10-Q 1 file001.txt FORM 10-Q U.S. Securities and Exchange Commission Washington, D.C. 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 December 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from _______________ to ______________ Commission file number 0-11480 BIOVEST INTERNATIONAL, INC. (Exact name of small business issuer as specified in its charter) Delaware 41-1412084 -------- ---------- (State or other jurisdiction (IRS Employer Identification Number) of incorporation or organization) 540 Sylvan Avenue, Englewood Cliffs, NJ 07632 (Address of principal executive offices) Issuer's telephone number: 201-816-8900 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At February 12, 2002, there were 9,629,696 shares of the registrant's Common Stock, $.01 par value, issued and outstanding. Transitional Small Business Disclosure Format (check one) Yes [ ] No [X] INDEX BIOVEST INTERNATIONAL, INC. PAGE PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Balance Sheet as of December 31, 2001............................. 3 Statements of Operations for the Three Months ended December 31, 2001 and 2000................................... 4 Statements of Cash Flows for the Three Months ended December 31, 2001 and 2000................................... 5 Notes to Financial Statements..................................... 6 ITEM 2. Management's Discussion and Analysis or Plan of Operations.......................................... 15 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K.............................. 18 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - BIOVEST INTERNATIONAL, INC.

BALANCE SHEET DECEMBER 31, 2001 ASSETS (UNAUDITED) ------------- Current assets Cash $ 264,000 Accounts receivable, net of $125,000 allowance for doubtful accounts 2,042,000 Costs and estimated earnings in excess of billings on uncompleted contracts 137,000 Inventories 1,942,000 Other 241,000 ------------- Total current assets 4,626,000 Property, plant and equipment, net 1,004,000 Other assets Inventories 63,000 Patents and trademarks, net 848,000 Other assets 21,000 Reorganization value in excess of amounts allocable to identifiable assets, net 2,226,000 ------------- $ 8,788,000 ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $ 1,968,000 Current portion of long-term debt 142,000 Accounts payable 1,555,000 Customer deposits 400,000 Accrued liabilities Compensation and related taxes 1,324,000 Other 614,000 Billings in excess of costs and estimated earnings on uncompleted contracts 73,000 ------------- Total current liabilities 6,076,000 Long-term debt 302,000 Commitments and contingencies -- Shareholders' equity Preferred stock, $ .01 par value, 10,000,000 shares authorized; none issued and outstanding -- Common stock, $.01 par value, 50,000,000 shares authorized; 9,629,696 shares issued and outstanding 96,000 Additional paid-in capital 12,010,000 Accumulated deficit (9,446,000) Stock subscription receivable (250,000) ------------- Total shareholders' equity 2,410,000 ------------- $ 8,788,000 =============

The accompanying notes are an integral part of this financial statement. 3 BIOVEST INTERNATIONAL, INC. STATEMENTS OF OPERATIONS (UNAUDITED)

Three Months Three Months Ended Ended December 31, 2001 December 31, 2000 ----------------- ----------------- Revenues Contract production services $ 1,817,000 $ 1,669,000 Consumable sales 291,000 457,000 System sales 464,000 468,000 Other 94,000 144,000 ----------- ----------- Total revenues 2,666,000 2,738,000 Operating costs and expenses Cost of sales 1,946,000 1,729,000 Research and development 1,053,000 342,000 Marketing, general and administrative 1,094,000 1,037,000 ----------- ----------- Total operating costs and expenses 4,093,000 3,108,000 ----------- ----------- Loss from operations (1,427,000) (370,000) Other income (expense) Interest expense (106,000) (11,000) ----------- ----------- Net loss $(1,533,000) $ (381,000) =========== =========== Net loss per common share-basic and diluted $ (.16) $ (.04) =========== =========== Weighted average number of common shares outstanding- basic and diluted 9,628,609 9,138,977 =========== ===========

The accompanying notes are an integral part of these financial statements. 4 BIOVEST INTERNATIONAL, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)

THREE MONTHS ENDED THREE MONTHS ENDED DECEMBER 31, 2001 DECEMBER 31, 2000 ----------------- ----------------- Cash flows from operating activities Net loss $(1,533,000) $ (381,000) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 48,000 30,000 Amortization 63,000 56,000 Issuance of common stock, options and warrants for services 55,000 137,000 Amortization of warrants related to debt 58,000 -- Changes in current operating items Accounts receivable (451,000) (234,000) Costs and estimated earnings in excess of billings on uncompleted contracts 451,000 (23,000) Inventories 41,000 (25,000) Other 239,000 57,000 Accounts payable and accrued liabilities 496,000 (57,000) Customer deposits 354,000 1,000 Billings in excess of costs and estimated earnings on uncompleted contracts (44,000) 179,000 ----------- ----------- Net cash used in operating activities (223,000) (260,000) ----------- ----------- Cash flows from investing activities Capital expenditures (38,000) (73,000) ----------- ----------- Net cash used in investing activities (38,000) (73,000) ----------- ----------- Cash flows from financing activities Proceeds from short-term borrowings 775,000 100,000 Repayment of short-term borrowings (200,000) -- Principal payments on long-term debt (34,000) (31,000) Financing costs (16,000) -- Stock subscription -- (35,000) ----------- ----------- Net cash provided by financing activities 525,000 34,000 ----------- ----------- Net increase (decrease) in cash 264,000 (299,000) Cash at beginning of period -- 548,000 ----------- ----------- Cash at end of period $ 264,000 $ 249,000 ----------- ----------- Cash paid for interest $ 21,000 $ 11,000 =========== ===========

The accompanying notes are an integral part of these financial statements. 5 BIOVEST INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (1) DESCRIPTION OF THE COMPANY Except as indicated otherwise, the term the "Company" refers to Biovest International, Inc. The Company is a biotechnology company focused on production and contract manufacturing of biologic drugs and products from small through commercial scale. It has historically developed, manufactured and marketed patented cell culture systems and equipment to pharmaceutical, diagnostic and biotechnology companies, as well as leading research institutions worldwide, and has provided contract cell production services to those institutions. While continuing this business, management has chosen to re-orient the Company's focus, assets and operations to increase contract cell production and biologic drug development and ownership. The Company's first drug product, a personalized vaccine for the most common and fastest-growing form of hematologic cancer, known as B-cell Non-Hodgkins lymphoma, is currently in a Phase III FDA-approved pivotal licensing trial. (2) SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been derived from unaudited interim financial information prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The financial statements of the Company, in the opinion of management, include all normal and recurring adjustments necessary for a fair presentation of results as of the dates and for the periods covered by the financial statements. Operating results for the three months ended December 31, 2001 are not necessarily indicative of the results that may be expected for the entire fiscal year. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended September 30, 2001. As of July 31, 1999, the Company adopted fresh start reporting in accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7 Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. Fresh-start reporting resulted in material changes to the Company's balance sheet, including 6 BIOVEST INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) valuation of assets at fair value in accordance with principles of the purchase method of accounting, valuation of liabilities pursuant to provisions of the Company's Modified First Amended Plan of Reorganization (Plan) and valuation of equity based on the reorganization value of the ongoing business. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures about contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. NET INCOME (LOSS) PER COMMON SHARE Basic net income (loss) per share of common stock is computed by dividing net income (loss) by the weighted average number of outstanding common shares. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of outstanding common shares and common share equivalents relating to stock options and warrants, when dilutive. For the three months ended December 31, 2001 and 2000 no common share equivalents would have been included in the computation of diluted net income per share had net income been achieved. Options and warrants to purchase 7,319,000 and 2,600,000 shares of common stock with a weighted average exercise price of $2.24 and $1.92 were outstanding at December 31, 2001 and 2000, and were not included in the computation of common stock equivalents because their exercise price was higher than the estimated fair market value of the common shares during the reporting period. In addition, diluted net income (loss) per share does not include 725,000 shares issuable upon the conversion of notes payable to common stock because the effect would have been antidilutive. RECENT ACCOUNTING PRONOUNCEMENT On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Intangible Assets. SFAS 142 is effective for fiscal years beginning after December 15, 2001, though earlier adoption is permitted. Under the new pronouncement, among other provisions, goodwill, including reorganization value in excess of amounts allocable to identifiable assets, and intangible assets with indefinite lives will no longer be amortized and will be tested for impairment annually and whenever there is an impairment indicator. The Company will continue to amortize the reorganization value in excess of amounts allocable to identifiable assets under its current method until the date of adoption, which is no later than October 1, 7 BIOVEST INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 2002, at which time amortization will no longer be recognized. By the end of the year of implementation the Company will have completed a transitional fair value based impairment test of goodwill. Impairment losses, if any, resulting from the transitional testing will be recognized as a cumulative effect of a change in accounting principle. The Company has not yet determined when it will adopt SFAS 142, nor what will be the effect on its financial statements. (3) GOING CONCERN During the three months ended December 31, 2001 the Company incurred a net loss of $1,533,000. At December 31, 2001 the Company had a deficit in working capital of $1,450,000. The Company has been meeting its cash requirements through the use of cash on hand, the sale of common stock and short-term borrowings, primarily from affiliates. In September 2001 the Company successfully entered into a definitive Cooperative Research and Development Agreement ("CRADA") with the National Cancer Institute ("NCI") for the development and ultimate commercialization of patient-specific vaccines for the treatment of non-Hodgkin's low-grade follicular lymphoma. The terms of the CRADA include, among other things, a requirement for the Company to pay $530,000 quarterly to NCI for expenses incurred in connection with the ongoing Phase III clinical trials. The Company is currently in negotiations with the NCI to reduce this and other financial requirements and has not yet made the second quarterly payment for the quarter ended December 31, 2001. Successful development of the vaccine, if approved by the FDA, from Phase III clinical trials through commercialization will commit the Company to several years of significant expenditures before revenues will be realized, if ever. The Company's ability to continue its present operations and meet its obligations under the CRADA is dependent upon its ability to obtain significant additional funding. Such additional financing could be sought from a number of sources, including the sale of equity or debt securities, strategic collaborations or recognized research funding programs. Management is currently in the process of exploring various financing alternatives to meet the Company's cash needs, including additional short-term loans from shareholders and others and the sale of equity securities. Management believes they will be able to raise the necessary funds to continue operations in the near term. There is no assurance that the additional required funds can be obtained on terms acceptable or favorable to the Company, if at all. The net losses incurred and the need for additional funding raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 8 BIOVEST INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (4) DETAILS TO BALANCE SHEET CONCENTRATION OF CREDIT RISK The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support amounts due. Management performs on-going credit valuations of its customers. Two customers accounted for 23% and 12% of revenues for the three months ended December 31, 2001, one of which accounted for 32% and a different customer accounted for 14% of the Company's trade accounts receivable balance at December 31, 2001. One customer accounted for 20% of revenues for the three months ended December 31, 2000. A significant amount of the Company's revenue has been derived from export sales. The Company's export sales were 47% and 34% for the three months ended December 31, 2001, and 2000, respectively. For the three months ended December 31, 2001, two foreign countries accounted for 13% and 11% of total revenues. For the three months ended December 31, 2000, one foreign country accounted for 14% of total revenues. INVENTORIES Inventories consist of the following: DECEMBER 31, 2001 ----------------- Finished goods.......... $ 281,000 Work-in-process......... 306,000 Raw materials........... 1,418,000 ---------- 2,005,000 Less non-current portion (63,000) ---------- $1,942,000 ========== The Company has inventory quantities in excess of anticipated sales requirements for the twelve months subsequent to December 31, 2001. Accordingly, a portion of the Company's inventory balance is classified as a non-current asset as of that date. (5) NOTES PAYABLE During September 2001, four of seven loans made in fiscal 2001 were renewed with new loans 9 BIOVEST INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) bearing interest at 10%, due on September 1, 2002 and convertible into shares of the Company's common stock at $3.00 per share at the holder's option. In connection with the renewals, the Company issued each party warrants to purchase 25,000 shares of the Company's common stock with an exercise price of $5.00 per share, exercisable from September 1, 2001 through September 30, 2006. The aggregate value of the warrants using the Black-Scholes pricing model, assuming zero dividend yield; a risk-free rate of 4.47%; expected volatility of 84%; and term of five years, was estimated to be $54,000 and is being amortized over the life of the loans which results in a higher effective interest rate. In August 2001, a shareholder loaned the Company $1,000,000 due on August 19, 2002, with interest at 7.5% per annum. This loan is also convertible, at the holder's option, into shares of the Company's common stock at $3.00 per share if the Company wishes to pay amounts under the loan before August 19, 2002. In connection with the issuance of the debt, the Company issued 100,000 warrants with an exercise price of $5.00 per share and 100,000 warrants with an exercise price of $10.00 per share, exercisable on or before August 1, 2006. The aggregate value of the warrants using the Black-Scholes pricing model, assuming zero dividend yield; a risk-free rate of 4.55%; expected volatility of 84%; and term of five years, was estimated to be $92,000 and is being amortized over the life of the loan which results in a higher effective interest rate. During the three months ended December 31, 2001 the Company obtained additional loans aggregating approximately $625,000; these loans bear interest at 7.5%, are due on various dates through October 15, 2002 and are also convertible into shares of the Company's common stock at $3.00 per share, at the holder's option, if the Company wishes to pay amounts under the loans before maturity. The Company issued 52,500 warrants with an exercise price of $2.50 per share and 52,500 warrants with an exercise price of $5.00 per share to a third party who assisted in the financing. The warrants are exercisable immediately and have a term of five years. The aggregate value of the warrants using the Black-Scholes pricing model, assuming zero dividend yield; risk-free interest rates ranging from 3.47% to 4.38%; expected volatility of 100%; and term of five years, was estimated to be $80,000. The Company also paid a commission of $16,000 to the third party who assisted with the financing. The value of the warrants and commission are being amortized over the life of the loans which results in a higher effective interest rate. In December 2001 an individual loaned the Company $150,000, under a note payable that bears interest at 7.5%, is due December 19, 2003 and is convertible into shares of the Company's common stock at $3.00 per share at the holder's option, if the Company wishes to pay amounts under the loan before maturity. In connection with the note the Company issued warrants to purchase 50,000 shares of the Company's common stock at $5.00 per share. The warrants are exercisable immediately and have a term of five years. The aggregate value of the warrants using the Black-Scholes pricing model, assuming zero dividend yield; a risk-free interest rate of 4.45%; expected volatility of 100%; and a term of five 10 BIOVEST INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) years, was estimated to be $35,000 and is being amortized over the life of the loans which results in a higher effective interest rate. (6) LONG-TERM DEBT Long-term debt was entered into pursuant to the Company's reorganization and consists of the following at December 31, 2001:

Promissory note payable to Internal Revenue Service, with interest of 8% per annum, payable in monthly installments of $11,095, including interest through February 1, 2004 and $320 per month thereafter through February 1, 2005...... $267,000 Promissory note payable to State of Minnesota, with interest of 8% per annum, payable in monthly installments of $2,700, including interest through February 1, 2005...................... 90,000 Amounts payable to regulatory agencies (i).......................... 87,000 -------- 444,000 Less current portion of long-term debt.......... 142,000 -------- $302,000 ========

(i) Pursuant to the Plan, the Company was obligated to repay certain regulatory agencies an aggregate amount of approximately $94,000 in equal monthly installments for six years from the date of assessment with interest at the rate of 8% per annum. During fiscal 2001, the Company was assessed $7,000, which was paid in full, by one of these agencies, but promissory notes with the others have not been signed. At December 31, 2001, the aggregate maturities of long-term debt by fiscal year are as follows: remainder of 2002-$105,000; 2003-$151,000; 2004-$87,000; 2005-$14,000; 2006 and subsequent years- $87,000. 11 BIOVEST INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (7) SHAREHOLDERS' EQUITY STOCK OPTIONS AND WARRANTS During the three months ended December 31, 2001 the Company granted 2,084,000 stock options to certain executive officers and employees. The options have an exercise price of $1.50 per share and a five year term. With respect to the options granted to certain executive officers, half are exercisable six months from the date of grant and the remaining options are exercisable one year from the date of the grant. Those granted to other employees are exercisable over a ten year term and vest one-third each year, on the anniversary of the grant, after the first year. During October 2001 the Company granted 100,000 stock options to an outside director for consulting services rendered during fiscal 2001. The options have an exercise price of $1.50 per share and a five year term; half are exercisable six months from the date of grant and the remaining options are exercisable one year from the date of grant. Compensation expense for services rendered was recognized in the amount of $82,000 during the year ended September 30, 2001 based upon the estimated fair value of the options. The options were valued using the Black-Scholes pricing model with the following assumptions: zero dividend yield; risk-free interest rate of 3.94%; expected volatility of 84%; and expected life of five years. During December 2001 the Company's Board of Directors approved the issuance of warrants to purchase 50,000 shares of its common stock at $2.50 per share to a shareholder for consulting services to be rendered to the Company. The warrants are exercisable immediately and have a term of five years. The warrants were valued using the Black-Scholes pricing model with the following assumptions: zero dividend yield; risk-free interest rate of 4.49%; expected volatility of 100%; and expected life of five years. Based upon the fair value of the warrants, the Company recorded $42,000 of expense during the three months ended December 31, 2001. The Board of Directors also approved entering into an agreement with the consultant whereby the consultant would be issued additional warrants if certain events occur. During the three months ended December 31, 2001 the Company issued 155,000 warrants in connection with various notes payable - see Note 5. 12 BIOVEST INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) COMMON STOCK ISSUED FOR SERVICES During the three months ended December 31, 2001, the Company issued 10,000 shares of common stock as employee compensation. The shares were valued at $1.25 per share, which resulted in approximately $13,000 of expense. (8) INCOME TAXES No provision for income taxes has been recorded for the three months ended December 31, 2001 and 2000 due to the losses incurred during the periods. At December 31, 2001, the Company has net operating loss carryforwards of approximately $48,000,000 (expiring 2003 to 2020) and a capital loss carryforward of approximately $14,000,000 (expiring in 2003). Due to various changes in ownership of the Company, a significant portion of these carryforwards are subject to significant restrictions with respect to the ability of the Company to use these amounts to offset future taxable income. Use of the Company's net operating loss carryforwards may be further limited as a result of future equity transactions. The Company has fully offset deferred tax assets resulting from differences in accounting between income tax and financial statement treatment with a valuation allowance. These differences consist almost entirely of net operating and capital loss carryforwards. (9) COMMITMENTS AND CONTINGENCIES COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENT In September 2001 the Company successfully entered into a definitive CRADA with the NCI for the development and ultimate commercialization of patient-specific vaccines for the treatment of non-Hodgkin's low-grade follicular lymphoma. The terms of the CRADA include, among other things, a requirement for the Company to pay $530,000 quarterly to NCI for expenses incurred in connection with the ongoing Phase III clinical trials and a requirement to meet certain staffing commitments. The Company is currently in negotiations with the NCI to reduce this and other financial requirements and has not yet made the second quarterly payment for the quarter ended December 31, 2001. The terms of the CRADA provide for the Company to be granted an exclusive option to negotiate with the NCI for a license to commercialize certain intellectual property resulting from the research conducted pursuant to the CRADA. There can be no assurance that research under the CRADA will be successful or, if it is successful, that the Company will be able to negotiate a license on favorable terms. In addition, the Company may not be able to derive any revenue from a license for a number of years, if at all. The agreement expires in September 2009, but may be unilaterally terminated by either party by giving thirty days written notice. Certain termination costs, as defined in the CRADA, will be the 13 BIOVEST INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) Company's responsibility if the CRADA is terminated. LEGAL PROCEEDINGS During fiscal 2001 the Company entered into a settlement agreement in connection with a legal matter. The terms of the settlement agreement provide for the Company and another plaintiff to be jointly paid an aggregate principal amount of $1,000,000 plus interest at prime. The principal amount is to be paid in increments of $50,000, $100,000 and $200,000 payable on various dates beginning July 2001 and ending June 2004, when all interest accrued on the principal shall be due and payable. The payments received from the defendant are to be shared by the Company and the other plaintiff pursuant to a separate agreement, which provides for the other plaintiff to receive up to $350,000 in the aggregate. During fiscal 2001 the Company received one payment of $50,000, which was recorded as other income in the statement of operations. The Company also recorded $50,000 of other expense related to professional fees that were contingent upon a settlement being negotiated and paid. The Company and the defendant also entered into a royalty agreement whereby the defendant is to pay a royalty to the Company of three percent of its product sales up to an aggregate of $3,000,000 in total royalty payments. The Company is uncertain about future collections and is not able to assess the defendant's ability to perform under the settlement agreement. As a result, the Company will record additional payments as income when received. From time to time the Company is subject to various legal proceedings in the normal course of business. Management believes that these proceedings will not have a material adverse effect on the financial statements. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS OVERVIEW On July 31, 1999, we emerged from Chapter 11 Bankruptcy Reorganization with new management, officers and directors. As of July 31, 1999, we adopted fresh start reporting in accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code". Fresh-start reporting resulted in material changes to our balance sheet, including valuation of assets at fair value in accordance with principles of the purchase method of accounting, valuation of liabilities pursuant to provisions of the Plan and valuation of equity based on the reorganization value of the ongoing business. In addition, our capital structure was recast in conformity with the Plan. In September 2001 we successfully entered into the CRADA with the NCI for the development and ultimate commercialization of patient-specific vaccines for the treatment of non-Hodgkin's low-grade follicular lymphoma. The terms of the CRADA include, among other things, a requirement for us to pay $530,000 quarterly to the NCI for expenses incurred in connection with the ongoing Phase III clinical trials. The Company is currently in negotiations with the NCI to reduce this and other financial requirements and has not yet made the second quarterly payment for the quarter ended December 31, 2001. Successful development of the vaccine, if approved by the FDA, from Phase III clinical trials through commercialization will commit us to several years of significant expenditures before revenues will be realized, if ever. Our ability to continue our present operations and meet our obligations under the CRADA is dependent upon our ability to obtain significant additional funding. We are currently in the process of exploring various financing alternatives to meet our cash needs, including additional short-term loans from shareholders and others and the sale of equity securities. Our management believes we will be able to raise the necessary funds to continue operations in the near term. There is no assurance that the additional required funds can be obtained on terms acceptable or favorable to the Company, if at all. The net losses we have incurred and the need for additional funding raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. RESULTS OF OPERATIONS REVENUES. Revenues for the three months ended December 31, 2001 of $2,666,000 were down 3% from 15 $2,738,000 for the three months ended December 31, 2000. Contract cell culture production services for the three months ended December 31, 2001 increased 9% from $1,669,000 to $1,817,000. The increases are primarily due to higher physical volume. The other components of revenues for the three months ended December 31, 2001 were lower than the comparable periods for last year. Consumable sales for the three months ended December 31, 2001 decreased 36% from $457,000 to $291,000 when compared with last year. Much of the shortfall in consumable revenues in the first fiscal quarter versus last year is expected to be realized in the second fiscal quarter as production moves through to completion. Systems sales decreased 1% from the prior year. GROSS MARGIN. The overall gross margin for the first quarter of fiscal year 2002 decreased versus the comparable quarter last year from 37% to 27%, but is comparable to the 27% margin experienced for the full fiscal year ended September 30, 2001. The decrease for the first fiscal quarter of 2002 is due to production interruptions initiated by customers combined with certain facility rearrangements. OPERATING EXPENSES. Research and development expenses for the three months ended December 31, 2001 increased approximately $711,000 or 208% over last year, reflecting increased expenses for the CRADA. CRADA expenses for the three months ended December 31, 2001 were approximately $992,000 versus $220,000 for the prior year. CRADA related expenses could nearly double in this fiscal year versus last year, if our plan is realized. These expenses are associated primarily with increased patient accrual expenses from the clinical trial and design engineering expense associated with designing a more efficient bioreactor for vaccine production. Marketing, general and administrative expenses increased $57,000 in the three months ended December 31, 2001 versus the same period in fiscal 2000. The increase is attributed largely to increased compensation costs and expenses related to the Company's financing activities. OTHER EXPENSE, NET. Other Expense, Net consists of interest expense on the Company's long-term debt that was assumed pursuant to the Company's reorganization and interest on the short-term loans, primarily from affiliates. Interest expense for the first three months of fiscal 2001 was $105,000 higher than for the first three months of fiscal 2000 due to the increase in the amount of debt between the periods. LIQUIDITY AND CAPITAL RESOURCES On December 31, 2001 the Company had a working capital deficit of $1,450,000 compared to a working capital deficit of $126,000 at September 30, 2001. During the three months ended December 31, 2001 and 2000, we utilized $38,000 and $73,000 of cash for capital expenditures. We have incurred significant losses and cash flow deficits in previous years. During fiscal year 2001 and 2000 we incurred losses of $5,832,000 and $1,884,000. During fiscal year 2001 and 2000, we used $2,070,000 16 and $2,216,000 of cash flow for operations. During the quarter ended December 31, 2001 we incurred a loss of $1,533,000 and used $223,000 of cash flow for operations. We have been meeting our cash requirements through the use of cash on hand, the sale of common stock and short-term borrowings, primarily from affiliates. During the three months ended December 31, 2001 the Company obtained additional loans aggregating approximately $625,000; these loans bear interest at 7.5%, are due on various dates through October 15, 2002 and are also convertible into shares of the Company's common stock at $3.00 per share, at the holder's option, if the Company wishes to pay amounts under the loans before maturity. The Company issued 52,500 warrants with an exercise price of $2.50 per share and 52,500 warrants with an exercise price of $5.00 per share to a third party who assisted in the financing. In December 2001 an individual loaned the Company $150,000, under a note payable that bears interest at 7.5%, is due December 19, 2003 and is convertible into shares of the Company's common stock at $3.00 per share at the holder's option, if the Company wishes to pay amounts under the loan before maturity. In connection with the note the Company issued warrants to purchase 50,000 shares of the Company's common stock at $5.00 per share. In September 2001, we successfully entered into a definitive CRADA with the NCI for the development and ultimate commercialization of patient specific vaccines for the treatment of non-Hodgkin's low-grade follicular lymphoma. The terms of the CRADA include, among other things, a requirement for us to pay $530,000 quarterly to NCI for expenses incurred in connection with the ongoing Phase III clinical trials. The Company is currently in negotiations with the NCI to reduce this and other financial requirements and has not yet made the second quarterly payment for the quarter ended December 31, 2001. Successful development of the vaccine, if approved by the FDA, from Phase III clinical trials through commercialization will commit us to several years of significant expenditures before revenues will be realized, if ever. Our ability to continue our present operations and meet our obligations under the CRADA is dependent upon our ability to obtain significant additional funding. Such additional financing could be sought from a number of sources, including the sale of equity or debt securities, strategic collaborations or recognized research funding programs. Management is currently in the process of exploring various financing alternatives to meet our cash needs, including additional short-term loans from our shareholders and others and the sale of equity securities. We believe that we will be able to raise the necessary funds to continue operations in the near term. There is no assurance that the additional funds, which are required, can be obtained on terms acceptable or favorable to us, if at all. Substantial delays in obtaining such financing would have an adverse effect on our ability to perform under the CRADA. 17 FLUCTUATIONS IN OPERATING RESULTS The Company's operating results may vary significantly from quarter to quarter or year to year, depending on factors such as timing of biopharmaceutical development and commercialization of products by the Company's customers, the timing of increased research and development and sales and marketing expenditures, the timing and size of orders and the introduction of new products or processes by the Company. Consequently, revenues, profits or losses may vary significantly from quarter to quarter or year to year, and revenue or profits in any period will not necessarily be indicative of results in subsequent periods. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K None SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized. BIOVEST INTERNATIONAL, INC. Date: February 13, 2002 /s/ Dr. Christopher Kyriakides ----------------- ------------------------------- Dr. Christopher Kyriakides Chief Executive Officer and Director (Principal Executive Officer) Date: February 13, 2002 /s/ Thomas F. Belleau ----------------- ---------------------- Thomas F. Belleau Chief Financial Officer (Principal Financial and Accounting Officer) 18