10-Q 1 s81313010q.htm FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013 s81313010q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-Q 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2013
 
OR
 
¨
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 0-11480
BIOVEST INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
41-1412084
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification Number)
 
300 S. Hyde Park Ave., Suite 210, Tampa, FL 33606
(Address of principal executive offices) (Zip Code)
 
(813) 864-2554
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
¨
Accelerated filer
¨
       
Non-accelerated filer
¨
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).    Yes  ¨    No  x
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a Bankruptcy Plan confirmed by the Bankruptcy Court.    Yes  x    No  ¨
 
As of August 14, 2013, there were 100,000,000 shares of the registrant’s common stock outstanding.

 
 
 
 
Forward-Looking Statements
 
Statements in this Quarterly Report on Form 10-Q that are not strictly historical in nature are forward-looking statements. These statements may include, but are not limited to, statements about: the timing of the commencement, enrollment, and completion of our clinical trials for our product candidates; the progress or success of our product development programs; the status of regulatory approvals for our product candidates; the timing of product launches; our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; and our estimates for future performance, anticipated operating losses, future revenues, capital requirements, and our needs for additional financing. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” “goal,” or other variations of these terms (including their use in the negative) or by discussions of strategies, plans or intentions. These statements are only predictions based on current information and expectations and involve a number of risks and uncertainties. The underlying information and expectations are likely to change over time. Actual events or results may differ materially from those projected in the forward-looking statements due to various factors, including, but not limited to, those set forth in “ITEM 1A. RISK FACTORS” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 and those set forth in our other filings with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
 
 
 
 
 
 
 
2
 
 
INDEX
BIOVEST INTERNATIONAL, INC.
 
     
   
Page
PART I. FINANCIAL INFORMATION
  
4
 
4
 
5
 
6
 
7
 
8
29
36
36
   
PART II. OTHER INFORMATION
  
36
37
37
37
37
37
38
39
 
 
3
 
 
PART I. FINANCIAL INFORMATION
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARY
(Debtor in Possession)
(Unaudited)
 
             
   
June 30, 2013
(Unaudited)
    
September 30,
2012
  
ASSETS
            
Current assets:
            
Cash
   $ 312,000     $ 72,000  
Accounts receivable, net of $8,000 allowance for doubtful accounts at June 30, 2013 and
   September 30, 2012
     464,000       221,000  
Costs and estimated earnings in excess of billings on uncompleted contracts
     151,000       28,000  
Inventories
     560,000       400,000  
Prepaid expenses and other current assets
     456,000       152,000  
Total current assets
     1,943,000       873,000  
Property and equipment, net
     1,304,000       935,000  
Patents and trademarks, net
     179,000       202,000  
Goodwill
     2,131,000       2,131,000  
Other assets
     371,000       598,000  
Total assets
   $ 5,928,000     $ 4,739,000  
LIABILITIES AND STOCKHOLDERS’ DEFICIT
                
Liabilities not subject to compromise:
                
      Current liabilities:
                
Accounts payable
   $ 787,000     $ 736,000  
Accrued liabilities
     844,000       5,069,000  
Customer deposits
     2,000       —  
Billing in excess of costs and estimated earnings on uncompleted contracts
     73,000       —  
Derivative liabilities
     —       857,000  
Notes payable, related party
     3,033,000       5,936,000  
Current maturities of long term debt
     —       28,889,000  
     Total current liabilities
     4,739,000       41,487,000  
                 
Long term debt, less current maturities
     —       2,833,000  
Accrued interest
     —       437,000  
Other
     26,000       98,000  
Total liabilities not subject to compromise
     4,765,000       44,855,000  
Liabilities subject to compromise (Note 9)
     44,350,000       —  
Total liabilities
     49,115,000       44,855,000  
Commitments and contingencies (Note 14)
     —       —  
Stockholders’ deficit:
                
Preferred stock, $0.01 par value, 50,000,000 shares authorized; no shares issued and
   outstanding
     —       —  
Common stock, $0.01 par value, 500,000,000 shares authorized; 146,510,818 and
   146,436,893 issued and outstanding at June 30, 2013 and September 30, 2012
     1,465,000       1,464,000  
Additional paid-in capital
     131,398,000       131,307,000  
Accumulated deficit
    
(176,050,000
 )    
(172,887,000
 )
Total stockholders’ deficit
     (43,187,000 )     (40,116,000 )
Total liabilities and stockholders’ deficit
   $ 5,928,000     $ 4,739,000  
 
The accompanying footnotes are an integral part of these condensed consolidated financial statements.
 
 
4
 
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARY (Debtor in Possession)
(Unaudited)
 
   
Three Months Ended
June 30,
    
Nine Months Ended
June 30,
  
   
2013
    
2012
    
2013
    
2012
  
Revenue:
                        
Products
   $ 644,000     $ 712,000     $ 1,646,000     $ 2,550,000  
Services
     551,000       192,000       913,000       635,000  
Total revenue
     1,195,000       904,000       2,559,000       3,185,000  
Operating costs and expenses:
                                
Cost of revenue:
                                
Products
     452,000       476,000       1,219,000       1,464,000  
Services
     336,000       252,000       728,000       698,000  
Research and development expense
     1,085,000       919,000       2,703,000       3,059,000  
General and administrative expense
     726,000       738,000       2,070,000       3,937,000  
Total operating costs and expenses
     2,599,000       2,385,000       6,720,000       9,158,000  
Loss from operations
     (1,404,000 )     (1,481,000 )     (4,161,000 )     (5,973,000 )
                                 
Other income (expense):
                                
Interest expense, net
     (71,000 )     (1,371,000 )     (3,413,000 )     (3,568,000 )
Gain on derivative liabilities
     150,000       1,082,000       851,000       190,000  
Other expense, net
     —       (2,000 )     —       (10,000 )
Total other income (expense)
     79,000       (291,000 )     (2,562,000 )     (3,388,000 )
                                 
Loss before reorganization items
     (1,325,000 )     (1,772,000 )     (6,723,000 )     (9,361,000 )
                                 
Reorganization items:
                                
Gain on reorganization
     —       —       —       222,000  
Gain on disallowance of Accentia claim
     4,544,000       —       4,544,000       —  
Gain on waiver of pre-petition expenses
     —       —       82,000       —  
Professional fees
     (716,000 )     —       (1,028,000 )     (25,000 )
Provision for rejected contracts
     —       —       (38,000 )     —  
Total reorganization items
     3,828,000       —       3,560,000       197,000  
Net Income/(Loss)
   $ 2,503,000     $ (1,772,000 )   $ (3,163,000 )   $ (9,164,000 )
                                 
Income/(Loss) per common share:
                                
Basic and diluted
   $ 0.02     $ (0.01 )   $ (0.02 )   $ (0.06 )
Weighted average shares outstanding:
                                
Basic and diluted
     146,510,818       145,669,967       146,505,676       144,902,554  

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

 
5
 
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARY
(Debtor in Possession)
NINE MONTHS ENDED JUNE 30, 2013
(Unaudited)
 
   
Common Stock
    
Additional
Paid-
in Capital
    
Accumulated
Deficit
    
Total
  
   
Shares
    
Amount
  
Balances at October 1, 2012
     146,436,893     $ 1,464,000     $ 131,307,000     $ (172,887,000 )   $ (40,116,000 )
Issuance of common shares for interest on
outstanding debt
     73,925       1,000       15,000       —       16,000  
Employee share-based compensation
     —       —       76,000       —       76,000  
Net Loss
     —       —       —       (3,163,000 )     (3,163,000 )
Balances at June 30, 2013
     146,510,818     $ 1,465,000     $ 131,398,000     $
(176,050,000
 )   $
(43,187,000
 )
 
The accompanying footnotes are an integral part of these condensed consolidated financial statements.
 
 
 
 
 
 
 
6
 
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARY (Debtor in Possession)
(Unaudited)
 
             
   
Nine Months Ended June 30,
  
   
2013
    
2012 
 
Cash flows from operating activities:
            
Net loss
   $ (3,163,000 )   $ (9,164,000 )
Adjustments to reconcile net loss to net cash flows from operating activities before reorganization
   items:
                
Depreciation
     123,000       96,000  
Amortization of patents
     22,000       22,000  
Employee share-based compensation
     76,000       2,532,000  
Amortization of discount on notes payable
     1,565,000       1,295,000  
Amortization of deferred loan costs
     9,000       89,000  
Shares issued for interest on outstanding debt
     1,000       12,000  
Gain on derivative liabilities
     (851,000 )     (190,000 )
Changes in cash resulting from changes in:
                
Operating assets
     (597,000 )     80,000  
Operating liabilities
     2,608,000       2,184,000  
Net cash flows from operating activities before reorganization items
     (207,000 )     (3,044,000 )
Reorganization items:
                
Gain on disallowance of Accentia claim
     (4,544,000 )     —  
Gain on waiver of pre-petition claim
     (82,000 )     —  
Provision for rejected contracts
     38,000       —  
Increase in accrued professional fees
     491,000       —  
Gain on reorganization plan
     —       (222,000 )
Net change in cash flows from reorganization items
     (4,097,000 )     (222,000 )
Net cash flows from operating activities
     (4,304,000 )     (3,266,000 )
Cash flows from investing activities:
                
Acquisition of furniture, equipment and leasehold improvements
     (492,000 )     (300,000 )
Net cash flows from investing activities
     (492,000 )     (300,000 )
Cash flows from financing activities:
                
Repayment of notes payable and long-term debt
     (75,000 )     (21,000 )
Proceeds from notes payable and long-term debt
     5,558,000       —  
(Payments to)/advances from related party
     (447,000 )     3,033,000  
Proceeds from exercise of stock options and warrants
     —       181,000  
Proceeds from equipment financing
     —       219,000  
Net cash flows from financing activities
     5,036,000       3,412,000  
                 
Net change in cash
     240,000       (154,000 )
Cash at beginning of period
     72,000       201,000  
Cash at end of period
   $ 312,000     $ 47,000  
                 
Supplemental disclosure of cash flow information:
                
                 
Non-cash financing and investing transactions:
                
Issuance of shares for payment of interest on outstanding debt
   $ 15,000     $ 77,000  
Issuance of shares to settle pre-petition claims
     —       952,000  
Increase in March 2014 Obligations
     —       63,000  
Cash paid for interest during period
   $ 3,000     $ 161,000  
 
The accompanying footnotes are an integral part of these condensed consolidated financial statements.
 
 
7
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
1. Description of the Company:
 
Overview:
 
Biovest International, Inc. (the “Company” or “Biovest”) is a biotechnology company focused on: the continued development and future commercialization of BiovaxID™, as a personalized therapeutic cancer vaccine for the treatment of B-cell blood cancers; the continued development, commercialization, manufacture and sale of AutovaxID® and its other instruments and disposables; and the commercial sale and production of cell culture products and related services.
 
As a result of Biovest’s collaboration with the National Cancer Institute (“NCI”), Biovest is developing BiovaxID, a personalized therapeutic cancer vaccine for the treatment of non-Hodgkin’s lymphoma (“NHL”), a B-cell cancer, specifically, follicular lymphoma (“FL”) and mantle cell lymphoma (“MCL”), and potentially other B-cell blood cancers. Both FL and MCL are generally considered to be incurable with currently approved therapies. These generally fatal diseases arise from the lymphoid tissue and are characterized by an uncontrolled proliferation and spread throughout the body of mature B-cells, which are a type of white blood cell. Three clinical trials conducted under the Company’s investigational new drug application (“IND”) have studied BiovaxID in NHL. These studies include a Phase 2 clinical trial and a Phase 3 clinical trial in patients with FL, as well as a Phase 2 clinical trial in patients with MCL. BiovaxID has demonstrated statistically significant Phase 3 clinical benefit by prolonging disease-free survival in FL patients treated with BiovaxID.  The Company believes that these clinical trials demonstrate the safety and efficacy of BiovaxID.
 
Based on the Company’s scientific advice meetings with multiple European Union (“EU”)-Member national medicines agencies, the Company filed its formal notice of intent to file a marketing authorization application (“MAA”) with the European Medicines Agency (“EMA”), which begins the EU marketing approval application process. Additionally, based on a scientific advice meeting conducted with Health Canada, the Company announced plans to file a new drug submission application (“NDS”) seeking regulatory approval in Canada. Biovest could receive decisions regarding EU marketing and Canadian regulatory approvals for BiovaxID within 12 months after the submission of the Company’s MAA and NDS assuming that the rigorous review processes advance forward in a timely and positive manner and no substantial regulatory issues or problems are encountered.  No assurance can be given that BiovaxID will receive marketing/regulatory approval from the regulatory authorities in any jurisdiction, including but not limited to the EU or Canada.  The Company also conducted a formal guidance meeting with the U.S. Food and Drug Administration (“FDA”) in order to define the path for the Company’s filing of a biologics licensing application (“BLA”) for BiovaxID’s U.S. regulatory/marketing approval. Further in its guidance, the FDA required that the Company conduct a confirmatory second Phase 3 clinical trial to complete the clinical data gained through its first Phase 3 clinical trial and its BiovaxID development program to support the Company’s filing of a BLA for BiovaxID.  The Company is preparing, subject to required funding, to initiate this second Phase 3 clinical trial to advance BiovaxID toward the U.S. market.
 
To support the Company’s planned commercialization of BiovaxID and to support the products of personalized medicine and particularly, patient specific oncology products, the Company developed and commercialized the AutovaxID bioreactor, a fully automated cell culture instrument that employs a fully disposable, closed-system cell-growth chamber incorporating a hollow fiber cell-growth cartridge.  Since it is fully enclosed, computer controlled and automated, AutovaxID requires limited supervision and manpower to operate compared to manual instruments. AutovaxID is suitable for growing antibody-secreting cell lines, including hybridomas and Chinese hamster ovary (“CHO”) cells, which are among the leading kinds of cell lines used for commercial therapeutic protein manufacture. AutovaxID has a small footprint and supports scalable production. The Company plans to utilize the AutovaxID technology to streamline the commercial manufacture of BiovaxID.  The Company believes that AutovaxID is the first cell culture system that enables production of personalized cell-based treatments economically.   AutovaxID uses a disposable production unit which provides for robust and dependable manufacturing while complying with the industry current good manufacturing practices (“cGMP”) standards. The Company also manufactures instruments and disposables used in the hollow fiber production of cell culture products. The Company manufactures mammalian cell culture products such as whole cells, recombinant and secreted proteins, and monoclonal antibodies for third parties, primarily researchers.  The Company has produced over 7,000 cell based products for an estimated 2,500 researchers around the world.  The Company considers its vast experience in manufacturing small batches of different cell based products, together with its expertise in designing and manufacturing instruments for personalized medicines as important competencies supporting the Company’s development of patient specific immunotherapies.
 
 
8
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
1. Description of the company (continued)
 
Corporate Overview:
 
In April 2003, the Company entered into an investment agreement with Accentia Biopharmaceuticals, Inc. (“Accentia”).  As a result of this agreement, in June 2003, the Company became a subsidiary of Accentia through the sale of shares of the Company’s authorized but unissued common and preferred stock representing approximately 81% of the Company’s then outstanding equity immediately following the investment. The aggregate investment commitment initially received from Accentia was $20 million. Following Accentia’s investment, the Company continued to be a reporting company under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Company files periodic and other reports with the Securities and Exchange Commission (“SEC”).  As of June 30, 2013, Accentia owned approximately 55% of the Company’s outstanding common stock.
 
On November 17, 2010, the Company completed and formally exited its previous reorganization proceeding under Chapter 11 of the U.S. Bankruptcy Code (“Chapter 11”). On March 19, 2012, the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division (the “Bankruptcy Court”) entered a Final Decree closing the Company’s Chapter 11 proceedings.  Through the provisions of the Company’s bankruptcy plan (as amended) (the “2010 Plan”), effective on November 17, 2010 (the “Effective Date”), the Company restructured its debts into a combination of new debt and equity.
 
On March 6, 2013, as a result of the Company’s inability to pay approximately $30 million in secured debt which had become due on November 17, 2012, the Company filed a voluntary petition to reorganize under Chapter 11, Case No.8:13-bk-2892-KRM.  See Note 2 below for further details.
 
2. The 2013 Bankruptcy Case:
 
On March 6, 2013 (the “Petition Date”), as a result of the Company’s inability to pay approximately $30 million in secured debt which had become due on November 17, 2012, the Company filed a voluntary petition to reorganize under Chapter 11, Case No.8:13-bk-2892-KRM, with the Bankruptcy Court (“the 2013 Bankruptcy Case”).  During the pendency of the Chapter 11 proceedings, the Company has operated its business as a debtor-in-possession in accordance with the provisions of Chapter 11, and will be subject to the jurisdiction of the Bankruptcy Court.
 
Under Section 362 of the United States Bankruptcy Code, actions to collect most of the Company’s prepetition liabilities, including payments owing to vendors with respect to goods furnished and services provided prior to the Petition Date, are automatically stayed and other contractual obligations of the Company generally may not be enforced. Shortly after the Petition Date, the Company began notifying all known actual or potential creditors of the Company for the purpose of identifying all potential prepetition claims. The Chapter 11 filings triggered defaults on substantially all debt obligations of the Company. The stay provisions of section 362 of the Bankruptcy Code, however, also apply to actions to collect prepetition indebtedness or to exercise control over the property of the Company’s estate in respect of such defaults.
 
On April 18, 2013, the Bankruptcy Court entered an Order approving of the process and procedures for (i) a transaction for the sale of substantially all of the Company’s assets outside the ordinary course of business pursuant to Sections 363 and 365 of the Bankruptcy Code, and/or (ii) a transaction for the funding of an alternative plan of reorganization, which, at a minimum, shall provide for (a) payment in full of the pre-petition and post-petition secured claims (inclusive of all fees, costs, interest and other amounts owed to the senior secured lenders) of the senior secured lenders and (b) higher or better treatment than that proposed in the plan for the holders of other claims against, and equity interests in, the Company. Also on April 18, 2013, the Bankruptcy Court approved the employment of Ferghana Partners, Inc, as an investment banker to provide services in connection with a potential sale transaction.  The deadline for submission of bids under the Section 363 Sale process was set for May 29, 2013 and the hearing regarding the Section 363 Sale, assuming the receipt of a qualifying bid, was also set for May 31, 2013. At the May 31, 2013 hearing, testimony of Ferghana Partners reported that no bids had been submitted by any third party for either a purchase of the Company’s assets or the funding of an alternative plan of reorganization.  On June 10, 2013 the Bankruptcy Court approved the Section 363 Sale to the Secured Lenders pursuant to the stalking horse bid as an alternative to the event that the Plan could not become Effective for any reason.
 
On June 10, 2013, the Company filed its First Modification to the First Amended Plan of Reorganization (the “2013 Plan”) in the case with the support of its senior, secured lenders.   The 2013 Plan provides for, among other things, the cancellation of all presently outstanding common stock, options and warrants in the Company.  In addition, the 2013 Plan provides for the conversion of virtually all pre-petition debt into new common stock of the reorganized Company as follows: (i) all outstanding indebtedness due to the Company’s senior secured lenders, totaling in excess of $41.0 million, will be converted into new equity representing ninety three percent (93%) of the issued and outstanding common stock in the reorganized Company and; (ii) approximately $5.4 million of unsecured indebtedness outstanding under the Company’s prepetition unsecured debt obligations will be converted and exchanged for new equity representing seven percent (7%) of the issued and outstanding common stock in the reorganized Company.
 
 
9
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
On June 27, 2013 an evidentiary hearing was held to determine the validity of an unsecured claim filed by Accentia (the “Accentia Claim”), our former majority shareholder and parent corporation.  The Company had originally classified its intercompany obligation due to Accentia as a “debt subject to compromise” through the Chapter 11 proceeding.  In the course of our Chapter 11 proceeding, Accentia timely filed an initial Proof of Claim for $5.0 million and later an Amended Proof of Claim in the amount of approximately $6.5 million.  The Official Committee of Unsecured Creditors (the “Creditors Committee”) filed an objection to the Accentia Claim, and after the June 27th hearing the Bankruptcy Court upheld the objection of the Creditors Committee and denied the Accentia Claim in its entirety, ruling that Accentia’s claim be stricken and that Accentia would have no continued claim in the Chapter 11 Case. 
 
On June 28, 2013, the Bankruptcy Court entered an Order Confirming the Debtor’s First Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the "Confirmation Order"), which approved and confirmed the Plan.  The occurrence of the Plan’s Effective Date was subject to satisfaction or waiver of certain conditions precedent including no modification or stay of the Confirmation Order or entry of other court order prohibiting the consummation of the transactions contemplated by the Plan, and all other actions and documents necessary to implement the Plan shall have been effected or executed. Each of the foregoing conditions to the effectiveness of the Plan were satisfied or waived, and the Effective Date occurred on July 9, 2013.
 
As a result of the Confirmation of our First Amended Plan of Reorganization, as modified, and upon the Effective Date of that Plan all previously-existing equity interests in our Company were canceled and extinguished, and new common stock is to be issued to secured and unsecured creditors.  Thus, as of July 9, 2013, Accentia ceased to be a stockholder of the Company and, in light of the previous denial of its unsecured creditor claim, retains no debt or equity interest in reorganized Biovest.

See Note 15 for further information regarding the 2013 Plan and the Company’s capital structure upon the Effective Date of the 2013 Plan.

3. Significant accounting policies:
 
Basis of presentation:
 
The accompanying unaudited condensed consolidated financial statements have been derived from unaudited interim financial information prepared in accordance with the rules and regulations of the SEC for quarterly financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance the U.S. generally accepted accounting principles (“GAAP”) 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 interim 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 interim financial statements.
 
Operating results for the three and nine months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the entire fiscal year. The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern.  These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012. The accompanying condensed consolidated balance sheet at September 30, 2012 has been derived from the audited financial statements at that date, but does not include all information and footnotes required by GAAP for complete financial statements.
 
Principles of consolidation:
 
The unaudited condensed consolidated financial statements include Biovest Europe, Limited, a wholly owned subsidiary of the Company. Biovest Europe, Limited was incorporated in the United Kingdom effective June 29, 2011.
 
All significant inter-company balances and transactions have been eliminated.
 
 
10
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
Accounting for reorganization proceedings:
 
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 852—Reorganizations (“ASC Topic 852”), which is applicable to companies in Chapter 11, generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of the Chapter 11 petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the statements of operations beginning in the quarter ending March 31, 2013. The balance sheet must distinguish prepetition liabilities subject to compromise from both those prepetition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts. In addition, cash provided by reorganization items must be disclosed separately in the statement of cash flows. The Company became subject to ASC Topic 852 effective on March 6, 2013, and has segregated those items as outlined above for all reporting periods after such date.
 
Use of estimates in the preparation of financial statements:
 
The preparation of condensed consolidated financial statements in conformity with GAAP require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures about contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
 
Inventories:
 
Inventories consist primarily of supplies and parts used in the assembly of the Company’s hollow fiber instrumentation and related materials. Inventories are stated at the lower of cost or market with cost determined using the first-in first-out (FIFO) method.
 
Property and equipment:
 
Property and equipment are recorded at cost. Depreciation for property and equipment is computed using the straight-line method over the estimated useful lives of three to seven years. Leasehold improvements are amortized over the shorter of their economic lives or the lease term.
 
Goodwill and intangible assets:
 
Goodwill relates to the Company’s cell culture and instrument manufacturing segments located in Minneapolis (Coon Rapids), Minnesota. Goodwill is tested for impairment annually or whenever there is an impairment indication. The Company has not recorded any impairment losses as a result of these evaluations.
 
Patents and trademarks:
 
Costs incurred in relation to patent applications are capitalized as deferred patent costs. If and when a patent is issued, the related patent application costs are transferred to the patent account and amortized over the estimated useful life of the patent. If it is determined that a patent will not be issued, the related patent application costs are charged to expense at the time such determination is made. Patent and trademark costs are recorded at historical cost. Patent and trademark costs are being amortized using the straight-line method over their estimated useful lives of six years for patents and twenty years for trademarks.
 
Deferred financing costs:
 
Deferred financing costs include fees paid in cash in conjunction with obtaining notes payable and long-term debt and are amortized over the term of the related financial instrument.
 
Contractual Interest Expense:
 
Contractual interest expense represents amounts due under the contractual terms of outstanding debt, including debt subject to compromise for which interest expense may not be recognized in accordance with the provisions of ASC Topic 852. As a result, the Company has ceased to record interest expense on its pre-petition debt obligations.
 
Carrying value of long-lived assets:
 
The carrying values of the Company’s long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. This assessment may be based upon management’s experience in the industry, historical and projected sales, current backlog, and expectations of undiscounted future cash flows. The Company reviews the valuation and amortization of those long-lived assets to determine possible impairment by comparing the carrying value to projected undiscounted future cash flows of the carrying value of the related assets. During the nine months ended June 30, 2013, the Company noted no events that would give it reason to believe that impairment on the Company’s long-lived assets is necessary.
 
 
11
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
Financial instruments:
 
Financial instruments, as defined in ASC Topic 825-Financial Instruments, consist of cash, evidence of ownership in an entity and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, the Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued liabilities, notes payable, long-term debt, and derivative financial instruments.
 
The Company carries cash, accounts receivable, accounts payable, and accrued liabilities at historical costs. The respective estimated fair values of these assets and liabilities approximate carrying values due to their current nature. The Company also carries notes payable and long-term debt at historical cost less discounts from warrants issued as loan financing costs; however, fair values of these debt instruments are estimated for disclosure purposes based upon the present value of the estimated cash flows at market interest rates applicable to similar instruments.
 
Fair value of financial assets and liabilities:
 
The Company measures the fair value of financial assets and liabilities in accordance with GAAP which defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements.
 
GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. GAAP describes three levels of inputs that may be used to measure fair value:
 
Level 1 – quoted prices in active markets for identical assets or liabilities
 
Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable
 
Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
 
The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. These instruments are required to be carried as derivative liabilities, at fair value.
 
The Company uses the Black-Scholes option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to measure the fair value of these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective inputs that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the Company’s trading market price and the trading market price of various peer companies, which have historically had high volatility.  Since derivative financial instruments are initially and subsequently carried at fair value, the Company’s operating results will reflect the volatility in these estimate and assumption changes.

Revenue recognition:
 
Instruments and disposables sales are recognized in the period in which the applicable products are delivered. The Company does not provide its customers with a right of return; however, deposits made by customers must be returned to customers in the event of non-performance by the Company and, as such, are not recognized as revenue until product delivery. Revenues from contract cell production services are recognized using the percentage-of-completion method, measured by the percentage of contract costs incurred to date to the estimated total contract costs for each contract. Contract costs include all direct material, subcontract and labor costs and those indirect costs related to contract performance, such as indirect labor, insurance, supplies and tools. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to revenues, costs and profits and are recognized in the period such revisions are determined. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change in the near term. The asset “costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed. Such revenues are expected to be billed and collected within one year on uncompleted contracts. The liability “billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenue recognized.
 
 
12
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
Research and development expenses:
 
The Company expenses research and development expenditures as incurred. Such costs include payroll and related costs, facility costs, equipment rental and maintenance, professional fees, outsourced consulting services, travel expenses associated with the Company’s regulatory strategy, the cost of laboratory supplies, and certain other indirect cost allocations that are directly related to research and development activities to (a) assist the Company in its analyses of the data obtained from the Company’s clinical trials and (b) update the Company’s manufacturing facility to facilitate its compliance with various regulatory validations and comparability requirements related to the Company’s manufacturing process and its facility, as the Company continues its advancement toward seeking marketing/regulatory approval from the EMA, Health Canada, the FDA and other foreign regulatory agencies.
 
Shipping and handling costs:
 
Shipping and handling costs are included as a component of cost of revenue in the accompanying condensed consolidated statements of operations.
 
Stock-based compensation:
 
The Company has accounted for stock-based compensation under the provisions of ASC Topic 718 – Stock Compensation which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (stock options and common stock purchase warrants). The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on historical volatility of peer companies and other factors estimated over the expected term of the stock options. The expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term.
 
4. Liquidity:
 
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes the Company will realize its assets and discharge its liabilities in the normal course of business.  As reflected in the accompanying condensed consolidated financial statements, as of June 30, 2013, the Company had an accumulated deficit of approximately $176 million and working capital deficit of approximately $2.8 million (not including those liabilities subject to compromise through the Company’s bankruptcy proceedings). Cash and cash equivalents, at June 30, 2013, were approximately $0.3 million. The Company’s independent auditors issued a “going concern” uncertainty report on the Company’s consolidated financial statements for the year ended September 30, 2012, citing significant losses and working capital deficits at that date, which raised substantial doubt about the Company’s ability to continue as a going concern.
 
Funding to provide the Company with working capital to continue its development of BiovaxID over the past nine months has been provided through secured promissory notes issued to our secured lenders.  Below is a summary of these transactions.
 
Corps Real Financings:
 
On December 3, 2012, the Company issued a secured promissory note to Corps Real, LLC (“Corps Real”) in the principal amount of $1.5 million (the “Corps Real II Note”).  Corps Real is an Illinois limited liability company, and is principally owned and managed by Ronald E. Osman, the chairman of the Company’s Board of Directors.  The Corps Real II Note accrues interest at 16% per annum with all interest due at maturity – December 3, 2013 and is secured by a first priority lien on all of the Company’s assets.
 
On March 5, 2013 the Company issued an additional secured note to Corps Real in the principal amount of $0.3 million (the “Corps Real III Note”).  The Corps Real III Note accrues interest at 16% per annum with all interest due at maturity – March 5, 2014 and is secured by a first priority lien of all the Company’s assets.
 
Due to the Company’s 2013 Bankruptcy Case, filed on March 6, 2013, both the Corps Real II Note and the Corps Real III Note are subject to compromise through the Company’s reorganization proceedings.  A summary of all the debt subject to compromise through the Company’s reorganization proceedings can be found in Note 9 below.
As of July 9, 2013, the Effective Date of the Company’s 2013 Plan, any obligations due under the Corps Real Notes have been extinguished in return for common stock of the reorganized Company.  See Note 15 for further information regarding the 2013 Plan and the Company’s capital structure upon Effective Date of the 2013 Plan.
 
 
13
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
Debtor-in-Possession Financing:
 
On March 8, 2013, Biovest filed a Debtor in Possession Financing Motion, requesting authority to obtain post-petition loans from
Laurus Master Fund Ltd., Calliope Corporation, Valens U.S. SPV I, LLC, Psource Structured Debt Limited, Valens Offshore SPV II, Corp, and Valens Offshore SPV I, Ltd, acting collectively through their agent, LV Administrative Services, Inc. (collectively, the “LV Entities”) in the aggregate principal amount of $3.0 million, along with authority to obtain post-petition loans from Corps Real in the amount of $2.7 million.  The LV Entities and Corps Real represent the Company’s pre-petition senior secured lenders (the “Senior Secured Lenders”) and have committed a total of $5.7 million (the “DIP Financing”) to be funded to the Company, which is secured by a security interest in and lien on all assets and properties of the Company. The security interests are senior to any existing pre-petition and post-petition liens, including any and all liens held by the Senior Secured Lenders.
 
On April 10, 2013, the DIP Financing was approved by final order of the Bankruptcy Court (the “DIP Order”).  Pursuant to the DIP Order, the Company is authorized draw down funds from the total $5.7 million committed in accordance with a budget filed with the court and approved by the Secured Lenders.
 
As of July 9, 2013, the Effective Date of the Company’s 2013 Plan, amounts due under the DIP Financing have been extinguished in return for common stock of the reorganized Company.  See Note 15 for further information regarding the 2013 Plan and the Company’s capital structure upon Effective Date of the 2013 Plan.
 
Additional expected financing activity:
 
It is the Company’s intention to meet its cash requirements through proceeds from the sales of its instrument and disposables and cell culture products and services, trade vendor credit, restructuring of its outstanding debt obligations through the Chapter 11 proceedings, and through the use of funds available under the DIP Financing discussed above and through future potential issuances of debt or equity securities.
 
As of August 14, 2013, the Company has approximately $2.0 million available under the DIP Financing, which is anticipated to fund the Company’s operations and commercialization efforts through October, 2013.   The Company’s ability to fund the additional confirmatory Phase 3 clinical trial required for FDA approval and to continue its detailed analyses of BiovaxID™’s clinical trial results and preparation for anticipated regulatory filings is dependent on the Company’s ability to obtain significant additional external funding in the near term, which raises substantial doubt about the Company’s ability to continue as a going concern. Additional sources of funding have not been established; however, additional financing is currently being sought by the Company through strategic collaborations, recognized research funding programs, domestic and/or foreign licensing of the Company’s product candidates and future potential issuances of debt or equity securities.  If adequate funds are not available from the foregoing sources in the immediate term, or if the Company determines it to otherwise be in the Company’s best interest, the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs or curtail some or all of its commercialization efforts.
 
 
14
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
5. Accounts receivable, concentrations of credit risk and major customers:
 
Financial instruments that subject the Company to concentrations of credit risk include cash and accounts receivable.
 
Accounts receivable are customer obligations due under normal trade terms for products sold to distributors and retail customers. The Company performs ongoing credit evaluations of customers’ financial condition, but does not require collateral or any other security to support amounts due. Management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The allowance for doubtful accounts contains a specific accrual for accounts receivable balances that are considered potential bad debts and a general accrual for remaining possible bad debts. Any accounts receivable balances that are determined to be uncollectible are written off to the allowance. Based on the information available, management believes that the current allowance for doubtful accounts is adequate. However, actual write-offs might exceed the recorded allowance.
 
Major customer information is as follows:
 
 
·
Four customers accounted for 75% of revenues for the three months ended June 30, 2013.
 
 
·
Four customers accounted for 67% of revenues for the three months ended June 30, 2012.
 
 
·
Two customers accounted for 43% of revenues for the nine months ended June 30, 2013.
 
 
·
One customer accounted for 21% of revenues for the nine months ended June 30, 2012.
 
 
·
Three customers accounted for 64% of trade accounts receivable as of June 30, 2013.
 
 
·
Three customers accounted for 71% of trade accounts receivable as of September 30, 2012.
 
A significant amount of the Company’s revenue has been derived from export sales. Details on the Company’s export sales are as follows:
 
 
·
The Company’s sales to the United Kingdom and Canada were 30% and 16% of revenues, respectively, for the three months ended June 30, 2013.
 
 
·
The Company had export sales totaling 24% of revenues to the United Kingdom and 23% of revenues to Canada for the three months ended June 30, 2012.
 
 
·
The Company had export sales totaling 32% of revenues to the United Kingdom and 15% of revenues to Canada for the nine months ended June 30, 2013.
 
 
·
The Company had export sales totaling 21% of revenues to the United Kingdom and 17% of revenues to Canada for the nine months ended June 30, 2012.
 
 
6. Inventories:
 
Inventories consist of the following:
 
   
June 30, 2013
(Unaudited)
    
September 30, 2012
  
Raw materials
   $ 371,000     $ 320,000  
Work-in-process
     60,000       —  
Finished goods
     129,000       80,000  
    $ 560,000     $ 400,000  
 
 
15
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
7. Related party transactions:
 
Notes payable, related party consists of the following:
 
             
   
June 30,  2013
(Unaudited)
    
September 30, 2012
  
Corps Real I Note
   $ —       2,292,000  
Unamortized discount on Corps Real I Note
     —       (397,000 )
Accentia Intercompany Payable
     —       4,041,000  
Debtor in Possession Financing (Note 4)
     3,033,000       —  
    $ 3,033,000     $ 5,396,000  
 
Corps Real I Note:
 
On November 17, 2010, the Company issued a secured convertible promissory note (as amended) (the “Corps Real I Note”) in an approximate principal amount of $2.3 million to Corps Real.   The Corps Real I Note accrued interest at a fixed rate of 16% per annum due at maturity.  On October 9, 2012, and under the terms of the Corps Real I Note, Corps Real elected to loan to the Company an additional $0.7 million.  As a result of the additional loan, the outstanding principal balance under the Corps Real I Note increased from approximately, $2.3 million to $3.0 million.  The Corps Real I Note is secured by a first priority lien on all of the Company’s assets.
 
As a result of the Company’s 2013 Bankruptcy Case, the balance outstanding under Corps Real I Note has been reclassified to ‘liabilities subject to compromise’ on the June 30, 2013 balance sheet (see Note 9).

As of July 9, 2013, the Effective Date of the Company’s 2013 Plan, any obligations due under the Corps Real I Note have been extinguished in return for common stock of the reorganized Company.  See Note 15 for further information regarding the 2013 Plan and the Company’s capital structure upon Effective Date of the 2013 Plan.
 
Accentia Intercompany Payable:
 
The Accentia intercompany payable consists mainly of advances to the Company from Accentia in the form of cash, interest, payments directly to third parties on the Company’s behalf, and allocated inter-company expenses for items such as payroll, insurance, and shared facility expenses.  The Company had originally classified the intercompany obligation due to Accentia as a  “debt subject to compromise” at the outset of the Company’s 2013 Bankruptcy Case in the amount of $4.5 million, the amount the Company expected would represent an allowed claim in the Company’s proceeding.  In the course of the Company’s Chapter 11 proceeding, Accentia timely filed a Proof of Claim in the amount of approximately $6.5 million.  The Official Committee of Unsecured Creditors (the “Creditors Committee”) filed an objection to the Accentia Claim, and at a hearing held June 27, 2013, the Bankruptcy Court upheld the objection of the Creditors Committee and denied the Accentia Claim in its entirety, ruling that Accentia’s claim be stricken and that Accentia would have no continued claim in the Chapter 11 Case. 
 
As a result of the Bankruptcy Court’s ruling on June 27, 2013, a gain of $4.5 million on disallowance of Accentia claim was recorded on the Company’s Statements of Operations for the three and nine month periods ended June 30, 2013.
 
8. Long-term debt:
 
Long-term debt is presented in the table below.  As a result of the Company’s 2013 Bankruptcy Case, all obligations listed in the table have been classified as liabilities subject to compromise on the Company’s balance sheet as of June 30, 2013 (see Note 9).
 

   
June 30,
2013
(Unaudited)
    
September 30,
2012
  
March 2014 Obligations
   $ —     $ 2,833,000  
November 2010 Convertible Notes, net of discount
of $0.29 million on September 30, 2012
     —       928,000  
Minnesota Promissory Notes
     —       344,000  
LV Entities Term A Notes
     —       23,467,000  
LV Entities Term B Notes
     —       4,160,000  
      —       31,722,000  
Less: current maturities
     —       (28,889,000 )
    $ —     $ 2,833,000  
 
 
16
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
March 2014 Obligations:
 
On November 17, 2010, the Company became obligated to pay certain of its unsecured creditors the aggregate principal amount of approximately $2.7 million in cash together with interest at 5% per annum to be paid in one installment on March 27, 2014 (the “March 2014 Obligations”). The aggregate principal balance of the March 2014 Obligations, increased by approximately $0.12 million due to the allowance of a previously unfiled unsecured claim, as well as an amendment to the amount owed on a separate, unsecured claim in fiscal 2012.
 
November 2010 Convertible Notes:
 
On November 17, 2010, the Company issued convertible notes (the “November 2010 Convertible Notes”) in the original aggregate principal amount of $7.04 million.  Interest on the November 2010 Convertible Notes accrued at a fixed rate of 7% per annum and was payable monthly.  The Company has paid the monthly interest due under the November 2010 Convertible Notes in shares of the Company’s common stock.   The holders of the November 2010 Convertible Notes had the option to convert all or a portion of the outstanding balance of the November 2010 Convertible Notes s into shares of the Company’s common stock at a conversion rate of $0.91 per share.  As of November 17, 2012, the maturity date of the November 2010 Convertible Notes, a total of $5.8 million in principal had been converted to the Company’s common stock, resulting in the issuance of 6.9 million shares of the Company’s common stock.  The aggregate principal balance outstanding on the November 2010 Convertible Notes, was approximately $1.2 million and became due and payable on November 17, 2012.
 
Because the Company was unable to pay the amounts due under the November 2010 Convertible Notes on November 17, 2012, an event of default occurred.  On December 19, 2012, Whitebox Credit Arbitrage Partners, LP, Whitebox Special Opportunities Fund Series B Partners, LP, Pandora Select Partners, LP, Whitebox Multi-Strategy Partners, LP, Whitebox Concentrated Convertible Arbitrage Partners, LP, (collectively, the “Whitebox Entities”) who hold a majority of the outstanding November 2010 Convertible Notes, commenced a breach of contract action in the State of Minnesota to secure monetary judgment(s) against the Company for the outstanding defaulted principal and interest owed to them.   Upon the filing of the 2013 Bankruptcy Case, this litigation was automatically stayed pursuant to provisions of federal bankruptcy law. As a result of the outstanding balance on their November 2010 Convertible Notes, the Whitebox Entities have an allowed unsecured claim in the approximate amount of $1.4 million in the Company’s 2013 Bankruptcy Case.
 
The common stock purchase warrants issued in conjunction with the November 2010 Convertible Notes contained adjustment features properly classified as derivative instruments required to be recorded at fair value.  The fair value of these derivative instruments have also been recorded as liabilities subject to compromise on the Company’s June 30, 2013 balance sheet due to the Company’s 2013 Bankruptcy Case.  As of July 9, 2013, the Effective Date of the Company’s 2013 Plan, all of the Company’s outstanding warrants were cancelled.  See Note 15 for further information regarding the 2013 Plan and the Company’s capital structure upon Effective Date of the 2013 Plan.
 
 
17
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
Minnesota Promissory Notes:
 
On May 6, 2011, the Company closed two financing transactions with the Economic Development Authority in and for the City of Coon Rapids (the “EDA”) and the Minnesota Investment Fund (the “MIF”), which provide capital to help add workers and retain high-quality jobs in the State of Minnesota. The Company issued two secured promissory notes in the aggregate amount of $0.353 million, which amortize over 240 months, with a balloon payment of $0.199 million due on May 1, 2021 (collectively, the “Minnesota Promissory Notes”). The Company may prepay the Minnesota Promissory Notes at any time prior to maturity without penalty. The entirety of the proceeds from the transaction were used to fund capital improvements made to the Company’s existing manufacturing facility in Minneapolis (Coon Rapids), Minnesota.  The Minnesota Promissory Notes bear interest as follows (yielding an effective interest rate of 4.1%):
 
 
•
Months 1-60 at 2.5% interest
 
 
•
Months 61-80 at 5.0% interest
 
 
•
Months 81-100 at 7.0% interest
 
 
•
Months 101-120 at 9.0% interest

As of July 9, 2013, the Effective Date of the Company’s 2013 Plan, the obligations due under the Minnesota Promissory Notes were affirmed.  On July 16, 2013, the Company issued payment in the amount of $9,353 representing the cumulative balance of the missed monthly principal and interest payments due while the Company was in reorganization.  It is the Company’s intent to resume the monthly amortizing payments due under the original terms of the notes beginning with the August 2013 installment.
 
LV Entities Term A and Term B Notes:
 
On November 17, 2010, the Company issued two notes – one in the aggregate principal amount of $24.9 million (the “Term A Notes”) and one in the aggregate principal amount of $4.2 million (the “Term B Notes”) to the LV Entities.
 
The Term A Notes accrued interest at the rate of 8% per annum (with a 12% percent per annum default rate) and became due on November 17, 2012.  On November 18, 2010, the Company prepaid the Term A Notes in an amount equal to $1.4 million from the proceeds received from the issuance of the November 2010 Convertible Notes.
 
The Term B Notes were due in one installment of principal and interest on November 17, 2013, and accrued interest at the rate of 8% per annum (with a 12% per annum default rate).  
 
The Term A Notes and Term B Notes were secured by a lien on all of the Company’s assets, junior only to the lien granted to Corps Real and to certain other permitted liens. The Term A Notes and Term B Notes were guaranteed (as amended) by Accentia (the “Accentia Guaranty”), up to a maximum amount of $4,991,360. The Accentia Guaranty was secured by Accentia’s pledge of 20,115,818 shares of Biovest common stock owned by Accentia.
 
On November 17, 2012, with the Term A Notes having matured, the Company and the LV Entities entered into a standstill agreement, whereby (i) the maturity dates of the Term A Notes were extended from November 17, 2012 to January 31, 2013 and (ii) the LV Entities granted the Company a forbearance until January 31, 2013 from exercising its rights and/or remedies available to it under the Term A Notes Notes.  Upon notification of an event of default by the LV Entities, LV (a) had the right to foreclose upon their lien on all of the Company’s assets (which is subordinate only to the security interest of Corps Real) and (b) may appoint one-third of the total membership of the Company’s Board of Directors.  The Company had not been notified of an event of default under the Term A or Term B Notes prior to the Company’s filing its 2013 Bankruptcy Case.

As of July 9, 2013, the Effective Date of the Company’s 2013 Plan, any obligations due under the March 2014 Obligations, the November 2010 Convertible Notes, and the LV Entities Term A and B Notes have been extinguished in return for common stock of the reorganized Company.  See Note 15 for further information regarding the 2013 Plan and the Company’s capital structure upon Effective Date of the 2013 Plan.
 
9. Liabilities subject to compromise:
 
As a result of the Company’s 2013 Bankruptcy Case, the payment of prepetition indebtedness may be subject to compromise or other treatment under the Company’s Plan of Reorganization. Although actions to enforce or otherwise effect payment of prepetition liabilities are stayed, at hearings held in March 2013, the Bankruptcy Court granted approval of Biovest’s administrative motions, generally designed to stabilize Biovest’s operations and covering, among other things, payroll obligations, business operations, tax matters, cash management, utilities, case management and retention of professionals.
 
 
18
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
The Company has been paying and intends to continue to pay undisputed post-petition claims in the ordinary course of business. In addition, the Company rejected a number of prepetition executory contracts with respect to the Company’s operations, with the approval of the Bankruptcy Court. Damages resulting from rejection of executory contracts and unexpired leases were treated as general unsecured claims and were classified as liabilities subject to compromise.   ASC Topic 852-Reorganizations require prepetition liabilities that are subject to compromise to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. The amounts currently classified as liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of the secured status of certain claims, the values of any collateral securing such claims, or other events.
 
Liabilities subject to compromise consist of the following:
 
   
June 30, 2013 
(Unaudited)
    
September 30, 2012
  
November 2010 Convertible Notes (Note 8)
   $ 1,216,000     $ —  
Corps Real I Note (Note 7)
     2,992,000       —  
Corps Real II Note (Note 4)
     1,500,000       —  
Corps Real III Note (Note 4)
     325,000       —  
LV Entities Term A Notes (Note 8)
     23,467,000       —  
LV Entities Term B Notes (Note 8)
     4,160,000       —  
March 2014 Obligations (Note 8)
     2,833,000       —  
Minnesota Promissory Notes (Note 8)
     328,000       —  
Accrued interest on outstanding debt (Note 11)
     6,609,000       —  
Series A Exchange Warrant liability (Note 10)
     5,000       —  
Pre-petition accounts payable
     605,000       —  
Other accrued pre-petition liabilities
     310,000       —  
    $ 44,350,000     $ —  

See Note 15 for further information regarding the resolution of the Company’s Liabilities subject to compromise upon July 9, 2013, the Effective Date of the Company’s 2013 Plan of Reorganization.
 
10. Derivative liabilities:
 
The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding common stock purchase warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. These instruments are required to be carried as derivative liabilities, at fair value.
 
The following table discloses the fair value of the Company’s derivative liabilities and their location in the accompanying condensed consolidated balance sheets as of June 30, 2013 and September 30, 2012. The Company held no derivative assets at either reporting date.
 
 
Liability Derivatives
  
 
June 30, 2013
(unaudited)
  
September 30, 2012
  
 
Balance Sheet
Location
  
Fair
Value
  
Balance Sheet
Location
  
Fair
Value
  
Derivatives not designated as hedging instruments
                
Series A Exchange Warrants
Liabilities Subject
to Compromise
   $ 5,000  
Derivative
Liabilities
   $ 857,000  
Total derivatives not designated as hedging instruments
     $ 5,000       $ 857,000  
 
 
19
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
The following table summarizes assets and liabilities measured at fair value on a recurring basis for the periods presented:
 
   
June 30, 2013
(unaudited)
    
September 30, 20121
 
 
Fair Value Measurements Using:
  
Level 1
    
Level 2
    
Level 3
    
Total
    
Level 1
    
Level 2
    
Level 3
    
Total
  
Liabilities
                                                
Derivative Liabilities
   $ —     $ 5,000     $ —     $ 5,000     $ —     $ 857,000     $ —     $ 857,000  

As of July 9, 2013, the Effective Date of the Company’s 2013 Plan, any obligations due under the Series A Exchange Warrants have been extinguished.  See Note 15 for further information regarding the 2013 Plan and the Company’s capital structure upon Effective Date of the 2013 Plan.

11. Accrued interest:
Interest accrued on the Company’s outstanding debt is in the table below.  Due to the Company’s 2013 Bankruptcy Case, all amounts listed as of June 30, 2013 have been classified as liabilities subject to compromise (Note 9) in the Company’s June 30, 2013 balance sheet except for approximately $70,000 accrued on the Debtor in Possession Financing which has been classified in current accrued liabilities on the June 30, 2013 balance sheet.  As a result of the 2013 Bankruptcy Case, the Company has ceased accruing interest on all of its prepetition debt obligations in accordance with ASC 852.  As of July 9, 2013, the Effective Date of the Company’s 2013 Plan, all interest obligations listed in the table below (excluding the $1,000 due under the Minnesota Promissory Notes), have been extinguished in return for common stock of the reorganized Company.  See Note 15 for further information regarding the 2013 Plan and the Company’s capital structure upon Effective Date of the 2013 Plan.
 
 
   
June 30, 2013
(Unaudited) 
   
September 30, 2012 
 
Corps Real I Note
   $ 594,000     $ 358,000  
Corps Real II Note
     58,000       —  
Corps Real III Note
     4,000       —  
Debtor in Possession Financing
     70,000       —  
November 2010 Convertible Notes
     200,000       7,000  
LV Entities Term A Notes
     4,454,000       3,518,000  
LV Entities Term B Notes
     790,000       624,000  
March 2014 Obligations
     508,000       437,000  
Minnesota Promissory Notes
     1,000       1,000  
Total accrued interest
   $ 6,679,000     $ 4,945,000  
Current
   $ 6,679,000     $ 4,508,000  
Non-Current
   $ —     $ 437,000  
 
The current portion of accrued interest has been recorded in current accrued liabilities on the consolidated balance as of September 30, 2012.
 
 
20
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
12. Common stock options and warrants:
 
Common stock options outstanding and exercisable as of June 30, 2013 are as listed in the tables below.  As of July 9, 2013, the effective date of the Company’s plan of reorganization, all common stock options have been cancelled.  Any holders of the common stock options listed below did not receive or retain any property or equity interest under the Plan.

                         
   
Shares
    
Weighted
Avg.
Exercise
Price
    
Weighted Avg.
Contractual
Life (yrs)
    
Aggregate
Intrinsic Value
  
Outstanding at October 1, 2012
     36,464,559     $ 0.53       6.86     $ 1,314,688  
Granted
     250,000       0.18       5.0       —  
Exercised
     —       —       —       —  
Cancelled
     (143,802 )     0.40       1.3       —  
Outstanding at June 30, 2013
     36,570,757       0.52       6.12       —  
Exercisable at June 30, 2013
     34,764,924     $ 0.52       6.02     $ —  
 
Non-vested employee stock options:

 
                  
   
Shares
    
Weighted Avg.
Grant-Date
Fair Value
    
Aggregate Intrinsic
Value
  
Non-vested at October 1, 2012
     2,422,261     $ 0.46        
Granted
     250,000       0.08        
Vested
     (866,428 )     0.08        
Cancelled
     —       —        
Non-vested at June 30, 2013
     1,805,833     $ 0.59     $ —  
 
Common stock warrants outstanding and exercisable as of June 30, 2013 are as listed in the table below.  As of July 9, 2013, the effective date of the Company’s plan of reorganization, all common stock warrants have been cancelled.  Any holders of the common stock warrants listed below did not receive or retain any property or equity interest under the Plan.

 
                  
   
Shares
    
Weighted
Avg. Price
    
Aggregate Intrinsic
Value
  
Outstanding at October 1, 2012
     24,887,173     $ 0.87        
Issued
     —       —        
Exercised
     —       —        
Cancelled
     (2,214,960 )      0.36        
Outstanding at June 30, 2013
     22,672,213       0.92     $ —  
Exercisable at June 30, 2013
     22,672,213     $ 0.92     $ —  
 
13. Segment information:
 
The Company operates in three identifiable industry segments. The Company’s Cell Culture Products and Services segment is engaged in the production and contract manufacturing of biologic drugs and cell production for research institutions worldwide. The Instruments and Disposables segment is engaged in the development, manufacture and marketing of patented cell culture systems, equipment and consumable parts to pharmaceutical, diagnostic and biotechnology companies, as well as leading research institutions worldwide. The Therapeutic Vaccine segment is focused on the development and commercialization of BiovaxID™.
 
The Company defines its segment operating results as earnings/(loss) before general and administrative costs, interest expense, interest income, other income, and income taxes. Under the Company’s shared resources concept, assets of the Company are common to the segments listed below and thus not segregated for reporting purposes.  The Company’s facilities expenses and other assets are not distinguished among the identifiable segments. Revenue and cost of sales information about the Company’s segments are as follows:
 
 
21
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
   
Three Months ended June 30,
    
Nine Months ended June 30,
  
   
2013
    
2012
    
2013
    
2012
  
Revenues
                        
                         
Instruments and Disposables
   $ 644,000     $ 712,000     $ 1,646,000     $ 2,450,000  
Cell Culture Services
     551,000       192,000       913,000       635,000  
Therapeutic Vaccine
     —       —       —       100,000  
Total Revenues
     1,195,000       904,000       2,559,000       3,185,000  
                                 
Cost of Sales
                                
Instruments and Disposables
     452,000       476,000       1,219,000       1,464,000  
Cell Culture Services
     336,000       252,000       728,000       698,000  
Therapeutic Vaccine
     —       —       —       —  
Total Cost of Sales
     788,000       728,000       1,947,000       2,162,000  
                                 
Gross Margin ($)
   $ 407,000     $ 176,000     $ 612,000     $ 1,023,000  
Gross Margin (%)
     34 %     19 %     24 %     32 %
 
 
 
 
 
 
 
22
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
14. Commitments and contingencies:
 
2013 Bankruptcy proceedings:
 
On March 6, 2013, as a result of the Company’s inability to pay approximately $30 million of its senior secured debt which had become due on November 17, 2012, Biovest filed a voluntary petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code with Case No.8:13-bk-02892-KRM. After confirmation hearings on May 31, 2013 and June 10, 2013, the Bankruptcy Court confirmed our First Amended Plan of Reorganization, (as amended and modified, the “Plan”), and entered an Order Confirming our Plan on June 28, 2013.  Our Plan became effective on July 9, 2013.  Two Notices of Appeal of provisions of the Bankruptcy Proceedings were filed by the Equity Committee during the pendency of the 2013 Bankruptcy Proceedings and both appeals remain pending, but the Equity Committee has been dissolved as of the effectiveness of the Plan and no party has as of this date been substituted in to continue to pursue these appeals.  See Note 15 for further information regarding the 2013 Plan and the Company’s capital structure upon Effective Date of the 2013 Plan.
 
Whitebox litigation:
 
On December 19, 2012, Whitebox Credit Arbitrage Partners, LP, Whitebox Special Opportunities Fund Series B Partners, LP, Pandora Select Partners, LP, Whitebox Multi-Strategy Partners, LP, and Whitebox Concentrated Convertible Arbitrage Partners, LP (collectively, the “Whitebox Entities”), a majority of the holders of the outstanding November 2010 Convertible Notes commenced a breach of contract action in the State of Minnesota to secure monetary judgment(s) against the Company for the outstanding defaulted principal and interest owed to them.  Upon the filing of the 2013 Bankruptcy Case, this litigation was automatically stayed pursuant to provisions of federal bankruptcy law. As a result of the outstanding balance on their November 2010 Convertible Notes, the Whitebox Entities have an allowed unsecured claim in the approximate amount of $1.4 million in the Company’s 2013 Bankruptcy Case.  On July 9, 2013, the effective date of our Plan, the Whitebox Entities unsecured claim was extinguished through the issuance of common stock in reorganized Biovest.  See Note 15 for further information regarding the 2013 Plan and the Company’s capital structure upon Effective Date of the 2013 Plan.
 
Other proceedings:
On July 24, 2013 and August 5, 2013, purported class actions were filed in the United States District Court for the Middle District of Florida (Tampa Division) against the Company’s former parent corporation, Accentia, and several current and former directors and officers of Biovest and Accentia.  Biovest was not named as a defendant in either complaint. The complaints allege that the defendants violated federal securities laws by making or causing Accentia and/or Biovest to make false statements, and by failing to disclose or causing Accentia and/or Biovest to fail to disclose material information, concerning the results of its Phase III clinical trial of BiovaxID and status of its approval by the FDA. Plaintiffs seek damages in an unspecified amount on behalf of shareholders who purchased common stock of Accentia or Biovest between July 24, 2008 and August 14, 2012 and were damaged as a result of the decline in the price of common stock allegedly attributable to the claimed violations.
 
Except for the foregoing, the Company is not aware of, or party to, any material legal proceedings, and management is not aware of any other, threatened legal proceedings that could cause a material adverse impact on the Company’s business, assets, or results of operations. Further, from time to time the Company is subject to various legal proceedings in the normal course of business, some of which are covered by insurance.
 
Facility leases:
 
The Company leases approximately 35,000 square feet in Minneapolis (Coon Rapids), Minnesota, which the Company uses for offices, laboratory, manufacturing, and warehousing space to support its development, potential commercialization, and production of BiovaxID™, the production of the Company’s perfusion cell culture equipment, and the Company’s contract cell culture services. The lease expires on December 31, 2020.   The Company has the right to extend the term of the lease.
 
The Company also leased approximately 7,400 square feet of office space in Tampa, Florida with Accentia and utilized the space as the Company’s principal executive and administrative offices. The lease expires on December 31, 2014 and is cancelable by either party with 120 days prior notice.   On April 1, 2013, as a result of a motion filed by the Company, the Bankruptcy Court ordered the lease to be canceled.
 
As of April 10, 2013, the Company entered into a new lease for approximately 1,300 square feet of office space in Tampa, Florida and utilizes the space as the Company’s principal executive and administrative offices. The lease expires on December 31, 2014 and is cancelable by either party with 90 days prior notice.
 
 
23
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
The Company plans to continue to evaluate its requirements for facilities during fiscal 2013. The Company anticipates that as its development of its product candidates advances and as the Company prepares for the future commercialization of its products, its facilities requirements will continue to change on an ongoing basis.
 
15. Effective Date of 2013 Plan and Pro-Forma Balance Sheet
 
On June 28, 2013, the Bankruptcy Court entered an Order Confirming the Company’s First Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, which approved and confirmed the Company’s Plan of Reorganization.  The occurrence of the Plan’s Effective Date was subject to satisfaction or waiver of certain conditions precedent including no modification or stay of the Confirmation Order or entry of other court order prohibiting the consummation of the transactions contemplated by the Plan, and all other actions and documents necessary to implement the Plan shall have been effected or executed. Each of the foregoing conditions to the effectiveness of the Plan were satisfied or waived, and the Effective Date occurred on July 9, 2013.
 
The following is a summary of the material terms of the Plan as confirmed.  This summary highlights only certain substantive provisions of the Plan and is not intended to be a complete description of the Plan.
 
Equity Interests and New Capital Structure
 
The Plan provides for the cancellation of all presently outstanding common stock in the Company (including all options and warrants to purchase such common stock), which ceased to trade or be recognized as an ownership interest in the Company as of July 9, 2013.  The Company’s Amended and Restated Certificate of Incorporation will authorize the Company to issue up to 50,000,000 shares of preferred stock and up to 300,000,000 shares of common stock.  As of the effective date, the Company will not have issued any preferred shares, and will have issued 100,000,000 common shares as follows:
 
 
·
to the holders of allowed secured claims – 93 million shares
 
·
to the holders of allowed unsecured claims – 7 million shares
 
Administrative Expenses
 
Administrative expenses consist primarily of legal fees incurred in the case as well as a rent cure claim for past amounts due under the lease for our manufacturing facility located in Coon Rapids, Minnesota.  The majority of the legal fees as well as the rent cure claim were paid by the Company, in cash, shortly after the effective date.  A portion of the legal fees (approximately $0.18 million) will remain accrued and become due by the Company, in cash, at later dates, but no later than March 31, 2014.

Priority Claims
Priority Claims consist of pre-petition wages due to the Company’s employees in the approximate amount of $0.12 million.  Priority wage claims were paid by the Company, in cash, shortly after the Effective Date.
 
DIP Financing Claims
 
As discussed in Note 4, the Bankruptcy Court previously approved a $5.7 million post-petition line of credit facility (the “DIP Financing”) from the Company’s secured creditors, Corps Real, LLC and the LV Entities.  As of August 14, 2013, approximately $4.0 million had been advanced under the agreement.  Pursuant to the terms of the Plan, the DIP Financing claims shall be deemed fully paid and any liens and security interests granted in favor of Corps Real and the LV Entities under the DIP Financing documents shall be released and terminated.  Furthermore, approximately $2.0 million remains available to the Company for working capital without payment of any further consideration by the Company.
 
Secured Claims
 
The allowed secured claims in the Company’s reorganization proceeding consist of the following:
 
 
·
The Corps Real Claims (including Corps Real I, II and III notes and DIP Financing Claims, plus accrued interest) totaling approximately $8.0 million.  On the effective date, the Corps Real Claims were exchanged for approximately 26 million shares of Reorganized Biovest Common Stock, representing approximately 26% of the total issued and outstanding shares of Reorganized Biovest Common Stock as of effective date, in full and final satisfaction of all allowed Corps Real claims.
 
 
·
The LV Entities Claims (including the Term A and Term B notes and DIP Financing Claims, plus accrued interest) totaling approximately $33.7 million.  On the effective date, the LV Entities Claims were exchanged for approximately 67 million shares of Reorganized Biovest Common Stock, representing approximately 67% of the total issued and outstanding shares of Reorganized Biovest Common Stock as of effective date, in full and final satisfaction of all allowed LV Entities claims.
 
 
24
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
 
·
The Minnesota Promissory Notes (including accrued interest) totaling approximately $0.33 million.  On the effective date, the obligations due under the Minnesota Promissory Notes were affirmed.  On July 16, 2013, the Company issued cash payment in the amount of $9,353 representing the cumulative balance of the missed monthly principal and interest payments due while the Company was in reorganization.  Following effective date, Reorganized Biovest shall continue to perform its obligations under the original terms of Minnesota Promissory Note documents.
 
Unsecured Claims
 
The allowed unsecured claims in the Company’s reorganization proceeding totaled approximately $5.4 million and consist of the following:
 
 
·
The November 2010 Convertible Notes (plus accrued interest) totaling approximately $1.4 million
 
·
The March 2014 Obligations (plus accrued interest) totaling approximately $3.3 million
 
·
Other accrued pre-petition liabilities totaling approximately $0.7 million

On the effective date, all allowed unsecured claims were entitled to seven million shares of Reorganized Biovest Common Stock, representing 7% of the total issued and outstanding shares of Reorganized Biovest Common Stock as of effective date in full and final satisfaction of all allowed unsecured claims.  Each holder of an allowed unsecured claim will receive their pro-rata share of the seven million shares available to all allowed unsecured claims.
 
Fresh Start Reporting
 
Fresh-start reporting requires that the reporting entity allocate the reorganization value to its assets and liabilities in relation to their fair values upon emergence from Chapter 11 if (i) the value of the assets of the emerging entity immediately before the date of confirmation is less than the total of all post-petition liabilities and allowed claims; and (ii) holders of existing voting shares immediately before confirmation receive less than 50% of the voting shares of the emerging entity.  The process regarding the allocation of fair value is guided by purchase price allocation standards under generally accepted accounting principles.  Adopting fresh-start reporting results in a new reporting entity with no beginning retained earnings or deficit.

The cancellation of all existing shares outstanding on effective date and issuance of new shares of the reorganized entity caused a related change of control of the Company.  Furthermore, the value of the assets of the emerging entity immediately before the date of confirmation was less than the total of all post-petition liabilities and allowed claims as follows:

Post petition current liabilities
   $ 1,652,000  
Post petition non-current liabilities
     339,000  
Allowed claims
     46,744,000  
Total post-petition liabilities and allowed claims
     48,735,000  
Preliminary estimated Reorganization Value
     (42,393,000 )
Excess of liabilities over reorganization value
   $ 6,342,000  


Accordingly, per ASC 852, the Company will adopt fresh-start reporting as of July 1, 2013 (the “Convenience Date”) after concluding that the operating results between the Convenience Date and the Effective Date do not result in a material difference.

The Company’s reorganization value was determined through a variety of factors.  Through the course of the Company’s Chapter 11 Case, the Court entered an order which approved an undertaking to enter into the sale of all assets of the Company in accordance with Section 363 and Section 365 of the Bankruptcy Code (the “Sale Order”).  Pursuant to the Sale Order, an investment banking firm was retained to perform the marketing and facilitation of the potential sale and an Asset Purchase Agreement was entered with the Secured Lenders of the Company to act as a “stalking horse” purchase bid.  Any qualifying bidder was afforded the opportunity to place a bid to either purchase the Company’s assets, or to sponsor an alternative reorganization plan which would provide equal or better treatment to all impaired classes of claims, with the initial bid established as the total of all outstanding secured debt of the Company plus the administrative expenses associated with the Chapter 11 Case, in the approximate amount of $43.0 million.  In the event that any qualifying bidders had submitted bids prior to the Sale Order deadline, an auction would have taken place.  No bids were submitted and as a result the Bankruptcy Court found and ruled in its Confirmation Order that the value of the Company at the time of Confirmation of the Company’s Plan was equal to or less than the total of the outstanding Secured Debt plus administrative expenses.
 
 
25
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012

Based upon the Court’s ruling, the Company engaged a valuation firm to assess the fair value of the Company’s assets, specifically the intangible assets related to the Company’s in-process research and development with respect to the potential commercialization of BiovaxID, as well as the ongoing value of the Company’s hollow fiber instrumentation and cell culture manufacturing operations.  The value of these assets were estimated by applying the income approach and market approach based upon significant inputs and assumptions and thus represent a Level 3 measurement as defined in ASC 820, Fair Value Measurement.
 
Pro Forma Results
 
Upon implementation of fresh-starting accounting, the Company allocated the preliminary estimated reorganization value as detailed in the table below to the various assets and liabilities based on their estimated fair values and eliminated the accumulated deficit and additional paid-in-capital balances. The reorganization value was first assigned to tangible and identifiable intangible assets. The excess of the reorganization value over and above the identifiable net asset values resulted in goodwill. The Successor Company’s debt and equity was also recorded at the fair value estimated through this process. As the estimated enterprise value is dependent on the achievement of future financial results and various assumptions, there is no assurance that financial results will be realized to support the estimated reorganization value.
 

 
 
 
 
 
26
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012

The effect of the plan of reorganization, including the adoption of fresh start reporting on the Company’s balance sheet as of June 30, 2013, had the Plan been effective on that date, is as follows:

         
Adjustments upon Effective Date
        
   
Pre-confirmation
    
Conversion of Debt
for New Equity
    
Fresh Start
    
Biovest Reorganized
Balance Sheet
  
ASSETS
                        
Current assets:
                        
Cash
   $ 312,000       –       –     $ 312,000  
Accounts receivable
     464,000       –       –       464,000  
Costs and estimated earnings in excess of billings on
uncompleted contracts
     151,000       –       –       151,000  
Inventories
     560,000       –       112,000       672,000  
Prepaid expenses and other current assets
     456,000       (248,000 )     –       208,000  
Total current assets
     1,943,000       (248,000 )     112,000       1,807,000  
Property and equipment
     1,304,000       –       –       1,304,000  
Intangible Assets
     2,310,000       –       38,825,000       41,135,000  
Other assets
     371,000       (371,000 )     –       –  
Total assets
   $ 5,928,000     $ (619,000 )   $ 38,937,000     $ 44,246,000  
                                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
                                
Liabilities not subject to compromise:
                                
      Current liabilities:
                                
Accounts payable
   $ 787,000       –       –     $ 787,000  
Accrued liabilities
     844,000       (208,000 )     –       636,000  
Customer deposits
     2,000       –       –       2,000  
Billing in excess of costs and estimated earnings on uncompleted contracts
     73,000       –       –       73,000  
Notes payable, related party
     3,033,000       (3,033,000 )     –       –  
Current maturities of long term debt
     —       18,000       –       18,000  
     Total current liabilities
     4,739,000       (3,223,000 )     –       1,516,000  
Long term debt, less current maturities
     —       311,000       –       311,000  
Other
     26,000       –       –       26,000  
Total liabilities not subject to compromise
     4,765,000       (2,912,000 )     –       1,853,000  
Liabilities subject to compromise
     44,350,000       (44,350,000 )     –       –  
Total liabilities
     49,115,000       (47,262,000 )     –       1,853,000  
Stockholders’ deficit:
                                
Preferred stock
     –       –       –       –  
Common stock - old
     1,465,000               (1,465,000 )     –  
Common stock - new
     –       1,000,000       –       1,000,000  
Additional paid-in capital
     131,398,000       41,393,000       (131,398,000 )     41,393,000  
Accumulated deficit
     (176,050,000 )     4,250,000       171,800,000       –  
Total stockholders’ deficit
     (43,187,000 )     46,643,000       38,937,000       42,393,000  
Total liabilities and stockholders’ deficit
   $ 5,928,000     $ (619,000 )   $ 38,937,000     $ 44,246,000  
 
 
16. Subsequent events:
 
Resignation of Samuel S. Duffey as Chief Executive Officer and President
 
Effective on July 9, 2013, Samuel S. Duffey, Esq. resigned as the Company’s Chief Executive Officer and President. 
 
 
27
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARY
(DEBTOR IN POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 
Appointment of Carlos Santos as Chief Executive Officer
 
Effective on July 9, 2013, Carlos F. Santos, 35, was appointed as the Company’s Chief Executive Officer.  Prior to July 8, 2013, Dr. Santos has served as the Company’s Senior Vice President, Product Development & Regulatory Affairs since March 2009.  In that role, Dr. Santos managed all key aspects of the Company’s personalized immunotherapy platform, including the Company’s clinical and regulatory affairs, while also leading the development of the Company’s manufacturing systems essential to personalized cancer vaccine production.  Dr. Santos has authored numerous peer-reviewed publications in the fields of active immunotherapy, oncology, and bioinformatics. Dr. Santos is a graduate of the University of Michigan where he earned a Ph.D. in Bioinformatics, and Washington University in St. Louis, where he earned a B.S. in Computer Science.  At the University of Michigan, he developed automated natural language processing systems to integrate high-throughput genomic experimental data with known protein interaction pathways in metastatic prostate cancer progression.  He also led the development of large-scale automated search and summarization engines for biomedical documents at the University of Michigan’s National Center for Integrative Biomedical Informatics (“NCIBI”).  From 1998 to 2001, he was a researcher at Washington University’s Institute for Biomedical Computing (now the Center for Computational Biology).
 
Appointment of Ronald E. Osman as Chairman of the Board of Directors and Eugene Grin as a Member of the Board of Directors
 
On July 8, 2013, Ronald E. Osman was appointed as the Chairman of the Company’s Board of Directors.  Mr. Osman has been a director of the Company since November 2006. Mr. Osman is the founder, president and senior partner of the law offices of Ronald E. Osman & Associates, Ltd. Mr. Osman established the practice in 1979. The firm concentrates on actions brought under the Federal False Claims Act as well as actions concerning commercial law and personal injury. The firm maintains offices in Marion, Illinois. After receiving a Bachelor of Science degree in Agriculture/Economics from the University of Illinois in 1968, Mr. Osman joined the United States Marine Corp, where he served as an officer from 1969 to 1972. In 1976, Mr. Osman began law school at Southern Illinois University. Mr. Osman completed his law degree in two and one half years and received his Juris Doctorate from Southern Illinois University in 1979. Mr. Osman has been actively engaged in the practice of law since that time. In addition to his law practice, Mr. Osman operates a farming business and an oil production business. He is a member of the Illinois Bar Association, the Illinois Trial Lawyers Association, and the National Health Lawyers Association. He also serves as a Member of the Board of Dongola Clinic and is a Founding Member of Rural Health, Inc. He also has previous experience in founding and selling business enterprises and has been an active participant in the financing activities of our company.  In addition, Mr. Osman manages Corps Real and the majority owner of Corps Real, MRB&B, LLC, which are shareholders of the Company.
 
Effective on July 9, 2013, Eugene Grin was appointed as a Member of the Company’s Board of Directors.  Mr. Grin is a principal and co-founder of Laurus Capital Management, LLC and Valens Capital Management, LLC, positions he has held since the founding of Laurus (2001) and Valens (2007).  The Laurus/Valens entities are shareholders of the Company.  Additionally, Mr. Grin is an executive officer of Global Equities and Realty, Inc. and certain of its related entities, which together comprise a full services asset management firm that specializes in implementing strategic turnarounds.  Mr. Grin received a B.A. in Engineering from The Technical College of Radio, Electronics and Industrial Engineering in the Ukraine in 1977.
 
 
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When you read this section of this Quarterly Report on Form 10-Q, it is important that you also read the condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q and in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2012. This section of this Quarterly Report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the matters discussed under the caption “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 and other risks and uncertainties discussed in our other filings with the Securities and Exchange Commission.
 
Overview
 
Biovest International, Inc. (“Biovest”) is a biotechnology company focused on: the continued development and future commercialization of BiovaxID™, as a personalized therapeutic cancer vaccine for the treatment of B-cell blood cancers; the continued development, commercialization, manufacture and sale of AutovaxID® and our other instruments and disposables; and the commercial sale and production of cell culture products and services.
 
As a result of our collaboration with the National Cancer Institute (“NCI”), we are developing BiovaxID as a personalized therapeutic cancer vaccine for the treatment of non-Hodgkin’s lymphoma (“NHL”), a B-cell cancer, specifically, follicular lymphoma (“FL”) and mantle cell lymphoma (“MCL”), and potentially other B-cell cancers. Both FL and MCL are generally considered to be incurable with currently approved therapies. These generally fatal diseases arise from the lymphoid tissue and are characterized by an uncontrolled proliferation and spread throughout the body of mature B-cells, which are a type of white blood cell. Three clinical trials conducted under our investigational new drug application (“IND”) have studied BiovaxID in NHL. These studies include a Phase 2 clinical trial and a Phase 3 clinical trial in patients with FL, as well as a Phase 2 clinical trial in patients with MCL. BiovaxID has demonstrated statistically significant Phase 3 clinical benefit by prolonging disease-free survival in FL patients treated with BiovaxID. We believe that these clinical trials demonstrate the safety and efficacy of BiovaxID.
 
Based on our scientific advice meetings with multiple European Union (“EU”)-Member national medicines agencies, we filed our formal notice of intent to file a marketing authorization application (“MAA”) with the European Medicines Agency (“EMA”), which begins the EU marketing approval application process.  Additionally, based on a scientific advice meeting conducted with Health Canada, we announced plans to file a new drug submission application (“NDS”) seeking regulatory approval in Canada. We could receive decisions regarding EU marketing and Canadian regulatory approvals for BiovaxID within 12 months after the submission and acceptance of our MAA and NDS assuming that the rigorous review processes advance forward in a timely and positive manner and no substantial regulatory issues or problems are encountered.  No assurance can be given that BiovaxID will receive marketing/regulatory approval from the regulatory authorities in any jurisdiction, including but not limited to the EU or Canada.  We also conducted a formal guidance meeting with the U.S. Food and Drug Administration (“FDA”) in order to define the path for our filing of a biologics licensing application (“BLA”) for BiovaxID’s U.S. regulatory/marketing approval. Further in its guidance, the FDA required that we conduct a second Phase 3 clinical trial to complete the clinical data gained through our first Phase 3 clinical trial and our BiovaxID development program to support our filing of the BLA for BiovaxID.  We are preparing, subject to required funding, to initiate this second Phase 3 clinical trial to advance BiovaxID toward the U.S. market.
 
To support our planned commercialization of BiovaxID and to support the products of personalized medicine and particularly patient specific oncology products, we developed and commercialized the AutovaxID bioreactor, a fully automated, reusable instrument that employs a fully disposable, closed-system cell-growth chamber incorporating a hollow fiber cell-growth cartridge.  Since it is fully enclosed, computer controlled and automated, AutovaxID requires limited supervision and manpower to operate, compared to manual instruments. AutovaxID is suitable for growing antibody-secreting cell lines, including hybridomas and Chinese hamster ovary (“CHO”) cells, which are among the leading kinds of cell lines used for commercial therapeutic protein manufacture. AutovaxID has a small footprint and supports scalable production. We plan to utilize the AutovaxID technology to streamline the commercial manufacture of BiovaxID.  We believe that AutovaxID is the first cell culture system that enables production of personalized cell-based treatments economically.   AutovaxID uses a disposable production unit which provides for robust and dependable manufacturing while complying with the industry current good manufacturing practices (“cGMP”) standards.
 
 
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We also manufacture instruments and disposables used in the hollow fiber production of cell culture products. We manufacture mammalian cell culture products such as whole cells, recombinant and secreted proteins, and monoclonal antibodies for third parties, primarily researchers.  We have produced over 7,000 cell based products for an estimated 2,500 researchers around the world.  We consider our vast experience in manufacturing small batches of different cell based products, together with our expertise in designing and manufacturing instruments for personalized medicines as important competencies supporting our development of patient specific immunotherapies.
 
Corporate Overview
 
In April 2003, we entered into an investment agreement with Accentia Biopharmaceuticals, Inc. (“Accentia”). As a result of this agreement, in June 2003, we became a subsidiary of Accentia through the sale of shares of our authorized but unissued common and preferred stock representing approximately 81% of our then outstanding equity outstanding immediately after the investment. The aggregate investment commitment initially received from Accentia was $20 million. Following Accentia’s investment, we continued to be a reporting company under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and we file periodic and other reports with the Securities and Exchange Commission (“SEC”).   As of June 30, 2013, Accentia owned approximately 55% of our outstanding common stock.
 
In November 2010, we completed and formally exited our previous reorganization under Chapter 11 of the U.S. Bankruptcy Code (“Chapter 11”).  On March 19, 2012, the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division (the “Bankruptcy Court”) entered a Final Decree closing our Chapter 11 proceedings.  Through the provisions of our bankruptcy plan (as amended) (the “2010 Plan”), effective on November 17, 2010, we restructured our debt into a combination of new debt and equity.
 
2013 Bankruptcy Case
 
On March 6, 2013 (the “Petition Date”), as a result of our inability to pay approximately $30 million in secured debt which had become due in November, 2012, we filed a voluntary petition to reorganize under Chapter 11 (Case No.8:13-bk-02892-KRM) with the Bankruptcy Court (the “2013 Bankruptcy Case”).  During the pendency of the Chapter 11 proceedings, we have operated our business as a debtor-in-possession in accordance with the provisions of Chapter 11, and will be subject to the jurisdiction of the Bankruptcy Court.
 
The following is a summary of certain significant events which have taken place in the 2013 Bankruptcy Case.  The description of such matters or events is qualified in its entirety by the actual pleadings filed in the 2013 Bankruptcy Case and, to the extent of any inconsistencies between the descriptions in this and any subsequent Quarterly Report on Form 10-Q and such pleadings, such pleadings shall control.  All of such pleadings are on file with, and may be obtained from, the Bankruptcy Court.
 
Retention of Professionals
 
We have retained the law firm of Stichter, Riedel, Blain & Prosser, P.A. (“Stichter, Riedel”) as our general bankruptcy counsel in the 2013 Bankruptcy Case.  On April 4, 2013, the Bankruptcy Court entered a final order approving the application by Biovest to employ Stichter, Riedel as its general bankruptcy counsel in the Bankruptcy Case.  On May 6, 2013, the Court entered a final order nunc pro tunc permitting us to retain the accounting firm of Cherry, Bekaert, LLP to provide us with audit and accounting services.
 
Appointment of Unsecured Creditors Committee
 
On March 19, 2013, the United States Trustee appointed a committee of creditors holding unsecured claims in the 2013 Bankruptcy Case (the “Creditors’ Committee”).  The members of the Creditors’ Committee are Whitebox Multi-Strategy Partners, LP, Donald Ferguson c/o Land Dynamics, Inc., and Spruce LLC.
 
Appointment of Equity Security Holders’ Committee
 
On March 19, 2013, the United States Trustee appointed a committee of holders of equity interests in the 2013 Bankruptcy Case (the “Equity Committee”).  The members of the Equity Committee are ASM Capital Advisors, LLC, Michael Hill, James W. Hill, MD, John D. Scelsi, and Andrew Zawacki.
 
Debtor-in-Possession Financing
 
On March 8, 2013, we filed our Emergency Motion for Interim and Final Orders Under 11 U.S.C. §§ 105, 361, 362, 363(c), 364(c), 364(d)(1), 364(e) and 507 and Fed. R. Bankr. P. 2002, 4001 and 9014: (I) Authorizing Biovest to Obtain Postpetition Financing and Grant Senior Liens and Superpriority Administrative Expense Status; (II) Authorizing Biovest to Use Cash Collateral; (III) Granting Adequate Protection to Prepetition Senior Secured Creditors; and (IV) Scheduling a Final Hearing Pursuant to Bankruptcy Rules 2002, 4001 and 9014 (the “DIP Financing Motion”).  In the DIP Financing Motion, we requested authority to obtain post-petition loans, advances, and other financial accommodations from our prepetition senior secured creditors Corps Real, LLC (“Corps Real”), Laurus Master Fund, Ltd., Calliope Corporation, Valens U.S. SPVI, LLC, Psource Structured Debt Limited, Valens Offshore SPV II, Corp, and Valens Offshore SPV I, Ltd, acting collectively through their agent, LV Administrative Services, Inc. (collectively, the “LV Entities”) (in their capacity as lenders under the DIP Financing Motion, collectively the “DIP Lenders”) in an amount of up to $5.675 million secured by a security interest in and lien on all assets and properties of Biovest which will be senior to any existing pre-petition and post-petition liens, including any and all liens held by the DIP Lenders.
 
 
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The post-petition financing was approved by the Bankruptcy Court on an interim basis pursuant to (i) that certain Interim Order Granting our DIP Financing Motion, dated March 14, 2013, (ii) that certain Second Interim Order our DIP Financing Motion, dated March 29, 2013.
 
At a final hearing conducted on April 8, 2013, the Court overruled the objections by the Equity Committee and the United States Trustee, granted the DIP Financing Motion on a final basis, and entered its Final Order Granting Debtor’s Emergency Motion for Interim and Final Orders Under 11 U.S.C. §§ 105, 361, 362, 363(c), 364(c), 364(d)(1), 364(e) and 507 and Fed. R. Bankr. P. 2002, 4001 and 9014: (I) Authorizing Biovest to Obtain Postpetition Financing and Grant Senior Liens and Superpriority Administrative Expense Status; (II) Authorizing Biovest to Use Cash Collateral; (III) Granting Adequate Protection to Prepetition Senior Secured Creditors; and (IV) Scheduling a Final Hearing Pursuant to Bankruptcy Rules 2002, 4001 and 9014 entered by the Bankruptcy Court on April 10, 2013 (the “Final DIP Financing Order”).
 
Pursuant to the Final DIP Financing Order, Biovest is authorized and empowered to (i) use cash collateral subject to the amended twelve week budget for the period from April 8, 2013 to June 30, 2013 attached to the Final DIP Financing Order, (ii) borrow up to $6.0 million  (inclusive of the advances made under the Interim Financing Orders, and inclusive of the March 5, 2013 $0.325 million advance made by Corps Real to us) from the DIP Lenders, on the terms and conditions set forth in the DIP Loan Documents (as defined in the Final DIP Financing Order, including the form of Debtor-in-Possession Credit and Security Agreement in the form filed with the Bankruptcy Court on April 8, 2013 (the “Final Credit Agreement”).
 
As approved, the Final DIP Financing Order and the Final Credit Agreement contemplate the filing of the Sale Motion and the request for the Bidding Procedures (both as discussed below), as well as the 2013 Plan, as well as the agreement reached with the Creditors’ Committee with respect to treatment under the Sale Motion and the 2013 Plan.
 
On April 11, 2013, the Equity Committee filed a notice of appeal, appealing the Final DIP Financing Order to the United States District Court for the Middle District of Florida.  As of the date of filing of this Form 10-Q, the appeal remains pending, but the Equity Committee has been dissolved as a result of the Effectiveness of the Company’s Plan and it is unclear as to whether any party continues to have standing to pursue the appeal.
 
Accentia’s Disputed Ownership Claim for Intellectual Property
 
On April 3, 2013, Accentia sent a letter to Corps Real and its counsel, asserting ownership of certain of the intellectual property and/or inventions owned by us, based upon the fact that certain of our employees were also employees of Accentia.  We disputed Accentia’s alleged ownership claims.
 
On May 28, 2013, Accentia, as plaintiff, filed with the Bankruptcy Court a Verified Complaint for Declaratory Judgment of Ownership and Inventorship of Certain Patents, Intellectual Property Rights and Contract Rights against the Debtor, as defendant (the “Accentia Complaint”). In the Accentia Complaint, Accentia sought a ruling from the Bankruptcy Court establishing Accentia’s alleged ownership interest in certain patents, intellectual property and/or contract rights of Biovest described in the Accentia Complaint. After responsive pleadings were filed and a preliminary hearing was held on this Accentia Complaint, Accentia voluntarily dismissed its Complaint on June 19, 2013.  As a result, and in light of the subsequent confirmation of our Plan and of the Plan becoming effective thereafter, Accentia is barred from re-asserting these claims in any other forum.
 
Section 363 Sale Motion and Bidding Procedures
 
On April 17, 2013, we filed a Motion for Entry of an Order (I) Approving the Sale of, and Bidding Procedures in Connection With the Sale of, Substantially All of the Assets of Biovest or the Rights Under our Amended Plan of Reorganization, (II) Establishing Procedures for the Assumption and/or Assignment by Biovest of Certain Executory Contracts and Unexpired Leases, (III) Approving Initial Overbid Amount and Subsequent Overbid Amounts, (IV) Approving Form and Manner of Notice of the Sale and Bidding Procedures, and (V) Setting Objection Deadlines (the “Sale Motion”).  The Sale Motion sought, including related relief as set forth in the Sale Motion, approval of the process and procedures for (i) a transaction for the sale of substantially all of our assets outside the ordinary course of business pursuant to Sections 363 and 365 of the Bankruptcy Code, and/or (ii) a transaction for the funding of an alternative plan of reorganization under the 2013 Plan, which, at a minimum, shall provide for (a) payment in full of the pre-petition and post-petition secured claims (inclusive of all fees, costs, interest and other amounts owed to the Senior Secured Lenders) of the Senior Secured Lenders and (b) higher or better treatment than that proposed in the 2013 Plan for the holders of other claims against, and equity interests in, us.  On April 18, 2013 the Bankruptcy Court entered an Order granting the Sale Motion and approving the process described herein.
 
 
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A stalking horse asset purchase agreement, dated as of April 17, 2013 (including all schedules attached thereto, and as it may be amended, the “Asset Purchase Agreement”), was entered into, subject to higher or better offers, by and between Biovest, as seller, and Corps Real and LV Administrative Services, Inc. (as agent for certain of the Lenders), as purchaser (the “Stalking Horse Purchasers”), which Asset Purchase Agreement contemplated a sale transaction.  An executed copy of the Asset Purchase Agreement was attached as Exhibit A to the Sale Motion.  Prior to the closing under the Asset Purchase Agreement, the Stalking Horse Purchasers assigned all of their rights and obligations thereunder to their designee (the “Purchaser”).
 
In the event there are no Qualified Bidders (as defined in the Sale Motion) other than the Stalking Horse Purchasers, and the auction (as defined in the Sale Motion) does not occur, the Asset Purchase Agreement will be consummated with the Purchaser unless the 2013 Plan is confirmed by the Bankruptcy Court at the Confirmation Hearing, in which event the Asset Purchase Agreement will be deemed terminated.  The total purchase price to be paid by the Purchaser under the Asset Purchase Agreement in a sale transaction consists of (i) a credit bid of all or a portion of the Lenders Allowed Secured Claims (as defined below) owed, as of the date of the Auction, by our Company to Corps Real or the Laurus/Valens Lenders, (ii) the assumption of certain of our liabilities by the Purchaser, and (iii) the payment by the Purchaser of certain allowed administrative expense claims in the 2013 Bankruptcy Case as more particularly described in the Asset Purchase Agreement.  As of April 16, 2013, the amount of the Lenders Allowed Secured Claims was approximately $39 million.  The Asset Purchase Agreement also provides that the holders of allowed unsecured claims against us in the 2013 Bankruptcy Case shall receive ten percent (10%) of the equity in the Purchaser in the event of a closing under the Asset Purchase Agreement, and that the allowed unsecured claims shall not include any deficiency claim of the Senior Secured Lenders.
 
The Order approving the Sale Motion included approval by the Bankruptcy Court of the Bidding Procedures, which are attached to the Plan as Exhibit A.  The significant dates under the Bidding Procedures are (i) a deadline for receipt of qualified bids, which is 12:00 noon (Eastern Standard Time) on May 29, 2013; (ii) an auction, which will begin at 9:00 a.m. (Eastern Standard Time) on May 30, 2013; and (iii) a Sale Hearing to commence immediately prior to the Confirmation Hearing.
 
On April 25, 2013, effective nunc pro tunc to April 18, 2013, the Court entered a final order authorizing retention of Ferghana Partners, Inc. as the investment banking firm to conduct the marketing and sale process mandated by the Sale Motion.  The deadline for submission of bids under the Section 363 Sale process was set for May 29, 2013 and the hearing regarding the Section 363 Sale, assuming the receipt of a qualifying bid, was set for May 31, 2013.  No bids were received pursuant to the Section 363 Sale process.  On June 10, 2013, at the conclusion of the Confirmation hearing, the Bankruptcy Court approved the Section 363 Sale to the Secured Lenders pursuant to the stalking horse bid as an alternative in the event that the Plan could not become Effective for any reason.
 
Equity Committee’s Motion to Appoint an Examiner or Chapter 11 Trustee
 
On April 8, 2013, during the final hearing on the DIP Financing Motion, the Equity Committee filed a Motion to Appoint an Examiner or Chapter 11 Trustee (Doc. No. 137).  Biovest filed a response and objection to the Motion, on the basis that (i) the motion was a negotiating tactic by the Equity Committee to obtain leverage in connection with the plan and sale process; (ii) the allegations even if proven did not rise to the level necessary to appoint a trustee or examiner; and (iii) the allegations were false and misleading.  At a hearing held on April 10, 2013, the Bankruptcy Court denied the motion, finding that the record made at the hearing and at previous hearings did not support the allegations contained in the motion, and determined that the allegations in the motion, even if proven, did not support the relief requested.  The Court expressed sensitivity about disparagement and use of the process in connection with the motion to create leverage in connection with the plan or sale process.  Finally, the Court determined that any concerns regarding the conduct of the sale process, other than concerns regarding the timing which have been addressed in connection with the relief previously granted by the Court, may be raised separately after input from the investment banker to be employed in connection with the sale.  On May 3, 2013 the Equity Committee filed a Motion for Reconsideration of the Court’s denial of the Trustee motion, which was once again denied by the Bankruptcy Court at a hearing held on May 14, 2013.
 
 
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Claims Bar Dates
 
On March 7, 2013, the Bankruptcy Court entered its Notice of Chapter 11 Bankruptcy Case, Meeting of Creditors, & Deadlines which, among other things, established May 20, 2013 as the deadline for filing claims against us by all of our creditors (not including Governmental Units), and the date that is 180 days from the Petition Date as the deadline for filing claims against us by all Governmental Units.
 
Execution of Lease for New Corporate Offices in Tampa, Florida
 
As of the Petition Date, we subleased approximately 7,400 square feet of office space in Tampa, Florida located at 324 South Hyde Park Avenue, Suite 350 (the “Current Leased Premises”) at a monthly rental cost of approximately $16,000.  We took action in the 2013 Bankruptcy Case to reject the existing sublease for the Current Leased Premises and relocate our business operations in Tampa, Florida to smaller space at a greatly reduced monthly rental cost.  We filed a motion with the Bankruptcy Court seeking approval of the terms of a new lease, at a monthly rental cost of approximately $2,125, for a twelve month term on or about April 8, 2013, which motion was granted at a hearing held on April 8, 2013.
 
Rejection of Lease for Current Leased Premises
 
In conjunction with our decision to relocate our corporate and administrative offices to a smaller space at a greatly reduced monthly rental rate, we filed a motion with the Bankruptcy Court seeking authority to reject a lease with sublease between us, as sublessee, and Accentia, as sublessor, including a rejection, if necessary, of the primary lease between Accentia, as tenant, and Hyde Park Plaza Associates, Ltd., as landlord.  On April 18, 2013, the Bankruptcy Court granted our motion.
 
Filing of Initial Plan of Reorganization and First Amended Plan of Reorganization
 
On March 7, 2013, we filed our Plan of Reorganization of Biovest International, Inc. under Chapter 11 of Title 11, of the Bankruptcy Code, dated as of March 6, 2013 (the “Initial Plan”).  The Initial Plan was the product of negotiations between Biovest, the Independent Board Committee of our Board of Directors, and the Senior Secured Lenders, and resulted in what Biovest believed was fair and equitable treatment of Holders of Unsecured Claims and Holders of Equity Interests.  In summary, the Initial Plan provided for treatment of Claims and Equity Interests as follows: (i) satisfaction of the Prepetition and Postpetition Claims of the Senior Secured Lenders by issuance of designated amounts of the Reorganized Biovest Common Stock constituting approximately ninety percent (90%) of the issued and outstanding shares of the Reorganized Biovest Common Stock, (ii) issuance of designated amounts of the Reorganized Biovest Common Stock to Holders of Allowed Unsecured Claims, and (iii) exchange of shares of Existing Biovest Common Stock with designated amounts of Reorganized Biovest Common Stock to the Holders of Allowed Equity Interests.  On April 18, 2013, we filed our First Amended Plan of Reorganization (the “First Amended Plan”) and (together with the Initial Plan, collectively the “2013 Plan”)  in the Bankruptcy Case with the support of our Senior Secured Lenders which, among other things, designates ninety percent (90%) of Reorganized Biovest common stock to the Senior Secured Lenders and ten percent (10%) of the Reorganized Biovest common stock to holders of allowed unsecured claims, and provides for the cancellation of existing Biovest common stock, with such holders not to receive any recovery under the 2013 Plan on account of such equity interests.  Also, on April 18, 2013, the Bankruptcy Court approved our Disclosure Statement and scheduled the hearing on Confirmation of the Plan for May 31, 2013.
 
Confirmation and Effectiveness of Plan
 
On May 31, 2013 and June 10, 2013, the Bankruptcy Court held a confirmation hearing,  overruled various objections to confirmation and confirmed the Plan, and on June 28, 2013 entered an Order Confirming Debtor’s First Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the "Confirmation Order"), which approved and confirmed the Plan. On July 8, 2013, the Bankruptcy Court held a hearing to consider the Response and Limited Objection by the Official Committee of Unsecured Creditors (the “Committee”) to the Plan (the “Committee Response”).  At the hearing, counsel to the Debtor, the Committee, and Corps Real, LLC and the Laurus/Valens Entities announced that an agreement had been reached resolving the Committee Response and providing for a further modification of Article 9.11 to the Plan.  As a result of that agreement, the Committee withdrew the Committee Response, and on July 9, 2013 the Bankruptcy Court entered an Agreed Order Resolving Response and Limited Objection by the Official Committee of Unsecured Creditors to First Modification to First Amended Plan of Reorganization (the “Agreed Order”), which included a new Article 9.11 (detailing the circumstances under which the shares issued pursuant to the Plan will be subject to “lock-up” provisions) to be added to the Plan.  On July 9, 2013 (the “Effective Date”), the Plan became effective and a notice of the Effective Date of the Plan (the “Notice of Effective Date”) was filed with the Bankruptcy Court. The occurrence of the Effective Date was subject to satisfaction or waiver of certain conditions precedent including no modification or stay of the Confirmation Order or entry of other court order prohibiting the consummation of the transactions contemplated by the Plan, and all other actions and documents necessary to implement the Plan shall have been effected or executed. Each of the foregoing conditions to the effectiveness of the Plan were satisfied or waived, and the Effective Date occurred on July 9, 2013.
 
 
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Results of Operations
 
Three and Nine Months Ended June 30, 2013 Compared to the Three and Nine Months Ended June 30, 2012
 
Revenues
 
Total revenues for the three months ended June 30, 2013 were $1.2 million, compared to revenues of $0.9 million for the three months ended June 30, 2012.  Instrument sales for the three month period ended June 30, 2013 decreased $0.1 million compared to the same three month period in the prior fiscal year, while cell culture service revenue increased by $0.4 million from last year due to the number of contracts completed or in-process year over year.
 
Total revenues for the nine months ended June 30, 2013 were $2.6 million, compared to revenues of $3.2 million for the nine months ended June 30, 2012. Instrument sales for the nine month period ended June 30, 2013 decreased $0.8 million compared to the prior fiscal year, primarily due to the mix of units sold. Also included in product revenue for the prior fiscal year is $0.1 million resulting from a data sharing agreement whereby we were compensated to share our data set compiled from our Phase 3 clinical trial for BiovaxID™. The current year’s results do not contain comparable revenue.  Cell culture service revenue for the nine month period ended June 30, 2013 has also increased $0.3 million from last year due to the number of contracts completed or in-process year over year.
 
Gross Margin
 
The gross margin as a percentage of sales for the three months ended June 30, 2013 increased from 19% to 34% when compared to the three months ended June 30, 2012, primarily due to the number of contracts in process during the current fiscal period.
 
The gross margin as a percentage of sales for the nine months ended June 30, 2013 decreased from 32% to 24% when compared to the nine months ended June 30, 2012. While revenues have decreased year over year, as discussed above, there was not a corresponding decrease in cost of sales as a relatively high percentage of costs are of a fixed nature.
 
Operating Expenses
 
Research and development expenses have decreased by $0.4 million for the nine months ended June 30, 2013 when compared to the same period in 2012. This change is attributable to a non-cash charge for compensation expense associated with incentive stock options issued to our employees on March 30, 2012.  There was no such comparable charge in the current fiscal year.
 
General and administrative expenses for the nine months ended June 30, 2013 decreased by $1.9 million when compared to the nine  months ended June 30, 2012 again due to the same incentive stock option issuance discussed above.
 
Other Income (Expense)
 
Other expense for the three and nine months ended June 30, 2013, includes contractual interest charges and amortization of discounts regarding the LV Entities Term A and Term B Notes, the Corps Real Notes, the November 2010 Convertible Notes, and other long term notes issued to our unsecured creditors as a result of our 2010 Plan.   Due to the fact that a majority of our debt matured on November 17, 2012, any discounts associated with the matured debt has been fully amortized by the first quarter of the 2013 fiscal year.  Due to the filing of our 2013 Reorganization Plan, we discontinued accruing interest as of March 6, 2013 on those notes subject to compromise through our reorganization proceedings, thus accounting for the large decrease in interest expense in the current quarter as well as year to date.
 
Other expense also includes a gain on derivative liabilities for the three and nine months ended June 30, 2013. In November, 2010, we issued warrants in connection with the issuance of our November 2010 Convertible Notes.  These warrants contain contingent exercise provisions which are required to be reported at fair value on each balance sheet date.  The values of these liabilities vary directly with the trading price of our outstanding common stock, accounting for the current and previous year derivative gains.
 
Reorganization Items
 
Gain on disallowance of Accentia claim:  Since November 2011, we had recorded an intercompany payable due to our former parent company, Accentia Biopharmaceuticals, Inc., which arose from cash advanced to us from Accentia, interest, payments from Accentia made directly to third parties on our behalf and allocated inter-company expenses for items such as payroll, insurance, and shared facility expenses.  We had originally classified our intercompany obligation due to Accentia as a ‘debt subject to compromise’ at the outset of our 2013 Bankruptcy Case.  In the course of our Chapter 11 proceeding, Accentia timely filed a Proof of Claim in the amount of approximately $6.5 million.  The Creditor’s Committee filed an objection to the Accentia Claim, and at a hearing held June 27, 2013, the Bankruptcy Court upheld that objection and denied the Accentia claim in its entirety, ruling that Accentia’s claim be stricken and that Accentia would have no continued claim of any amount in our Chapter 11 Case.  As a result of this ruling, a gain of $4.5 million on disallowance of the Accentia claim was recorded on our Statement of Operations for the three and nine month periods ended June 30, 2013.
 
 
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Professional Fees: In the current fiscal year’s results are expenses of $1.0 million for legal fees, U.S. Trustee fees and other professional fees associated with our current Chapter 11 proceedings.
 
Provision for rejected contracts: In an effort to decrease operating expenses, we rejected and terminated our lease in Tampa, FL, effective on April 20, 2013 through our reorganization proceedings. We initially recorded a net provision of $0.04 million to allow for damages resulting from the rejection of this unexpired lease, which are treated by the bankruptcy code as general unsecured claims and are limited to either 15 percent of the balance of the rent reserved in the lease or the rent reserved for one year from the filing date or the date the premises were surrendered, whichever is earlier.
 
Liquidity
 
As reflected in the accompanying condensed consolidated financial statements, as of June 30, 2013, we had an accumulated deficit of approximately $176 million and working capital deficit of approximately $2.8 million (not including those liabilities subject to compromise through our 2010 Bankruptcy Case). Cash and cash equivalents, at June 30, 2013, were approximately $0.3 million. Our independent auditors issued a “going concern” uncertainty report on our consolidated financial statements for the year ended September 30, 2012, citing significant losses and working capital deficits at that date, which raised substantial doubt about our ability to continue as a going concern.
 
Funding to provide the Company with working capital to continue its development of BiovaxID over the past nine months has been provided through secured promissory notes issued to our secured lenders.  Below is a summary of these transactions.
 
Corps Real Financings:
 
On December 3, 2012, we issued a secured promissory note to Corps Real in the amount of $1.5 million (the “Corps Real II Note”).  Corps Real is an Illinois limited liability company, and is principally owned and managed by Ronald E. Osman, the Chairman of our Board of Directors.  The Corps Real II Note accrues interest at 16% per annum with all interest due at maturity – December 3, 2013.  The Corps Real II Note is secured by a first priority lien on all of our assets.
 
On March 5, 2013 we issued an additional secured note to Corps Real in the amount of $0.3 million (the “Corps Real III Note”).  The Corps Real III Note accrues interest at 16% per annum with all interest due at maturity – March 5, 2014.  The Corps Real III Note is secured by a first priority lien on all of our assets.
 
As of July 9, 2013, the Effective Date of the Company’s 2013 Plan, any obligations due under the Corps Real Notes have been extinguished in return for common stock of the reorganized Company.  See Note 15 to the consolidated financial statements for further information regarding the 2013 Plan and the Company’s capital structure upon Effective Date of the 2013 Plan.
 
Debtor-in-Possession Financing:
 
On March 8, 2013, we filed the DIP Motion, requesting authority to obtain the DIP Financing from our Senior Secured Lenders to be funded to us and secured by a security interest in and lien on all of our assets and properties which will be senior to any existing pre-petition and post-petition liens, including any and all liens held by the Senior Secured Lenders.
 
On April 10, 2013, the DIP Financing was approved by the Bankruptcy Court pursuant to a final DIP financing order.  Under the terms of the final DIP financing order, we are authorized draw down funds from the total $5.7 million committed in accordance with a budget submitted to the court and approved by the Senior Secured Lenders.
 
As of July 9, 2013, the Effective Date of the Company’s 2013 Plan, amounts due under the DIP Financing have been extinguished in return for common stock of the reorganized Company.  See Note 15 for further information regarding the 2013 Plan and the Company’s capital structure upon Effective Date of the 2013 Plan.
 
Additional expected financing activity:
 
It is our intention to meet our cash requirements through proceeds from the sales of our instrument and disposables and cell culture products and services, trade vendor credit, restructuring of our outstanding debt obligations through the Chapter 11 proceedings and from the proceeds available under the DIP Financing discussed above.  Although the amounts due under the DIP Financing have been extinguished through our 2013 Plan, the secured lenders have committed to fund the approximate $2.0 million still available under the agreement without any further consideration from us.
 
Our ability to fund operations as well as the commencement of the additional confirmatory Phase 3 clinical trial required for FDA approval and continue our detailed analyses of BiovaxID™’s clinical trial results, is dependent upon on our ability to obtain additional significant external funding in the near term, which raises substantial doubt about our ability to continue as a going concern. Additional sources of funding have not been established; however, additional financing is currently being sought through strategic collaborations, recognized research funding programs, and potential domestic and/or foreign licensing of our product candidates and efforts to sell debt or equity securities.  If adequate funds are not available from the foregoing sources in the immediate term, or if we determine it to otherwise be in our stakeholders’ best interests, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or curtail some or all of our commercialization efforts.
 
 
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Cash Flows for the Nine Months Ended June 30, 2013
 
Our net loss for the nine months ended June 30, 2013 was $3.1 million. We have adjusted the net loss on our cash flow statement for certain non-cash expenses including the amortization of discounts recorded on our outstanding debt in the amount of $1.6 million, the accrual of interest due but unpaid on our outstanding debt in the amount of $1.8 million, as well as an adjustment of $4.5 million representing the gain on the disallowance of the Accentia claim as previously discussed. After these and other non-cash adjustments to our net loss, cash used in operating activities was $4.3 million for the nine months ended June 30, 2013.
 
Net cash outflows from investing activities in the current year include the purchase of approximately $0.5 million in laboratory equipment for our manufacturing facility in Minnesota.
 
Net cash inflows from financing activities were $5.0 million for the nine months ended June 30, 2013. Financing activities for the period included the repayment of approximately $0.4 million in principal on the Accentia intercompany balance.   We also received a total aggregate amount of approximately $2.6 million under the terms of the Corps Real I, II and III Notes, as well as $3.0 million under the terms of the DIP Financing which have been used to fund our business operations for the period.
 
Fluctuations in Operating Results
 
Our 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 our customers, the timing and size of orders for instrumentation and cultureware, and the timing of increased research and development of BiovaxID™. Consequently, revenues, profits or losses may vary significantly from quarter to quarter or year to year, and revenue or profits or losses in any period will not necessarily be indicative of results in subsequent periods.
 
 
Not Applicable.
 
 
Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our chief executive officer (principal executive officer) and chief financial officer (principal financial officer), we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting
 
Due to various organizational changes that have occurred over the nine months ended June 30, 2013, some of our processes relating to  internal control over financial reporting have been modified.  However, in evaluating these modifications, we do not expect that they have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  

PART II. OTHER INFORMATION
 
 
2013 Bankruptcy proceedings:
 
On March 6, 2013, we filed a voluntary petition for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division (the “Bankruptcy Court”) with Case No.8:13-bk-02892-KRM.  On March 7, 2013, we filed our Plan of Reorganization, and, on April 18, 2013, we filed our First Amended Plan of Reorganization. After confirmation hearings on May 31, 2013 and June 10, 2013, the Bankruptcy Court confirmed our First Amended Plan of Reorganization, (as amended and modified, the “Plan”), and entered an Order Confirming our Plan on June 28, 2013.  Our Plan became effective on July 9, 2013.  Two Notices of Appeal of provisions of the Bankruptcy Proceedings were filed by the Equity Committee during the pendency of the 2013 Bankruptcy Proceedings and both appeals remain pending, but the Equity Committee has been dissolved as of the effectiveness of the Plan and no party has as of this date been substituted in to continue to pursue these appeals.  See Note 15 to the financial statements for further information regarding the 2013 Plan and our capital structure upon Effective Date of the 2013 Plan.
 
 
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Whitebox litigation:
 
On December 19, 2012, Whitebox Credit Arbitrage Partners, LP, Whitebox Special Opportunities Fund Series B Partners, LP, Pandora Select Partners, LP, Whitebox Multi-Strategy Partners, LP, and Whitebox Concentrated Convertible Arbitrage Partners, LP (collectively, the “Whitebox Entities”), a majority of the holders of the outstanding November 2010 Convertible Notes commenced a breach of contract action in the State of Minnesota to secure monetary judgment(s) against the Company for the outstanding defaulted principal and interest owed to them.  Upon the filing of the 2013 Bankruptcy Case, this litigation was automatically stayed pursuant to provisions of federal bankruptcy law. As a result of the outstanding balance on their November 2010 Convertible Notes, the Whitebox Entities have an allowed unsecured claim in the approximate amount of $1.4 million in our 2013 Bankruptcy Case.  On July 9, 2013, the effective date of the 2013 Plan, the Whitebox Entities unsecured claim was extinguished through the issuance of common stock in reorganized Biovest.  See Note 15 to the financial statements for further information regarding the 2013 Plan and our capital structure upon the Effective Date of the 2013 Plan.
 
Other proceedings:
On July 24, 2013 and August 5, 2013, purported class actions were filed in the United States District Court for the Middle District of Florida (Tampa Division) against our former parent corporation, Accentia, and several current and former directors and officers of Biovest and Accentia.  Biovest was not named as a defendant in either complaint. The complaints allege that the defendants violated federal securities laws by making or causing Accentia and/or Biovest to make false statements, and by failing to disclose or causing Accentia and/or Biovest to fail to disclose material information, concerning the results of its Phase III clinical trial of BiovaxID and status of its approval by the FDA. Plaintiffs seek damages in an unspecified amount on behalf of shareholders who purchased common stock of Accentia or Biovest between July 24, 2008 and August 14, 2012 and were damaged as a result of the decline in the price of common stock allegedly attributable to the claimed violations.
 
 
Except for the foregoing, we are not aware of or party to any material legal proceedings, and management is not aware of any additional threatened legal proceedings that could cause a material adverse impact on our business, assets, or results of operations. Further, from time to time we are subject to various legal proceedings in the normal course of business, some of which are covered by insurance.
 
ITEM  1A.
 
As a smaller reporting company, we are not required to provide the information required by this item.
 
 
None.
 
 
None.
 
 
Not Applicable.
 
ITEM  5.
 
None.  

 
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ITEM 6.
 
The following exhibits are filed as part of, or are incorporated by reference into, this Quarterly Report on Form 10-Q.
 
Exhibit
Number
  
Description of Document
     
  31.1
  
Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer (Principal Executive Officer).
     
  31.2
  
Rule 13a-14(a)/15d-14(a) Certifications of Acting Chief Financial Officer (Principal Financial Officer).
     
  32.1
  
18 U.S.C. Section 1350 Certifications of Chief Executive Officer.
     
  32.2
  
18 U.S.C. Section 1350 Certifications of Acting Chief Financial Officer.
     
101
  
The following financial information from Biovest International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (unaudited), formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2013 and September 30, 2012, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2013 and 2012 (unaudited), (iii) Condensed Consolidated Statements of Stockholders’ Deficit for the nine months ended June 30, 2013 (unaudited), (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2013 and 2012 (unaudited), and (v) the Notes to Condensed Consolidated Financial Statements.
 

 

 

 
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
 
   
 
BIOVEST INTERNATIONAL, INC.
 
(Registrant)
   
Date: August 14, 2013
/s/ Carlos Santos
 
Carlos Santos, PhD
 
Chief Executive Officer
 
(Principal Executive Officer)
   
Date: August 14, 2013
/s/ Brian D. Bottjer
 
Brian D. Bottjer, CPA
 
Acting Chief Financial Officer; Controller
 
(Principal Financial Officer and Principal Accounting Officer)
 
 
 
 
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