683) for its AccuTrac DNA lane tracking dye technology.

On April 30, 2001 the Company settled the claim referenced above and executed a
patent license agreement (U.S. Patent No. 6,110,683) with Applied Biosystems
Group of PE Corporation, New York. The Company received licensing fees of
$400,000 in the second quarter, of which $200,000 was received in cash and the
remaining $200,000 in product and service credits.

Item 2. Changes in Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

On May 7, 2001, the Company held its Annual Meeting of Shareholders. The
following were the results of the meeting.

(1) The Shareholders elected Everette G. Allen, Jr., Raymond H. Cypess and
Thomas R. Reynolds as Class I directors to serve until the Company's Annual
Meeting of Shareholders in 2002 or until their successors are elected and
shall have qualified. The voters were as follows:



Director Votes Cast For Votes Cast Against Votes Withheld
Broker Non-Votes
Everette, G. Allen Jr 1,472,346 2,335 467
Raymond H. Cypess 1,472,346 2,335 467
Thomas R. Reynolds 1,472,346 2,335 467



(2) The Shareholders elected Samuel P. Sears Jr. as a Class II director to
serve until the Company's Annual Meeting of Shareholders in 2001 or until
his successor is elected and shall have qualified. The votes were as
follows:

Director Votes Cast For Votes Cast Against Votes Withheld
Broker Non-Votes
Samuel P. Sears Jr. 1,472,346 2,335 467


(3) The Shareholders elected Donald A McAfee as a Class III director to serve
until the Company's Annual Meeting of Shareholders in 2001 or until his
successor is elected and shall have qualified. The votes were as follows:

Director Votes Cast For Votes Cast Against Votes Withheld
Broker Non-Votes
Donald A McAfee 1,472,346 2,335 467

17

(4) The shareholders of the Company ratified the appointment of McGladery &
Pullen, LLP as independent auditors of the Company for the fiscal year
ending December 31, 2001. The votes were as follows:



Votes Cast For Votes Cast Against Votes Withheld
Broker Non-Votes
1,474,181 0 500



The following individuals' terms as directors of the Company continued after the
meeting:

Director Name Class Term Expires
L. McCarthy Downs II 2002
Robert B. Harris II 2002
Richard J. Freer III 2003



Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.



Exhibit Number Description of Exhibit

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 Indenture of Trust by and between the Virginia Small Business
Financing Authority and Crestar Bank relating to the issuance
of industrial revenue bonds for the benefit of the Company (2)
10.1 Warrant Agreement between the Company and Richard J. Freer, as
amended (1)
10.2 Warrant Agreement between the Company and Thomas R. Reynolds,
as amended (1)
10.3 Warrant Agreement between the Company and Robert B. Harris, as
amended (1)
10.4 Employment Agreement for Richard J. Freer (1)
10.5 Employment Agreement for Thomas R. Reynolds (1)
10.6 Employment Agreement for Robert B. Harris (1)
10.7 Executive Severance Agreement for Richard J. Freer (1)
10.8 Executive Severance Agreement for Thomas R. Reynolds (1)
10.9 Executive Severance Agreement for Robert B. Harris (1)
10.10 1997 Stock Incentive Plan, as amended (1)
10.11 Loan Agreement by and between the Virginia Small Business
Financing Authority and the Company (2)



(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.



18

(b) Reports on Form 8-K. On May 7, 2001, the Company filed a Current Report
on Form 8-K announcing the filing of a provisional patent, captioned Adsorption
and Removal of Endotoxin from Physiological Fluids Using Cationoc Helix
Peptides.

On May 8, 2001, the Company filed a Current Report on Form 8K announcing the
settlement of the patent dispute with Applied Biosystems.


SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.



COMMONWEALTH BIOTECHNOLOGIES, INC.

By: /s/ James H. Brennan
----------------------------
James H. Brennan
Controller and Principal Accounting Officer
June 2001


19