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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

(Mark One)

For the quarterly period ended March 31, 2004

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)

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 13, 2004, 2,800,556 shares of common stock, no par value, of the registrant were outstanding.

Transitional Small Business Disclosure Format (Check one)    Yes  ¨    No  x

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COMMONWEALTH BIOTECHNOLOGIES, INC.

INDEX

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PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

COMMONWEALTH BIOTECHNOLOGIES, INC.

BALANCE SHEETS

See Notes to Financial Statements.

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COMMONWEALTH BIOTECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS

See Notes to Financial Statements.

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COMMONWEALTH BIOTECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS

See Notes to Financial Statements.

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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, 2003, 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 of the Securities and Exchange Commission. 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 months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. Certain expenses on the statements of operations for the three months ended March 31, 2003 have been reclassified with no effect on net income or loss per common share, to be consistent with the classifications adopted for the three months ended March 31, 2004.

NOTE 2. STOCK OPTIONS

The Company accounts for its employee stock plan and management warrants under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, no stock based compensation cost has been recognized as all options and warrants granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on the net income (loss) and income and (loss) per share had compensation cost for all the stock-based compensation been determined based on the grant date fair values on awards consistent with the method described in FASB Statement No. 123, Accounting for Stock-Based Compensation:

The following tables summarizes options outstanding:

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NOTE 3. EARNINGS (LOSS) PER SHARE

The Company follows the guidance provided in the Statement of Financial Accounting Standards (“SFAS”) 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. Basic earnings (loss) per common share is computed by dividing the net earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted per share amounts assume the conversion, exercise or issuance of all potential common stock instruments such as warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share.

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The following table indicates the weighted average shares outstanding for the period.

NOTE 4. ENGAGEMENT OF JESSUP & LAMONT SECURITIES CORPORATION

Jessup & Lamont, (Jessup), a securities corporation, has been engaged as its exclusive financial advisor, to provide the Company with the placement (the Placement) of certain securities of the Company. The agreement was signed on April 22, 2004 and is for 45 days unless (a) it is extended by agreement of the parties hereto; or it is terminated sooner by either party hereto upon written notice to the other party.

In accordance with the terms of its engagement letter with Jessup, the Company agrees to pay Jessup the following fees for compensation:

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The following should be read in conjunction with the Company’s 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’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 services (commercial contracts, and government contracts). The Company continues to grow its defense contract business and is now actively engaged in all areas in bio defense related work. The Company acts as both prime and subcontractor for bio defense related work.

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 sources 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 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 molecular diagnostic assays performed. The Company designed and implemented molecular diagnostic assays for the presence of DNA attributable to the various human herpes viruses. This platform technology is being used to serve individual patients across the country and in support of an on-going clinical study with a new anti-viral therapeutic. The Company has grown its molecular diagnostic platform in several other critical areas and its services are being used in support of still other on-going clinical trials and in support of fundamental research and development programs for its clients.

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The Company continues to grow its defense contract business. The Company acts as both prime and subcontractor for bio defense related work.

Three Months Ended March 31, 2004 Compared with Three Months Ended March 31, 2003.

Revenues

The Company 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.

Gross revenues increased by $258,248 or 22.4% from $1,155,201 during the first quarter of 2003 (the “2003 Quarter”) to $1,413,449 during first quarter of 2004 (the “2004 Quarter”).

Lab services decreased by $79,310 or 56.0% from $141,639 during the 2003 Quarter to $62,329 during the 2004 Quarter. This decrease is primarily due to an the effort of the Company to move away from short term work and begin to focus on long-term commercial and government contracts.

Commercial contracts increased by $34,970 or 15.9%, from $220,551 during the 2003 Quarter to $255,522 during the 2004 Quarter. This increase is primarily due to work on two new contracts. During the 2004 Quarter, revenues from these clients amounted to $110,481. There was no work done for these clients during the 2003 Quarter.

Government contracts increased by $350,402 or 51.4%, from $681,708 during the 2003 Quarter to $1,032,109 during the 2004 Quarter. This increase was primarily due to additional contracts from existing clients. Total revenue for this new work amounted to $544,948 during the 2004 Quarter.

Genetic testing decreased by $57,670 or 79.1%, from $72,867 during the 2003 Quarter to $15,197 during the 2004 Quarter. This decrease is a direct result of the completion of two genetic contracts in January 2004.

Cost of Services

Cost of services consists primarily of materials, labor, subcontractor costs and overhead. The cost of services increased by $25,242 or 2.8%, from $881,238 during the 2003 Quarter to $906,480 during the 2004 Quarter. The cost of services as a percentage of revenue was 64.1% and 76.2% during the 2004 and 2003 quarters, respectively.

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The costs for direct materials increased by $16,433, or 7.6%, from $215,256 during the 2003 Quarter, to $231,689 during the 2004 Quarter. However as a percentage of revenue, the cost of direct materials was 16.4% and 18.6% during the 2004 and 2003 Quarters respectively. This decrease is a direct result of projects during the 2004 Quarter being more labor intensive than in the 2003 Quarter.

Direct labor increased by $10,822, or 3.8%, from $286,929 during the 2003 Quarter, to $297,751 during the 2004 Quarter. This increase is attributable to increase in contracts and revenues as stated earlier.

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 $44,222, or 13.0%, from $340,753 during the 2003 Quarter to $384,975 during 2004 Quarter. As a percentage of revenue, these costs were 27.2% and 29.5% during 2004 and 2003.

Total compensation and benefits increased by $19,107 or 14.4% from $132,793 during the 2003 Quarter to $151,900 during the 2004 Quarter. This increase is attributable to the raises given to employees at the beginning of the year. Professional fees increased by $12,981 or 29.4% from $44,205 during the 2003 Quarter to $57,186 during the 2004 Quarter. Office expenses increased by $7,531 or 43.0% from $17,530 during the 2003 Quarter to $25,061 during the 2004 Quarter. This increase is primarily due new anti-virus software purchased for the Company.

Interest Income (Expenses)

Interest income during the 2004 Quarter compared to the 2003 Quarter remained relatively flat with a decrease of $494. Interest expense incurred by the Company during the 2004 and 2003 Quarter’s includes 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 $18,287 or 27.1% from $67,421 during the 2003 Quarter to $49,135 during the 2004 Quarter. This decrease is a result of a one time adjustment to accrued interest.

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Liquidity and Capital Resources

The 2004 Period reflected cash provided from operating activities of $597,847, as compared to $(172,881) during the 2003 Period. This was primarily due to the Company reporting net income of $78,187 and a decrease in accounts receivable of $307,418. Depreciation and amortization for the 2004 Quarter was $152,328.

The 2004 Period reflected a use of cash from investing activities of $236,968, as compared to $5,579 during the 2003 Period. The increase reflects the purchase of equipment needed to maintain and begin servicing new contract work.

The 2004 Period reflected net cash from financing activities of $603,252, as compared to $1,087 during the 2003 Period. In March 2004, the Company received approximately $563,000 from the exercise of stock options.

Net working capital as of March 31, 2004 and December 31, 2003 was $1,163,140 and $575,909 respectively. This increase is a direct result of the increase in cash.

Critical Accounting Policies

A summary of the Company’s accounting policies follows:

Estimates: The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of asset 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 and acceptance of biologically relevant materials that have been synthesized in accordance with project terms. Laboratory service projects are generally administered under fee for service contracts. Any revenues from research and development arrangements, including corporate contracts and research grants, are recognized pursuant to the terms of the related agreements as work is performed, or scientific milestones, if any are achieved. Amounts received in advance of the performance of services or acceptance of a milestone, are recorded as deferred revenue.

Accounts receivable: Accounts receivable are carried at original invoice amount less an estimate for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received.

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CBI has met the SEC and NASDAQ Corporate Governance Rules.

As a consequence of the Sarbanes-Oxley Act, the NASDAQ imposed certain changes in the rules of corporate governance which are aimed at strengthening its listing standards. The Securities and Exchange Commission (SEC) approved the rules imposed by NASDAQ which include:

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:

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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.

ITEM 3. CONTROLS AND PROCEDURES

The Company’s Chief Executive Officer and Controller (principal executive officer and principal financial officer, respectively) have concluded based on their evaluation as of December 31, 2003 that the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15c) under the Securities Act of 1934, as amended (“Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by the Company under the Exchange Act is accumulated, recorded, processed, summarized and reported to management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding whether or not disclosure is required.

During the quarter ended March 31, 2004, there were no changes in our “internal controls over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable.

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

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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(b) Reports on Form 8-K.

On March 11, 2004, the Company filed a Current Report on Form 8-K announcing the execution of two major bio-defense contracts valued at nearly $1 million.

On March 30, 2004, the Company filed a Current Report on Form 8-K announcing that it entered into a two-year broad teaming agreement with DynPort Vaccine Company LLC.

On March 30, 2004, the Company filed a Current Report on Form 8-K announcing a joint extension with Vistionix, Inc. of a contract with the U.S. Army to provide secure correspondence screening services.

On March 31, 2004, the Company filed a Current Report on Form 8-K relating to the removal of the “going concern” statement from the Company’s financial statements.

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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.

May 17, 2004

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EXHIBIT INDEX

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